<PAGE> 1
As filed with the Securities and Exchange Commission on September 4, 1997
Registration No.333-32113
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
STATEN ISLAND BANCORP, INC.
(Exact name of registrant as specified in its articles of incorporation)
----------------
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<S> <C> <C>
Delaware 6711 13-3958850
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(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Code Number) Identification No.)
</TABLE>
15 Beach Street
Staten Island, New York 10304
(718) 447-7900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Harry P. Doherty
Chairman of the Board and Chief Executive Officer
15 Beach Street
Staten Island, New York 10304
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Raymond A. Tiernan, Esq.
Hugh T. Wilkinson, Esq.
Kevin M. Houlihan, Esq.
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
12th Floor
Washington, D.C. 20005
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ X ]
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AMOUNT
TITLE OF EACH CLASS OF TO BE PURCHASE PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share (1) 42,981,250 shares $10.00 $ 429,812,500 (2) $130,246.22 (3)
- -----------------------------------------------------------------------------------------------------------------
Participation interests 1,518,689 shares -- -- (4)
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</TABLE>
(1) Includes shares of Common Stock to be issued to the SISB Community
Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.
(4) The securities of Staten Island Bancorp, Inc. to be purchased by the Staten
Island Savings Bank 401(k) Savings Plan are included in the amount shown
for Common Stock. Accordingly, no separate fee is required for the
participation interests. In accordance with Rule 457(h) of the Securities
Act, as amended, the registration fee has been calculated on the basis of
the number of shares of Common Stock that may be purchased with the current
assets of such Plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
===============================================================================
<PAGE> 2
PROSPECTUS SUPPLEMENT
STATEN ISLAND BANCORP, INC.
COMMON STOCK, $.01 PAR VALUE PER SHARE
STATEN ISLAND SAVINGS BANK 401(k) SAVINGS PLAN
(1,518,689 SHARES AND PARTICIPATIONS THEREIN)
This Prospectus Supplement relates to the offer and sale to employees
of Staten Island Savings Bank (the "Bank" or the "Employer") who are
participants ("Participants") in the Staten Island Savings Bank 401(k) Savings
Plan in RSI Retirement Trust ("Profit Sharing Plan" or the "Plan") of up to
1,518,689 shares of Staten Island Bancorp, Inc. (the "Company") common stock,
par value $.01 per share (the "Common Stock"), and participation interests in
the Profit Sharing Plan, as set forth herein.
In connection with the reorganization of the Bank to the stock form of
organization and the formation of the Company (the "Conversion") and pursuant
to the Bank's and the Company's Plan of Conversion (the "Plan of Conversion"),
the Company and the Bank have amended the Profit Sharing Plan to provide, among
other things that Participants in the Profit Sharing Plan be able to direct the
investment of the vested portion of their account balances within the Profit
Sharing Plan into an investment fund consisting of Common Stock (the "Employer
Stock Fund"). The Profit Sharing Plan will permit Participants in the Profit
Sharing Plan to direct the trustee of the Profit Sharing Plan (the "Trustee")
to purchase Common Stock with amounts in the Profit Sharing Plan attributable
to such Participants. This Prospectus Supplement relates to the initial
election of a Participant to direct the purchase of Common Stock in the
Conversion. This Prospectus Supplement does not cover reoffers or resales of
the Common Stock. See "Restrictions on Resale."
The Prospectus dated ______________, 1997 of the Company (the
"Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Company, the Conversion, the Common
Stock and the financial condition, results of operations, and business of the
Bank. This Prospectus Supplement, which provides detailed information with
respect to the Profit Sharing Plan, should be read only in conjunction with the
Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "Risk Factors" in the Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR ANY
OTHER FEDERAL OR STATE AGENCY OR STATE SECURITIES COMMISSION,
NOR HAS SUCH COMMISSION, OFFICE OR ANY STATE SECURITIES
COMMISSIONERS OR OTHER AGENCY PASSED UPON THE
ACCURACY OF THIS PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND OR THE SAVINGS
ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR THE BANK.
The date of this Prospectus Supplement is ___________, 1997.
<PAGE> 3
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS PROSPECTUS
SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE BANK OR THE PROFIT
SHARING PLAN. THIS PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL
OR SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, THE
BANK OR THE PROFIT SHARING PLAN SINCE THE DATE HEREOF OR THAT THE INFORMATION
HEREIN CONTAINED OR INCORPORATED BY REFERENCE IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT SHOULD BE READ ONLY
IN CONJUNCTION WITH THE PROSPECTUS THAT IS ATTACHED HERETO AND SHOULD BE
RETAINED FOR FUTURE REFERENCE.
TABLE OF CONTENTS
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PAGE
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The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Securities Offered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Election to Purchase Common Stock in the Conversion . . . . . . . . . . . . . . . . . . . 1
Value of Participation Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Method of Directing Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Time for Directing Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Irrevocability of Transfer Direction . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Direction to Purchase Common Stock After the Conversion . . . . . . . . . . . . . . . . . 2
Purchase Price of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Nature of Participant's Interest in the Common Stock . . . . . . . . . . . . . . . . . . . 3
Voting and Tender Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Description of the Profit Sharing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Eligibility and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Contributions Under the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Limitations on Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Withdrawals and Distributions From the Sharing Plan . . . . . . . . . . . . . . . . . . . 11
Administration of the Profit Sharing Plan . . . . . . . . . . . . . . . . . . . . . . . . 12
Reports to Profit Sharing Plan Participants . . . . . . . . . . . . . . . . . . . . . . . 12
Plan Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Amendment and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Merger, Consolidation or Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ERISA and Other Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Restrictions on Resale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SEC Reporting and Shortswing Profit Liability . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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Experts 18
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Index to Financial Statements and Supplemental Schedules . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
<PAGE> 5
THE OFFERING
SECURITIES OFFERED
Up to 1,518,689 shares of Common Stock which may be acquired by the
Profit Sharing Plan for the accounts of employees participating in the Profit
Sharing Plan, as well as participation interests in the Profit Sharing Plan,
are offered hereby. Only employees of the Bank may participate in the Profit
Sharing Plan. Information with regard to the Profit Sharing Plan is contained
in this Prospectus Supplement and information with respect to the Company, the
Conversion and the financial condition, results of operations and business of
the Bank is contained in the attached Prospectus. The address of the principal
executive office of the Company is 15 Beach Street, Staten Island, New York
10304-2713. The Company's telephone number is (718) 447-7900. The address and
telephone number of the Bank's principal executive office are the same as the
Company's.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Conversion, the Profit Sharing Plan has been
amended to permit each Participant to direct that all or part of the funds
which represent his or her beneficial interest in the assets of the Profit
Sharing Plan may be transferred to an investment fund that will invest in
Common Stock (the "Employer Stock Fund") and used to purchase Common Stock in
the Conversion. The Profit Sharing Plan permits this one-time election outside
the specific election dates as discussed below. The ability of a Participant
to purchase Common Stock in the Conversion pursuant to directions to transfer
all or a portion of their beneficial assets in the Profit Sharing Plan will be
based upon the Participant's status as an Eligible Account Holder and/or
Supplemental Eligible Account Holder and/or purchases by such Plan Participant
in the Community Offering and the availability of Common Stock. See
"Description of the Profit Sharing Plan - Investment of Contributions." The
Trustee of the Profit Sharing Plan will follow the Participants' directions to
purchase Common Stock in the Conversion. Funds not transferred to the Employer
Stock Fund will remain in the other investment funds of the Profit Sharing Plan
as directed by the Participants.
VALUE OF PARTICIPATION INTERESTS
The assets of the Profit Sharing Plan were valued as of July 21, 1997
and each Participant was informed of the value of his or her beneficial
interest in the Profit Sharing Plan. The value represented the market value as
of July 21, 1997 of past contributions to the Profit Sharing Plan by the Bank
and the Participants and any earnings thereon, less previous withdrawals.
METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is a form to direct a
transfer among investment funds (the "Investment Form"). If a Participant
wishes to transfer all or part of his or her beneficial interest in the assets
of the Profit Sharing Plan to the purchase of
<PAGE> 6
Common Stock in the Conversion, he or she should indicate that decision in Part
2 of the Investment Form. If a Participant does not wish to make such an
election, he or she does not need to take any action.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the
Employer Stock Fund to purchase Common Stock in the Conversion is ____________,
1997. The Investment Form should be returned to the Bank by no later than
12:00 noon, Eastern Time, on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited in the Profit
Sharing Plan to his or her accounts to the Employer Stock Fund in order to fund
the purchase of Common Stock in the Conversion shall be irrevocable.
Subsequent to the Conversion, however, Participants will be able to direct
transfers within the Profit Sharing Plan, as explained below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant may direct that a certain
percentage of his or her interests in the trust fund established for the Profit
Sharing Plan (the "Trust Fund") be transferred to the Employer Stock Fund and
invested in Common Stock. Alternatively, a Participant may direct that a
certain percentage of his or her interest in the Employer Stock Fund be
transferred to the Trust Fund to be invested in accordance with the terms of
the Profit Sharing Plan. Participants will be permitted to direct that future
contributions made to the Profit Sharing Plan by or on their behalf be invested
in Common Stock. Following the initial election, the allocation of a
Participant's interest in the investment funds may be changed as allowed by the
Profit Sharing Plan. The initial election to invest a percentage of his or her
interest in the Employer Stock Fund shall not be counted as one of the changes
in investment direction that are otherwise permitted to be made by the Profit
Sharing Plan. Special restrictions apply to transfers directed by those
Participants who are officers, directors and principal stockholders of the
Company who are subject to the provisions of Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "1934 Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in the Conversion will be used by the Trustee to purchase Common
Stock through the exercise of subscription rights granted to Participants as an
Eligible Account Holder, Supplemental Eligible Account Holder, Other Member or
officer or employee under the Plan of Conversion. The price paid for such
shares of Common Stock will be the same
2
<PAGE> 7
price as is paid by all other persons who purchase Common Stock in the
Conversion. The prices paid by the Trustee for shares of Common Stock will not
exceed "adequate consideration" as defined in Section 3(18) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the
Profit Sharing Plan. Each Participant has an allocable interest in the
investment funds of the Profit Sharing Plan but not in any particular assets of
the Profit Sharing Plan. Accordingly, a specific number of shares of Common
Stock will not be directly attributable to the account of any Participant.
Earnings, e.g. , gains and losses, are allocated to the Account of a
Participant based upon the particular investment designations of the
Participants. Therefore, earnings with respect to a Participant's Account
should not be affected by the investment designations (including investments
in Common Stock) of other Participants.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee will generally exercise voting and tender rights
attributable to all Common Stock held by the Trust as directed by Participants
with interests in the Employer Stock Fund. With respect to each matter as to
which holders of Common Stock have a right to vote, each Participant will be
allocated a number of voting instruction rights reflecting his or her
proportionate interest in the Employer Stock Fund. The number of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
and negative on each matter shall be proportionate to the number of voting
instruction rights exercised in the affirmative and negative, respectively. In
the event of a tender offer for Common Stock, the Plan provides that each
Participant will be allotted a number of tender instruction rights reflecting
his or her proportionate interest in the Employer Stock Fund. The percentage
of shares of Common Stock held in the Employer Stock Fund that will be tendered
will be the same as the percentage of the total number of tender instruction
rights that are exercised in favor of tendering. The remaining shares of
Common Stock held in the Employer Stock Fund will not be tendered. The Profit
Sharing Plan makes provision for Participants to exercise their voting
instruction rights and tender instruction rights on a confidential basis.
DESCRIPTION OF THE PROFIT SHARING PLAN
INTRODUCTION
The Profit Sharing Plan has been in effect since May 1, 1987. The
Profit Sharing Plan is a qualified retirement plan which includes a cash or
deferred arrangement established in accordance with requirements under Section
401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the trust pursuant to which the assets
3
<PAGE> 8
of the Profit Sharing Plan are held is intended to be a qualified trust under
Section 501(a) of the Code.
The Bank intends that the Profit Sharing Plan, in operation, will
comply with the requirements under Section 401(a) and Section 401(k) of the
Code. The Bank will adopt any amendments to the Profit Sharing Plan that may
be necessary to ensure the qualified status of the Profit Sharing Plan under
the Code and applicable Treasury Regulations.
The Profit Sharing Plan is an "individual account plan" other than a
"money purchase pension plan" within the meaning of ERISA. As such, the Profit
Sharing Plan is subject to all of the provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Profit Sharing Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA, which by their terms do not apply to
an individual account plan (other than a money purchase plan). The Profit
Sharing Plan is not subject to Title IV (Plan Termination Insurance) of ERISA.
Neither the funding requirements contained in Part 3 of Title I of ERISA nor
the plan termination insurance provisions contained in Title IV of ERISA will
be extended to Participants (as defined below) or beneficiaries under the
Profit Sharing Plan.
Applicable federal law requires the Profit Sharing Plan to impose
substantial restrictions on the right of a Participant to withdraw amounts held
for his or her benefit under the Profit Sharing Plan prior to the Participant's
termination of employment with the Bank. A substantial federal tax penalty
also may be imposed on withdrawals made prior to the Participant's attainment
of age 59 1/2, regardless of whether such a withdrawal occurs during his or her
employment with the Bank or after termination of employment.
The following statements are summaries of certain provisions of the
Profit Sharing Plan. They are not complete and are qualified in their entirety
by the full text of the Profit Sharing Plan, which is incorporated by reference
herein. Terms not otherwise defined herein are otherwise defined in the Profit
Sharing Plan. Copies of the Profit Sharing Plan are available to all employees
upon request to the Plan Administrator. Each employee is urged to read
carefully the full text of the Profit Sharing Plan.
ELIGIBILITY AND PARTICIPATION
Certain employees of the Employer are eligible to participate in the
Profit Sharing Plan as of the first payroll period on or after the first day of
the calendar month designated by the eligible employee ("Participation Date")
following completion of one year of service (at least 1,000 hours during a
twelve consecutive month period) with the Bank. Employees compensated on an
hourly, daily, commission fee or retainer basis, leased employees (within the
meaning of Section 414(n) of the Code) and employees covered by a collective
bargaining agreement which does not expressly provide for their coverage under
the Profit Sharing Plan, are not eligible to participate in the Profit Sharing
Plan.
4
<PAGE> 9
As of [________ __, 1997], there were approximately ___ employees
eligible to participate in the Profit Sharing Plan, and ____ employees had
elected to participate in the Profit Sharing Plan.
CONTRIBUTIONS UNDER THE PROFIT SHARING PLAN
401(k) CONTRIBUTIONS. Each Participant in the Profit Sharing Plan is
permitted to elect to reduce his or her Compensation (as defined below)
pursuant to a "Compensation Reduction Agreement" by an amount not less than 1%
and not more than 8% and have that amount contributed to the Profit Sharing
Plan on his or her behalf. These amounts are credited to the Participant's
"Basic Contribution Account." The Profit Sharing Plan defines "Compensation"
as a Participant's "Base Compensation" from the Employer for the year prior to
any reduction pursuant to a Compensation Reduction Agreement. Base
Compensation includes salary, Basic Contributions (the contributions of the
Employer made in connection with the Participant's Compensation Reduction
Agreement), wages and wage continuation payments to an employee who is absent
due to illness or disability of a short-term nature. The term Compensation
does not include overtime, commissions, expense allowances, severance pay,
fees, bonuses, contributions other than Basic Contributions made by the
Employer to the Profit Sharing Plan, and contributions made by the Employer to
any other pension, insurance, welfare, or other employee benefit or deferred
compensation plan. The annual compensation of each Participant taken into
account under the Profit Sharing Plan is limited to $150,000 (adjusted for
increases in the cost of living as permitted by the Code). Generally, a
Participant may elect to modify the amount contributed to the Profit Sharing
Plan under his or her Compensation Reduction Agreement not more often than
twice in any Plan Year by filing the applicable form to a Profit Sharing Plan
representative at least 10 days prior to the first day of the payroll period
for which the change is to become effective. However, special restrictions
apply to persons subject to Section 16 of the 1934 Act. Basic Contributions
are transferred by the Employer to the Trustee of the Plan.
Notwithstanding the preceding, a Participant who receives a hardship
distribution under the terms of the Profit Sharing Plan, may not be eligible to
make additional contributions under a Compensation Reduction Agreement for a
period of twelve moths after the receipt of the hardship distribution.
EMPLOYER CONTRIBUTIONS. The Bank makes discretionary contributions
to the Profit Sharing Plan, subject to the limitations on the deductibility of
such contributions set forth in the Code. For Participants in the Profit
Sharing Plan for less than 5 years, the Bank may contribute for each Plan Year
50% of each Participant's Basic Contributions up to a maximum of 6% of the
Participants' Basic Contributions. For Participants in the Profit Sharing Plan
greater than 5 years but less than 10 years the Bank may contribute for each
Plan Year 75% of each Participant's Basic Contributions up to 6% of the
Participant's Basic Contributions. For Participants in the Profit Sharing Plan
greater than 10 years the Bank
5
<PAGE> 10
may contribute for each Plan Year 100% of each Participant's Basic Contribution
up to a maximum of 6% of the Participant's Basic Contribution.
Such amounts are credited to the "Participant's Matching Contribution
Account." After the Conversion, at the discretion of the Bank, the Employer
contributions made with respect to Participants who are Bank employees will be
credited to the Participant's Account in the Bank's Employee Stock Ownership
Plan. At its discretion, the Employer may make an additional contribution to
the Plan as of the end of the Plan Year in an amount determined by the Employer
for the purpose of ensuring that the Profit Sharing Plan complies with Section
401(k) of the Code ("Special Contribution"). Such amounts are credited to the
Participant's Basic Contribution Accounts. Special Contributions may be made
only to the accounts of non-highly compensated employees.
LIMITATIONS ON CONTRIBUTIONS
LIMITATIONS ON ANNUAL ADDITIONS AND BENEFITS. Pursuant to the
requirements of the Code, the Profit Sharing Plan provides that the amount of
contributions and forfeitures allocated to each Participant's Basic
Contribution Account and Matching Contribution Account during any plan year may
not exceed the lesser of 25% of the Participant's Section 415 Compensation for
the Plan Year or $30,000 (adjusted for increases in the cost of living as
permitted by the Code). A Participant's Section 415 Compensation is a
Participant's Compensation, excluding any Employer contribution to the Profit
Sharing Plan or to any other plan of deferred compensation or any distributions
from a plan of deferred compensation. In addition, annual additions shall be
limited to the extent necessary to prevent the limitations set forth in the
Code for all of the qualified defined benefit plans and defined contribution
plans maintained by the Bank from being exceeded. To the extent that these
limitations would be exceeded by reason of excess annual additions with respect
to a Participant, such excess will be disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to
reduce the Employer's contributions for such Participant in the next Limitation
Year, and each succeeding Limitation Year if necessary; and
(ii) If an excess amount still exists and the Participant is not
covered by the Profit Sharing Plan at the end of the Limitation Year, the
excess amount during the succeeding Limitation Year, shall be allocated to
each Participant then actively participating in the Profit Sharing Plan.
LIMITATION ON 401(k) PLAN CONTRIBUTIONS. The annual amount of
Deferred Compensation under a Compensation Reduction Agreement of a Participant
(when aggregated with any elective deferrals of the Participant under a
simplified employee pension plan or a tax-deferred annuity) may not exceed
$7,000 adjusted for increases in the cost of living as permitted by the Code
(the limitation for 1997 is $9,500). Contributions in excess of this
limitation ("excess deferrals") will be included in the Participant's gross
income for federal income tax purposes in the year they are made. In addition,
any such excess
6
<PAGE> 11
deferral will again be subject to federal income tax when distributed by the
Profit Sharing Plan to the Participant, unless the excess deferral (together
with any income allocable thereto) is distributed to the Participant not later
than the first April 15th following the close of the taxable year in which the
excess deferral is made. Any income on the excess deferral that is distributed
not later than such date shall be treated, for federal income tax purposes, as
earned and received by the Participant in the taxable year in which the excess
deferral is made.
LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES.
