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GSB FINANCIAL CORPORATION
(PROPOSED HOLDING COMPANY FOR GOSHEN SAVINGS BANK)
1,955,000 SHARES OF COMMON STOCK - $10.00 PER SHARE
GSB Financial Corporation (the "Company"), a Delaware Corporation, recently
formed to own all the stock of Goshen Savings Bank (the "Bank"), is offering up
to 1,955,000 of its common stock, par value $.01 per share (the "Common Stock"),
for a purchase price of $10.00 per share (the "Purchase Price") in connection
with the conversion of the Bank from a mutual savings bank to a stock savings
bank pursuant to the Bank's plan of conversion (the "Plan" or "Plan of
Conversion"). In certain circumstances, the Company may increase the amount of
Common Stock offered to 2,248,250 shares. See footnote 4 to the table below.
The conversion of the Bank to stock form, the issuance of the Bank's stock to
the Company and the sale of the Common Stock by the Company are referred to as
the "Conversion." Consummation of the Conversion is subject to, among other
things, (i) the approval of the Plan of Conversion by a majority of the votes
eligible to be cast by members (depositors) of the Bank, (ii) the receipt of all
required federal (Continued on following page)
FOR INFORMATION ON HOW TO PURCHASE COMMON STOCK, CALL (914) 291-8787.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE PURCHASING
COMMON STOCK, SEE "RISK FACTORS" AT PAGE 10.
----------------------------
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR ANY
OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================================
Estimated Underwriting Fees Estimated Net
Purchase Price(1) and Other Expenses(2) Conversion Proceeds(3)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $10.00 $0.48 $9.52
- -----------------------------------------------------------------------------------------------------
Minimum Total(1) $14,450,000 $771,000 $13,679,000
- -----------------------------------------------------------------------------------------------------
Midpoint Total(1) $17,000,000 $818,000 $16,182,000
- -----------------------------------------------------------------------------------------------------
Maximum Total(1) $19,550,000 $865,000 $18,685,000
- -----------------------------------------------------------------------------------------------------
Minimum Total
As Adjusted(4) $22,482,500 $917,500 $21,565,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal (the "Appraisal") by
Capital Resources Group, Inc. ("CRG") dated March 14, 1997, which states that
the aggregate estimated pro forma market value of the Common Stock to be
outstanding immediately after the Conversion ranges from $14,450,000 to
$19,550,000 with a midpoint of $17,000,000 (the "Valuation Range"). The
Appraisal is based upon estimates and projections that may change. The Appraisal
is not a recommendation to purchase Common Stock nor any assurance that a
purchaser will be able to sell Common Stock at prices equal to or greater than
the Purchase Price. See "The Conversion--Stock Pricing and Number of Shares to
be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from the
Conversion, including estimated fixed expenses of approximately $517,000 and
marketing fees to be paid to Capital Resources Inc. ("Capital Resources," an
affiliate of CRG), which fees are estimated to be $254,000 and $348,000,
respectively, at the minimum and the maximum of the Valuation Range. See "The
Conversion--Marketing Arrangements." Such fees may be deemed to be underwriting
fees, and Capital Resources may be deemed to be an underwriter. See "Pro Forma
Data" for the assumptions used to arrive at these estimates. Actual fees and
expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts depending
on the number of shares sold and other factors. Includes the purchase of shares
of Common Stock by the GSB Financial Corporation Employee Stock Ownership Plan
and Trust (the "ESOP"), funded by a loan which the Company intends to make to
the ESOP, which initially will be deducted from the Company's stockholders'
equity. See "Use of Proceeds" and "Pro Forma Data."
(4) As adjusted to give effect to the sale of up to an additional 15% of the
shares which may be offered, without resolicitation of subscribers or any right
of cancellation, due to regulatory or market considerations and general
financial and economic conditions. See "Pro Forma Data" and "The
Conversion--Stock Pricing and Number of Shares to Be Issued." For a discussion
of the distribution and allocation of the additional shares, if any, see "The
Conversion--Subscription Offering."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR BY ANY OTHER GOVERNMENT AGENCY.
------------
CAPITAL RESOURCES, INC.
------------
The date of this Prospectus is May 14, 1997.
<PAGE>
(Continued from previous page)
approvals for the issuance of the Common Stock, and (iii) the sale of at least
$14,450,000 of Common Stock, which is the minimum of the estimated pro forma
market value of the Common Stock to be issued in the Conversion (the "Valuation
Range," which has been established as a range of from $14,450,000 to
$19,550,000, with a midpoint of $17,000,000). In addition, the consummation of
the Conversion is also conditioned on the receipt of an opinion of counsel or a
satisfactory Internal Revenue Service ("IRS") ruling regarding the federal tax
consequences of the Conversion. See "The Conversion--Conditions and
Termination."
The right to subscribe for the Common Stock has been granted, in the
following order of priority, to:
First Priority - Depositors of the Bank on December 31, 1995 ("Eligible
Account Holders").
Second Priority - Tax-qualified employee benefit plans of the Bank or
the Company ("Employee Plans").
Third Priority - Depositors of the Bank on March 31, 1997 ("Supplemental
Eligible Account Holders").
Fourth Priority - Depositors of the Bank on May 9, 1997
("Other Members").
The offer of Common Stock by the Company to the four priority groups is referred
to as the "Subscription Offering." Subscription rights granted in the
Subscription Offering may not be transferred by the holders of those rights.
Persons violating this prohibition against transfer may lose their right to
purchase stock in the Subscription Offering and may be subject to other
penalties.
Subject to the prior rights of holders of subscription rights and
market conditions at or near the completion of the Subscription Offering, the
Bank may also offer unsold shares of Common Stock for sale through Capital
Resources, Inc. ("Capital Resources"), as marketing agent on a best efforts
basis, to certain persons to whom this Prospectus is delivered (the "Public
Offering"). See "The Conversion--Public Offering." The Company may also elect to
conduct a community offering (the "Community Offering") to sell any remaining
unsold shares, with a preference given to natural persons residing in Orange
County, New York. See "The Conversion -- Community Offering." The Subscription
Offering, the Public Offering and the Community Offering are referred to,
together, as the "Offerings."
The GSB Financial Corporation Employee Stock Ownership Plan and Trust
(the "ESOP") intends to subscribe for 8% of the total number of shares of Common
Stock issued in the Conversion. However, the ESOP may purchase some or all of
such shares in the open market after the Conversion. Shares purchased by the
ESOP in the Subscription Offering are anticipated to be funded by a loan from
the Company to be repaid over a period of up to ten years (the "ESOP Loan").
Except for the ESOP, no person may subscribe in the Subscription
Offering for more than $150,000 of the Common Stock offered in the Conversion
and no person, together with associates of and persons acting in concert with
such person, may purchase in the Offerings more than $150,000 of Common Stock.
The maximum purchase limitation may be increased in the sole discretion of the
Bank or the Company. The minimum purchase is 25 shares. See "The
Conversion--Additional Purchase Restrictions."
<PAGE>
The Bank has engaged Capital Resources to consult with and advise the
Company and the Bank in the Offerings, and Capital Resources has agreed to use
its best efforts to assist the Company with the solicitation of subscriptions
and purchase orders for shares of Common Stock in the Offerings. Capital
Resources is not obligated to take or purchase any shares of Common Stock in the
Offerings. The Company and the Bank have agreed to indemnify Capital Resources
against certain liabilities arising under the Securities Act of 1933, as
amended. See "The Conversion--Marketing Arrangements."
The Subscription Offering will terminate at 12:00 noon, eastern time,
on June 20, 1997 (the "Subscription Offering Expiration Date") unless extended
by the Bank and the Company, with the approval of the Office of Thrift
Supervision (the "OTS"), if necessary. To subscribe for shares in the
Subscription Offering, the Company must receive an executed order form and
certification form with payment in full at $10.00 per share (or appropriate
instructions authorizing withdrawal from a deposit account). Subscriptions paid
by cash, check, bank draft, or money order will be placed in a segregated
account at the Bank and will earn interest at the Bank's passbook rate from the
date of receipt until the completion or termination of the Conversion. Payments
authorized to be withdrawn from deposit accounts at the Bank will continue to
earn interest at the contractual rate until the Conversion is completed or
terminated, but these funds will be unavailable to the depositor for any other
purpose. See "The Conversion--Subscription Offering" and "--Purchasing Common
Stock."
The Company has received conditional approval from The Nasdaq Stock
Market, Inc. to have the Common Stock quoted on the Nasdaq National Market under
the symbol "GOSB" upon completion of the Conversion. 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 the Common Stock will trade at or above the Purchase Price. See
"Risk Factors--Absence of Market for Common Stock."
2
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MAP APPEARS HERE
3
<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS INCLUDED IN THIS PROSPECTUS.
GSB Financial Corporation
The Company is a Delaware corporation recently organized by the Bank to
own all of the capital stock of the Bank to be issued in the Conversion.
Immediately after the Conversion, the only significant assets of the Company
will be (1) the capital stock of the Bank, (2) the loan that the Company intends
to make to the ESOP and (3) the net proceeds from the sale of the Company's
stock remaining after acquiring the capital stock of the Bank and funding the
ESOP Loan. The net proceeds from the sale of the Common Stock in the Offerings
are estimated to be from $13,679,000 to $18,685,000, subject to a possible
increase to $21,565,000 in the event of an increase of up to 15% in the Common
Stock to be issued in the Conversion. The Company will buy all the stock to be
issued by the Bank in the Conversion for a price equal to 50% of the net
proceeds. The remaining net proceeds will be retained by the Company and used
for general corporate purposes. The 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. See "Use of
Proceeds." The business of the Company will initially consist of overseeing its
investment in the Bank. See "Business of the Company," "Business of the Bank"
and "Regulation--Holding Company Regulation."
Goshen Savings Bank
General. The Bank was originally founded in 1871 as a New York mutual
savings bank. On March 18, 1997, the Bank became a federal mutual savings bank.
The Bank is extensively regulated, supervised and examined by the OTS and the
Federal Deposit Insurance Corporation ("FDIC"). The Bank has a main office in
Goshen, New York, a nearby drive-up facility, and a branch in an elder care
facility in Goshen which opened in March 1997. The Bank's market area consists
of the village of Goshen and surrounding communities to a radius of 12 miles,
including most of Orange County, New York. The Bank gathers deposits primarily
from its market area and makes loans primarily to persons or businesses in its
market area. See "Business of the Bank--Market Area" and "--Competition." Most
of the Bank's loans are mortgage loans secured by one-to-four family
owner-occupied residences in its market area. To a lesser extent, the Bank makes
commercial mortgage loans, construction loans and consumer loans. The Bank also
invests in U.S. Treasury and agency securities, corporate debt securities,
mortgage-backed securities, certain mutual fund and equity securities, and other
liquid assets.
At December 31, 1996, the Bank had total assets of $97.0 million, of
which $61.0 million were loans and $27.2 million were investment and
mortgage-backed securities, total deposits of $82.6 million and total equity
(retained earnings) of $12.1 million. At that same date, the Bank satisfied all
capital requirements of the FDIC which then applied to it. The Bank's tangible,
core and total risk-based capital ratios at such date, calculated in accordance
with OTS regulations that have applied to it since it became a federal savings
bank on March 18, 1997, were 12.30%, 12.30% and 21.85%, respectively. The Bank
satisfied the capital ratio requirements to be classified as "well capitalized"
by the OTS. See "Regulatory Capital Compliance," "Capitalization," "Pro Forma
Data" and "Regulation--Regulation of Federal Savings Associations." The Bank's
deposits are insured up to the maximum allowable amount by the Bank Insurance
Fund (the "BIF") of the FDIC.
4
<PAGE>
The Bank's net income (loss) was $295,000 for the three months ended
December 31, 1996 and was $558,000, ($462,000) and $311,000 for the 1996, 1995
and 1994 fiscal years, respectively. The Bank's net loss in fiscal 1995 resulted
in part from a $279,000 provision for losses related to the failure of Nationar,
then the Bank's principal correspondent bank, and a charge of $394,000
representing the cumulative after tax effect of an accounting change. See
"Selected Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business of the Bank."
Business Strategy. The Bank's principal business strategy has been to
maintain its focus as a traditional local-oriented institution by concentrating
its lending activities in one-to-four family residential mortgage loans,
primarily first mortgage loans, but also including residential second mortgages
and home equity line of credit loans. The Bank seeks to maintain a high level of
credit quality with low delinquencies in order to minimize loan losses. See
"Business of the Bank--Lending Activities" and "--Asset Quality." The Bank's
non-loan investments are also concentrated in highly-rated debt securities. See
"Business of the Bank--Investment Activities."
The Conversion and the Sale of Company Stock
The Bank's Board of Directors has adopted the Plan of Conversion which
provides that the Bank will become a federal stock savings bank. All of the
capital stock of the Bank issued in the Conversion will be acquired by the
Company in exchange for 50% of the net proceeds from the sale of the Company's
stock. The Conversion cannot be completed unless, among other things, it is
approved by the Bank's members (depositors) at a special meeting (the "Special
Meeting") to be held on June 24, 1997. See "The Conversion--General."
The purpose of the Conversion is to increase the Bank's capital and so
that it will be structured as a stock institution like commercial banks, most
major business corporations and a growing number of savings institutions. The
Conversion will enhance the Bank's ability to raise additional capital, expand
its current operations, acquire other financial institutions or branch offices,
and provide additional funds for home financing in its market area. The holding
company form of organization in which the Company owns all the stock of the Bank
provides additional flexibility to diversify through newly-formed subsidiaries
or through acquisitions of or mergers with other financial institutions. There
are no current arrangements, understandings or agreements regarding any such
opportunities. See "The Conversion--Reasons for the Conversion." The holding
company form of organization also provides certain protections against hostile
takeovers. See "Risk Factors--Certain Anti-takeover Provisions."
The Company's Common Stock will be offered in the Subscription
Offering, in order of priority, to Eligible Account Holders, Employee Plans of
the Bank or the Company, Supplemental Eligible Account Holders and Other
Members. If the amount of Common Stock to be issued is increased as a result of
an increase of up to 15% in the maximum of the Valuation Range, the ESOP will
have a first priority right to purchase such additional shares. Subscription
rights will expire at 12:00 noon, eastern time, on the Subscription Offering
Expiration Date, unless extended by the Bank and the Company, with the approval
of the OTS, if necessary. If available after the Subscription Offering, Common
Stock is expected to be offered in a Public Offering. The Plan of Conversion
also permits the Bank and the Company to sell any remaining Common Stock in a
Community Offering with a preference to natural persons residing in Orange
County, New York. See "The Conversion--Subscription Offering," "--Public
Offering," and "--Community Offering."
The Bank and the Company have retained Capital Resources as consultant
and advisor in connection with the Offerings and to assist in soliciting
subscriptions and purchase orders in the Offerings.
5
<PAGE>
The Bank and the Company will pay a fee to Capital Resources based on the
aggregate purchase price of the Common Stock sold in the Offerings. Capital
Resources is affiliated with Capital Resources Group, Inc. ("CRG"), which has
prepared the appraisal of the estimated pro forma market value of the Common
Stock to be issued in the Conversion (the "Appraisal"). See "The
Conversion--Marketing Arrangements."
Purchase Procedure
In order to purchase Common Stock in the Subscription Offering, a
purchaser must submit a fully completed stock order form, a signed certification
form required by the OTS, and payment in full either by check, money order, bank
draft, cash or an authorization to withdraw funds from an account at the Bank.
Wire transfers will not be accepted. Orders in excess of $25,000 must be paid
for by bank check, certified check or withdrawal authorization from an account
with sufficient collected funds. The Company and the Bank are not obligated to
accept or process orders which are submitted on facsimile or copied stock order
forms. The Bank is prohibited from lending funds to any person or entity for the
purpose of purchasing Common Stock in the Conversion. All persons with
subscription rights must list all their accounts on the stock order form, giving
all names on each account and the account numbers. Failure to do so may reduce
the number of shares allocated to the subscriber if there is an oversubscription
in any priority category. See "The Conversion--Purchasing Common Stock."
Restrictions on Transfer of Subscription Rights
Subscription rights may not be transferred and no agreement to transfer
subscription rights will be valid. Each person exercising subscription rights
must certify that any purchase of Common Stock will be solely for the
purchaser's own account and that there is no agreement or understanding
regarding the sale or transfer of any shares purchased as a result of the
exercise of those rights. The Company and the Bank will pursue any and all legal
and equitable remedies if they become aware of the transfer of subscription
rights and will not honor orders known by them to involve the transfer of such
rights. See "The Conversion--Restrictions on Transferability of Subscription
Rights and Common Stock."
Purchase Limitations
The minimum purchase is 25 shares. The maximum purchase limit is
$150,000, except that the ESOP will be permitted to purchase 8% of the shares of
Common Stock issued in the Conversion. At any time during the Conversion, the
Company and the Bank may increase the maximum purchase limitation, and increase
the amount that may be subscribed for in the Offerings, to up to 5% of the
shares offered. The Company may further increase the maximum purchase limit to
9.99% of the shares offered, but the amount by which each order exceeds 5% of
the shares offered may not, in the aggregate, exceed 10% of the total shares
offered. If the maximum purchase limit is increased, subscribers who submit
orders for $150,000 of Common Stock will be resolicited and given an opportunity
to increase their orders. See "The Conversion--Additional Purchase
Restrictions."
Stock Pricing and Number of Shares to be Issued
The aggregate purchase price of the Common Stock to be issued in the
Conversion will be based upon the Appraisal. CRG has advised the Bank that in
its opinion, dated March 14, 1997, the aggregate estimated pro forma market
value of such Common Stock, representing the estimated market value of such
Common Stock upon consummation of the Conversion and after the receipt of the
net proceeds by the Company, ranged from $14,450,000 to $19,550,000, with a
midpoint of $17,000,000. See "The Conversion--Stock Pricing and Number of Shares
to Be Issued." The Company has established a Purchase
6
<PAGE>
Price of $10.00 per share, and, therefore, the Company intends to sell between
1,445,000 and 1,955,000 shares of Common Stock in the Conversion, subject to a
possible increase by up to 15% as described below. The Appraisal is not a
recommendation of any kind as to the advisability of purchasing Common Stock nor
can any assurance be given that purchasers of the Common Stock in the Conversion
will be able to sell such shares at or above the Purchase Price.
The actual number of shares of Common Stock to be issued in the
Conversion will be determined by the Company and the Bank based upon an updated
appraisal by CRG of the estimated pro forma market value of the Common Stock,
giving effect to the Conversion, at the completion of the Offerings. If approved
by the OTS, the Valuation Range may be increased or decreased to reflect market
and economic conditions prior to the completion of the Conversion, and under
such circumstances the Company may increase or decrease the number of shares of
Common Stock to be issued in the Conversion. The maximum of the Valuation Range
may be increased by up to 15% and the number of shares of Common Stock to be
issued in the Conversion may be increased to 2,248,250 shares due to regulatory
considerations, changes in the market and general financial and economic
conditions. Subscribers will be resolicited and allowed to modify or cancel
their subscriptions if the updated appraisal by CRG reflects an estimated pro
forma market value of the Common Stock to be issued in the Conversion of more
than $22,482,500 or less than $14,450,000. Subscribers will also be permitted to
modify or cancel their subscriptions if the Conversion is not completed within
45 days after the Subscription Offering Expiration Date. See "Pro Forma Data,"
"Risk Factors--Possible Increase in the Valuation Range and Number of Shares to
be Issued" and "The Conversion--Stock Pricing and Number of Shares to be
Issued."
Dividends
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to declare dividends on the Common Stock. The
Board of Directors does not presently intend to declare dividends on the Common
Stock but will consider doing so in the future. In the future, declarations of
dividends, if any, by the Board of Directors will depend upon a number of
factors, including the amount of the net proceeds from the Offerings retained by
the Company, investment opportunities available to the Company or the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations, general
economic conditions, industry standards and other factors. The Company has
committed to the OTS that it will not pay or undertake any action that will
further the payment of a return of capital or other extraordinary dividend for
one year after the consummation of the Conversion. As the principal asset of the
Company, the Bank will provide the principal source of funds for payment of
dividends by the Company. See "Dividend Policy."
Benefits to Management and Directors
The Board of Directors of the Company is adopting the ESOP and,
following the Conversion, expects to adopt a stock option plan (the "Stock
Option Plan") and a restricted stock award plan (the "Incentive Stock Award
Plan" or "ISAP"). These plans are available to provide benefits to officers,
employees and, except for the ESOP, to non-employee directors of the Bank and
the Company. The ESOP is also expected to purchase 8% of the Common Stock issued
in the Conversion. The Stock Option Plan will permit the issuance of options to
purchase, in the aggregate, shares of Common Stock equal to 10% of the number of
shares issued in the Conversion, and the ISAP will provide for the grant of
restricted stock awards, in the aggregate, of up to 4% of the shares of stock
issued in the Conversion.
Stock Option Plan. If, as the Company intends, the Stock Option Plan is
implemented within one year after the Conversion, it must be approved first by
stockholders at a meeting to be held at least six
7
<PAGE>
months after the Conversion. OTS regulations provide that the Stock Option Plan
may permit the grant of options to purchase, in the aggregate, a number of
shares equal to not more than 10% of the Common Stock issued in the Conversion,
with no more than 25% of such aggregate number of options to be awarded to any
officer of the Bank and not more than 5% of such aggregate to be awarded to a
non-employee director. It is expected that the exercise price of options granted
under the Stock Option Plan will be equal to the fair market value of the Common
Stock on the date the option is granted. Shares issued to satisfy the exercise
of options under the Stock Option Plan may come from authorized but unissued
shares or from shares repurchased by the Company. See "Risk Factors--Possible
Dilution From Stock Options and the ISAP" and "Management of the
Bank--Benefits--Stock Option Plan."
Incentive Stock Award Plan. The ISAP is subject to the same approval
requirements as the Stock Option Plan. If implemented, the ISAP is expected to
be funded with Common Stock repurchased by the Company. Based upon the $10.00
Purchase Price, such repurchased shares would cost the Company from $578,000 to
$899,300 at the minimum and 15% above the maximum of the Valuation Range. The
ISAP is expected to provide for the award of shares of Common Stock to directors
and officers which will vest 20% per year for five years after the date of the
award. Under the anticipated terms of the ISAP, recipients will receive shares
without any cost. OTS regulations provide that the ISAP may permit the award of
shares, in the aggregate, equal to not more than 4% of the Common Stock issued
in the Conversion, with no more than 25% of such aggregate number of shares to
be awarded to any officer of the Bank and not more than 5% of such aggregate to
be awarded to a non-employee director. Based upon the $10.00 Purchase Price, the
aggregate market value of the restricted stock intended to be awarded under the
ISAP to Clifford E. Kelsey, Jr., President and Chief Executive Officer is from
$144,500 to $224,825 and for the five non-employee directors as a group is from
$144,500 to $224,825, based upon the minimum and 15% above the maximum of the
Valuation Range, respectively. For financial reporting purposes, the Company
will record compensation expense on account of the ISAP during periods in which
awards vest in an amount equal to the fair market value of the stock on the date
of vesting. If the fair market value on that date is greater than $10.00 per
share, compensation expense will increase correspondingly. See "Management of
the Bank--Benefits--Incentive Stock Award Plan."
Employee Stock Ownership Plan. The ESOP intends to purchase up to 8% of
the Common Stock issued in the Conversion and to finance its subscription with
the ESOP Loan from the Company with a term of up to ten years at an interest
rate of 7.75% per annum. The Bank intends to make contributions to the ESOP to
pay principal and interest on the ESOP Loan. If shares are unavailable for
purchase by the ESOP in the Subscription Offering, then the ESOP intends to
purchase such shares in the open market after the Conversion. The Common Stock
acquired by the ESOP will be allocated to eligible employees as the ESOP Loan is
repaid. The ESOP provides for accelerated vesting in the event of a change of
control. See "Management of the Bank--Benefits--Employee Stock Ownership Plan."
Executive Officer Employment Contracts. The Bank and the Company have
entered into employment contracts ("Employment Contracts") with four executive
officers that will provide for, among other benefits, cash payments to them if
their employment is terminated following a change of control of the Bank or the
Company. Based on current compensation and benefit costs, cash payments to be
made in the event of a change of control of the Bank or the Company pursuant to
the terms of the Employment Contracts would be approximately $460,000 to Mr.
Kelsey and $1,276,000 to the four executive officers as a group. However, the
actual amount payable cannot be estimated at this time because it will be based
on facts existing at the time of the change of control. See "Management of the
Bank--Employment Contracts."
The Bank and the Company also intend to enter into employee retention
agreements ("Retention Agreements"), effective on the Conversion, with four
other officers. Based on current compensation and
8
<PAGE>
benefits, cash payments to be made in the event of a change of control of the
Bank or the Company would be approximately $533,000. However, the actual amount
payable cannot be estimated at this time because it will be based on facts
existing at the time of the change of control. See "Management of the
Bank--Employee Retention Agreements."
Subscriptions By Executive Officers and Directors. The Bank's executive
officers and directors intend to purchase $576,450 of Common Stock in the
Offerings, or from 3.99% to 2.56% of the Common Stock to be sold in the
Conversion based on the minimum and 15% above the maximum of the Valuation
Range, respectively. Subscriptions by executive officers will receive the same
priority, based upon their status among the subscription priority categories, as
all other depositors, except that, in the event of an oversubscription, their
subscription rights based upon deposits made during the one year prior to
December 31, 1995 will be subordinate to the subscription rights of other
Eligible Account Holders. See "The Conversion--Participation by the Board and
Senior Management."
Anti-takeover Aspects of Conversion
The certificate of incorporation and bylaws of the Company, the charter
and bylaws of the Bank, the compensation plans and arrangements, and certain
provisions of federal law, can be expected to have an adverse effect on the
willingness or ability of a person or group to acquire control of the Company,
which, in turn, could have an adverse effect on the market price of the Common
Stock. For example, the certificate of incorporation of the Company provides
that shares owned in excess of 10% of the shares outstanding cannot be voted and
the Employment Contracts, Retention Agreements and benefit plans provide for
potentially material payments to officers and employees if there is a change in
control of the Company. Provisions of federal law and the Plan of Conversion
also restrict attempts to acquire control of the Company or the Bank in the
years immediately following the Conversion. See "Restrictions on Acquisition of
the Company and the Bank," "Management of the Bank--Employment Contracts" and
"--Employee Retention Agreements."
Risk Factors
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.
9
<PAGE>
RISK FACTORS
The following risk factors should be considered by prospective investors in
deciding whether to purchase the common stock offered in the Offerings
Interest Rate Risk
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 savings deposits and borrowed money. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Analysis of Net
Interest Income." Differences in the period to repricing of assets and
liabilities can affect net interest income if market interest rates change. At
December 31, 1996, $18.3 million, or 29.9%, of the Bank's total loans were
fixed-rate one-to-four family mortgage loans. In addition, at December 31, 1996,
the Bank had $22.3 million in investment and mortgage-backed securities with
fixed rates of interest. The Bank generally accepts savings deposits for
considerably shorter terms than its fixed-rate mortgage loans. Furthermore,
although at December 31, 1996, $34.8 million, or 56.8%, of total loans, were
adjustable rate one-to-four family mortgage loans, the interest rate on most of
these loans adjusts only annually, and on some loans as infrequently as once
every five years. These loans are often also subject to annual and lifetime
limits on interest rate adjustments. As a consequence, an increase in general
market interest rate conditions could have an adverse effect on the Bank's
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Management of Interest Rate Risk."
Management seeks to limit interest rate risk by originating, when customer
demand permits, adjustable rate loans. However, during certain periods, such as
at the present time when interest rates are perceived to be relatively low,
customers tend to prefer fixed rate mortgage loans to lock in the lower rates.
During periods of perceived higher interest rates, customers tend to prefer
adjustable rate loans with rates that they expect to adjust downward as market
interest rates decline. Therefore, there can be no assurance that the Bank will
be able to limit the adverse effects of fluctuating interest rates by
originating sufficient adjustable rate loans.
Allowance for Loan Losses
At December 31, 1996, the Bank's allowance for loan losses was $133,000
or 0.2% of total loans. The allowance as a percentage of total loans is
relatively low when compared with other savings institutions in New York.
Although management of the Bank believes that the allowance for loan losses is
adequate in light of the quality of the Bank's loan portfolio and current
economic conditions, future events may require additions to the allowance for
loan losses above those reasonably anticipated. These events include: (i)
adverse changes in economic conditions and changes in interest rates that may
affect the ability of borrowers to make payments on loans, (ii) changes in the
financial capacity of individual borrowers, (iii) changes in the local real
estate market and the value of the Bank's loan collateral and (iv) future review
and evaluation of the Bank's loan portfolio, internally or by regulators. The
amount of the allowance for loan losses represents estimates made by management
that are susceptible to significant changes due to changes in values of
collateral, national and regional economic conditions, prevailing interest rates
and other factors. 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. See "Business of the Bank--Asset
Quality."
10
<PAGE>
Lending Concentration
The Bank has historically employed an operating strategy which
emphasized the origination of one-to-four family residential mortgage loans in
Orange County, New York. At December 31, 1996, 90.4% of the Bank's total loans
were owner-occupied one-to-four family residential mortgage loans, primarily
first liens on properties located in Orange County. See "Business of the
Bank--Lending Activities." This lack of geographic diversification could have an
adverse impact on the Bank and the Bank's profitability if Orange County were to
suffer a substantial economic decline. Furthermore, a material decline in local
housing values could have an adverse effect on the ability of the Bank to
recover the full amount due on mortgage loans in default. In addition, the
profitability of the Bank's one-to-four family residential lending business
could be adversely impacted by competitive market forces and technological
advances of its competitors.
Competition
The Bank faces intense and increasing competition both in making loans
and in attracting deposits. The Bank's market area has many financial
institutions, including some which have greater financial resources, name
recognition and market presence than the Bank, and all of which are competitors
of the Bank to varying degrees. The Bank's competition for loans comes
principally from commercial banks, other savings banks, savings and loan
associations, mortgage banking companies, finance companies and credit unions.
The Bank's most direct competition for deposits historically has come from other
savings banks, savings and loan associations, commercial banks and credit
unions. In addition, the Bank faces increasing competition for deposits from
non-bank institutions such as brokerage firms, insurance companies, money market
mutual funds, other mutual funds (such as corporate and government securities
funds) and annuities. Trends toward the consolidation of the banking industry
and the lifting of interstate banking and branching restrictions may make it
more difficult for smaller institutions, such as the Bank, to compete
effectively with large national and regional banking institutions. See "Business
of the Bank--Market Area" and "--Competition."
Impact of Technological Advances
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. The
Company's future success may depend, in part, on its ability to address the
needs of its customers by using technology to provide products and services that
will satisfy customer demands for convenience and create additional efficiencies
in the Bank's operations. Many of the Bank's competitors have substantially
greater resources than the Bank to invest in technological improvements. There
can be no assurance that the Bank will be able to effectively implement new
technology-driven products and services or be successful in marketing such
products and services to the public.
Additional Capital; Return on Equity
As a result of the Conversion, the Company will have, on a consolidated
basis, total equity that is substantially more than the equity of the Bank prior
to the Conversion. Loan demand is not expected to increase correspondingly, and
thus the Company is likely to be faced with the choice of either investing
capital in lower yielding debt securities or making higher risk investments to
increase yields. Furthermore, the Company is not expected to be able to
immediately leverage the new capital, and therefore the increase in equity may
adversely affect return on equity (net income divided by average equity), absent
a corresponding increase in net income. The Bank's return on equity was 7.68%
(annualized) and 1.01% (annualized) for the three months ended December 31, 1996
and 1995, respectively and was 4.88%,
11
<PAGE>
(4.04)% and 2.72% for the years ended September 30, 1996, 1995 and 1994,
respectively. The Company initially intends to invest the net proceeds in short
and medium term investments which generally have lower yields than loans. There
can be no assurance that the Company will be able to increase net income in
future periods in amounts commensurate with the increase in equity resulting
from the Conversion. See "Pro Forma Data." Furthermore, current OTS policy on
stock repurchases by the Company could limit the Company's flexibility in
utilizing the net proceeds. See "Use of Proceeds" and "The Conversion --
Restrictions on Repurchase of Stock."
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 stock charter
and bylaws, as well as certain federal regulations, assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions include, among other things, supermajority voting on certain matters,
staggered boards of directors, noncumulative voting for directors, limits on the
calling of special meetings, certain uniform price provisions for certain
business combinations and limits on voting shares in excess of 10% of the
outstanding shares. Any person owning in excess of 10% of the outstanding shares
of voting stock will not be permitted to cast any votes with respect to shares
in excess of the 10% limit. The Bank's Stock Charter also prohibits, for five
years, the acquisition of, or the offer to acquire, directly or indirectly, the
beneficial ownership of more than 10% of the Bank's equity securities, except
for the acquisition of stock of the Bank by the Company. 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 Company's Board of Directors and, thus, generally
may serve to perpetuate current management and could have an adverse effect on
the market price of the Common Stock.
Voting Control of Officers and Directors. Directors and executive
officers of the Bank and the Company expect to purchase approximately 3.99% or
2.56% of the shares of Common Stock to be sold in the Conversion, based upon the
minimum and 15% above the maximum of the Valuation Range, respectively. In
addition, the ESOP intends to purchase 8% of the Common Stock to be sold in the
Conversion. As a result, assuming the Stock Option Plan and the ISAP are
implemented, directors, executive officers and employees have the potential to
control the voting of approximately 25.99% and 24.56% of the Company's Common
Stock (based on the minimum and 15% above the maximum, respectively of the
Valuation Range and assuming that ISAP Shares are awarded from, and all stock
options are exercised and satisfied with, shares repurchased by the Company),
thereby enabling them to prevent or render more difficult the approval of
transactions and other corporate actions requiring a supermajority vote of
stockholders, such as certain business combinations and the amendment of certain
charter provisions. 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."
Provisions in Management Contracts and Benefit Plans. Certain
provisions contained in the proposed Employment Contracts, Retention Agreements,
the ESOP, the Stock Option Plan and the ISAP that provide for cash payments or
the vesting of benefits upon a change of control of the Company or the Bank may
make it less likely, or more costly, for a person to seek to acquire the Company
or the Bank and could result in stockholders receiving less for their Common
Stock than otherwise might be paid in the event of an acquisition of the
Company. See "Management of the Bank--Employment Contracts," and "--Employee
Retention Agreements" and "Management of the Bank--Benefits--Employee Stock
Ownership Plan," "--Stock Option Plan" and "--Incentive Stock Award Plan."
12
<PAGE>
Absence of Market for Common Stock
The Company and the Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock at this time.
The Company has received conditional approval from the Nasdaq Stock Market to
have its Common Stock approved for quotation on the Nasdaq National Market under
the symbol "GOSB" upon completion of the Conversion. One of the requirements for
continued listing of the Common Stock on the Nasdaq National Market is that
there be at least two market makers for the Common Stock and the National
Association of Securities Dealers, Inc. (the "NASD") has proposed, among other
things, increasing this requirement to three market makers. The Company will
seek to encourage and assist sufficient market makers to make a market in its
Common Stock to satisfy Nasdaq requirements. Capital Resources will assist the
Company in such efforts and expects that it will be a market maker in the Common
Stock. While the Company anticipates that there will be other broker-dealers who
will act as market makers for the Common Stock, there can be no assurance that
there will be sufficient market makers for the Common Stock.
Making a market in securities involves maintaining bid and asked
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. The development of a public trading market depends upon
the existence of willing buyers and sellers, the presence of which is not within
the control of the Company, the Bank or any market maker. Accordingly, there can
be no assurance that an active and liquid trading market for the Common Stock
will develop, or, once developed, will continue, nor can there be any assurances
that purchasers of the Common Stock will be able to sell their shares at or
above the Purchase Price. The absence or discontinuance of a market for the
Common Stock may have an adverse impact on both the price and liquidity of the
Common Stock and if a market for the Common Stock does not develop, it may be
difficult for investors to sell their shares of Common Stock. See "Market for
the Common Stock."
Possible Increase in the Valuation Range and Number of Shares to be Issued
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the maximum of the Valuation Range of up to 15% to
reflect changes in market and financial conditions following the commencement of
the Subscription Offering. If the Valuation Range is so increased, it is
expected that the Company will issue up to 2,248,250 shares of Common Stock in
the Conversion for aggregate proceeds of up to $22,482,500. An increase in the
number of shares issued would decrease the pro forma net earnings per share and
stockholders' equity per share but would increase the Company's pro forma
consolidated stockholders' equity and net earnings.
Possible Dilution From Stock Options and the ISAP
Common Stock equal to 10% of the shares issued in the Conversion will
be reserved for issuance under the Stock Option Plan, the implementation of
which will be subject to the approval of the stockholders of the Company. If all
of the options were to be exercised and satisfied using authorized but unissued
shares of Common Stock, the voting interests of existing stockholders would be
diluted by approximately 9.09%, and, assuming that all options were granted at
the Purchase Price, the effect on pro forma net earnings per share and
stockholders' equity per share would be as set forth under "Pro Forma Data."
Also, following the Conversion, the ISAP, if implemented, will provide for the
grant of shares in an amount equal to 4% of the shares of Common Stock issued in
the Conversion. The Company expects to acquire the shares used to fund the ISAP
through open market purchases, subject to OTS approval, if necessary. However,
if the ISAP is funded with authorized but unissued shares, the interests of
existing
13
<PAGE>
stockholders would be diluted by approximately 3.85% (assuming no exercise of
any options). See "Pro Forma Data" for the effect on pro forma net earnings per
share and stockholders' equity per share. Stockholders will not have preemptive
rights to acquire shares issued to satisfy the exercise of stock options or to
fund the ISAP. If the ISAP is funded by open market purchases, the voting
interests of existing stockholders would not be diluted, and the effect on pro
forma net earnings per share and stockholders' equity per share would be as set
forth under "Pro Forma Data." A dilution of the interests of existing
stockholders could be expected to have an adverse effect on the market price of
the Common Stock.
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Bank has received an opinion from CRG that subscription rights
granted to Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members have no value. However, this opinion is not binding on the IRS. If
the subscription rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders or Other Members are deemed to have an ascertainable
value, such Eligible Account Holders, Supplemental Eligible Account Holders or
Other Members could be taxed upon the receipt or exercise of the subscription
rights in an amount equal to such value. Additionally, the Bank could recognize
a gain for tax purposes on the distribution of the subscription rights. Although
the IRS is not known to have taken the position that subscription rights
constitute taxable income in similar conversions, the IRS may change its
position in the future. See "The Conversion--Effects of Conversion to Stock Form
on Depositors and Borrowers of the Bank."
Regulation of Financial Institutions
The Bank is subject to extensive regulation and supervision as a
federal savings bank. Federal regulatory authorities have extensive discretion
in connection with their supervision and enforcement activities and their
examination policies, including the imposition of restrictions on the operation
of a federal savings bank, the classification of its assets and the imposition
of an increase in its allowance for loan losses. In addition, the Company, as a
savings association holding company, will be subject to extensive regulation and
supervision. Any change in the regulatory structure or the applicable statutes
or regulations, whether by the OTS, the FDIC or the Congress, could have a
material impact on the Company, the Bank, its operations and the Conversion. See
"Regulation."
Congress has considered various proposals to consolidate and reorganize
the regulatory functions of the four federal banking agencies: the OTS, the
FDIC, the Office of the Comptroller of the Currency and the Board of Governors
of the Federal Reserve System. Legislation has also been introduced that would
limit the activities of unitary savings association holding companies to those
permitted to be engaged in by multiple savings association holding companies,
being principally those activities permitted of bank holding companies. See
"Regulation--Holding Company Regulation." The outcome of efforts to effect
regulatory consolidation and reorganization and to change the permitted
activities of holding companies is uncertain. Therefore, the Bank is unable to
determine the extent to which such legislation, if enacted, would affect its
business.
Risk of Delay in Consummation of the Conversion
The successful consummation of the Conversion will depend, in part,
upon market conditions, both generally and with respect to the Common Stock, and
upon the operating results of the Bank. If, following completion of the
Offerings, various factors (including the market demand for the Common Stock as
reflected by the level of subscriptions received in such Offerings) result in
the estimated pro forma market value of the Common Stock (as determined by
Capital Resources) being outside the Valuation Range (other
14
<PAGE>
than an increase of up to 15% above the maximum of the Valuation Range, as
discussed elsewhere in this prospectus), a resolicitation of subscribers would
likely be required. This would delay completion of the Conversion, increase
expenses and delay the ability of the Company to commence deploying and
leveraging the net proceeds. Developments other than market conditions could
also delay the Conversion; however, management is currently unaware of any such
developments.
FORWARD-LOOKING STATEMENTS
When used in this prospectus, in future filings by the Company with the
SEC, in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," or similar expressions
are intended to identify "forward-looking statements". In addition, certain
disclosures and information contained in this prospectus of a type customarily
provided by financial institutions, such as an analysis of the adequacy of the
loan loss allowance or an analysis of the interest rate sensitivity of the
Company's assets and liabilities, are inherently based upon predictions of
future events and circumstances.
The Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
Some of the risks and uncertainties that may affect the operations, performance,
development and results of the Company's business, the interest rate sensitivity
of its assets and liabilities, and the adequacy of its loan loss allowance,
include but are not limited to: (i) deterioration in local, regional, national
or global economic conditions which could result, among other things, in an
increase in loan delinquencies, a decrease in property values, or a change in
the housing turnover rate; (ii) changes in market interest rates or changes in
the speed at which market interest rates change; (iii) changes in laws and
regulations affecting the financial service industry; (iv) changes in
competition; and (v) changes in consumer preferences.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
affect the Company's financial performance and could cause the Company's actual
results or circumstances for future periods to differ materially from those
anticipated or projected.
15
<PAGE>
SELECTED FINANCIAL INFORMATION
Set forth below are selected financial and other data of the Bank. This
financial data is derived in part from, and should be read in conjunction with,
the Financial Statements and Notes to Financial Statements of the Bank presented
elsewhere in this Prospectus. In the opinion of management of the Bank, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of results for or as of the periods indicated have been included.
Selected Financial Condition Data:
<TABLE>
<CAPTION>
At December 31, At September 30,
---------------- ------------------------------------------------------
1996(1) 1996 1995 1994 1993 1992
------- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total assets........................... $96,966 $96,323 $101,041 $100,222 $100,290 $96,041
Loans receivable, net (2).............. 61,013 58,727 57,919 57,171 47,561 47,027
Mortgage-backed securities (3) ........ 6,173 6,474 4,404 2,226 1,753 2,224
Investment securities (3).............. 21,016 23,081 27,844 34,714 45,516 41,123
Cash and cash equivalents.............. 5,479 4,684 7,195 2,370 1,707 1,892
Deposits............................... 82,583 83,442 88,093 86,396 88,803 85,383
Borrowings............................. 1,000 - 1,000 2,000 - -
Total equity........................... 12,106 11,747 11,097 11,508 11,197 10,391
Selected Operations Data:
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended December 31, Year Ended September 30,
------------------- ------------------------------------------------------
1996(1) 1995(1) 1996 1995 1994 1993 1992
------- ------- -------- ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income .................................. $ 1,676 $ 1,534 $6,235 $ 5,715 $ 5,747 $ 6,414 $ 7,069
Interest expense ................................. 781 913 3,448 3,289 2,689 3,026 4,072
------ ------- ------- ------- ------- ------- -------
Net interest income ............................ 895 621 2,787 2,426 3,058 3,388 2,997
Provision for loan losses ........................ -- 13 24 29 25 10 40
------ ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses ................... 895 608 2,763 2,397 3,033 3,378 2,957
Non-interest income .............................. 162 179 489 450 377 425 916
Non-interest expense ............................. 637 626 2,343 2,931 2,798 2,599 2,382
------ ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and cumulative
effect of changes in accounting principles ..... 420 161 909 (84) 612 1,204 1,491
Income tax expense (benefit) ..................... 125 63 351 (16) 301 398 651
------ ------- ------- ------- ------- ------- -------
Income (loss) before cumulative effect of changes
in accounting principles ...................... 295 98 558 (68) 311 806 840
Cumulative effect of changes
in accounting principles (4) .................. -- -- -- (394) -- -- --
Net income (loss)............................ $ 295 $ 98 $ 558 $ (462) $ 311 $ 806 $ 840
====== ======= ======= ======= ======= ======= =======
</TABLE>
Notes appear after following page.
16
<PAGE>
Selected Financial Ratios and Other Data (5):
<TABLE>
<CAPTION>
At or for the Three
Months Ended
December 31, At or for the Year Ended September 30,
------------------ ---------------------------------------------
1996(1) 1995(1) 1996 1995 1994 1993 1992
------- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
to average total assets)(6).............. 0.95% 0.11% 0.56% (0.46)% 0.31% 0.82% 0.89%
Return on average equity (net income
to average equity)(6).................... 7.68 1.01 4.88 (4.04) 2.72 7.47 8.42
Average interest-earnings assets to
average interest-bearing liabilities..... 112.73 108.09 109.57 109.91 112.69 110.73 109.75
Net interest rate spread (7)(8)........... 3.37 2.28 2.71 2.27 2.85 3.28 2.88
Net interest margin (8)(9)................ 3.81 2.60 3.08 2.62 3.21 3.64 3.31
Net interest income after provision
for loan losses to total other expenses.. 1.41x 0.97x 1.18x 0.82x 1.08x 1.30x 1.24x
Capital and Asset Quality Ratios:
Average equity to average total assets.... 12.33 11.15 11.53 11.40 11.34 10.99 10.66
Total equity to assets end of period...... 12.48 11.13 12.20 10.98 11.48 11.16 10.82
Non-performing assets to total assets..... 0.003 - 0.02 0.22 0.26 0.27 0.15
Non-performing loans to total loans....... 0.005 - 0.03 0.39 0.45 0.56 0.17
Allowance for loan losses to total loans.. 0.22 0.22 0.21 0.20 0.19 0.19 0.20
Allowance for loan losses to
non-performing loans................... 44.33x NM(10) 7.69x 0.51x 0.41x 0.34x 1.15x
Other Data:
Number of real estate loans outstanding 891 911 876 913 951 922 992
Number of deposit accounts............. 11,603 12,616 11,695 12,556 12,106 12,040 12,284
Full service offices (11) ............. 1 1 1 1 1 1 1
</TABLE>
Notes appear on following page.
17
<PAGE>
(1) The data presented above and elsewhere in this prospectus at or for the
three months ended December 31, 1996 and 1995 are unaudited and reflect, in the
opinion of management, all adjustments (consisting of only normal recurring
adjustments, except as described in Note 6 below) which are necessary to present
fairly the results for such interim periods.
(2) Shown net of deferred fees and the allowance for loan losses.
(3) At December 31, 1996, all of the Bank's mortgage-backed securities are
classified as held to maturity and all investment securities are classified as
available for sale. See Notes 2, 3 and 4 of Notes to Financial Statements. For
1994, investment securities include $2,172,000 of trading securities.
(4) Reflects the recognition, in one lump sum, of the transition obligation for
post-retirement pension benefits recognized in accordance with Statement of
Financial Accounting Standards ("SFAS") 106. See Note 12 of Notes to Financial
Statements.
(5) Asset quality and capital ratios are at end of period. Other ratios are
based upon month end average balances. Ratios for the three-month periods have
been annualized where appropriate.
(6) For the purpose of disclosing the annualized return on average assets and
return on average equity, 75% (net of tax) of the lump sum distributions
received annually in December on the Bank's investment in the Institutional
Investors Mutual Fund and 75% of the net tax benefit resulting from a change in
New York State law regarding bad debt deductions has been excluded. See Note 5
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Average Balances, Interest Rates and Yields" and "--Comparison of
Operating Results for the Three Months Ended December 31, 1996 and December 31,
1995--Income Tax Expense."
(7) The net interest rate spread represents the difference between the weighted
average yield on interest earning assets and the weighted average cost of
interest-bearing liabilities.
(8) Reported spread and margin have been adjusted for the three month periods as
set forth in Note 5 to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Average Balances, Interest Rates and
Yields."
(9) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
(10) Not Meaningful. The denominator (non-performing loans) is zero.
(11) In March 1997, the Bank opened a branch in Goshen, New York.