Sections 401(k) and 401(m) of the Code limit the amount of Deferred
Compensation that may be made to the Profit Sharing Plan in any Plan Year on
behalf of Highly Compensated Employees (defined below) in relation to the
amount of Deferred Compensation made by or on behalf of all other employees
eligible to participate in the Profit Sharing Plan. Specifically, the actual
deferral percentage (i.e., the average of the ratios, calculated separately for
each eligible employee in each group, by dividing the amount of Deferred
Compensation credited to the Basic Contribution Account of such eligible
employee by such eligible employee's compensation for the Plan Year) of the
Highly Compensated Employees may not exceed the greater of (i) 125% of the
actual deferral percentage of all other eligible employees, or (ii) the lesser
of (x) 200% of the actual deferral percentage of all other eligible employees,
or (y) the actual deferral percentage of all other eligible employees plus two
percentage points. In addition, the actual contribution percentage for such
Plan Years (i.e., the average of the ratios calculated separately for each
eligible employee in each group, by dividing the amount of voluntary Employee
and Employer matching contribution credited to the Matching Contribution
Account and Special Contribution of such eligible employee by such eligible
employee's compensation for the Plan Year) of the Highly Compensated Employees
may not exceed the greater of (i) 125% of the actual contribution percentage of
all other eligible employees, or (ii) the lesser of (x) 200% of the actual
contribution percentage of all other eligible employees, or (y) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, for years beginning after December 31, 1996, a Highly
Compensated Employee includes any employee who, during the Plan Year or the
preceding Plan Year, (1) was at any time a 5% owner (i.e., owns directly or
indirectly more than 5% of the stock of the Employer, or stock possessing more
than 5% of the total combined voting power of all stock of the Employer), or
(2) for the preceding year (i) had compensation from the employer in excess of
$80,000, and (ii) if the employer elects the application of this clause for
such preceding year, was in the top-group of employees for such preceding year.
An employee is in the top-paid group of employees for any year if such employee
is in the group consisting of the top 20 percent of employees when ranked on
the basis of compensation paid during such year. Such amounts are adjusted
annually to reflect increases in the cost of living.
In order to prevent the disqualification of the Profit Sharing Plan,
any amount contributed by Highly Compensated Employees that exceeds the average
deferral limitation
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<PAGE> 12
in any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Employer will be subject to a
10% excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate.
TOP-HEAVY PLAN REQUIREMENTS. If for any Plan Year the Profit Sharing
Plan is a Top-Heavy Plan (as defined below), then (i) the Bank may be required
to make certain minimum contributions to the Profit Sharing Plan on behalf of
non-key employees (as defined below), and (ii) certain additional restrictions
would apply with respect to the combination of annual additions to the Profit
Sharing Plan and projected annual benefits under any defined benefit plan
maintained by the Bank.
In general, the Profit Sharing Plan will be regarded as a "Top-Heavy
Plan" for any Plan Year if, as of the last day of the preceding Plan Year, the
aggregate balance of the Accounts of Participants who are Key Employees exceeds
60% of the aggregate balance of the Accounts of all Participants. Key
Employees generally include any employee who, at any time during the Plan Year
or any of the four preceding Plan Years, is (1) an officer of the Employee
having annual compensation in excess of 50% of the amount under Section
415(b)(1)(A) of the Code ($60,000 for 1997), (2) one of the ten employees
having annual compensation greater than the Section 415(c)(1)(A) amount
($30,000 for 1997) and owning, directly or indirectly, the largest interests in
the Company, (3) a 5% owner of the Company, (i.e., owns directly or indirectly
more than 5% of the stock of the Company, or stock possessing more than 5% of
the total combined voting power of all stock of the Bank) or (4) a 1% owner of
the Company having annual compensation in excess of $150,000 (160,000 for
1997).
INVESTMENT OF CONTRIBUTIONS
GENERAL. All amounts credited to Participants' Accounts under the
Profit Sharing Plan are held in the Plan Trust (the "Trust") which is
administered by the Trustee appointed by the Bank's Board of Directors.
Prior to __________________, 1997, the Accounts of a Participant held
in the Trust have been invested by the Trustee at the direction of the
Participant in the following funds:
a. Core Equity Fund;
b. Emerging Growth Equity Fund;
c. Value Equity Fund;
d. Intermediate - Term Bond Fund;
e. Actively Managed Bond Fund;
f. Short-Term Investment Fund.
The Profit Sharing Plan, as amended effective _______________, now
provides that in addition to the Funds specified above, a Participant who is
employed by the Bank may
8
<PAGE> 13
direct the Trustee to invest all or a portion of his Basic Contribution Account
or Rollover Account in the Stock Fund. The Matching Contribution Account of
Participants who are Bank employees will be entirely invested in Employer Stock
under the terms of Staten Island Savings Bank Employee Stock Ownership Plan
being implemented by the Bank.
At least once in each calendar quarter, but in no event more
frequently than two times each Plan Year, a Participant may elect to have both
past and future contributions and additions to the Participant's Basic
Contribution Account and Rollover Account invested either in the Employer Stock
Fund or among such other Funds. [PARTICIPANTS MAY ALSO ELECT TO HAVE PAST
CONTRIBUTIONS TO THEIR MATCHING CONTRIBUTION ACCOUNTS INVESTED IN EITHER THE
EMPLOYER STOCK FUND OR AMONG SUCH OTHER FUNDS.] These elections will be
effective on the effective date of the Participant's written notice to the plan
administrator, provided such notice is filed with the administrator at least 10
days before it is to become effective. Any amounts credited to a Participant's
Accounts for which investment directions are not given will be invested in
accordance with the terms of the Profit Sharing Plan.
A Participant who receives a loan from the Profit Sharing Plan has a
separate account established under the Profit Sharing Plan. The balance of a
Participant's loan account represents the unpaid principal and interest (if
any) of such participant's loan from the Profit Sharing Plan. Repayments of
principal and payments of interest on loans are invested by the Trustee as
directed by the Participant or, if no investment directions are given, in
accordance with the terms of the Plan.
The net gain (or loss) of the Funds from investments (including
interest payments, dividends, realized and unrealized gains and losses on
securities, and expenses paid from the Trust) will be determined at least
monthly during the Plan Year. For purposes of such allocations, all assets of
the Trust are valued at their fair market value.
PREVIOUS FUNDS. Prior to _______________, contributions under the
Plan were invested in the seven Funds specified above. The annual percentage
return on these funds for the prior three years was:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C> <C>
a. Core Equity Fund 21.53% 40.17% 1.31%
b. Emerging Growth Equity Fund 27.09 42.83 2.53
c. Value Equity Fund 25.90 33.96 (1.14)
d. Intermediate -Term Bond Fund 4.02 13.99 (2.54)
e. Actively Managed Bond Fund 3.15 17.70 (4.21)
f. Short-term Investment Fund 4.70 5.39 3.40
</TABLE>
THE EMPLOYER STOCK FUND. The Employer Stock Fund will consist of
investment in Common Stock made on and after the effective date of the
Conversion. Cash dividends, if any, paid on Common Stock held in the Employer
Stock Fund will be credited to a cash dividend subaccount for each Participant
investing in the Employer Stock Fund. The Board of Directors of the Company
may consider a policy of paying cash dividends on the Common Stock in the
future; however, no decision as to the amount or timing of cash dividends, if
any, has been made. The Trustee will, to the extent practicable, use all
9
<PAGE> 14
amounts held by it in the Employer Stock Fund (except the amounts credited to
cash dividend subaccounts) to purchase shares of Common Stock of the Company.
It is expected that all purchases will be made at prevailing market prices.
Under certain circumstances, the Trustee may be required to limit the daily
volume of shares purchased. Pending investment in Common Stock, assets held in
the Employer Stock Fund will be placed in bank deposits and other short-term
investments.
When Common Stock is purchased or sold, the cost or net proceeds are
charged or credited to the Accounts of Participants affected by the purchase or
sale. Participants' Accounts will also be adjusted for any brokerage
commissions, transfer fees and other expenses incurred in the sale and purchase
of Common Stock for the Employer Stock Fund. A Participant's Account will be
adjusted to reflect changes in the value of shares of Common Stock resulting
from stock dividends, stock splits and similar changes.
As of the date of this Prospectus Supplement, none of the shares of
Common Stock have been issued or are outstanding and there is no established
market for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of the
Company and the Bank and market conditions for the Common Stock generally.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL
RISKS IN INVESTMENT IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE
RISK FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS ON PAGE _____.
VESTING
A Participant at all times has a fully vested nonforfeitable interest
in his Basic Contribution Account and the earnings thereon under the Plan.
Generally, a Participant vests in his or her Matching Contribution Account
under the Plan according to the following schedule:
<TABLE>
<CAPTION>
Period of Service Vested Percentage
----------------------------- -----------------
<S> <C>
less than 2 years 0%
2 years but less 3 years 20%
3 years but less than 4 years 40%
4 years but less than 5 years 60%
5 years but less than 6 years 80%
6 or more years 100%
</TABLE>
10
<PAGE> 15
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT. A Participant may
make a withdrawal from his (i) Basic Contribution Account plus certain earnings
thereon, and (ii) the net value of his or her (a) Rollover Contribution
Account, (b) Matching Contribution Account, if 100% vested, and (c) Profit
Sharing Account, if 100% vested subject to the hardship distribution rules
under the Plan. These requirements are designed to ensure that Participants
have a true financial need before a withdrawal may be made.
A Participant who has attained age 59 1/2 may be entitled to withdraw
up to twice during the Plan Year all or any portion of net value of his or her
Basic Contribution Account and Rollover Contribution Account.
DISTRIBUTION UPON RETIREMENT, DISABILITY OR TERMINATION OF EMPLOYMENT.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment as soon as administratively feasible after such termination of
employment if the vested value of the Participant's Account is $3,500 or less.
If the vested portion of the Participant's Account balance is greater than
$3,500, the Participant may receive a distribution (subject to the minimum
distribution rules) in a lump sum payment: (a) as soon as administratively
possible after termination, (b) as of any Valuation Date up to 13 months after
termination or (c) as of the date the Participant attains normal retirement
age. Alternatively, a Participant who terminates service as of his or her
retirement day may elect to receive benefits in the form installments over a
period not to exceed 15 years. Benefit payments ordinarily shall be made not
later than 60 days following the end of the Plan Year in which occurs the
latest of the Participant's: (i) termination of employment; (ii) the attainment
of age 65 or (iii) the 10th anniversary of commencement of participation in the
Plan; but in no event later than the April 1 following the calendar year in
which the Participant attains age 70 1/2; or the calendar year in which the
employee retires. However, if the vested portion of the Participant's Account
balances exceeds $3,500, no distribution shall be made from the Plan prior to
the Participant's attaining age 65 unless the Participant elects to receive to
an earlier distribution.
DISTRIBUTION UPON DEATH. A Participant who dies before his or her
entire vested interest has been distributed shall have his or her benefits paid
to the surviving spouse in a lump sum as soon as administratively possible
following the date of his death. If however, the Participant elected prior to
his death to receive a deferred lump sum payment and had not yet received such
distribution, such Beneficiary shall receive a lump sum distribution as of the
earlier of the Valuation Date in the Participant's election or the last
Valuation Date which occurs within one (1) year of the Participant's death. If
the Participant elected to and began receiving a distribution in the form of
installments, such Beneficiary shall receive distributions over the remaining
period, at the times set forth in such election. With respect to an unmarried
Participant, and in the case of a married Participant with spousal consent to
the designation of another beneficiary, payment of benefits to the beneficiary
of a deceased Participant shall be made in the form of a lump-sum payment or in
the same manner described above as to a Participant with a surviving spouse.
11
<PAGE> 16
NONALIENATION OF BENEFITS. Except with respect to federal income tax
withholdings and as provided with respect to a qualified domestic relations
order (as defined in the Code), benefits payable under the Profit Sharing Plan
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any
kind, either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the Profit Sharing Plan shall be void.
ADMINISTRATION OF THE PROFIT SHARING PLAN
The Trustee with respect to the Profit Sharing Plan is the named
fiduciary of the Profit Sharing Plan for purposes of Section 402 of ERISA.
The Trustee is appointed by the Board of Directors of the Bank to
serve at its pleasure. The current Trustee of the Profit Sharing Plan is the
RSI Retirement Trust. However, an additional Trustee is being appointed to
hold funds invested in the Employer Stock Fund.
The Trustee receives, holds and invests the contributions to the
Profit Sharing Plan in trust and distributes them to Participants and
beneficiaries in accordance with the terms of the Profit Sharing Plan and the
directions of the Plan Administrator. The Trustee is responsible for
investment of the assets of the Trust.
REPORTS TO PROFIT SHARING PLAN PARTICIPANTS
[THE ADMINISTRATOR (AS DEFINED BELOW) WILL FURNISH TO EACH PARTICIPANT
A STATEMENT AT LEAST QUARTERLY SHOWING (i) THE BALANCE IN THE PARTICIPANT'S
ACCOUNT AS OF THE END OF THAT PERIOD, (ii) THE AMOUNT OF CONTRIBUTIONS
ALLOCATED TO SUCH PARTICIPANT'S ACCOUNT FOR THAT PERIOD, AND (iii) THE
ADJUSTMENTS TO SUCH PARTICIPANT'S ACCOUNT TO REFLECT EARNINGS OR LOSSES,
DISTRIBUTIONS, LOANS DISBURSED, LOAN REPAYMENTS AND/OR TRANSFERS BETWEEN
INVESTMENT FUNDS.]
PLAN ADMINISTRATION
Pursuant to the terms of the Profit Sharing Plan, the Profit Sharing
Plan is administered by one or more persons who are appointed by and who serve
at the pleasure of the Bank (the "Administrator").
Currently, the Administrator is RSI Retirement Trust. The address and
telephone number of the Administrator is 317 Madison Avenue, New York, New York
10017; (___) ________. The Administrator is responsible for the administration
of the Profit Sharing Plan, interpretation of the provisions of the Profit
Sharing Plan, prescribing procedures for filing applications for benefits,
preparation and distribution of information explaining the Profit Sharing Plan,
maintenance of Profit Sharing Plan records, books of account and all other data
necessary for the proper administration of the Profit Sharing Plan, and
preparation and filing of all returns and reports relating to the Profit
Sharing Plan which are required to be filed with the U.S. Department of Labor
and the IRS, and for all disclosures
12
<PAGE> 17
required to be made to Participants, Beneficiaries and others under Sections
104 and 105 of ERISA.
AMENDMENT AND TERMINATION
It is the current intention of the Bank to continue the Profit Sharing
Plan indefinitely. Nevertheless, the Bank may terminate the Profit Sharing
Plan at any time. If the Profit Sharing Plan is terminated in whole or in
part, then regardless of other provisions in the Profit Sharing Plan, each
Participant affected by such termination shall have a fully vested interest in
his Account. The Bank reserves the rights to make, from time to time, any
amendment or amendments to the Profit Sharing Plan which do not cause any part
of the Trust to be used for, or diverted to, any purpose other than the
exclusive benefit of Participants or their beneficiaries; provided, however,
that the Bank may make any amendment it determines necessary or desirable, with
or without retroactive effect, or comply with ERISA.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Profit Sharing Plan
with another plan, or the transfer of the Trust assets to another plan, the
Profit Sharing Plan requires that each Participant will (if either the Profit
Sharing Plan or the other plan were then terminated) receive a benefit
immediately after the merger, consolidation or transfer which is equal to or
greater than the benefit he would have been entitled to receive immediately
before the merger, consolidation or transfer (if the Profit Sharing Plan had
then terminated).
FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following is only a brief summary of certain federal
income tax aspects of the Profit Sharing Plan which are of general application
under the Code and is not intended to be a complete or definitive description
of the federal income tax consequences of participating in or receiving
distributions from the Profit Sharing Plan. The summary is necessarily general
in nature and does not purport to be complete. Moreover, statutory provisions
are subject to change, as are their interpretations, and their applicable may
vary in individual circumstances. Finally, the consequences under applicable
state and local income tax laws may not be the same as under the federal income
tax laws. PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO
ANY DISTRIBUTION FROM THE PROFIT SHARING PLAN AND TRANSACTIONS INVOLVING THE
PROFIT SHARING PLAN.
The Profit Sharing Plan will be submitted to the IRS in a timely
manner for a determination that it is qualified under Section 401(a) and 401(k)
of the Code, and that the related Trust is exempt from tax under Section 501(a)
of the Code. A plan that is "qualified" under these sections of the Code is
afforded special tax treatment which include the following: (1) the sponsoring
employer is allowed an immediate tax deduction for the amount contributed to
the Profit Sharing Plan each year; (2) participants pay no current income tax
on amounts contributed by the employer on their behalf; and (3) earnings of the
plan are tax-exempt thereby permitting the tax-free accumulation of income and
gains on
13
<PAGE> 18
investments. The Profit Sharing Plan will be administered to comply in
operation with the requirements of the Code as of the applicable effective date
of any change in the law. The Bank expects to timely adopt any amendments to
the Profit Sharing Plan that may be necessary to maintain the qualified status
of the Profit Sharing Plan under the Code. Following such an amendment, the
Bank will submit the Profit Sharing Plan to the IRS for a determination that
the Profit Sharing Plan, as amended, continues to qualify under Sections 401(a)
and 501(a) of the Code and that it continues to satisfy the requirements for a
qualified cash or deferred arrangement under Section 401(k) of the Code.
Should the Profit Sharing Plan receive from the IRS an adverse determination
letter regarding its tax exempt status, all participants would generally
recognize income equal to their vested interest in the Profit Sharing Plan, the
participants would not be permitted to transfer amounts distributed from the
Profit Sharing Plan to an IRA or to another qualifies retirement plan, and the
Bank may be denied certain deductions taken with respect to the Profit Sharing
Plan.
LUMP SUM DISTRIBUTION. A distribution from a Profit Sharing Plan to a
Participant or the beneficiary of a Participant will qualify as a Lump Sum
Distribution if it is made: (i) within one taxable year to the Participant or
beneficiary; (ii) on account of the Participant's death, disability or
separation from service, or after the Participant attains age 59 1/2; and (iii)
consists of the balance to the credit of the Participant under this Profit
Sharing Plan and all other profit sharing plans, if any, maintained by the
Bank. The portion of any Lump Sum Distribution that is required to be included
in the Participant's or beneficiary's taxable income for federal income tax
purposes (the "total taxable amount") consists of the entire amount of such
Lump Sum Distribution less the amount of after-tax contributions, if any, made
by the Participant to any other profit sharing plans maintained by the Bank
which is included in such distribution.
AVERAGING RULES. The Small Business Job Protection Act of 1996
repealed five-year income averaging for lump sum distributions for taxable
years beginning after 1999. Ten-year averaging which was grandfathered for
individuals who attained the age of 50 before January 1, 1986 was retained.
The portion of the total taxable amount of a Lump Sum Distribution that is
attributable to participation after 1973 in this Profit Sharing Plan or in any
other profit sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However for distributions prior to the effective date, a Participant
who has completed at least five years of participation in this Plan before the
taxable year in which the distribution is made, or a beneficiary who receives a
Lump Sum Distribution on account of the Participant's death (regardless of the
period of the Participant's participation in this Plan or any other profit
sharing plan maintained by the Employer), may elect to have the ordinary income
portion of such Lump Sum Distribution taxed according to a special averaging
rule ("five-year averaging"). The election of the special averaging rules may
apply only to one Lump Sum Distribution received on or after the Participant
turns 50 1/2 and the recipient elects to have any other Lump Sum Distribution
from a qualified plan received in the same taxable year taxed under the special
averaging rule. Under a special grandfathering rule, individuals who turned 50
by 1986 may elect to have their Lump Sum Distribution taxed under either the
five-year averaging rule or under the prior law ten-year averaging rule. Such
individuals also may elect to have that portion of the Lump Sum Distribution
attributable to the
14
<PAGE> 19
participant's pre-1974 participation in the Plan taxed at a flat 20% rate as
gain from the sale of a capital asset.
COMMON STOCK INCLUDED IN LUMP SUM DISTRIBUTION. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be
reduced by the amount of any net unrealized appreciation with respect to such
Common Stock, i.e., the excess of the value of such Common Stock at the time of
the distribution over its cost of the Profit Sharing Plan. The tax basis of
such Common Stock, to the Participant or beneficiary for purposes of computing
gain or loss on its subsequent sale will be the value of the Common Stock at
the time of distribution less the amount of net unrealized appreciation. Any
gain on a subsequent sale or other taxable disposition of such Common Stock, to
the extent of the amount of net unrealized appreciation at the time of
distribution, will be considered long-term capital gain regardless of the
holding period of such Common Stock. Any gain on a subsequent sale or other
taxable disposition of the Common Stock in excess of the amount of net
unrealized appreciation at the time of distribution will be considered either
short-term capital gain or long-term capital gain depending upon the length of
the holding period of the Common Stock. The recipient of a distribution may
elect to include the amount of any net unrealized appreciation in the total
taxable amount of such distribution to the extent allowed by the regulations to
be issued by the IRS.