18
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
The following tables summarize certain financial and operational
information and other data for the Bank as of or for the periods ended March 31,
1997 and 1996 (unaudited) and September 30, 1996 and, in the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the results for the unaudited periods have been made.
This information is derived in part from and should be read in conjunction with
the Financial Statements of the Bank and Notes thereto presented elsewhere
herein. The results of operations for the three and six months ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
entire year or any other period.
<TABLE>
<CAPTION>
Selected Financial Data
At March 31, 1997 At September 30, 1996
----------------- ---------------------
(In Thousands)
Total Amount of:
<S> <C> <C>
Assets............................................... $ 95,617 $ 96,323
Loans receivable, net................................ 61,734 58,727
Mortgage-backed securities........................... 5,925 6,474
Investment securities................................ 21,386 23,081
Cash and cash equivalents............................ 2,970 4,684
Deposits............................................. 82,501 83,442
Borrowings........................................... -- --
Total equity......................................... 12,125 11,747
Number of:
Real estate loans outstanding........................ 884 876
Deposit accounts..................................... 11,558 11,695
Full service offices................................. 2 1
</TABLE>
<TABLE>
<CAPTION>
Selected Operations Data
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Interest income................................ $ 1,621 $1,546 $3,297 $3,080
Interest expense............................... 767 859 1,547 1,772
------ ------ ----- -----
Net interest income......................... 854 687 1,750 1,308
Provision for loan losses...................... -- -- -- 13
------ ------ ------ -------
Net interest income after
provision for loan losses.................. 854 687 1,750 1,295
Non-interest income............................ 55 175 216 354
Non-interest expenses.......................... 737 682 1,374 1,308
------ ------ ----- -----
Income before income taxes..................... 172 180 592 341
Provision for income taxes..................... 68 72 193 135
------- ------- ------ ------
Net income (loss)........................... 104 108 399 206
</TABLE>
19
<PAGE>
Selected Financial Ratios
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets (net income to
average total assets)............................. 0.43% 0.44% 0.83% 0.41%
Return on average equity (net
income to average equity)......................... 3.42% 3.85% 6.63% 3.67%
Average interest-earning assets to average
interest-bearing liabilities...................... 115.05% 109.32% 113.89% 108.70%
Average equity to average total assets............... 12.72% 11.40% 12.52% 11.28%
Equity to assets at period end....................... 12.68% 12.20% 12.68% 12.20%
Net interest rate spread............................. 3.26% 2.67% 3.35% 2.50%
Net interest margin.................................. 3.77% 3.02% 3.82% 2.83%
Net interest income after provision for loan
losses to total other expenses.................... 1.16% 1.01% 1.27% 0.99%
Non-performing assets to total assets,
end of period..................................... 0.07% 0.00% 0.07% 0.00%
Non-performing loans to total loans,
end of period..................................... 0.11% 0.00% 0.11% 0.00%
Allowance for loan losses to total
loans, end of period ............................. 0.21% 0.21% 0.21% 0.21%
Allowance for loan losses to
non-performing loans, end of period............... 188.46% NM(2) 188.46% NM(2)
- ---------------------
(1) Ratios for three and six month periods are stated on an annualized basis.
Such ratios and results are not necessarily indicative of results that may
be expected for the full year.
(2) NM - Not meaningful, the denominator is zero.
</TABLE>
20
<PAGE>
Comparison of Financial Condition at March 31, 1997 and September 30, 1996
Total assets decreased by $707,000, or 0.7%, from $96.3 million at
September 30, 1996 to $95.6 million at March 31, 1997. Net loans increased by
$3.0 million from $58.7 million at September 30, 1996 to $61.7 million at March
31, 1997, as the Bank continued to emphasize the origination of loans. The
increase in loans was funded principally by declines in the Bank's securities
investments and federal funds sold. Mortgage-backed securities declined by
$549,000 from $6.5 million to $5.9 million due to principal payments received
while investment securities declined by $1.7 million from $23.1 million to
$21.4 million due primarily to maturities and, to a lesser extent, to a
reduction in the market value of the investment securities in the Bank's
portfolio as interest rates rose. Federal funds sold declined by $1.5 million
from $1.7 million to $200,000.
Deposits declined by $941,000 from $83.4 million to $82.5 million from
September 30, 1996 to March 31, 1997. The decline resulted from management's
continuing efforts to reduce the Bank's cost of funds by moderating the rates
paid on certificates of deposit.
The Bank's equity increased by $378,000 from $11.7 million at September
30, 1996 to $12.1 million at March 31, 1997. The increase resulted from net
income of $399,000, partially offset by a $21,000 decline in net unrealized
gains on securities available for sale.
Comparison of Operating Results for the Three Months Ended March 31, 1997 and
March 31, 1996
General. Net income for the three month period ended March 31, 1997 was
$104,000, a decrease of $4,000 from net income of $108,000 for the three months
ended March 31, 1996. The decrease was represented principally by a $115,000
decline in realized gains on the sale of securities and $50,000 of environmental
remediation costs recorded during the three months ended March 31, 1997,
substantially offset by a $167,000 increase in net interest income after
provision for loan losses.
Interest Income. Interest income for the three months ended March 31,
1997 increased $75,000 from $1.5 million for the three months ended March 31,
1996 to $1.6 million for the comparable period in 1997. The yield on average
interest-earning assets increased from 6.79% to 7.16% between the periods as
yields increased on all major asset categories. The increase in overall average
yield was due to the combined effect of generally higher interest rate
conditions coupled with the repricing to market rates of teaser rate adjustable
mortgage loans originated during 1994 which did not adjust to fully indexed
rates until July 1996 or January 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Analysis of Net Interest
Income--Teaser Rate Loans."
Contributing to the increase in interest income was a shift in the mix
of assets as the average balance of loans, the Bank's highest yielding asset
category, increased by 6.3% while the average balances of investment and
mortgage-backed securities declined by 9.7% and 6.4%, respectively. Average
interest-earning assets declined by $545,000 from $91.1 million for the three
months ended March 31, 1996 to $90.6 million for the comparable period in 1997,
which partially offset the increase in interest income.
Interest Expense. Interest expense declined by $92,000 from $859,000
for the three months ended March 31, 1996 to $767,00 for the three months ended
March 31, 1997, due principally to a decline in the average cost of funds of 22
basis points from 4.12% for the three months ended March 31, 1996 to 3.90% for
the three months ended March 31, 1997 and a decline in the average balance of
interest-bearing liabilities of $4.6 million from $83.3 million to $78.7
million. These declines were caused principally by declines in both the average
rates paid and average balances of certificates of deposit. The average rate
paid
21
<PAGE>
on certificates of deposit declined from 5.42% for the three months ended March
31, 1996 to 4.88% for the three months ended March 31, 1997 and the average
balance of such accounts declined from $41.1 million to $38.0 million between
the periods as the Bank continued to seek to reduce its average cost of funds by
moderating the rates paid on those accounts. Furthermore, as the Bank received
payment of substantially all of its claims against Nationar, the Bank no longer
needed high cost certificates of deposit to fund non-earning assets frozen at
Nationar. The Bank also elected not to match rate increases offered by other
local banks on money market accounts during the latter part of calendar year
1996 and early 1997, resulting in a decline in the average balance of money
market accounts of $655,000, or 6.1%. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Analysis of Net Interest
Income--Efforts to Reduce Cost of Funds" and "--The Closing and Liquidation of
Nationar."
Net Interest Income. Net interest income increased by $167,000 from
$687,000 for the three months ended March 31, 1996 to $854,000 for the three
months ended March 31, 1997 as a result of the combined effect of the increase
in interest income and the decrease in interest expense discussed above. The
Bank's spread, representing the difference between the average rate paid on
interest-earning assets and the average rate paid on interest-bearing
liabilities, increased 59 basis points from 2.67% for the three months ended
March 31, 1996 to 3.26% for the three months ended March 31, 1997. The repricing
of teaser rate loans and the moderation of rates offered on certificate accounts
both had positive affects on net interest income.
The Bank's net interest margin increased from 3.02% during the three
months ended March 31, 1996 to 3.77% for the three months ended March 31, 1997.
The 75 basis point increase was caused by the combined effect of the increase in
spread and an increase in the ratio of interest-earning assets to
interest-bearing liabilities from 109.3% to 115.0% between the periods. Average
interest-bearing liabilities decreased by $4.6 million compared to a decrease in
average interest-earning assets of $545,000, caused in part by the resolution of
the Nationar matter which resulted in the release to the Bank of frozen assets
that had not been earning interest. The ratio was also positively affected by
the retention of earnings which increased the Bank's capital.
Provision for Loan Losses. The Bank did not record a provision for loan
losses during either of the periods due to the Bank's low levels of past due and
non-performing loans. Loans past due 90 days or more were $68,000 at March 31,
1997, represented by one residential one-to-four family mortgage loan. The Bank
had no other non-performing assets at that date. See "Business of the
Bank--Asset Quality."
Non-interest Income. Non-interest income decreased by $120,000 from
$175,000 for the three months ended March 31, 1996 to $55,000 for the three
months ended March 31, 1997. The decrease resulted principally from the fact
that the Bank had $115,000 of realized gains on the sale of securities ($69,000
net of tax effect) during the three months ended March 31, 1996, compared to no
such gains during the like period in 1997.
Non-interest Expense. Non-interest expense increased by $55,000 from
$682,000 for the three months ended March 31, 1996 to $737,000 for the three
months ended March 31, 1997. The principal cause of the increase was a $50,000
expense recorded during the three months ended March 31, 1997 on account of
costs incurred or anticipated for the removal of environmental contamination on
property adjoining the Bank's main office. See "Business of the
Bank--Properties." The remainder of the increase resulted from normal
fluctuations in expenses, as the Bank did not experience significant changes in
any principal non-interest expense categories. Compensation and benefits expense
increased by 1.0% from $394,000 to $398,000 while occupancy expense decreased by
15.4% from $58,000 to $49,000 principally because snow
22
<PAGE>
removal expense declined by $10,000 as the extremely harsh winter of 1996 was
followed by the relatively mild winter of 1997.
Income Tax Expense. Income tax expense declined from $72,000 for the
three months ended March 31, 1996 to $68,000 for the three months ended March
31, 1997 due to the decrease in net income between the periods.
Comparison of Operating Results for the Six Months Ended March 31, 1997 and
March 31, 1996
General. Net income for the six months ended March 31, 1997 was
$399,000, an increase of $193,000 over net income of $206,000 for the six months
ended March 31, 1996. The improvement resulted principally from improved yields
on assets and reductions in the cost of funds, partially offset by a decline in
gains on sales of securities and $50,000 of environmental remediation costs
recorded during the six months ended March 31, 1997.
Interest Income. Interest income increased $216,000 from $3.1 million
for the six months ended March 31, 1996 to $3.3 million for the six months ended
March 31, 1997 as the average yield on the Bank's interest-earning assets
increased from 6.72% to 7.26% due to increasing general interest rate conditions
and the upward repricing of the Bank's teaser rate mortgage loans. An increase
in the percentage of average interest-earning assets represented by loans from
63.3% for the six months ended March 31, 1996 to 67.6% for the six months ended
March 31, 1997 also had a positive effect on interest income, while a decrease
in the average volume of interest-earning assets between the periods from $91.2
million to $90.1 million adversely affected interest income. See "--Comparison
of Operating Results for the Three Months Ended March 31, 1997 and March 31,
1996--Interest Income."
Interest Expense. Interest expense declined by $225,000 from $1.8
million for the six months ended March 31, 1996 to $1.5 for the six months ended
March 31, 1997. The decline resulted from a reduction in the average rate paid
on interest-bearing liabilities of 31 basis points, from 4.22% to 3.91%, as the
Bank moderated the rates offered on certificates of deposit and money market
accounts. Average interest-bearing liabilities also declined from $83.9 million
to $79.1 million between the periods.
Net Interest Income. Net interest income increased by $441,000 from
$1.3 million for the six months ended March 31, 1996 to $1.7 million for the six
months ended March 31, 1997. The increase resulted from the combined effect of
the increase in interest income and the decrease in interest expense. The Bank's
spread increased from 2.50% for the six months ended March 31, 1996 to 3.35% for
the six months ended March 31, 1997 as the average rate earned on interest
earning assets increased while the average rate paid on interest-bearing
liabilities declined. The Bank's net interest margin increased from 2.83% for
the six months ended March 31, 1996 to 3.82% for the six months ended March 31,
1997. The increase in the net interest margin corresponded to the increase in
spread, also positively affected by an increase in the excess of interest
earning assets over interest-bearing liabilities due to the resolution of the
Nationar matter.
Provision for Loan Losses. The provision for loan losses declined from
$13,500 for the six months ended March 31, 1996 to zero for the six months ended
March 31, 1997. The Bank did not provide additional amounts for loan losses
during the six months ended March 31, 1997 due to its low level of
non-performing loans and its low level of charge-offs.
Non-interest Income. Non-interest income declined by $138,000 from
$354,000 for the six months ended March 31, 1996 to $216,000 for the six months
ended March 31, 1997. The principal cause of the
23
<PAGE>
decline was $115,000 of gains on the sale of securities during the six months
ended March 31, 1996 compared to no such gains during the comparable period in
1997 and a $26,000 decline in capital gains distributions from the Bank's mutual
fund investments.
Non-interest Expense. Non-interest expense increased $66,000 from $1.3
million for the six months ended March 31, 1996 to $1.4 million for the six
months ended March 31, 1997. The increase was caused principally by $50,000 in
environmental remediation expenses which the Bank recorded during the latter
period.
Income Tax Expense. Income tax expense increased from $135,000 for the
six months ended March 31, 1996 to $193,000 for the six months ended March 31,
1997. The increase was caused by an increase in income before taxes from
$341,000 to $592,000. The increase was partially offset by a $60,000 reduction
in deferred tax liabilities due to changes in New York law regarding tax bad
debt deductions. See "Taxation--New York State Taxation."
Regulatory Capital Ratios at March 31, 1997
The following table sets forth the Bank's regulatory captial ratios at
March 31, 1997 as compared to the minimum regulatory capital requirements
imposed by the OTS (dollars in thousands).
Requirement Actual Excess
----------- ------ ------
Tangible capital $1,432 1.50% $12,003 12.57% $10,571 11.07%
Core capital $2,865 3.00% $12,003 12.57% $ 9,138 9.57%
Risk-based capital $4,392 8.00% $12,130 22.10% $ 7,738 14.10%
GSB FINANCIAL CORPORATION
GSB Financial Corporation (the "Company") was recently organized at the
direction of the Board of Directors 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 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--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 ESOP
Loan, and will have no significant liabilities. The Company intends to use a
portion of the net proceeds it retains to make the ESOP Loan to enable the ESOP
to purchase 8% of the Common Stock issued in the Conversion. See "Use of
Proceeds." The management of the Company is as 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.
There
24
<PAGE>
are no current arrangements, understandings or agreements regarding any such
opportunities. However, subsequent to the Conversion, the Company will be in a
position, 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 of the Offerings to be retained by the Company, income
thereon and dividends from the Bank.
The Company's executive office is located at the administrative offices
of the Bank, One South Church Street, Goshen, New York 10924. Its telephone
number is (914) 294-6151.
GOSHEN SAVINGS BANK
The Bank was organized in 1871 as a New York State chartered mutual
savings bank. The Bank converted to a federal mutual savings bank on March 18,
1997. The Bank's deposit accounts are insured to the maximum allowable amount by
the BIF as administered by the FDIC. The Bank services its customers from its
main office in Goshen, an adjacent drive-up facility, and a branch opened in
March 1997 at an elder care facility in Goshen. At December 31, 1996, the Bank
had total assets of $97.0 million, total deposits of $82.6 million and total
equity of $12.1 million. The Bank's market area consists of the Village of
Goshen, New York and the surrounding communities to a radius of approximately 12
miles, representing most of Orange County, New York. Based upon data as of June
30, 1996 published by the FDIC, the Bank's share of total FDIC-insured deposits
within its market area was less than 5%.
The Bank is a community-oriented savings bank whose businesses
primarily consist of accepting deposits from customers and investing those funds
in residential mortgage loans in its local market area. To a lesser degree, the
Bank makes commercial mortgage loans and consumer loans and invests in
investment and mortgage-backed securities. At December 31, 1996, the Bank's loan
portfolio, net, totaled $61.0 million, or 62.9% of total assets. All of the
Bank's loan origination and related loan servicing activities are conducted
internally by Bank personnel.
The Bank's investment activities primarily consist of investing in debt
securities issued by the United States Government and its agencies, corporate
debt securities, mortgage-backed securities and certain limited equity
securities. At December 31, 1996, the Bank had $21.0 million in U.S. Government,
agency, municipal, corporate and foreign government debt securities, mutual fund
shares, and corporate equity securities, representing 21.7% of total assets, all
of which were classified as available for sale. At December 31, 1996, the Bank's
equity securities represented $2.8 million of the investment securities and
consisted of stock of the Federal Home Loan Bank of New York ("FHLBNY") and the
Student Loan Marketing Association, Inc. ("SLMA") and mutual fund shares issued
by the Institutional Investors Capital Appreciation Fund, Inc. (referred to
herein, with other related funds, as the Institutional Investors Mutual Fund, or
"IIMF"). At December 31, 1996, the Bank had $6.2 million in mortgage-backed
securities, or 6.4% of total assets, all of which were issued by
governmental-sponsored and federal agencies such as the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") and the Government National Mortgage Association ("GNMA"). All
mortgage-backed securities were classified as held to maturity.
The Bank's executive office is located at One South Church Street,
Goshen, New York 10924. Its telephone number is (914) 294-6151.
25
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At December 31, 1996, the Bank was subject to FDIC minimum capital
requirements and satisfied all such requirements. Set forth below is a summary
of the Bank's compliance with the OTS capital standards now applicable to it, on
an historical basis at December 31, 1996, and on a pro forma basis assuming that
the indicated number of shares were sold as of such date and assuming the
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 shares expected
to be acquired by the ISAP are deducted from pro forma regulatory capital. See
"Pro Forma Data".
<TABLE>
<CAPTION>
Pro Forma Based Upon Net Proceeds at December 31, 1996
----------------------------------------------------------------------------------------------------------
Historical at Minimum of Midpoint of Maximum of 15% Above Maximum
December 31, 1996 Valuation Range Valuation Range Valuation Range of Valuation Range(1)
-------------------- ------------------- -------------------- -------------------- ----------------------
Percent of Percent of Percent of Percent of Percent of
Applicable Applicable Applicable Applicable Applicable
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> <C>
GAAP Capital (3).. $12,106 12.48% $ 17,212 16.6% $ 18,157 17.3% $ 19,103 18.0% $ 20,191 18.7%
======== ====== ======== ===== ======== ===== ======== ===== ======== =====
Tangible Capital:
Capital Level (4). $11,899 12.30% $ 17,005 16.4% $ 17,950 17.1% $ 18,896 17.8% $ 19,984 18.6%
Requirement (5)... 1,451 1.50% 1,554 1.5% 1,573 1.5% $ 1,592 1.5% 1,613 1.5%
------- ------ -------- ----- -------- ----- -------- ----- -------- -----
Excess........... $10,448 10.80% $ 15,451 14.9% $ 16,377 15.6% $ 17,304 16.3% $ 18,371 17.1%
======== ====== ======== ===== ======== ===== ======== ===== ======== =====
Core Capital:
Capital Level (4) $11,899 12.30% $ 17,005 16.4% $ 17,950 17.1% $ 18,896 17.8% $ 19,984 18.6%
Requirement (5).. 2,903 3.00% 3,108 3.0% 3,146 3.0% 3,183 3.0% 3,226 3.0%
------- ------ -------- ----- -------- ----- -------- ----- -------- -----
Excess........... $ 8,996 9.30% $ 13,897 13.4% $ 14,804 14.1% $ 15,713 14.8% $ 16,758 15.6%
======== ====== ======== ===== ======== ===== ======== ===== ======== =====
Risk-based capital:(6)
Capital level (4) $12,032 21.85% $ 17,138 29.1% $ 18,083 30.3% $ 19,029 31.5% $ 20,117 32.9%
Requirement (5).. 4,405 8.00% 4,716 8.0% 5,053 8.0% 5,153 8.0% 5,268 8.0%
------- ------ -------- ----- -------- ----- -------- ----- -------- -----
Excess........... $ 7,627 13.85% $ 12,422 21.1% $ 13,030 22.3% $ 13,876 23.5% $ 14,849 24.9%
======== ====== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the maximum of the Valuation 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 Offering.
(2) Tangible and core capital ratios are shown as a percentage of tangible
assets. Risk-based capital ratios shown as a percentage of risk-weighted assets.
(3) The difference between capital under generally accepted accounting
principles ("GAAP") and regulatory tangible and core capital is an adjustment to
GAAP capital by the amount of the net unrealized gain/loss, if any, on
available-for-sale securities recognized only for GAAP purposes, and other
adjustments not pertinent to the Bank. Regulatory risk-based capital reflects
these adjustments and includes the allowance for loan losses. See
"Regulation--Regulation of Federal Savings Associations--Capital Requirements."
(4) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the sale of Common Stock in the Offerings. These levels also
assume funding by the Bank of the ISAP equal to 4% of the Common Stock issued
and repayment of the ESOP Loan in level principal installments over a period of
10 years. See "Management of the Bank--Benefits" for a discussion of the ISAP
and ESOP.
(5) In order to be classified as "well-capitalized," a federal savings bank
must, in addition to other requirements, have ratios of core and total capital
to risk-weighted assets of at least 6.0% and 10.0%, respectively, and its ratio
of core capital to total assets must be at least 5.0%. See
"Regulation--Regulation of Federal Savings Associations--Capital Requirements"
and "--Prompt Corrective Action."
(6) Pro forma risked-based capital data assumes net proceeds are invested in
assets that carry a risk-weighting equal to 56.8%, being the average risk
weighting of the Bank's assets at December 31, 1996.
26
<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 $13,679,000 and $18,685,000 million (or $21,565,000 if the Valuation
Range is increased by 15%). See "Pro Forma Data" and "The Conversion--Stock
Pricing and Number of Shares to be Issued" 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 $13.7 million to $18.7 million, the Company
expects to utilize between $6.85 million and $9.35 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 to
increase its levels of one-to-four family real estate lending and, to a lesser
extent, other lending, depending on market conditions as suitable opportunities
arise. The Bank also intends to utilize the net proceeds for investments in
short- and medium-term, investment grade debt securities and mortgage-backed
securities. The Company may use net proceeds from the Conversion to purchase
stock to fund the ISAP or to satisfy the exercise of options issued under the
Stock Option Plan. See "Management of the Bank--Benefits--Stock Option Plan" and
"--Benefits--Incentive Stock Award Plan."
The Company intends to use a portion of the net proceeds it retains to
make the ESOP Loan 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 the Conversion. Based upon the
sale of from 1,445,000 shares to 1,955,000 shares at the minimum and maximum of
the Valuation Range, the amount of the ESOP Loan would be $1,156,000 or
$1,564,000, respectively (or $1,798,600 if the maximum of the Valuation Range is
increased by 15%), with a term of ten years at an interest rate of 7.75% per
year. 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--Benefits--Employee Stock Ownership Plan." The remaining net
proceeds retained by the Company will initially be invested in short- and
medium-term debt obligations, mortgage-backed securities and other investment
grade marketable equity securities, and may be invested in deposits in or loans
to the Bank.
The net proceeds 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, or diversification into other banking related businesses. 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--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 OTS, the Company
may not repurchase any Common Stock in the first year after the 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 repurchase would cause the
Bank to become "undercapitalized" within the meaning of the OTS's prompt
27
<PAGE>
corrective action regulation. See "Regulation--Regulation of Federal Savings
Associations--Prompt Corrective Action." 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 are not 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 stockholders. If the Company determines to
repurchase stock, such repurchases may be made at prices in excess of the
Purchase Price. To the extent that the Company repurchases stock at market
prices in excess of the Purchase Price, 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 "Regulation--Regulation of Federal Savings
Associations--Limitations on Capital Distributions" and "The Conversion --
Restrictions on Repurchase of Stock."
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. In
the future, declarations of dividends by the Board of Directors, if any, will
depend upon a number of factors, including the amount of net proceeds retained
by the Company in the Conversion, investment opportunities available to the
Company or the Bank, capital requirements, regulatory limitations, the Company's
and the Bank's financial condition, results of operations, tax considerations,
general economic conditions, industry standards and other factors. No assurances
can be given, however, that any dividends will be paid or, if payment is
commenced, will continue to be paid.
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 required to be
created as part of the Conversion for the benefit of certain depositors. See
"The Conversion--Liquidation Account." For information concerning federal
regulations which apply to the Bank regarding its ability to make capital
distributions, including payment of dividends to its holding company, see
"Regulation--Regulation of Federal Savings Associations--Limitations on Capital
Distributions" and "Taxation--Federal Taxation--Distributions." Assuming the
sale of Common Stock at the maximum of the Valuation Range, at December 31,
1996, after giving pro forma effect to (i) the Conversion and related expenses,
(ii) the deduction from capital of the amount expected to be borrowed by the
ESOP and the cost of shares of Common Stock to be acquired in connection with
the ISAP and (iii) the retention by the Bank of 50% of the net proceeds of the
Conversion, the Bank would be permitted to make capital distributions of up to
approximately $6.9 million to the Company without prior OTS approval.
Unlike the Bank, the Company is not generally subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net
28
<PAGE>
proceeds retained by the Company and earnings thereon and may be dependent, in
part, upon dividends from the Bank. The Company has committed to the OTS that it
will pay or undertake any action that will further the payment of a return of
capital or other extraordinary dividend for one year after the consummation of
the Conversion. The Company is subject 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.
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 "GOSB" 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 after the Conversion. See "Risk Factors--Absence of
Market for Common Stock."
29
<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 $13.7 million and $21.6 million based upon the
following assumptions: (i) the ESOP will purchase 8% of the Common Stock issued
in the Conversion and the remaining shares will be sold in the Offerings; (ii)
Capital Resources will receive a fee equal to 2% of the aggregate purchase price
of the shares sold in the Offerings, except that no fee will be paid with
respect to shares purchased by the ESOP, and by officers, employees, and
directors of the Bank and Company and members of their immediate families, which
purchases are estimated at $600,000; and (iii) Conversion expenses, excluding
the marketing fees paid to Capital Resources, will be approximately $517,000.
Actual Conversion expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the three months
ended December 31, 1996 and for the year ended September 30, 1996 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 5.55% (the one year
U.S. Treasury constant maturity index for the week which included December 31,
1996). The yield on a one year U.S. Treasury bill, rather than an arithmetic
average of the average yield on interest-earning assets and average rate paid on
deposits, has been used to estimate income on net proceeds because it is
believed that the one year U.S. Treasury bill rate is a more accurate estimate
of the rate that would be obtained on an investment of net proceeds from the
Offerings. 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 3.33% (based on an assumed tax rate of
40.0%). 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.
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 amounts 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 and for the three months ended December 31, 1996,
and at and for the year ended September 30, 1996, 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 ISAP, which is expected to be adopted by the Company
following the Conversion and presented to stockholders for approval. See
"Management of the Bank--Benefits--Incentive Stock Award Plan." No effect has
been given in the tables to the possible issuance of additional shares reserved
for future issuance pursuant to the Stock Option Plan expected to be adopted by
the Board of Directors of the Company and presented to stockholders for
approval, nor does book value as presented give any effect to the liquidation
account to be established in the Conversion. See "The Conversion--Effects of
Conversion on Depositors and Borrowers--Liquidation Rights" and "Management of
the Bank--Benefits--Stock Option Plan."
30
<PAGE>
<TABLE>
<CAPTION>
At or For the Three Months Ended December 31, 1996
------------------------------------------------------------------------------
1,445,000 1,700,000 1,955,000 2,248,250
Shares (Minimum) Shares (Midpoint) Shares (Maximum) Shares (15% Above
at $10.00 at $10.00 at $10.00 Maximum) at
Per Share Per Share Per Share $ 10.00 Per Share
---------------- ------------------- ------------------- -------------------
(Dollars in Thousands, Except Per Share Amount)
<S> <C> <C> <C> <C>
Gross Proceeds ..................................... $ 14,450 $ 17,000 $ 19,550 $ 22,483
Less offering expenses and commissions ............. (771) (818) (865) (919)
----------- ----------- ----------- -----------
Estimated net conversion proceeds ............... 13,679 16,182 18,685 21,564
Less ESOP and ISAP funding ......................... (1,734) (2,040) (2,346) (2,698)
----------- ----------- ----------- -----------
Estimated proceeds available for investment (1) . $ 11,945 $ 14,142 $ 16,339 $ 18,866
=========== =========== =========== ===========
Net income:
Historical ...................................... $ 295 $ 295 $ 295 $ 295
Pro forma adjustments:
Net -earnings from proceeds ..................... 99 118 136 157
ESOP expense (2) ................................ (17) (20) (23) (27)
ISAP expense (3) ................................ (17) (20) (23) (27)
----------- ----------- ----------- -----------
Pro forma net income .......................... $ 360 $ 373 $ 385 $ 398
=========== =========== =========== ===========
Net income per share:
Historical ...................................... $ 0.22 $ 0.19 $ 0.16 $ 0.14
Pro forma adjustments:
Net earnings from proceeds ...................... 0.07 0.08 0.08 0.08
ESOP expense .................................... (0.01) (0.01) (0.01) (0.01)
ISAP expense .................................... (0.01) (0.01) (0.01) (0.01)
----------- ----------- ----------- -----------
Pro forma net income per share ................ $ 0.27 $ 0.25 $ 0.22 $ 0.20
=========== =========== =========== ===========
Weighted average shares used in
calculation ................................... 1,330,845 1,565,700 1,800,555 2,070,638
Ratio of offering price to pro forma
net income per share (annualized).............. 9.26x 10.00x 11.36x 12.50x
=========== =========== =========== ===========
Stockholders' equity (book value)(5):
Historical ...................................... $ 12,106 $ 12,106 $ 12,106 $ 12,106
Pro forma adjustments:
Estimated net conversion proceeds ............. 13,679 16,182 18,685 21,564
Less Common Stock acquired by:
ESOP........................................ (1,156) (1,360) (1,564) (1,799)
ISAP ....................................... (578) (680) (782) (899)
----------- ----------- ----------- -----------
Pro forma book value ................... $ 24,051 $ 26,248 $ 28,445 $ 30,972
=========== =========== =========== ===========
Stockholders' equity (book value) per share:
Historical ...................................... $ 8.38 $ 7.12 $ 6.19 $ 5.38
Pro forma per share adjustments:
Estimated net conversion proceeds ............. 9.47 9.52 9.56 9.59
Less Common Stock acquired by:
ESOP ....................................... (0.80) (0.80) (0.80) (0.80)
ISAP ....................................... (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma book value per share ......... $ 16.65 $ 15.44 $ 14.55 $ 13.77
=========== =========== =========== ===========
Shares used in calculation ............. 1,445,000 1,700,000 1,955,000 2,248,250
Offering price per share as a percentage
of pro forma book value per share ............... 60.06% 64.77% 68.73% 72.62%
=========== =========== =========== ===========
</TABLE>
Notes appear after following page
31
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30, 1996
---------------------------------------------------------------------------------
2,248,250
1,445,000 1,700,000 1,955,000 Shares (15% Above
Shares (Minimum) Shares (Midpoint) Shares (Maximum) Maximum)
at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
------------------- ------------------- ------------------- -------------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds ....................................... $ 14,450 $ 17,000 $ 19,550 $ 22,483
Less offering expenses and commissions ............... (771) (818) (865) (919)
----------- ----------- ----------- -----------
Estimated net conversion proceeds ............... 13,679 16,182 18,685 21,564
Less ESOP and ISAP funding ........................... (1,734) (2,040) (2,346) (2,698)
----------- ----------- ----------- -----------
Estimated proceeds available for investment (1).. $11,945 $ 14,142 $ 16,339 $ 18,866
=========== =========== =========== ===========
Net income:
Historical ...................................... $ 558 $ 558 $ 558 $ 558
Pro forma adjustments:
Net earnings from proceeds ...................... 398 471 544 628
ESOP expense (2) ................................ (69) (82) (94) (108)
ISAP expense (3) ................................ (69) (82) (94) (108)
----------- ----------- ----------- -----------
Pro forma net income ......................... $ 818 $ 865 $ 914 $ 970
=========== =========== =========== ===========
Net income per share:
Historical ...................................... $ 0.42 $ 0.36 $ 0.31 $ 0.27
Pro forma adjustments:
Net earnings from proceeds ...................... 0.30 0.30 0.30 0.30
ESOP expense .................................... (0.05) (0.05) (0.05) (0.05)
ISAP expense .................................... (0.05) (0.05) (0.05) (0.05)
----------- ----------- ----------- -----------
Pro forma net income per share ............... $ 0.62 $ 0.56 $ 0.51 $ 0.47
=========== =========== =========== ===========
Weighted average shares used in
calculation .................................. 1,335,180 1,570,800 1,806,420 2,077,383
Ratio of offering price to pro forma
net income per share ......................... 16.13x 17.86x 19.61x 21.28x
=========== =========== =========== ===========
Stockholders' equity (book value)(5):
Historical ...................................... $ 11,747 $ 11,747 $ 11,747 $ 11,747
Pro forma adjustments:
Estimated net conversion proceeds ............ 13,679 16,182 18,685 21,564
Less Common Stock acquired by:
ESOP ..................................... (1,156) (1,360) (1,564) (1,799)
ISAP ..................................... (578) (680) (782) (899)
----------- ----------- ----------- -----------
Pro forma book value ................. $ 23,692 $ 25,889 $ 28,086 $ 30,613
=========== =========== =========== ===========
Stockholders' equity (book value) per share:
Historical ...................................... $ 8.13 $ 6.91 $ 6.01 $ 5.22
Pro forma per share adjustments:
Estimated net conversion proceeds ............ 9.47 9.52 9.56 9.59
Less Common Stock acquired by:
ESOP ..................................... (0.80) (0.80) (0.80) (0.80)
ISAP ..................................... (0.40) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma book value per share ....... $ 16.40 $ 15.23 $ 14.37 $ 13.61
=========== =========== =========== ===========
Shares used in calculation ........... 1,445,000 1,700,000 1,955,000 2,248,250
Offering price per share as a percentage
of pro forma book value per share ............... 60.98% 65.66% 69.59% 73.48%
=========== =========== =========== ===========
</TABLE>
Notes appear on following page.
32
<PAGE>
(1) No effect has been given to withdrawals from deposit accounts to purchase
Common Stock in the Conversion.
(2) It is assumed that 8% of the Common Stock issued in the Conversion will be
purchased by the ESOP. The funds used to acquire such shares are assumed to have
been borrowed by the ESOP from the Company. The amount 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 payments due on the ESOP Loan. The Bank's total annual payment on the
ESOP Loan is based upon ten equal annual installments of principal, with an
assumed interest rate at 7.75%. The pro forma net earnings assumes: (i) that the
Bank's contribution to the ESOP is equivalent to the debt service requirement
for the period and was made at the end of the period; (ii) that 2,890, 3,400,
3,910, and 4,497 shares were committed to be released during the three months
ended December 31, 1996, and that 11,560, 13,600, 15,640 and 17,986 shares were
committed to be released during the year ended September 30, 1996, in each case
at the minimum, midpoint, maximum and 15% above the maximum of the Valuation
Range, respectively, 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--Benefits--Employee
Stock Ownership Plan."
(3) Gives effect to the ISAP expected to be adopted by the Company following the
Conversion. The Company intends to acquire an amount of Common Stock equal to 4%
of the shares of Common Stock sold in the Conversion to fund the ISAP or 57,800,
68,000, 78,200 and 89,930 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Valuation Range, respectively. In
calculating the pro forma effect of the ISAP, it is assumed that the shares were
acquired at the beginning of the period presented in open market purchases at
the Purchase Price and that 5% and 20% of the purchase price of such shares was
an amortized expense during the three month period ended December 31, 1996 and
the year ended September 30, 1996, respectively, based upon a vesting period
under the ISAP of five years. The issuance of authorized but unissued shares of
the Company's Common Stock to fund the ISAP instead of open market purchases
would dilute the interests of existing stockholders by approximately 3.85%. In
such event, pro forma net earnings per share would be $0.26, $0.23, $0.20 and
$0.18, and pro forma stockholders' equity per share would be $16.39, $15.23,
$14.23 and $13.63 at the minimum, midpoint, maximum and 15% above the maximum of
the Valuation Range, respectively, for the three months ended December 31, 1996.
Pro forma net earnings per share would be $0.59, $0.53, $0.49 and $0.45 and pro
forma stockholders equity per share would be $16.15, $15.03, $14.20 and $13.48
at the minimum, midpoint, maximum and 15% above the maximum of the Valuation
Range, respectively, for the year ended September 30, 1996. There can be no
assurance that the actual purchase price of the shares used to fund the ISAP
will be equal to the Purchase Price. See "Management of the
Bank--Benefits--Incentive Stock Award Plan."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the Company
following the Conversion. Under the Stock Option Plan, an amount equal to 10% of
the Common Stock issued in connection with the Conversion or 145,500, 170,000,
195,550 and 224,825 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Valuation Range, respectively, will be reserved for future
issuance upon the exercise of options to be granted under the Stock Option Plan.
The issuance of Common Stock to satisfy the exercise of options under the Stock
Option Plan will result in the dilution of existing stockholders' interests.
Assuming all options were exercised at the beginning of the period at an
exercise price of $10.00 per share, and further assuming the reinvestment of the
proceeds received by the Company upon the same assumptions as the reinvestment
of the net proceeds of the Offerings, for the three months ended December 31,
1996, the pro forma net earnings per share would be $0.26, $0.23, $0.20 and
$0.18, respectively, and the pro forma stockholders' equity per share would be
$15.81, $14.75, $13.97 and $13.29, respectively, and for the year ended
September 30, 1996, the pro forma net earnings per share would be $0.58, $0.53,
$0.48 and $0.45, respectively, and the pro forma stockholders' equity per share
would be $16.04, 14.95, 14.14 and 13.43, respectively. See "Management of the
Bank--Benefits --Stock Option Plan."
(5) The retained earnings of the Bank will be substantially restricted after the
Conversion. See "Dividend Policy," and "The Conversion--Effects of Conversion on
Depositors and Borrowers--Liquidation Rights."
33
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at December 31, 1996, including deposits and borrowings, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion, 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>
15% Above
Minimum Midpoint Maximum Maximum
1,445,000 1,700,000 1,955,000 2,248,250
Goshen Savings Shares at Shares at Shares at Shares at
Historical $10 Per Share $10 Per Share $10 Per Share $10 Per Share (1)
---------- ------------- ------------- ------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits (2).................................... $ 82,583 $ 82,583 $ 82,583 $ 82,583 $ 82,583
Borrowings...................................... 1,000 1,000 1,000 1,000 1,000
-------- -------- -------- -------- --------
Total deposits and borrowings................... 83,583 83,583 83,583 83,583 83,583
======== ======== ======== ======== ========
Capital Stock :
Preferred Stock, $0.01 par value:
500,000 shares authorized; none outstanding. - - - - -
Common Stock, $ 0.01 par value(3)
4,500,000 shares authorized;
shares outstanding as shown................. - 14 17 20 22
Additional paid-in capital.................. - 13,665 16,165 18,665 21,543
Equity - substantially restricted (4)........... 12,106 12,106 12,106 12,106 12,106
-------- -------- -------- -------- --------
Less:
Common Stock acquired by ESOP(5).............. - (1,156) (1,360) (1,564) (1,799)
Common Stock acquired by ISAP(6).............. - (578) (680) (782) (899)
-------- -------- -------- -------- --------
Total stockholders' equity...................... $ 12,106 $ 24,051 $ 26,248 $ 28,445 $ 30,973
======== ======== ======== ======== ========
</TABLE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the maximum of the Valuation 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
Offering.
(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) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan intended to be adopted by the Company
and presented for approval of stockholders at a meeting of stockholders
following the Conversion. The Stock Option Plan 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. See "Management of the
Bank--Benefits--Stock Option Plan."
(4) The equity of the Bank will be substantially restricted after the
Conversion. See "The Conversion--Effects of Conversion on Depositors and
Borrowers--Liquidation Rights."
(5) Assumes that 8% of the shares issued in connection with the Conversion 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--Benefits--Employee Stock Ownership Plan."
(6) Assumes that, subsequent to the Conversion, shares equal to 4% of the shares
of Common Stock issued in the Conversion are purchased by the Company through
open market purchases for use to fund the ISAP. The Common Stock purchased by
the ISAP is reflected as a reduction of stockholders' equity. See "Risk
Factors--Possible Dilution from Stock Options and the ISAP," "Pro Forma Data"
and "Management of the Bank--Benefits--Incentive Stock Award Plan."
34
<PAGE>
GOSHEN SAVINGS BANK
STATEMENTS OF INCOME
The following Statements of Income of the Bank for each of the years in
the three-year period ended September 30, 1996 have been audited by Nugent &
Haeussler, P.C., independent certified public accountants, whose report thereon
appears elsewhere in this Prospectus. With respect to information for the three
months ended December 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
three months ended December 31, 1996 are not necessarily indicative of the
results that may be expected for the year ended September 30, 1997. These
statements should be read in conjunction with the Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Prospectus. Prior to March 18,
1997, the Bank was a New York chartered mutual savings bank operating under the
same name.
<TABLE>
<CAPTION>
Three Months Ended December 31, Years Ended September 30,
------------------------------- -------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans $1,154,728 $1,015,808 $4,327,786 $3,882,416 $3,360,217
Mortgage-backed securities 112,825 75,336 396,257 197,792 171,451
Federal funds sold 21,947 30,045 122,586 99,101 43,942
Investment securities:
U.S. Treasury and other
government agencies 104,393 139,885 529,275 500,473 571,934
Corporate bonds 195,678 197,856 691,502 900,754 1,454,023
Other 86,020 75,154 167,053 134,413 145,748
---------- ---------- ---------- ---------- ----------
Total interest income 1,675,591 1,534,084 6,234,459 5,714,949 5,747,315
--------- --------- --------- --------- ---------
Interest expense:
Deposit accounts 764,180 913,063 3,364,566 3,260,266 2,685,867
Other borrowing 15,888 0 82,900 28,443 3,193
---------- ----------- ---------- ---------- ----------
Total interest expense 780,068 913,063 3,447,466 3,288,709 2,689,060
---------- ---------- ---------- ---------- ---------
Net interest income before
provision for loan losses 895,523 621,021 2,786,993 2,426,240 3,058,255
Provision for loan losses 0 13,500 23,500 29,000 25,000
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 895,523 607,521 2,763,493 2,397,240 3,033,255
---------- ---------- ---------- ---------- ----------
Non-interest income:
Realized gains on sale of
investment securities 0 0 114,681 13,861 19,727
Capital gain distributions 93,139 119,260 119,260 180,964 198,904
Unrealized gain (loss) on trading
securities 0 0 0 0 (86,672)
Service charges on deposit accounts 36,705 37,036 147,247 148,460 85,434
Other income 31,759 23,179 107,547 106,354 159,447
---------- ---------- ---------- ---------- ----------
Total non-interest income 161,603 179,475 488,735 449,639 376,840
---------- ---------- ---------- ---------- ----------
Continued on following page
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Statements of Income continued from preceding page.
Three Months Ended December 31, Years Ended September 30,
------------------------------- -------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-interest expense:
Compensation and employee benefits 355,120 337,974 1,506,787 1,485,753 1,455,631
Office occupancy 43,628 45,853 191,011 177,207 213,253
Federal deposit insurance
premiums 0 8,708 10,708 142,302 200,194
Advertising 17,644 11,796 60,412 30,594 74,982
Data processing fees 51,244 49,886 222,671 192,461 177,744
Depreciation 38,060 36,567 142,406 141,884 147,928
Office supplies 21,781 21,280 90,306 82,252 78,883
Other 109,747 113,872 350,793 400,025 449,607
Nationar writedown (recovery) 0 0 (232,223) 278,623 0
---------- ---------- ---------- ---------- ----------
Total non-interest expense 637,224 625,936 2,342,871 2,931,101 2,798,222
Income (loss) before income tax
expense and cumulative effect
of accounting change 419,902 161,060 909,357 (84,222) 611,873
Income tax expense 124,600 63,000 351,400 (16,000) 301,000
---------- ---------- ---------- ---------- ----------
Net income (loss) before cumulative
effect of accounting change 295,302 98,060 557,957 (68,222) 310,873
Cumulative effect of accounting
change - Postretirement benefits 0 0 0 (393,750) 0
---------- ---------- ---------- ---------- ----------
Net Income (loss) $ 295,302 $98,060 $557,957 $(461,972) $310,873
========== ======= ======== ========== ========
</TABLE>
See accompanying notes to financial statements
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and, therefore, has no
results of operations. The Bank's results of operations are dependent
principally on its net interest income, representing the difference between the
income earned on its loan and securities portfolios and its cost of funds,
represented principally by interest paid on its deposit accounts. Results of
operations are also affected by the Bank's provision for loan losses. In
addition to net interest income, other sources of income for the Bank include
deposit account fees, loan and loan servicing fees, gains on the sale of
securities, capital gain distributions on mutual fund investments, and fees for
banking services such as safe deposit boxes.
The largest category of non-interest expense is compensation and
benefits expense. Other principal categories of non-interest expense include
occupancy expense, data processing costs, advertising and marketing expenses,
and insurance costs. Through the fiscal year ended September 30, 1995, deposit
insurance premiums payable to the FDIC also represented a significant category
of non-interest expense, but have not been significant since the BIF reached its
required reserve ratio and insurance premiums were reduced beginning with the
quarter ended September 30, 1995. See "Regulation--Regulation of Federal Savings
Associations--Insurance of Deposit Accounts."
Management Strategy
The Bank operates as a traditional savings bank, obtaining deposits
from its local community and investing those deposits principally in one-to-four
family residential mortgage loans and, to a lesser degree, in securities issued
by the United States government or its agencies, corporate debt securities rated
in the three highest grades by nationally recognized rating agencies, and
mortgage-backed securities. Management seeks to maintain a high quality loan
portfolio with low levels of delinquencies and non-performing assets by
concentrating on residential mortgage loans in its local community.
The Bank seeks to avoid loans perceived to be speculative or to present
significantly increased risk, regardless of whether the yields on such loans may
be higher than the average yields on loans in the Bank's portfolio. As a result,
at December 31, 1996, 86.8% of the Bank's loan portfolio represented loans
secured by first mortgages on owner-occupied one-to-four family residential real
estate, 3.6% represented home equity loans (including lines of credit and
conventional second mortgages) secured by junior liens on residential real
estate, and 3.6% represented loans secured by one-to-four family residential
real estate used for rental purposes. The Bank does not make loans to finance
the acquisition, subdivision and development of vacant land, loans to builders
and developers, or any material loans for commercial purposes other than those
secured by real estate. The Bank also invests in debt securities, concentrating
in corporate securities to maximize yields, while controlling risks by limiting
such investments to securities rated in the three highest grades by a nationally
recognized rating organization.
When appropriate and based upon customer demand, the Bank may make
residential mortgage loans that do not fit within its current portfolio and
asset/liability management needs. These loans are generally sold on the
secondary market, with the Bank retaining servicing rights. However, the Bank
has not made any such loans since fiscal 1994 nor has the Bank sold loans since
fiscal 1994.
37
<PAGE>
Analysis of Net Interest Income
Net interest income, the principal source of income for the Bank,
represents the difference between the income on interest-earning assets and the
expense of interest-bearing liabilities. Net interest income depends principally
upon (i) the balance of interest-earning assets that the Bank can maintain based
upon its funding sources; (ii) the relative amounts of interest-earning assets
versus interest-bearing liabilities; and (iii) the difference between the yields
earned on those assets and the rates paid on those liabilities. Net interest
income can also be adversely affected by non-performing loans because they must
still be funded by interest-bearing liabilities, but they do not provide
interest income. Furthermore, when an asset is designated as non-performing, all
accrued but unpaid interest is reversed against current period income, further
reducing net interest income.