DISTRIBUTION: ROLLOVERS AND DIRECT TRANSFERS TO ANOTHER QUALIFIED
PLAN OR TO AN IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Profit Sharing Plan may be rolled over to
another qualified retirement plan or to an Individual Retirement Account
("IRA") without regard to whether the distribution is a Lump Sum Distribution
or a Partial Distribution. Effective January 1, 1993, Participants have the
right to elect to have the Trustee transfer all or any portion of an "eligible
rollover distribution" directly to another plan qualified under Section 401(a)
of the Code or to an IRA. If the Participant does not elect to have an
"eligible rollover distribution" transferred directly to another qualified plan
or to an IRA, the distribution will be subject to a mandatory federal
withholding tax equal to 20% of the taxable distribution. The principal types
of distributions which do not constitute eligible rollover distributions are
(i) an annuity type distribution made over the life expectancy of the
Participant (or Participant and another) or for a period of 10 years or more,
(ii) a minimum distribution required by Section 409 (a) (9) of the Code, or
(iii) the portion of any distribution not includable in gross income, except
that unrealized appreciation in employee securities can be included in an
eligible rollover distribution. The tax law change described above did not
modify the special tax treatment of Lump Sum Distributions, that are not rolled
over or transferred i.e., forward averaging, capital gains tax treatment and
the nonrecognition of net unrealized appreciation, discussed earlier.
ERISA AND OTHER QUALIFICATION
As noted above, the Profit Sharing Plan is subject to certain
provisions of ERISA, and will be submitted to the IRS for a determination that
it is qualified under Section 401(a) of the Code.
15
<PAGE> 20
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX
ASPECTS OF THE PROFIT SHARING PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE
CODE AND IS NOT INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE
FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS
FROM THE PROFIT SHARING PLAN. ACCORDINGLY, EACH PARTICIPANT IS URGED TO
CONSULT A TAX ADVISOR CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES
OF PARTICIPATING IN AND RECEIVING DISTRIBUTIONS FROM THE PROFIT SHARING PLAN.
RESTRICTIONS ON RESALE
Any person receiving shares of Common Stock under the Profit Sharing
Plan who is an "affiliate" of the Company as the term "affiliate" is used in
Rules 144 and 405 under the Securities Act of 1933, as amended (the "Securities
Act"), (e.g., directors, officers and substantial shareholders of the Company)
may reoffer or resell such shares only pursuant to a registration statement
filed under the Securities Act assuming the availability thereof, pursuant to
Rule 144 or some other exemption of the registration requirements of the
Securities Act. Any person who may be an "affiliate" of the Company may wish
to consult with counsel before transferring any Common Stock owned by him. In
addition, Participants are advised to consult with counsel as to the
applicability of Section 16 of the 1934 Act which may restrict the sale of
Common Stock where acquired under the Profit Sharing Plan, or other sales of
Common Stock.
Persons who are not deemed to be "affiliates" of the Company at the
time of resale will be free to resell any shares of Common Stock to them under
the Plan, either publicly or privately, without regard to the Registration and
Prospectus delivery requirements of the Securities Act or compliance with the
restrictions and conditions contained in the exemptive rules thereunder. An
"affiliate" of the Company is someone who directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common control,
with the Company. Normally, a director, principal officer or major shareholder
of a corporation may be deemed to be an "affiliate" of that corporation. A
person who may be deemed an "affiliate" of the Company at the time of a
proposed resale will be permitted to make public resales of the Company's
Common Stock only pursuant to a "reoffer" Prospectus or in accordance with the
restrictions and conditions contained in Rule 144 under the Securities Act or
some other exemption from registration, and will not be permitted to use this
Prospectus in connection with any such resale. In general, the amount of the
Company's Common Stock which any such affiliate may publicly resell pursuant to
Rule 144 in any three-month period may not exceed the greater of one percent of
the Company's Common Stock then outstanding or the average weekly trading
volume reported on the New York Stock Exchange during the four calendar weeks
prior to the sale. Such sales may be made only through brokers without
solicitation and only at a time when the Company is current in filing the
reports required of it under the 1934 Act.
16
<PAGE> 21
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the 1934 Act imposes reports and liability requirements
on officers, directors and persons beneficially owning more than ten percent of
public companies such as the Company. Section 16(a) of the 1934 Act requires
the filing of reports of beneficial ownership. Within ten days of becoming a
person subject to the reporting requirements of Section 16(a), a Form 3
reporting initial beneficial ownership must be filed with the Securities and
Exchange Commission ("SEC"). Certain changes in beneficial ownership, such as
purchases, sales, gifts and participation in savings and retirement plans must
be reported periodically, either on a Form 4 within ten days after the end of
the month in which a change occurs, or annually on a Form 5 within 45 days
after the close of the Company's fiscal year. Participation in the Employer
Stock Fund of the Plan by officers, directors and persons beneficially owning
more than ten percent of the Company must be reported to the SEC annually on a
Form 5 by such individuals.
In addition to the reporting requirements described above, Section
16(b) of the 1934 Act provides for the recovery by the Company of profits
realized by any officer, director or any person beneficially owning more than
ten percent of the Company's Common Stock ("Section 16(b) Persons") resulting
from the purchase and sale or sale and purchase of the Company's Common Stock
within any six-month period.
The SEC has adopted rules that provide exemption from the profit
recovery provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided
certain requirements are met.
EXPERTS
The financial statements of the Profit Sharing Plan as of December 31,
1995 and 1994 on and for the years then ended have been included herein in
reliance upon the report of Arthur Andersen, independent certified public
accountant, appearing elsewhere wherein, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon
by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D. C., which firm acted
as special counsel for the Company and the Bank in connection with the
Conversion.
17
<PAGE> 22
STATEN ISLAND SAVINGS BANK
401(k) SAVINGS PLAN
FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
18
<PAGE> 23
STATEN ISLAND SAVINGS BANK
401(k) SAVINGS PLAN
Index to Financial Statements
Independent Auditors' Report
Financial Statements:
Statements of Net Assets Available for Plan Benefits
Statements of Changes in Net Assets Available for Plan Benefits
Notes to Financial Statements
Supplemental Schedules:
Schedule of Investment
Schedule of Reportable Transactions
F-1
<PAGE> 24
STATEN ISLAND SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
INVESTMENT FORM
---------------------
Name of Plan Participant:
---------------------------
Social Security Number:
---------------------------
1. INSTRUCTIONS. In connection with the proposed reorganization
of Staten Island Savings Bank (the "Conversion"), the Staten Island Savings
Bank 401(k) Savings Plan in RSI Retirement Trust ("Profit Sharing Plan") has
been amended to permit participants to direct their current account balances
for their Basic Contribution Account and Matching Contribution Account and
Rollover Account into a new fund: the Employer Stock Fund. The percentage of a
participant's account transferred at the direction of the participant into the
Employer Stock Fund will be used to purchase shares of common stock of Staten
Island Bancorp, Inc. (the "Common Stock").
To direct a transfer of all or part of the funds credited to your
Accounts to the Employer Stock Fund, you should complete and file this form
with the Human Resources Department, no later than ______________, 1997. A
representative for the Plan Administrator will retain a copy of this form and
return a copy to you. If you need any assistance in completing this form,
please contact _____________________. If you do not complete and return this
form to the Plan Administrator by _________, the funds credited to your
accounts under the Plan will continue to be invested in accordance with your
prior investment direction, or in accordance with the terms of the Plan if no
investment direction has been provided.
2. INVESTMENT DIRECTIONS. I hereby direct the Plan Administrator
to invest the following percentage (in multiples of not less than 25%) of my
Basic Contribution Account, Matching Contribution Account and Rollover Account.
a. Core Equity Fund ____%
b. Emerging Growth Fund ____%
c. Value Equity Fund ____%
d. Intermediate - Term Investment Fund ____%
e. Actively Managed Bond Fund ______%
f. Short-Term Investment Fund _____%
g. Employer Stock Fund ________%
NOTE: The total percentage of directed investments, above, may not
exceed 100%.
3. ACKNOWLEDGEMENT OF PARTICIPANT. I understand that this
Investment Form shall be subject to all of the terms and conditions of the
Profit Sharing Plan. I acknowledge that I have received a copy of the
Prospectus and the Prospectus Supplement.
- ----------------------------------- ----------
Signature of Participant Date
- ----------------------------------------------------
ACKNOWLEDGEMENT OF RECEIPT BY ADMINISTRATOR. This Investment Form was received
by the Plan Administrator and will become effective on the date noted below.
- ----------------------------------- ----------
By: Date
<PAGE> 25
ARTHUR ANDERSEN LLP
STATEN ISLAND SAVINGS BANK
401(k) SAVINGS PLAN
PLAN EIN: 13-5579133
PLAN NUMBER: 002
FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 26
STATEN ISLAND SAVINGS BANK
401(k) SAVINGS PLAN
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS:
Statements of Net Assets Available for Plan Benefits as of
December 31, 1996 and 1995 2
Statement of Changes in Net Assets Available for Plan Benefits
for the Year Ended December 31, 1996 3
NOTES TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES 4-8
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
AS OF DECEMBER 31, 1996 9
ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS FOR
THE YEAR ENDED DECEMBER 31, 1996 10
</TABLE>
NOTE: All other schedules are omitted as they are not applicable or
are not required based on disclosure requirements of the
Employee Retirement Income Security Act of 1974 and applicable
regulations issued by the Department of Labor.
<PAGE> 27
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees of
Staten Island Savings Bank:
We have audited the accompanying statements of net assets available for plan
benefits of the Staten Island Savings Bank 401(k) Savings Plan as of December
31, 1996 and 1995, and the related statement of changes in net assets available
for plan benefits for the year ended December 31, 1996. These financial
statements and the schedules referred to below are the responsibility of the
plan administrator. Our responsibility is to express an opinion on these
financial statements and schedules 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 net assets available for plan benefits of the Staten
Island Savings Bank 401(k) Savings Plan as of December 31, 1996 and 1995, and
the changes in its net assets available for plan benefits for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules as listed in
the accompanying index are presented for purposes of additional analysis and
are not a required part of the basic financial statements but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. The supplemental schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
As explained in the notes thereto, information certified by the trustee and
presented in the schedules of assets held for investment purposes and
reportable transactions does not disclose the historical cost of certain
investments. Disclosure of this information, which is not considered material
to the financial statements taken as a whole, is required by the Department of
Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974.
/s/ ARTHUR ANDERSEN LLP
New York, New York
August 15, 1997
-1-
<PAGE> 28
STATEN ISLAND SAVINGS BANK
401(k) SAVINGS PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------------- --------------
<S> <C> <C>
ASSETS:
Loans to participants $ 794,445 $ 617,990
-------------- ------------
Investments stated at fair value-
Core Equity Fund 7,473,698 5,597,914
Emerging Growth Equity Fund 1,764,255 986,421
Value Equity Fund 1,269,361 751,949
Actively Managed Bond Fund 1,084,036 886,934
Intermediate-Term Bond Fund 699,042 433,343
Short-Term Investment Fund 1,028,456 856,184
-------------- ------------
Total investments 13,288,849 9,512,745
-------------- ------------
Cash 6,991 13,756
-------------- ------------
Net assets available for plan benefits $ 14,090,285 $ 10,144,491
============== ============
</TABLE>
The accompanying notes are an integral part of these statements.
-2-
<PAGE> 29
STATEN ISLAND SAVINGS BANK
401(k) SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Emerging
Core Equity Growth Value Equity
Fund Equity Fund Fund
--------------- ---------------- ---------------
<S> <C> <C> <C>
ADDITIONS:
Contributions-
Employer $ 622,253 $ 168,183 $ 130,078
Employee 264,876 72,470 58,047
------------ ---------- ----------
887,128 240,653 188,124
Investment income-
Realized and unrealized gain (loss) on investments 1,233,413 281,922 222,262
Loan repayments (including interest) 286,636 52,509 40,571
Interfund transfers - 140,071 29,771
Rollovers 315,186 164,095 121,672
------------ ---------- ----------
Total additions 2,722,364 879,250 602,400
------------ ---------- ----------
DEDUCTIONS:
Distributions to participants or beneficiaries (243,842) (23,842) (19,112)
New loans (349,069) (77,574) (65,876)
Interfund transfers (253,669) - -
------------ ---------- ----------
Total deductions (846,580) (101,416) (84,988)
------------ ---------- ----------
Net increase (decrease) 1,875,784 777,834 517,412
NET ASSETS AVAILABLE FOR PLAN BENEFITS,
beginning of year 5,597,914 986,421 751,949
------------ ---------- ----------
NET ASSETS AVAILABLE FOR PLAN BENEFITS,
end of year $ 7,473,698 $1,764,255 $1,269,361
============ ========== ==========
<CAPTION>
Actively Intermediate-
Managed Term Short-Term
Bond Fund Bond Fund Investment
------------ -------------- ----------
<S> <C> <C> <C>
ADDITIONS:
Contributions-
Employer $ 115,339 $ 102,566 $ 128,600
Employee 52,537 45,842 52,451
---------- --------- -----------
167,877 148,408 181,051
Investment income-
Realized and unrealized gain (loss) on investments 31,083 21,837 40,038
Loan repayments (including interest) 30,249 15,017 38,605
Interfund transfers 12,229 31,893 39,706
Rollovers 75,499 73,097 147,198
---------- --------- -----------
Total additions 316,936 290,252 446,597
---------- --------- -----------
DEDUCTIONS:
Distributions to participants or beneficiaries (64,566) (26,909) (206,768)
New loans (55,268) (27,644) (67,557)
Interfund transfers - - -
---------- --------- -----------
Total deductions (119,834) (54,553) (274,325)
---------- --------- -----------
Net increase (decrease) 197,102 235,699 172,272
NET ASSETS AVAILABLE FOR PLAN BENEFITS,
beginning of year 886,934 433,343 856,184
---------- --------- -----------
NET ASSETS AVAILABLE FOR PLAN BENEFITS,
end of year $1,084,036 $ 669,042 $1,028,456
========== ========= ===========
<CAPTION>
Summary of
Loans to
Participants Other Total
------------------- -------------- ----------------
<S> <C> <C> <C>
ADDITIONS:
Contributions-
Employer $ - $ (6,765) $ 1,260,254
Employee - - 546,222
--------- ---------- ------------
- (6,765) 1,806,476
Investment income-
Realized and unrealized gain (loss) on investments - - 1,830,555
Loan repayments (including interest) (409,573) - 54,013
Interfund transfers - - 253,669
Rollovers - - 896,747
--------- ---------- ------------
Total additions (409,573) (6,765) 4,841,461
--------- ---------- ------------
DEDUCTIONS:
Distributions to participants or beneficiaries (56,960) - (641,998)
New loans 642,988 - -
Interfund transfers - - (253,669)
--------- ---------- ------------
Total deductions 586,028 - (895,667)
--------- ---------- ------------
Net increase (decrease) 176,455 (6,765) 3,945,794
NET ASSETS AVAILABLE FOR PLAN BENEFITS,
beginning of year 617,990 13,756 10,144,491
--------- ---------- ------------
NET ASSETS AVAILABLE FOR PLAN BENEFITS,
end of year $ 794,445 $ 6,991 $ 14,090,285
========= ========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
-3-
<PAGE> 30
STATEN ISLAND SAVINGS BANK
401(k) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING
AND ADMINISTRATIVE POLICIES
Basis of Accounting
The accounting records of the Staten Island Savings Bank 401(k) Savings Plan
(the "Plan") are maintained on the cash basis of accounting which is not
significantly different from the accrual basis of accounting.
Investments
The trust established under the Plan is administered through participation in
the RSI Retirement Trust (the "RSI Trust"). The RSI Trust is a tax-exempt
trust registered as an open-end management investment company under the
Investment Company Act and is the Trustee of the Plan. Plan assets held by the
RSI Trust are represented as units of beneficial interest in one or more of the
investment funds offered by the RSI Trust. The net asset value of the units of
beneficial interest in each investment fund are based on the market value of
the underlying assets of the funds, determined generally by reference to
available market prices. Net investment income and net appreciation
(depreciation) in fair value of units held represents the Plan's proportionate
share of the net investment income and realized and unrealized investment gains
and losses of the RSI Trust investment funds.
Forfeitures
Effective April 1, 1990, the Plan was amended, allocating forfeitures as a
reduction of employer and future employer matching contributions. Employer
contributions were reduced by forfeitures in the amount of $33,598 in 1996.
2. PLAN DESCRIPTION
The following description of the Plan provides only general information.
Participants should refer to the Plan agreement for a more complete description
of the Plan's provisions.
-4-
<PAGE> 31
General
The Plan is a defined contribution plan, sponsored by Staten Island Savings
Bank (the "Bank"), covering all salaried employees of the Bank who have
completed one year of service. It is subject to the provisions of the Employee
Retirement Income Security Act of 1974.
Participant Accounts
Each participant's account is credited with the participant's contributions and
an allocation of the Bank's contribution and Plan earnings. Allocations are
based on participant earnings or account balances, as defined. The payment to
which a participant is entitled is the benefit that can be provided from the
participant's account.
Vesting
Participants are immediately vested in their voluntary contributions plus
actual earnings thereon. Vesting in the remainder of their accounts is based
on years of continuous service. A participant is 100 percent vested after six
years of credited service.
Retirement Provisions and Withdrawals
Upon disability, death, retirement or termination, a participant (or his
estate) is entitled to receive a lump sum distribution equal to the value of
his or her account, or installments over a period not to exceed 15 years of
accumulated plan benefits. Participants may also, in certain instances, make
cash withdrawals to meet an unusual or financial emergency. Plan participants
terminated or retired during the Plan year are entitled to distributions of
$553,081 and $167,658 as of December 31, 1996 and 1995, respectively, which are
included in net assets in the accompanying Statements of Net Assets Available
for Plan Benefits.
Loan Provisions
Participants are permitted to obtain loans from the Plan in an amount of up to
50% of the net value of their 100% vested balance, not to exceed $50,000.
Interest is charged on these loans at a rate similar to that which would be
charged at other financial institutions. Loans bear interest at a rate between
9.25% and 9.50% for 1996 and 7% and 9.5% for 1995. Loan terms cannot exceed 5
years unless the proceeds are used to finance the purchase of a primary
residence, in which case the term of the loan cannot exceed a period of 15
years.
3. FUNDING POLICY
Participants may contribute a minimum of 1% up to a maximum of 8% in 1996 and
1995 of their annual wages before bonuses and overtime not to exceed the
maximum amount permitted under the Internal Revenue Code ($9,240 in 1996 and
1995). The Bank will match 50% to 100% of participant contributions, based on
years of service up to a maximum of 6% of annual wages.
-5-
<PAGE> 32
The Bank may, at its discretion, make contributions to eligible employees on
September 30, based on compensation for the twelve-month period ending
September 30. Such discretionary contributions were $890,755 and $759,716 in
1996 and 1995, respectively. In addition to any other contributions, the Bank
may, at its discretion, make special contributions to the basic contributions
account of any eligible employee.
4. INVESTMENTS
As of December 31, 1996 and 1995, as amended May 31, 1995, the Plan assets were
primarily invested in the following funds administered by the Trustee as
follows:
Core Equity Fund - Consists of investments in a broadly diversified group of
large, financially sound, high-quality companies.
Emerging Growth Equity Fund - Consists of investments primarily in smaller
companies with higher than average returns on equity, earnings growth
potential and dividend growth potential. The fund's holdings focus on
companies with market capitalization of less than $1 billion.
Value Equity Fund - Consists of investments in financially sound companies
that have low price earnings ratios, above average dividend yields,
favorable price-to-book ratios, and are currently out of favor in the
marketplace.
Actively Managed Bond Fund - Consists of investments in bonds with a full
spectrum of maturities (0-30 years) and of high quality.
Intermediate-Term Bond Fund - Consists of investments in high-quality fixed
income securities that mature within ten years or have an expected average
life of ten years or less. In terms of quality, at all times at least 50%
of the investments must be in U.S. Government issues and at least 75% of the
total investments must be instruments rated "AA" or better by certain rating
agencies.