During the period from October 1, 1993 (the beginning of the 1994
fiscal year) through December 31, 1996, three principal factors had substantial
effects on the financial condition and results of operations of the Bank. These
three factors were (i) the closing and subsequent liquidation of Nationar, which
was then the Bank's principal correspondent bank; (ii) the origination of
adjustable rate mortgage loans ("ARMs") by the Bank at interest rates which were
substantially discounted from the value of the index plus the margin used for
determining interest rate adjustments ("teaser rate loans"); and (iii) the
decision of the Bank to try to reduce its cost of funds.
The Closing and Liquidation of Nationar. On February 6, 1995, Nationar,
which was then the Bank's principal correspondent bank and also its investment
advisor, was closed by the New York Superintendent of Banks (the
"Superintendent"). Nationar was a commercial bank formed in order to provide
commercial banking services to savings banks. The deposit accounts at Nationar
were not insured by the FDIC. When Nationar was closed, the Bank had total
deposits and federal funds sold at Nationar of approximately $2,930,000, which
were frozen pending the liquidation of Nationar by the Superintendent. The Bank
also had a $1,000,000 borrowing relationship with Nationar in the form of a
repurchase agreement, and the Bank owned capital stock and capital debentures of
Nationar with a book value on the date of closure of $47,000. The deposits and
federal funds sold which were frozen at Nationar ceased earning interest after
Nationar was closed, and thus have not been considered interest-earning assets
for the purpose of calculating yields on applicable asset categories and the
Bank's spread (the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities).
The closing of Nationar had a number of effects on the Bank's net
interest income. No interest was earned by the Bank on the deposits and federal
funds sold while the Superintendent processed the Nationar liquidation.
Furthermore, unavailability of the liquid assets at Nationar created a liquidity
shortage which the Bank met by offering a high interest rate certificate of
deposit program in February 1995 to attract additional funds. The program
generated approximately $2.6 million of certificates of deposit at a nominal
interest rate of 6.80% and a yield after compounding of 7.04%, of which
approximately 96% had terms of twelve months. Although these deposits solved
immediate liquidity needs, they increased the Bank's average cost of funds.
Furthermore, one of the Bank's competitors, also facing Nationar-related
liquidity problems, offered high-rate certificates of deposit after the Bank's
own program expired. The Bank believes some of its depositors with lower rate
savings deposits may have moved their deposits to higher yielding accounts at
the competitor, which would also increase the average cost of funds. Finally,
after Nationar was closed, the Bank temporarily shifted the mix of its
investment portfolio away from corporate debt securities with higher yields in
favor of United States Treasury and agency obligations with lower yields, which
shift was subsequently reversed.
38
<PAGE>
In addition, due to the uncertainties of the liquidation process,
during the year ended September 30, 1995, the Bank recorded a $279,000 provision
for Nationar losses which did not directly affect net interest income. In fiscal
1996, the Bank recovered $232,000 of its provision for Nationar losses as it
became apparent that the Bank would recover substantially all of its Nationar
claims. The repurchase agreement with Nationar was also liquidated during fiscal
1996.
Teaser Rate Loans. From April 1993 to December 1994, the Bank offered
ARMs with low initial interest rates. This was done due to customer preferences
and to maintain the Bank's competitive position when a nearby bank, which had
recently converted to the stock form of ownership and had substantial funds to
invest in local mortgage loans, offered mortgage loan programs with low initial
interest rates. The Bank offered initial rates from 4.25% to 5.00% coupled with
a delay of up to 18 months until the first interest adjustment, with annual
adjustments thereafter. Loans originated during the first half of a calendar
year did not have their first interest rate adjustment until July of the
following year, while loans originated during the second half of the calendar
year did not have their first interest rate adjustment until January of the
second year after the closing. Therefore, loans originated during the latter
half of 1993 did not have their first interest rate adjustment until January
1995 and loans originated in 1994 did not have their first interest rate
adjustments until July 1995 or January 1996. Interest rates are then adjusted
based upon changes in the one year Treasury Bill constant maturity index,
subject to a 2% per year maximum rate adjustment and a lifetime maximum interest
rate adjustment, measured from the initial teaser rate, of from 5.5% to 6.0%.
General market interest rate conditions, notably including the one year
Treasury Bill index used to calculate interest rate adjustments on the teaser
rate loans, increased throughout 1994. The combined effect of the low initial
interest rates, the increase in the value of the index, and the 2% per period
cap on interest rate adjustments, caused the teaser rate loans not to reach a
fully indexed interest rate until July 1995 at the earliest, with some loans not
reaching a fully indexed rate until January 1, 1997. Therefore, the yields
earned on the Bank's loans, and consequently the Bank's net interest income, was
adversely affected. As the interest rates on the teaser rate loans increased,
the Bank experienced an increase in spread and interest income. At December 31,
1996, the Bank had approximately $16.9 million of such loans remaining in its
portfolio, representing approximately 27.6% of total loans. Of these loans, $5.2
million had interest rates of 7.00% or less at December 31, 1996, most of which
were expected to adjust during fiscal 1997 to fully-indexed interest rates based
upon the one year Treasury Bill constant maturity index plus 200 basis points.
Efforts to Reduce Cost of Funds. As market interest rate conditions
rose during calendar year 1994, the Bank, to meet its competition, increased the
rates it offered on its certificates of deposit. This increase caused the Bank
to pay higher rates on new certificates of deposit and roll-overs from existing
certificates of deposit. In addition, the spread between the rates paid on
certificates of deposit versus passbook and other deposit programs widened,
making certificates of deposit more attractive to existing customers and causing
a shift in the mix of deposits away from lower-rate accounts and towards
certificates of deposit. The high interest rate certificate of deposit program
offered by the Bank to increase liquidity after the Nationar closure, coupled
with competitive pressures and the general effects of the high market interest
rate conditions which pertained in the latter part of calendar year 1994 and the
early part of calendar year 1995, increased the Bank's cost of funds,
principally reflected by an increase in the rates paid on certificates of
deposit. The rate paid on savings accounts remained constant, but lower cost
savings accounts declined as a percentage of total deposits, indirectly
increasing the average cost of funds.
During fiscal 1996, the Bank determined to seek to reduce its cost of
funds. When the high rate certificates of deposit offered after the closing of
Nationar matured in February 1996, the Bank did not offer premium rates to
retain such deposits. In addition, as general market interest rates declined,
the Bank did not aggressively pursue the retention of maturing high-rate
certificates of deposit by offering above-market
39
<PAGE>
rates at renewal. Instead, the Bank offered moderate rates in line with the
average rates being offered in its market area. In addition, the Bank did not
offer premium rates for certificates of deposit of $100,000 or more, as do many
financial institutions, resulting in a low level of such deposits. Certificates
of deposit of $100,000 or more represented only $1.7 million, or 2.1%, of total
deposits at December 31, 1996.
Average Balances, Interest Rates and Yields
The following tables present, for the periods indicated, the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. Also set forth is information
regarding outstanding balances and yields or costs, with related information, at
December 31, 1996. No tax equivalent adjustments were made. All average balances
are monthly average balances. Non-interest-bearing checking accounts are
included in the tables as a component of non-interest-bearing liabilities.
<TABLE>
<CAPTION>
For the Three Months Ended December 31,
-------------------------------------------------------------------
At December 31, 1996 1996 1995
--------------------- ------------------------------ ------------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost(4)(5) Balance Interest Cost(4)(5)
------- ---- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1) $61,013 7.68% $ 60,323 $1,155 7.66% $ 57,519 $ 1,016 7.07%
Mortgage-backed securities........... 6,173 6.85 6,226 113 7.26 5,146 75 5.83
Investment securities................ 21,016 6.51 21,295 386 6.48 26,325 413 5.87
Federal funds sold................... 3,400 6.47 1,720 22 5.12 2,323 30 5.17
------- -------- ----- --------- -----
Total interest-earning assets....... 91,602 7.31 89,564 1,676 7.30 91,313 1,534 6.60
Non-interest-earning assets.......... 5,364 7,192 ----- 8,844 -----
------- -------- ---------
Total assets........................ $96,966 $ 96,756 $ 100,157
======= ======== =========
Interest-bearing liabilities:
Savings accounts..................... $26,134 3.00% $25,994 196 3.02 $26,896 202 3.00
Certificate accounts................. 37,959 4.91% 37,850 467 4.94 42,498 601 5.66
Money market......................... 10,587 3.00% 10,439 78 2.99 10,773 89 3.30
NOW accounts......................... 4,025 2.50% 3,736 24 2.57 3,178 21 2.64
Other................................ 1,133 6.30% 1,431 16 4.47 1,134 - 0.00
----- -------- ----- ----- ----
Total interest-bearing liabilities.. 79,838 3.93% 79,450 781 3.93 84,479 913 4.32
Non-interest-bearing liabilities..... 5,022 ---- 5,379 ----- ---- 4,509 ---- -----
------- -------- ---------
Total liabilities................... 84,860 84,829 88,988
Equity.... .......................... 12,106 11,927 11,169
------- -------- ---------
Total liabilities and equity........ $96,966 $ 96,756 $ 100,157
======= ======== =========
Net interest income/spread (2)....... 3.38% $ 895 3.37% $ 621 2.28%
==== ===== ==== ===== ====
Net earning assets/net interest margin(3) $11,764 NA $ 10,114 3.81% $ 6,834 2.60%
======= ======== ==== ========= ====
Ratio of average interest-earning assets
to average interest-bearing liabilities.. 1.15x 1.13x 1.08x
==== ===== ====
</TABLE>
Notes appear on following page.
40
<PAGE>
Average Balances, Interest Rates and Yields (continued)
<TABLE>
<CAPTION>
For the Year Ended September 30,
------------------------------------------------------------------------------------
1996 1995 1994
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>
Interest-earnings assets:
Loans receivable(1) ................. $57,794 $ 4,328 7.49% $ 58,433 $ 3,882 6.64% $ 51,069 $ 3,360 6.58%
Mortgage-backed securities........... 6,334 396 6.25 2,910 198 6.80 2,311 171 7.40
Investment securities................ 24,136 1,388 5.75 29,409 1,536 5.22 40,638 2,172 5.34
Federal funds sold................... 2,310 123 5.32 1,740 99 5.69 1,211 44 3.63
------- ------ -------- -------- -------- -------
Total interest-earning assets....... 90,574 6,235 6.88 92,492 5,715 6.18 95,229 5,747 6.03
------ -------- -------
Non-interest-earning assets ......... 8,505 7,929 5,425
------ -------- --------
Total assets........................ $99,079 $100,421 $100,654
======= ======== ========
Interest-bearing liabilities:
Savings accounts..................... $27,154 814 3.00 $ 29,533 891 3.02 $ 34,615 1,037 3.00
Certificate accounts................ 40,284 2,130 5.29 38,195 1,886 4.94 32,838 1,153 3.51
Money market......................... 10,800 333 3.08 11,779 397 3.37 13,821 421 3.05
NOW accounts......................... 3,376 88 2.61 3,290 86 2.61 2,992 74 2.47
Other................................ 1,051 83 7.90 1,358 29 2.14 242 4 1.65
------- ------ -------- ----- -------- ------
Total interest-bearing liabilities.. 82,665 3,448 4.17 84,155 3,289 3.91 84,508 2,689 3.18
Non-interest-bearing liabilities..... 4,987 ------ ---- 4,819 ----- ---- 4,731 ------ ----
------- -------- --------
Total liabilities................... 87,652 88,974 89,239
Equity............................... 11,427 11,447 11,415
------- -------- --------
Total liabilities and equity...... $99,079 $100,421 $100,654
======= ======== ========
Net interest income/spread (2)...... $ 2,787 2.71% $ 2,426 2.27% $ 3,058 2.85%
======= ==== ======= ==== ======= ====
Net earning assets/net interest margin (3) $ 7,909 3.08% $8,337 2.62% $ 10,721 3.21%
======= ==== ====== ==== ======== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities... 1.10x 1.10x 1.13x
==== ==== ====
</TABLE>
(1) Average balances include non-accrual loans, with respect to which interest
is recognized on a cash basis only.
(2) The spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(3) The net interest margin, also known as the net yield on average
interest--earning assets, represents net interest income as a percentage of
average interest-earning assets.
(4) Yields and related ratios for the three month periods have been annualized
when appropriate.
(5) During the three months ended December 31, 1996 and 1995, the Bank received
$55,000 and $36,000, respectively, in annual non-capital distributions on its
IIMF investment which was recorded as interest earned. IIMF is a group of
mutual funds that invest in securities which are permissable investments for a
New York State chartered savings bank. For the purpose of reporting the yields,
spreads and net interest margin for such periods, only one-quarter of such
amounts have been taken into account so that yields, spreads and margins are
comparable to those shown for the annual periods. If such amounts had been
included in full for the respective fiscal quarters, the interest rate spreads
for the three months ended December 31, 1996 and 1995 would have been 3.55% and
2.40%, respectively, and the net interest margins would have been 4.00% and
2.72%, respectively, for such periods.
41
<PAGE>
Rate/Volume Analysis of Net Interest Income
One method of analyzing net interest income is to consider the effect
of changes in the average balance and changes in the average rate on different
categories of assets and liabilities. The following table presents the dollar
amount of changes in interest income and interest expense for major components
of interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes related to outstanding balances and changes due to the
changes in interest rates. Information is provided on changes attributable to
(i) changes in volume (i.e., changes in average balance (volume) multiplied by
old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old
volume). For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Three Months Ended
December 31, Year Ended September 30,
----------------------------- ------------------------------------------------------
1996 vs. 1995 1996 vs. 1995 1995 vs. 1994
------------- ------------- -------------
Increase (Decrease) Due To: Increase (Decrease) Due To: Increase (Decrease) Due To:
--------------------------- --------------------------- ---------------------------
Rate Volume Total Rate Volume Total Rate Volume Total
---- ------ ----- ---- ------ ----- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (In Thousands)
Loans .................................. $ 88 $ 51 $ 139 $ 489 $ (43) $ 446 $ 33 $ 489 $ 522
Mortgage-backed securities ............. 20 18 38 (17) 215 198 (15) 42 27
Investment securities .................. 59 (86) (27) 145 (293) (148) (48) (588) (636)
Federal funds sold and other ........... - (8) (8) (7) 31 24 31 24 55
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets .......... $ 167 $ (25) $ 142 $ 610 $ (90) $ 520 $ 1 $ (33) $ (32)
===== ===== ===== ===== ===== ===== ===== ===== =====
Interest-bearing liabilities:
Savings accounts ....................... 1 (7) (6) (6) (71) (77) 7 (153) (146)
Certificate accounts ................... (72) (62) (134) 138 106 244 523 210 733
Money market accounts .................. (8) (3) (11) (32) (32) (64) 42 (66) (24)
NOW accounts ........................... (1) 4 3 (1) 3 2 4 8 12
Other .................................. 16 - 16 62 (8) 54 1 24 25
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing liabilities ..... $ (64) $ (68) $(132) $ 161 $ (2) $ 159 $ 577 $ 23 $ 600
===== ===== ===== ===== ===== ===== ===== ===== =====
Net change in net interest income ...... $ 231 $ 43 $ 274 $ 449 $ (88) $ 361 $(576) $ (56) $(632)
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Management of Interest Rate Risk
The principal objective of the Bank's interest rate risk policy is to
avoid taking undue interest rate risk while continuing to satisfy customer
demand for loans. Management seeks to limit, but not eliminate, interest rate
risk by offering adjustable rate loans. However, during periods of low interest
rates when customers prefer fixed-rate loan products, the Bank is willing to
make those loans, which can often be made at interest rates higher than those
which must then be offered to attract borrowers willing to accept adjustable
rate loans. To balance against the interest rate risk which accompanies the
making of such loans, the Bank has from time to time offered adjustable rate
loan products at low initial interest rates and in the past sold portions of its
fixed rate mortgage portfolio to FNMA, while retaining the servicing of those
loans.
Interest rate pricing and interest rate risk strategy objectives are
implemented, in the first instance, by the Bank's Asset/Liability Committee,
consisting of five officers of the Bank. The committee meets weekly to review
the pricing of the Bank's loan and deposit products. The Board of Directors of
the Bank receives and reviews a report on the Bank's estimated interest rate
sensitivity every month. When
42
<PAGE>
appropriate based upon its need to manage interest rate risk, the Bank may
emphasize adjustable rate loans or short term debt securities investments, or
may seek to lengthen the maturities of its liabilities. The Bank also seeks to
cushion itself against interest rate fluctuations by preserving a loyal customer
base with core deposits that are less prone to gravitate to high rate deposit
products as interest rates rise. For example, at September 30, 1994, 1995 and
1996, and at December 31, 1996, the Bank had passbook and statement savings
deposits of $34.4 million, $27.2 million, $26.8 million and $26.1 million,
respectively, reflecting a significant level of deposits with interest rates
that did not change for more than three years. After the decline from 1994 to
1995 due to a shift in customer preference caused by an increase in the rates
paid on certificates of deposit, the level of passbook and statement savings
deposits has remained stable and the slight decline has been less than the
percentage decline in total deposits.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest
sensitive" and by monitoring the Bank's estimated interest sensitivity "gap." An
asset or liability is said to be interest sensitive within a specific time
period if it will mature or reprice within that time period. The interest
sensitivity gap is defined as the difference between the amount of
interest-earning assets estimated to mature or reprice within a specific time
period and the amount of interest-bearing liabilities estimated to mature or
reprice within that same time period. At December 31, 1996, the Bank's one year
gap position, the difference between the estimated amount of interest-earning
assets maturing or repricing within one year and interest-bearing liabilities
maturing or repricing within one year, as a percentage of total assets, was
estimated to be a positive 19.10%, as shown on the table below.
A gap is considered positive for any period when the amount of
interest-sensitive assets exceeds the amount of interest sensitive liabilities
estimated to reprice within such period. A gap is considered negative when the
amount of interest sensitive liabilities exceeds the amount of interest
sensitive assets estimated to reprice within a given period. Accordingly, during
a period of rising interest rates, the net interest income of an institution
with a positive gap for such period could be positively affected as the cost of
its interest-bearing liabilities may rise more slowly than the yield on its
interest-earning assets. Net interest income of such an institution could be
negatively affected during a period of falling interest rates. The effect could
be the reverse for an institution with a negative gap. However, the repricing of
most assets and liabilities is discretionary and subject to customer preference.
Thus, for example, during periods of rising interest rates, loan customers may
delay the sales of their homes, resulting in reduced loan turnover. At the same
time, deposit customers with low-rate savings, demand and NOW accounts may
accelerate the migration of deposits into higher rate certificates of deposit as
the rates on certificates of deposit become more attractive.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1996, which are
estimated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown. 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. Loans and mortgage-backed
securities with adjustable rates are reflected during the period in which
repricing is scheduled. Fixed-rate mortgage loans and fixed rate mortgage-backed
securities are included in the table without regard to scheduled principal
payments or assumed voluntary prepayments. Federal funds sold are assumed to be
immediately interest sensitive. Prior to approximately December 1994, the Bank's
adjustable rate loan documentation for new loans provided that the loans would
reprice either on January 1 or July 1 of each year, depending upon when during
the year the loan was made. Thus, at December 31, 1996, a disproportionate
portion of the Bank's adjustable-rate mortgage portfolio
43
<PAGE>
was scheduled to reprice the following day. Therefore, the one year gap
information may be more meaningful.
The Bank assumes that 70% of savings accounts, money market accounts
and NOW accounts are core deposits and therefore are expected to reprice beyond
five years. The remainder of such deposits are assumed to reprice ratably over
the first five years. Certificates of deposit are included based upon their
contractual maturities.
Estimates of loan prepayment rates and deposit turnover rates can have
a significant impact on the Bank's estimated gap. While the Bank believes the
assumptions used to prepare the following table are reasonable, there can be no
assurance that such estimates will approximate actual future loan repayment and
deposit withdrawal activity. See "Business of the Bank--Lending Activities,"
"--Investment Activities" and "--Sources of Funds."
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------------------------------------------------------
Less Three Over Ten
Than Months Over One Over Three Over Five Through Over
Three Through Through Through Through Twenty Twenty
Months One Year Three Years Five Years Ten Years Years Years Total
----- -------- ----------- ---------- --------- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Mortgage loans............................ $24,759 $14,008 $ 2,554 $1,386 $773 $ 4,229 $ 10,417 $ 58,126
Mortgage backed securities................ 695 1,233 1,949 910 775 611 - 6,173
Other loans............................... 1,622 66 227 305 756 - 65 3,041
Federal funds sold........................ 3,400 - - - - - - 3,400
Investment securities..................... 4,074 5,044 7,115 3,270 1,513 - - 21,016
-------- ------ ----- ----- -------- ------- -------- --------
Total interest-earning assets............. 34,550 20,351 11,845 5,871 3,817 4,840 10,482 91,756
-------- ------ ----- ----- -------- ------- -------- --------
Interest-bearing liabilities:
NOW accounts.............................. 60 180 482 482 2,821 - - 4,025
Savings accounts.......................... 392 1,176 3,136 3,136 18,294 - - 26,134
Money market accounts..................... 159 477 1,270 1,270 7,411 - - 10,587
Certificates of deposits.................. 12,428 20,508 4,548 475 - - - 37,959
Borrowings................................ 1,000 - - - - - - 1,000
-------- ------ ----- ----- -------- ------- -------- --------
Total interest-bearing liabilities........ 14,039 22,341 9,436 5,363 28,526 - - 79,705
-------- ------ ----- ----- -------- ------- -------- --------
Interest-earning assets less
less interest-bearing liabilities......... $20,511 $ (1,990) $ 2,409 $508 $(24,709) $ 4,840 $ 10,482 $ 12,051
======== ======= ======= ======= ======== ======= ======== ========
Cumulative interest sensitivity gap........ $20,511 $ 18,521 $20,930 $21,438 $ (3,271) $ 1,569 $ 12,051
======== ======= ======= ======= ======== ======= ========
Cumulative gap to total assets............. 21.15% 19.10% 21.58% 22.11% (3.37)% 1.62% 12.43%
======== ======= ======= ======= ======== ====== ========
Cumulative gap to interest-earning assets.. 22.35% 20.19% 22.81% 23.36% (3.56)% 1.71% 13.13%
======== ======= ======= ======= ======== ====== ========
Cumulative interest-earning assets to
cumulative interest-bearing liabilities... 246.10% 150.91% 145.68% 141.89% 95.90% 101.97% 115.12%
======== ======= ======= ======= ======== ====== ========
</TABLE>
Upon consummation of the Conversion, the Company, on a consolidated
basis, will initially experience an increase in investable assets approximately
equal to the net proceeds from the sale of the Common Stock in the Conversion
less the amount of the ESOP Loan. The investment of these net proceeds can be
expected to increase any positive gap and reduce any negative gap because such
investment will add assets estimated to mature or reprice within each period
while there will be no immediate corresponding increase in liabilities estimated
to mature or reprice during the same period.
44
<PAGE>
Comparison of Financial Condition at December 31, 1996 and September 30, 1996.
Total assets at December 31, 1996 were $97.0 million, an increase of
$643,000, or 0.7%, from total assets of $96.3 million at September 30, 1996. The
increase is represented principally by an increase in loans of $2.3 million, or
3.9%, from $58.7 million at September 30, 1996 to $61.0 million at December 31,
1996, as management continued to emphasize the origination of one-to-four family
residential mortgage loans. This increase was substantially offset by a decrease
in investment securities available for sale of $2.1 million, or 8.9%, from $23.1
million at September 30, 1996 to $21.0 million at December 31, 1996. The
increase in assets was funded principally through a $1.0 million advance from
the FHLBNY. The Bank elected to fund asset growth with the borrowing from the
FHLBNY to avoid the need to increase the rates offered on deposits to attract
funds. Certificates of deposit decreased $379,000 from $38.3 million at
September 30, 1996 to $38.0 million at December 31, 1996 and total deposits
decreased $859,000, or 1.0%, from $83.4 million to $82.6 million between the
same dates.
The Bank's total equity at December 31, 1996 was $12.1 million, an
increase of $359,000 from $11.7 million at September 30, 1996. The increase
resulted principally from net income during the quarter of $295,000 and an
increase in the unrealized gain on securities available for sale, net of taxes,
of $64,000.
Comparison of Financial Condition at September 30, 1996 and September 30, 1995.
Total assets at September 30, 1996 were $96.3 million compared to
$101.0 million at September 30, 1995, a decrease of $4.7 million, or 4.7%. The
decrease resulted principally from the deliberate attempt by the Bank to reduce
its cost of funds, as discussed above. Total deposits also decreased $4.7
million between the same dates from $88.1 million to $83.4 million. Furthermore,
the liquidation of Nationar by the Superintendent resulted in the termination of
the Bank's $1.0 million repurchase agreement borrowing with Nationar, which
reduced the Bank's total assets by that amount.
The deposit outflow was funded principally by a reduction in the Bank's
portfolio of investment securities, which totaled $27.8 million at September 30,
1995 and decreased by $4.7 million to $23.1 million at September 30, 1996.
Federal funds sold also decreased by $2.1 million, principally because assets
classified as federal funds sold, which had been frozen at Nationar, were repaid
to the Bank as Nationar was liquidated. Due to the active solicitation of new
residential mortgage loans, the Bank was able to maintain its loan portfolio
despite the reduction in overall size, as loans receivable, net, increased by
$808,000, or 1.4%, from $57.9 million at September 30, 1995 to $58.7 million at
September 30, 1996.
The Bank's total equity at September 30, 1996 was $11.7 million, an
increase of $650,000, or 5.9%, over the September 30, 1995 level. This increase
was composed of 1996 net income of $558,000 and a $92,000 increase in the net
unrealized gain in securities available for sale.
On December 29, 1995, in accordance with an interpretation by the
Financial Accounting Standard Board (the "FASB"), the Bank reclassified its
entire investment securities portfolio from "held to maturity" to "available for
sale." This was done in order to provide the Bank with additional flexibility in
dealing with liquidity and funding requirements, although the Bank has generally
not engaged in the sale of securities classified as available for sale. See
Notes 1 and 2 of Notes to Financial Statements.
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Comparison of Operating Results for the Three Months Ended December 31, 1996 and
December 31, 1995
General. Net income for the three months ended December 31, 1996 was
$295,000, an increase of $197,000 from net income of $98,000 during the three
months ended December 31, 1995. The improvement in net income resulted
principally from an increase in net interest income of $274,000 caused by both
an increase in the yield on interest-earning assets and a decrease in the cost
of funds. The Bank also experienced a $26,000 decline in capital gain
distributions on its investment in IIMF due to fluctuations in securities
trading activities by IIMF. Net income was also positively affected by a
reduction in the effective income tax rate due to changes in New York tax laws.
Interest Income. Interest income increased by $142,000, or 9.2%, from
$1.5 million for the quarter ended December 31, 1995 to $1.7 million for the
quarter ended December 31, 1996. The increase was caused principally by an
improvement in the yield on loans, the Bank's largest category of
interest-earning assets, by 59 basis points from 7.07% to 7.66%. This
improvement in loan yield resulted principally from two factors. First, the
yield on many of the Bank's teaser rate residential mortgage loans adjusted
upward, despite declining market interest rates, as the interest rates on the
loans reached the value of the interest rate index plus the margin. Second,
since late 1994, customer preferences had shifted away from ARMs and towards
fixed-rate mortgage loans which generally provide for higher initial interest
rates than adjustable-rate loans, thus improving the yields available on
newly-originated loans. The yields on the Bank's investment and mortgage-backed
securities portfolios also increased by 61 basis points and 143 basis points,
respectively. The increase in the yield on investment securities resulted from
an increased emphasis on corporate debt securities rather than U.S. Government
and agency securities, while the yield on mortgage-backed securities increased
principally due to upward rate adjustments in adjustable rate securities.
Also contributing to the improvement in interest income was a shift in
the mix of assets between the two quarters as loans, the highest yielding asset
category, increased as a percentage of average interest-earning assets from
63.0% for the quarter ended December 31, 1995 to 67.4% for the quarter ended
December 31, 1996. At the same time, average investment securities, which
generally have lower yields than loans, decreased as a percentage of average
interest-earning assets from 28.8% during the quarter ended December 31, 1995 to
23.8% for the quarter ended December 31, 1996. The change in the mix of assets
represented the implementation of management's strategy to maintain a high level
of assets invested in loans in order to maximize yields and provide credit
facilities in the Bank's local market while not investing a high percentage of
the Bank's assets in loan types perceived to have greater risks. In July 1996,
the Bank hired a full time loan solicitor who travels throughout the Bank's
market area, meeting with potential applicants, real estate brokers and other
real estate professionals in order to increase loan orginations.
Partially offsetting the improvements due to yield increases and
changes in the mix of assets was a reduction in average interest-earning assets
of $1.7 million, or 1.9%, from $91.3 million during the quarter ended December
31, 1995 to $89.6 million for the quarter ended December 31, 1996 due to the
Bank's decision to reduce its cost of funds, which resulted in a reduction in
funding sources and a consequent reduction in earning assets.
Interest Expense. Interest expense decreased by $132,000 from $913,000
for the quarter ended December 31, 1995 to $781,000 for the quarter ended
December 31, 1996. The decrease resulted principally from a decrease of 72 basis
points, from 5.66% to 4.94%, in the rate paid on certificates of deposit, as the
Bank realized the effects of its program to decrease its cost of funds. The
average balance of
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certificates of deposit also declined by $4.6 million, or 10.9%, from an average
of $42.5 million during the quarter ended December 31, 1995 to $37.9 million
during the quarter ended December 31, 1996, and also declined as a percentage of
average interest-bearing liabilities from 50.3% during the 1995 quarter to 47.6%
during the 1996 quarter. The average cost of money market accounts decreased by
31 basis points as the Bank reduced its interest rates on such accounts as
market rates declined. The Bank's overall average cost of funds decreased by 39
basis points from 4.32% for fiscal 1995 to 3.93% for fiscal 1996.
Net Interest Income. The combined effect of the increase in the yield
on interest-earning assets and the decrease in the cost of funds was a 109 basis
point increase in the Bank's spread, from 2.28% for the quarter ended December
31, 1995 to 3.37% for the quarter ended December 31, 1996. The change in the
rates earned and paid, evidenced by the change in spread, is estimated to have
accounted for approximately 85% of the $274,000 increase in net interest income.
The net yield on average interest-earning assets increased by 121 basis points,
from 2.60% to 3.81%, which was greater than the 109 basis point improvement in
spread. The net yield increased more than the spread principally due to an
increase in the excess of interest-earning assets over interest bearing
liabilities by $3.3 million. This improvement was caused by the release of the
frozen Nationar assets which the Bank was able to invest in earning assets, an
increase in average equity of $758,000, and an increase in non-interest bearing
liabilities, principally checking accounts. Non-performing assets were at low
levels during both periods and changes in the level of average non-performing
assets did not have a material effect on the change in net interest income.
Provision for Loan Losses. The provision for loan losses results from
management's analysis of the adequacy of the Bank's allowance for loan losses.
If management determines that an increase in the allowance is warranted, then
the increase is accomplished through a provision for loan losses which is
charged as an expense on the Bank's income statement. The provision for loan
losses was zero for the three months ended December 31, 1996, compared to a
provision of $13,500 for the three months ended December 31, 1995. The decrease
in the provision resulted from management's assessment of the adequacy of the
allowance for loan losses based upon the Bank's low level of non-performing,
delinquent and classified loans, and the Bank's historical experience. No
provision was recorded during the quarter ended December 31, 1996 because during
the quarter the Bank had recoveries of $10,000 and no charge-offs, while at
quarter-end, the Bank had only $3,000 of non-performing assets, represented by
three consumer loans that were more than 90 days past due, and no other
classified assets.
The Bank periodically reviews its loan portfolio, levels of charge-offs
and recoveries, general economic conditions and other factors to determine
whether the allowance for loan losses is at a level which management believes is
adequate. Any determination of the adequacy of the allowance for loan losses is
necessarily speculative based upon estimates of the future performance of the
Bank's loan portfolio. Unanticipated events, either generally or with respect to
particular borrowers, could materially and adversely affect the adequacy of the
allowance and could require material additional provisions for loan losses in
the future. For example, a downturn in the economy in the Bank's market area
could increase loan defaults and reduce the value of the collateral for existing
loans. There can be no assurance that material future provisions for loan losses
to replenish or increase the allowance will not be necessary. Furthermore,
federal bank regulatory agencies can, as part of the examination process,
require that the Bank adversely classify certain assets and insist that
additional provisions be taken so the allowance is increased to cover perceived
risks of such classified assets. See "Business of the Bank--Asset Quality."
Non-interest Income. The Bank's non-interest income is comprised
principally of service fees on loans and deposit accounts, net securities gains
or losses, capital gain distributions from the Bank's investment in IIMF, and
miscellaneous other income. Non-interest income declined by $18,000, principally
due to a decline of $26,000 in capital gain distributions on the Bank's
investment in IIMF from $119,000
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for the three months ended December 31, 1995 to $93,000 for the three months
ended December 31, 1996. IIMF capital gain distributions are made annually in
December of each year, and shifts in trading by IIMF due to market conditions
caused a reduction in realized gains which were distributed by IIMF to its
shareholders.
Non-interest Expense. Non-interest expense increased by $11,000 from
$626,000 during the quarter ended December 31, 1995 to $637,000 during the
quarter ended December 31, 1996. The increase was principally due to a $17,000
increase in compensation and employee benefits expense caused by normal
inflation and merit increases. FDIC insurance premiums declined from $9,000
during the quarter ended December 31, 1995 to zero during the quarter ended
December 31,1996 as the BIF reserve reached statutorily required levels. See
"Regulation--Regulation of Federal Savings Associations--Insurance of Deposit
Accounts." Management believes that compensation and benefits expense will
increase after the Conversion due to the ESOP and, if adopted, other stock
benefit plans. Furthermore, the Company expects other expenses will increase as
a result of the costs associated with operating as a publicly-traded stock
institution.
Income Tax Expense. Income tax expense increased from $63,000 for the
quarter ended December 31, 1995 to $125,000 for the quarter ended December 31,
1996. The increase was principally the result of the increase in the Bank's
pre-tax income from $161,000 to $420,000. The Bank's effective tax rate
decreased from 39.1% to 29.7% principally due to a $60,000 reduction in deferred
tax liabilities caused by changes in New York State law regarding the tax bad
debt deduction. See "Taxation--New York State Taxation." After the Conversion,
the Company will be required to pay a State of Delaware annual franchise tax.
See "Taxation--Delaware State Taxation."
Comparison of Operating Results for the Years Ended September 30, 1996 and
September 30, 1995
General. Net income for the year ended September 30, 1996 was $558,000,
compared to a loss of $462,000 for the year ended September 30, 1995. The
improvement in net income resulted principally from the following factors.
First, the Bank received payment of a substantial portion of its claims against
Nationar in fiscal 1996, allowing the Bank to recover $232,000 of the $279,000
provision for possible Nationar losses recorded in fiscal 1995. Second, in
fiscal 1995, the Bank recognized in one lump sum its entire estimated accrued
expense of post-retirement benefits other than pensions for its employees in
accordance with SFAS No. 106. See Note 12 of Notes to Financial Statements.
Third, the Bank's FDIC insurance premium was substantially reduced from 1995 to
1996 as the BIF of the FDIC reached its required reserve ratio and FDIC
insurance premiums for BIF-insured institutions were virtually eliminated.
However, in the future, the Bank will incur expenses associated with the
repayment of the bonds (the "FICO bonds") issued in the late 1980s to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation. See
"Regulation--Regulation of Federal Savings Associations-Insurance of Deposit
Accounts." Finally, the Bank's net interest income before the provision for loan
losses increased $361,000 as the Bank's spread increased, which increase more
than offset a decline in the average balance of interest-earning assets.
Interest Income. Interest income increased $520,000, or 9.1%, from $5.7
million in fiscal 1995 to $6.2 million in fiscal 1996. The principal cause of
this increase was an increase in the average rate earned on loans of 85 basis
points from 6.64% to 7.49% and the average rate earned on investment securities
of 53 basis points from 5.22% to 5.75%, which more than offset decreases in the
rates earned on mortgage-backed securities and federal funds sold. The increase
in the rate earned on loans resulted from the upward adjustment of the interest
rates on the Bank's teaser rate residential mortgage. These upward adjustments,
which brought the yields on the loans closer to market rates, more than
outweighed the declining and then
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level general market interest rate conditions during fiscal 1996 which was the
principal cause of a decline in yields on other assets. The increase in yields
on investment securities resulted from the combined effect of an increase in the
proportion of corporate debt securities in the investment portfolio and the
rollover of maturing investment securities with lower yields acquired during
fiscal 1994 into new investment securities with higher yields as market interest
rates were, in general, slightly higher. The decline in the yield on
mortgage-backed securities was partially caused by the Bank's decision to
increase its mortgage-backed securities portfolio to increase yields. Although
the new mortgage-backed securities generally had higher yields than new
investment securities, the yields were lower than the Bank's older
mortgage-backed securities, resulting in a reduction in the average yield on
that portfolio.
In addition, as interest rates generally rose throughout 1994, customer
preference gradually shifted from ARMs to fixed-rate mortgage loans, apparently
due to borrower fears that rates would continue to rise and rates on ARMs would
continue to adjust upward. Although in 1994 and before, the Bank occasionally
sold fixed rate residential mortgage loans to FNMA with servicing retained by
the Bank, since 1995 the Bank has retained in its portfolio all fixed-rate
residential mortgage loans it has originated. During fiscal 1996, virtually all
of the Bank's residential mortgage loan originations were fixed-rate loans. The
customer preference for fixed-rate loans positively affected interest income
during fiscal 1996 in two ways. First, newly-originated fixed-rate loans
generally have higher interest rates than even the fully-indexed initial rate on
a newly-originated ARMs. In addition, with the waning of customer interest in
ARMs, the, Bank no, longer originated teaser rate ARMs with low initial interest
rates.
These factors which increased interest income from fiscal 1995 to
fiscal 1996 far outweighed the adverse effect on interest income of a $1.9
million, or 2.1%, reduction in average interest-earning assets from $92.5
million in fiscal 1995 to $90.6 million in fiscal 1996. The average balance of
loans, the Bank's largest interest-earning asset category, decreased by
$639,000, or 1.1%, between the periods. Investment securities, the next largest
category of interest-earning assets, declined by $5.3 million, or 17.9%, which
decline was partially offset by an increase in mortgage-backed securities of
$3.4 million, or 117.7%, between the periods. The decline in the average balance
of interest-earning assets was a direct result of management's decision to try
to decrease the Bank's cost of funds, which reduced funding sources for asset
maintenance or growth.
Interest Expense. Interest expense increased $159,000 from $3.3 million
in fiscal 1995 to $3.4 million in fiscal 1996. The principal cause of the
increase was an increase in the average balance of certificates of deposit by
$2.1 million, or 5.5%, from fiscal 1995 to fiscal 1996, coupled with an increase
in the average rate paid on such accounts by 35 basis points. The increase in
both the average balance and rate paid on certificates of deposit was caused by
the combined effect of the post-Nationar special promotion (which generated
certificates of deposit that did not begin to mature until late-February 1996)
and the generally rising interest rates during 1994. As market interest rate
conditions peaked in early calendar year 1995, some customers sought
certificates of deposit with maturities in excess of 18 months to lock in the
high interest rates. These high rate certificates of deposit continued to
increase interest expense through fiscal 1996.
In addition, during fiscal 1996, the Bank recognized $39,000 of
interest expense representing interest allocable to fiscal 1995 related to a
repurchase agreement with Nationar. When the assets of Nationar were frozen, the
Bank believed that it would be permitted to offset the repurchase agreement
against its frozen deposit accounts at Nationar so no interest cost should be
accrued on the repurchase agreement. However, when the Superintendent made his
first distribution to the Bank on account of its Nationar claim in fiscal 1996,
the Bank was charged $83,000 of interest on the repurchase agreement, of
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which $39,000 was on account of interest during fiscal 1995. This amount is
included as interest on other liabilities in 1996.
Net Interest Income. Net interest income before the provision for loan
losses increased by $361,000 from fiscal 1995 to fiscal 1996, representing the
net effect of the $520,000 increase in interest income partially offset by the
$159,000 increase in interest expense. The overall increase in net interest
income was caused principally by an increase in the Bank's spread by 44 basis
points from 2.27% to 2.71%. While management continued to concentrate its asset
investments in loans to increase average overall yields, management also sought
to reduce its cost of funds by reducing its emphasis on certificates of deposit
as funding sources. The average yield on interest earning assets increased by 70
basis points compared to an increase in the average cost of funds of 26 basis
points.
During both fiscal 1996 and 1995, non-performing assets were at low
levels and changes in the level of average non-performing assets from fiscal
1995 to fiscal 1996 did not have a material effect on the change in net interest
income.
Provision for Loan Losses. From fiscal 1995 to fiscal 1996, the
provision for loan losses was reduced by $5,500 from $29,000 to $23,500. The
decrease in the provision resulted from management's assessment of the adequacy
of the allowance for loan losses, the level of non-performing, delinquent and
classified loans, and the Bank's historical experience. Throughout 1995 and
1996, the Bank had low levels of non-performing, delinquent and classified
loans, and net charge-offs amounted to only $21,000 in fiscal 1995 and $15,000
in fiscal 1996. All charge-offs during both periods were on non-real estate
secured consumer loans. More than 85% of the Bank's loans throughout fiscal 1995
and 1996 were secured by first mortgages on owner-occupied one-to-four family
residences, which, when compared to unsecured loans or commercial mortgage
loans, tend to have lower default rates and, even after default, tend to result
in lower charge-offs as a percentage of total loan amount. Therefore, the
provision for loan losses in both periods represented principally the
replenishment of amounts charged against the allowance. See also "--Comparison
of Operating Results for the Three Months Ended December 31, 1996 and December
31, 1995--Provision for Loan Losses."
Provision for Nationar Losses. After Nationar was closed in February
1995, there was substantial uncertainty regarding the amounts which claimants
would be able to recover as the Superintendent proceeded with the liquidation
process. Various estimates of the ability to recover assets at Nationar
circulated among government officials and others involved in the process. The
Bank determined that the appropriate course, based upon information then
available, was to create an allowance for losses on its Nationar claim by
recognizing a provision for such losses. As a result, during fiscal 1995, the
Bank recorded a $279,000 provision for losses on its Nationar claims.
During fiscal 1996, the Superintendent began to make liquidating
distributions on Nationar claims and the uncertainty regarding the recovery of
the Bank's Nationar assets was alleviated. As a result, the Bank determined that
its existing allowance exceeded the uncertainties associated with its remaining
claim, and the Bank recovered $232,000 of the allowance. The remainder of the
allowance in the amount of $47,000 was considered to be unrecoverable and
represents the Nationar capital stock and capital debentures owned by the Bank.
Non-interest Income. Non-interest income increased from $450,000 in
fiscal 1995 to $489,000 in fiscal 1996. The principal cause of the increase was
an increase in net gains on the sale of securities by $101,000 recognized when
the Bank sold a portion of its investment in SLMA stock during fiscal 1996 at a
gain of $120,000. Capital gain distributions decreased by $62,000 from fiscal
1995 to fiscal 1996 because
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of fluctuations in the realization of gains by IIMF. IIMF pays regular dividends
and traditionally pays a capital gain dividend each year in December. The amount
of the capital gain dividend depends upon the market value of the securities
owned by IIMF and the timing of IIMF's securities trading activities, which,
depending upon market conditions, result in realized gains which are distributed
each December.
Non-interest Expense. Non-interest expense, excluding the effect of the
Nationar-related provision discussed above, declined by $77,000 from fiscal 1995
to fiscal 1996. The principal cause of the decline was a $132,000 decline in
FDIC insurance premiums. During the quarter ended June 30, 1995, the BIF of the
FDIC reached its required reserve ratio of 1.25% of insured deposits. As a
result, FDIC insurance premiums for BIF-insured institutions, such as the Bank,
were reduced beginning with the quarter ended September 30, 1995. Prior to the
reduction in the premium rate, the Bank was paying deposit insurance premiums
equal to 0.23% of deposits. During the quarter ended September 30, 1995, the
rate was reduced to 0.04% and beginning January 1, 1996, the rate was reduced to
the statutory minimum of $2,000 per year regardless of deposit levels.
After Nationar was closed, and in anticipation of the adverse effects
of having $2.7 million in non-earning assets frozen for an indefinite period of
time while the Nationar liquidation was completed, the Bank undertook a program
of cost containment to seek to mitigate the loss of interest income. As a
result, other categories of non-interest expense remained relatively constant
from fiscal 1995 to fiscal 1996, increasing $19,000, or 2.3%. Compensation and
benefits expense increased 1.4% due to normal fluctuations in salary and benefit
costs, while occupancy expense increased 7.8% due to normal increases in the
cost of occupying the Bank's headquarters in Goshen. Other operating expenses,
representing regular expenses of banking operations such as depreciation,
insurance, data processing, advertising, stationary and postage, increased by
$19,000 or 2.3% from fiscal 1995 to 1996. The largest increase was in
advertising expense, which approximately doubled from $31,000 to $60,000 as the
Bank aggressively advertised for new loans and increased general advertising in
connection with its 125th anniversary.
Effect of SFAS 106. SFAS 106, "Employer's Accounting for
Post-retirement Benefits Other Than Pensions," issued in December 1990, requires
that the cost of post-retirement benefits, other than pensions, be recognized on
an accrual basis as employees perform the services which earn the
post-retirement benefits. This departed from prior practice in which the costs
of such benefits were recognized as and when paid. Prior to the adoption of SFAS
106, the Bank offered all its retired employees health, dental and life
insurance coverage. After the adoption of SFAS 106, the Bank reduced
post-retirement non-pension benefits for employees who are not yet retired so
current employees are now entitled to post-retirement health and dental benefits
only if they have 23 years of service and their age plus years of service equals
at least 75. SFAS 106 permits employers to accrue the additional liability for
pre-adoption service credit either in one lump sum or gradually over a period of
years. During fiscal 1995, the Bank adopted SFAS 106 and elected to recognize
its entire estimated accrued obligation for post-retirement non-pension benefits
in one lump sum in the year of adoption. Therefore, in fiscal 1995, the Bank
recognized a net expense of $394,000 as the cumulative effect of an accounting
change, representing estimated accrued liability of $656,000, net of related
taxes of $262,000. In fiscal 1996, the Bank recognized $108,000 as a component
of compensation and benefits expense representing accrued liability for
post-retirement benefits on account of services rendered during the year. See
Note 12 of Notes to Financial Statements.
Income Tax Expense. Income tax expense increased from a tax benefit of
$16,000 in fiscal 1995 to a tax expense of $351,000 in 1996. This increase was
principally the result of the increase in the Bank's income before taxes and
before the cumulative effect of accounting changes from a loss of $84,000 in
fiscal 1995 to income of $909,000 in fiscal 1996. Most of the Bank's income is
taxable under both federal and New York state income tax laws. Tax-exempt
municipal bonds were not a material income producing
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factor in either year. The dividends the Bank receives on investments in equity
securities are subject to a 70% dividend received deduction on common stock and
42% on preferred stock of public utilities, which deduction amounted to $48,000
on dividends of $72,000 in 1995 and $42,000 on dividends of $60,000 in 1996.
Comparison of Operating Results for the Years Ended September 30, 1995 and
September 30, 1994
General. The Bank reported a net loss for the year ended September 30,
1995 of $462,000, compared to net income of $311,000 for the year ended
September 30, 1994. The decline in net income resulted principally from the
following factors. First, the Bank's spread decreased during a period of rising
interest rates as the rates on the Bank's loans increased more slowly than its
cost of funds, which adversely affected net interest income. Second, the Bank's
excess of interest-earning assets over interest-bearing liabilities,
representing interest-earning assets funded by demand deposits and capital,
decreased, which also exerted downward pressure on net interest income. Finally,
the closure of Nationar in February 1995 caused the Bank to record a provision
for possible losses on its Nationar claims.
Interest Income. Interest income declined $32,000, or 0.6%, from fiscal
1994 to fiscal 1995, despite generally rising market interest rates during
calendar year 1994. The principal cause of the decline was a $2.7 million, or
2.9%, decline in average interest-earning assets, which was partially offset by
a 15 basis point increase in average yield. The decline in average
interest-earning assets was principally caused the $2.9 million of assets at
Nationar which earned no interest for most of fiscal 1995.