Short-Term Investment Fund - Consists of investments in high-quality cash
equivalent type investments offering substantial liquidity and capital
preservation. The average maturity of the fund's holdings is less than one
year.
-6-
<PAGE> 33
Investments in Trust Funds Managed
by the RSI Trust
Changes in the units of beneficial interest of the trust funds managed by
the RSI Trust in which the Plan participated from January 1, 1996 to
December 31, 1996, were as follows:
<TABLE>
<CAPTION>
Equity Funds
--------------------------------------------
Unit Fair
Units Value Value
------------- --------- ---------------
<S> <C> <C> <C>
CORE EQUITY FUND:
Beginning 112,656.75 $49.69 $ 5,597,914
Ending 123,757.22 60.39 7,473,698
------------- ------ -----------
Net increase (decrease) 11,100.47 $10.70 $ 1,875,784
============= ====== ===========
EMERGING GROWTH EQUITY FUND:
Beginning 18,545.23 $53.19 $ 986,421
Ending 26,098.44 67.60 1,764,255
------------- ------ -----------
Net increase (decrease) 7,553.21 $14.41 $ 777,834
============= ====== ===========
VALUE EQUITY FUND:
Beginning 21,589.11 $34.83 $ 751,949
Ending 28,947.79 43.85 1,269,361
------------- ------ -----------
Net increase (decrease) 7,358.69 $ 9.02 $ 517,412
============= ====== ===========
</TABLE>
<TABLE>
<CAPTION>
Fixed-Income Funds
----------------------------------------------
Unit Fair
Units Value Value
------------ ----------- ----------------
<S> <C> <C> <C>
ACTIVELY MANAGED BOND FUND:
Beginning 28,805.92 $30.79 $ 886,934
Ending 34,132.13 31.76 1,084,036
----------- ------ -----------
Net increase (decrease) 5,326.21 $ 0.97 $ 197,102
=========== ====== ===========
INTERMEDIATE-TERM BOND FUND:
Beginning 15,025.78 $28.84 $ 433,343
Ending 22,301.42 30.00 669,042
----------- ------ -----------
Net increase (decrease) 7,273.64 $ 1.16 $ 235,699
=========== ====== ===========
SHORT-TERM INVESTMENT FUND:
Beginning 43,772.19 $19.56 $ 856,184
Ending 50,217.59 20.48 1,028,456
----------- ------ -----------
Net increase (decrease) 6,445.40 $ 0.92 $ 172,272
=========== ====== ===========
</TABLE>
-7-
<PAGE> 34
The fair value of individual investments that represent 5% or more of the
Plan's total net assets as of December 31, 1996 and 1995, is as follows:
<TABLE>
<S> <C>
1996:
Core Equity Fund $ 7,473,698
Emerging Growth Equity Fund 1,764,255
Value Equity Fund 1,269,361
Actively Managed Bond Fund 1,284,036
Short-Term Managed Bond Fund 1,028,456
1995:
Core Equity Fund 5,597,914
Emerging Growth Equity Fund 986,421
Value Equity Fund 751,949
Actively Managed Bond Fund 886,934
Short-Term Managed Bond Fund 856,184
</TABLE>
5. PLAN TERMINATION
The Bank intends to continue the Plan indefinitely but reserves the right to
amend or terminate it. If the Plan is terminated or if there is a complete
discontinuance of contributions, the Plan participants will be fully vested in
their rights under the Plan.
6. TAX STATUS
The Plan has received a favorable determination letter from the Internal
Revenue Service dated February 16, 1995, indicating that the Plan, as amended
through December 14, 1993, is tax exempt under Section 401(a) of the Internal
Revenue Code of 1986.
7. ADMINISTRATIVE COSTS
The Plan incurs certain administrative costs in connection with its investment
activities which are borne by the Bank.
8. ROLLOVERS FROM GATEWAY
On August 18, 1995, the Bank acquired Gateway State Bank ("Gateway"). Under
the Provisions of the acquisition agreement, all salaried, active employees of
Gateway on August 18, 1995, who became salaried, active employees of the Bank
on August 19, 1995, were recognized under the Plan for purposes of Plan
eligibility and were given credit for years of services for purposes of vesting
in employer matching contributions. The Plan was amended as such. The Gateway
401(k) Plan assets were distributed to the respective participants with an
option to rollover their respective assets to the Staten Island Savings Bank
401(k) Plan. The total rollover from the Gateway 401(k) Plan to the Staten
Island Savings Bank 401(k) Plan was $867,699, which occurred in October 1996.
-8-
<PAGE> 35
STATEN ISLAND SAVINGS BANK
401(k) SAVINGS PLAN
PLAN EIN: 13-5579133
PLAN NUMBER: 002
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
Units Unit
Description of Investment Held Value Fair Value
------------------------- ------------- ----------- ----------------
<S> <C> <C> <C>
Equity:
Core 123,757.22 $60.39 $ 7,473,698
Emerging Growth 26,098.44 67.60 1,764,255
Value 28,947.79 43.85 1,269,361
------------ ------ -------------
10,507,314
-------------
Fixed-Income Funds:
Actively Managed Bonds 34,132.13 31.76 1,084,036
Intermediate-Term Bonds 22,301.42 30.00 669,042
Short-Term Managed Bonds 50,217.59 20.48 1,028,456
------------ ------ -------------
2,781,535
-------------
Special Fund 6,991
-------------
Total fund value 13,295,840
Loans to Participants (Interest rates range from 9.25%
to 9.50% with maturities from one to fifteen years) 794,445
-------------
Total investments $ 14,090,285
=============
</TABLE>
NOTE: The historical cost of investments is not presented as the
Trustee is unable to provide such information.
This schedule should be read in conjunction with the accompanying
financial statements and notes thereto.
-9-
<PAGE> 36
STATEN ISLAND SAVINGS BANK
401(k) SAVINGS PLAN
PLAN EIN: 13-5579133
PLAN NUMBER: 002
ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Current
Value
of Assets
Number Number on
Description of Purchase of Selling Transaction
of Assets Purchases Price Sales Price Date
----------- --------- ------------ ------ ----------- --------------
<S> <C> <C> <C> <C> <C>
SERIES OF TRANSACTIONS:
Core Equity Fund 45 $ 1,344,596 51 $ 699,567 $ 2,044,163
Emerging Growth Equity Fund 44 593,812 33 85,552 679,364
Short-Term Investment Fund 27 353,630 27 190,499 544,129
</TABLE>
NOTE: For the purpose of this schedule, reportable transactions include
either (i) a single transaction or (ii) a series of transactions
involving a specific investment which are individually or in the
aggregate in excess of 5% of the current value of Plan assets at the
beginning of a plan year.
There are no persons that are known to be parties in interest in the
Plan.
The historical cost of investments is not presented as the Trustee is
unable to provide such information.
The net gain or (loss) is not presented as the Trustee is unable to
provide such information.
This schedule should be read in conjunction with the accompanying financial
statements and notes thereto.
-10-
<PAGE> 37
PROSPECTUS
STATEN ISLAND BANCORP, INC.
(Proposed Holding Company for Staten Island Savings Bank)
35,595,238 Shares (Anticipated Maximum) of Common Stock
$10.00 per Share
Staten Island Bancorp, Inc. (the "Company"), a Delaware corporation,
is offering up to 35,595,238 shares of its common stock, par value $.01 per
share (the "Common Stock"), in connection with the conversion of Staten Island
Savings Bank ("Staten Island Savings" or the "Bank") from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank pursuant to the
Bank's plan of conversion (the "Plan" or "Plan of Conversion"). Under certain
circumstances, the Company may increase the amount of Common Stock offered
hereby to up to 40,934,524 shares. The simultaneous conversion of the Bank to
stock form, the issuance of the Bank's stock to the Company and the offer and
sale of the Common Stock by the Company are referred to herein as the
"Conversion."
Nontransferable rights to subscribe for the Common Stock have been
granted, in order of priority, to (i) certain depositors of Bank, (ii) the
Company's Employee Stock Ownership Plan ("ESOP"), (iii) certain other
depositors of the Bank, and (iv) directors, officers and employees of the Bank,
subject to the limitations described herein (the "Subscription Offering"). In
the event that there are any shares of Common Stock which are not sold in the
Subscription Offering, the Company anticipates that it will offer any such
shares of Common Stock for sale in a community offering (the "Community
Offering"). If necessary, any shares of Common Stock not subscribed for in the
Subscription Offering or purchased in the Community Offering will be offered to
members of the general public on a best efforts basis by a selling group of
broker-dealers managed by Keefe, Bruyette & Woods, Inc. ("Keefe, Bruyette"), in
a syndicated community offering (the "Syndicated Community Offering"). (The
Subscription Offering, Community Offering and Syndicated Community Offering are
referred to collectively as the "Offerings"). The purchase price in the
Offerings is $10.00 per share (the "Purchase Price").
With the exception of the ESOP, the maximum amount that any person may
purchase in any particular priority category in the Offerings is generally
limited to 30,000 shares of Common Stock (subject to adjustment). No person,
together with associates and persons acting in concert with such person, may
purchase in the aggregate more than 1.0% of the Common Stock sold in the
Conversion (subject to adjustment). The minimum purchase is 25 shares. See
"The Conversion - Limitations on Common Stock Purchases."
THE SUBSCRIPTION OFFERING WILL CLOSE AT 12:00 NOON, EASTERN TIME, ON
_______, 1997 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY THE COMPANY AND THE
BANK, WITH REGULATORY
i
<PAGE> 38
APPROVAL IF NECESSARY. THE COMMUNITY OFFERING OR ANY SYNDICATED COMMUNITY
OFFERING MUST BE COMPLETED WITHIN 45 DAYS AFTER THE CLOSE OF THE SUBSCRIPTION
OFFERING, OR _______, 1997, UNLESS EXTENDED BY THE COMPANY AND THE BANK, WITH
REGULATORY APPROVAL IF NECESSARY. No single extension can exceed 90 days, and
the extensions may not go beyond _______, 1999. Any extension of the Offerings
will be conducted in accordance with the terms described herein. Orders
submitted are irrevocable until the completion of the Conversion; provided
that, if the Conversion is not completed within the 45-day period referred to
above, unless such period has been extended, all subscribers will have their
funds returned promptly with interest at the Bank's passbook rate, and all
withdrawal authorizations will be cancelled. The completion of the
Subscription Offering is subject to potential delay and subscribers will have
no access to funds used to subscribe for shares of Common Stock, regardless of
any such delay. See "The Conversion - Subscription Offering and Subscription
Rights."
THE COMPANY HAS APPLIED TO HAVE ITS COMMON STOCK LISTED ON THE NEW
YORK STOCK EXCHANGE ("NYSE") UNDER THE SYMBOL "SIB." PRIOR TO THE OFFERINGS,
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 "MARKET FOR COMMON STOCK."
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK SALES CENTER AT
(718) ___-____. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" AT PAGE __ HEREOF.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, OR ANY OTHER FEDERAL AGENCY OR STATE SECUR-
ITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR
OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
ii
<PAGE> 39
<TABLE>
<CAPTION>
=============================================================================================================
Estimated
Underwriting Estimated
Subscription Fees and Other Net
Price(1) Expenses(2) Proceeds(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share $10.00 $0.22 $9.78
- -------------------------------------------------------------------------------------------------------------
Midpoint Per Share $10.00 $0.20 $9.80
- -------------------------------------------------------------------------------------------------------------
Maximum Per Share $10.00 $0.19 $9.81
- -------------------------------------------------------------------------------------------------------------
Maximum Per Share, as adjusted $10.00 $0.18 $9.82
- -------------------------------------------------------------------------------------------------------------
Total Minimum(1) $263,095,238 $5,726,056 $257,369,182
- -------------------------------------------------------------------------------------------------------------
Total Midpoint(1) $309,523,810 $6,217,264 $303,306,546
- -------------------------------------------------------------------------------------------------------------
Total Maximum(1) $355,952,381 $6,708,472 $349,243,909
- -------------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted(4) $409,345,238 $7,273,370 $402,071,868
=============================================================================================================
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") dated July 17, 1997, which states that the
estimated pro forma market value of the Common Stock ranged from $263.1
million to $356.0 million (the "Estimated Valuation Range"), or between
26,309,524 and 35,595,238 shares of Common Stock at 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 $3,000,000 and fees
to be paid to Keefe, Bruyette in connection with the Subscription and
Community Offerings, which fees are estimated to be $2,726,056,
$3,217,264, $3,708,472, and $4,273,370 at the minimum, mid-point, maximum
and maximum, as adjusted. Keefe, Bruyette is not obligated to purchase
any shares of Common Stock in the Offerings. Such fees paid to Keefe,
Bruyette may be deemed to be underwriting fees. See "The Conversion -
Marketing Arrangements." The actual fees and expenses may vary from the
estimates.
(3) Actual net proceeds may vary substantially from estimated amounts.
Includes the purchase of shares of Common Stock by the ESOP, which
initially will be deducted from the Company's stockholders' equity. For
the effects of such purchase, see "Capitalization" and "Pro Forma Data."
(4) Reflects a 15% increase in the Estimated Valuation Range, which may occur
without a resolicitation of subscribers or any right of cancellation, to
reflect changes in market and financial conditions prior to completion of
the Conversion or to fill the order of the ESOP.
-------------------------------------------
KEEFE, BRUYETTE & WOODS, INC.
-------------------------------------------
The date of this Prospectus is ___________, 1997.
iii
<PAGE> 40
[MAP of Registrant's Market area to be produced here.]
1
<PAGE> 41
SUMMARY
This summary is qualified in its entirety by the more detailed
information regarding the Company and the Bank and the Financial Statements of
the Bank appearing elsewhere in this Prospectus.
STATEN ISLAND BANCORP, INC.
Staten Island Bancorp, Inc. is a Delaware corporation organized in
July 1997 by the Bank for the purpose of becoming a unitary holding company of
the Bank. The Company will purchase all of the capital stock of the Bank to be
issued in the Conversion in exchange for 50% of the net Conversion proceeds and
will retain the remaining 50% of the net proceeds as its initial
capitalization. Immediately following the Conversion, the only significant
assets of the Company will be the capital stock of the Bank, the Company's loan
to the ESOP, and the remainder of the net Conversion proceeds retained by the
Company. The business and management of the Company initially will consist
primarily of the business and management of the Bank. Initially, the Company
will neither own nor lease any property, but will instead use the premises and
equipment of the Bank. At the present time, the Company does not intend to
employ any persons other than officers of the Bank, and the Company 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 or changes its
business in the future. See "Business" and "Management - Management of the
Company."
The Company's executive office is located at the executive office of
the Bank at 15 Beach Street, Staten Island, New York 10304, and its telephone
number is (718) 447-7900.
STATEN ISLAND SAVINGS BANK
The Bank was originally founded as a New York-chartered savings bank
in 1864. In August 1997, the Bank converted to a federally-chartered mutual
savings bank. The Bank is a traditional, full-service, community oriented
savings bank headquartered in Staten Island, New York. As of April 30, 1997,
Staten Island Savings had $1.8 billion of total assets, $1.7 billion of total
liabilities, including $1.6 billion of deposits, and $177.3 million of net
worth (representing 9.6% of total assets). Staten Island Savings is primarily
engaged in attracting deposits from the general public and using those and
other available sources of funds to originate loans secured primarily by
single-family (one- to four-units) residences located in Staten Island and, to
a lesser extent, Brooklyn, New York. The Bank reported $6.9 million of net
income for each of the four month periods ended April 30, 1997 and 1996 and
$21.8 million, $13.2 million and $16.2 million of net income for the years
ended December 31, 1996, 1995 and 1994, respectively. For the four months
ended April 30, 1997, the Bank's annualized return on average assets and return
on average equity were 1.15% and 12.11%, respectively. During the four months
ended April 30, 1997, the Bank's interest rate spread was 4.02% and its net
interest margin was 4.58%.
2
<PAGE> 42
The Bank has long-standing ties to Staten Island with over 133 years
of service to the communities and residents of Staten Island. As of June 30,
1996 (the latest available data), the Bank is the largest depository
institution in terms of deposit market share in Staten Island with 30% of the
total deposits and 23% of the total number of branch offices of depository
institutions in Staten Island. Historically, the Bank also has been among the
leaders in terms of the number and amount of residential mortgage loan
originations in Staten Island. Staten Island Savings' operating strategy
emphasizes customer service and convenience and, in large part, the Bank
attributes its commitment to maintaining customer satisfaction for its market
share position. The Bank attempts to differentiate itself from its competitors
by providing the type of personalized customer service not generally available
from larger banks while offering a greater variety of products and services
than is typically available from smaller, local depository institutions. The
Bank has an experienced management team directing its operations. The Bank's
Chairman and Chief Executive Officer and President and Chief Operating Officer
have 31 years and 27 years, respectively, of service with the Bank while the
other executive officers of the Bank have an average of 14 years of service
with Staten Island Savings. See "Staten Island Savings Bank."
In recent years, the Bank has facilitated its growth through
acquisitions. In 1990, the Bank acquired several branch offices of a former
savings and loan association from the Resolution Trust Corporation and, in
August 1995, the Bank acquired Gateway Bancorp, Inc. and its wholly owned
subsidiary, Gateway State Bank, a New York-chartered commercial bank
("Gateway") which was headquartered in Staten Island, New York, and which was
merged with and into the Bank. The acquisition of Gateway added $276.6 million
in deposits, $124.2 million in loans, $123.5 million in securities and five
branch offices (two of which were combined with other offices) to the Bank's
balance sheet and resulted in $15.6 million of goodwill which is being
amortized over 20 years on a straight-line basis. An integral part of the
Bank's strategy in acquiring Gateway was to facilitate the diversification of
the products and services offered by the Bank. As a commercial bank, Gateway's
efforts were directed more towards the commercial sector than retail consumer
banking which had been the Bank's primary focus. Gateway also offered certain
products and services previously not available from the Bank, such as
commercial business loans and trust services.
The Bank has attempted to capitalize on its acquisition of Gateway by
generally continuing to offer, with certain changes, the products and services
previously offered by Gateway. As a result, the Bank is able to offer its
customers a more complete product line. In addition, the Bank also has
attempted to enhance its business development efforts through active personal
solicitation of potential new customers as well as by increased cross-selling
efforts to existing customers. While the Bank's lending focus continues to be
single-family (one-to four-units) residential mortgage loans, the acquisition
of Gateway has facilitated the Bank's ability to be a more active originator of
commercial real estate loans, construction and land loans and commercial
business loans, which amounted to 11.5%, 3.2%, and 0.9%, respectively, of the
Bank's net loan portfolio at April 30, 1997. In addition, at such date the
Bank's demand deposit accounts amounted to $158.1 million, or 9.8% of total
deposits, compared to $63.0 million, or 5.1% of total deposits, at December 31,
1994.
3
<PAGE> 43
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary federal regulator. The Bank is also regulated by the Federal
Deposit Insurance Corporation ("FDIC"), the administrator of the Bank Insurance
Fund ("BIF"). The Bank is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the Federal Home Loan Bank ("FHLB") of New York, which is one of
the 12 regional banks comprising the FHLB System.
Staten Island Savings' executive office is located at 15 Beach Street,
Staten Island, New York 10304, and its telephone number is (718) 447-7900.
THE CONVERSION AND THE OFFERINGS
On April 16, 1997, the Board of Trustees of the Bank adopted the Plan
of Conversion pursuant to which the Bank is converting to a federally-chartered
stock savings bank, all the common stock of which will be acquired by the
Company in exchange for 50% of the net Conversion proceeds. The other 50% of
the net Conversion proceeds will be retained by the Company. The Conversion is
subject to OTS approval, which has been conditionally received, and is subject
to approval of the Bank's members at a special meeting to be held for this
purpose on ________, 1997. In addition, the Company has received the
conditional approval of the OTS to become a savings and loan holding company
subject to regulation by the OTS. See "Use of Proceeds" and "The Conversion -
General." By converting to the stock form of organization, the Bank will be
structured in the form used by many other savings institutions, commercial
banks and other business entities. See "The Conversion - Purposes of
Conversion."
Pursuant to the Plan and in connection with the Conversion, the
Company is offering up to 35,595,238 shares of Common Stock in the Subscription
Offering. The Common Stock is first being offered in the Subscription Offering
with nontransferable subscription rights being granted, in the following order
of priority, to (i) depositors of the Bank with account balances of $50.00 or
more as of the close of business on March 31, 1996 ("Eligible Account
Holders"), (ii) the ESOP, (iii) depositors of the Bank with account balances of
$50.00 or more as of the close of business on JUNE 30, 1997 ("Supplemental
Eligible Account Holders"), (iv) depositors of the Bank as of the close of
business on __________, 1997 (other than Eligible Account Holders and
Supplemental Eligible Account Holders), ("Other Members"), and (v) directors,
officers and employees of the Bank. SUBSCRIPTION RIGHTS WILL EXPIRE IF NOT
EXERCISED BY 12:00 NOON, EASTERN TIME, ON __________, 1997, UNLESS EXTENDED.
It is anticipated that shares not subscribed for in the Subscription
Offering will be offered to certain members of the general public in a
Community Offering and, if necessary, in a Syndicated Community Offering. The
Company and the Bank will reserve the absolute right to reject or accept any
orders in the Community Offering or the Syndicated Community Offering, in whole
or in part, either at the time of receipt of an order or as soon as practicable
following the Expiration Date or any extension thereof.
4
<PAGE> 44
Payments for subscriptions made by cash, check or money order will be
placed in a segregated account at the Bank and will earn interest at the Bank's
passbook rate (2.85% as of the date of this Prospectus) from the date of
receipt until the Conversion is completed or terminated. Payments authorized
by withdrawal from deposit accounts at the Bank will continue to earn interest
at the contractual rate until the Conversion is completed or terminated; these
funds will be otherwise unavailable to the depositor until such time. If a
withdrawal is authorized to fund the purchase of Common Stock, the funds will
be withdrawn upon consummation of the Conversion without penalty.
The Company and the Bank have retained Keefe, Bruyette as consultant
and advisor in connection with the Offerings and to assist in soliciting
subscriptions in the Offerings. Keefe, Bruyette may also manage a selling
group of broker-dealers in the Syndicated Community Offering to facilitate the
Offerings. Keefe, Bruyette is not obligated to take or purchase any shares of
Common Stock in the Offerings. See "The Conversion - Subscription Offering and
Subscription Rights," "- Community Offering" and "- Marketing Arrangements."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS
Prior to the completion of the Conversion, no person may transfer or
enter into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Each person exercising
subscription rights will be required to certify that the purchase of Common
Stock is solely for the purchaser's own account and that there is no agreement
or understanding regarding the sale or transfer of such shares. See "The
Conversion - Restrictions on Transfer of Subscription Rights and Shares."
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE AND PERSONS FOUND TO BE ATTEMPTING TO
TRANSFER SUBSCRIPTION RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF SUCH RIGHTS
AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS. The Company
and the Bank will refer to the OTS any situations that they believe may involve
a transfer of subscription rights and will not honor orders known by them to
involve the transfer of such rights.
PURCHASE LIMITATIONS
With the exception of the ESOP, which intends to purchase up to an
aggregate of 8% of the number of shares of Common Stock issued in the
Conversion, or 2,104,761 shares and 2,847,619 shares at the minimum and maximum
of the Estimated Valuation Range, respectively, the maximum amount that any
person may purchase in any priority category in the Subscription Offering, as
well as in the Community Offering and any Syndicated Community Offering, is
generally limited to 30,000 shares of Common Stock. No person, together with
associates of or persons acting in concert with such person, may purchase in
the aggregate more than 1.0% (or 355,952 shares at the maximum of the Estimated
Valuation Range) of the Common Stock sold in the Conversion. For a definition
of the terms "associate" and "acting in concert," see "The Conversion -
Limitations on Common Stock Purchases." At any time during the Offerings, and
without further approval by the members of the Bank, the Company and the Bank
may, in their
5
<PAGE> 45
sole discretion, increase the individual purchase limitations up to 5% of the
shares offered (1,779,761 shares at the maximum of the Estimated Valuation
Range). If the purchase limitation is increased, persons who submitted an order
for 355,952 shares of Common Stock will be given the opportunity to increase
their order. In the event of a decrease in the purchase limitation, any orders
in excess of the revised purchase limitation will be reduced to the extent
necessary. The minimum purchase is 25 shares. See "The Conversion -
Limitations on Common Stock Purchases." In the event of an oversubscription,
shares will be allocated in accordance with the Plan as described in "The
Conversion - Subscription Offering and Subscription Rights" and "- Community
Offering."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Federal regulations require the aggregate purchase price of the Common
Stock to be consistent with an independent appraisal of the estimated pro forma
market value of the Common Stock following the Conversion. RP Financial, an
independent appraiser, has advised the Bank that, in its opinion, dated July
17, 1997, the Estimated Valuation Range was from $263.1 million to $356.0
million, with a midpoint of $309.5 million. THIS APPRAISAL OF THE COMMON STOCK
IS NOT INTENDED AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS
TO THE ADVISABILITY OF PURCHASING SUCH STOCK, NOR CAN ANY ASSURANCE BE GIVEN
THAT PURCHASERS OF THE COMMON STOCK WILL BE ABLE TO SELL SUCH SHARES AFTER THE
CONVERSION AT OR ABOVE THE PURCHASE PRICE.
All shares of Common Stock issued in the Conversion will be sold at
the Purchase Price of $10.00 per share, which was established by the Boards of
Directors of the Company and the Bank. The actual number of shares to be
issued in the Conversion will be determined by the Company and the Bank based
upon the final updated valuation of the estimated pro forma market value of the
Common Stock, giving effect to the Conversion, at the completion of the
Offerings. The number of shares of Common Stock to be issued is expected to
range from a minimum of 26,309,524 shares to a maximum of 35,595,238 shares.
Subject to approval of the OTS, the Estimated Valuation Range may be increased
or decreased to reflect market and economic conditions prior to the completion
of the Conversion or to fill the order of the ESOP, and under such
circumstances the Company and the Bank may increase or decrease the number of
shares of Common Stock to be issued in the Conversion. No resolicitation of
subscribers will be made and subscribers will not be permitted to modify or
cancel their subscriptions unless the gross proceeds from the sale of the
Common Stock are less than the minimum or more than 15% above the maximum of
the current Estimated Valuation Range. An affirmative response to any
resolicitation must be received by the Bank in order to confirm subscriptions.
In connection with a resolicitation, to the extent that subscriptions are
cancelled, rescinded or reduced, all funds delivered to the Company or the Bank
will be promptly returned with interest earned from the date of receipt, and
withdrawal authorizations will be reduced or cancelled. See "Pro Forma Data,"
"Risk Factors - Possible Dilutive Effect of Issuance of Additional Shares" and
"The Conversion - Stock Pricing and Number of Shares to be Issued."
6
<PAGE> 46
SISB COMMUNITY FOUNDATION
In furtherance of the Bank's commitment to the communities that it
serves, the Plan of Conversion provides for the establishment of a private
charitable foundation in connection with the Conversion. The Plan provides
that the Bank and the Company will create the SISB Community Foundation (the
"Foundation"), which will be incorporated under Delaware law as a nonstock
corporation, and will fund the Foundation with shares of Common Stock
contributed by the Company, as further described below. The Company and the
Bank believe that the funding of the Foundation with Common Stock of the
Company is a means of enhancing the bond between the Bank and the communities
that it serves and thereby enable such communities to share in the potential
growth and success of the Company over the long term. By further enhancing the
Bank's visibility and reputation in the communities that it serves, the Bank
believes that the Foundation will benefit the long term value of the Bank's
community banking franchise. See "The Conversion--Establishment of the
Charitable Foundation--Structure of the Foundation."
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation, which will be comprised of members of the
Company's Board of Directors and certain other individuals chosen in light of
their commitment and service to charitable and community purposes. The
directors of the Foundation will be responsible for establishing the policies
of the Foundation with respect to grants or donations by the Foundation,
consistent with the purposes for which the Foundation was established, and will
also be responsible for directing the activities of the Foundation, including
matters related to ownership of the Common Stock held by the Foundation.
However, it is expected that establishment of the Foundation will be subject to
certain conditions, including, among others, a requirement that the Common
Stock of the Company held by the Foundation be voted in the same ratio as all
other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company. See "The Conversion--Establishment of the
Charitable Foundation--Regulatory Conditions Imposed on the Foundation."
The Company proposes to fund the Foundation by contributing to the
Foundation immediately following the Conversion a number of shares of
authorized but unissued shares of Common Stock equal to 5.0% of the Common
Stock sold in the Offerings, or 1,315,476 and 1,779,762 shares at the minimum
and maximum of the Estimated Valuation Range, respectively. Such contribution,
once made, will not be recoverable by the Company or the Bank. Assuming the
sale of shares at the maximum of the Estimated Valuation Range and the issuance
of shares to the Foundation, the Company will have 37,375,000 shares issued and
outstanding, of which the Foundation will own 1,779,762 shares, or 4.8%. DUE
TO THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK TO THE FOUNDATION, PERSONS
PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING
INTERESTS IN THE COMPANY DILUTED BY 4.8%. SEE "PRO FORMA DATA."
As a result of the establishment of the Foundation, the Company will
recognize an expense of the full amount of the contribution, offset in part by
a corresponding tax benefit, during the quarter in which the contribution is
made, which is expected to be the fourth quarter
7
<PAGE> 47
of 1997. Such expense will reduce earnings and have a material impact on the
Company's earnings for such quarter and for the year. Assuming a contribution
of $17.8 million in Common Stock in 1997, based on the maximum of the Estimated
Valuation Range and assuming a marginal tax rate of 47%, the Company estimates
a net tax effected expense of $9.4 million. In addition, the Bank does not
anticipate making future charitable contributions to the Foundation during the
first five years following the initial contribution to the Foundation. For
further discussion of the Foundation and its impact on purchasers in the
Conversion, see "Risk Factors--Establishment of the Foundation." "Pro Forma
Data," "Comparison of Valuation and Pro Forma Information With No Foundation"
and "The Conversion--Establishment of the Foundation."
BENEFITS OF CONVERSION TO OFFICERS AND DIRECTORS
GENERAL. In connection with the Conversion, the Bank's directors and
executive officers as a group (15 persons) have proposed to purchase 500,000
shares of Common Stock, or 1.9% and 1.4% of the Common Stock at the minimum and
maximum of the Estimated Valuation Range, respectively, excluding shares to be
issued to the Foundation.
THE ESOP. The Company has adopted the ESOP, a tax-qualified benefit
plan for officers and employees of the Company and the Bank, which intends to
purchase 8% of the shares of Common Stock offered in the Conversion, or
2,104,761 shares ($21.0 million) and 2,847,619 shares ($28.5 million) at the
minimum and maximum of the Estimated Valuation Range, respectively. The
Company intends to use a portion of the net proceeds retained by it to make a
loan directly to the ESOP to enable the ESOP to purchase such shares. See
"Management - Management of the Bank - Benefits - Employee Stock Ownership
Plan."
STOCK OPTION PLAN. Following consummation of the Conversion, the
Company intends to adopt a stock option plan for the benefit of the directors,
officers and employees of the Company and the Bank (the "Stock Option Plan"),
pursuant to which the Company intends to reserve a number of shares of Common
Stock equal to an aggregate of 10% of the Common Stock issued in the Conversion
(3,559,523 shares at the maximum of the Estimated Valuation Range) for issuance
pursuant to stock options and stock appreciation rights. The Stock Option Plan
will not be implemented prior to the receipt of stockholder approval of the
plan. For stock option plans implemented within one year of a mutual-to-stock
conversion, OTS regulations currently permit an aggregate of up to 30% of the
shares available under the Stock Option Plan to be granted to non-employee
directors. In addition, OTS regulations further provide that under such stock
option plans, no officer may receive stock options for more than 25% of the
shares available under the stock option plan, which, in the Company's case,
would amount to 889,880 shares if the amount of Common Stock sold in the
Conversion is equal to the maximum of the Estimated Valuation Range. It is
currently anticipated that the Company will implement the Stock Option Plan
within one year of the Conversion and that it will comply with all applicable
OTS regulations. See "Management - Management of the Bank - Benefits - Stock
Option Plan."
8
<PAGE> 48
RECOGNITION AND RETENTION PLAN. Following consummation of the
Conversion, the Company intends to adopt a recognition and retention plan for
the benefit of the directors, officers and employees of the Company and the
Bank (the "Recognition Plan" or "RRP"). The Recognition Plan will not be
implemented prior to the receipt of stockholder approval of the plan. It is
expected that the Recognition Plan will be submitted to stockholders for
approval at the same time as the Stock Option Plan. Upon the receipt of such
approval, the Recognition Plan is expected to purchase a number of shares of
Common Stock either from the Company or in the open market equal to an
aggregate of 4% of the Common Stock issued in the Conversion (1,423,809 shares
or $14.2 million at the maximum of the Estimated Valuation Range). Similar to
the treatment of the Stock Option Plan, current OTS regulations provide that,
with respect to stock benefit plans such as the Recognition Plan implemented
within one year of a mutual-to-stock conversion, an aggregate of no more than
30% of the shares available under such plan may be awarded to non-employee
directors and no more than 25% of the shares available under such plan may be
awarded to any individual officer. It is currently anticipated that the
Company will implement the Recognition Plan within one year of the Conversion
and that it will comply with all applicable OTS regulations. See "Management -
Management of the Bank - Benefits - Recognition Plan."
EMPLOYMENT AGREEMENTS. Upon consummation of the Conversion, the
Company and the Bank intend to enter into three-year employment agreements with
Messrs. Harry Doherty and James Coyle as well as similar agreements with the
Bank's Executive Vice President and four Senior Vice Presidents (collectively,
the "Other Senior Officers"). If the employment of such officers is terminated
as a result of a change in control of the Company, Messrs. Harry Doherty and
James Coyle would each be entitled to a cash severance amount equal to three
times his average annual compensation over his most recent five taxable years.
At least 30 days prior to each annual anniversary date of the employment
agreement, the Boards of Directors of the Company and the Bank shall determine
whether or not to continue the term of the agreements for an additional one
year. See "Management - Management of the Bank - Employment Agreements."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), no Prospectus will be
mailed any later than five days prior to such date or hand delivered any later
than two days prior to such date. Execution of the order form will confirm
receipt or delivery of the Prospectus in accordance with Rule 15c2-8. Order
forms will only be distributed with a Prospectus. The Company and the Bank
will accept for processing only orders submitted on original order forms.
Copies of order forms will not be accepted nor will order forms unaccompanied
by an executed certification form. Payment by check, money order, cash or
debit authorization to an existing account at Bank must accompany the order
form. No wire transfers will be accepted.
9
<PAGE> 49
In order to ensure that Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are properly identified as to their
stock purchase priorities, depositors as of the close of business on the
Eligibility Record Date (March 31, 1996) or the Supplemental Eligibility Record
Date June 30, 1997, and/or depositors as of the close of business on the
Voting Record Date, ________ __, 1997, must list all accounts on the stock
order form giving all names on each account and the account numbers. See "The
Conversion - Procedure for Purchasing Shares in the Subscription and Community
Offerings."
USE OF PROCEEDS
The net proceeds from the sale of Common Stock in the Conversion are
estimated to be between $257.4 million and $349.2 million ($402.1 million
assuming a 15% increase in the Estimated Valuation Range), depending on the
number of shares sold and the expenses of the Conversion. See "Pro Forma
Data." The Company will purchase all of the capital stock of the Bank to be
issued in the Conversion in exchange for 50% of the net Conversion proceeds and
will retain the remaining 50% of the net proceeds as its initial
capitalization. The Company intends to use a portion of the net proceeds
retained by it to make a loan directly to the ESOP to enable the ESOP to
purchase up to 8% of the Common Stock. The amount of the loan is expected to
be between $21.0 million and $28.5 million at the minimum and maximum of the
Estimated Valuation Range, respectively. See "Management of the Company -
Benefits - Employee Stock Ownership Plan." The remaining net proceeds retained
by the Company initially may be used to invest in U.S. Government and federal
agency securities of various maturities, mortgage-backed, mortgage-related or
other securities, deposits in either the Bank or other financial institutions,
or a combination thereof. Ultimately, the portion of net proceeds retained by
the Company may be used to support the Bank's lending activities, to support
the future expansion of operations through establishment of additional branch
offices or other customer facilities, acquisitions of other financial service
organizations, such as other savings institutions and commercial banks
(although no such transactions are specifically being considered at this time),
and for other business and investment purposes, including the payment of
regular cash dividends and possible repurchases of the Company's Common Stock.
See "Dividend Policy." Funds contributed to the Bank from the Company will be
used for general business purposes. The proceeds will be used to support the
Bank's lending and investment activities and thereby enhance the Bank's
capabilities to serve the borrowing and other financial needs of the
communities it serves. See "Use of Proceeds."
DIVIDENDS
Following consummation of the Conversion, the Board of Directors of
the Company intends to consider implementation of a policy of paying quarterly
cash dividends on the Common Stock. However, there has been no determination
made at this point in time as to the initial rate of dividend, if any, to be
paid on the Common Stock. Declarations of dividends by the Company's Board of
Directors will depend upon a number of factors, including the amount of the net
proceeds retained by the Company in the Conversion, investment opportunities
available to the Company or the Bank, capital requirements, the Company's and
the Bank's
10
<PAGE> 50
financial condition and results of operations, tax considerations, statutory
and regulatory limitations, and general economic conditions. There can be no
assurances that dividends will in fact be paid on the Common Stock or that, if
paid, such dividends will not be reduced or eliminated in future periods. For
a more detailed discussion of the factors that may affect the payment of
dividends, see "Dividend Policy."
MARKET FOR COMMON STOCK
The Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Company
has applied to have the Common Stock listed on the NYSE under the symbol
"SIB." No assurance can be given that an active and liquid trading market
for the Common Stock will develop. Further, no assurance can be given that
purchasers will be able to sell their shares at or above the Purchase Price
after the Conversion. See "Risk Factors -- Absence of Market for the Common
Stock" and "Market for Common Stock."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors, including, among other factors, the
potential for a low return on equity following the Conversion and the
uncertainty as to future growth opportunities, the charitable foundation to be
established by the Bank in connection with the Conversion, the potential
effects of changes in interest rates and the current interest rate environment,
risks related to commercial real estate loans, construction and land loans and
commercial business loans competition, the Bank's geographic concentration of
loans, certain anti-takeover provisions, recent legislation affecting the
deduction for bad debt reserves, regulatory oversight, the absence of a market
for the Common Stock, a possible increase in the number of shares issued in the
Conversion, the possible dilutive effect of the issuance of additional shares
of Common Stock, potential increased compensation expenses after the
Conversion, possible adverse tax consequences of the distribution of
subscription rights to purchase the Common Stock and the potential delay in
consummation of the Conversion and the irrevocability of orders.
11
<PAGE> 51
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands)
The following selected historical consolidated financial data for the
five years ended December 31, 1996 is derived in part from the audited
consolidated financial statements of the Bank. The historical consolidated
financial data for the four months ended April 30, 1997 and 1996 is derived
from unaudited consolidated financial statements. The unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
accruals, which management of the Bank considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the four months ended April 30, 1997 are not
necessarily indicative of the results that may be expected for any other
interim period or the entire year ending December 31, 1997. The selected
historical consolidated financial data set forth below should be read in
conjunction with, and is qualified in its entirety by, the historical
consolidated financial statements of the Bank, including the related notes,
included elsewhere herein.