The average balance of loans increased by $7.4 million, or 14.4%, from
fiscal 1994 to fiscal 1995, while the average yield on those loans increased by
6 basis points. The yield did not increase more dramatically, despite the
increase in market interest rates, because teaser rate ARMs continued to be
originated through the end of fiscal 1994, and the rates on all such loans
originated during fiscal 1994 did not adjust upward for the first time until
July 1, 1995 or January 1, 1996.
The average balance of investment securities declined by $11.2 million,
or 27.6%, from fiscal 1994 to fiscal 1995, which decline exceeded the increase
in loans. The decline in investment securities was caused by the Bank's
desire to increase overall yields by increasing loans as a percentage of total
assets. The reduction in interest income from the decline in the average balance
of investment securities outweighed the increase caused by the increase in the
average balance of loans. The yield on investment securities also declined 12
basis points, from 5.34% to 5.22%, despite higher market interest rate
conditions, because of a temporary shift in new purchases of investment
securities in favor of U.S. Government and agency securities and away from
corporate debt securities with higher yields.
Interest Expense. Interest expense increased $600,000, or 22.3%, from
fiscal 1994 to fiscal 1995. The principal causes of the increase were increases
in both the average balance and the rate on certificates of deposit resulting in
an increase in the Bank's average cost of funds from 3.18% in fiscal 1994 to
3.91% in fiscal 1995. New certificates of deposit and those which rolled over
during the period earned interest at increasing rates due to generally higher
average market interest rate conditions as interest rates began to increase in
approximately January 1994 and continued to increase until approximately January
1995. As market interest rates increased, customer preference is believed to
have shifted towards certificates of deposit as the yields became more
attractive. In addition, the Bank received $2.6 million of high rate
certificates of deposit as the result of the deposit program offered after
Nationar closed. Overall, the average cost of certificates of deposit increased
from 3.51% in fiscal 1994 to 4.94% in fiscal 1995. Deposits in lower costing
savings and money market accounts declined, which management believes resulted
from the shift in depositor preference as certificates of deposit became more
attractive.
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Net Interest Income. Net interest income before the provision for loan
losses declined by $632,000, or 20.7%, from fiscal 1994 to fiscal 1995. The
yields earned on interest-earning assets increased more slowly than the rates
paid on interest-bearing liabilities, so the Bank's spread decreased by 58 basis
points. In addition, as assets were tied up in connection with the Nationar
liquidation, average interest-earning assets declined by $2.7 million, or 2.9%,
while average interest-bearing liabilities declined by only $353,000 or 0.4%.
The excess of interest-earning assets over interest-bearing liabilities thus
declined by $2.4 million, which is estimated to have caused approximately a
$147,000 reduction in net interest income, assuming that such $2.4 million of
assets would have earned interest at a rate equal to 6.18%, the average yield on
interest earning assets in fiscal 1995. Changes in the level of average
non-performing assets from fiscal 1994 to fiscal 1995 did not have a material
effect on the change in net interest income.
Provision for Loan Losses. The provision for loan losses was $25,000 in
fiscal 1994 and increased to $29,000 in fiscal 1995. Throughout both years, the
Bank experienced low levels of non-performing, delinquent and classified loans,
with net charge-offs totaling only $10,000 in fiscal 1994 and $21,000 in fiscal
1995. The provision for loan losses replenished the allowance after these
charge-offs. See "Business of the Bank--Asset Quality."
Provision for Nationar Losses. As described, the Bank recorded a
$279,000 provision for losses on its Nationar claims during fiscal 1995 due to
the uncertainties that existed regarding the liquidation of Nationar by the
Superintendent.
Non-interest Income. Non-interest income increased by $73,000 from
$377,000 in fiscal 1994 to $450,000 in fiscal 1995. The increase was principally
the result of $87,000 of losses on trading securities which were recorded in
1994. Prior to the adoption of SFAS 115, the Bank maintained a trading
securities portfolio consisting principally of its IIMF and SLMA securities.
Trading securities were reported at fair value, with unrealized gains and losses
being recognized as a component of other income. The value of the Bank's trading
securities portfolio declined during fiscal 1994 because of normal fluctuations
in the value of the securities. When the Bank adopted SFAS 115 at the beginning
of fiscal 1995, the trading securities were classified as available for sale, so
thereafter they were reported at fair value, with unrealized gains and losses,
net of applicable taxes, being included as a separate component of retained
earnings. By September 30, 1995, the Bank had recorded on its balance sheet a
cumulative net unrealized gain in securities available for sale of $51,000,
representing the effect of the adoption of SFAS 115 on securities held at the
beginning of fiscal 1995 plus the effect of securities transactions and market
fluctuations during the year.
In addition, service fees on deposits increased by $63,000 from $85,000
in fiscal 1994 to $148,000 in fiscal 1995. This increase resulted principally
from an increase in fees on checking accounts. The increase was offset by
reductions of $53,000 in other non-interest income principally because in 1994
the Bank earned income in connection with the sale of mortgage loans and there
were no sales of loans in 1995, and, to a lesser extent, small reductions in
capital gain distributions and gains on the sale of securities.
Non-interest Expense. Non-interest expense, excluding the effect of the
Nationar provision, declined by $146,000 from fiscal 1994 to fiscal 1995. The
principal cause of the decline was a $58,000 decline in FDIC insurance premiums
because during the quarter ended September 30, 1995, the Bank began paying
reduced deposit insurance premiums at the rate of 0.4% of insured deposits
instead of the 0.23% rate during fiscal 1994 and the rest of fiscal 1995.
Compensation and benefits expense increased $30,000, or 2.1%, between the
periods due to normal inflation-based raises while occupancy expense decreased
by $36,000 and other operating expenses decreased by $82,000 due to the careful
monitoring of expenses during fiscal 1995 as discussed above in relation to the
Nationar matter.
53
<PAGE>
Effect of SFAS 106. As discussed above, in fiscal 1995, the Bank
recognized its entire estimated accrued obligation for post-retirement
non-pension benefits in one lump sum in the amount of $394,000 as the cumulative
effect of an accounting change, representing estimated accrued liability of
$656,000, net of related taxes of $262,000.
Income Tax Expense. Income tax expense decreased from $301,000 in
fiscal 1994 to a tax benefit of $16,000 in fiscal 1995. This decrease was
principally the result of the decrease in the Bank's income before taxes from
$612,000 in fiscal 1994 to a loss of $84,000 in fiscal 1995. Tax-exempt bond
interest did not materially effect the Bank's combined effective tax rate in
either year. The Bank was entitled to a dividend received deduction of $35,000
on dividends of $55,000 in 1994 and $48,000 on dividends of $72,000 in 1995.
Liquidity and Capital
The Bank's primary sources of funds are deposits, proceeds from the
principal and interest payments on loans, mortgage-backed and debt securities,
capital gain distributions on its IIMF investment, and, during certain periods,
proceeds from the sale of loans. While maturities and scheduled amortization of
loans and securities are predictable sources of funds, deposit outflows,
mortgage prepayments and mortgage loan and securities sales are greatly
influenced by general interest rates, economic conditions and competition.
The primary investing activity of the Bank is the origination of
residential one-to-four family mortgage loans and the purchase of
mortgage-backed and debt securities. During the three months ended December 31,
1996 and the years ended September 30, 1996, 1995 and 1994, the Bank's loan
originations totaled $3.8 million, $10.2 million, $7.8 million and $18.7
million, respectively. Loans, net, after payments and charge-offs, increased by
$2.3 million, $823,000, $759,000 and $9.6 million during such periods,
respectively, while investment and mortgage-backed securities, excluding the
effect of unrealized gains and losses, declined by $2.5 million, $2.9 million,
$4.9 million and $10.2 million, respectively, during the same periods. New loan
and securities investments were funded primarily by principal repayments on
loans, mortgage-backed and debt securities. Loan sales of $3.5 million provided
additional liquidity to the Bank during fiscal 1994, but loan sales did not
provide materials funds during fiscal 1995, and 1996 or the three months ended
December 31, 1996.
From September 30, 1994 to September 30, 1995, deposits and other
interest-bearing funding sources increased $697,000, or 0.8%, from $88.4 million
to $89.1 million, and then declined by $5.7 million, or 6.3%, from September 30,
1995 to September 30, 1996. Deposits increased from 1994 to 1995 only slightly,
and less than the interest credited on deposits during the year, as customers
sought non-bank investment vehicles when the equity markets improved and market
interest rates rose. Deposits decreased from 1995 to 1996 as part of
management's efforts to reduce the Bank's cost of funds. Deposit flows are also
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 regular basis.
Excess short-term liquidity is invested in overnight federal funds sold. If the
Bank requires funds beyond its ability to generate them internally, additional
sources of funds are available through the use of borrowings. At December 31,
1996, the Bank had available lines of credit with the FHLBNY of $9.8 million.
The Bank had outstanding borrowings of $1.0 million from the FHLBNY at December
31, 1996. The Bank decided to use such borrowings to satisfy funding needs at
the time rather than increase the rates paid on new deposits, which
54
<PAGE>
could have had a greater adverse effect on the cost of funds. The Bank does not
generally use borrowings as a major source of funds. After the closure of
Nationar, the Bank borrowed funds on a short term basis from other financial
institutions until it was able to generate additional deposits to satisfy
liquidity needs.
Loan commitments totaled $2.2 million at December 31, 1996, and the
Bank had $1.2 million of unused home equity lines of credit and $180,000 of
unused consumer overdraft checking lines of credit. Management anticipates that
the Bank 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 December 31, 1996 totaled $32.9 million. The Bank may elect to
allow some of those deposits to leave the Bank if it can reduce its cost of
funds by doing so without adversely affecting liquidity. However, management
anticipates that the Bank will be able to retain substantially all of such
deposits if the Bank needs to do so to fund loans and other investments.
At December 31, 1996, the Bank exceeded all regulatory capital
requirements of the FDIC then applicable to it, with a leverage capital level of
$11.9 million, or 12.3% of adjusted assets; total risk-based capital of $12.0
million, or 21.85% of risk-weighted assets, and Tier 1 risk-based capital of
$11.9 million, or 21.61% of risk-weighted assets. The Bank was classified as
"well capitalized" at December 31, 1996 under FDIC regulations applicable to it
on that date and its capital ratios were sufficient for it to be classified as
"well capitalized" under OTS regulations had the Bank been a federal savings
bank on that date. See "Regulatory Capital Compliance" and
"Regulation--Regulation of Federal Savings Associations--Capital Requirements"
for a discussion of the Bank's compliance with OTS capital requirements.
Prior to its conversion to a federal savings bank on March 18, 1997,
the Bank was not subject to any mandatory liquidity ratio requirements under the
regulations of the FDIC or the New York State Banking Department. The Bank is
now subject to the minimum liquidity ratio regulations of the OTS, which
currently require that the Bank must maintain liquid assets equal to at least
5%, of its net withdrawable accounts plus short term borrowings, measured on a
monthly basis. The Bank satisfies this OTS requirement. At December 31, 1996,
the Bank's liquid assets totaled 29.3% of net withdrawable accounts plus short
term borrowings.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with Generally Accepted Accounting Principals ("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 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, although interest rates generally increase during
periods when the rate of inflation is increasing and decrease during periods of
decreasing inflation. See "--Management of Interest Rate Risk" for a discussion
of the effect of changing interest rates on the Bank.
Impact of New Accounting Standards
Accounting for Long Lived Assets. In 1995, the FASB issued SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and for Long Lived Assets
to be Disposed of" ("SFAS 121"). This Statement establishes accounting standards
for the impairment of long-lived assets, certain identifiable
55
<PAGE>
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 for the Bank on October 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 SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123").
SFAS 123 establishes financial accounting standards for stock-based employee
compensation plans. SFAS 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 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 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 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 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 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities, addressing, for example, the financial statement effect of
transactions such as the sale of loans with full or partial recourse. After a
transfer of financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred. The entity ceases to
recognize financial assets it no longer controls and liabilities that have been
extinguished. If a transfer does not meet the criteria for a sale, the transfer
is accounted for as a secured borrowing with pledge of collateral. SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and may only be applied
prospectively. The Company has not yet determined the impact that SFAS 125 will
have on the Company's Financial Statements.
56
<PAGE>
BUSINESS OF THE COMPANY
General
The Company was organized as a Delaware corporation on March 17, 1997
at the direction of the Board of Directors of the Bank for the purpose of
acquiring all of the outstanding capital stock of the Bank upon consummation of
the Conversion. Upon completion of the Conversion, the Company will become a
unitary savings association holding company subject to regulation by the OTS.
See "Regulation--Holding Company Regulation."
Business
The Company is not an operating company. After the Conversion, in
addition to directing, planning and coordinating the business activities of the
Bank, the Company expects that it will invest the net proceeds of the Offerings
remaining after acquiring the stock of the Bank primarily in federal funds,
government and federal agency mortgage-backed securities, other debt securities,
high-grade short-term marketable securities, deposits of or loans to the Bank,
or a combination thereof. The Company also intends to make the ESOP Loan to
enable the ESOP to purchase up to 8% of the Common Stock in the Conversion. In
the future, the Company may acquire or organize other operating subsidiaries,
including other financial institutions, or it may merge with or acquire other
financial institutions and financial services related companies, although there
are no current arrangements, understandings or agreements regarding any such
expansion. See "Use of Proceeds." Initially, the Company will neither own nor
lease any property but will instead use the premises, equipment and furniture of
the Bank. The Company does not presently intend to employ any persons other than
certain officers of the Bank who will not be separately compensated by the
Company. The Company may utilize the support staff of the Bank from time to
time, if needed. Additional employees may be hired as appropriate if the Company
expands its business.
BUSINESS OF THE BANK
General
The Bank's principal business consists of gathering deposits from the
general public within its market area and investing those deposits primarily in
one-to-four family residential first mortgage loans, debt obligations issued by
the U.S. Government, its agencies, and business corporations, and
mortgage-backed securities. To a lesser extent, the Bank makes home equity line
of credit and other second mortgage loans on one-to-four family residential
properties, commercial mortgage loans, construction loans and consumer loans.
The Bank's revenues are derived principally from interest on mortgage loans and
securities investments. The Bank's primary sources of funds are deposits,
proceeds from principal and interest payments on loans, mortgage-backed and
investment securities and borrowings.
Market Area
The Bank's market area is the Village of Goshen, New York and its
surrounding communities to a distance of approximately 12 miles, representing
most of Orange County, New York. The Village of Goshen is the county seat of
Orange County and lies 60 miles northwest of New York City. Although
predominantly rural with many small towns, many residents of the market area
work in New York City and other communities to the south and east, commuting by
train or automobile. They tend to reside in Orange County due to lower housing
costs and the quieter, more rural atmosphere. Principal occupations of
57
<PAGE>
residents in the community include retail trades, manufacturing, professional
services (including health, education and other professional fields) and
government administration.
The Bank's market area grew significantly in population during the
1980s as rising housing prices closer to New York City, coupled with an
abundance of vacant land in Orange County, led to a boom in housing
construction. As the economy throughout the region declined in the late 1980s
and early 1990s, communities surrounding the Bank continued to experience
growth, but more slowly. According to U.S. census data, approximately 18% of the
residents of Goshen and its surrounding zip code area who were over 5 years of
age resided outside Orange County only five years earlier. The conversion of
Stewart International Airport, 12 miles to the northeast of Goshen, into a
full-service commercial airport in 1990, gave the Bank's market area an
additional boost. However, the health of the economy in the New York City
metropolitan area has, and will continue to have, a direct effect on the
economic well being of residents and businesses in the Bank's market area.
Competition
The Bank's principal competitors for deposits are other savings banks,
savings and loan associations, commercial banks and credit unions in the Bank's
market area, money market mutual funds, insurance companies, brokerage firms and
other financial institutions, many of which are substantially larger in size
than the Bank. The Bank's competition for loans comes principally from savings
banks, savings and loan associations, commercial banks, mortgage bankers,
finance companies and other institutional lenders. The Bank's principal methods
of competition include loan and deposit pricing, maintaining close ties with its
local community, advertising and marketing programs and the types of services
provided.
The Bank is subject to competition from other financial institutions
which may have much greater financial and marketing resources. However, the Bank
believes it benefits from its community bank orientation as well as its
relatively high core deposit base. The relative economic stability of the Bank's
lending area is reflected in the small number of mortgage delinquencies
experienced by the Bank.
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists
primarily of conventional first mortgage loans secured by one-to-four family
residences. At December 31, 1996, the Bank had total loans receivable of $61.2
million, of which $53.1 million, or 86.8%, were owner-occupied one-to-four
family residential first mortgage loans. The remainder consisted of $4.3 million
of commercial mortgage loans, or 7.1% of total loans (which include $2.2 million
of loans secured by one-to-four family residential property used for rental
purposes); $2.2 million of home equity lines of credit and other loans secured
by junior liens on one-to-four family owner-occupied residential properties, or
3.6% of total loans; $708,000 of construction loans, or 1.2% of total loans;
$807,000 of consumer loans which are not secured by real estate, or 1.3% of
total loans; and $15,000 of other loans, or 0.02% of total loans.
The Bank may originate loans as permitted by federal laws and
regulations. Interest rates on loans are affected by the demand for loans, the
supply of money available for lending and the rates offered by competitors.
These factors are in turn affected by, among other things, economic conditions,
monetary policies of the federal government, and legislative tax policies. The
Bank seeks to compete successfully for loan opportunities in its market area
through hands-on local originations, community involvement, responsiveness to
customer and community needs, competitive pricing, and low origination fees.
58
<PAGE>
Loan Portfolio Composition Table
The following table sets forth the composition of the Bank's mortgage and other
loan portfolios in dollar amounts and in percentages at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------- -----------------------------------------
1996 1996 1995
------------------- ------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4 family (1):
Home purchase and refinance...... $ 53,074 86.77% $ 50,377 85.57% $ 49,552 85.36%
Construction..................... 708 1.16% 1,003 1.71% 352 0.61%
Home equity...................... 2,219 3.63% 2,197 3.73% 2,122 3.66%
-------- ------ -------- ------ -------- ------
Total residential 1-4 family.. 56,001 91.56% 53,577 91.01% 52,026 89.63%
Commercial real estate:
1-4 family rental property...... 2,178 3.56% 2,202 3.74% 2,465 4.25%
Other commercial mortgages...... 2,166 3.54% 2,255 3.83% 2,660 4.58%
-------- ------ -------- ------ -------- ------
Total commercial real estate.. 4,344 7.10% 4,457 7.57% 5,125 8.83%
-------- ------ -------- ------ -------- ------
Total mortgage loans........ 60,345 98.66% 58,034 98.58% 57,151 98.46%
Consumer and other loans:
Savings account loans........... 144 0.23% 148 0.25% 209 0.36%
Home improvement loans.......... 85 0.14% 103 0.17% 100 0.17%
Automobile loans................ 120 0.20% 125 0.21% 92 0.16%
Other consumer loans............ 458 0.75% 447 0.76% 477 0.82%
Commercial business loans....... 15 0.02% 15 0.03% 20 0.03%
-------- ------ -------- ------ -------- ------
Total non-real estate loans... 822 1.34% 838 1.42% 898 1.54%
-------- ------ -------- ------ -------- ------
Total loans................ 61,167 100.00% 58,872 100.00% 58,049 100.00%
-------- ======= -------- ======= -------- =======
Less:
Deferred loan fees, net......... 21 22 16
Allowance for loan losses....... 133 123 114
-------- -------- --------
Total loans, net................. $ 61,013 $ 58,727 $ 57,919
======== ======== =========
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------
1994 1993 1992
------------------- ------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4 family (1):
Home purchase and refinance...... $ 49,279 86.01% $ 41,214 86.47% $ 39,702 84.23%
Construction..................... 1,316 2.30% 15 0.03% 64 0.14%
Home equity...................... 2,141 3.74% 2,542 5.33% 3,422 7.26%
-------- ------ -------- ------ -------- ------
Total residential 1-4 family.. 52,736 92.05% 43,771 91.83% 43,188 91.63%
Commercial real estate:
1-4 family rental property...... 2,406 4.20% 2,052 4.30% 1,805 3.83%
Other commercial mortgages...... 1,402 2.45% 1,133 2.38% 1,321 2.80%
-------- ------ -------- ------ -------- ------
Total commercial real estate.. 3,808 6.65% 3,185 6.68% 3,126 6.63%
-------- ------ -------- ------ -------- ------
Total mortgage loans........ 56,544 98.70% 46,956 98.51% 46,314 98.26%
Consumer and other loans:
Savings account loans........... 176 0.31% 215 0.45% 214 0.46%
Home improvement loans.......... 79 0.14% 116 0.24% 99 0.21%
Automobile loans................ 26 0.04% 42 0.09% 77 0.16%
Other consumer loans............ 439 0.77% 335 0.70% 417 0.89%
Commercial business loans....... 26 0.04% 2 0.01% 11 0.02%
-------- ------ -------- ------ -------- ------
Total non-real estate loans... 746 1.30% 710 1.49% 818 1.74%
-------- ------ -------- ------ -------- ------
Total loans................ 57,290 100.00% 47,666 100.00% 47,132 100.00%
-------- ======= -------- ======= -------- ======
Less:
Deferred loan fees, net......... 13 14 13
Allowance for loan losses....... 106 91 92
-------- -------- --------
Total loans, net................. $ 57,171 $ 47,561 $ 47,027
======== ======== ========
</TABLE>
(1) Includes owner-occupied one-to-four family residences. Loans secured by
one-to four family residences which are used as rental property are classified
as commercial real estate loans.
59
<PAGE>
The following table presents the Bank's loan portfolios by fixed and adjustable
rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------ ------------------------------------------
1996 1996 1995
------------------ ---------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans
Real estate:
Residential 1-4 family .........$18,318 29.95% $15,040 25.55% $ 9,507 16.38%
Home equity .................... 832 1.36% 717 1.22% 295 0.51%
Commercial real estate ......... 1,122 1.83% 1,125 1.91% 920 1.58%
Construction ................... 708 1.16% 1,003 1.70% 352 0.61%
------- ----- ------ ----- ------ -----
Total real estate loans ...... 20,980 34.30% 17,885 30.38% 11,074 19.08%
Consumer and other ............... 718 1.17% 737 1.25% 779 1.34%
------- ----- ------ ----- ------ -----
Total fixed rate loans ....... 21,698 35.47% 18,622 31.63% 11,853 20.42%
Adjustable rate loans:
Real estate:
Residential 1-4 family ......... 34,756 56.82% 35,337 60.03% 40,045 68.99%
Home equity .................... 1,387 2.27% 1,480 2.51% 1,827 3.15%
Commercial real estate ......... 3,222 5.27% 3,332 5.66% 4,205 7.24%
------- ----- ------ ----- ------ -----
Total real estate ........... 39,365 64.36% 40,149 68.20% 46,077 79.38%
Consumer and other ............... 104 0.17% 101 0.17% 119 0.20%
------- ----- ------ ----- ------ -----
Total adjustable rate loans . 39,469 64.53% 40,250 68.37% 46,196 79.58%
------- ----- ------ ----- ------ -----
Total loans ............... 61,167 100.00% 58,872 100.00% 58,049 100.00%
------- ====== ------ ====== ------ ======
Less:
Deferred loan fees, net ........ 21 22 16
Allowance for loan losses ...... 133 123 114
------- -------- --------
Total loans, net .................$61,013 $ 58,727 $ 57,919
======= ======== ========
</TABLE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------
1994 1993 1992
--------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans:
Real estate:
Residential 1-4 family ......... $10,749 18.76% $ 11,516 24.16% $12,838 27.24%
Home equity .................... - 0.00% - 0.00% 5 0.01%
Commercial real estate ......... 479 0.84% 572 1.20% 958 2.03%
Construction ................... 1,316 2.30% 15 0.03% 64 0.14%
------- ----- -------- ----- -------- -----
Total real estate loans ...... 12,544 21.90% 12,103 25.39% 13,865 29.42%
Consumer and other ............... 656 1.14% 647 1.36% 755 1.60%
------- ----- -------- ----- -------- -----
Total fixed rate loans ....... 13,200 23.04% 12,750 26.75% 14,620 31.02%
Adjustable rate loans:
Real estate:
Residential 1-4 family ......... 38,530 67.25% 29,698 62.31% 26,864 57.00%
Home equity .................... 2,141 3.74% 2,542 5.33% 3,417 7.25%
Commercial real estate ......... 3,329 5.81% 2,613 5.48% 2,168 4.60%
------- ----- -------- ----- -------- -----
Total real estate ........... 44,000 76.80% 34,853 73.12% 32,449 68.85%
Consumer and other ............... 90 0.16% 63 0.13% 63 0.13%
------- ----- -------- ----- -------- -----
Total adjustable rate loans . 44,090 76.96% 34,916 73.25% 32,512 68.98%
------- ----- -------- ----- -------- -----
Total loans ............... 57,290 100.00% 47,666 100.00% 47,132 100.00%
------- ====== -------- ====== -------- ======
Less:
Deferred loan fees, net ........ 13 14 13
Allowance for loan losses ...... 106 91 92
-------- ------- ------
Total loans, net ................. $ 57,171 $47,561 $ 47,027
======== ======= ========
</TABLE>
60
<PAGE>
Residential Mortgage Loans. The primary focus of the Bank's lending
activities are mortgage loans secured by first liens on one-to-four family
owner-occupied residential real estate. At December 31, 1996, approximately
$53.1 million, or 86.8%, of the Bank's total loan portfolio consisted of such
loans. The Bank offers both ARMs and fixed-rate mortgage loans. The relative
proportions of fixed-rate loans versus ARMs originated by the Bank depends
principally upon current customer preference, which is generally driven by
general economic and interest rate conditions and the pricing offered by the
Bank's competitors. At December 31, 1996, approximately 65.5% of the Bank's
residential one-to-four family owner-occupied first mortgage portfolio were ARMs
and approximately 34.5% were fixed rate loans. The ARMs generally carry annual
caps and life-of-the-loan ceilings which limit interest rate adjustments.
The Bank's residential loan underwriting criteria are generally
comparable to those required by the FNMA and other major secondary market loan
purchasers. Generally, ARM credit risks are somewhat greater than fixed-rate
loans primarily because, as interest rates rise, the borrowers' payments rise,
increasing the potential for default. Although the Bank offers teaser rate ARMs
with low initial interest rates that are not based upon the index plus the
margin for determining future rate adjustments, the Bank underwrites such loans
based on the payment due at the fully-indexed rate.
In addition to verifying income and assets of borrowers, the Bank
obtains independent appraisals on all residential first mortgage loans and title
insurance is required at closing. Private mortgage insurance is required on all
loans with a loan to value ratio in excess of 80% and the Bank requires real
estate tax escrows on such loans. Real estate tax escrows are voluntary on
residential mortgage loans with loan to value ratios of 80% or less.
The Bank has offered ARMs since the early 1980s. In the early years,
the Bank's ARMs provided for interest rate adjustments based upon the Contract
Interest Rate Index, (the "CIRI") and the Monthly Median Cost of Funds Index,
(the "COFI"), both as originally published by the Federal Home Loan Bank Board.
These indexes have proved to be unsatisfactory because the COFI generally reacts
slowly to interest rate changes and the CIRI no longer reflects the same spread
against market interest rates due to changes in mortgage lending patterns. As a
result, at December 31, 1996, the Bank had approximately $7.0 million of ARMs
based upon the COFI and CIRI with current interest rates from 3.80% to 7.00%.
ARMs originated in recent years have interest rates that adjust annually based
upon the movement of the one year treasury bill constant maturity index, plus a
margin of from 2% to 2.75%. These loans generally have a maximum interest rate
adjustment of 2% per year, with a lifetime maximum interest rate adjustment,
measured from the initial interest rate, of 5.5% or 6%.
From approximately April 1993 to December 1994, the Bank originated
teaser rate ARMs with discounted initial interest rates as low as 4.25%. During
that period, it was also the Bank's policy to bunch the interest rate
adjustments on its new ARMs so that the interest rate on loans originated from
January through June did not first adjust until July 1 of the following year,
while the interest rate on loans originated from July through December did not
first adjust until January 1 of the second calendar year after origination.
Because of the low initial interest rates and the increase in the one year
treasury bill index throughout 1994, many of these loans did not adjust to a
fully indexed interest rate until July 1996 or January 1997.
Fixed-rate residential mortgage loans are generally originated by the
Bank for terms of 15 or 30 years. Although 30 year fixed-rate mortgage loans may
adversely affect the Bank's net interest income in periods of rising interest
rates, the Bank originates such loans to satisfy customer demand. Such loans are
generally originated at initial interest rates which exceed the fully indexed
rate on ARMs offered at the same time. Fixed-rate residential mortgage loans
originated by the Bank generally include due-on-sale
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<PAGE>
clauses which permit the Bank to demand payment in full if the borrower sells
the property without the Bank's consent. Due-on-sale clauses are an important
means of adjusting the rates of the Bank's fixed-rate mortgage loan portfolio,
and the Bank has generally exercised its rights under these clauses.
After the Conversion, management intends to continue to emphasize the
origination of mortgage loans secured by one-to-four family owner-occupied
residences.
Home Equity Loans. The Bank makes home equity loans, representing loans
secured by second mortgages on one-to-four family owner-occupied residences.
These loans are of two types. The Bank offers a home equity line of credit
secured by a residential mortgage, normally a second lien. These loans have
adjustable rates of interest and generally provide for an initial advance period
of five or ten years, during which the borrower pays interest only, or
interest plus a nominal principal amount, and can borrow, repay, and reborrow
the principal balance. This is followed by a repayment period, generally ten
years, during which the balance of the loan is repaid in principal and interest
installments. The Bank also offers regular amortizing home equity loans. These
loans are fully advanced at closing and repayable in monthly principal and
interest installments over a period not to exceed 10 years. Second mortgage
loans are limited to a maximum loan to value ratio, including prior liens, of
not more than 80%. At December 31, 1996, the Bank had $1.4 million in
outstanding advances on home equity lines of credit and $832,000 in regular
amortizing home equity loans.
Commercial Mortgage Loans. The Bank originates fixed and adjustable
rate mortgage loans secured by office buildings, retail establishments,
one-to-four family non-owner occupied residential real estate used for rental
purposes, and other types of commercial property, almost always secured by
property located in the Bank's market area. At December 31, 1996, the Bank's
commercial mortgage loan portfolio was $4.3 million, or 7.1% of total loans. At
December 31, 1996, the Bank's largest such loan was a participation loan with a
local savings bank in which the Bank's participation was $489,000, or 44% of the
total loan. The loan is secured by a mixed use office and retail center located
in the Village of Goshen.
The Bank makes commercial mortgage loans with loan to value ratios up
to 75%, terms up to 15 years, and amortization periods up to 15 years. At
December 31, 1996, $3.2 million of the Bank's commercial mortgage loans had
adjustable rates and $1.1 million had fixed rates.
Loans secured by commercial properties generally involve a greater
degree of risk than one-to-four family residential mortgage loans. Because
payments on such loans are often dependent on successful operation or management
of the properties, repayment may be subject, to a greater extent, to adverse
conditions in the real estate market or the economy. The Bank seeks to minimize
these risks through its underwriting policies. In reaching its decision on
whether to make a commercial mortgage 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
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.
The Bank generally requires a debt service coverage ratio of a minimum
of 120% and the personal guarantee of the borrower. The Bank also requires an
appraisal on the property conducted by an independent appraiser and title
insurance. When evaluating the qualifications of the borrower for a commercial
mortgage 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
62
<PAGE>
skills and the ability to maintain the property from current rental income or
from the borrower's operations on the property. 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.
Construction Loans. The Bank offers residential single family
construction loans to persons who intend to occupy the property upon completion
of construction. Upon completion of construction, these loans are automatically
converted into permanent residential mortgage loans and classified as such. The
proceeds of the construction loan are advanced in stages on a percentage of
completion basis as construction progresses. The loans generally provide for a
construction period of not more than six months during which the borrower pays
interest only. In recognition of the risks involved in such loans, the Bank
carefully monitors construction through regular inspections and the borrower
must qualify for the permanent mortgage loan before the construction loan is
made. At December 31, 1996, the Bank had eight construction loans with an
outstanding principal balance of $708,000. The Bank's delinquency experience
with its construction loans has been favorable. At the end of each fiscal year
since September 30, 1992, and at December 31, 1996, the Bank had no
non-performing construction loans. See "--Asset Quality."
Consumer Loans. The Bank also makes short-term fixed-rate consumer
loans either unsecured or secured by savings accounts, automobiles or other
consumer assets. Consumer loans, excluding these secured by real estate, totaled
$807,000, or 1.3% of total loans, at December 31, 1996. These loans generally
have an average term of not more than five years and have interest rates higher
than mortgage loans. The shorter terms to maturity are helpful in managing the
Bank's interest rate risk. These loans are generally underwritten based upon the
borrower's ability to repay and the value of the collateral for the loan.
Collateral value, except for loans secured by bank deposits or marketable
securities, is a secondary consideration because personal property collateral
generally rapidly depreciates in value, is difficult to repossess, and rarely
generates close to full value at a forced sale.
Origination of Loans. Loan originations come from a number of sources.
Residential loan originations can be attributed to depositors, retail customers,
telephone inquiries, advertising, the efforts of the Bank's loan officers, and
referrals from other borrowers, real estate brokers and builders. The Bank
originates loans through its own efforts and does not use mortgage brokers,
mortgage bankers or other fee paid loan finders.
All of the Bank's lending is subject to its written, nondiscriminatory
underwriting standards and to loan origination procedures prescribed by the
Bank's Board of Directors. Officers of the Bank have the authority to approve
loans at differing levels established by the Board of Directors based upon the
position and expertise of the officer. All loans up to $250,000 must be approved
by at least two senior loan officers and all loans from $250,000 to $500,000
must be approved by Mr. Kelsey and Mr. Durland. Loans over $500,000, of which
the Bank had none at December 31, 1996, must be approved in advance by the
Bank's ad hoc loan review committee. All other mortgage loans are reviewed by
the Bank's ad hoc loan committee after approval.
As a federal savings bank, the aggregate amount of loans that the Bank
is permitted to make to any one borrower is generally limited to 15% of
unimpaired capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At
December 31, 1996, 15% of the Bank's capital and surplus was approximately $1.8
million. On that date, the Bank's largest aggregate loan relationship was
$792,000, represented by three loans to affiliated borrowers. One of the three
component loans, a participation loan with a balance owed to the Bank at
December 31, 1996 of
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<PAGE>
$489,000, is the Bank's largest loan and is secured by mixed use commercial
property in Goshen. The two related loans include a residential mortgage loan on
the primary residence of a principal of the commercial loan borrower and a
mortgage loan on a small mixed-use commercial property to a related entity. The
Bank had two other loan relationships at December 31, 1996 with balances in
excess of $500,000. One relationship, in the amount of $668,000, included a
commercial mortgage loan on medical offices in the amount of $424,000 and a
residential mortgage loan to a principal of the commercial loan borrower. The
other relationship, in the amount of $658,000, included the same mortgage loan
on the medical facility, a residential mortgage loan on another principal's
home, and a small overdraft checking line of credit. At December 31, 1996, the
Bank had three loans outstanding with principal balances in excess of $250,000
and an additional 11 loans with principal balances from $200,000 to $250,000.
None of these loans were past due 90 days or more on December 31, 1996 or
otherwise classified as non-performing.
The following table sets forth the Bank's loan originations, loan sales
and principal repayments for the periods indicated. All loans sold were whole
loans.
<TABLE>
<CAPTION>
Three Months Ended
December 31, Year Ended September 30,
------------------ ------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Total loans, beginning of period............ $ 58,872 $ 58,049 $ 57,290 $47,666
-------- -------- -------- -------
Loans originated:
Residential 1 to 4 family................... 2,915 6,198 3,557 14,238
Commercial real estate...................... 17 334 1,195 1,649
Construction loans.......................... 453 1,652 1,271 1,489
Consumer loans (1).......................... 408 2,030 1,780 1,317
-------- -------- -------- -------
Total loans originated.................. 3,793 10,214 7,803 18,693
Loans purchased............................. - - - -
Loans sold.................................. - - - (3,481)
Principal repayments........................ (1,498) (9,373) (7,022) (5,574)
Total charge-offs........................... - (18) (22) (14)
-------- -------- -------- -------
Net loan activity........................... 2,295 823 759 9,624
-------- -------- -------- -------
Total loans, end of period................ $ 61,167 $ 58,872 $ 58,049 $ 57,290
======== ======== ======== ========
</TABLE>
(1) Includes home equity loans secured by subordinate liens on one-to-four
family owner-occupied residences.
The Bank does not purchase loans. Prior to fiscal 1995, the Bank sold
part of its fixed rate residential mortgage loan production to FNMA and retained
the right to service those loans. At December 31, 1996, the Bank's portfolio of
loans serviced for FNMA totaled $7.3 million. The Bank did not service loans for
any other investors at that date. The Bank has never purchased loan servicing
rights.
Loan Maturity. The following table shows the contractual maturity of
the Bank's loan portfolio at December 31, 1996. Loans are shown as due based on
their contractual terms to maturity. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the final loan
payment is due without regard to rate adjustments. The table does not reflect
the effects of loan
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<PAGE>
amortization, possible prepayments or enforcement of due-on-sale clauses.
Non-performing loans are shown as being due based upon their contractual
maturity without regard to acceleration due to default.
<TABLE>
<CAPTION>
Residential Home
1-4 Family Equity Consumer Commercial Construction Total
---------- ------ -------- ---------- ------------ -----
(In Thousands)
Amounts due:
<S> <C> <C> <C> <C>
Within 3 months................. $ 3 $ - $146 $ - $ - $ 149
3 months to 1 year.............. 17 - 70 5 708 800
1 to 3 years.................... 228 - 292 31 - 551
3 to 5 years.................... 1,246 88 246 719 - 2,299
5 to 1O years................... 2,189 744 68 304 - 3,305
10 to 20 years.................. 16,460 1,387 - 3,285 - 21,132
Over 20 years................... 32,931 - - - - 32,931
------ ----- --- ----- --- ------
Total loans..................... 53,074 2,219 822 4,344 708 61,167
Less:
Allowance for loan loss......... 112 - 21 - - 133
Deferred loan fees, net......... 21 - - - - 21
------ ----- --- ----- --- --------
Total loans, net............ $52,941 $ 2,219 $801 $4,344 $ 708 $ 61,013
======= ======= ==== ====== ===== ========
</TABLE>
The following table sets forth at December 31, 1996, the dollar amount
of loans due after December 31, 1997, and whether such loans have fixed
interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
Residential 1-4 family..... $ 18,300 $34,754 $ 53,054
Home equity................ 832 1,387 2,219
Commercial................. 1,120 3,219 4,339
Consumer................... 522 84 606
-------- ------- --------
Total.................. $ 20,774 $39,444 $ 60,218
======== ======= ========
</TABLE>
Asset Quality
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the deficiency to be cured by
contacting the borrower. Late notices are sent when a payment is more than 15
days past due and a late charge is generally assessed at that time. The Bank
attempts to contact personally any borrower who is more than 30 days past due.
In most cases, deficiencies are cured promptly. All loans past due 60 days or
more, and all loans in which the borrower is delinquent in the payment of real
estate taxes regardless of payment status, are added to a watch list and a loan
officer of the Bank contacts the borrower on a regular basis to seek to cure the
delinquency. If a loan becomes past due 90 days, the Bank refers the matter to
an attorney, who first seeks to obtain payment without litigation and, if
unsuccessful, generally commences a foreclosure action or other appropriate
legal action to collect the loan. A foreclosure action, if the default is not
cured, generally leads to a judicial sale of the mortgaged real estate. The
judicial sale is normally delayed if the borrower files a bankruptcy petition
because the foreclosure action cannot be continued unless the Bank first obtains
relief from the automatic stay provided by the Bankruptcy Code.
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<PAGE>
If the Bank acquires the mortgaged property at foreclosure sale or
accepts a voluntary deed in lieu of foreclosure, the acquired property is then
classified as Real Estate Owned ("REO") until it is sold. At December 31, 1996,
the Bank had no REO. When REO is acquired, the property is recorded at the lower
of the principal balance of the loan or fair value less costs of sale of the
property and any shortfall between the recorded value of the property and the
carrying value of the loan is charged to the allowance for loan losses.
Thereafter, changes in the value of the REO are reflected as a valuation
allowance. The Bank is permitted to finance sales of REO by "loans to
facilitate," which may involve a lower down payment or a longer repayment term
or other more favorable features than generally would be granted under the
Bank's underwriting guidelines. Currently, the Bank has no "loans to
facilitate."
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at December 31, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
-------------------------------------------------------
60-89 Days 90 Days and Over Total Loans Delinquent
-------------------------- --------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family.... 11 $748 1.39% - $ - 0.00% 11 $ 748 1.39%
Home equity .............. 1 42 1.89% - - 0.00% 1 42 1.89%
Commercial................ - - 0.00% - - 0.00% - - 0.00%
Consumer and other loans.... 18 12 1.46% 3 3 0.36% 21 15 1.82%
-- ---- - ------ -- -----
Total................ 30 $802 1.31% 3 $ 3 0.005% 33 $ 805 1.32%
== ==== = ====== == =====
</TABLE>
The following table sets forth information with respect to the Bank's
non-performing assets (which generally includes loans that are delinquent for 90
days or more and real estate owned) at the dates indicated. At December 31,
1996, there were no loans other than those included in the table below with
regard to which management had information about possible credit problems of the
borrower that caused management to seriously doubt the ability of the borrower
to comply with present loan repayment terms.
<TABLE>
<CAPTION>
At December 31, At September 30,
-----------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(In Thousands)
Non-accrual loans:
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4 family real estate.............. $ - $ 16 $ 157 $ 42 $ - $ -
Non-mortgage loans:............................. - - - - - -
----- ---- ----- ----- ----- ----
Total non-accrual loans....................... - 16 157 42 - -
===== ==== ===== ===== ===== ====
Accruing loans past due 90 days or more:
Residential 1-4 family.......................... - - 68 160 264 80
Home equity..................................... - - - 51 - -
Consumer........................................ 3 - - 4 5 -
----- ---- ----- ----- ----- ----
Total loans past due 90 days
or more and still accruing................. 3 - 68 215 269 80
----- ---- ----- ----- ----- ----
Total non-performing loans.................. 3 16 225 257 269 80
Real estate owned.................................. - - - - - 65
Other non-performing assets........................ - - - - - -
----- ---- ----- ----- ----- ----
Total non-performing assets........................ $ 3 $ 16 $ 225 $ 257 $ 269 $145
===== ==== ===== ===== ===== ====
Non-performing loans
as a percent of total loans..................... 0.005% 0.03% 0.39% 0.45% 0.56% 0.17%
Non-performing assets
as a percent of total assets.................... 0.003% 0.02% 0.22% 0.26% 0.27% 0.15%
</TABLE>
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<PAGE>
It is the Bank's policy to discontinue accruing interest on a loan when
it becomes 90 days or more delinquent unless the Bank determines that the nature
of the delinquency and the collateral are such that collection of the principal
and interest on the loan in full is reasonably assured. Once the accrual of
interest is discontinued, the Bank records interest as and when received until
the loan is restored to accruing status.
For the three months ended December 31, 1996 and the years ended
September 30, 1996, 1995 and 1994, the amount of interest income that would have
been recorded on non-accrual loans was $0, $1,400, $6,700 and $1,300,
respectively, of which $0, $1,400, $0 and $0 was actually collected by the Bank
and recorded as income during each such period. Interest earned on loans 90 days
or more delinquent and still accruing interest amounted to $123, $0, $7,600 and
$7,000 for such periods, respectively.
Classified Assets. OTS regulations require that federal savings banks
classify their assets on a regular basis and establish prudent valuation
allowances based on such classifications. In addition, in connection with
examinations of savings associations, OTS examiners have authority to identify
problem assets and, if appropriate, require them to be classified. FDIC and New
York State Banking Department examiners had similar authority before the Bank
converted to a federal savings bank. OTS regulations provide for three adverse
classifications for problem assets: Substandard, Doubtful and Loss. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the Bank will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of Substandard assets, with the
additional characteristics that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high probability of loss. An asset classified Loss
is considered uncollectible and of such little value that its continuance as an
asset of the Bank is not warranted. The regulations have also created a Special
Mention category, consisting of assets which do not currently expose the Bank to
a sufficient degree of risk to warrant classifications, but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as Substandard or Doubtful require the Bank to
establish prudent valuation allowances. If an asset or portion thereof is
classified as Loss, the Bank must either establish a specific allowance for loss
equal to 100% of the portion of the asset classified Loss or charge off such
amount. If the Bank does not agree with an examiner's classification of an
asset, it may appeal this determination to the District Director of the OTS. On
the basis of management's review of its loans at December 31, 1996, the Bank had
no classified assets and no loans categorized by management as "Special
Mention."
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Bank's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover loan losses which are deemed probable and can be estimated.
The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, management's assessment
of the credit risk inherent in the portfolio, historical loan loss experience
and the Bank's underwriting policies. The Bank evaluates on a loan by loan basis
each calendar quarter all loans which are at least sixty days past due or for
which there are unpaid real estate taxes and considers whether the allowance
should be adjusted to protect against risks associated with such loans. The
analysis of the adequacy of the allowance is reported to and reviewed by the
Board of Directors quarterly. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions and the
Bank's actual experience differ substantially from the conditions and experience
used in the assumptions upon which the initial determinations are based.
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<PAGE>
While the Bank believes that it has established an adequate allowance
for loan losses based upon its low level of prior charge-offs, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio as part of a
future regulatory examination, will not request the Bank to materially increase
its allowance for loan losses, thereby negatively affecting the Bank's financial
condition and earnings at that time. Moreover, no assurance can be made that
future additions to the allowance will not be necessary based on changes in
economic and real estate market conditions, further information obtained
regarding existing loans, identification of additional problem loans and other
factors, both within and outside of management's control. The directors of the
Bank and the Company have reviewed the provision for loan losses and the
allowance for loan losses and the assumptions utilized by management as to their
reasonableness and adequacy.
The following table analyzes activity in the Bank's allowance for loan
losses during the fiscal years indicated.
<TABLE>
<CAPTION>
Three Months Ended
December 31, Year Ended September 30,
------------------ -------------------------------------------------
1996 1996 1995 1994 1993 1992
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Allowance, beginning of period........... $123 $114 $106 $ 91 $ 92 $ 71
Provision:
Residential 1-4 family.................. - - 15 20 10 40
Commercial real estate.................. - - - - - -
Consumer................................ - 24 14 5 - -
---- ---- ----- ---- ---- ----
Total provision....................... - 24 29 25 10 40
Charge-offs:
Residential 1-4 family.................. - - - - (6) (25)
Consumer................................ - (18) (22) (14) (7) (7)
---- ---- ----- ---- ---- ----
Total charge-offs .................... - (18) (22) (14) (13) (32)
---- ---- ----- ---- ---- ----
Recoveries:
Residential 1-4 family.................. - - - - 2 13
Consumer................................ 10 3 1 4 - -
---- ---- ----- ---- ---- ----
Total recoveries ................... l0 3 1 4 2 13
---- ---- ----- ---- ---- ----
Net charge-offs (recoveries)............. 10 (15) (21) (10) (11) (19)
---- ---- ----- ---- ---- ----
Allowance, end of period................. $133 $123 $ 114 $106 $ 91 $ 92
==== ==== ===== ==== ==== ====
Allowance as a percent of total loans.... 0.22% 0.21% 0.20% 0.19% 0.19% 0.20%
</TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. The allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any category.
68
<PAGE>
<TABLE>
<CAPTION>
At December 31, At September 30,
----------------- -----------------------------------------------------------------
1996 1996 1995 1994
--------------- ------------------ ----------------- -------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance allocated to:
Residential 1-4 family...... $ 112 90.40% $ 112 89.30% $ 112 89.02% $97 89.75%
Commercial real estate...... - 7.10% - 7.57% - 8.83% - 6.65%
Construction................ - 1.16% - 1.71% - 0.61% - 2.30%
Consumer and other.......... 21 1.34% 11 1.42% 2 1.54% 9 1.30%
----- ------ ----- ------ ----- ------ ----- ------
Total allowance............. $ 133 100.00% $ 123 100.00% $ 114 100.00% $ 106 100.00%
===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
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 presence of hazardous materials may have a
substantial adverse effect on the value of such property as collateral and may
cause economic difficulties for the borrower, causing the loan to go into
default. Although environmental risks are usually associated with loans secured
by commercial real estate, risks also may exist for loans secured by residential
real estate if, for example, there is nearby commercial contamination or if the
residence was constructed on property formerly used for commercial purposes. The
Bank attempts to control its risk by requiring a phase one environmental
assessment by a Bank-approved engineer as part of its underwriting review for
all mortgage loans other than those secured by one-to-three family residences.
The Bank believes its procedures regarding the assessment of
environmental risk are adequate and, as of December 31, 1996, the Bank was
unaware of any environmental issues with respect to any of its mortgage loans
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. See "--Properties" for a discussion of environmental matters regarding
the Bank's main office.
Investment Activities
General. The investment policy of the Bank, which is approved by the
Board of Directors, is based upon its asset/liability management goals and is
designed primarily to provide satisfactory yields while maintaining adequate
liquidity, a balance of high quality, diversified investments, and minimal risk.
The investment policy is implemented by the Chief Executive Officer.
As required by SFAS 115, securities are classified into three
categories: trading, held-to-maturity and available-for-sale. Securities that
are bought and held principally for the purpose of selling them in the near term
are classified as trading securities and are reported at fair value with
unrealized gains and losses included in trading account activities in the
statement of earnings. Securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity and reported at
amortized cost. All other securities are classified as available-for-sale.
Available-for-sale securities are reported at fair value
69
<PAGE>
with unrealized gains and losses included, on an after-tax basis, as a separate
component of retained earnings. The Bank has not had a trading securities
portfolio since 1994 and has no current plans to maintain such a portfolio in
the future. At December 31, 1996, $21.0 million of investment securities were
classified as available-for-sale and none were classified as held to maturity.
At December 31, 1996, $6.2 million of mortgage-backed securities were classified
as held-to-maturity with a fair value of $6.3 million, and none were classified
as available for sale. In 1995, the FASB issued a special report allowing the
transfer of securities from held-to-maturity to the available-for-sale
classification during the period from November 15, 1995 to December 31, 1995,
with no recognition of any related unrealized gain or loss in current earnings.
In December 1995, the Bank transferred investment securities held-to-maturity
with an amortized cost of approximately $20.9 million to the available-for-sale
classification. The gross unrealized gain related to the transferred securities
was approximately $121,000.
Investment Securities. The Bank's investment securities portfolio
totaled $21.0 million at December 31, 1996. It is the policy of the Bank to
invest in debt securities issued by the United States Government, its agencies,
municipalities and corporations. In order to benefit from higher yields, the
Bank concentrates its investment securities portfolio in corporate debt
securities, which totaled $11.6 million, or 55.4% of investment securities, at
December 31, 1996. Such securities have greater risks than U.S. Government
securities because of the greater possibility that the corporate obligor,
compared to the U.S. Government, will default in payment of the obligation. To
control these risks, the Bank limits its investment in corporate debt securities
to those rated in the three highest grades by a nationally recognized rating
organization. The Bank also invests in IIMF, a group of mutual funds all of
whose investments would qualify as direct investments for a New York chartered
savings bank. The only IIMF fund in which the Bank held investments at December
31, 1996 was the Institutional Investors Capital Appreciation Fund, Inc., which
invests principally in common stocks of companies listed on the New York Stock
Exchange that have paid regular dividends for at least ten consecutive fiscal
years. At December 31, 1996, the Bank's investment in IIMF shares totaled $1.9
million.
At December 31, 1996, the Bank had an investment of $599,000 in stock
of the FHLBNY, which investment was necessary for the Bank to maintain its
membership in the FHLBNY and to utilize FHLBNY borrowing facilities. If the Bank
increases its FHLBNY borrowings, the Bank may have to increase its investment in
FHLBNY stock because the Bank must own FHLBNY stock at least equal to 5% of its
borrowings. The Bank's yield on FHLBNY stock was 5.90% for the fiscal year ended
September 30, 1996 and was 6.61% (annualized) for the three months ended
December 31, 1996.
Mortgage-Backed Securities. The Bank invests in mortgage-backed
securities to supplement the yields on it loan portfolio. At December 31, 1996,
the Bank's mortgage-backed securities portfolio totaled $6.2 million, all of
which was classified as held to maturity. At December 31, 1996, all of the
Bank's mortgage-backed securities were issued or guaranteed by FNMA, FHLMC or
GNMA and all were pass through securities. The Bank's mortgage-backed securities
portfolio had a weighted average yield of 6.85% at December 31, 1996.
Mortgage-backed securities generally have higher yields than investment
securities because of the longer terms and the uncertainties associated with the
timing of mortgage repayments. In addition, mortgage-backed securities are more
liquid than individual mortgage loans and may be used to collateralize
borrowings of the Bank. However, these securities generally yield less than the
loans that underlie them because of the cost of payment guarantees or credit
enhancements that reduce credit risk. Mortgage-backed securities of the type
held by the Bank are generally weighted at 20%, rather than the 50% weighting
for performing residential one-to-four family mortgage loans, in determining
risk-based capital ratios.
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<PAGE>
While investment and mortgage-backed securities carry a reduced credit
risk as compared to loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. See "Risk Factors--Interest Rate Risk."
The following table sets forth certain information regarding the
amortized cost and fair value of the Bank's available for sale, held to maturity
and trading securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
-------------------- -----------------------------------------------------------------------
1996 1996 1995 1994
--------------------- --------------------- ------------------------ ---------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- ----- ---- -----
Securities Available for Sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities...... $ 3,012 $ 3,023 $ 4,718 $ 4,714 $ 2,051 $ 2,054 $ - $ -
U.S. Government agencies...... 2,972 3,015 2,967 2,984 - - - -
Corporate debt obligations.... 11,570 11,649 12,043 12,075 - - - -
Other securities.............. 506 506 506 505 - - - -
------ --------- --------- --------- --------- --------- ------- --------
Total...................... 18,060 18,193 20,234 20,278 2,051 2,054 - -
------ --------- --------- --------- --------- --------- ------- --------
FHLBNY stock.................. 599 599 599 599 - - - -
Corporate equity securities... 2,002 2,224 2,002 2,204 1,956 2,040 - -
------ --------- --------- --------- --------- --------- ------- --------
Total equity securities.... 2,601 2,823 2,601 2,803 1,956 2,040 - -
------ --------- --------- --------- --------- --------- ------- --------
Total available for sale. 20,661 21,016 22,835 23,081 4,007 4,094 - -
------ --------- --------- --------- --------- --------- ------- --------
Securities Held to Maturity:
U.S. Treasury................. - - - - 5,834 5,801 9,570 9,397
U.S. Government agencies...... - - - - 2,933 2,965 504 504
Corporate debt obligations.... - - - - 13,964 13,934 21,432 21,117
Other......................... - - - - 1,019 1,011 1,036 1,001
Mortgage-backed securities.... 6,173 6,252 6,474 6,529 4,404 4,492 2,226 2,230
------ --------- --------- --------- --------- --------- -------- -------
Total held to maturity..... 6,173 6,252 6,474 6,529 28,154 28,203 34,768 34,249
------ --------- --------- --------- --------- --------- -------- --------
Trading Account Securities:
Equity securities............. - - - - - - 2,259 2,172
------ --------- --------- --------- --------- --------- -------- --------
Total Securities........... $ 26,834 $ 27,268 $ 29,309 $ 29,610 $ 32,161 $ 32,297 $ 37,027 $ 36,421
======= ========= ========= ========= ========= ========= ========= =========
</TABLE>
71
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and stated maturity of the Bank's securities at
December 31, 1996. There were no securities (exclusive of obligations of the
U.S. Government and any federal agencies) issued by any one entity with a total
carrying value in excess of 10% of the Bank's equity at December 31, 1996,
except that at December 31, 1996, the Bank's IIMF shares had a carrying value of
$1.9 million. Securities with no stated maturity are shown as having a maturity
of more than ten years.
<TABLE>
<CAPTION>
At December 31, 1996
-----------------------------------------------------------------------------------------------------
One Year One to Five to More than Total
or Less Five Years Ten Years Ten Years Securities
----------------- ----------------- ----------------- ----------------- -------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities .. $ - - $ 3,023 5.96% $ - - - - $ 3,023 5.96% $ 3,023
U.S. Government agency..... - - 3,015 6.81% - - - - 3,015 6.81% 3,015
Municipal obligations ..... 101 5.00% - - - - - - 101 5.00% 101
Corporate debt obligations. 5,793 6.30% 5,856 6.74% - - - - 11,649 6.52% 11,649
Mortgage-backed securities. - - 2,858 6.35% 775 7.48% 2,540 7.21% 6,173 6.85% 6,252
Other debt securities ..... 400 5.25% 5 5.50% - - - - 405 5.25% 405
FHLBNY stock .............. - - - - - - 599 6.61% 599 6.61% 599
Other equity securities ... - - - - - - 2,224 6.98% 2,224 6.98% 2,224
------ ------- ------- ------ ------- -------
Total ................... $6,294 6.24% $14,757 6.52% $ 775 7.48% $5,363 7.05% $27,189 6.59% $27,268
====== ======= ======= ====== ======= =======
</TABLE>
Sources of Funds
General. The Bank's primary source of funds is deposits. In addition,
the Bank derives funds for loans and investments from loan and security
repayments and prepayments, from net revenues from operations and, to a lesser
extent, from borrowings. Scheduled payments on loans and mortgage-backed and
investment securities are a relatively stable source of funds, while savings
inflows and outflows and loan and mortgage-backed and investment securities
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowings are occasionally used to compensate for reductions
in other sources of funds.
Deposits. The Bank offers several types of deposit programs to its
customers, including passbook and statement savings accounts, NOW accounts,
money market deposit accounts, checking accounts and certificates of deposit.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. The Bank's deposits are obtained predominantly from its Orange County
market area. The Bank relies primarily on customer service and long-standing
relationships with customers to attract and retain these savings deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
savings deposits. The Bank does not pay premium rates for certificates of
deposit in excess of $100,000 nor does the Bank use brokers to obtain deposits.
At December 31, 1996, the Bank had $82.6 million of deposits outstanding.
The Bank prices its deposit offerings based upon market and competitive
conditions in its market area. During fiscal 1996 and the three months ended
December 31, 1996, the Bank took steps to decrease its cost of funds by
moderating the rates it offered on certificates of deposit. Certificates of
deposit as a percentage of total deposits decreased from 48.9% at September 30,
1995 to 45.9% at September 30, 1996 and remained at 46.0% at December 31, 1996.
Due to declining market interest rates and the Bank's efforts to reduce its cost
of funds, certificates of deposits with rates of 6.00% or more totaled $1.3
million, or 3.3%,
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<PAGE>
of the Bank's certificates of deposit at December 31, 1996 compared to $15.8
million, or 36.8%, at September 30, 1995. Total deposits decreased by $5.2
million during the twelve months ended December 31, 1996, principally as a
result of management's efforts to reduce the cost of funds. The deposit outflow
was funded principally by a reduction in investment securities of $4.6 million,
a reduction in federal funds sold of $1.6 million, and a reduction of $1.6
million in cash and due from banks. The reductions in cash and due from banks
and federal funds sold was enabled by the receipt of a substantial portion of
the Bank's Nationar claim.
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated. Interest rates shown for non-time accounts are
the rates in effect at December 31, 1996.
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------- --------------------------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Non-time accounts:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts (3.00%)...... $26,134 31.65% $26,805 32.12% $27,198 30.87% $34,354 39.76%
NOW accounts (2.50%).......... 4,025 4.87% 3,636 4.36% 3,308 3.76% 3,491 4.04%
Checking accounts............. 3,878 4.70% 4,206 5.04% 3,796 4.31% 3,667 4.25%
Money market accounts (3.00%). 10,587 12.82% 10,457 12.53% 10,756 12.21% 13,255 15.34%
------- ----- ------- ----- ------- ----- ------- -----
Total non-time accounts.... 44,624 54.04% 45,104 54.05% 45,058 51.15% 54,767 63.39%
------- ----- ------- ----- ------- ----- ------- -----
Time accounts:
3.00-3.99%.................... 346 0.42% 501 0.60% 1,759 2.00% 27,222 31.51%
4.00-4.99%.................... 24,569 29.75% 25,479 30.53% 4,595 5.22% 2,653 3.07%
5.00-5.99%.................... 11,785 14.27% 9,736 11.67% 20,853 23.67% 1,640 1.90%
6.00-6.99%.................... 923 1.12% 2,291 2.75% 15,517 17.61% 114 0.13%
7.00-7.99%.................... 336 0.40% 331 0.40% 311 0.35% - 0.00%
------- ----- ------- ----- ------- ----- ------- -----
Total time accounts........ 37,959 45.96% 38,338 45.95% 43,035 48.85% 31,629 36.61%
------- ----- ------- ----- ------- ----- ------- -----
Total deposits......... $82,583 100.0% $83,442 100.0$ $88,093 100.0% $86,396 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Three Months Ended
December 31, Year Ended September 30,
---------------- ---------------------------------
1996 1996 1995 1994
------- ------ -------- -------
(In Thousands)
Net deposits (withdrawals)... $(1,623) $(8,016) $(1,563) $(5,093)
Interest credited............ 764 3,365 3,260 2,686
------- ------- ------- -------
Net increase (decrease)
in deposits ............... $ (859) $(4,651) $ 1,697 $(2,407)
======= ======= ======= =======
73
<PAGE>
The following table sets forth the amount of certificates of deposit
outstanding and the remaining period to maturity of such deposits at December
31, 1996.
<TABLE>
<CAPTION>
Amount Due During the Due After
Twelve Months Ended December 31, December 31,
----------------------------------------- ------------
Interest Rate 1997 1998 1999 1999 Total
------------- ---- ---- ---- ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00-3.99%................ $ 346 $ - $ - $ - $ 346
4.00-4.99%................ 22,984 1,527 27 31 24,569
5.00-5.99%................ 8,967 2,035 642 141 11,785
6.00-6.99%................ 640 45 222 16 923
7.00-7.99%................ - - 51 285 336
-------- ------- -------- ------- --------
Total..................... $ 32,937 $ 3,607 $ 942 $ 473 $ 37,959
======== ======= ======== ======= ========
</TABLE>
At December 31, 1996, the Bank had $1.7 million in certificates of
deposit with balances of $100,000 or more ("jumbo deposits"), representing
2.09% of all deposits, as follows:
<TABLE>
<CAPTION>
Original Minimum Interest Percentage of Percentage of
Term Balance Rate (1) Balance Total Deposits Jumbo Deposits
---- ------- -------- ------- -------------- --------------
(In Thousands)
<C> <C> <C> <C> <C> <C>
1-3 months.................. $100,000 3.60% $334 0.40% 19.33%
4-6 months.................. $100,000 4.90% 301 0.37% 17.42%
6-12 months................. $100,000 5.10% 670 0.81% 38.77%
Over twelve months.......... $100,000 5.10% 423 0.51% 24.48%
------ ---- ------
Total ................................. $1,728 2.09% 100.00%
====== ==== ======
</TABLE>
(1) Interest rate offered as of December 31, 1996.
Borrowings. Although deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes,
the Bank has in the past relied upon borrowed funds or repurchase agreements to
supplement its available funds. The Bank has borrowed funds, either through
direct borrowings or through the sale of securities under agreements to
repurchase, on an infrequent basis when the cost of borrowings was attractive
when compared to the rate required to be paid on deposits plus the deposit
insurance premium required to be paid. Furthermore, immediately after the
closure of Nationar, the Bank availed itself of borrowed funds for a short time
to satisfy its immediate liquidity needs until it was able to replace its funds
at Nationar with the proceeds of new deposits. In the future, the Bank may use
borrowings to provide funds in order to assist in the leveraging of the
additional capital anticipated to be received in the Conversion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital."
Total borrowings at December 31, 1996 were $1.0 million, represented by
an advance from the FHLBNY. The Bank undertook this borrowing in order to
provide needed funds at a time when the Bank did not want to increase the rates
paid on certificates of deposit to attract funds. At no time have the Bank's
short term borrowings exceeded 30% of equity.
74
<PAGE>
Subsidiary Activities
As a federal savings bank, the Bank may invest up to 2% of its assets
in subsidiaries, with an additional investment of 1% of assets if the investment
serves primarily community, inner city and community development. The Bank may
also invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal savings bank may engage in directly. The Bank does
not have any subsidiaries.
Properties
The Bank conducts its business through its headquarters in Goshen, a
nearby public accommodation drive-up facility, and a branch opened in March 1997
at an elder care facility in Goshen, as shown in the following table. The elder
care facility is operated by a non-profit corporation of which Mr. Kelsey is a
director. The following table sets forth certain information regarding the
Bank's deposit-taking offices.
<TABLE>
<CAPTION>
Approximate Net Book
Location Date acquired Owned/Leased Square Feet Value
(In Thousands)
<S> <C> <C> <C> <C>
One South Church Street 1971 Owned 10,680 $2,003
Goshen, NY 10924 with
adjacent drive-up facility
at 50 South Church Street
214 Harriman Drive March 1997 Leased 105 N/A
Goshen, NY 10924
</TABLE>
In late 1996, an underground petroleum tank on property adjoining the
Bank's main office was discovered to be leaking and the leakage seeped
underground to the property on which the Bank's main office is located. This
contamination is being remediated by the adjoining land owner and the Bank does
not believe that it poses any continuing risks. The Bank has agreed to share in
the cost of remediation. The Bank estimates that its share of the cost will be
approximately $50,000, which amount was recorded as an expense during the
quarter ended March 31, 1997. See "Summary of Recent Developments -- Comparison
of Operating Results for the Three Months Ended March 31, 1997 and March 31,
1996 -- Non-interest Expense."
Personnel
At December 31, 1996, the Bank employed 31 full-time and 1 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--Benefits" for a description of certain compensation and
benefit programs offered to the Bank's employees.
Legal Proceedings
In the ordinary course of its operations, the Bank is a party to
routine litigation involving claims incidental to the savings bank business.
Management believes that no current litigation, threatened or pending, to which
the Bank or its assets is or may become a party, poses a substantial likelihood
of potential loss or exposure which would have a material adverse effect on the
financial condition or results of operations of the Bank or the Company.
75
<PAGE>
REGULATION
Set forth below is a brief summary of certain laws which relate to the
regulation and supervision of the Bank. The Bank became a federally chartered
savings bank on March 18, 1997 and prior to that date was, as a New
York-chartered mutual savings bank, subject to the rules and regulations of the
New York State Banking Department and the FDIC.
General
The Bank is subject to extensive regulation, examination, and
supervision by the OTS, as its chartering agency, and the FDIC, as its deposit
insurer. The Bank's deposit accounts are insured up to applicable limits by the
BIF of the FDIC, and the Bank is a member of the FHLBNY. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition, and it must obtain regulatory approvals prior to entering into
certain transactions, such as mergers with, or acquisitions of, other depository
institutions. The OTS and the FDIC have the authority to conduct periodic
examinations to assess the Bank's compliance with various regulatory
requirements. Prior to becoming a federal savings bank, these examinations were
conducted by the New York State Banking Department and the FDIC. This regulation
and supervision establishes a comprehensive framework of activities in which a
savings association (which term includes federal savings banks such as the Bank)
can engage and is intended primarily for the protection of the FDIC insurance
fund and depositors. For a discussion of the Bank's history, see "Goshen Savings
Bank." The Company, as a savings association holding company, will also be
required to file certain reports with, and otherwise comply with, the rules and
regulations of the OTS and of the SEC under the federal securities laws.
The OTS and the FDIC have discretion in 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 policies, whether by the
OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.
Regulation of Federal Savings Associations
Business Activities. The Bank's lending and investment powers come from
the Home Owners' Loan Act, as amended (the "HOLA"), and the regulations of the
OTS. Under these laws and regulations, the Bank may invest in mortgage loans
secured by residential and commercial real estate, commercial and consumer
loans, certain types of debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. The Bank's powers are subject to limits,
including, among others, (a) a prohibition against acquiring any corporate debt
security that is not rated in one of the four highest rating categories; (b) a
limit of 400% of capital that can be invested in loans secured by
non-residential real estate property; (c) a limit of 10% of assets that can be
invested in commercial loans; (d) a limit of 35% of assets that can be invested
in consumer loans and acquisitions of certain debt securities; (e) a limit of 5%
of assets which can be invested in non-conforming loans (loans in excess of the
specific limitations of the HOLA); and (f) a limit of the greater of 5% of
assets or an
76
<PAGE>
association's capital which can be invested in certain construction loans made
for the purpose of financing what is or is expected to become residential
property.
Loans to One Borrower. Under the HOLA, savings associations are
generally subject to the same limits on loans to one borrower as are imposed on
national banks. Generally, a savings association may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. Up to an additional 10% of unimpaired capital
and surplus can be lent if the additional amount is fully secured by
readily-marketable collateral. Such collateral may consist of cash, certain debt
and equity securities and bullion but generally does not include real estate. If
the Bank had been a federal savings bank at December 31, 1996, its regulatory
limit on loans to one borrower would have been in excess of $1.8 million. At
December 31, 1996, the Bank's largest aggregate loans to one borrower was
$792,000. The Bank is in compliance with all applicable limitations on loans to
one borrower.
QTL Test. The HOLA requires a savings association to meet a qualified
thrift lender, or "QTL" test. Under the QTL test, a savings association must
maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" in at least nine months of the most recent 12-month period.
"Portfolio assets" means, in general, total assets less (a) specified liquid
assets up to 20% of total assets, (b) certain intangibles, including goodwill
and credit card and purchased mortgage servicing rights, and (c) the value of
property used to conduct the association's business. "Qualified thrift
investments" include various types of loans made for residential and housing
purposes, investments related to such purposes, such as certain mortgage-backed
securities, education, small business and credit card loans, and consumer loans
and certain other loans and investments up to, in the aggregate, 20% of
portfolio assets. At December 31, 1996, more than 85% of the Bank's assets were
qualified thrift investments, and the Bank would have satisfied the QTL test at
that date had it been subject to such requirement.
A savings association that fails the QTL test must either restrict its
activities or convert to a bank charter. The initial restrictions include
prohibitions against (a) engaging in any new activity not permissible for a
national bank, (b) paying dividends not permissible under national bank
regulations, (c) obtaining new advances from any Federal Home Loan Bank and (d)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year after a
savings association ceases to meet the QTL test, any company controlling the
association must register under, and become subject to the requirements of, the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). If the savings
association does not requalify under the QTL test within three years after it
fails the QTL test, it must terminate any activity and dispose of any investment
not permissible for a national bank and must repay as promptly as possible any
outstanding advances from a Federal Home Loan Bank. A savings association that
has failed the QTL test may requalify under the QTL test and be free of such
limitations, but it may do so only once.
Capital Requirements. OTS regulations require savings associations to
maintain tangible capital equal to 1.5% of total assets as adjusted under the
OTS regulations, core capital equal to 3% of such adjusted total assets and
total capital (core capital plus supplementary capital) equal to 8% of
risk-weighted assets. Tangible capital is defined, generally, as common
stockholders' equity (including the Bank's equity as a mutual institution),
certain noncumulative perpetual preferred stock and related earnings and
minority interests in equity accounts of fully consolidated subsidiaries, less
intangibles (other than certain purchased mortgage servicing rights) and
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank. The Bank's tangible capital at December 31, 1996 was $11.9
million. Core capital is equal to tangible capital plus certain qualifying
supervisory goodwill and certain purchased credit card relationships. At
December 31, 1996, the Bank had no core capital which was not also tangible
capital.
77
<PAGE>
In determining compliance with the risk-based capital requirement, a
savings association computes its risk-weighted assets by multiplying its assets
and certain off-balance sheet items by risk-weights, which range from 0% for
cash and obligations issued by the United States Government or its agencies to
100% for consumer and commercial loans, as established by the OTS based on the
perceived risks inherent in the type of asset. Supplementary capital for
determining compliance with the risk-based capital requirement includes
cumulative and other perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses. The allowance for loan and lease losses includable in
supplementary capital is limited to 1.25% of risk-weighted assets, and
supplementary capital cannot exceed the amount of core capital. The Bank has no
supplementary capital except for its allowance for loan losses, which totaled
$133,000 at December 31, 1996, and which did not exceed the 1.25% limit.
The OTS has adopted but deferred enforcement of a regulation that
requires a savings association with "above normal" interest rate risk to hold
additional capital to account for such risk when determining compliance with the
risk-based capital requirements. The regulation does not apply to institutions,
such as the Bank, which have risk-based capital ratios in excess of 12% and have
total assets less than $300,000,000. A savings association's interest rate risk
is measured by the decline in the net portfolio value of its assets (i.e.,
generally, the difference between the present value of payments to be received
on its assets and the present value of payments to be made on its liabilities.)
If a savings association's interest rate risk exposure exceeds 2% of the
economic value of its assets (calculated in the same manner), it would be
considered to have "above normal" risk. The additional capital required would
equal one-half of the difference between the association's measured interest
rate risk and 2%, multiplied by the economic value of the association's assets.
That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement.
Due to the Bank's recent conversion to a federal savings bank, the OTS
has not calculated the Bank's interest rate risk under the model described
above. Management believes that if the regulation is implemented in its current
form by the OTS, and even if the exemption for small institutions is deleted,
there will be no material effect on the ability of the Bank to be classified as
"well capitalized" for regulatory purposes. See "Regulatory Capital Compliance."
Limitations on Capital Distributions. OTS regulations impose limits on
capital distributions by savings associations, such as cash dividends, payments
to repurchase or otherwise acquire its shares, payments to stockholders of
another institution in a cash-out merger and other distributions charged against
capital. These regulations apply to distributions by the Bank, but not to
distributions by the Company. At least 30-days written notice must be given to
the OTS of a proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions must
first be approved by the OTS. An association such as the Bank that satisfies all
regulatory capital requirements and that is not otherwise restricted in making
capital distributions may, after notifying the OTS, and provided that the
capital distribution will not cause the association to fail to meet any
regulatory capital requirement, make capital distributions during a calendar
year equal to the greater of (a) 100% of its net earnings during the current
calendar year plus the amount that would reduce by one-half the excess of its
capital over its capital requirements at the beginning of the calendar year, or
(b) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. The OTS can prohibit a
proposed capital distribution if the OTS has determined that the association is
in need of more than normal supervision or if it determines that a proposed
distribution would constitute an unsafe or unsound practice. Furthermore, the
Bank would be prohibited from making any capital distribution if, after the
distribution, the Bank would fail to meet its minimum capital requirements. See
"--Prompt Corrective Action."
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The OTS has proposed to simplify its capital distribution rules. Under
the proposal, the approval of the OTS would be required only for capital
distributions by associations that are deemed to be in troubled condition or
that are undercapitalized or would be undercapitalized after the capital
distribution. If the proposal is adopted, the Bank, as a subsidiary of a savings
association holding company, would still be required to give the OTS notice of a
proposed capital distribution. See "--Prompt Corrective Action" for the
definition of undercapitalized.
Liquidity. The Bank must maintain an average daily balance of liquid
assets (cash, certain time deposits, bankers' acceptances, specified United
States Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to a
monthly average of a percentage of its net withdrawable deposit accounts plus
short-term borrowings. The applicable percentage, currently 5%, may be changed
from time to time by the OTS within the range of 4% to 10% depending upon
economic conditions and the savings flows of member institutions. OTS
regulations also require each savings association (other than mutual savings
banks such as the Bank prior to the Conversion) to maintain an average daily
balance of short-term liquid assets at a percentage (currently 1%) of the total
of its net withdrawable deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. These requirements did not apply to the Bank prior to becoming a
federal savings bank in March 1997. However, the Bank's liquidity and short term
liquidity ratios, at December 31, 1996, calculated in accordance with OTS
regulations, were 29.3% and 10.3%, respectively.
Assessments. Savings associations must pay assessments to the OTS to
fund the operations of the OTS. The general assessment, paid on a semi-annual
basis, is computed upon the savings association's total assets, including
consolidated subsidiaries. The Bank was not subject to the assessment prior to
January 1, 1997, because it was not a federal savings bank until March 18, 1997.
The Bank estimates that its pro forma annual assessment based upon assets at
December 31, 1996, would be approximately $42,000, compared to $21,600 paid to
the New York State Banking Department during calendar year 1996.
Branching. The Bank is permitted to open branches throughout New York
State. Subject to certain limitations, the Bank may also establish branches in
any state of the United States if either (a) the state expressly authorizes
branches of savings associations located in another state or (b) the Bank
satisfies certain requirements under the Internal Revenue Code of 1986 similar
to those for a "qualified thrift lender" under the HOLA. See "--QTL Test." This
authority preempts any state law purporting to regulate branching by federal
savings associations. The Bank has no present plans to open a branch outside New
York State.
Community Reinvestment. Under the Community Reinvestment Act (the
"CRA"), a savings association must, consistent with its safe and sound
operation, 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 products and services that it believes are
best suited to its particular community. The OTS, in connection with its
examination of a savings association, must assess the association's record of
meeting the credit needs of its community and must take such record into account
in its evaluation of certain applications by such association. The CRA also
requires all institutions to make public disclosure of their CRA ratings. Prior
to becoming a federal savings bank, the Bank was subject to comparable CRA
regulations implemented by the FDIC and the Bank received a "Satisfactory" CRA
rating in its most recent FDIC examination.
In April 1995, the OTS and the other federal banking agencies amended
their CRA regulations. Among other things, the amended CRA regulations
substitute a new evaluation system that rates an
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institution based on its actual performance in meeting community needs. In
particular, the new system focuses on three tests: (a) a lending test, to
evaluate the institution's record of making loans in its assessment areas; (b)
an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefiting low
or moderate income individuals and businesses; and (c) a service test, to
evaluate the institution's delivery of services through its branches, ATMs and
other offices. The amended CRA regulations also clarify how an institution's CRA
performance would be considered in the application process. The Bank has not
been examined for CRA compliance under the amended regulations.
Transactions With Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act (the "FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates must be secured by
certain specified collateral, and the purchase of low quality assets from
affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are at least as
favorable to the association as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive
officers, and 10% stockholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among
other things, these provisions require that extensions of credit to insiders (a)
be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features and (b)
not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.
However, recent legislation permits the Bank to make loans to executive
officers, directors and principal shareholders ("insiders") on preferential
terms, provided the extension of credit is made pursuant to a benefit or
compensation program of the Bank that is widely available to employees of the
Bank or its affiliates and does not give preference to any insider over other
employees of the Bank or affiliate. The Bank has no such benefit or compensation
programs. It is the Bank's policy not to make loans to directors, officers and
employees.
Enforcement. The OTS has primary enforcement responsibility over
savings associations and has the authority to bring enforcement action against
all "institution-affiliated parties," including any controlling stockholder or
any stockholder, attorney, appraiser or accountant who knowingly or recklessly
participates in any violation of applicable law or regulation or breach of
fiduciary duty or certain other wrongful actions that causes or is likely to
cause more than a minimal loss or other significant adverse effect on an insured
savings association. Civil penalties range from $5,000 for each day during which
violations of law, regulations, orders, and certain written agreements and
conditions continue, up to
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$1 million per day for such violations if the person obtained a substantial
pecuniary gain as a result of such violation or knowingly or recklessly caused a
substantial loss to the institution. Criminal penalties for certain financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. In addition, regulators may take enforcement action against an
institution that fails to comply with its regulatory requirements. Possible
enforcement actions range from the imposition of a capital plan and capital
directive to receivership, conservatorship, or the termination of deposit
insurance. The FDIC may recommend to the OTS that enforcement action be taken
with respect to a particular savings association. If action is not taken by the
Director of the OTS, the FDIC has authority to take such action under certain
circumstances.
Standards for Safety and Soundness. The OTS, together with the other
federal bank regulatory agencies, has prescribed guidelines, effective August 9,
1995, which establish minimal general standards relating to internal controls
and information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. Effective October 1, 1996, these guidelines were expanded to
cover asset quality and earnings evaluation and monitoring as well. The
guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder. In addition, the OTS may order an institution
that has been given notice by the OTS that it is not satisfying any of such
safety and soundness standards to submit a compliance plan. If an institution
then fails to submit an acceptable plan or fails in any material respect to
implement an accepted compliance plan, the OTS must issue an order directing
action to correct the deficiency and may issue an order directing other actions
of the types to which an undercapitalized association is subject under the
"prompt corrective action" requirements described below. If an institution fails
to comply with such an order, the OTS may seek enforcement in judicial
proceedings and civil money penalties.
Prompt Corrective Action. Under federal law, the OTS is required to
take prompt action to correct deficiencies in undercapitalized savings
associations. A savings association is categorized as "well capitalized" or
"adequately capitalized" if its ratio of total capital to risk-weighted assets
is at least 10.0% or 8.0%, respectively, its ratio of core capital to
risk-weighted assets is at least 6.0% or 4.0%, respectively, its ratio of core
capital to total assets is at least 5.0% or 4.0% (3.0% if the institution has
the best supervisory rating), respectively, and it is not subject to any order
or directive by the OTS to meet a specific capital level. Savings associations
that do not meet these standards are classified as "undercapitalized." A savings
association with a total risk-based capital ratio of less than 6.0% or a core
capital ratio of less than 3.0% is considered to be "significantly
undercapitalized." A savings association with a tangible capital to assets ratio
of 2% or less is deemed to be "critically undercapitalized." See "--Capital
Requirements."
Dividends, other capital distributions or the payment of management
fees to any controlling person are prohibited if, following such distribution or
payment, an association would be undercapitalized. An undercapitalized
association must file a plan to restore its capital within 45 days after being
notified that it is undercapitalized. Undercapitalized, significantly
undercapitalized and critically undercapitalized institutions are subject to
increasing prohibitions on permitted activities, and increasing levels of
regulatory supervision, based upon the severity of their capital problems. The
OTS is required to monitor closely the condition of an undercapitalized
association. Enforcement action taken by the OTS can escalate to the appointment
of a conservator or receiver of a critically undercapitalized institution. When
appropriate, the OTS can also require corrective action by a savings association
holding company under the "prompt corrective action" requirements.
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Based upon its existing capital ratios and regulatory classification,
the Bank qualifies as "well capitalized" and the OTS prompt corrective action
regulations are not expected to have a material effect on the Bank or the
Company.
Insurance of Deposit Accounts. The Bank is a member of the BIF, and the
Bank pays its deposit insurance assessments to the BIF. The FDIC also maintains
another insurance fund, the SAIF, which primarily insures the deposits of
savings and loan associations and certain other federal savings banks.
Deposit insurance premiums payable to the FDIC are based upon a system
which categorizes insured institutions based upon their perceived risks to the
FDIC insurance fund. The FDIC assigns an institution to one of three capital
categories: (a) well capitalized, (b) adequately capitalized or (c)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory categories based on an evaluation by the institution's primary
federal regulator and information that the FDIC considers relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. Deposit insurance premiums depend on an institution's capital and
supervisory categories.
During May 1995, the amount of the BIF reserve reached 1.25% of total
deposits insured by the BIF. As a result, the FDIC reduced BIF assessment rates.
The rate for "well capitalized" institutions without any significant supervisory
concerns, such as the Bank, was $2,000 per year beginning with the first half of
1996, and the rates for higher risk institutions range upwards to 0.27% of
deposits. In September 1996, the $2,000 minimum was abolished and the Bank now
pays no deposit insurance premium. If the Bank maintains its regulatory and
capital status and the BIF reserve does not fall below 1.25%, the Bank would
continue to pay no FDIC deposit insurance premiums under current law.
However, effective January 1, 1997, institutions with BIF-insured
deposits will be required to pay a share of the cost of the bonds (the "FICO
bonds") issued in the late 1980s by the Financing Corporation to recapitalize
the now defunct Federal Savings and Loan Insurance Corporation. Until December
31, 1999, or such earlier date on which the last savings association ceases to
exist, institutions with BIF-assessable deposits, such as the Bank, will be
subject to a FICO bond premium equal to one-fifth of the rate on SAIF-assessable
deposits. It has been estimated that the FICO bonds premium will be
approximately 1.3 basis points (1.3 cents per $100 of insured deposits) for
BIF-assessable deposits and approximately 6.5 basis points for SAIF-assessable
deposits.
FDIC insurance of deposits may be terminated by the FDIC upon a finding
that an institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC or the OTS. The management of the Bank does not
know of any practice, condition or violation that might lead to termination of
deposit insurance.
Federal Home Loan Bank System. The Bank is a member of the FHLBNY,
which is one of the regional Federal Home Loan Banks composing the Federal Home
Loan Bank System. Each Federal Home Loan Bank acts as a central credit facility
for its member institutions. At December 31, 1996, the Bank had $1.0 million of
advances (borrowings) from the FHLBNY. The Bank must own shares of capital stock
in the FHLBNY at least equal to the greater of 1% of the principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year or 5% of its advances from the FHLBNY. At December 31, 1996, the Bank
held $599,000 of capital stock of the FHLBNY, which satisfied this requirement.
During the twelve months ended December 31, 1996, the FHLBNY paid a 6.47%
dividend on its capital stock. If the Bank materially increases its residential
mortgage loans, or obtains significant advances from the FHLBNY, the Bank would
be required to increase its investment in FHLBNY capital
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stock. Advances from the FHLBNY must be secured by specified types of
collateral, and all long-term advances may be obtained only for the purpose of
providing funds for residential housing finance.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of earnings that the FHLBNY
can pay as dividends to its members and could also result in the FHLBNY imposing
a higher rate of interest on advances. Further, there can be no assurance that
the impact of current or future federal laws on the FHLBNY will not also cause a
decrease in the value of FHLBNY capital stock.
The Federal Reserve System. The Bank is required, under the regulations
of the Federal Reserve Board ("FRB"), to maintain non-interest-earning reserves
against its transaction accounts (primarily NOW and regular checking accounts).
Reserves must be maintained in the amount of 3% of the first $52.0 million of
transaction accounts. Transaction accounts in excess of $52.0 million are
subject to a 10% reserve requirement, which the FRB may adjust between 8% and
12%. The first $4.3 million of transaction accounts are exempt from the reserve
requirements, which exemption is adjusted by the FRB at the end of each year.
The Bank is in compliance with these reserve requirements. Because required
reserves must be either vault cash or certain non-interest-bearing accounts, the
reserve requirement reduces interest-earning assets. The balances maintained to
meet the reserve requirements may be used to satisfy liquidity requirements
imposed by the OTS. Federal Home Loan Bank System members are also authorized to
borrow from the Federal Reserve "discount window," but FRB regulations require
such institutions to exhaust all Federal Home Loan Bank sources before borrowing
from a Federal Reserve Bank.
Holding Company Regulation.
The Company will be a unitary savings association holding company. As
such, the Company must 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
association subsidiaries, if any. Among other things, this authority permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the financial safety, soundness, or stability of a subsidiary savings
association.
A savings association holding company may not, directly or indirectly,
or through one or more subsidiaries, acquire another savings association or
holding company thereof without prior written approval of the OTS; acquire or
retain, with certain exceptions, more than 5% of a savings association or
holding company that is not a subsidiary, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquire or retain control of a depository institution that is not
insured by the FDIC. In evaluating an application by a holding company to
acquire a savings association, the OTS must consider the financial and
managerial resources and future prospects of the company and savings association
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
As a unitary savings association holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to satisfy
the QTL test. See "--Regulation of Federal Savings Associations--QTL Test" for a
discussion of the QTL requirements. If the Company acquires another savings
association as a separate subsidiary (except for certain supervisory
acquisitions of troubled institutions), the Company would become a multiple
savings association holding company and would be subject to limits on its
business activities. The activities of a multiple savings association holding
company and its non-insured association subsidiaries are limited primarily to
activities permissible for bank holding companies under Section 4(c)(8)
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of the Bank Holding Company Act, subject to the prior approval of the OTS, and
to other activities authorized by OTS regulation.
A multiple savings association holding company may not acquire savings
associations in more than one state, except (a) in a supervisory transaction or
(b) if the laws of the state of the association to be acquired specifically
permit such acquisitions. The conditions imposed by the various states on
interstate acquisitions vary. The Company has no present plans to engage in the
acquisition of a savings association outside New York State.
Federal Securities Laws
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.
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 (a) 1% of the
outstanding shares of the Company or (b) 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.
TAXATION
General
The following is a discussion of material tax matters and does not
purport to be a comprehensive description of the federal and state income tax
rules applicable to the Bank or the Company. For a discussion of the tax
consequences of the Conversion, see "The Conversion--Effects of Conversion on
Depositors and Borrowers -- Tax Effects."
Federal Taxation
General. The Bank is taxed for federal income tax purposes in
accordance with the Internal Revenue Code of 1986, as amended (the "Code"), in
substantially the same manner as all other business corporations, subject to
certain special provisions applicable to financial institutions. The Bank files
its federal tax returns on a calendar year basis. The Bank has not been audited
by the Internal Revenue Service ("IRS") during the last five years. For federal
income tax purposes, after the Conversion, the Company and the Bank may file
consolidated income tax returns and report their income on a calendar year basis
using the accrual method of accounting and will be subject to federal income
taxation in the same manner as other corporations, but generally subject, as to
the Bank, to the same special provisions applicable to financial institutions
filing tax returns on an unconsolidated basis.
Bad Debt Deduction. In 1996, the Internal Revenue Code (the "Code") was
amended, effective for tax years beginning in 1996, to change the method by
which the Bank may take tax deductions for bad
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debts. Under previous law, the Bank was permitted, subject to the satisfaction
of various standards and requirements, to elect between a number of different
methods for accounting for its bad debts for tax purposes. One method, the
percentage of taxable income method, or PTI method, permitted the Bank to
establish a reserve for bad debts and make additions to the reserve based upon a
percentage of its taxable income, regardless of whether it actually experienced
losses from bad debts equal to the amount of the deduction. Additions to the bad
debt reserve were deductible in determining federal income tax. The PTI method
has been abolished for tax years beginning in 1996.
As a result of the abolition of the PTI method, the Bank will now be
required, for federal income tax purposes, to use the experience method in
determining its tax bad debt deduction, which method generally permits tax
deductions for bad debts based upon a six year moving average of actual loan
loss experience. Furthermore, the 1996 amendment to the Code provides that
institutions which had previously used the PTI method must recapture (i.e.,
treat as taxable income) a part of the institution's existing tax bad debt
reserve. For the Bank, the amount required to be recaptured is $207,000,
representing the excess of its tax bad debt reserve at December 31, 1995 over
the level of the reserve at December 31, 1987, referred to as the "excess
reserve." This amount must be recaptured over a period of from six to eight
years, beginning with calendar year 1996. However, in accordance with the
requirements of SFAS 109 regarding the establishment of deferred tax assets and
liabilities for financial statement purposes, the Bank had already established a
deferred tax liability representing the tax effect of the recapture of its
excess reserve. See Note 13 of Notes to Financial Statements. Therefore, the
recapture is not expected to have a material effect on the Bank's financial
condition or results of operations.
Distributions. If the Bank makes certain types of distributions
("non-dividend distributions") to the Company which are not in the nature of
dividends, such distributions will be considered to have been made first from
the Bank's unrecaptured tax bad debt reserves (including the balance of its
reserves as of December 31, 1987 which are not part of excess reserves). An
amount based on the non-dividend distribution will be included in the Bank's
income for tax purposes. Non-dividend distributions subject to this rule include
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 are
not subject to this rule.
The amount of additional taxable income caused by 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 the
Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such non-dividend
distribution would be includable in income for federal income tax purposes,
assuming a 34% federal corporate income tax rate. The Company and the Bank do
not anticipate that the Bank will pay any non-dividend distributions to the
Company after the Conversion. See "Regulation" 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.
Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is also adjusted by determining the tax treatment of certain items in
a manner that negates the deferral of income resulting from the regular tax
treatment of those items. Thus, the Bank's AMTI is increased by an amount equal
to 75% of the amount by which the Bank's adjusted current earnings exceeds its
AMTI (determined without regard to this adjustment and prior to reduction for
net operating losses). The Bank does not expect to be subject to the AMT.
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Dividends Received. The Company may exclude from its income 100% of
dividends received from the Bank as a member of the same affiliated group of
corporations. A 70% dividends received deduction generally applies with respect
to dividends received from domestic corporations that are not members of such
affiliated group, except that an 80% dividends received deduction applies if the
Company and the Bank own more than 20% of the stock of a corporation paying a
dividend. Under pending legislative proposals, the 70% dividends received
deduction would be reduced to 50% with respect to dividends paid after enactment
of such legislation.
New York State 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 Bank's 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 deductions. In
addition, New York also imposed a tax surcharge at the rate of 2.5% on the
Bank's New York State Franchise Tax which surcharge expired at the end of 1996.
In 1996, New York tax laws were amended, after the PTI method was
abolished for federal income tax purposes, to retain the PTI method for
determining tax bad debt deductions for New York State income tax purposes for
certain qualifying thrift institutions, such as the Bank. As a result, provided
that the Bank continues to satisfy the qualification requirements under New York
law, the Bank will be permitted to continue to use the PTI method for
determining its state tax bad debt deduction. The amendment to New York law also
prevented the recapture of any excess reserve created for New York state tax
purposes. As a result of this provision, the Bank has reduced its deferred tax
liability for financial reporting purposes under SFAS 109 as it relates to the
tax bad debt reserve for state purposes. Therefore, during the three months
ended December 31, 1996, the Bank's income tax expense for financial reporting
purposes was reduced by $60,000 to recognize the reduction in the deferred tax
liability.
The Bank's state income tax returns have not been audited for at least
the past five years.
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.
The minimum tax is generally equal to $5,000 for each 1,000,000 shares of
authorized capital stock, regardless of whether such stock has been issued.
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MANAGEMENT OF THE COMPANY
Directors and Executive Officers
The Board of Directors of the Company currently consists of seven
members, each of whom is also a director of the Bank. Each director of the
Company has served as such since the Company's incorporation in March 1997. The
Board of Directors of the Company is divided into three classes, each of which
contains approximately one-third of the Board. The directors are 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
directors Gengel and Guarino, has a term of office expiring at the first annual
meeting of stockholders; a second class, consisting of directors Durland and
Hopkins has a term of office expiring at the second annual meeting of
stockholders; and a third class, consisting of directors Kelsey, Mueller and
Lippincott, has a term of office expiring at the third annual meeting of
stockholders. See "Management of the Bank--Directors."
The executive officers of the Company are Mr. Clifford E. Kelsey, Jr.
President and Chief Executive Officer and Mr. Richard C. Durland, Executive Vice
President and Treasurer, who are directors of the Company, and Mr. Stephen W.
Dederick, Chief Financial Officer, Ms. Diane D. King, Senior Vice President and
Assistant Treasurer, and Ms. Jenny M. Ford, Vice President and Secretary. See
"Management of the Bank--Executive Officers." 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 or removal by the
Board of Directors. Information concerning the principal occupations, employment
and compensation of the directors and officers of the Company during the past
five years is set forth under "Management of the Bank--Biographical
Information."
Committees of The Company
The Company has established or plans to establish the following
committees of its Board of Directors:
The Compensation Committee. The Compensation Committee, consisting
of directors Kelsey, Mueller and Lippincott, will review and make
recommendations to the Board regarding compensation of the executive officers
and employees of the Company.
The Audit Committee. The Audit Committee, consisting of directors
Mueller, Gengel and Guarino, will meet periodically with the Company's
independent Certified Public Accountants to arrange for the Company's annual
financial statement audit and to review and evaluate recommendations made during
the annual audit. The Audit Committee will also review and approve the internal
auditing procedures of the Company.
The Stock Plans Committee. The Stock Plans Committee, not yet
established, will be responsible for administering and making grants or awards
under the Stock Option Plan and the ISAP. The Stock Plans Committee will also
oversee the Company's activities related to the ESOP.
No decision has been made as to whether a nominating committee will be
established or the procedure for submitting stockholder suggestions for
nominations. See "Restrictions on Acquisition of the Company and the
Bank--Restrictions in the Company's Certificate of Incorporation and
Bylaws--Certain Bylaw Provisions."
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<PAGE>
Directors' Compensation
It is anticipated that directors of the Company who are not employees
of the Company or the Bank or any of their subsidiaries shall receive an
attendance fee of $500 for each Board of Directors meeting and $300 for each
committee meeting, other than meetings which are joint or contemporaneous
meetings with the Board or Committees of the Bank, for which separate
compensation will not be paid. Directors will also be eligible for participation
in the Stock Option Plan and ISAP expected to be implemented by the Company. See
"Management of the Bank--Benefits--Stock Option Plan" and "--Incentive Stock
Award Plan."