<TABLE>
<CAPTION>
Four Months Ended
April 30, December 31,
------------------------ ---------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets . . . . . . . . . . . $1,848,295 $1,735,585 $1,782,323 $1,728,130 $1,376,220 $1,365,543 $1,333,646
Cash and cash equivalents . . . . 113,744 57,594 52,622 77,263 29,984 44,155 54,405
Securities held to maturity . . . -- -- -- -- 321,263 310,460 785,823
Securities available for sale . . 677,486 783,556 703,134 788,622 378,207 463,176 --
Securities trading . . . . . . . . 14,406 -- -- -- -- -- --
Loans receivable, net . . . . . . 976,501 825,903 968,015 801,137 608,954 513,803 454,982
Intangible assets(1) . . . . . . . 19,798 21,875 20,490 22,633 492 1,028 1,564
Deposit accounts . . . . . . . . . 1,606,793 1,548,410 1,577,748 1,535,617 1,225,918 1,223,708 1,221,582
Borrowings . . . . . . . . . . . . 30,043 45 54 46 47 49 50
Net worth . . . . . . . . . . . . 177,295 150,977 171,080 150,082 125,444 118,619 98,516
<CAPTION>
Four Months Ended
April 30, Year Ended December 31,
------------------------- ---------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income . . . . . . . . . $ 42,925 $ 39,206 $ 124,430 $ 104,356 $ 90,284 $ 93,152 $ 96,057
Interest expense . . . . . . . . . 16,903 16,743 50,437 44,234 36,537 38,327 49,454
----------- ---------- ---------- ----------- ----------- ---------- ----------
Net interest income . . . . . . . 26,022 22,463 73,993 60,122 53,747 54,825 46,603
Provision for possible loan losses 4,667 -- 1,000 -- 76 1,335 2,271
----------- ---------- ---------- ----------- ----------- ---------- ----------
Net interest income after
provision for possible loan
losses . . . . . . . . . . . . . 21,355 22,463 72,993 60,122 53,671 53,490 44,332
Other income . . . . . . . . . . . 1,864 2,249 3,929 4,040 2,048 3,307 1,456
Other expenses . . . . . . . . . . 14,752 13,129 40,066 32,953 25,557 24,873 23,467
----------- ---------- ---------- ----------- ----------- ---------- ----------
Income before provision for income
taxes . . . . . . . . . . . . . 8,467 11,583 36,856 31,209 30,162 31,924 22,321
Provision for income taxes . . . . 1,579 4,715 15,081 13,284 13,958 14,150 9,746
----------- ---------- ---------- ----------- ----------- ---------- ----------
Income before cumulative effect of
accounting change . . . . . . . 6,888 6,868 21,775 17,925 16,204 17,774 12,575
Cumulative effect of change in
accounting for income taxes . . -- -- -- 4,700 -- 1,514 --
----------- ---------- ---------- ----------- ----------- ---------- ----------
Net income . . . . . . . . . . . . $ 6,888 $ 6,868 $ 21,775 $ 13,225 $ 16,204 $ 16,260 $ 12,575
=========== ========== ========== =========== =========== ========== ==========
<CAPTION>
KEY OPERATING RATIOS:
At or For the Four
Months At or For the Year Ended December 31,
Ended April 30, ------------------------------------------------------
---------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:(2)
Return on average assets . . . . . . 1.15% 1.21% 1.24% 0.88% 1.17% 1.21% 1.00%
Return on average equity . . . . . . 12.11 13.86 14.03 9.54 13.27 15.17 14.00
Average interest-earning assets to
average interest-bearing
liabilities . . . . . . . . . . . . 118.89 118.97 120.24 117.17 113.05 110.61 108.55
Interest rate spread(3) . . . . . . . 4.02 3.62 3.84 3.63 3.64 3.91 3.48
Net interest margin(3) . . . . . . . 4.58 4.21 4.46 4.16 4.00 4.22 3.82
Noninterest expenses, exclusive of
amortization of intangible assets,
to assets . . . . . . . . . . . . . 2.35 2.19 2.16 2.11 1.81 1.82 1.81
ASSET QUALITY RATIOS:
Nonperforming assets to total assets
at end of period(4) . . . . . . . . 1.39% 1.60% 1.34% 1.44% 0.61% 0.62% 0.48%
Allowance for loan losses to
nonperforming loans at end of
period . . . . . . . . . . . . . . 60.16 40.84 43.85 44.20 38.79 41.21 48.86
Allowance for loan losses to total
loans at end of period . . . . . . 1.48 1.34 1.02 1.32 0.51 0.62 0.50
CAPITAL AND OTHER RATIOS:
Average equity to average assets . . 9.52% 8.78% 8.85% 9.21% 8.84% 8.00% 7.11%
Tangible equity to assets at end of
period . . . . . . . . . . . . . . 8.33 7.50 8.22 7.09 9.55 8.40 7.34
Total capital to risk-weighted
assets . . . . . . . . . . . . . . 21.11 19.58 20.66 19.65 17.16 16.30 13.78
</TABLE>
- ------------------------------
(1) Consists of excess of cost over fair value of net assets acquired
("goodwill") and core deposit intangibles which amounted to $14.7
million and $5.1 million at April 30, 1997, respectively.
(2) With the exception of end of period ratios, all ratios are based on
average daily balances during the respective periods and are
annualized where appropriate.
(3) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities; net interest margin represents net
interest income as a percentage of average interest-earning assets.
(4) Nonperforming assets consist of non-accrual loans, accruing loans more
than 90 days past due and real estate acquired through foreclosure or
by deed-in-lieu thereof.
12
<PAGE> 52
SUMMARY OF RECENT DEVELOPMENTS
(Dollars in Thousands)
The selected consolidated financial and other data in the Bank set
forth below does not purport to be complete and should be read in conjunction
with, and is qualified in its entirety by, the more detailed information,
including the consolidated financial statements and related Notes, appearing
elsewhere herein. In the opinion of management, financial information at June
30, 1997 and for the three months and six months ended June 30, 1997 and 1996
reflect all adjustments (consisting only of normal recurring accruals) which
are necessary to present fairly the results for such periods. Results for the
three and six month periods ended June 30, 1997 and 1996 may not be indicative
of operations of the Bank on an annualized basis.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
-------------------- ------------------------
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets............................................. $1,921,810 $1,782,323
Cash and cash equivalents................................ 77,398 52,622
Securities available for sale............................ 770,830 703,134
Securities trading....................................... 8,437 --
Loans receivable, net.................................... 1,004,039 968,015
Intangible assets(1)..................................... 19,452 20,490
Deposit accounts......................................... 1,642,343 1,577,748
Borrowings............................................... 60,043 54
Net worth................................................ 185,251 171,080
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Month Ended
June 30, June 30,
----------------------------------- -----------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income.................................. $33,210 $30,481 $65,086 $59,980
Interest expense................................. 13,272 12,552 25,788 25,081
------- ------- ------- -------
Net interest income.............................. 19,938 17,929 39,298 34,899
Provision for possible loan losses............... 2,501 -- 5,001 --
------- ------- ------- -------
Net interest income after provision for
possible loan losses......................... 17,437 17,929 34,297 34,899
Other income..................................... 1,841 1,679 3,051 3,430
Other expenses................................... 10,589 10,038 21,436 19,944
------- ------- ------- -------
Income before provision for income taxes......... 8,689 9,570 15,912 18,385
Provision for income taxes....................... 3,655 4,638 4,951 8,043
------- ------- ------- -------
Net income....................................... $ 5,034 $ 4,932 $10,961 $10,342
====== ====== ====== ======
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
Three Months Ended Six Month Ended
June 30, June 30,
----------------------------------- -----------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
KEY OPERATING RATIOS
PERFORMANCE RATIOS:(2)
Return on average assets.......................... 1.08% 1.13% 1.20% 1.20%
Return on average equity.......................... 11.38 13.12 12.63 13.76
Average interest-earning assets to average
interest-bearing liabilities.................. 118.81 120.41 118.83 119.50
Interest rate spread(3)........................... 3.94 3.71 3.98 3.68
Net interest margin(3)............................ 4.50 4.33 4.54 4.28
Noninterest expenses, exclusive of
amortization of intangible assets, to assets.. 2.16 2.17 2.24 2.18
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of
period........................................ 1.18% 1.53% 1.18% 1.53%
Allowance for loan losses to nonperforming
loans at end of period........................ 67.69 38.36 67.69 38.36
Allowance for loan losses to total loans at
end of period................................. 1.44 1.14 1.44 1.14
CAPITAL AND OTHER RATIOS:
Average equity to average assets.................. 9.48% 8.59% 9.52% 8.71%
Tangible equity to assets at end of period........ 8.25 7.61 8.25 7.61
Total capital to risk-weighted assets............. 21.12 19.43 21.12 19.43
</TABLE>
- ------------
(1) Consists of excess of cost over fair value of net assets acquired
("goodwill") and core deposit intangibles which amounted to $14.6
million and $4.9 million at June 30, 1997, respectively.
(2) With the exception of end of period ratios, all ratios are based on
average daily balances during the respective periods and are annualized
where appropriate.
(3) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities; net interest margin represents net
interest income as a percentage of average interest-earning assets.
(4) Nonperforming assets consist of non-accrual loans, accruing loans more
than 90 days past due and real estate acquired through foreclosure or
by deed-in-lieu thereof.
At June 30, 1997, the Bank's total assets amounted to $1.92 billion
compared to $1.78 billion at December 31, 1996. The increase of $140.0 million
or 7.9% was primarily due to an increase in investments and loans receivable as
the result of the utilization of proceeds from additional borrowings and
deposit inflows. Borrowings increased from $54,000 at December 31,
<PAGE> 54
1996 to $60.0 million at June 30, 1997. During the six months ended June 30,
1997, the Bank began to use repurchase agreements as an additional source of
funds. Deposits increased $65.0 million or 4.1% to $1.64 billion at June 30,
1997 compared to $1.58 billion at December 31, 1996. Net worth increased from
$171.1 million at December 31, 1996 to $185.3 million at June 30, 1997. The
$14.2 million or 8.3% increase was primarily due to continued profitable
operations during the six month period as well as a $3.2 million increase in
the net amount of unrealized appreciation on securities available for sale.
Net income amounted to $5.0 million for both the three months ended
June 30, 1997 and 1996. Net income amounted to $11.0 million for the six months
ended June 30, 1997 compared to $10.3 million for the same period in 1996, an
increase of $619,000 or 6.0%. The increase during the six months ended June 30,
1997 compared to the same period in 1996 was due to an increase in net interest
income and a decrease in the provision for income taxes which were partially
offset by an increase in the provision for possible loan losses.
Net interest income increased $2.0 million or 11.2% to $19.9 million
for the three months ended June 30, 1997 compared to the same period in 1996 as
a result of a $2.7 million or 9.0% increase in interest income which was
partially offset by a $720,000 or 5.7% increase in interest expense. The Bank's
interest rate spread increased to 3.94% for the three months ended June 30,
1997 compared to 3.71% for the comparable 1996 period which more than offset
the decrease in the ratio of average interest-earning assets to average
interest-bearing liabilities to 118.81% for the 1997 period from 120.41% for
the 1996 period. In addition, the Bank's net interest margin increased to 4.50%
for the three months ended June 30, 1997 compared to 4.33% for the comparable
1996 period. Net interest income increased $4.4 million or 12.6% to $39.3
million for the six months ended June 30, 1997 compared to the same period in
1996 as a result of a $5.1 million or 8.5% increase in interest income which
was partially offset by a $707,000 or 2.8% increase in interest expense. The
Bank's interest rate spread increased to 3.98% for the six months ended June
30, 1997 from 3.68% for the comparable 1996 period which more than offset the
decrease in the ratio of average interest-earning assets to average
interest-bearing liabilities to 118.83% for the 1997 period from 119.50% for
the 1996 period. The Bank's net interest margin also increased from 4.28% for
the six months ended June 30, 1996 to 4.54% for the comparable period in 1997.
The Bank's provision for loan losses amounted to $2.5 million and
$5.0 million for the three and six months ended June 30, 1997, respectively.
The Bank did not make any provisions during the comparable 1996 periods. The
provision for loan losses during the three and six months ended June 30, 1997
was based on management's continuing review of the risk elements in the Bank's
loan portfolio. In establishing provisions in the 1997 periods, management of
the Bank considered in particular the overall increase in the Bank's loan
portfolio, the potential increased risk of loss generally attributed to
commercial real estate loans, construction and land loans and commercial
business loans as well as management's continuing experience with the loan
portfolio acquired from Gateway (which constituted more than half of the Bank's
total non-performing assets at June 30, 1997), a longer than anticipated
work-out period with respect to such Gateway loans, and its consideration that,
despite charge-offs of $913,000 in the six months ended June 30, 1997 and $2.7
million in 1996, the Bank's total non-performing loans have not been reduced
but have increased slightly since December 31, 1995. While no assurance can be
given that future charge-offs and/or additional provisions will not be
necessary, management of the Bank believes that, as of June 30, 1997, the
allowance for possible loan losses was adequate.
<PAGE> 55
Other income increased $162,000 or 9.6% to $1.8 million for the three
months ended June 30, 1997 compared to $1.7 million for the same period in
1996. Such increase was due primarily to increases in service and fee income
primarily as the result of an increase in the volume of transactions. Other
income decreased $379,000 or 11.0% to $3.1 million for the six months ended
June 30, 1997 compared to $3.4 million for the same period in 1996. Such
decrease primarily was the result of losses from securities transactions as the
result of certain restructuring efforts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Comparison of
Results of Operations for the Four Months Ended April 30, 1997 and 1996 - Other
Income."
Other expenses increased $551,000 or 5.5% to $10.6 million for the
three months ended June 30, 1997 compared to $10.0 million for the same period
in 1996. Other expenses increased $1.5 million or 7.5% to $21.4 million for the
six months ended June 30, 1997 compared to $19.9 million for the same period in
1996. In addition to increases in personnel expenses due to normal salary
increases, the increases in other expenses during both the three- and six-month
periods ended June 30, 1997, were due primarily to increased data processing
costs as the result of the Bank's write-off of its investment in the service
bureau providing its data processing services. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Comparison of Results
of Operations for the Four Months Ended April 30, 1997 and 1996 Other Income."
The provision for income taxes amounted to $3.7 million and $4.6
million for the three months ended June 30, 1997 and 1996, respectively,
resulting in effective tax rates of 42.1% and 48.5%, respectively. The
provision for income taxes amounted to $5.0 million and $8.0 million for the
six months ended June 30, 1997 and 1996, respectively, resulting in effective
tax rates of 31.1% and 43.7%, respectively. The decrease in the provision for
income taxes for the six months ended June 30, 1997 was due to a $2.6 million
reversal of previously deferred income taxes related to bad debt reserves
accumulated for New York City purposes. For a discussion of such reversal, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Comparison of Results of Operations for the Four Months Ended
April 30, 1997 and 1996 - Provision for Income Taxes."
<PAGE> 56
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere
in this Prospectus, should be carefully considered by investors in deciding
whether to purchase the Common Stock offered hereby.
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION; UNCERTAINTY AS TO
FUTURE GROWTH OPPORTUNITIES
At April 30, 1997, the Bank's ratio of equity to assets was 9.6%. The
Company's equity position will be significantly increased as a result of the
Conversion. On a pro forma basis as of April 30, 1997, assuming the sale of
Common Stock at the midpoint of the Estimated Valuation Range, the Company's
ratio of equity to assets would be 21.2%. The Company's ability to leverage
this capital will be significantly affected by industry competition for loans
and deposits. The Company currently anticipates that it will take time to
prudently deploy such capital. As a result, the Company's return on equity
initially is expected to be below the industry average after the Conversion.
In an effort to fully deploy post-Conversion capital, in addition to
attempting to increase its loan and deposit growth, the Company may seek to
expand its banking franchise by acquiring other financial institutions or
branches in the New York metropolitan area and/or New Jersey. The Company's
ability to grow through selective acquisitions of other financial institutions
or branches of such institutions will be dependent on successfully identifying,
acquiring and integrating such institutions or branches. There can be no
assurance the Company will be able to generate internal growth or to identify
attractive acquisition candidates, acquire such candidates on favorable terms
or successfully integrate any acquired institutions or branches into the
Company. Neither the Company nor the Bank has any specific plans, arrangements
or understandings regarding any such expansions or acquisitions at this time,
nor have criteria been established to identify potential candidates for
acquisition.
ESTABLISHMENT OF THE FOUNDATION
Pursuant to the Plan, the Company intends to voluntarily establish a
charitable foundation in connection with the Conversion. The Plan provides
that the Bank and the Company will establish the Foundation, which will be
incorporated under Delaware law as a nonstock corporation and will be funded
with shares of Common Stock contributed by the Company. The contribution of
Common Stock to the Foundation will be dilutive to the interests of
stockholders and will have an adverse impact on the reported earnings of the
Company in 1997, the year in which the Foundation will be or is to be
established.
Dilution of Stockholders' Interests. The Company proposes to fund the
Foundation with Common Stock of the Company in an amount equal to 5.0% of the
Common Stock to be sold in the Conversion. At the minimum, midpoint and
maximum of the Estimated Valuation Range, the contribution to the Foundation
would equal 1,315,476, 1,547,619 and 1,779,762 shares of
13
<PAGE> 57
Common Stock, with a value of $13.2 million, $15.5 million and $17.8 million,
respectively, based on the Purchase Price. Assuming the sale of Common Stock
at the maximum of the Estimated Valuation Range, upon completion of the
Conversion and establishment of the Foundation, the Company will have
37,375,000 shares issued and outstanding of which the Foundation will own
1,779,762 shares of Common Stock, or 4.8%. As a result, persons purchasing
shares of Common Stock in the Conversion will have their ownership and voting
interests in the Company diluted by 4.8%. See "Pro Forma Data."
Impact on Earnings. The contribution of Common Stock to the
Foundation will have an adverse impact on the Company's and the Bank's earnings
in the year in which the contribution is made. The Company will recognize the
full expense in the amount of the contribution of Common Stock to the
Foundation in the quarter in which it occurs, which is expected to be the
fourth quarter of 1997. The amount of the contribution will range from $13.2
million to $17.8 million, based on the minimum and maximum of the Estimated
Valuation Range, respectively. The contribution expense will be partially
offset by the tax benefit related to the expense. The Company and the Bank
have been advised by their independent tax advisors that the contribution to
the Foundation will be tax deductible, subject to an annual limitation based on
10% of the Company's annual taxable income. Assuming a contribution of $17.8
million in Common Stock (based on the maximum of the Estimated Valuation
Range), the Company estimates a net tax effected expense of $9.4 million (based
on a 47% marginal tax rate). If the Foundation had been established at
December 31, 1996, the Bank would have reported net income of $12.4 million for
the year ended December 31, 1996 rather than reporting net income of $21.8
million. Management cannot predict earnings for 1997, but expects that the
establishment and funding of the Foundation will have an adverse impact on the
Company's earnings for such year. However, in light of the expected
contribution to the Foundation, the Bank does not expect in the future to make
other than nominal charitable contributions within the communities it serves.
In addition, the Company and the Bank do not currently anticipate making
additional contributions to the Foundation within the first five years
following the initial contribution.
Tax Considerations. The Company and the Bank have been advised by
their independent tax advisors that an organization created for the
above-described purposes would qualify as a Section 501(c)(3) exempt
organization under the Internal Revenue Code of 1986, as amended (the "Code"),
and would be classified as a private foundation. The Foundation will submit a
request to the Internal Revenue Service ("IRS") to be recognized as an exempt
organization. The Company and the Bank have received an opinion of their
independent tax advisors that the Foundation would qualify as a Section
501(c)(3) exempt organization under the Code, except that such opinion does not
consider the impact of the condition expected to be required by regulatory
authorities that Common Stock issued to the Foundation be voted in the same
ratio as all other shares of the Company's Common Stock on all proposals
considered by stockholders of the Company. See "The Conversion--Establishment
of the Foundation--Regulatory Conditions Imposed on the Foundation."
Consistent with this condition, in the event that the Company or the Foundation
receives an opinion of its legal counsel that compliance with the voting
restriction would (i) cause a violation of Delaware law and the OTS determines
that federal law would not preempt the application of the laws of Delaware to
the Foundation, (ii) have the effect of causing
14
<PAGE> 58
the Foundation to lose its tax-exempt status, or otherwise have a material and
adverse tax consequence on the Foundation or (iii) subject the Foundation to an
excise tax under Section 4941 of the Code, the OTS shall waive such voting
restriction upon submission of a legal opinion by the Company or the Foundation
that is satisfactory to the OTS. The independent tax advisors' opinion further
provides that there is substantial authority for the position that the
Company's contribution of its own stock to the Foundation would not constitute
an act of self-dealing, and that the Company would be entitled to a deduction
in the amount of the fair market value of the stock at the time of the
contribution, subject to an annual limitation based on 10% of the Company's
annual taxable income. The Company, however, would be able to carry forward
any unused portion of the deduction for five years following the contribution.