Executive Compensation
Since the formation of the Company, none of the officers of the Company
have received remuneration from the Company. It is currently expected that,
unless and until the Company becomes actively involved in business activities
separate from those conducted by the Bank, no separate compensation will be paid
to the officers of the Company. However, the Company has entered into employment
contracts with four of its executive officers and expects to enter into a
Retention Agreement with its fifth executive officer. See "Management of the
Bank-Employment Contracts" and "-- Employee Retention Agreements." Decisions
regarding the Company's executive compensation will be made by the Company's
Board of Directors, acting upon the recommendations of the Compensation
Committee. Executive Officers of the Company who are directors will not vote on
their own compensation.
Indemnification and Liability of Directors
The certificate of incorporation of the Company provides that a
director of the Company shall be indemnified by the Company to the fullest
extent authorized by the General Corporation Law of the State of Delaware
against all expenses, liability and loss reasonably incurred or suffered by such
person in connection with his or her activities as a director or officer of the
Company or as a director or officer of another company, if the director or
officer held such position at the request of the Company. Delaware law requires
that such director, officer, employee or agent, in order to be indemnified, must
have acted in good faith and in a manner reasonably believed to be not opposed
to the best interest of the Company and, with respect to any criminal action or
proceeding, did not have reasonable cause to believe his or her conduct was
unlawful.
The certificate of incorporation of the Company and Delaware law also
provide that the indemnification provisions of such certificate and the statute
are not exclusive of any other right which a person seeking indemnification may
have or later acquire under any statute, provision of the certificate of
incorporation or bylaws of the Company, agreement, vote of stockholders or
disinterested directors, or otherwise. The certificate of incorporation of the
Company also provides that a director shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director except for breaches of duty of loyalty, acts or omissions in bad
faith or involving intentional misconduct or violation of law, liability for the
unlawful payment of dividends or unlawful stock purchase or receptions or
transactions where the director derives improper personal benefit.
These provisions may have the effect of deterring stockholder
derivative actions, since the Company may ultimately be responsible for expenses
for both parties to the action.
In addition, the certificate of incorporation of the Company and
Delaware law also provide that the Company may maintain insurance, at its
expense, to protect itself and any director, officer, employee or
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agent of the Company or another corporation, partnership, joint venture, trust
or other enterprise against any expense, liability or loss, whether or not the
Company has the power to indemnify such person against such expense, liability
or loss under the Delaware General Corporation Law. The Company intends to
obtain such insurance.
MANAGEMENT OF THE BANK
Directors
The following table sets forth certain information regarding the Board
of Directors of the Bank. Ages are as of May 1, 1997. The service of directors
includes their service as trustees of the Bank prior to its conversion from a
state mutual savings bank to a federal mutual savings bank.
<TABLE>
<CAPTION>
Director Term
Name Age Position(s) Held with the Bank Since Expires
- ---- --- ------------------------------ ----- -------
<S> <C> <C> <C> <C>
Clifford E. Kelsey, Jr. 64 President & Chief Executive
Officer, Director 1973 2000
Richard C. Durland 53 Executive Vice President
& Treasurer, Director 1980 1999
Herbert C. Mueller 70 Director 1973 2000
Roy L. Lippincott 56 Director 1978 2000
Stephen O. Hopkins 58 Director 1980 1999
Gene J. Gengel 55 Director 1995 1998
Thomas V. Guarino 43 Director 1996 1998
</TABLE>
Executive Officers
The following table sets forth certain information regarding the
executive officers of the Bank. Ages are as of May 1, 1997.
<TABLE>
<CAPTION>
Name Age Position(s) Held with the Bank
- ---- --- ------------------------------
<S> <C> <C>
Clifford E. Kelsey, Jr. 64 President, Chief Executive Officer and Director
Richard C. Durland 53 Executive Vice President, Treasurer and Director
Stephen W. Dederick 40 Chief Financial Officer
Diane D. King 47 Senior Vice President, Assistant Treasurer and Head Teller
Jenny M. Ford 48 Vice President and Secretary
</TABLE>
Each of the executive officers of the Bank is expected to retain his
and her office after the Conversion until the next annual meeting of the Board
of Directors of the Bank and their successors are elected and qualified or until
they are removed or replaced. Officers are re-elected by the Board of Directors
annually.
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<PAGE>
Biographical Information
The following biographical information is provided for the directors
and executive officers of the Bank. Professional background and employment
history are provided for at least the past five years.
Directors
CLIFFORD E. KELSEY, JR. serves as the President, Chief Executive
Officer and a director of the Bank. Mr. Kelsey has been involved in the
financial institutions industry for more than 30 years and has served as
President, Chief Executive Officer and director of the Bank since 1973. He also
has served as a director of the Institutional Investors Capital Appreciation
Fund, Inc. (an IIMF mutual fund), the Arden Hill Hospital, the Arden Hill Life
Care Center and the Arden Hill Life Care Retirement Community since 1994.
RICHARD C. DURLAND serves as the Executive Vice President, Treasurer
and a director of the Bank. Mr. Durland joined the Bank in 1970 and has served
as the Executive Vice President, Treasurer and a director since 1980. He is
presently the Treasurer of the Goshen Rotary Club.
HERBERT C. MUELLER has been a director of the Bank since 1973. Dr.
Mueller is a retired veterinarian, past owner of the Orange County Veterinary
Hospital and past president of the Hudson Valley Veterinary Association. He also
serves as the Treasurer and director of the Black Meadow Club, a local hunting
club. Dr. Mueller served in the 11th Airborne Division from 1946 to 1947.
ROY L. LIPPINCOTT has been a director of the Bank since 1978. Mr.
Lippincott is the President of Lippincott Funeral Chapel, Inc. in Goshen, New
York and of Lippincott Funeral Home Inc., in Chester, New York. From 1968 until
1996, Mr. Lippincott was President of Ralston Lippincott Hasbrouck Ingrasia
Funeral Home, Inc. located in Middletown, New York. Mr. Lippincott served as the
Orange County Coroner from 1971 until 1985.
STEPHEN O. HOPKINS has been a director of the Bank since 1980. Mr.
Hopkins has been the regional representative for the Sutphen Corporation and
S.V.I. Trucks since 1992, supplying fire and rescue apparatus to fire stations.
From 1981 to 1983, Mr. Hopkins served as the President of the Cataract Engine &
Hose Co. Mr. Hopkins presently serves on the Board of Directors for the Goshen
Historic Track and has served is this capacity since its inception. He has been
the Town Supervisor for the Town of Goshen since 1996. Mr. Hopkins served as the
Mayor of the Village of Goshen from 1983 until 1989 and as the Chief of the
Goshen Fire District from 1975 to 1978.
GENE J. GENGEL has been a director of the Bank since 1995. Mr. Gengel
is the Executive Director of the Orange County Cerebral Palsy Association
Rehabilitation Center, a position he has held since 1992. From 1971 to 1992, Mr.
Gengel held various management positions, culminating in General Manager, of the
Highland Telephone Company. Mr. Gengel is a member of the Goshen Rotary Club and
the Elks Club and has served as the Chairperson of the Human Resource Committee
of the New York State Telephone Association.
THOMAS V. GUARINO has been a director of the Bank since 1996. Mr.
Guarino has been the President and Senior Portfolio Manager of the Hudson Valley
Investment Advisors, Inc., an investment management and advisory company, since
1995. Prior to that, he had been a Vice President of Fleet Investment Advisors,
Inc., since 1988 and was Vice President in charge of investments of Norstar Bank
of the Hudson Valley from 1981 to 1988. Mr. Guarino was an Adjunct Assistant
Professor of finance for the Orange County Community College from 1983 until
1995. He is a past president of the Goshen
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Rotary Club, the Mid-Hudson Chapter of the American Institute of Banking and the
Hudson Valley Estate Planning Council. Mr. Guarino also serves as a trustee of
the Goshen Rotary Scholarship Foundation, Inc.
Executive Officers Who Are Not Directors
STEPHEN W. DEDERICK joined the Bank in February 1997 as its Chief
Financial Officer. Prior to joining the Bank, he was the Vice President and
Controller of MSB Bank, where he also served on the Asset/Liability Committee
and the Investment Committee. Mr. Dederick joined MSB Bank in 1985. He is
active in scouting and is a member and past treasurer of the Pine Bush Lions
Club.
DIANE D. KING has served as the Bank's Senior Vice President and
Assistant Treasurer since January 1997. Ms. King has been with the Bank for 29
years and has served in various positions, including as the Bank's Head Teller
beginning in 1977, Assistant Treasurer since 1984 and Secretary from 1986
through 1996.
JENNY M. FORD has served as the Bank's Vice President and Secretary
since January 1997. Ms. Ford joined the Bank in 1972 and has served in various
capacities since that time including bookkeeper, administrative assistant and
Assistant Secretary.
Committees and Meetings of the Board of Directors of the Bank
The Board of Directors of the Bank meets on a monthly basis and may
have additional special meetings from time to time. During the fiscal year ended
September 30, 1996, the Board of Directors met 12 times. No current director
attended fewer than 75% of the total number of Board meetings and meeting of
committees of which such director was a member during fiscal 1996.
The Bank has established the following committees of its Board of
Directors:
The Executive and Finance Committee consists of Messrs. Kelsey,
Durland, Mueller, Hopkins and Lippincott. The Executive and Finance Committee
meets as necessary between meetings of the full Board of Directors and generally
has the full authority of the Board of Directors. The Executive and Finance
Committee did not meet during fiscal 1996.
The Examining Committee consists of Messrs. Mueller, Gengel and
Guarino. The Examining Committee meets periodically with the Bank's independent
Certified Public Accountants to arrange for the Bank's annual financial
statement audit and to review and evaluate recommendations made during the
annual audit. The Examining Committee also reviews the regulatory reports of
examination and reviews and approves the Bank's internal auditing procedures.
The Examining Committee met four times during fiscal 1996.
The Salary Committee consists of Messrs. Kelsey, Mueller and
Lippincott. The Salary Committee reviews and makes recommendations to the Board
regarding the compensation of the executive officers and employees of the Bank.
The Salary Committee met twice in fiscal 1996.
The Real Estate Appraisal Committee consists of Messrs. Mueller and
Lippincott. The members of the committee conduct drive-by re-appraisals of the
real estate collateral for existing loans. The Appraisal Committee met once in
fiscal 1996.
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<PAGE>
The Ad Hoc Loan Review Committee consists of two directors on a
rotating basis and meets as need to review mortgage loans approved by officers
of the Bank. The Ad Hoc Loan Review Committee met 31 times in fiscal 1996.
Directors' Compensation
Each director of the Bank who is not an employee of the Company or the
Bank or any of their subsidiaries, receives an attendance fee of $500 for each
Board of Directors meeting, $300 for each committee meeting and an appraisal fee
of $250 for a half day and $475 for a full day of collateral re-appraisals. The
aggregate amount of fees paid to all directors for the year ended September 30,
1996 was approximately $49,875. Directors may defer the receipt of their fees
until retirement or reaching a specified age. The deferrals are unfunded and
when due are paid either in a lump sum or installments. Interest accrues on the
deferred fees until paid. The deferral plan will also apply to fees earned by
directors of the Company. It is anticipated that directors will also receive
benefits under the Stock Option Plan and ISAP expected to be implemented by the
Company. See "--Benefits--Stock Option Plan" and "--Incentive Stock Award Plan."
Executive Compensation
Decisions regarding the Bank's executive compensation are made by the
Bank's Board of Directors, upon the recommendations made by the Salary
Committee. Executive officers of the Bank who are directors do not vote on their
own compensation.
The following table sets forth the cash compensation paid by the Bank
for services rendered in all capacities during the fiscal year ended September
30, 1996, to the Chief Executive Officer and all executive officers of the Bank
who received compensation in excess of $100,000 (the "Named Executive
Officers").
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Summary Compensation Table
- ---------------------------------------------------------------------------------------------------------------------
Annual Compensation (1)
----------------------------------------------------------------------------
Other Annual All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Compensation
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Clifford E. Kelsey, Jr., President 1996 $123,610 $--- $--- 4,717
and Chief Executive Officer
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with the transitional provisions applicable to the revised
rules on executive officer and director compensation disclosure adopted by the
SEC, as informally interpreted by the SEC's Staff, Summary Compensation
information is excluded for the fiscal years ended September 30, 1995 and 1994
because neither the Bank nor the Company were public companies during such
years. For 1996 there were no: (a) perquisites with an aggregate value in excess
of the lesser of $50,000 or 10% of the total of the individual's 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; or (d) preferential discounts
on stock. For 1996, the Bank had no restricted stock or stock related plans in
existence. All other compensation includes life insurance premiums of $1,023 and
matching contributions under the 401(k) plan of $3,694.
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Transactions With Certain Related Persons
The directors and executive officers of the Bank maintain normal
deposit account relationships with the Bank on terms and conditions no more
favorable than those available to the general public. The Bank does not make
loans to directors, officers and employees. If a lending relationship exists
when a person becomes a director or officer, the Bank makes arrangements to sell
such loans to another financial institution when the individual joins the Bank.
Mr. Kelsey is a member of the board of directors of the non-profit
elder care facility where the Bank maintains its recently-opened branch office.
Mr. Kelsey has no ownership interest in the facility. Mr. Kelsey is also a
member of the board of directors of IIMF, the mutual fund in which the Bank
invests. IIMF was established as a group of mutual funds to invest in securities
in which a savings bank is permitted to invest and the board of directors
consists principally of chief executive officers of savings institutions.
Employment Contracts
The Company and (subject to non-objection by the OTS) the Bank have
entered into employment agreements (the "Employment Contracts") with Mr. Kelsey,
Mr. Durland, Ms. King and Ms. Ford (each a "Senior Executive" and collectively
the "Senior Executives"). The Employment Contracts establish the respective
duties and compensation of each Senior Executive and 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
Senior Executives.
The Employment Contracts provide for three-year terms beginning on
May 1, 1997. Each of the Employment Contracts provides that, commencing on the
first anniversary date and continuing each anniversary date thereafter, the
Board of Directors may, provided that the Senior Executive does not object,
extend the applicable Employment Contract for an additional year, so that the
remaining term shall be three years, after conducting a performance evaluation
of the Senior Executive. The Employment Contracts provide that the Senior
Executive's base salary will be reviewed annually. It is anticipated that this
review will be performed by the Salary Committee of the Bank and the
Compensation Committee of the Company, and approved by non-employee members of
the Board. The base salary for Mr. Kelsey as of May 1, 1997 is $128,622, which
was his salary as set by the Board of Directors effective January 1, 1997. The
Employment Contracts also provide for, among other things, entitlement to
participation in such stock, retirement and welfare benefit plans as the Bank
may maintain from time to time. The Employment Contracts provide for termination
by the Bank or the Company at any time for cause as defined in the Employment
Contracts.
If the Bank or the Company terminates the Senior Executive's employment
for reasons other than for cause, or if the Senior Executive resigns from the
Bank and the Company for certain specified reasons, the Senior Executive would
be entitled to a lump sum cash payment in an amount equal to the sum of (a) the
present value of the remaining cash compensation (salary plus bonus at the
highest rate at which bonuses had been paid during the five year period prior to
such termination) due to the Senior Executive, (b) the additional contributions
or benefits that would have been earned under any employee benefit plans of the
Bank or the Company during the remaining term of the Employment Contract and (c)
payments that would have been made under any incentive compensation plan during
the remaining term of the Employment Contracts. If permitted by applicable law,
provision will also be made for the cash out of stock options, appreciation
rights or restricted stock as if the Senior Executive was fully vested. The Bank
and the Company would also continue the Senior Executive's life, health and any
disability insurance or
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<PAGE>
other benefit plan coverage for specified periods. Reasons specified as grounds
for resignation for purposes of the Employment Contracts include, in general,
material breach by the Company or the Bank or adverse change in salary or other
compensation and benefits, function, title or working conditions, or, in the
event of a change in control (as defined in the Employment Contracts), the
failure to provide such stock-based compensation and benefits as are at least as
favorable as those usually and customarily provided to similarly situated
officers. In general, for purposes of the Employment Contracts and the plans
maintained by the Company or the Bank, a "change in control" will generally be
deemed to occur when a person or group of persons acting in concert acquires
beneficial ownership of 25% or more of any class of equity security of the
Company or the Bank, upon stockholder approval of a merger or consolidation
unless certain conditions are met, or a change of the majority of the Board of
Directors of the Company or the Bank or upon liquidation or sale of
substantially all the assets of the Company or the Bank. Based on current
compensation and benefit costs, cash payments to be made in the event of a
change in control of the Bank or the Company pursuant to the terms of the
Employment Contracts would approximately $460,000 payable to Mr. Kelsey and
$816,000 to the other three executive officers in the aggregate. However, the
actual amount that may be paid cannot be estimated at this time, because the
actual amount will be based on the compensation and benefit costs applicable to
these individuals and other factors existing at the time of the change in
control which cannot be determined at this time.
Payments to the Senior Executives under the Bank's Employment Contracts
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 Contracts would be made
by the Company. To the extent that payments under the Company's Employment
Contracts and the Bank's Employment Contracts are duplicative, payments due
under the Company's Employment Contracts would be offset by amounts actually
paid by the Bank. Senior Executives would be entitled to reimbursement of
certain costs incurred in interpreting or enforcing the Employment Contracts.
Cash and benefits paid to a Senior Executive under the Employment
Contracts together with payments under other benefit plans following a "change
in control" of the Bank or the Company may constitute an "excess parachute"
payment under Section 280G of the Code, resulting in the imposition of a 20%
excise tax on the recipient and the denial of the deduction for such excess
amounts to the Company and the Bank. The Company's Employment Contracts include
a provision indemnifying each Senior Executive on an after-tax basis for any
such excise taxes.
Employee Retention Agreements
Effective upon the Conversion, the Bank (subject to the non-objection
of the OTS) and the Company intend to enter into Retention Agreements with four
key employees (the "Other Officers"). The purpose of the Retention Agreements is
to secure the Other Officers' continued availability and attention to the Bank's
affairs, relieved of distractions arising from the possibility of a corporate
change in control. The Retention Agreements do not impose an immediate
obligation on the Bank to continue the Other Officers' employment but provide
for a period of assured employment ("Assurance Period") following a change in
control of the Bank or Company. The Retention Agreements provide for an initial
Assurance Period of three years commencing on the date of a change in control.
In general, the applicable Assurance Periods will be automatically extended on a
daily basis under the Retention Agreements until written notice of non-extension
is given by the Bank or the Other Officer, in which case an Assurance Period
would end on the third anniversary of the date such notice is given.
If, upon a change in control, or within 12 months of, and in connection
with, a change of control, an Other Officer is discharged without "cause" (as
defined in the Retention Agreements) or the Other Officer
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<PAGE>
voluntarily resigns within one year following a material adverse change in such
employee's position, duties, salary or due to a material breach of the Retention
Agreement by the Bank or Company, the Other Officer (or, in the event of such
employee's death, such employee's estate) would be entitled to a lump sum cash
payment equal to the present value of the remaining base salary due during the
Assurance Period plus any additional contributions and benefits that the Other
Officer would have earned under the Bank's or Company's employee benefit plans
during the Assurance Period. Each Other Officer's life, health and disability
coverage would also be continued during the Assurance Period. The total amount
of termination benefits payable to each Other Officer under the Retention
Agreements is limited to three times the Other Officer's average total
compensation for the prior five calendar years. Payments to the Other Officers
under their respective Retention Agreements will be guaranteed by the Company to
the extent that the required payments are not made by the Bank. Based on current
compensation and benefit costs applicable to the Other Officers expected to be
covered by the Retention Agreements, cash payments to be made in the event of a
change in control of the Bank or the Company would be approximately $533,000.
However, the actual amount that may be paid under the Retention Agreements in
the event in a change of control of the Bank or the Company cannot be estimated
at this time because it will be based on the compensation and benefit costs
applicable to the Other Officers and other factors existing at the time of the
change in control which cannot be determined at this time.
Benefits
Pension Plan. The Bank maintains a non-contributory, tax-qualified
defined benefit pension plan (the "Pension Plan") for eligible employees. All
employees and officers with more than 1,000 hours of service per year who have
attained age 21 and completed one year of service are eligible to participate in
the Pension Plan. The Pension Plan provides a benefit for each participant. The
annual benefit is equal to 2% of the participant's average annual compensation
multiplied by the participant's number of years of service. A participant is
entitled to a maximum of 30 years of service under the Pension Plan.
Average annual compensation is the average annual compensation for the
three years prior to retirement. A participant is fully vested in his or her
pension after five years of service. The Pension Plan is funded by the Bank on
an actuarial basis, and all assets are held in trust by the Pension Plan
trustee. The following table illustrates the annual benefit payable upon normal
retirement at age 65 in the normal form of benefit under the Pension Plan at
various levels of average annual compensation and years of service under the
Pension Plan. For the plan year ended September 30, 1996, the maximum
permitted average annual compensation for determining pension benefits under the
Bank's Pension Plan was $150,000 and the maximum annual pension benefit was
$90,000.
<TABLE>
<CAPTION>
Pension Plan Table
-------------------------------------------------------------------------------
Years of Credited Service
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Remuneration 15 20 25 30
------------ ------ ------ ------ ------
$75,000 $22,500 $30,000 $37,500 $45,000
------- ------- ------- ------- -------
100,000 30,000 40,000 50,000 60,000
------- ------ ------ ------ ------
125,000 37,500 50,000 62,500 75,000
------- ------ ------ ------ ------
150,000 45,000 60,000 75,000 90,000
------- ------ ------ ------ ------
175,000 45,000 60,000 75,000 90,000
------- ------ ------ ------ ------
200,000 45,000 60,000 75,000 90,000
------- ------ ------ ------ ------
225,000 45,000 60,000 75,000 90,000
------- ------ ------ ------ ------
</TABLE>
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<PAGE>
At December 31, 1996, Mr. Kelsey had 29 years of credited service under
the Pension Plan and Mr. Durland had 26 years of credited service.
401(k) Plan. The Bank maintains a tax-qualified savings and profit
sharing plan under Section 401(k) of the Code (the "401(k) Plan"). Salaried
employees with at least one year of service may make pretax salary deferrals and
after tax contributions under the 401(k) Plan. Salary deferrals are made by
election and are limited to 10% of compensation up to $150,000 (for 1996), or to
a limit imposed under the Code ($9,500 for 1996). The Bank makes matching
contributions equal to 100% of the amount of salary contributions, up to 3% of
salary. Employees are fully vested in their salary deferrals and after tax
contributions, and become incrementally vested in the Bank's contribution after
one year and fully vested in the Bank's contributions after five years.
Employee Stock Ownership Plan. The Company is establishing, and the
Bank will adopt, an ESOP and related trust to become effective upon completion
of the Conversion. Substantially all employees of the Bank or the Company who
have attained age 21 and have completed one year of service are eligible to
become participants in the ESOP. The ESOP intends to purchase eight percent (8%)
of the Common Stock issued in the Conversion using the proceeds of the ESOP Loan
from the Company. Although contributions to the ESOP will be discretionary, the
Company and the Bank intend to make annual contributions to the ESOP in an
aggregate amount at least equal to the payments due under the ESOP Loan. It is
expected that this loan will be for a term of up to ten years, will bear
interest at the rate of 7.75% per annum and will call for level annual payments
of principal and interest designed to amortize the loan over its term. It is
anticipated that the loan will also permit optional pre-payment. The Company and
the Bank may contribute amounts to the ESOP in excess of the amounts necessary
to service the ESOP Loan.
Shares purchased by the ESOP will initially be pledged as collateral
for the ESOP Loan and will be allocated among participants in the ESOP as the
loan is repaid. The pledged shares will be released annually from the pledge in
an amount proportional to the repayment of the ESOP loan for each plan year. The
released shares, and any subsequently acquired shares that are not pledged to
secure a loan, will be allocated among ESOP participants on the basis of the
participant's total taxable compensation for the year of allocation. Benefits
generally become vested after five years of service, with no vesting prior to
completion of five years of credited service. Employees will receive credit for
service prior to the Conversion for vesting purposes. Participants also become
immediately vested upon termination of employment due to death, retirement at
age 65 or older, permanent disability or upon the occurrence of a change of
control. Forfeitures (shares allocated to an employee which are not yet vested
when such employee's employment terminates) will be reallocated among remaining
participating employees, in the same proportion as contributions. Vested
benefits may be paid in a single sum or installment payments and are payable
upon death, retirement at age 65 or older, disability or termination of
employment.
A corporate trustee for the ESOP not affiliated with the Bank or the
Company will be appointed prior to the Conversion and will continue thereafter.
The ESOP trustee, subject to its fiduciary duty, must vote all allocated shares
held in the ESOP and all allocated shares for which no instructions have been
received in accordance with the voting instructions received with respect to
allocated shares. Under the ESOP, shares not yet allocated to ESOP participants
will be voted generally in the same proportion as allocated shares for which
voting instructions are received.
The ESOP may purchase additional shares of Common Stock in the future,
in the open market or otherwise, and may do so either on with borrowed funds or
with cash dividends, periodic employer contributions or other cash flow.
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Stock Option Plan. Following the Conversion, the Board of Directors of
the Company intends to adopt the Stock Option and Incentive Plan (the "Stock
Option Plan"). If implemented prior to the first anniversary of the Conversion,
OTS regulations require that the adoption of the Stock Option Plan be subject to
stockholder approval obtained at a meeting of stockholders to be held no earlier
than six months after the completion of the Conversion. An amount of shares of
Common Stock equal to 10% of the shares of Common Stock to be issued in the
Conversion is expected to be reserved for issuance under the Stock Option Plan.
No determinations have been made by the Board of Directors as to the specific
terms of the Stock Option Plan or the amount of awards thereunder. However, OTS
regulations provide that no individual officer or employee may receive more than
25% of the options granted and that non-employee directors may not receive more
than 5% individually or more than 30% in the aggregate of the options granted,
under option plans implemented within one year after the Conversion.
The purpose of the anticipated adoption of the Stock Option Plan will
be to attract and retain qualified personnel in key positions, provide
directors, officers and key employees with a proprietary interest in the Company
as an incentive to contribute to the success of the Company and its subsidiaries
and reward directors, officers and key employees for outstanding performance.
Although the terms of the Stock Option Plan have not yet been determined, it is
expected that the Stock Option 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 of control of the
Bank or the Company. Unless sooner terminated, the Stock Option Plan is expected
to be in effect for a period of 10 years. All options granted to non-employee
directors will be Non-Statutory Stock Options. If implemented, the Company
currently intends to grant to President and Chief Executive Officer Clifford E.
Kelsey, Jr., the maximum number of options so permitted (options for from 36,125
to 56,206 shares at the minimum and 15% above the maximum of the Valuation
Range) and also to grant to each non-employee director (five persons) the
maximum permitted number of options (options for from 7,225 to 11,241 shares at
the minimum and 15% above the maximum of the Valuation Range, respectively).
However, a final determination of the amount of options to be granted to such
persons has not been made. No determination regarding the amount of options
which may be granted to other officers and employees of the Bank has been made
and such determination is not currently expected to be made until just prior to
the solicitation of proxies for the anticipated stockholders' meeting at which
the Stock Option Plan is expected to be presented for approval.
The Stock Option Plan will be administered by a committee of the Board
of Directors (the "Stock Plans Committee"), and such committee will determine
which officers and employees will be granted options and Limited Rights, whether
such options will be Incentive Stock Options 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 Stock Option Plan will permit options to be granted for terms
of up to 10 years (5 years in the case of Incentive Stock Options granted to
employees who are 10% stockholders) and at exercise prices no less than the fair
market value at date of grant (110% of fair market value in the case of
Incentive Stock Options granted to employees who are 10% stockholders).
The Stock Option Plan is expected to provide for the exercisability and
vesting of options granted thereunder in the manner specified by the Stock Plans
Committee. OTS regulations generally require that options granted under plans
implemented within one year after the Conversion begin vesting no earlier than
one year from the date of stockholder approval of the plan and thereafter vest
at a rate of no more than 20% per year. It is also expected that, in the event
of death or disability, grants would be 100% vested, and
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options would terminate upon or within a fixed period after termination of
employment of an officer or employee, or upon termination of service as a
director.
It is anticipated that the Stock Option Plan, to the extent permitted
by OTS regulations, and subject to applicable OTS vesting requirements, will
also provide for Limited Rights which, upon a change of control, will allow the
holder to exercise such Limited Rights and thereby 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.
An employee will not be deemed to have received taxable income upon
grant or exercise of any Incentive Stock Option unless shares received through
the exercise of such option are disposed of within one year after the date the
stock is received in connection with the option exercise or within two years
after the date of grant of the option. No compensation deduction may 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 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 may be a
deductible expense for tax purposes for the Company. In the case of Limited
Rights, upon exercise, the option holder would be required to include the amount
paid to him or her upon exercise in his or her gross income for federal income
tax purposes in the year in which the payment is made and the Company may be
entitled to a deduction for federal income tax purposes of the amount paid.
Incentive Stock Award Plan (the "ISAP"). Following the Conversion, the
Company also intends to establish the Incentive Stock Award Plan 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 and the Company at no cost to the
recipients of such awards. The ISAP will provide for the award of shares of
Common Stock ("ISAP Shares"), the full ownership of which will gradually vest in
the person to whom the shares are awarded over a five year period. If
implemented prior to the first anniversary of the Conversion, OTS regulations
require that the adoption of the ISAP and awards thereunder be subject to
stockholder approval obtained at a meeting of stockholders held no earlier than
six months after the completion of the Conversion.
If the ISAP is implemented, the Company expects to make available
Common Stock in an amount up to 4% of the shares of Common Stock issued in the
Conversion to fund awards under the ISAP. These shares be acquired through open
market purchases, if permitted, or from authorized but unissued shares. No
determinations have been made as to the specific terms of the ISAP or the amount
of awards thereunder. Although no specific award determinations have been made,
the Company anticipates that, if the ISAP is implemented, the Company will
provide awards to eligible officers, employees and directors to the extent
permitted by applicable regulations. Current OTS regulations provide that no
individual employee may receive more than 25% of the shares of any plan and that
non-employee directors may not receive more than 5% of the shares individually
or 30% in the aggregate for all directors, in the case of plans implemented
within one year following the Conversion. If implemented, the Company currently
intends to award to President and Chief Executive Officer Clifford E. Kelsey,
Jr., the maximum number of shares so permitted (from 14,450 to 22,482 shares at
the minimum and 15% above the maximum of the Valuation Range) and also to award
to each non-employee director (five persons) the maximum permitted (from 2,890
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to 4,496 shares at the minimum and 15% above the maximum of the Valuation Range,
respectively). Based upon the $10.00 Purchase Price, the aggregate market value
of the restricted stock intended to be awarded under the ISAP to Mr. Kelsey and
the five non-employee directors is from $289,000 to $449,620 at the minimum and
15% above the maximum of the Valuation Range, respectively. However, a final
determination of the amount of shares to be awarded to such persons has not been
made. No determination regarding the amount of awards which may be made to other
officers and employees of the Bank has been made and such determination is not
currently expected to be made until just prior to the solicitation of proxies
for the anticipated stockholders' meeting at which the ISAP is expected to be
presented for approval.
Any ISAP adopted shall be administered by the Stock Plans Committee.
Awards of ISAP Shares to non-employee directors are expected to be
self-executing. The ISAP is expected to provide for the vesting of awards
granted thereunder in the manner specified by the Stock Plans Committee and
consistent with OTS regulations, which currently require that awards under plans
implemented within one year following the Conversion begin vesting no earlier
than one year from the date of stockholder approval and thereafter vest at a
rate of no more than 20% per year. It is also expected that, in the event of
death or disability, grants would be 100% vested and further vesting of unvested
awards would cease upon termination of employment of an officer or employee, or
upon termination of service as a director.
When ISAP Shares become vested in accordance with the ISAP, the
participants will recognize income equal to the fair market value of the Common
Stock at that time. The amount of income recognized by the participants may be a
deductible expense for tax purposes for the Company. For financial reporting
purposes, the Company will record compensation expense on account of the ISAP
during the periods in which awards vest in an amount equal to the fair market
value of the stock on the date of vesting. If the fair market value on that date
is greater than the Purchase Price in the Offerings, compensation expense will
increase correspondingly. Prior to vesting, dividends paid by the Company on any
ISAP Shares will be held pending the vesting of the shares on which the
dividends were paid. The participants will receive payment of such dividends as
and when ISAP Shares vest. Subject to limitations which may be imposed by the
OTS, persons awarded shares under the ISAP will be permitted to vote those
shares prior to the vesting of the shares.
If authorized but unissued shares are used to fund the ISAP after the
Conversion, the interests of existing stockholders will be diluted. See "Pro
Forma Data."
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THE CONVERSION
The Board of Directors of the Bank and the OTS have approved the Plan
of Conversion. OTS approval does not constitute a recommendation or endorsement
of the Plan of Conversion. Certain terms used in the following summary of the
pertinent aspects of the Conversion are defined in the Plan of Conversion, a
copy of which may be obtained from the Bank.
General
On February 6, 1997 the Board of Directors of the Bank adopted the
Plan, pursuant to which the Bank would be converted from a federally chartered
mutual savings bank to a federally chartered stock savings bank, with the
concurrent formation of the Company. It is currently intended that all of the
capital stock of the Bank will be held by the Company. The OTS has approved the
Plan subject to its approval by the members of the Bank entitled to vote at the
Special Meeting to be held on June 24, 1997 and subject to the satisfaction
of certain other conditions imposed by the OTS in its approval.
The OTS has approved the Company's application to become a savings and
loan holding company and to acquire all of the Common Stock of the Bank, which
will become a wholly owned subsidiary of the Company. Pursuant to such OTS
approval, 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 issued and
outstanding capital stock of the Bank.
The Conversion will be accomplished through adoption of the proposed
federal stock charter which will authorize the issuance of capital stock by the
Bank. The Conversion will be accounted for as a pooling of interests. Under the
Plan, the Common Stock is being offered for sale by the Company. As part of the
Conversion, the Company is conducting a Subscription Offering of the Common
Stock for holders of subscription rights. Subscription rights have been granted
to Eligible Account Holders (depositors on December 31, 1995), the Tax-Qualified
Employee Benefit Plans of the Bank or the Company, Supplemental Eligible Account
Holders (depositors on March 31, 1997, who are not Eligible Account Holders) and
Other Members (depositors of the Bank on May 9, 1997). Depending upon
market conditions at or near the completion of the Subscription Offering, the
Company may also conduct a Public Offering through Capital Resources. The Plan
also allows the Bank to conduct a Community Offering with preference given to
natural person rending in Orange County, New York. The Plan provides that the
Conversion must be completed within 24 months after the date of the approval of
the Plan by the depositors of the Bank. See "--Risk of Delayed Offering."
Reasons for the Conversion
The Bank has several business purposes for the Conversion. The sale of
the Company's Common Stock will provide the Bank with additional equity capital
to support its existing operations, subject to applicable regulatory
restrictions. At December 31, 1996, the Bank had core and tangible capital equal
to 12.30% of applicable assets and risk-based capital equal to 21.85% of
risk-weighted assets. See "Regulatory Capital Compliance" for discussion of the
pro forma effects of the Offerings on the Bank's capital ratios. The sale of the
Common Stock is the most effective means of increasing the Bank's permanent
capital and does not involve the high interest cost and repayment obligation of
subordinated debt. In addition, investment of the net proceeds of the sale of
Common Stock is expected to provide additional operating income to further
increase the Bank's capital on a continuing basis.
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The Conversion will structure the Bank in the stock form used in the
United States by all commercial banks, most major business corporations and the
majority of savings institutions. The Conversion will give many of the Bank's
depositors the opportunity to become stockholders of the Company, thereby
allowing them to own stock in the financial organization in which they maintain
deposit accounts. Such ownership should encourage depositors who become
stockholders to promote the Bank to others, thereby further contributing to the
Bank's earnings potential. The Bank also expects that the ESOP, the Stock Option
Plan and the ISAP will assist it in attracting and retaining qualified personnel
and successfully competing with other financial institutions in its principal
market area. If the Stock Option Plan and the ISAP which the Board of Directors
of the Company intends to adopt are implemented within one year after the
Conversion, which is presently intended, then such plans must first be approved
at a meeting of the Company's stockholders to be held no earlier than six months
after the Conversion. See "Management of the Bank-Benefit Plans--Stock Option
Plan" and "-Incentive Stock Award Plan."
The Board of Directors of the Bank believes that the holding company
structure will facilitate the diversification of the Bank's business activities
and the acquisition of other savings institutions as well as other companies.
The holding company structure will enable an acquired savings institution to
operate on a more autonomous basis as a wholly-owned subsidiary of the Company,
rather than as a division of the Bank. For example, the acquired savings
institution could retain its own directors, officers and corporate name as well
as have representation on the Board of Directors of the Company. As of the date
hereof, the Company has no plans or understandings to acquire any other
institution or engage in any activities other than holding the Bank's stock.
Effects of Conversion on Depositors and Borrowers
Voting Rights. Upon Conversion, the Bank's depositors will have no
voting rights in the Bank and will therefore not be able to elect directors or
to otherwise participate in the conduct of the affairs of the Bank or the
Company unless they own Common Stock. Currently, these rights are accorded to
the Bank's depositors. Following the Conversion, the Bank will become a
wholly-owned subsidiary of the Company, which will hold all voting rights in the
Bank. Voting rights in the Company will be held exclusively by the Company's
stockholders. Stockholders will be entitled to vote on any matter to be
considered by the stockholders of the Company and will generally be entitled to
one vote for each share of the Common Stock owned. See "Restrictions on
Acquisition of the Company and the Bank-Restrictions in the Company's
Certificate of Incorporation and Bylaws-Limitations on Voting Rights" for a
discussion of limitations applicable to the voting rights of the Company's
stockholders.
Deposit Accounts and Loans. The Bank's deposit accounts, balances of
the individual accounts, and the existing FDIC insurance coverage of deposit
accounts will not be affected by the Conversion. Furthermore, the Conversion
will not affect the loan accounts, the balances owed, or the obligations of the
borrowers under their individual contractual arrangements with the Bank.
Tax Effects. The Bank has received an opinion from its counsel, Serchuk
& Zelermyer, LLP, covering those tax matters that are material to the Conversion
and stating that the Conversion will constitute a nontaxable reorganization
under Section 368(a)(1)(F) of the Code. Among other things, the opinion, filed
as an exhibit to the registration statement of which this prospectus is a part,
provides that: (i) the Conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Code, and no gain or loss will be recognized by the Bank in
either its mutual form or its stock form, or by the Company, by reason of the
proposed Conversion; (ii) no gain or loss will be recognized by the Bank upon
the receipt of money from the Company for stock of the Bank, and no gain or loss
will be recognized by the Company upon the receipt of money for the Common
Stock; (iii) the assets of the Bank in either its mutual or its stock form will
have
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the same basis before and after the Conversion; (iv) the holding period of the
assets of the Bank will include the period during which the assets were held by
the Bank in its mutual form prior to the Conversion; (v) no gain or loss will be
recognized by the Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members upon the issuance to them of withdrawable deposit
accounts in the Bank after the Conversion in the same dollar amount as their
accounts in the Bank plus an interest in the liquidation account of the Bank
after the Conversion in exchange for their accounts in the Bank prior to the
Conversion; (vi) the receipt by Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members of nontransferable subscription rights to
purchase shares of the Common Stock under the Plan is taxable to Eligible
Account Holders, Supplemental Eligible Account Holders, and Other Members to the
extent the subscription rights have value; (vii) the basis of each account
holder's accounts in the Bank after the Conversion will be the same as the basis
of his or her accounts in the Bank prior to the Conversion, decreased by the
fair market value of the non-transferable subscription rights received and
increased by the amount, if any, of gain recognized on the exchange; (viii) the
basis of each account holder's interest in the liquidation account will be zero;
(ix) the holding period of the Common Stock acquired through the exercise of
subscription rights shall begin on the date on which the subscription rights are
exercised; (x) the Bank in its stock form will succeed to and take into account
the earnings and profits or deficit in earnings and profits of the Bank, in its
mutual form, as of the date of Conversion; (xi) the Bank, immediately after
Conversion, will succeed to the bad debt reserve accounts of the Bank, in its
mutual form, and the bad debt reserves will have the same character in the hands
of the Bank after Conversion as if no distribution or transfer had occurred; and
(xii) the creation of the liquidation account will have no effect on the Bank's
taxable income, deductions, or addition to reserve for bad debts either in its
mutual or stock form.
The opinion of Serchuk & Zelermyer, LLP is based in part on the
assumption that the exercise price of the subscription rights to purchase Common
Stock will be approximately equal to the fair market value of that stock at the
time of the completion of the proposed Conversion. With respect to the
subscription rights, the Bank has received an opinion of CRG, which, based on
certain assumptions, concludes that the subscription rights to be received by
Eligible Account Holders, Supplemental Eligible Account Holders, and Other
Members do not have any economic value at the time of distribution or at the
time the subscription rights are exercised, whether or not a Public Offering or
other purchase arrangement takes place. Such opinion is based on the fact that
such rights are: (i) acquired by the recipients without payment therefor, (ii)
non-transferable, (iii) of short duration, and (iv) afford the recipients the
right only to purchase Common Stock at a price equal to its estimated fair
market value, which will be the same price at which shares of Common Stock for
which no subscription right is received in the Subscription Offering may be
offered in the Public Offering. If the subscription rights granted to Eligible
Account Holders, Supplemental Eligible Account Holders, or Other Members are
deemed to have an ascertainable value, receipt of such rights would be taxable
probably only to those Eligible Account Holders, Supplemental Eligible Account
Holders, or Other Members who exercise the subscription rights in an amount
equal to such value (either as a capital gain or ordinary income), and the Bank
could recognize gain on the distribution of subscription rights.
The Bank is subject to New York taxation and has received the opinion
of Serchuk & Zelermyer, LLP that the Conversion will be treated for New York
state tax purposes similar to the Conversion's treatment for federal tax
purposes.
Unlike a private letter ruling, the opinions of Serchuk & Zelermyer,
LLP and CRG have no binding effect or official status, and no assurance can be
given that the conclusions reached in any of those opinions would be sustained
by a court if contested by the IRS or the New York tax authorities. Eligible
Account Holders, Supplemental Eligible Account Holders, and Other Members are
encouraged to consult with
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their own tax advisers as to the tax consequences in the event the subscription
rights are deemed to have an ascertainable value.
Liquidation Rights. The Bank has no plans to liquidate. However, if
there is ever a complete liquidation of the Bank, either before or after the
Conversion, deposit account holders will receive the protection of FDIC
insurance up to applicable limits. Additional liquidation rights before and
after the Conversion are described below.
In the event of a complete liquidation prior to the Conversion, each
holder of a deposit account in the Bank in its present mutual form would receive
his or her pro rata share of any assets of the Bank remaining after payment of
claims of all creditors (including the claims of all depositors in the amount of
the withdrawal value of their accounts). Such holder's pro rata share of
remaining assets, if any, would be in the same proportion of such assets as the
balance in his or her deposit account was to the aggregate balance in all
deposit accounts in the Bank at the time of liquidation.
After the Conversion, each deposit account holder, in the event of a
complete liquidation, would have a claim of the same general priority as the
claims of all other general creditors of the Bank. Therefore, except as
described below, the deposit account holder's claim would be solely in the
amount of the balance in his or her deposit account plus accrued interest. The
holder would have no interest in the value of the Bank above that amount.
The Plan of Conversion provides that there shall be established, upon
the completion of the Conversion, a "liquidation account" for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in an amount
equal to the net worth of the Bank as of the latest practicable date prior to
the Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder will have an initial interest in such liquidation account for each
deposit account held in the Bank on the applicable record date. An Eligible
Account Holder's and Supplemental Eligible Account Holder's interest as to each
deposit account will be in the same proportion to the total liquidation account
as the balance in his or her account on the Eligibility Record Date (December
31, 1995) and the Supplemental Eligibility Record Date (March 31, 1997),
respectively, was to the aggregate balance in all deposit accounts of Eligible
Account Holders and Supplemental Eligible Account Holders on such date. However,
if the amount in any Eligible Account Holder's or Supplemental Eligible Account
Holder's deposit account at the close of business on any annual closing date of
the Bank is less than the lowest amount in such account on the Eligibility
Record Date and/or the Supplemental Eligibility Record Date, as the case may be
or at the close of business on any previous annual closing date after the
Eligibility Record Date and/or the Supplemental Eligibility Record Date, then
the account holder's interest in the liquidation account will be reduced by an
amount proportionate to any such reduction. The interest of an account holder in
the liquidation account will never increase despite any increase in the balance
of the account holder's related accounts after the Conversion. The account
holder's interest will cease to exist if such deposit account is closed.
Certificates of deposit will be deemed closed when they mature.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether the
Bank, as converted, or another insured savings institution is the surviving
institution, is deemed to be a complete liquidation for purposes of distribution
of the
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liquidation account and, in any such transaction, the liquidation account
would be assumed to the full extent required by regulations of the OTS as then
in effect.
Subscription Offering.
In accordance with OTS regulations, nontransferable Subscription Rights
have been granted under the Plan to the following persons and entities in the
following order of priority: (i) Eligible Account Holders; (ii) Employee Plans;
(iii) Supplemental Eligible Account Holders; and (iv) Other Members. 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. The subscription priority categories are more fully described
below.
First Priority: Eligible Account Holders. Each Eligible Account Holder
(depositors of the Bank on December 31, 1995) will receive non-transferable
subscription rights on a priority basis to purchase that number of shares of
Common Stock which is equal to the greater of (i) 15,000 shares ($150,000), (ii)
one-tenth of one percent (0.10%) of the total offering, or (iii) 15 times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the qualifying deposit of the Eligible Account Holder
and the denominator is the total amount of qualifying deposits of all Eligible
Account Holders, subject to the $150,000 maximum and 25 share minimum purchase
limitations specified in the Plan. If Eligible Account Holders exercise
subscription rights for more shares of Common Stock than the total number of
shares available, shares of Common Stock shall be allocated to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase 100
shares of Common Stock or the total amount of his or her subscription, whichever
is less. Any shares of Common Stock not so allocated shall be allocated among
the subscribing Eligible Account Holders on an equitable basis, in the
proportion that the amounts of their respective qualifying deposits bear to the
total qualifying deposits of all subscribing Eligible Account Holders. If the
amount so allocated exceeds the amount subscribed for by any one or more
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Eligible Account Holders whose subscriptions are still
not fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied. Subscription rights received by
officers and directors in this category based on their increased deposits in the
Bank in the one-year period preceding December 31, 1995, are subordinated to the
subscription rights of other Eligible Account Holders.
Second Priority: Employee Plans. Tax-qualified employee benefit plans
of the Bank or the Company have been granted subscription rights to purchase up
to 10% of the total shares issued in the Conversion. The ESOP is an Employee
Plan and intends to purchase up to 8% of the Common Stork issued in the
Conversion.
The right of Employee Plans to purchase the Common Stock is subordinate
to the right of the Eligible Account Holders to purchase the Common Stock.
However, if the maximum of the Valuation Range is increased by up to 15%, the
Employee Plans have a first priority right to fill their subscription out of any
additional shares sold as a result of such increase. The Employee Plans may,
however, determine to purchase some or all of the shares covered by their
subscriptions after the Conversion in the open market or, if approved by the
OTS, out of authorized but unissued shares.
Third Priority: Supplemental Eligible Account Holders. Each
Supplemental Eligible Account Holder (depositors of the Bank on March 31, 1997
who are not Eligible Account Holders) will receive non-transferable subscription
rights to purchase that number of shares of Common Stock which is equal to the
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greater of 15,000 shares ($150,000) sold in the Conversion, one tenth of one
percent (0.10%) of the total offering, or 15 times the product (rounded down to
the next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the amount of
the qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all Supplemental
Eligible Account Holders, subject to the $150,000 maximum and 25 share minimum
purchase limitations specified in the Plan. If Supplemental Eligible Account
Holders exercise subscription rights for more shares of Common Stock than the
total number of shares remaining after satisfying higher priority subscription
rights, shares of Common Stock shall be allocated to permit each subscribing
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares of Common Stock sufficient to make his or her total allocation
equal to 100 shares of Common Stock or the total amount of his or her
subscription, whichever is less. Any shares of Common Stock not so allocated
shall be allocated among the subscribing Supplemental Eligible Account Holders
on an equitable basis, related to the amounts of their respective qualifying
deposits as compared to the total qualifying deposits of all subscribing
Supplemental Eligible Account Holders.