Thus, while the Company would have received a tax benefit of approximately $8.4
million in 1996 (based upon the sale of stock at the maximum of the Estimated
Valuation Range and a contribution of $17.8 million of Common Stock and the
Bank's pre-tax income for 1996), the Company is permitted under the Code to
carry over the excess contribution in the five following years. Assuming the
sale of Common Stock at the maximum of the Estimated Valuation Range, the
Company estimates that for federal income tax purposes, a substantial portion
of the deduction should be deductible over the six-year period. Although the
Company and the Bank have received an opinion of their independent tax advisors
that the Company will be entitled to the deduction of the charitable
contribution, there can be no assurances that the IRS will recognize the
Foundation as a Section 501(c)(3) exempt organization or that the deduction
will be permitted. In such event, the Company's tax benefit related to the
Foundation would have to be fully expensed, resulting in further reduction in
earnings in the year in which the IRS makes such a determination.
Comparison of Valuation and Other Factors Assuming the Foundation is
Not Established as Part of the Conversion. The establishment of the Foundation
was taken into account by RP Financial in determining the estimated pro forma
market value of the Common Stock. The aggregate price of the shares of Common
Stock being offered in the Subscription and Community Offerings is based upon
the independent appraisal conducted by RP Financial of the estimated pro forma
market value of the Common Stock. The pro forma aggregate price of the Common
Stock being offered for sale in the Conversion is currently estimated to be
between $263.1 million and $356.0 million, with a midpoint of $309.5 million.
The pro forma price to book ratio and the pro forma price to annualized
earnings ratio, at and for the four months ended April 30, 1997, are 72.1% and
11.11x, respectively, at the midpoint of the Estimated Valuation Range. In the
event that the Conversion did not include the Foundation, RP Financial has
estimated that the estimated pro forma market value of the Common Stock would
be $335.0 million at the midpoint based on a pro forma price to book ratio and
the pro forma price to earnings ratio at 71.9% and 11.49x, respectively. The
amount of Common Stock that would be offered in the Conversion at the midpoint
of the Estimated Valuation Range is approximately $25.5 million less than the
estimated amount of Common Stock that would be offered in the Conversion
without the Foundation based on the estimate provided by RP Financial.
Accordingly, certain account holders of the Bank who subscribe to purchase
Common Stock in the Subscription Offering would receive fewer shares depending
on the size of a depositor's stock order and the amount of his or her
qualifying deposits in the Bank and the overall level of subscriptions. See
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"Comparison of Valuation and Pro Forma Information with No Foundation." This
estimate by RP Financial was prepared solely for purposes of providing Eligible
Account Holders and subscribers with information with which to make an informed
decision on the Conversion.
The decrease in the amount of Common Stock being offered as a result
of the contribution of Common Stock to the Foundation will not have a
significant effect on the Company or the Bank's capital position. The Bank's
regulatory capital is in excess of its regulatory capital requirements and will
further exceed such requirements following the Conversion. The Bank's
tangible, core and risk-based capital ratios at April 30, 1997 would be 14.0%,
15.0% and 31.35%, respectively. On a consolidated basis, the Company's pro
forma stockholders' equity would be $450.7 million, or approximately 21.2% of
pro forma consolidated assets, assuming the sale of shares at the midpoint of
the Estimated Valuation Range. Pro forma stockholders' equity per share and
pro forma net earnings per share would be $13.87 and $0.30, respectively. If
the Foundation was not being established in the Conversion, based on the RP
Financial estimate, the Company's pro forma stockholders' equity would be
approximately $465.6 million, or approximately 21.8% of pro forma consolidated
assets at the midpoint of the Estimated Valuation Range, and pro forma
stockholders' equity per share and pro forma net earnings per share would be
substantially similar with the Foundation as without the establishment of the
Foundation. See "Comparison of Valuation and Pro Forma Information with No
Foundation."
Potential Anti-Takeover Effect. Upon completion of the Conversion,
the Foundation will own 4.8% of the total shares of the Common Stock
outstanding. Such shares will be owned solely by the Foundation; however,
pursuant to a condition expected to be required by regulatory authorities, it
is anticipated that the shares of Common Stock held by the Foundation will be
voted in the same ratio as all other shares of the Common Stock on all
proposals considered by the stockholders of the Company. As such, the Company
does not believe the Foundation will have an anti-takeover effect on the
Company. However, in the event that the OTS were to waive this voting
restriction for the reasons described herein as provided in the condition, the
Foundation's Board of Directors would exercise sole voting power over such
shares and would no longer be subject to the restriction. See "The
Conversion--Establishment of the Foundation--Regulatory Conditions Imposed on
the Foundation." As a majority of the Foundation's Board of Directors will be
comprised of the members of the Board of Directors, in the event the OTS waived
the voting restriction (although it is not currently anticipated that the
Company and the Foundation will seek such a waiver), management of the Company
and the Bank may benefit to the extent that the Board of Directors of the
Foundation determines to vote the shares of Common Stock held by the Foundation
in favor of proposals supported by the Company and the Bank. Furthermore, in
such an event, when the Foundation's shares are combined with shares purchased
directly by officers and directors of the Company, shares expected to be held
by the Recognition Plan, and shares held by the ESOP trust, the aggregate of
such shares will exceed 20% of the outstanding Common Stock, which could enable
management to defeat stockholder proposals requiring 80% approval.
Consequently, such potential voting control might preclude takeover attempts
that certain stockholders deem to be in their best interest, and might tend to
perpetuate management. However, since the ESOP shares are allocated to all
eligible employees of the Bank, and any unallocated shares will be voted by the
trustees in the same proportions as allocated shares are voted, and because the
Recognition Plan must first be
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approved by stockholders no sooner than six months following completion of the
Conversion, and awards under such proposed plans may be granted to employees
other than executive officers and directors, management of the Company does not
expect to have voting control of all shares covered by the ESOP and other
stock-based benefit plans. See"--Certain Anti-Takeover Provisions--Voting
Control of Directors and Executive Officers." Moreover, as the Foundation sells
its shares of Common Stock over time, its ownership interest and voting power
in the Company is expected to decrease.
Potential Challenges. To date, there has been limited precedent with
respect to the establishment and funding of a charitable foundation as part of
a conversion of a mutual savings institution to stock form. In addition,
establishment and funding of the Foundation will require the OTS to grant the
Company and the Bank waivers from its mutual-to-stock conversion regulations.
As such, the Foundation and the OTS's non-objection to the Conversion may be
subject to potential challenges with respect to, among other things, the
Company's and the Bank's ability to establish the Foundation, notwithstanding
that the Board of Trustees of the Bank and the Board of Directors of the
Company have carefully considered the various factors involved in the
establishment of the Foundation in reaching their determination to establish
the Foundation as part of the Conversion, and/or with respect to the OTS's
authority to grant the waivers necessary to establish the Foundation. See "The
Conversion-- Establishment of the Charitable Foundation--Purpose of the
Foundation." If challenges were to be instituted seeking to require the Bank
and the Company to eliminate establishment of the Foundation in connection with
the Conversion, no assurances can be made that the resolution of such
challenges would not result in a delay in the consummation of the Conversion or
that any objecting persons would not be ultimately successful in obtaining such
removal or other relief against the Bank and the Company. In addition, if the
Bank and the Company are forced to eliminate the Foundation, it could affect the
amount of orders received in the Offerings and, if the number of shares of
Common Stock times the Purchase Price would be either below the minimum or more
than 15% above the maximum of the Estimated Price Range, then the Company may
be required to resolicit subscribers in the Offerings.
Approval of Members. Establishment of the Foundation is subject to
the approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered
as a separate matter from approval of the Plan of Conversion. If the Bank's
members approve the Plan of Conversion, but not the establishment of the
Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being
offered for sale in the Offering since the Estimated Valuation Range, as set
forth herein, takes into account the proposed contribution to the Foundation.
If the pro forma market value of the Company without the Foundation is either
greater than $409.3 million or less than $263.1 million or if the OTS otherwise
requires a resolicitation of subscribers, the Bank will establish a new
Estimated Valuation Range and commence a resolicitation of subscribers (i.e.,
subscribers will be permitted to continue their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscription funds will be promptly
refunded with interest.) Any change in the Estimated Valuation Range must be
approved by the OTS. See "The Conversion - Stock Pricing and Number of Shares
to be Issued."
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT
The operations of the Bank are substantially dependent on its net
interest income, which is the difference between the interest income earned on
its interest-earning assets and the interest
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expense paid on its interest-bearing liabilities. Like most savings
institutions, the Bank's earnings are affected by changes in market interest
rates, and other economic factors beyond its control. While the Bank's average
interest rate spread increased from 3.64% for 1994 to 3.84% for 1996 and 4.02%
for the four months ended April 30, 1997, no assurance can be given that the
Bank's average interest rate spread will not decrease in future periods. Any
such decrease in the Bank's average interest rate spread could adversely affect
the Bank's net interest income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations."
If an institution's interest-earning assets have longer effective
maturities than its interest-bearing liabilities, the yield on the
institution's interest-earning assets generally will adjust more slowly than
the cost of its interest-bearing liabilities and, as a result, the
institution's net interest income generally would be adversely affected by
material and prolonged increases in interest rates and positively affected by
comparable declines in interest rates. The Bank attempts to reduce the
vulnerability of its operations to changes in interest rates by maintaining
significant amounts of assets with relatively short terms and/or adjustable
rates of interest. Based upon certain repricing assumptions, the Bank's
interest-earning liabilities repricing or maturing within one year exceeded its
interest-bearing assets with similar characteristics by $127.3 million or 6.9%
of total assets. Accordingly, an increase in interest rates generally would
result in a decrease in the Bank's average interest rate spread and net
interest income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset and Liability Management."
In addition to affecting interest income and expense, changes in
interest rates also can affect the value of the Bank's interest-earning assets,
which are comprised of fixed and adjustable-rate instruments, and the ability
to realize gains from the sale of such assets. Generally, the value of
fixed-rate instruments fluctuates inversely with changes in interest rates. At
April 30, 1997, the Bank had $677.5 million of securities available for sale
($385.9 million of which had fixed-rates of interest) and the Bank had $3.5
million of net unrealized gains with respect to such securities, which were
included as a separate component in the Bank's total net worth, net of tax, as
of such date.
The OTS has implemented an interest rate risk component into its
risk-based capital rules, which is designed to calculate on a quarterly basis
the extent to which the value of an institution's assets and liabilities would
change if interest rates increase or decrease. If the net portfolio value of
an institution would decline by more than 2% of the estimated market value of
the institution's assets in the event of a 200 basis point increase or decrease
in interest rates, then the institution is deemed to be subject to a greater
than "normal" interest rate risk and must deduct from its capital 50% of the
amount by which the decline in net portfolio value exceeds 2% of the estimated
market value of the institution's assets, as of an effective date to be
determined. As of April 30, 1997, if interest rates increased or decreased by
200 basis points, the Bank's net portfolio value would decrease by 18.5% and
increase by 6.6%, respectively, of the estimated market value of the Bank's
portfolio equity, as calculated by the OTS. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset and Liability
Management." As a result of such interest rate risk, the Bank could be
required to deduct $4.7
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million from its total regulatory capital if certain regulations were
applicable, although even with such deduction the Bank would continue to be
deemed "well-capitalized." See "Regulation - Regulation of Federal Savings
Banks - Regulatory Capital Requirements."
Changes in interest rates also can affect the average life of loans
and mortgage-related securities. Decreases in interest rates in recent periods
have resulted in increased prepayments of loans and mortgage-backed securities,
as borrowers refinanced to reduce borrowing costs. Under these circumstances,
the Bank is subject to reinvestment risk to the extent that it is not able to
reinvest such prepayments at rates which are comparable to the rates on the
maturing loans or securities. See "Business - Lending Activities."
RISKS RELATED TO COMMERCIAL REAL ESTATE LOANS, CONSTRUCTION AND LAND LOANS AND
COMMERCIAL BUSINESS LOANS
As a result of its acquisition of Gateway in August 1995, the Bank has
become more active in originating commercial real estate loans, construction
and land loans and commercial business loans, which amounted to $112.3 million
(or 11.5% of the Bank's net loan portfolio), $31.4 million (or 3.2% of the net
loan portfolio) and $8.3 million (or 0.9% of the net loan portfolio),
respectively.
Commercial real estate and construction and land lending generally is
considered to involve a higher degree of risk than singe-family residential
lending due to a variety of factors, including generally larger loan balances,
the dependency on successful operation of the project for repayment, loan terms
which often do not require full amortization of the loan over its term and to
successfully develop and/or sell the property. In addition, risk of loss on a
construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost (including interest) of construction. During the
construction phase, a number of factors could result in delays and cost
overruns. If the estimate of value proves to be inaccurate, the Bank may be
confronted, at or prior to the maturity of the loan, with a project, when
completed, having a value which is insufficient to assure full repayment.
Commercial business loans are generally considered to involve a higher degree
of risk than residential mortgage loans because the collateral may be in the
form of intangible assets and/or inventory subject to market obsolescence.
Commercial business loans may involve large loan balances to single borrowers
or groups of related borrowers, with the repayment of such loans typically
dependent on the successful operations and income stream of the borrower. Such
risks can be significantly affected by economic conditions. In addition,
commercial business lending generally requires substantially greater oversight
efforts compared to residential real estate lending. See "Business - Lending
Activities - Other Loans." As of April 30, 1997, the Bank had $8.9 million of
non-performing commercial real estate loans, $2.7 million of non-performing
construction and land loans and $300,000 of non-performing commercial business
loans. See "Business - Asset Quality - Non-Performing Assets." The Bank
recently has hired two additional commercial lending officers and the Bank
generally intends to increase the amounts of its originations of commercial
real estate loans, construction and land loans and commercial business loans.
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STRONG COMPETITION WITHIN THE BANK'S MARKET AREA
Competition in the banking and financial services industry is intense.
In its market area, the Bank competes with commercial banks, savings
institutions, mortgage brokerage firms, credit unions, finance companies,
mutual funds, insurance companies, and brokerage and investment banking firms
operating locally and elsewhere. Many of these competitors have substantially
greater resources and lending limits than the Bank and may offer certain
services that the Bank does not or cannot provide. The profitability of the
Bank depends upon its continued ability to successfully compete in its market
area.
GEOGRAPHIC CONCENTRATION OF LOANS
The Bank's market area consists primarily of Staten Island and
Brooklyn, New York and, to a lesser extent, the other areas of the New York
City metropolitan area and northern New Jersey. The Bank's real estate loans
are primarily secured by properties located in its market area and all of the
Bank's loans are primarily made to residents of its market area. Accordingly,
the asset quality of the Bank's loan portfolio is highly dependent upon the
economy and the unemployment rate in its market area. While the Staten Island
economy generally has been stable in recent years, there is still potential for
a significant degree of volatility in the local economy due to a continued
heavy reliance on the economic conditions in Manhattan and the securities and
financial services industries headquartered therein. June 1997 data indicates
that the unemployment rates in Richmond County (Staten Island) and Kings County
(Brooklyn), New York, were 8.8% and 11.0%, respectively compared to the
national average of 5.2%. No assurance can be given that downturns in the
economy in the Bank's market area may not adversely affect the Bank's
operations in the future. See "Business - Market Area and Competition."
CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S GOVERNING INSTRUMENTS AND DELAWARE LAW.
Certain provisions of the Company's Certificate of Incorporation and Bylaws, as
well as certain provisions in Delaware law, will assist the Company in
maintaining its status as an independent publicly-owned corporation.
Provisions in the Company's Certificate of Incorporation and Bylaws provide,
among other things, (i) that the Board of Directors of the Company shall be
divided into three classes; (ii) that special meetings of stockholders may only
be called by the Board of Directors of the Company; (iii) that stockholders
generally must provide the Company advance notice of stockholder proposals and
nominations for director and provide certain specified related information;
(iv) noncumulative voting for the election of directors; (v) that no person may
acquire more than 10% of the issued and outstanding shares of any class of
equity security of the Company; (vi) the authority to issue shares of
authorized but unissued Common Stock and preferred stock and to establish the
terms of any one or more series of Preferred Stock, including voting rights
(which may be waived by the Board of Directors under certain circumstances) and
(vii) supermajority voting requirements with respect to certain business
transactions involving the Company. Provisions under Delaware law applicable
to the Company provide, among other things, that the Company may not engage in
a business combination with an "interested shareholder" (generally a holder of
15% of a corporation's voting stock) during the three-year period after the
interested shareholder became such except under certain specified
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circumstances. In addition, OTS regulations prohibit, for a period of one year
following the date of Conversion, offers to acquire or the acquisition of
beneficial ownership of more than 10% of the outstanding voting stock of the
Company. The above provisions may discourage potential proxy contests and
other potential takeover attempts, particularly those which have not been
negotiated with the Board of Directors, and thus generally may serve to
perpetuate current management. See "Restrictions on Acquisition of the Company
and the Bank."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and executive
officers of the Company expect to purchase approximately 1.9% or 1.4% of the
shares of Common Stock outstanding based upon the minimum and the maximum of
the Estimated Valuation Range, respectively, to be sold in the Offerings. See
"Proposed Management Purchases." The directors who act as trustees of the ESOP
are also expected to immediately control the voting of 8% of the shares of
Common Stock issued in the Conversion through the ESOP, at least until an
allocation has been made under the ESOP. Under the terms of the ESOP, after an
allocation has been made, the unallocated shares will be voted by the trustees
in the same proportion as the allocated shares are voted by the ESOP
participants.
The Company intends to seek stockholder approval of the Company's
proposed Recognition Plan, which is a non-tax-qualified restricted stock plan
for the benefit of directors, officers and employees of the Company and the
Bank. Assuming the receipt of stockholder approval, which stockholder approval
cannot be obtained earlier than six months following the Conversion pursuant to
regulations of the OTS, the Company expects to acquire Common Stock on behalf
of the Recognition Plan, in an amount equal to 4% of the Common Stock issued in
the Conversion, or 1,052,381 shares and 1,423,809 shares at the minimum and
maximum of the Estimated Valuation Range, respectively. These shares will be
acquired either through open market purchases, if permissible, or from
authorized but unissued Common Stock. Under the terms of the Recognition Plan,
recipients of awards will be entitled to instruct the trustee of the
Recognition Plan as to how the underlying shares should be voted, and the
trustee will be entitled to vote all unallocated shares in its discretion. If
the shares are purchased in the open market, directors and executive officers
would have effective control over 5.6% or 3.8% of the Common Stock outstanding
(including the shares to be issued to the Foundation) at such time based upon
the minimum and the maximum of the Estimated Valuation Range, respectively,
before giving effect to the potential exercise of any stock options by
directors and officers of the Company and the Bank, and shares held by the
ESOP. If approved by stockholders at a meeting held no earlier than six months
following the Conversion, the Company intends to reserve for future issuance
pursuant to the Stock Option Plan a number of authorized shares of Common Stock
equal to an aggregate of 10% of the Common Stock issued in the Conversion
(3,559,523 shares, based on the issuance of the maximum 35,595,238 shares).
See "Management - Management of the Bank - Benefits." Management's potential
voting control could, together with additional stockholder support, preclude or
make more difficult takeover attempts that certain stockholders deem to be in
their best interest and may tend to perpetuate existing management.
PROVISIONS OF STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS. The ESOP
provides for accelerated vesting in the event of a change in control. In
addition, upon consummation of
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the Conversion, the Company and the Bank will enter into employment agreements
with the Bank's Chairman and Chief Executive Officer, its President and Chief
Operating Officer and with the Other Senior Officers, which agreements will
provide for severance pay in the event of a change in control. These
provisions may have the effect of increasing the cost of acquiring the Company,
thereby discouraging future attempts to take over the Company or the Bank. In
addition, it is possible that the Stock Option Plan and the Recognition Plan
may not be implemented until more than one year following completion of the
Conversion, and, in such event, such plans could provide for accelerated
vesting in the event of a change in control of the Company. See "Restrictions
on Acquisition of the Company and the Bank - Restrictions in the Company's
Certificate of Incorporation and Bylaws," "Management of the Company -
Benefits" and "Management of the Bank - Employment Agreements."