The rights of Supplemental Eligible Account Holders to subscribe for
the Common Stock are subordinate to the rights of the Eligible Account Holders
and Employee Plans to subscribe for the Common Stock.
Fourth Priority: Other Members. Other Members (depositors who are
entitled to vote at the Special Meeting who are not Eligible Account Holders or
Supplemental Eligible Account Holders) will receive non-transferable
subscription rights to purchase up to the greater of 15,000 shares ($150,000),
or one tenth of one percent (0.10%) of the total offering, subject to the
$150,000 maximum and 25 share minimum purchase limitations specified in the Plan
to the extent such stock is available following subscriptions by Eligible
Account Holders, Employee Plans, and Supplemental Eligible Account Holders. If
the allocation made pursuant to this paragraph results in an oversubscription
when added to the shares of Common Stock subscribed for by the Eligible Account
Holders, the Employee Plans, and the Supplemental Account Holders, the shares
available will be allocated among the subscribing Other Members so as to permit
each subscribing Other Member, to the extent possible, to purchase a number of
shares of Common Stock sufficient to make his or her total allocation equal to
100 shares of Common Stock or the total number of shares covered by the
subscription of the Other Member. Any remaining shares will be allocated among
the subscribing Other Members whose subscriptions remain unsatisfied on a 100
shares (or whatever lesser amount is available) per order basis until all orders
have been filled or the remaining shares have been allocated.
Subscription Offering Expiration Date. The Subscription Offering will
expire at 5:00 p.m., Eastern Time, on June 20, 1997, unless the Subscription
Offering is extended, at the discretion of the Board of Directors, up to an
additional 45 days with the approval of the OTS, if necessary, but without
additional notice to subscribers (the "Subscription Offering Expiration Date").
Subscription rights will become void if not exercised on or prior to the
Subscription Offering Expiration Date. See "Purchasing Common Stock" for a
description of how to subscribe for Common Stock.
Public Offering
To the extent that shares remain available, and subject to market
conditions at or near the completion of the Subscription Offering, the Company
may offer shares of Common Stock pursuant to the Plan to selected persons in a
Public Offering on a best-efforts basis through Capital Resources in such a
manner as to promote a wide distribution of the Common Stock. Orders received in
connection with the Public Offering, if held, will receive a lower priority than
orders properly made in the Subscription Offering
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by persons exercising subscription rights. Common Stock sold in the Public
Offering will be sold at $10.00 per share, the same price as all other shares
sold in the Conversion.
Depending on market conditions, Capital Resources may utilize selected
broker-dealers for the sale of Common Stock in the Public Offering. If selected
broker-dealers are used, the Bank will pay the selling commissions of such
selected broker-dealers and the fee payable to Capital Resources on account of
shares sold by such selected broker-dealers shall be reduced to 1.0% of the
amount so sold.
No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than 15,000 shares or $150,000 of
Common Stock in the Public Offering. The date by which orders must be received
in the Public Offering ("Public Offering Expiration Date") will be set by the
Company at the time of commencement of the Public Offering; provided however, if
the Public Offering is extended beyond August 4, 1997, each subscriber in the
Public Offering will have the opportunity to maintain, modify, or rescind his or
her order. All funds received in the Public Offering will be promptly returned
with interest to each subscriber unless he or she affirmatively indicates
otherwise in the event of such a resolicitation.
In the event the Company determines to conduct a Public Offering,
persons to whom a Prospectus is delivered may order shares of Common Stock by
submitting a completed stock order and an executed certification along with
payment in immediately available funds or a duly executed withdrawal
authorization from an existing brokerage account to Capital Resources by not
later than the Public Offering Expiration Date. Promptly upon receipt of
available funds, together with a properly executed stock order and account
withdrawal authorization, if applicable, and certification, Capital Resources
will forward such funds to the Bank to be deposited in a subscription escrow
account.
If an order in the Public Offering is accepted, promptly after the
completion of the Conversion, a certificate for the appropriate amount of shares
will be forwarded to Capital Resources as nominee for the beneficial owner. In
the event that an order is not accepted or the Conversion is not consummated,
the Bank will promptly refund with interest the funds received to Capital
Resources, which will then return the funds to the subscriber.
If a Public Offering is held, the opportunity to order shares of Common
Stock in the Public Offering is subject to the right of the Bank and the
Company, in their sole discretion, to accept or reject any such orders in whole
or in part at the time of receipt of an order or as soon as practicable
following the Public Offering Expiration Date.
Community Offering
The Plan of Conversion provides that the Company may offer Common Stock
remaining after the Subscription Offering in a Community Offering with a
preference given to natural persons residing in Orange County, New York. Any
order received in the Community Offering, if held, will receive a lower priority
than orders in the Subscription Offering by persons exercising Subscription
Rights. If a Community Offering is held, Common Stock sold in the Community
Offering will be sold at the same price as shares sold in the Subscription
Offering. The Company and the Bank have the right to reject, in whole or in
part, in their sole discretion, any orders for Common Stock in a Community
Offering.
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Additional Purchase Restrictions
The Plan provides for certain additional limitations on the purchase of
the Common Stock by eligible subscribers and others in the Conversion. Each
purchaser must purchase a minimum of 25 shares. No person (or persons through a
single account), together with any associate or group of persons acting in
concert, may subscribe for or purchase more than 15,000 shares of Common Stock
($150,000), except for the Employee Plans which may purchase up to 10% of the
Common Stock issued in the Conversion, but currently intend to purchase 8% of
the Common Stock issued in the Conversion. Depending on market conditions and
the results of the Offerings, the Board of Directors, in its sole discretion,
may increase or decrease the purchase limitation without the approval of the
depositors of the Bank and without resoliciting subscribers except as described
below, provided that the maximum purchase limitation may not be increased to a
percentage in excess of 5%. The maximum purchase limitation can be further
increased to 9.99% if the amount by which subscriptions exceed 5% does not, in
the aggregate, exceed 10%. If the maximum purchase limit is increased,
subscribers who submit orders for $150,000 of Common Stock will be resolicited
and given an opportunity to increase their orders.
The OTS regulations governing the Conversion limit the number of shares
that officers and directors and their associates may purchase. In the aggregate,
the officers and directors of the Bank or their associates may not purchase more
than 34% of the shares of the Common Stock issued in the Conversion. The
directors and officers of the Bank and the Company are not deemed to be acting
in concert solely by reason of their being directors and officers of the Bank or
the Company.
In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the Valuation Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority: (i) to fill the Employee Plans' subscription of up to 8% of
the Adjusted Maximum number of shares; (ii) to satisfy other unfilled
subscriptions in the order of priority set forth above.
The term "associate" of a person is defined in the Plan to mean (i) any
corporation or organization (other than the Bank, the Company or a
majority-owned subsidiary of the Bank) of which such person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities, (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity (excluding tax-qualified employee
stock benefit plans or non-tax-qualified employee stock benefit plans in which a
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity and except that, for purposes of aggregating total
shares that may be held by senior officers and directors of the Bank or the
Company, the term "Associate" does not include any tax-qualified employee
benefit plan), and (iii) any relative or spouse of such person or any relative
of such spouse, who has the same home as such person or who is a director or
officer of the Bank or the Company, or any of its parents or subsidiaries. For
example, a corporation of which a person serves as an officer would be an
associate of such person, and therefore, all shares purchased by such
corporation would be included with the number of shares which such person
individually could purchase under the above limitations.
Each person purchasing shares of the Common Stock in the Conversion
will be deemed to confirm that such purchase does not conflict with the maximum
purchase limitation. In the event that such purchase limitation is violated by
any person (including any associate or group of persons affiliated or otherwise
acting in concert with such persons), the Company will have the right to
purchase from such person at the Purchase Price per share
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all shares acquired by such person in excess of such purchase limitation or, if
such excess shares have been sold by such person, to receive the difference
between the Purchase Price per share paid for such excess shares and the price
at which such excess shares were sold by such person. This right of the Company
to purchase such excess shares will be assignable by the Company.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the Bank.
For certain restrictions on the Common Stock purchased by directors and
officers, see "--Restrictions on Transferability of Subscription Rights and
Common Stock." In addition, under guidelines of the NASD, members of the NASD
and their associates are subject to certain restrictions on the transfer of
securities purchased in accordance with subscription rights and to certain
reporting requirements upon purchase of such securities.
Purchasing Common Stock
In order to exercise subscription rights in the Subscription Offering,
an eligible subscriber must deliver to the Bank, on or prior to the Subscription
Offering Expiration Date, (i) a Subscription Offering stock order form (a
"Subscription Order Form") fully completed and signed, (ii) a certification form
properly signed, and (iii) payment in full as described below. See "--Payment
for Shares". In order to subscribe in the Public Offering, if held, subscribers
must deliver to the Bank, on or prior to the Public Offering Expiration Date,
(i) a Public Offering stock order form (a "Public Order Form" and together with
the "Subscription Order Form, an "Order Form") with an account withdrawal
authorization, if applicable, and (ii) payment in full as described below. See
"--Payment for Shares." The Employee Plans will not be required to pay for the
shares at the time they subscribe in the Subscription Offering but rather may
pay for the shares upon consummation of the Conversion. All subscription rights
under the Plan will expire on the Subscription Offering Expiration Date, whether
or not the Bank has been able to locate each person entitled to such
subscription rights. The Bank and Company shall have the right, in their sole
discretion, to permit institutional investors to submit contractually
irrevocable orders in the Public Offering without payment in full. Once
tendered, subscription orders cannot be revoked without the consent of the Bank
and the Company unless the Conversion is not completed within 45 days after the
Subscription Offering Expiration Date.
If a Subscription Order Form (i) is not delivered to the addressee by
the United States Postal Service or the Bank is otherwise unable to locate the
addressee; (ii) is not received by the Bank or is received after the
Subscription Offering Expiration Date; (iii) is defectively completed or
executed; (iv) is not accompanied by the full required payment for the shares
subscribed for (including instances where a savings account or certificate of
deposit balance from which withdrawal is authorized is insufficient to fund the
amount of such required payment, but excluding subscriptions by the Employee
Plans) or, in the case of an institutional investor in the Public Offering, by
delivering irrevocable orders together with a legally binding commitment to pay
the full purchase price prior to 48 hours before the completion of the
Conversion; or (v) is not mailed pursuant to a "no mail" order placed in effect
by the account holder, then in any such event the related subscription rights
will lapse as though the person holding such rights failed to return the
completed Subscription Order Form within the time period specified. The Company
may, but will not be required to, waive any irregularity on any Order Form or
require the submission of corrected Order Forms or the remittance of full
payment for subscribed shares by such date as the Company may otherwise specify.
The waiver of an irregularity on an Order Form in no way obligates the Company
to waive any other irregularity on any other Order Form. Waivers will be
considered on a case by case basis. The Bank and the Company reserve the right
in their sole discretion to accept or reject orders received on photocopies or
facsimile Order Forms, or whose payment is to be made by wire transfer or
payment from private third parties. The interpretation by the Bank or Company of
the terms and conditions of the Plan and of the acceptability of the Order Forms
will be final, subject to the authority of the OTS.
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To ensure that each purchaser receives a Prospectus at least 48 hours
before the Subscription Offering Expiration Date or, if applicable, the Public
Offering 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 an Order Form
will confirm receipt or delivery in accordance with Rule 15c2-8. Order Forms
will only be distributed with a Prospectus.
For subscriptions to be valid, payment for all subscribed shares, at
$10.00 per share, will be required to accompany all properly completed Order
Forms, on or prior to the applicable expiration date, unless such date is
extended by the Bank or the Company. Employee Plans subscribing for shares in
the Subscription Offering may pay for such shares upon consummation of the
Conversion. Payment for shares of Common Stock may be made (i) in cash, if
delivered in person, (ii) by check or money order, or (iii) for shares of Common
Stock subscribed for in the Subscription Offering, by authorization of
withdrawal from savings accounts (including certificates of deposit) maintained
with the Bank. For orders or subscriptions of $25,000 or more, payments must be
made by bank check, money order or withdrawal authorization, if applicable, from
an account with sufficient collected funds. Payments made in cash or by check or
money order will be placed in a segregated account and interest will be paid by
the Bank at the passbook savings account rate as of the date of this prospectus,
from the date payment is received until the Conversion is completed or
terminated. An executed Order Form, once received by the Company, may not be
modified, amended, or rescinded without the consent of the Bank, unless the
Conversion is not completed within 45 days after the conclusion of the
Subscription Offering, in which event subscribers may be given the opportunity
to increase, decrease, or rescind their subscriptions for a specified period of
time. In the event that the Conversion is not consummated for any reason, all
funds submitted pursuant to the Offerings will be promptly refunded with
interest as described above.
Appropriate means by which withdrawals from deposit accounts may be
authorized are provided in the Subscription Order Form. Once such a withdrawal
has been authorized, none of the designated withdrawal amount may be used by a
subscriber for any purpose other than to purchase the Common Stock for which a
subscription has been made until the Conversion has been completed or
terminated. In the case of payments authorized to be made through withdrawal
from savings or certificates of deposit, all sums authorized for withdrawal will
continue to earn interest at the contract rate until the Conversion has been
completed or terminated. Interest penalties for early withdrawal applicable to
certificates of deposit will not apply to withdrawals authorized for the
purchase of shares, however, if a partial withdrawal results in a certificate of
deposit with a balance less than the applicable minimum balance requirement, the
certificate shall be canceled at the time of withdrawal, without penalty, and
the remaining balance will earn interest at the passbook savings account rate
subsequent to the withdrawal.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Offerings, provided that such IRAs are not
maintained at the Bank. Persons with IRAs maintained at the Bank must have their
accounts transferred to an unaffiliated institution or broker to purchase shares
of Common Stock in the Offerings. Instructions on how to transfer self-directed
IRAs maintained at the Bank can be obtained from the Stock Center located at the
Bank's main office.
Federal regulations prohibit the Bank from lending funds or extending
credit to any person to purchase the Common Stock in the Conversion.
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Conversion will be mailed to the persons entitled thereto at the
address noted on the Order Form, as soon as practicable following consummation
of the Conversion. Any certificates returned as undeliverable will be held until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law.
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Until certificates for the Common Stock are available and delivered to
subscribers, subscribers may not be able to sell the shares of stock for which
they subscribed.
Marketing Arrangements
The Company and the Bank have retained Capital Resources, a
broker-dealer registered with the SEC and a member of the NASD to consult with
and advise the Company and the Bank and to assist, on a best efforts basis, in
the distribution of the Common Stock in the Conversion. The services Capital
Resources will perform include: (i) training and educating the Company's and the
Bank's employees regarding the mechanics and regulatory requirements of the
stock conversion process; (ii) conducting information meetings for potential
subscribers, if necessary; (iii) managing the sales efforts in the Offerings;
(iv) assisting in the collection of proxies from depositors for use at the
Special Meeting; and (v) keeping records of subscriptions and orders for Common
Stock. Capital Resources will receive for its services a fee of 2.0% of the
total dollar amount of Common Stock sold in the Offerings, excluding purchases
by directors, officers and employees of the Bank and the Company and their
immediate family members, and the ESOP. If selected dealers are utilized in
connection with the Offerings, the Company will pay a fee (negotiated at such
time) to such selected dealers and a management fee to Capital Resources of 1.0%
of the shares sold by an NASD member firm pursuant to a selected dealer's
agreement. The fee to be negotiated with the selected dealers is expected to be
approximately 4.0% of the total dollar amount sold through selected dealers.
Capital Resources will also be reimbursed for its legal fees and for reasonable
out-of-pocket expenses. The Bank and the Company have agreed to indemnify
Capital Resources, to the extent allowed by law, for reasonable costs and
expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act. Capital Resources has received fees
totaling $45,000 for consulting and advisory services relating to the
Conversion, which fees will be credited against marketing fees payable to
Capital Resources. Capital Resources' legal and out of pocket expenses will not
exceed $55,000. See "Pro Forma Data" for further information regarding expenses
of the Conversion. Capital Resources is affiliated with CRG.
The Common Stock will be offered in the Offerings principally by the
distribution of this prospectus and through activities conducted at a Stock
Center located at the Bank's main office, in an area that is not publicly
accessible. The Stock Center is expected to operate during normal business hours
throughout the Offerings. It is expected that a registered representative
employed by Capital Resources will be working at, and supervising the operation
of, the Stock Center. Capital Resources will be responsible for overseeing the
mailing of materials relating to the Offerings, responding to questions
regarding the Conversion and the Offerings and processing Order Forms. It is
expected that Bank and Company personnel will be present in the Stock Center to
assist Capital Resources with clerical matters and to answer questions related
solely to the business of the Bank.
Directors and executive officers of the Company may participate in the
solicitation of offers to purchase Common Stock in jurisdictions where such
participation is not prohibited. Other employees of the Company and the Bank may
participate in the Offerings 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. Questions of prospective purchasers will be directed
to executive officers of the Company or registered representatives of Capital
Resources. The Company will rely on Rule 3a4-1 promulgated under the Exchange
Act, and sales of Common Stock will be conducted in accordance with Rule 3a4-1,
so as to permit officers, directors, and employees to participate in the sale of
Common Stock. No officer, director, or employee of the Company or the Bank will
be compensated in connection with such person's solicitations or other
participation in the
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Offerings by the payment of commissions or other remuneration based either
directly or indirectly on transactions in the Common Stock.
The Company will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for the Common Stock pursuant to the Plan reside. However, no person will be
offered or allowed to purchase any Common Stock under the Plan if he or she
resides (a) in a foreign country or (b) in a state of the United States with
respect to which any of the following apply: (i) a small number of persons
otherwise eligible to subscribe for shares under the Plan reside in such state;
(ii) the granting of subscription rights or offer or sale of shares of Common
Stock to such persons would require the Bank, the Company, or its employees to
register, under the securities laws of such state, as a broker or dealer or to
register or otherwise qualify its securities for sale in such state; or (iii)
such registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of subscription
rights to any such person.
Participation by the Board and Senior Management
The following table sets forth certain information as to the intended
purchases of Common Stock by each director and executive officer of the Bank and
by all directors and executive officers as a group, including their
"associates." The directors and executive officers of the Bank have expressed
their intentions to purchase an aggregate of approximately $576,450 of Common
Stock in the Subscription Offering, representing 3.99% and 2.56% at the minimum
and 15% above the maximum of the Valuation Range, respectively. For purposes of
the following table, it has been assumed that 1,700,000 shares (the midpoint of
the Valuation Range) of the Common Stock will be sold at $10.00 per share and
that sufficient shares will be available to satisfy subscriptions in all
categories. Shares purchased by the ESOP which may be allocated to executive
officers are excluded.
<TABLE>
<CAPTION>
Number Aggregate
of Purchase Percent
Name Position Shares Price of Shares
- ---- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
Clifford E. Kelsey, Jr. President, Chief Executive 10,000 $100,000 0.59%
Officer and Director
Richard C. Durland Executive Vice President 5,000 50,000 0.29%
and Director
Gene J. Gengel Director 10,000 100,000 0.59%
Thomas V. Guarino Director 12,000 120,000 0.70%
Stephen O. Hopkins Director 2,000 20,000 0.12%
Roy L. Lippincott Director 10,000 100,000 0.59%
Herbert C. Mueller Director 7,500 75,000 0.44%
Stephen W. Dederick Chief Financial Officer 25 250 -
Diane D. King Senior Vice President 1,000 10,000 0.06%
Jenny M. Ford Vice President and Secretary 120 1,200 0.01%
-------- ------------ -----
Total executive officers
and directors (10 persons) 57,645 $576,450 3.39%
====== ======== ====
</TABLE>
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Risk of Delay in Consummating the Conversion.
The completion of the sale of the Common Stock will be dependent, in
part, upon the Bank's operating results and market conditions at the time of the
Offerings. Under the Plan, all shares offered in the Conversion must be sold and
the Conversion be completed within 24 months after the date of the Special
Meeting. While the Bank and the Company anticipate completing the Conversion
within this period, if the Boards of Directors of the Bank and the Company are
of the opinion that economic conditions generally or the market for publicly
traded thrift institution stocks make undesirable a sale of the Common Stock,
then the Offerings may be delayed until such conditions improve.
A material delay in the completion of the sale of shares with an
aggregate purchase price equal to at least the minimum of Valuation Range may
result in a significant increase in the costs of completing the Conversion.
Significant changes in the Bank's operations and financial condition, the
aggregate market value of the shares to be issued in the Conversion and general
market conditions may occur during such material delay. In the event the
Conversion is not consummated within 24 months after the date of the Special
Meeting, the Bank would charge accrued Conversion costs to then current period
operations.
Stock Pricing and Number of Shares to be Issued
Capital Resources Group, Inc. ("CRG") a financial consulting and
appraisal firm that is experienced in the evaluation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by the Bank to prepare an appraisal (the "Appraisal") of the estimated
pro forma market value of the Common Stock to be sold pursuant to the
Conversion. CRG will receive a fee of $30,000 for its appraisal and to assist in
the preparation of other material and will be reimbursed for reasonable
out-of-pocket expenses, up to $5,000. CRG will receive a fee of $5,000 for any
appraisal update. In addition, CRG will receive a fee of $30,000 plus up to an
additional $10,000 in expenses for its assistance with record management and
proxy solicitation services in connection with the Conversion. The Bank has
agreed to indemnify CRG under certain circumstances against liabilities and
expenses (including certain legal fees) arising out of or based on any
misstatement or untrue statement of a material fact contained in the information
supplied by the Bank to CRG, except where CRG is determined to have been
negligent or failed to exercise due diligence in the preparation of the
appraisal. CRG is independent of the Company and the Bank but is affiliated with
Capital Resources.
The Appraisal contains an analysis of a number of factors including,
but not limited to, the Bank's financial condition and operating trends, the
competitive environment within which the Bank operates, operating trends of
certain thrift institutions and savings and loan holding companies, relevant
economic conditions, both nationally and in the State of New York which affect
the operations of thrift institutions, and stock market values of certain
institutions. In addition, CRG has advised the Bank that it has considered and
will consider the effect of the additional capital raised by the sale of the
Common Stock on the estimated aggregate pro forma market value of such shares.
The Board of Directors has reviewed the Appraisal, including the stated
methodology of CRG and the assumptions used in the preparation of the Appraisal.
The Board of Directors is relying upon the expertise, experience and
independence of CRG and is not qualified to determine the appropriateness of the
assumptions or the methodology. The Appraisal has been filed as an exhibit to
the registration statement of which this prospectus is a part. See "Additional
Information."
On the basis of the above, CRG has determined, in its opinion, that as
of March 14, 1997 the estimated aggregate pro forma market value of the Common
Stock to be issued in the Conversion was
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within the Valuation Range of from $14,450,000 to $19,550,000 with a midpoint of
$17,000,000. The Company has determined to offer the shares in the Conversion at
a price of $10.00 per share. Therefore, the Company expects to issue, and is
offering in the Offerings, from 1,445,000 to 1,955,000 shares of Common Stock,
subject to increase to up to 2,248,250 shares of Common Stock as described
below.
CRG will update the Appraisal prior to consummation of the Conversion.
If the final estimated aggregate pro forma market value of the Common Stock to
be issued in the Conversion is between $19,550,000 (the maximum of the Valuation
Range) and $22,482,500 (15% above the maximum of the Valuation Range), the total
number of shares being offered may be adjusted and a new Valuation Range may be
established without resolicitation of subscribers and without a new vote of
Bank's depositors, unless required by the OTS. Any adjustments to the Valuation
Range as a result of market and financial conditions would be subject to OTS
review. If the final estimated value is less than $14,450,000 or more than
$22,482,500, then subscribers will be resolicited and, unless the OTS permits
otherwise, a new vote of the Bank's depositors to approve the Conversion will be
required. No sale of the shares will take place unless prior thereto CRG
confirms to the OTS that, to the best of CRG's knowledge and judgment, nothing
of a material nature has occurred which would cause it to conclude that the
aggregate Purchase Price of all shares to be sold in the Conversion is
incompatible with its estimate of the aggregate pro forma market value of the
Common Stock at the time of the sale.
The Appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the Common
Stock. In preparing the Appraisal, CRG has relied upon and assumed the accuracy
and completeness of financial and statistical information provided by the Bank.
CRG did not independently verify the financial statements and other information
provided by the Bank, nor did CRG value independently the assets and liabilities
of the Bank. The Appraisal considers the Bank only as a going concern and should
not be considered as an indication of the liquidation value of the Bank.
Moreover, because the 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 the Common Stock will
thereafter be able to sell such shares at prices corresponding to the Valuation
Range at the time of the Offerings.
An increase in the total number of shares to be issued in the
Conversion would decrease both a subscriber's ownership interest and the pro
forma equity and net income on a per share basis while increasing the pro forma
equity and net income on an aggregate basis. In the event of a material
reduction in the valuation, the Bank may decrease the number of shares to
reflect the reduced valuation. A decrease in the number of shares to be issued
in the Conversion would increase both a subscriber's ownership interest and the
pro forma equity on a per share basis while decreasing equity on an aggregate
basis.
Restrictions on Repurchase of Stock
Generally, within one year following the Conversion, the Company may
not repurchase Common Stock, and in the second and third year following the
Conversion, the Company may only repurchase Common Stock as part of an
open-market stock repurchase program in an amount up to 5% of the outstanding
stock during each of those two years, provided the repurchase does not cause the
Bank to become undercapitalized and at least 10 days prior notice of the
repurchase is provided to the OTS. The OTS may disapprove the repurchase program
upon a determination that (1) the repurchase program would adversely affect the
financial condition of the Bank, (2) the information submitted is insufficient
upon which to base a conclusion as to whether the financial condition would be
adversely affected, or (3) a valid business purpose was not demonstrated.
However, the Regional Director of the OTS, on a case by case basis, may permit
repurchases after six months following the Conversion and may permit additional
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repurchases during the second and third year. In addition, SEC rules also
restrict the method, time, price, and number of shares of Common Stock that may
be repurchased by the Company and affiliated purchasers. If, in the future, the
rules and regulations regarding the repurchase of stock are liberalized, the
Company may utilize the rules and regulations then in effect.
Restrictions on Transferability of Subscription Rights and Common Stock
The OTS conversion regulations prohibit any person with subscription
rights, including Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members of the Bank, 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 subscribing
for shares will be required to certify that such person is purchasing shares
solely for his or her own account and that such person 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 if they become aware of the transfer of subscription rights and will
not honor orders known by them to involve the transfer of such rights.
Shares of the Common Stock purchased by directors and officers of the
Company shall be subject to the restriction that said shares shall not be sold
for a period of one year following completion of the Conversion, except for a
disposition of shares in the event of the death of the stockholder or in any
exchange of the Common Stock in connection with a merger or acquisition of the
Company approved by the regulatory authorities. Accordingly, shares of the
Common Stock issued by the Company to directors and officers shall bear a legend
giving appropriate notice of the foregoing restriction, and, in addition, the
Company will give appropriate instructions to the transfer agent for the Common
Stock with respect to the applicable restriction relating to the transfer of any
restricted stock. Any shares issued to directors and officers as a stock
dividend, stock split, or otherwise with respect to restricted stock shall be
subject to the same restrictions.
For a period of three years following the Conversion, no director or
officer of the Bank, the Company or their associates may, without the prior
approval of the OTS, purchase any shares of Common Stock other than from or
through a broker or dealer registered with the SEC unless the purchase involves
more than 1% of the outstanding shares of Common Stock through an arm's length
transaction.
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the
Board of Directors of the Bank will be final, however, such interpretations
shall have no binding effect on the OTS. The Plan provides that, if deemed
necessary or desirable by the Board of Directors, the Plan may be substantively
amended by the Board of Directors as a result of comments from the OTS or
otherwise, prior to the solicitation of proxies from the Bank's depositors and
at any time thereafter with the concurrence of the OTS, except that in the event
that the regulations under which the Plan was adopted are liberalized subsequent
to the approval of the Plan by the OTS and the Bank's depositors at the Special
Meeting, the Board of Directors may amend the Plan to conform to the regulations
without further approval of the OTS or the depositors of the Bank to
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the extent permitted by law. An amendment to the Plan that would result in a
material adverse change in the terms of the Conversion would require a
resolicitation.
Conditions and Termination
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes of the
depositors of the Bank eligible to be cast at the Special Meeting and the sale
of all shares of Common Stock within 24 months following such approval of the
Plan. If these conditions are not satisfied, the Plan will be terminated and the
Bank will continue its business in the mutual form of organization. The Plan may
be terminated by the Board of Directors at any time prior to the Special Meeting
and, with the approval of the OTS, by the Board of Directors at any time
thereafter.
Other
All statements made in this prospectus are qualified by the contents of
the Plan, the material terms of which are set forth in this prospectus. The Plan
(without exhibits) is attached to the Proxy Statement distributed in connection
with the Special Meeting. Copies of the Plan are also available from the Bank
and it should be consulted for further information.
Adoption of the Plan by the Bank's depositors authorizes the Board of
Directors to amend or terminate the Plan.
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
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 stock charter 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.
Restrictions in the Company's Certificate of Incorporation and Bylaws
General. 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.
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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 acting in such capacity, 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 total number
of authorized directorships, whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is presented
to the Board for adoption (referred to as the "Whole Board"). 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 division of
the Board into three classes 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 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 stockholders 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 holder's choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
certificate of incorporation expressly provides that there shall not be
cumulative voting, which makes it more difficult for stockholders with a
minority interest in the Company to obtain representation on the Board of
Directors. 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. 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.
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Authorized Shares. The certificate of incorporation authorizes the
issuance of 4,500,000 shares of Common Stock and 500,000 shares of preferred
stock. The shares of Common Stock and preferred stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with flexibility 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 and the issuance of additional shares
upon exercise of stock options or to fund the ISAP if the ISAP is not funded
through the purchase of shares on the open market.
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) unless (i) 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) the proposed transaction meets certain conditions which are
designed to afford the stockholders a fair price in consideration for their
shares. 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 the Company
or subsidiary owned directly or indirectly, by an Interested Stockholder or
Affiliate thereof.
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Evaluation of Offers. The certificate of incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer 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 of 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 of the Company, 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 who intends to bring on any business to be conducted at an annual
stockholders' 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
such 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.
Anti-takeover Effects of Management Compensation Arrangements
The Company and the Bank have entered into agreements with key officers
which will provide such officers 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 Contracts," and "--Employee
Retention Agreements." Furthermore, in the future, the Stock Option Plan and
ISAP 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, but such provisions are currently not permitted under OTS
regulations. See "Management of the Bank--Benefit Plans--Stock Option Plan," and
"--Benefit Plans--Incentive Stock Award Plan." These provisions may make it more
difficult for companies or persons
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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 Directors and executive officers of the Bank intend to purchase in
the aggregate approximately 3.99% or 2.56% of the shares of the Common Stock
based on the minimum and 15% above the maximum, respectively, of the Valuation
Range. In addition, the ESOP intends to purchase 8% of the Common Stock issued
in the Conversion. The Company anticipates that it will reacquire 4% of the
Common Stock issued in the Conversion to fund the ISAP and expects to grant
options to purchase shares equal to 10% of the Common Stock issued in the
Conversion under the Stock Option Plan to Directors and executive officers. As a
result, assuming that the ISAP awards and stock options are satisfied out of
shares repurchased by the Company, Directors, executive officers and employees
have the potential to control the voting of approximately 25.99% of the
Company's Common Stock at the minimum and 24.56% at 15% above the maximum of the
Valuation Range, thereby enabling them to prevent transactions requiring the
approval of at least 80% of the Company's outstanding shares of voting stock
described above.
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
Business Combinations. In general, Section 203 of the Delaware General
Corporation Law ("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 Stock Charter and New Bylaws
Although the Board of Directors of the Bank is not aware of any effort
that might be made to obtain control of the Bank after Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions 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 Stock Charter 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), other than the Company or a
tax-qualified employee benefit plan such as the ESOP, 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. If 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 Stock Charter 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 Stock Charter, 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.
Regulatory Restrictions
The Plan of Conversion prohibits 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 Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits 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.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or the
Company; or (iii) offers which are not opposed by the Board of Directors of the
Bank and which receive the prior approval of the OTS. Such prohibition is also
applicable to the acquisition of the stock of the Company. Such acquisition may
be disapproved by OTS if it is found, among other things, that the proposed
acquisition (a) would frustrate the purposes of the provisions of the
regulations regarding conversions, (b) would be manipulative or deceptive, (c)
would subvert the fairness of the conversion, (d) would be likely to result in
injury to the savings institution, (e) would not be consistent with economical
home financing, (f) would otherwise violate law or regulation, or (g) would not
contribute to the prudent deployment of the savings institution's conversion
proceeds. If any person, directly or indirectly, violates this regulation, the
securities beneficially owned by such person in excess of 10% shall
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not be counted as shares entitled to vote and shall not be voted by any person
or counted as voting shares in connection with any matters submitted to a vote
of stockholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the 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, directly or indirectly through control of 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 "control,"
as that term is defined in OTS regulations, of a federally-insured savings
institution 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 by the OTS if 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; or (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 Company stock are not limited to three years after the Conversion 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.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 4,500,000 shares of Common Stock
having a par value of $.01 per share and 500,000 shares of preferred stock
having a par value of $.01 per share (the "Preferred Stock"). The Company
currently expects to issue up to 1,955,000 shares of Common Stock (based on the
maximum of the Valuation Range, or 2,248,250 shares in the event of an increase
of 15% in the maximum of the Valuation Range) 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, except for
shares that may be issued upon the exercise of stock options which may be
granted pursuant to the Stock Option Plan. The Company may also elect to fund
awards under the ISAP with authorized but unissued 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 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
or any other government agency.
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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." 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 federal mutual savings bank, corporate powers and control of the
Bank are vested in its Board of Directors, who elect the officers of the Bank
and who fill any vacancies on the Board of Directors 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 liquidation account (see
"The Conversion--Effects of Conversion on Depositors and Borrowers--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.
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. See
"Management of the Company--Indemnification and Liability of Directors."
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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
The Federal Stock Charter of the Bank, to be effective upon the
Conversion authorizes the issuance of capital stock consisting of 4,500,000
shares of common stock, par value $0.01 per share, and 500,000 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 of the
Bank up to the amount authorized by the Federal Stock Charter without the
approval of the Bank's stockholders, except to the extent that such approval is
required by governing law. All of the issued and outstanding common stock of the
Bank (which is currently expected to be 1,000 shares) 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 Company as the holder of the Bank's common stock will be
entitled to receive 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--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 Company, as the
holder 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. Stockholders of the Bank will not be permitted to cumulate
votes for the election of directors. See "Restrictions on Acquisition of the
Company and the Bank--Restrictions in the Company's Certificate of Incorporation
and Bylaws."
Liquidation. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of its 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
liquidation account, all assets of the Bank available for distribution in cash
or in kind. If additional preferred stock is issued subsequent to Conversion,
the holders thereof may also have priority over the holders of common stock in
the event of liquidation or dissolution.
123
<PAGE>
Preemptive Rights and 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. The common stock will not be subject to redemption.
Upon receipt by the Bank of the full specified purchase price therefor, the
common stock will be fully paid and nonassessable.
Preferred Stock
None of the shares of the Bank's authorized preferred stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
EXPERTS
The financial statements of the Bank and its subsidiaries as of
September 30, 1996 and 1995, and for each of the years in the three-year period
ended September 30, 1996, have been included herein in reliance upon the report
of Nugent & Haeussler, P.C., 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.
CRG 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
Serchuk & Zelermyer, LLP, White Plains, New York, counsel to the Bank and
Company. Certain legal matters will be passed upon for Capital Resources by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.
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 Appraisal, 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 Appraisal 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
124
<PAGE>
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 conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 10 Exchange Place, Jersey City, New Jersey 07302.
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 of Conversion, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion.
Copies of the certificate of incorporation and the bylaws of the
Company and the Federal Stock Charter and Bylaws of the Bank are available
without charge from the Bank upon written or oral request.
125
<PAGE>
GOSHEN SAVINGS BANK
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report ................................................. F-2
Balance Sheets at September 30, 1995 and 1996
and at December 31, 1996 ................................................ F-3
Statements of Income for the Years Ended September 30, 1994, 1995 and 1996 and
for the three months ended December 31, 1995 and 1996 ................... 35
Statements of Equity for the Years Ended September 30, 1994, 1995 and 1996
and the three months ended December 31, 1996 ............................ F-4
Statements of Cash Flows for the Years Ended September 30, 1994, 1995 and 1996
and the three months ended December 31, 1995 and 1996 ................... F-5
Notes to Financial Statements ................................................ F-9
</TABLE>
All data as of and for the three month periods ended December 31, 1995 and 1996
are unaudited
All schedules are omitted because the required information is not applicable or
is included in the Financial Statements and related Notes.
The Financial Statements of the Company have been omitted because the Company
has not yet issued any stock, has no assets, no liabilities and has not
conducted any business other than of an organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Trustees
Goshen Savings Bank
1 South Church Street
Goshen, New York 10924
We have audited the accompanying balance sheets of the Goshen Savings
Bank (the "Bank") as of September 30, 1996 and 1995, and the related statements
of income, changes in equity and cash flows for each of the years in the
three-year period ended September 30, 1996. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Goshen Savings
Bank at September 30, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three year period ended September
30,1996 in conformity with generally accepted accounting principles.
Respectfully submitted,
/s/ Nugent & Haeussler, P.C.
- ---------------------------------
NUGENT & HAEUSSLER, P. C.
December 13, 1996
Newburgh, New York
F-2
<PAGE>
GOSHEN SAVINGS BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Assets
------
Cash and due from banks (net of Nationar
loss reserve of $232,223 at
September 30, 1995) $ 2,078,800 $ 2,963,955 $ 3,394,554
Federal funds sold 3,400,000 1,720,000 3,800,000
------------ ------------ ------------
Cash and cash equivalents 5,478,800 4,683,955 7,194,554
Investment securities:
Held to maturity (approximate market
value of $23,710,629 at
September 30, 1995) (Note 2) 0 0 23,749,441
Available for sale (Notes 3 and 4) 21,015,886 23,080,708 4,094,239
Mortgage backed securities, held to
maturity (approximate market value of
$6,252,401 at December 31, 1996 and
$6,529,210 in 1996 and
$4,492,219 in 1995) (Note 5) 6,173,152 6,473,727 4,403,974
Loans receivable, net (Notes 6 and 7) 61,013,334 58,726,543 57,919,411
Banking house and equipment (Note 8) 2,226,595 2,261,456 2,325,766
Accrued interest receivable (Note 9) 647,381 664,818 803,078
Prepaid expenses and other assets 411,285 432,282 550,473
------------ ------------ ------------
Total Assets $ 96,966,433 $ 96,323,489 $101,040,936
============ ============ ============
Liabilities and Equity
----------------------
Liabilities:
Deposits (Note 10) $ 82,583,319 $ 83,441,831 $ 88,092,701
Advance payments by borrowers 132,645 53,863 98,584
Accrued expenses and other liabilities 1,144,277 1,080,614 752,626
Other borrowings (Note 11) 1,000,000 0 1,000,000
------------ ------------ ------------
Total Liabilities 84,860,241 84,576,308 89,943,911
------------ ------------ ------------
Commitments and Contingent Liabilities
(Note 15)
Equity:
Retained earnings 11,899,037 11,603,735 11,045,778
Net unrealized gain on securities
available for sale (net of tax) 207,155 143,446 51,247
------------ ------------ ------------
Total Equity 12,106,192 11,747,181 11,097,025
------------ ------------ ------------
Total Liabilities and Equity $ 96,966,433 $ 96,323,489 $101,040,936
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
GOSHEN SAVINGS BANK
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
Unrealized Gain
On Investment
Retained Securities Available
Earnings For Sale, Net Total
-------- ------------- -----
<S> <C> <C> <C>
Balance, October 1, 1993 $11,196,877 $ 0 $11,196,877
Net income 310,873 0 310,873
----------- -------- -----------
Balance, September 30, 1994 11,507,750 0 11,507,750
Effect of adoption of SFAS 115 0 51,247 51,247
Net (loss) (461,972) 0 (461,972)
----------- -------- -----------
Balance, September 30, 1995 11,045,778 51,247 11,097,025
Net income 557,957 0 557,957
Net change in unrealized gain
on investment securities
available for sale, net of 0 92,199 92,199
---------- -------- -----------
income taxes
Balance, September 30, 1996 11,603,735 143,446 11,747,181
Net income (unaudited) 295,302 0 295,302
Net change in unrealized gain
on investment securities
available for sale, net of
income taxes (unaudited) 0 63,709 63,709
----------- -------- -----------
Balance, December 31, 1996 $11,899,037 $207,155 $12,106,192
=========== ======== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
GOSHEN SAVINGS BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 557,957 $ (461,972) $ 310,873
Adjustments to reconcile
net income to net cash provided
by operating activities:
Depreciation 142,406 141,884 147,928
Provision for loan losses 23,500 29,000 25,000
Provision for Nationar
loss contingency (232,223) 232,223 0
Write-down on Nationar stock
and debentures 0 46,400 0
Net gain on sale of other
real estate owned (4,579) (2,614) 0
Gain on sale of investment securities
held to maturity 0 (13,861) (19,727)
Gain on sale of investment
securities available for sale (114,681) 0 0
Unrealized loss on trading
securities 0 0 86,672
Other assets 256,451 (23,211) 129,564
Net amortization on investment
securities held to maturity 0 554,012 842,684
Net amortization on investment
securities available for sale 222,033 5,923 0
Net amortization (accretion) on
mortgage-backed securities
held to maturity 1,977 (4,787) (1,195)
Increase (decrease) in accrued
expenses and other liabilities 261,606 496,675 (27,040)
------------ ------------ ------------
Net cash provided by operating
activities 1,114,447 999,672 1,494,759
------------ ------------ ------------
Cash flows from investing activities:
Purchases of mortgage-backed
securities held to maturity (3,652,592) (2,578,114) (982,881)
Proceeds from principal
paydowns of mortgage-backed
securities held to maturity 1,580,861 404,739 511,090
Proceeds from maturity and
redemption of investment securities
held to maturity 0 14,319,522 16,555,000
Proceeds from maturity and redemption of
investment securities available for sale 11,510,633 0 0
Purchase of investment securities
held to maturity 0 (6,910,944) (10,215,774)
Purchase of investment securities available
for sale (7,400,887) (2,079,575) 0
Proceeds from sale of investment
securities held to maturity 0 1,035,509 3,553,460
Proceeds from sale of investment securities
available for sale 701,456 0 0
Net increase (decrease) in loans (988,053) (819,600) (6,154,918)
Proceeds from sale of loans 0 0 (3,480,520)
Capital expenditures (78,096) (56,777) (265,371)
Proceeds from sale of other
real estate owned 165,000 45,000 0
------------ ------------ ------------
Net cash provided by
investing activities 1,838,322 3,359,760 (479,914)
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
GOSHEN SAVINGS BANK
STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Cash flow from financing activities:
Net increase (decrease) in demand,
statement passbook, money market and
NOW deposit accounts (4,650,870) 1,696,678 (2,407,369)
Increase (decrease) in advances from borrowers for taxes
and insurance (44,721) 442 55,302
Net increase (decrease) in
other borrowings (1,000,000) (1,000,000) 2,000,000
------------ ------------ ------------
Net cash provided by (used in)
financing activities (5,695,591) 697,120 (352,067)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (2,742,822) 5,056,552 662,778
Cash and cash equivalents at
beginning of year 7,426,777 2,370,225 1,707,447
------------ ------------ ------------
Cash and cash equivalents
and end of year $ 4,683,955 $ 7,426,777 $ 2,370,225
============ ============ ============
Additional Disclosures:
Supplemental disclosures of cash flows information-cash
paid during year for:
Interest on other borrowings $ 82,900 $ 28,443 $ 3,193
Income taxes 119,523 (56,629) 370,537
Supplemental schedule of non-cash investing activities:
Reduction in loans receivable
resulting from the transfer
to real estate owned 157,421 42,386 0
Transfers of equity investment
securities to investment
securities trading portfolio 0 0 2,259,097
Transfers of investment
securities - held to maturity
to investment securities -
available for sale 20,912,562 0 0
Transfers of investment securities
- trading portfolio to investment
securities - available for sale 0 2,172,009 0
Change in unrealized gains
in investment securities -
available for sale 92,199 51,247 0
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
GOSHEN SAVINGS BANK
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1996 1995
----------- -----------
Cash flows from operating activities:
Net income $ 295,302 $ 98,060
Adjustments to reconcile
net income to net cash provided
by operating activities:
Depreciation 38,060 36,567
Provision for loan losses 0 13,500
Provision for Nationar
loss contingency 0 0
Write-down on Nationar stock
and debentures 0 0
Net gain on sale of other
real estate owned held to maturity 0 (4,579)
Gain on sale of investment
securities held to maturity 0 0
Gain on sale of investment securities
available for sale 0 0
Unrealized loss on trading
securities 0 0
Other assets 38,434 250,250
Net amortization on investment securities
held to maturity 0 74,912
Net amortization on investment securities
available for sale 21,295 7,324
Net accretion on mortgage-backed
securities held to maturity (2,353) (3,947)
Increase (decrease) in accrued
expenses and other liabilities 18,125 (9,441)
----------- -----------
Net cash provided by operating
activities 487,645 525,767
----------- -----------
Cash flows from investing activities:
Purchases of mortgage-backed securities
held to maturity 0 (1,107,534)
Proceeds from principal paydowns of
mortgage-backed securities held to maturity 302,930 199,833
Proceeds from maturity and
redemption of investment securities
held to maturity 0 3,299,587
Proceeds form maturity and redemption of
investment securities available for sale 3,234,638 0
Purchase of investment securities held to
maturity 0 (1,108,220)
Purchase of investment securities available
for sale (1,081,866) 0
Proceeds from sale of investment securities
held to maturity 0 0
Proceeds from sale of investment securities
available for sale 0 0
Net increase (decrease) in loans (2,286,791) (388,011)
Proceeds from sale of loans 0 0
Capital expenditures (3,199) (957)
Proceeds from sale of other
real estate owned 0 165,000
----------- -----------
Net cash provided by
investing activities 165,712 1,059,698
----------- -----------
See accompanying notes to financial statements.
F-7
<PAGE>
GOSHEN SAVINGS BANK
STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flow from financing activities:
Net increase (decrease in
demand, statement, passbook,
money market and NOW
deposit accounts (858,512) (312,729)
Increase (decrease) in advances from
borrowers for taxes and insurance 78,782 63,121
Net increase (decrease) in
other borrowings 1,000,000 0
------------ ------------
Net cash provided by (used in)
financing activities 141,488 (312,729)
------------ ------------
Net increase (decrease) in cash
and cash equivalents 794,845 1,272,736
Cash and cash equivalents at
beginning of year 4,683,955 7,426,777
------------ ------------
Cash and cash equivalents
and end of year $ 5,478,800 $ 8,699,513
============ ============
Additional Disclosures:
Supplemental disclosures of cash flows information-cash paid during
year for:
Interest on other borrowings $ 15,888 $ 0
Income taxes 39,050 0
Supplemental schedule of non-cash investing activities
Reduction in loans receivable
resulting from the transfer
to real estate owned 0 157,421
Transfers of equity investment securities
to investment securities
trading portfolio 0 0
Transfers of investment
securities-held to maturity to
investment securities - available for sale 0 20,912,562
Transfers of investment securities-trading
portfolio to investment securities-
available for sale 0 2,172,009
Change in unrealized gains in investment
securities available for sale 63,709 45,386
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
A. Organization
The Goshen Savings Bank (the "Bank"), is a mutual thrift. The
Bank is chartered under the laws of the State of New York. The
Bank provides banking services to individual and corporate
customers, with its business activities concentrated in Orange
County, New York.
A substantial portion of the Bank's loans are secured by real
estate located in Orange County in New York State. Accordingly,
the ultimate collectibility of a substantial portion of the
Bank's loan portfolio is dependent upon market conditions in
these market areas. In addition, other real estate owned, if
any, is also generally located in Orange County in New York
State.
B. Basis of Financial Statement Presentation
The accounting and reporting policies of the Bank conform in all
material respects to generally accepted accounting principles
and to general practice within the thrift industry.
The balance sheet as of December 31, 1996 and the related
statements of income and cash flows for the three month periods
ended December 31, 1996 and 1995 and changes in equity for the
three month period ended December 31, 1996 are unaudited and, in
the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation as of
December 31, 1996 and for the results for the unaudited periods
have been made.
C. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance
for losses on loans and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans in
connection with the determination of the allowances for losses
on loans and foreclosed real estate, management obtains
independent appraisals for significant properties.
While management uses available information to recognize losses
on loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the
Bank's allowance for losses on loans and foreclosed real estate.
Such agencies may require the Bank to recognize additions to the
allowances based on their judgments about information available
to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowance for losses
on loans and foreclosed real estate may change materially in the
near term.
F-9
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. [Continued}
D. Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash
equivalents include cash on hand and in banks, interest-earning
deposits and Federal funds sold with original maturities of
ninety days or less.
E. Investment Securities
Securities Held to Maturity
Government, Federal Agency, and Corporate debt securities that
management has the positive intent and ability to "hold until
maturity" are stated at cost, adjusted for premium amortization
and discount accretion, computed on a straight-line basis over
the life of the note to maturity. This method of amortization
differs from the interest method and results in immaterial
differences for reporting purposes.
Mortgage-backed securities represent participating interests in
pools of long-term first mortgage loans originated and serviced
by issuers of the securities. Mortgage-backed securities are
carried at unpaid principal balances, adjusted for unamortized
premiums and unearned discounts. Premiums and discounts are
amortized on a straight-line basis over the life of the pools
to maturity. This method of amortization differs from the
interest method and results in immaterial differences for
reporting purposes.
Securities Available for Sale
Securities to be held for indefinite periods of time including
securities that management intends to use as part of its
asset-liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, or other
similar factors are classified as "available for sale" and are
recorded at fair value with the unrealized appreciation or
depreciation, net of taxes reported separately as a component of
equity.
E. Investment Securities
Trading Securities
The third classification are "trading securities" which include
debt securities and equity securities purchased in connection
with the Bank's trading activities and as such are expected to
be sold in the near term. There are no investments in trading
securities on the books of the Bank at December 31, 1996,
September 30, 1996 and 1995.
Gains and losses on the sale of securities are determined using
the specific identification method.
F. Reclassification of Investment Securities
In November 1995, the Financial Accounting Standards Board
released its special report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities". This special report contained a provision
that allowed entities to, as of November 15, 1995, but no later
than December 31, 1995, to reassess the appropriateness of the
classifications of all securities held at that time. At the
Board of Trustees meeting December 14, 1995, approval was
granted to management to reclassify "all" investment securities
as available for sale and such reclassification was recorded
effective December 29, 1995.
F-10
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. [Continued}
G. Loans Receivable and Allowance for Loan Losses
Loans receivable are stated at the amount of unpaid principal,
less net deferred loan fees and the allowance for loan losses.
The allowance for loan losses is established through a provision
for loan losses charged to expense. Loans are charged against
the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb
losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors
as changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrowers'
ability to pay.
Accrual of interest is discontinued on a loan when management
believes that the borrowers' financial condition is such that
collection of interest is doubtful. This generally occurs when
payment of principal or interest is past due three months or
more and there is no insurance or guaranty as to payment.
G. Loans Receivable and Allowance for Loan Losses (Continued)
Effective January 1, 1995, the Bank adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan. "Under the
provision of SFAS No 114, a loan is considered impaired when
based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. SFAS No. 114
requires creditors to measure impairment of a loan based on the
present value of expected future cash flows discounted at the
loan's effective interest rate or at the loan's observable
market price or the fair value of the collateral if the loan is
collateral dependent. If the measure of the impaired loan is
less than the recorded investment in the loan, a creditor shall
recognize an impairment by recording a valuation allowance with
a corresponding charge to bad debt expense. This statement also
applies to restructured loans and eliminates the requirement to
classify loans that are in-substance foreclosures as foreclosed
assets except for loans where the creditor has physical
possession of the underlying collateral, but not legal title.
Effective January 1, 1996, the Bank also adopted SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," which amends SFAS No. 114 to allow
a creditor to use existing methods for recognizing interest
income on impaired loans. SFAS No. 114 is applicable to all
loans that are identified for evaluation of impairment, except
for, among other, large groups of smaller-balance homogenous
loans, such as residential mortgage loans and consumer
installment loans, that are collectively evaluated for
impairment and loans that are measured at fair value or the
lower of cost or fair value.
An insignificant payment delay, which is defined by the Bank as
up to 90 days, will not cause a loan to be classified as
impaired. In addition, a loan is not considered impaired when
payments are delayed but the Bank expects to collect all amounts
due, including accrued interest for the period of delay. All
loans identified as impaired are evaluated independently. The
Bank does not aggregate impaired loans for evaluation purposes.
Payments received on impaired loans are applied first to accrued
interest, if any, and then to principal.
F-11
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
H. Banking House and Equipment
Land is carried at cost. Banking house, furniture, fixtures and
equipment are stated at cost, less depreciation. Depreciation is
calculated using the straight-line method based upon the
estimated life of the related assets.
I. Investments in Real Estate (Real Estate Owned)
Real estate investments include properties acquired through
legal foreclosure and the properties secured by loans classified
as in-substance foreclosures. These properties are initially
recorded at the lower of cost or the fair value of the property
less estimated selling cost. Any resulting write-downs are
charged to the allowance for loan losses. Thereafter, these
properties are carried at the lower of cost or estimated fair
value less estimated selling cost, with any adjustments recorded
in a valuation allowance. There are no investments in real
estate on the books of the Bank at December 31, 1996, September
30, 1996 and 1995.
J. Income Taxes
In February 1992, the Financial Accounting Standards Board
issued SFAS No. 109, "Accounting for Income Taxes." Under the
asset and liability method of SFAS No. 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 basis. 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. Under SFAS No. 109, the
effect of deferred tax assets and liabilities of a change in tax
rates is recognized as income or expense in the period that
includes the enactment date.
Effective September 30, 1994, the Bank implemented Statement No.
109 with no material effects to the financial condition. The
Bank did not need to report any cumulative effect concerning
this change in the method of accounting.
K. Reclassifications
Amounts in the prior periods' financial statements are
reclassified whenever necessary to conform to current period
presentations.
F-12
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 2. INVESTMENT SECURITIES - HELD TO MATURITY.
As a result of the Board of Trustees resolution dated December 14,
1995, the Bank has no investment securities held to maturity at
December 31, 1996 or September 30, 1996. A summary comparison of
securities held to maturity by type as of September 30, 1995 is as
follows:
<TABLE>
<CAPTION>
September 30, 1995
------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Description Cost Gains Losses Value
----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
United States Treasury $ 5,833,552 $ 561 $ 33,214 $ 5,800,899
United States Government
Agencies 2,933,346 31,545 0 2,964,891
Corporate Debt Obligations 13,963,912 45,417 75,451 13,933,878
Municipal Debt
Obligations 98,753 2,433 0 101,186
Foreign Debt Obligations 919,878 0 10,103 909,775
----------- ---------- ---------- -----------
$23,749,441 $ 79,956 $ 118,768 $23,710,629
=========== ========== ========== ===========
</TABLE>
On the basis of estimated market values at September 30, 1995, there
is a net depreciation of $38,812 in investment securities.
The amortized cost and approximate fair value of investment
securities held to maturity at September 30, 1995, by contractual
maturity are shown below. Expected maturities will differ from
contractual maturities because certain issuers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
September 30, 1995
------------------
Amortized Approximate
Cost Fair Value
----------- -----------
Due within one year $ 9,469,074 $ 9,666,468
Due one year to five years 14,280,367 14,044,161
----------- -----------
$23,749,441 $23,710,629
=========== ===========
NOTE 3. INVESTMENT SECURITIES - AVAILABLE FOR SALE.
A summary comparison of securities available for sale as of December
31, 1996, September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
December 31, 1996 (Unaudited)
-----------------------------------------------------
Carrying Gross Gross Estimated
Value Unrealized Unrealized Fair
Description (Cost) Gains Losses Value
----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
United States Treasury $ 3,012,178 $ 10,741 $ 99 $ 3,022,820
United States Government
Agencies 2,972,372 42,243 0 3,014,615
Corporate Debt Obligations 11,569,417 87,105 6,828 11,649,694
Municipal Debt Obligations 98,753 1,840 0 100,593
Foreign Debt Obligations 406,720 0 1,712 405,008
Equity Securities 2,601,119 222,037 0 2,823,156
----------- ----------- ----------- -----------
$20,660,559 $ 363,966 $ 8,639 $21,015,886
=========== =========== ========== ===========
</TABLE>
F-13
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3. INVESTMENT SECURITIES - AVAILABLE FOR SALE. (Continued)
<TABLE>
<CAPTION>
September 30, 1996
------------------
Carrying Gross Gross Estimated
Value Unrealized Unrealized Fair
Description (Cost) Gains Losses Value
----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
United States Treasury $ 4,717,714 $ 4,808 $ 8,335 $ 4,714,187
United States Government
Agencies 2,967,353 18,507 2,120 2,983,740
Corporate Debt Obligations 12,042,427 47,229 14,750 12,074,906
Municipal Debt Obligations 98,753 1,451 0 100,204
Foreign Debt Obligations 407,293 0 2,937 404,356
Equity Securities 2,601,119 202,196 0 2,803,315
----------- ---------- ---------- -----------
$22,834,659 $ 274,191 $ 28,142 $23,080,708
=========== ========== ========== ===========
September 30, 1995
------------------
Carrying Gross Gross Estimated
Value Unrealized Unrealized Fair
Description (Cost) Gains Losses Value
----------- ----------- ----------- ---------- ---------
United States Treasury $ 2,050,796 $ 4,366 $ 1,332 $ 2,053,830
Corporate Equity Securities 1,956,584 116,697 32,872 2,040,409
----------- ----------- ---------- -----------
$ 4,007,380 $ 121,063 $ 34,204 $ 4,094,239
=========== =========== ========== ===========
</TABLE>
The amortized cost and approximate fair value of securities
available for sale at December 31, 1996, September 30, 1996 and
1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because certain issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
(Unaudited)
December 31, 1996
-----------------
Amortized Approximate
Cost Fair Value
----------- -----------
Due within one year $ 6,279,294 $ 6,294,723
Due one year to five years 11,780,146 11,898,007
Due over five years 2,601,119 2,823,156
----------- -----------
Total $20,660,559 $21,015,886
=========== ===========
September 30, 1996
------------------
Amortized Approximate
Cost Fair Value
----------- -----------
Due within one year $ 8,796,071 $ 8,793,412
Due one year to five years 11,437,469 11,483,981
Due over five years 2,601,119 2,803,315
----------- -----------
Total $22,834,659 $23,080,708
=========== ===========
F-14
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3. INVESTMENT SECURITIES - AVAILABLE FOR SALE. (Continued)
September 30, 1995
------------------
Amortized Approximate
Cost Fair Value
----------- -----------
Due within one year $ 506,525 $ 506,015
Due one year to five years 1,544,271 1,547,815
Due over five years 1,956,584 2,040,409
----------- -----------
Total $ 4,007,380 $ 4,094,239
=========== ===========
Proceeds from the sale of securities available for sale were
approximately $700 thousand and $1 million during the years ended
September 30, 1996 and 1995 respectively, which resulted in gross
realized gains of approximately $120 thousand and $14 thousand,
respectively and gross realized losses of approximately $5 thousand
and $0 thousand, respectively. There were no sales of securities
available for sale during the three months ended December 31, 1996
and 1995, respectively.
NOTE 4. FEDERAL HOME LOAN BANK STOCK.
As a member of the Federal Home Loan Bank ("FHLB") system, the Bank
is required to maintain a minimum investment in FHLB stock. The
current investment exceeds (unaudited) the required level at
December 31, 1996. Any excess may be redeemed by the Bank or called
by the FHLB at par. At its discretion, the FHLB may declare
dividends on this stock. The Bank has $598,900 invested in FHLB
stock at December 31, 1996, which is included in Equity Securities
in Note 3.
NOTE 5. MORTGAGE BACKED SECURITIES - HELD TO MATURITY.
Mortgage backed securities held to maturity at December 31, 1996,
September 30, 1996 and 1995, consists of Federal National Mortgage
Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC)
and Government National Mortgage Association (GNMA) and are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 (Unaudited)
-----------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Mortgage Backed
Securities $6,173,152 $128,653 $ 49,404 $6,252,401
========== ======== ======== ==========
September 30, 1996
-----------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Mortgage Backed
Securities $6,473,727 $84,082 $ 28,599 $6,529,210
========== ======= ======== ==========
</TABLE>
F-15
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 5. MORTGAGE BACKED SECURITIES - HELD TO MATURITY (Continued).
<TABLE>
<CAPTION>
September 30, 1995
------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Mortgage Backed
Securities $ 4,403,974 $ 114,581 $ 26,336 $ 4,492,219
=========== ========= ========== ===========
</TABLE>
The amortized cost and approximate fair market value of mortgage
backed securities at December 31, 1996, September 30, 1996 and 1995,
by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because certain issuers may have
the right to call or prepay obligations with or without call or
prepayment penalties.
(Unaudited)
December 31, 1996
-----------------
Amortized Approximate
Cost Fair Value
--------- -----------
Due within one year $ 0 $ 0
Due one year to five years 2,873,553 2,843,401
Due five to ten years 781,121 792,000
Due after ten years 2,518,478 2,617,000
----------- -----------
Total $ 6,173,152 $ 6,252,401
=========== ===========
September 30, 1996
------------------
Amortized Approximate
Cost Fair Value
--------- -----------
Due within one year $ 24,098 $ 29,582
Due one year to five years 2,987,645 2,928,628
Due five to ten years 798,074 800,000
Due after ten years 2,663,910 2,771,000
----------- -----------
Total $ 6,473,727 $ 6,529,210
=========== ===========
September 30, 1995
------------------
Amortized Approximate
Cost Fair Value
--------- -----------
Due within one year $ 0 $ 0
Due one year to five years 2,195,603 1,751,965
Due five to ten years 1,347,158 1,347,666
Due after ten years 861,213 1,392,588
----------- -----------
Total $ 4,403,974 $ 4,492,219
=========== ===========I
F-16
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 6. LOANS RECEIVABLE, NET.
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30, September 30,
1996 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Loans Secured by Real Estate
----------------------------
One to four family residential $ 53,782,067 $51,380,248 $49,903,937
Commercial real estate 4,344,464 4,456,876 5,125,311
Home equity line of credit loans 2,219,274 2,196,588 2,122,015
------------ ----------- -----------
Total Loans Secured by Real Estate 60,345,805 58,033,712 57,151,263
------------ ----------- -----------
Other Loans
-----------
Loans on savings accounts 144,066 148,156 209,486
Property improvement loans 84,608 103,253 100,360
Education loans 0 0 954
Commercial loans 14,980 14,980 20,114
Consumer and other loans 577,829 571,715 567,634
------------ ----------- -----------
Total Other Loans 821,483 838,104 898,548
------------ ----------- -----------
Total Loans Receivable 61,167,288 58,871,816 58,049,811
Less:
Deferred loan fees 20,835 22,258 15,831
Allowance for losses-loans 133,119 123,015 114,569
------------ ----------- -----------
Loans Receivable, Net $ 61,013,334 $58,726,543 $57,919,411
============ =========== ===========
</TABLE>
The Bank entered into an agreement with the Federal National
Mortgage Association to sell on a loan-by-loan basis, the current
fixed rate mortgage loan originations with the Bank retaining the
servicing for such loans. The Bank sold no loans during the three
months ended December 31, 1996 and the year ended September 30, 1996
and 1995. As a result of sales in prior years, loans which are
serviced by the Bank, which are not included in the statement of
condition, were $7,272,578 and $7,865,246 at December 31, 1996 and
1995, respectively, $7,350,208, $7,977,643 and $8,529,944 at
September 30, 1996, 1995 and 1994, respectively.
NOTE 7. ALLOWANCE FOR LOAN LOSSES.
Activity in the allowance for loan losses for the three months ended
December 31, 1996 and 1995 and the years ended September 30, 1996,
1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Years Ended
December 31, September 30,
--------------------- -----------------------
1996 1995 1996 1995 1994
--------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Balance at Beginning
of Year $ 123,015 $ 114,569 $ 114,569 $ 106,241 $ 91,470
Provision charged to
operations 0 13,500 23,500 29,000 25,000
Loans charged off
Real estate 0 0 0 0 0
Other loans 0 (2,333) (17,962) (22,289) (13,779)
Recoveries
Real estate 0 0 0 0 0
Other loans 10,104 659 2,908 1,617 3,550
--------- ---------- ---------- --------- ---------
Balance at end of period $ 133,119 $ 126,395 $ 123,015 $ 114,569 $ 106,241
========= ========== ========== ========= =========
</TABLE>
F-17
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 7. ALLOWANCE FOR LOAN LOSSES. (Continued)
The following table sets forth information with regard to
non-performing loans:
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1996 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Loans in non-accrual status $ 0 $ 15,526 $ 157,421
======= ======== =========
</TABLE>
There were no troubled debt restructurings at December 31, 1996,
September 30, 1996, or 1995.
Accumulated interest on non-accrual loans, as shown above, collected
and recognized as interest income for the three months December 31,
1996 and 1995, and the years ended September 30, 1996, 1995 and
1994, was not material to equity or total interest income.
NOTE 8. BANKING HOUSE AND EQUIPMENT.
Banking House and equipment at December 31, 1996, September 30, 1996
and 1995 are summarized by major classification as follows:
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1996 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Land $1,111,997 $1,111,997 $1,111,997
Buildings and improvements 891,058 901,769 946,576
Furniture, fixtures and equipment 223,540 247,690 267,193
---------- ---------- ----------
Banking House and Equipment, Net $2,226,595 $2,261,456 $2,325,766
========== ========== ==========
</TABLE>
The Bank records depreciation expense directly against the cost of
the related asset and does not utilize an accumulated depreciation
account. Amounts charged to depreciation expense were $38,060 for
the three months ended December 31, 1996, and $142,406 and $141,884
for the years ended September 30, 1996 and 1995, respectively.
NOTE 9. ACCRUED INTEREST RECEIVABLE.
A summary of accrued interest receivable as of December 31, 1996,
September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1996 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Securities available for sale $ 298,719 $ 326,364 $ 48,229
Investment securities held to
maturity 0 0 429,851
Loans receivable 348,662 338,454 324,998
--------- --------- --------
Total Accrued Interest Receivable $ 647,381 $ 664,818 $803,078
========= ========= ========
</TABLE>
F-18
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 10. SAVINGS DEPOSITS.
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
December 31, 1996 September 30, 1996 September 30, 1995
----------------- ------------------ ------------------
Type of No. of No. of No. of
Accounts Accounts Amount Accounts Amount Accounts Amount
-------- -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Regular savings 5286 $26,134,273 5304 $26,804,675 5886 $27,198,034
Certificates of deposit 2442 37,959,268 2476 38,337,637 2725 43,035,042
Demand 3875 18,489,778 3915 18,299,519 3945 17,859,625
-----------------------------------------------------------
11603 $82,583,319 11695 $83,441,831 12556 $88,092,701
===== =========== ===== =========== ===== ===========
</TABLE>
The approximate amount of contractual maturities of certificate of
deposit accounts for the twelve month periods subsequent to December
31, 1996, are as follows:
Twelve month periods ended December 31,
---------------------------------------
1997 $ 32,937,233
1998 3,607,024
1999 942,007
2000 453,003
2001 20,001
------------
$ 37,959,268
============
The approximate amount of contractual maturities of certificate of
deposit accounts for the twelve month periods subsequent to
September 30, 1996, are as follows:
Twelve month periods ended September 30,
----------------------------------------
1997 $ 33,298,554
1998 3,682,061
1999 733,012
2000 612,010
2001 12,000
------------
$ 38,337,637
============
The approximate amount of contractual maturities of certificate of
deposit accounts for the twelve month periods subsequent to
September 30, 1995, are as follows:
Twelve month periods ended September 30,
----------------------------------------
1996 $ 36,915,042
1997 4,163,000
1998 804,000
1999 593,000
2000 560,000
------------
$ 43,035,042
============
At December 31, 1996, September 30, 1996 and 1995, the aggregate of
time deposit accounts with balances equal to or in excess of
$100,000 was approximately $1.7 million, $1.5 million and $2.5
million, respectively. Deposits in excess of $100,000 are not
Federally insured.
F-19
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 10. SAVINGS DEPOSITS. (Continued)
Interest expense on deposits for the three months ended December 31,
1996 and 1995, and the years ended September 30, 1996, 1995, and
1994 is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Years Ended
December 31, September 30,
------------------ -----------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Regular savings $196,042 $201,917 $ 810,894 $ 886,756 $1,036,739
Certificates of deposit 466,581 601,273 2,129,433 1,886,494 1,152,489
Demand 101,538 109,873 421,133 483,612 495,135
Escrow 19 0 3,107 3,404 1,504
-------- -------- ---------- ---------- ----------
$764,180 $913,063 $3,364,566 $3,260,266 $2,685,867
======== ======== ========== ========== ==========
</TABLE>
NOTE 11. BORROWED FUNDS.
As of December 31, 1996, the Bank has a line of credit in the amount
of $4,900,600 from the Federal Home Loan Bank. The Bank has used
$1,000,000 of this line of credit. Interest paid on these borrowed
funds for the three months ended December 31, 1996 was approximately
$16,000.
Borrowed funds at September 30, 1995, are $1,000,000 related to a
repurchase agreement with Nationar. The interest paid on the reverse
repurchase agreement through September 30, 1995 was approximately
$22,000. Interest was not accrued on this debt after the New York
State Banking Department seized the operations of Nationar on
February 6, 1995. The Bank also paid interest on line of credit
advances during 1995 which totaled $6,443.
In addition, at September 30, 1996, the Bank recognized $38,700 of
interest expense representing interest allocable to fiscal 1995
related to a repurchase agreement with Nationar. When the assets of
Nationar were frozen, the Bank believed that it would be permitted
to offset the repurchase agreement, against its frozen deposit
accounts at Nationar so no interest cost should be accrued on the
repurchase agreement. However, when the Superintendent made his
first distribution to the Bank on account of its Nationar claim in
fiscal 1996, the Bank was charged $82,900 for interest on the
repurchase agreement, of which $38,700 was on account of interest
during fiscal year 1995.
NOTE 12. EMPLOYEE BENEFITS.
Retirement Plans:
A. Pension Plan
The Bank has a non-contributory defined benefit pension plan
covering substantially all of its employees. Current and past
service pension costs are funded as accrued. The Bank has recorded
pension expense for this period in accordance with SFAS #87.
F-20
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 12. EMPLOYEE BENEFITS. (Continued)
A. Pension Plan (Continued)
The following table sets forth the plan's funded status and amounts
recognized in the Bank's statement of financial condition as of
December 31, 1996 and December 31, 1995. (The plan's funded status
as of September 30, 1996 and 1995 were not available because the
acturial valuations for the plan are completed annually at December
31.)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation $ 1,966,800.00 $ 1,846,829.00
============== ==============
Projected benefit obligation for service
rendered to date $(2,553,400.00) $(2,397,727.00)
Plan assets at fair value 2,928,200.00 2,496,122.00
-------------- --------------
Plan assets in excess of projected benefit 374,800.00 98,395.00
Amount contributed during fourth quarter 22,700.00 38,722.00
Unrecognized net (gain) loss from past
experience different from that assumed
and effects of changes in assumptions (46,500.00) 209,288.00
Prior service cost not yet recognized in
net periodic pension cost 19,500.00 23,430.00
Unrecognized net asset being
recognized over 11.81 years (70,200.00) (87,345.00)
-------------- --------------
(Accrued) prepaid pension cost $ 300,300.00 $ 282,490.00
============== ==============
Net pension cost for 1996 and 1995 included the following
components:
December 31, December 31,
1996 1995
-------------- ----------
Service cost - benefits earned during
the period $ 109,482.00 $ 99,791.00
Interest cost on projected benefit
obligation 177,770.00 161,901.00
Actual return on plan assets (364,532.00) (430,730.00)
Amortization of unrecognized transition
asset (17,159.00) (17,159.00)
Amortization of unrecognized loss 0.00 9,342.00
Amortization of past service liability 3,965.00 3,965.00
Amortization of deferred investment loss
liability 163,474.00 270,046.00
-------------- --------------
Net Pension Expense $ 73,000.00 $ 97,156.00
============== ==============
</TABLE>
F-21
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 12. EMPLOYEE BENEFITS. (Continued)
A. Pension Plan (Continued)
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value
of the projected benefits obligation for both years were 7.0 percent
and 5.5 percent respectively. The expected long-term rate of return
on assets was 8.0 percent.
The pension expense was $73,000 and $97,156 for the years ended
December 31, 1996 and 1995 respectively.
B. Profit Sharing Plan
On May 1, 1993, the Bank placed in effect a profit sharing trust
retirement plan (a defined contribution plan) which covers all
eligible employees and includes an employees' thrift savings plan
established under the provisions of Internal Revenue Code Section
401(k). Profit sharing contributions will be made as a matching of
the employees voluntary before-tax contributions up to a maximum of
three percent of the individual employees' salary. The employer may,
from time to time, change the plan to provide for a different
matching contribution. Employees will be notified of any change
made. The Bank's contributions to the profit sharing retirement plan
amounted to $6,065 and $5,716 for the three months ended December
31, 1996 and 1995, respectively and $28,295, $27,185 and $28,615
for the fiscal years ended September 30, 1996, 1995 and 1994,
respectively.
The Bank has every intention of continuing to offer the plan to all
eligible employees. However, the Bank reserves the right to change,
amend, modify, or even terminate the plan, if necessary. Termination
of the plan is unlikely, but should it happen, the eligible
employees will receive the full value of their plan accounts.
C. Other Retirement Benefits
In addition to pension benefits, the Bank provides certain health
care and life insurance benefits for retired employees and their
spouses. Employees will become eligible for these benefits if they
reach normal retirement age (60) and have worked for the Bank for 23
years.
SFAS No. 106, issued in December 1990, requires that the cost of
postretirement benefits other than pensions be recognized on an
accrual basis as employees perform services to earn the benefits.
This is a significant change from the prevalent current practice of
accounting for these benefits on a pay-as-you-go (cash) basis. The
cumulative postretirement benefit obligation (APBO) at the date of
adoption (the "transition obligation") may be recognized in income
as the cumulative effect of an accounting change in the period of
adoption or over future periods as a component of the postretirement
benefit cost. During the year ended September 30, 1995, the Bank
adopted SFAS No. 106. At the adoption date, the transition
obligation amounted to $655,750. The Bank recorded this charge to
earnings as the cumulative effect of an accounting change, net of
related taxes $262,000.
F-22
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 12. EMPLOYEE BENEFITS. (Continued)
C. Other Retirement Benefits (Continued)
The following is a reconciliation of the funded status of the plan
at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Accumulated Postretirement Benefit Obligation
<S> <C> <C>
Retirees $ 262,100 $ 280,317
Active employees fully eligible for benefits 202,300 193,188
Other active employees 495,200 457,874
---------- -----------
Total 959,600 931,379
Unrecognized gain (loss) (177,900) (224,451)
Fair value of plan assets 0 0
---------- -----------
Accrued postretirement benefits $ 781,700 $ 706,928
========== ===========
</TABLE>
The components of the net periodic postretirement benefit cost for 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Service cost $ 24,300 $ 24,260
Interest cost 74,900 70,450
Amortization of unrecognized gain (loss) 8,300 13,237
---------- -----------
Postretirement benefit cost $ 107,500 $ 107,947
========== ===========
</TABLE>
A discount rate of 7.75%, an annual rate of salary increases of 6.5%
and a 9.5% increase in the assumed health care costs reducing
linearly to 5.5% in the year 2005, were used to determine the APBO
at December 31, 1996 and a discount rate of 8.25%, an annual rate of
salary increases of 6.5% and a 10% increase in the assumed health
care costs reducing linearly to 5.5% in the year 2005, were used to
determine the APBO at December 31, 1995.
NOTE 13. INCOME TAXES.
The following is a summary of the components of income tax expense
for the three months ended December 31, 1996 and 1995, and the years
ended September 30, 1995 and 1994:
The components of income tax expense as of September 30, 1996, are
as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Years Ended
December 31, September 30,
---------------------- ----------------------
1996 1995 1996 1995 1994
---------- --------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Current tax:
Expense $ 204,000 $ 66,500 $ 395,000 $ 209,000 $ 167,000
Deferred tax (benefit):
Expense (79,400) (3,500) (43,600) (225,000) 134,000
--------- -------- --------- --------- ---------
Income tax expense $ 124,600 $ 63,000 $ 351,400 $ (16,000) $ 301,000
========= ======== ========= ========= =========
</TABLE>
F-23
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 13. INCOME TAXES. (Continued)
Income tax expense for financial reporting purposes is less than the
amount computed by applying the statutory federal income tax rate of
34% to income taxes for the reasons noted in the table below:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Years Ended
December 31, September 30,
---------------------- ----------------------
1996 1995 1996 1995 1994
---------- --------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Expense at statutory
federal tax rate $ 142,800 $ 54,800 $ 309,000 $ (28,600) $ 208,000
Tax-exempt income (850) (850) (1,700) (1,700) (1,700)
State income taxes, net
of federal tax benefit 29,200 11,200 60,400 (5,600) 42,500
Other, net (46,550) (2,150) (16,300) 19,900 52,200
--------- -------- --------- --------- ---------
Income tax expense $ 124,600 $ 63,000 $ 351,400 $ (16,000) $ 301,000
========= ======== ========= ========= =========
Effective tax rate 29.7% 39.1% 38.6% (19.0%) 49.2%
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
December 31, 1996, September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Postretirement employee benefits $ 322,500 $ 313,800 $ 262,000
Allowance for loan losses 54,500 50,400 46,900
Mark to market securities tax 90,900 82,800 34,600
Other 23,900 24,500 51,000
--------- --------- ---------
Total deferred tax assets 491,800 471,500 394,500
--------- --------- ---------
Deferred tax liabilities:
Depreciation 67,600 87,500 101,200
Prepaid pension costs 123,000 121,300 92,700
Tax bad debt reserve over the base year 114,200 155,100 136,600
--------- --------- ---------
Total deferred tax liabilities 304,800 363,900 330,500
--------- --------- ---------
Net deferred tax asset (liability)
at the end of period 187,000 107,600 64,000
Net deferred tax asset (liability)
at the beginning of period 107,600 64,000 (289,000)
--------- --------- ---------
Deferred tax benefit for the period $ (79,400) $ (43,600) $(225,000)
========= ========= =========
</TABLE>
F-24
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 13. INCOME TAXES. (Continued)
In addition to the deferred tax amounts described above, the Bank
also had a deferred tax liability of approximately $148 thousand,
$103 thousand and $36 thousand at December 31, 1996, September 30,
1996 and September 30, 1995, respectfully related to the net
unrealized gain on securities available for sale.
As a qualifying thrift institution under IRS guidelines, the Bank is
allowed a special bad debt deduction which has not been subject to
deferred taxes through December 31, 1987 in accordance with SFAS No.
109. Accordingly, no deferred tax liability has been recorded for
the tax bad debt reserve at December 31, 1987. This reserve, along
with the "supplemental" reserve was approximately $921 thousand at
December 31, 1987, will not be subject to tax as long as the Bank
continues to qualify as a thrift for IRS purposes.
NOTE 14. NATIONAR LIQUIDATION.
At the close of business, February 6, 1995, the Superintendent of
Banks of the State of New York took possession of Nationar. Nationar
is a bank wholly-owned by Savings Banks in New York State and is
regulated by the New York State Banking Department. Nationar
provides banks with item processing, deposit accounts, securities
safekeeping, trust services, credit, cash and investment management
services.
Goshen Savings Bank at September 30, 1995, had recorded a provision
for losses in the amount of $278,623. The provision is allocated as
$232,223 netted against the demand account balance and $46,400
against Nationar debentures and stock. The liquidation of Nationar
by the New York State Banking Department has reflected that the
losses were less than originally anticipated and the Bank was able
to reverse the provision for losses on Nationar accounts by the
amount of $232,223 during the year ended September 30, 1996.
NOTE 15. COMMITMENTS AND CONTINGENCIES.
The Bank is a party to certain financial instruments with
off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized on the statement of financial condition. The contract
amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the commitments to extend credit is represented
by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.
Unless otherwise noted, the Bank does not require collateral or
other security to support off-balance-sheet financial instruments
with credit risk.
F-25
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 15. COMMITMENTS AND CONTINGENCIES. (Continued)
A. Commitments Pending
Contract amounts of financial instruments that represent credit risk
are as follows:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited)
December 31, September 30, September 30,
Commitments Pending 1996 1996 1995
------------------- ------------ ------------- ---------
<S> <C> <C> <C>
Mortgage Loans $ 2,195,700 $ 2,525,875 $ 702,490
Equity Line of Credit:
Available Draw 1,196,962 1,104,587 1,156,083
Overdraft Checking 180,358 176,823 168,993
----------- ----------- -----------
$ 3,573,020 $ 3,807,285 $ 2,027,566
=========== =========== ===========
</TABLE>
The breakdown of fixed rate loan commitments and the corresponding
interest rate range at December 31, 1996 and September 30, 1996 are
as follows:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
At December 30, At September 30,
1996 1996
------------ ---------
<S> <C> <C>
Fixed Rate Commitments:
First Mortgage Loans $2,049,200 $2,405,875
Home Equity Loans 56,500 80,000
----------- -----------
Total Fixed Rate Loan
Commitments $2,105,700 $2,485,875
Fixed Rate Commitment
Interest Rate Range 7.75% to 9.00% 8.00% to 9.75%
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being fully drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral, if
any, required by the Bank upon the extension of credit is based on
management's credit evaluation of the customer. Mortgage and
construction loan commitments are secured by a first lien on real
estate. Collateral on extensions of credit for commercial loans
varies but may include accounts receivable, inventory, property,
plant and equipment and income producing commercial property.
B. Environmental Contingency
Subsequent to the audit date of September 30, 1996, the Bank
determined that there were underground oil tanks on the Village of
Goshen property that had contaminated the soil on the Bank's
property. This resulted in the Bank, with the assistance of the
Village, to properly plan for the removal of both the tanks and the
contaminated soil to correct this environmental problem. At December
31, 1996, the cost for this cleanup was not available, however, the
Bank does not anticipate this to be material.
F-26
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 16. BANK INSURANCE FUND.
The Bank is a member of the Bank Insurance Fund (BIF) of the Federal
Deposit Insurance Corporation (FDIC), and the Bank pays all of its
deposit insurance assessments to the BIF of the FDIC.
For the first three quarters of 1995, BIF member institutions paid
deposit insurance premiums based on a schedule ranging from $0.23 to
$0.31 per $100.00 of deposits. Applicable law requires that the BIF
be recapitalized to a ratio of 1.25% of reserves to deposits.
In August 1995, the FDIC, in anticipation of the BIF's imminent
achievement of the 1.25% reserve ratio, reduced the deposit
insurance premium rates paid by BIF insured banks from a range of
$0.23 to $0.31 per $100.00 of deposits to a range of $0.04 to $0.31
per $100.00 of deposits. The new rate schedule for the BIF was made
effective June 1, 1995. The FDIC refunded to BIF insured
institutions the premium they had paid for the period beginning on
June 1, 1995, and the Bank received a refund in the amount of
$53,716. The refunded premium amount was recorded as an offset to
the FDIC assessment expense. For the three months ended December 31,
1996 and 1995, the net FDIC assessment expense amounted to $0 and
$8,708, respectively and for the years ended September 30, 1996,
1995, and 1994, net FDIC assessment expense amounted to $10,708,
$142,402 and $200,194, respectively.
NOTE 17. INSURANCE OF ACCOUNTS AND REGULATORY CAPITAL.
FDICIA was signed into law on December 19, 1991. Regulations
implementing the prompt corrective action provisions of FDICIA
became effective on December 19, 1992. In addition to the prompt
corrective action requirements, FDICIA includes significant changes
to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory
agencies, increased reporting requirements for insured institutions,
and new regulations concerning internal controls, accounting, and
operations.
The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital
categories, in declining order are "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized",
and "critically undercapitalized". Institutions categorized
as"undercapitalized" or worse are subject to certain restrictions,
including the requirement to file a capital plan with their primary
federal regulator, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and
increased supervisory monitoring, among other things. Other
restrictions may be imposed on the institution either by its primary
federal regulator, the New York State Banking Department or by the
Federal Deposit Insurance Corporation (FDIC), including requirements
to raise additional capital, sell assets, or sell the entire
institution. Once an institution becomes "critically
undercapitalized", it must generally be placed in receivership or
conservatorship within 90 days.
FIRREA was signed into law on August 9, 1989; regulations for
savings institutions' minimum capital requirements went into effect
on December 7, 1989. In addition to its capital requirements, FIRREA
includes provisions for changes in the federal regulatory structure
for institutions, including a new deposit insurance system,
increased deposit insurance premiums, and restricted investment
activities with respect to noninvestment grade corporate debt and
certain other investments. FIRREA also increases the required ratio
of housing-related assets in order to qualify as a savings
institution.
F-27
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 17. INSURANCE OF ACCOUNTS AND REGULATORY CAPITAL. (Continued)
Current regulations require savings institutions to have a minimum
regulatory tangible capital equal to 1.5% of adjusted total assets,
a minimum 4% core/ leverage capital ratio, a minimum 4% tier 1
risk-based ratio, and a minimum 8% total risk-based capital ratio
to be considered "adequately capitalized". An institution is deemed
to be "critically undercapitalized" if it has a tangible equity
ratio of 2% or less.
In determining the amount of risk-weighted assets for purposes of
the risk-based capital requirement, savings institutions must
compute their risk-weighted assets by multiplying its assets and
certain off-balance sheet items by risk-weights, which range from
0% for cash and obligations issued by the United States Government
or its agencies to 100% for consumer and commercial loans, as
established by OTS capital regulations based upon the risks the OTS
believes are inherent in the types of assets.
The Bank is currently classified as "well-capitalized." No event or
occurrence has taken place since the Bank's last regulatory safety
and soundness examination which would lead management to believe
that a change in the Bank's classification as "well capitalized"
would be appropriate.
At December 31, 1996, the Bank complied with all the capital
requirements described above as shown below:
<TABLE>
<CAPTION>
Unaudited - Regulatory
----------------------
Core/ Tier I Total
GAAP Tangible Leverage Risk Based Risk Based
Capital Capital Capital Capital Capital
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per GAAP $12,106,192 $12,106,192 $12,106,192 $12,106,192 $12,106,192
=========== =========== =========== =========== ===========
Supplemental Capital Items:
General valuation
allowance 0 0 0 133,119
Unrealized (gains) on
securities available
for sale (207,155) (207,155) (207,155) (207,155)
----------- ----------- ----------- -----------
Regulatory Capital $11,899,037 $11,899,037 $11,899,037 $12,032,156
=========== =========== =========== ===========
Total Assets $96,966,433
===========
Adjusted Total Assets $96,759,278 $96,759,278
=========== ===========
Risk Weighted Assets $55,067,000 $55,067,000
=========== ===========
Capital Ratio 12.30% 12.30% 21.61% 21.85%
===== ===== ===== =====
Regulatory Capital Categories
Well Capitalized if Equal
to or Greater Than 5.0% 6.0% 10.0%
=== === ====
Adequately Capitalized if Equal
to or Greater Than 4.0% 4.0% 8.0%
=== === ===
Undercapitalized if Less Than 4.0% 4.0% 8.0%
=== === ===
</TABLE>
F-28
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS.
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", requires the Bank to disclose estimated fair values
for its financial instruments. Whenever possible, quoted market
prices are used to estimate the fair value of a financial
instrument. An active market does not exist, however, for many
financial instruments. As a result, fair value estimates are made,
as of a specific date, based on judgments regarding future expected
cash flows, current economic conditions, risk factors and other
characteristics of the financial instrument. These estimates are
subjective in nature and involve uncertainties. Changes in these
judgments often have a material impact on the fair value estimates.
In addition, since these estimates are made as of a specific date,
they are susceptible to material changes in the near future. The
information presented is based on pertinent information available
to management as of each period presented. Although management is
not aware of any factors, other than changes in interest rates,
that would significantly affect the estimated fair values, the
current estimated value of these instruments may have changed
significantly since that point in time.
While these estimated fair value amounts are designed to represent
estimates of the amounts at which these instruments could be
exchanged in a current transaction between willing parties
(excluding the value of customer relationships), many of the Bank's
financial instruments lack an available trading market as
characterized by willing parties engaged in an exchange
transaction. In addition, it is the Bank's intent to hold most of
its financial instruments to maturity, therefore, it is not
probable that the fair values shown will be realized in a current
transaction. The estimated fair values disclosed do not reflect the
value of assets and liabilities that are not considered financial
instruments. In addition, the value of long-term relationships with
depositors (core deposit intangibles) and other customers are not
reflected. The value of these items is significant.
The following describes the methodology and assumptions used to
estimate fair value of financial instruments required by SFAS 107.
Cash and short-term investments. Cash and short-term investments
are by definition short-term and do not present any unanticipated
credit issues. Therefore, the carrying amount is a reasonable
estimate of fair value.
Securities. The estimated fair values of securities by type are
provided in Note 3 to the financial statements. These are based on
quoted market prices, when available. If a quoted market price is
not available, fair value is estimated using quoted market prices
for similar securities.
Mortgage-backed Securities
The fair value of mortgage-backed securities is estimated based on
bid prices published in financial newspapers or bid quotations
received from securities dealers.
Loans. The Bank's management has determined that the carrying
amounts of the loan portfolio approximates the estimated fair
value. Quoted market prices are not available for the loan
portfolio. The cost of determining the fair values of the loan
portfolio would be excessive.
F-29
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS. (Continued)
Deposits. Under SFAS 107, the fair value of deposits with no stated
maturity is equal to the amount payable on demand. Therefore, the
fair value estimates for these products do not reflect the benefits
that the Bank receives from the low-cost, long-term funding they
provide. These benefits are significant. Quoted market prices are
not available for fixed rate time deposits. The estimated fair
value of these financial instruments has not been determined
through an independent valuation because the cost to do so would be
excessive. Management feels that the carrying amount of fixed rate
deposits are reasonable estimates of the fair values of these
financial instruments.
Off-Balance Sheet Instruments. The estimated fair value of
commitments to extend credit is estimated using fees currently
charged for similar arrangements adjusted for changes in interest
rates and credit risk that has occurred subsequent to origination.
Because the Bank believes that the credit risk associated with
available but undisbursed commitments would essentially offset the
fees that could be recognized under similar arrangements, and
because the commitments are either short term in nature or subject
to immediate repricing, no fair value has been assigned to these
off-balance sheet commitments.
The following is a summary of the carrying values and estimated
fair values of the Bank's financial instruments at December 31,
1996 and September 30, 1996:
<TABLE>
<CAPTION>
(Unaudited)
December 31, 1996 September 30, 1996
----------------- ------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Cash Equivalents $ 5,478,800 $ 5,478,800 $ 4,683,955 $ 4,683,955
Securities Available
for Sale 21,015,886 21,015,886 23,080,708 23,080,708
Mortgage Backed Securities -
Held to Maturity 6,173,152 6,252,401 6,473,726 6,529,210
Loans Receivable 61,013,334 61,013,334 58,726,543 58,726,543
Financial Liabilities:
Deposits 82,583,319 82,583,319 83,441,831 83,441,831
</TABLE>
NOTE 19. SUBSEQUENT EVENT -- ADOPTION OF PLAN OF CONVERSION. (Unaudited)
On February 6, 1997, the Board of Trustees of the Bank, subject to
regulatory approval and approval by members of the Bank,
unanimously adopted a Plan of Conversion to convert from a New York
State chartered mutual savings bank to a federally chartered
capital stock savings bank with the concurrent formation of a
holding company. The transaction is expected to be accomplished
through the conversion of the Bank's New York State charter to a
federal charter and the sale of the holding company's common stock
in an amount equal to the pro forma market value of the stock after
giving effect to the conversion. A subscription offering of the
sale of the holding company's common stock will be offered on a
priority basis to the Bank's depositors and to a tax-qualified
employee stock ownership plan. Any shares of the holding company's
common stock not sold in the
F-30
<PAGE>
GOSHEN SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 19. SUBSEQUENT EVENT -- ADOPTION OF PLAN OF CONVERSION.
(Unaudited) (Continued)
subscription offering are expected to be offered for sale to the
general public. At the time of the conversion, the Bank will
establish a liquidation account in an amount equal to its total net
worth as of the date of the latest balance sheet appearing in the
final prospectus. The liquidation account will be maintained for
the benefit of eligible depositors who continue to maintain their
accounts at the Bank after the conversion. The liquidation account
will be reduced annually to the extent that eligible depositors
have reduced their qualifying deposits. Subsequent increases will
not restore a depositor's interest in the liquidation account. In
the event of a complete liquidation, each depositor with an
interest in the liquidation account will be entitled to receive a
distribution in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The Bank may not pay
dividends that would reduce stockholders' equity below the required
liquidation account balance.
Under Office of Thrift Supervision (OTS) regulations, limitations
have been imposed on all "capital distributions" by savings
institutions, including cash dividends. The regulation establishes
a three-tiered system of restrictions, with the greatest
flexibility afforded to thrifts which are both well-capitalized and
given favorable qualitative examination ratings by the OTS. For
example, a thrift which is given one of the two highest examination
ratings and has "capital" equal to its fully phased-in regulatory
capital requirements could, after prior notice but without the
prior approval of the OTS, make capital distributions in any year
that would reduce by one-half the amount of its capital which
exceeds its fully phased-in capital requirement, as adjusted to
reflect net income to date during the year. Other thrifts would be
subject to more stringent procedural and substantive requirements,
the most restrictive being prior OTS approval of any capital
distribution.
Conversion costs will be deferred and deducted from the proceeds of
the shares sold in the conversion. If the conversion is not
completed, all costs will be charged to expense. No conversion
costs were incurred as of December 31, 1996.
F-31
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by GSB Financial Corporation or Goshen Savings Bank. 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 authorized or in which the person making such offer
or solicitation is not qualified 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 GSB
Financial Corporation or Goshen Savings Bank since any of the dates as of which
information is furnished herein or since the date hereof.
TABLE OF CONTENTS
Page
----
Summary .................................................................. 4
Risk Factors ............................................................. 10
Forward-Looking Statements ............................................... 15
Selected Financial Information ........................................... 16
Summary of Recent Developments............................................ 19
GSB Financial Corporation ................................................ 24
Goshen Savings Bank ...................................................... 25
Regulatory Capital Compliance ............................................ 26
Use of Proceeds .......................................................... 27
Dividend Policy .......................................................... 28
Market for the Common Stock .............................................. 29
Pro Forma Data ........................................................... 30
Capitalization ........................................................... 34
Goshen Savings Bank Statements of Income ................................. 35
Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................... 37
Business of the Company .................................................. 57
Business of the Bank ..................................................... 57
Regulation ............................................................... 76
Taxation ................................................................. 84
Management of the Company ................................................ 87
Management of the Bank ................................................... 89
The Conversion ........................................................... 100
Restrictions on Acquisition of the Company and the Bank .................. 115
Description of Capital Stock of the Company .............................. 121
Description of Capital Stock of the Bank ................................. 123
Transfer Agent and Registrar ............................................. 124
Experts .................................................................. 124
Legal and Tax Opinion .................................................... 124
Additional Information ................................................... 124
Index to Financial Statements ............................................ F-1
Until the later of June 20, 1997, or 25 days after the commencement of the
Subscription Offering, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
1,955,000
Shares
GSB Financial
Corporation
(Proposed Holding
Company for
Goshen Savings Bank)
Common Stock
PROSPECTUS
Capital Resources, Inc.
May 14, 1997