LEGISLATION LIMITING DEDUCTION OF BAD DEBT RESERVES
Under Section 593 of the Internal Revenue Code of 1986, as amended
(the "Code"), until the first tax year beginning on or after January 1, 1996,
thrift institutions such as the Bank generally were permitted to establish a
tax reserve for bad debts and to make annual additions thereto, which
additions, within specified limitations, could be deducted in arriving at their
taxable income. The Bank's deduction with respect to "qualifying loans" was
computed using an amount based on the Bank's actual loss experience (the
"Experience Method") or a percentage equal to 8.0% of the Bank's taxable income
(the "PTI Method"). Under recently enacted legislation, the PTI Method was
repealed. As a result, the Bank is permitted to deduct only actual bad debts
as they occur and cannot utilize the percentage of taxable income method to
make additions to its bad debt reserves in the future to reduce its effective
tax rate. In addition, the Bank is required to recapture for tax purposes (i.e.
take into income) over a six year period the excess of the balance of its bad
debt reserves as of December 31, 1995 over the balance of such reserves as of
December 31, 1987. The Bank's excess amounted to $8.4 million (for which
deferred taxes have been provided). However, under the legislation, such
recapture requirements would be suspended for each of two successive taxable
years beginning January 1, 1996, in which the Bank originates a minimum amount
of certain residential loans based upon the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding 1996. See
"Taxation - Federal Taxation."
REGULATORY OVERSIGHT AND LEGISLATION
The Bank is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority, and by the FDIC as insurer
of its deposits up to applicable limits. The Bank is a member of the FHLB
System and is subject to certain limited regulations promulgated by the FRB.
As the holding company of the Bank, the Company also will be subject to
regulation and oversight by the OTS. Such regulation and supervision govern
the activities in which an institution can engage and are intended primarily
for the protection of the insurance fund and depositors. Regulatory
authorities have been granted extensive discretion in connection with their
supervisory and enforcement activities which are intended to strengthen the
financial condition of the banking and thrift industries, including the
imposition of restrictions on the
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operation of an institution, the classification of assets by the institution
and the adequacy of an institution's allowance for loan losses. Any change in
such regulation and oversight, whether by the OTS, the FDIC or Congress, could
have a material impact on the Company, the Bank and their respective
operations. See "Regulation."
On September 30, 1996, the Deposit Insurance Funds ("DIF") Act of 1996
was enacted into law. The DIF Act contemplates the development of a common
charter for all federally chartered depository institutions and the abolition
of separate charters for national banks and federal savings associations. It
is not known what form the common charter may take and what effect, if any, the
adoption of a new charter would have on the financial condition or results of
operations of the Bank. See "Regulation - Regulation of Federal Savings
Banks."
Legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) require federal savings associations to convert to a national bank or
a state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed, and, if
passed, in what form the legislation would be passed. As a result, management
cannot accurately predict the possible impact of such legislation on the Bank.
ABSENCE OF MARKET FOR THE COMMON STOCK
The Company and the Bank have never issued capital stock. Keefe,
Bruyette has been retained to assist in the distribution of the Common Stock on
a "best efforts" basis and is not obligated to purchase any shares of Common
Stock in the Offerings. The Company has applied to have its Common Stock
listed on the NYSE. See "Market for Common Stock." Making a market in
securities 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.
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. Because there can be no assurance
that buyers and sellers of the Company's Common Stock can be readily matched,
investors may wish to consider the potential illiquid and long-term nature of
an investment in the Common Stock. There can be no assurance that an active
and liquid trading market for the Common Stock will develop, or once developed,
will continue, nor any assurances that purchasers of the Common Stock will be
able to sell their shares at or above the Purchase Price. The absence of a
liquid and active trading market, or the discontinuance thereof, may have an
adverse effect on both the price and the liquidity of the Common Stock.
POSSIBLE INCREASE IN NUMBER OF SHARES ISSUED IN THE CONVERSION
The number of shares to be sold in the Conversion may be increased as
a result of an increase in the Estimated Valuation Range of up to 15% to
reflect changes in market and financial conditions prior to completion of the
Conversion or to fill the order of the ESOP. In
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the event that the Estimated Valuation Range is so increased, it is expected
that the Company will issue up to 40,934,524 shares of Common Stock at the
Purchase Price for an aggregate price of up to $409.3 million. An increase in
the number of shares will decrease net income per share and stockholders'
equity per share on a pro forma basis and will increase the Company's
consolidated stockholders' equity and net income. Such an increase will also
increase the Purchase Price as a percentage of pro forma stockholders' equity
per share and net income per share.
The ESOP currently intends to purchase 8% of the Common Stock, which
purchase may be increased to up to 10% of the Common Stock. In the event that
the number of shares to be sold in the Conversion are increased as a result of
an increase in the Estimated Valuation Range, the ESOP shall have a first
priority to purchase all of such shares sold in the Conversion in excess of
35,595,238 shares, up to a maximum of 10% of the total number of shares issued
in the Conversion. See "Pro Forma Data" and "The Conversion - Stock Pricing
and Number of Shares to be Issued."
POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES
If the Recognition Plan is approved by stockholders of the Company,
the Recognition Plan intends to acquire an amount of Common Stock equal to 4%
of the shares of Common Stock issued in the Conversion. If such shares are
acquired at a per share price equal to the Purchase Price, the cost of such
shares would be $14.2 million, assuming the Common Stock sold in the Conversion
is equal to the maximum of the Estimated Valuation Range. Such shares of
Common Stock may be acquired in the open market with funds provided by the
Company, if permissible, or from authorized but unissued shares of Common
Stock. In the event that the Recognition Plan acquires authorized but unissued
shares of Common Stock from the Company, the interests of existing stockholders
will be diluted. The issuance of authorized but unissued shares of Common
Stock to such plan in an amount equal to 4% of the Common Stock issued in the
Conversion would dilute the voting interests of existing stockholders by
approximately 3.8%, and net income per share and stockholders' equity per share
would be decreased by a corresponding amount. See "Pro Forma Data" and
"Management - Management of the Bank - Benefits - Recognition Plan."
If the Stock Option Plan is approved by stockholders of the Company,
the Company intends to reserve for future issuance pursuant to such plan a
number of shares of Common Stock equal to an aggregate of 10% of the Common
Stock issued in the Conversion (3,559,523 shares, based on the issuance of the
maximum 35,595,238 shares). Such shares may be authorized but previously
unissued shares, treasury shares or shares purchased by the Company in the open
market or from private sources. If only authorized but previously unissued
shares are used under such plan, the issuance of the total number of shares
available under such plan would dilute the voting interests of existing
stockholders by approximately 9.1%, and net income per share and stockholders'
equity per share would be decreased by a corresponding amount. See "Pro Forma
Data" and "Management - Management of the Bank - Benefits."
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POTENTIAL INCREASED COMPENSATION EXPENSE AFTER THE CONVERSION
In November 1993, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 93-6 entitled "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 requires
an employer to record compensation expense in an amount equal to the fair value
of shares committed to be released to employees from an employee stock
ownership plan instead of an amount equal to the cost basis of such shares. If
the shares of Common Stock appreciate in value over time, SOP 93-6 will result
in increased compensation expense with respect to the ESOP as compared with
prior guidance which required the recognition of compensation expense based on
the cost of shares acquired by the ESOP. It is impossible to determine at this
time the extent of such impact on future net income. See "Pro Forma Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Accounting Pronouncements." In addition, after
consummation of the Conversion, the Company intends to implement, subject to
stockholder approval (which approval cannot be obtained earlier than six months
subsequent to the Conversion), the Recognition Plan. Upon implementation, the
release of shares of Common Stock from the Recognition Plan will result in
additional compensation expense. See "Pro Forma Data" and "Management -
Management of the Bank - Benefits - Recognition Plan."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Company and the Bank have received a letter from RP Financial
advising them of its belief 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 Internal Revenue Service
("IRS"). If the subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and 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 and Other
Members who exercise the subscription rights (either as capital gain or
ordinary income) in an amount equal to such value. Whether subscription rights
are considered to have ascertainable value is an inherently factual
determination. See "The Conversion - Effects of Conversion" and "- Tax
Aspects."
IRREVOCABILITY OF ORDERS; POTENTIAL DELAY IN COMPLETION OF OFFERINGS
Orders submitted in the Subscription Offering, Community Offering
and/or any Syndicated Community Offering are irrevocable. Funds submitted in
connection with any purchase of Common Stock in the Offerings will be held by
the Company until the completion or termination of the Conversion, including
any extension of the Expiration Date. Because, among other factors, completion
of the Conversion will be subject to an update of the independent appraisal
prepared by RP Financial, there may be one or more delays in the completion of
the Conversion. Subscribers will have no access to subscription funds and/or
shares of Common Stock until the Conversion is completed or terminated.
25
<PAGE> 69
STATEN ISLAND BANCORP, INC.
The Company was organized in July 1997 at the direction of the Board
of Trustees of the Bank for the purpose of holding all of the capital stock of
the Bank and in order to facilitate the Conversion. The Company has applied
for the approval of the OTS to become a savings and loan holding company and as
such will be subject to regulation by the OTS. After completion of the
Conversion the Company will conduct business initially as a unitary savings and
loan holding company. See "Regulation - Regulation of Savings and Loan Holding
Companies." Upon consummation of the Conversion, the Company will have no
significant assets other than all of the outstanding shares of common stock of
the Bank, the portion of the net proceeds from the Offerings retained by the
Company and the Company's loan to the ESOP, and the Company will have no
significant liabilities. See "Use of Proceeds." Initially, the management of
the Company and the Bank will be substantially identical and 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 officers who are also officers of the
Bank, and the Company 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 or changes its business in the future.
Management believes that the holding company structure will provide
the Company and the Bank with additional flexibility to diversify its business
activities through existing or newly-formed subsidiaries, or through
acquisitions of other entities, including potentially other financial
institutions and financial services related companies. Although there are no
current arrangements, understandings or agreements regarding any such
opportunities or transactions, the Company will be in a position after the
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such acquisition and expansion opportunities
that may arise. The initial activities of the Company are anticipated to be
funded by the proceeds to be retained by the Company and earnings thereon, as
well as dividends from the Bank. See "Dividend Policy."
The Company's principal executive office is located at the executive
office of the Bank at 15 Beach Street, Staten Island, New York 10304 and its
telephone number is (718) 447-7900.
STATEN ISLAND SAVINGS BANK
Staten Island Savings operated as a New York-chartered savings bank
since it was founded in 1864 until its conversion to a federally-chartered
mutual savings bank in August 1997. The Bank maintains a network of 16 full
service branch offices and three limited service branch offices in Staten
Island, New York, and one branch office in the Bay Ridge area of Brooklyn, New
York. As of April 30, 1997, Staten Island Savings had $1.8 billion of total
assets, $1.7 billion of total liabilities, including $1.6 billion of deposits,
and $177.3 million of net worth (representing 9.6% of total assets). Staten
Island Savings is primarily engaged in attracting deposits from the general
public and using those and other available sources of funds to originate loans
secured primarily
26
<PAGE> 70
by single-family (one-to four-units) residences located in Staten Island and,
to a lesser extent, Brooklyn, New York. The Bank also originates loans secured
by commercial real estate, construction and land loans (primarily to developers
operating in Staten Island), home equity loans, multi-family residential loans
and other loans. Commencing with its acquisition of Gateway in August 1995,
the Bank has diversified, to a certain extent, its business activities by
increasing its emphasis on attracting commercial customers. In addition to
continuing Gateway's traditional commercial bank business, which emphasized
commercial real estate and construction and land loans, the Bank has increased
its business development efforts, has hired additional personnel, including
experienced commercial loan originators, and has commenced a program designed
to cross-sell services to existing customers as well as attract new customers.
In addition to its loan and deposit products, the Bank also provides trust
services and savings bank life insurance.
The Bank has long-standing ties to Staten Island with over 133 years
of service to the communities and residents of Staten Island. As of June 30,
1996 (the latest available data), the Bank is the largest depository
institution in terms of deposit market share in Staten Island with 30% of the
total deposits and 23% of the total number of branch offices of depository
institutions in Staten Island. Historically, the Bank also has been among the
leaders in terms of the number and amount of new residential mortgage loan
originations in Staten Island. Staten Island Savings' operating strategy
emphasizes customer service and convenience and, in large part, the Bank
attributes its commitment to maintaining customer satisfaction for its market
share position. The Bank attempts to differentiate itself from its competitors
by providing the type of personalized customer service not generally available
from larger banks while offering a greater variety of products and services
than is typically available from smaller, local depository institutions. The
Bank has an experienced management team directing its operations. The Bank's
Chairman and Chief Executive Officer and President and Chief Operating Officer
have 31 years and 27 years, respectively, of service with the Bank while the
other executive officers of the Bank have an average of 14 years of service
with Staten Island Savings.
The Bank is subject to examination and comprehensive regulation by the
OTS, which is the Bank's chartering authority and primary federal regulator.
The Bank is also regulated by the FDIC, the administrator of the BIF. The Bank
is also subject to certain reserve requirements established by the FRB and is a
member of the FHLB of New York, which is one of the 12 regional banks
comprising the FHLB System.
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 $257.4 million and $349.2 million ($402.1 million assuming an increase
in the Estimated Valuation Range 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.
27
<PAGE> 71
The Company will purchase all of the capital stock of the Bank to be
issued in the Conversion in exchange for 50% of the net Conversion proceeds,
and the Company will retain the remaining 50% of the net proceeds. The Company
intends to use a portion of the net proceeds to make a loan directly to the
ESOP to enable the ESOP to purchase up to 8% of the Common Stock. Based upon
the issuance of 26,309,524 shares or 35,595,238 shares at the minimum and
maximum of the Estimated Valuation Range, respectively, the loan to the ESOP
would be $21.0 million and $28.5 million, respectively. See "Management of the
Company - Benefits - Employee Stock Ownership Plan." The remaining net
proceeds retained by the Company initially may be used to invest in investment
securities, mortgage-backed securities, U.S. Government and federal agency
securities of various maturities, deposits in either the Bank or other
financial institutions, or a combination thereof. The portion of the net
proceeds retained by the Company may ultimately be used to support the Bank's
lending activities, to support the future expansion of operations through
acquisitions of other financial institutions or branch offices (although no
such transactions are specifically being considered at this time), and for
other business and investment purposes, including the payment of regular or
special cash dividends, possible repurchases of the Common Stock or returns of
capital. Management of the Company may consider expanding or diversifying,
should such opportunities become available. Neither the Bank nor the Company
has any specific plans, arrangements, or understandings regarding any
acquisitions or diversification of activities at this time, nor have criteria
been established to identify potential candidates for acquisition.
Following the six-month anniversary of the completion of the
Conversion (to the extent permitted by the OTS), and based upon then existing
facts and circumstances, the Company's Board of Directors may determine to
repurchase some shares of Common Stock, subject to any applicable statutory and
regulatory requirements. Such facts and circumstances may include but not be
limited to (i) market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and an improvement in 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. Any stock
repurchases will be subject to the determination of the Company's Board of
Directors that the Bank will be capitalized in excess of all applicable
regulatory requirements after any such repurchases. The payment of dividends
or repurchase of stock, however, would be prohibited if the Bank's net worth
would be reduced below the amount required for the liquidation account to be
established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. As of April 30, 1997, the initial balance of the
liquidation account would be approximately $177.3 million. See "Dividend
Policy," "The Conversion - Liquidation Rights" and "The Conversion - Certain
Restrictions on Purchase or Transfer of Shares After the Conversion."
The Company will be a unitary savings and loan holding company which,
under existing laws, would generally not be restricted as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender ("QTL"). See
28
<PAGE> 72
"Regulation - Regulation of Savings and Loan Holding Companies" for a
description of certain regulations applicable to the Company.
The portion of the net proceeds used by the Company to purchase the
capital stock of the Bank will be added to the Bank's general funds to be used
for general corporate purposes, including increased lending activities and
purchases of securities. While the amount of net proceeds received by the Bank
will further strengthen the Bank's capital position, which already
substantially exceeds all regulatory requirements, it should be noted that the
Bank is not converting primarily to raise capital. After the Conversion, the
Bank's tangible capital ratio will be 14.0% (based upon the midpoint of the
Estimated Valuation Range). As a result, the Bank will be a well-capitalized
institution. After the Conversion, the Bank intends to emphasize capital
strength and growth in assets and earnings.
THE NET PROCEEDS MAY VARY BECAUSE TOTAL EXPENSES OF THE CONVERSION MAY
BE MORE OR LESS THAN THOSE ESTIMATED. The net proceeds will also vary if the
number of shares to be issued in the Conversion is adjusted to reflect a change
in the estimated pro forma market value of the Bank. Payments for shares made
through withdrawals from existing deposit accounts at the Bank will not result
in the receipt of new funds for investment by the Bank but will result in a
reduction of the Bank's interest expense and liabilities as funds are
transferred from interest-bearing certificates or other deposit accounts.
DIVIDEND POLICY
Upon completion of the Conversion, the Board of Directors of the
Company intends to consider implementation of a policy of paying dividends on
the Common Stock, subject to statutory and regulatory requirements. However,
there has been no determination made at this point in time as to the initial
rate of dividend, if any, to be paid on the Common Stock. The initial or
continued payment of dividends thereof 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, the Company's and the Bank's financial condition and results of
operations, tax considerations, statutory and regulatory limitations, and
general economic conditions. No assurances can be given that any dividends
will be paid or that, if paid, will not be reduced or eliminated in future
periods. Special cash dividends, stock dividends or returns of capital may be
paid in addition to, or in lieu of, regular cash dividends (however, the
Company and the Bank have committed to the OTS that they will take no action
with respect to any return of capital during the one-year period following
consummation of the Conversion).
Dividends from the Company may eventually depend, in part, upon
receipt of dividends from the Bank, because the Company initially will have no
source of income other than dividends from the Bank, earnings from the
investment of proceeds from the sale of Common Stock retained by the Company,
and interest payments with respect to the Company's loan to the ESOP. A
regulation of the OTS imposes limitations on "capital distributions" by savings
institutions, including cash dividends, payments by a savings institution to
repurchase or otherwise acquire its stock, payments to stockholders of another
savings institution in a cash-out merger and other
29
<PAGE> 73
distributions charged against capital. See "Regulation - Regulation of Federal
Savings Banks - Capital Distribution - Regulation."
Any payment of dividends by the Bank to the Company which would be
deemed to be drawn out of the Bank's bad debt reserves would require a payment
of taxes at the then-current tax rate by the Bank on the amount of earnings
deemed to be removed from the reserves for such distribution. The Bank does not
intend to make any distribution to the Company that would create such a federal
tax liability. See "Taxation."
Unlike the Bank, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders,
although the source of such dividends may eventually be dependent, in part,
upon dividends from the Bank in addition to the net proceeds retained by the
Company and earnings thereon. The Company is subject, however, to the
requirements of Delaware law, which generally limit dividends to an amount
equal to the excess of the net assets of the Company (the amount by which total
assets exceed total liabilities) over its statutory capital, or if there is no
such excess, to its net profits for the current and/or immediately preceding
fiscal year.
MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock, and,
consequently, there is no established market for the Common Stock at this time.
The Company has applied to have its Common Stock listed on the NYSE under the
symbol "SIB." Making a market involves maintaining bid and ask quotations
and being able, as principal, to effect transactions in reasonable quantities
at these quoted prices, subject to various securities laws and other regulatory
requirements. Additionally, the development of a liquid public market depends
on 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,
the number of active buyers and sellers of the Common Stock at any particular
time may be limited. Under such circumstances, investors in the Common Stock
could have difficulty disposing of their shares and should not view the Common
Stock as a short-term investment. Accordingly, there can be no assurance that
an active and liquid trading market for the Common Stock will develop or that,
if developed, it will continue, nor is there any assurance that persons
purchasing shares of Common Stock will be able to sell them at or above the
Purchase Price. Keefe, Bruyette has indicated its intention to act as a market
maker in the Common Stock following the consummation of the Conversion,
depending on trading volume and subject to compliance with applicable laws and
regulatory requirements. There can be no assurance there will be two or more
market makers for the Common Stock. There can be no assurance that purchasers
will be able to sell their shares at or above the Purchase Price.
30
<PAGE> 74
REGULATORY CAPITAL
At April 30, 1997, the Bank exceeded all of the regulatory capital
requirements applicable to it. The table on the following page sets forth the
Bank's historical regulatory capital at April 30, 1997 and the pro forma
regulatory capital of the Bank after giving effect to the Conversion, based
upon the sale of the number of shares shown in the table. The pro forma
regulatory capital amounts reflect the receipt by the Bank of 50% of the net
Conversion proceeds, minus the amounts to be loaned to the ESOP and contributed
to the RRP. The pro forma risk-based capital amounts assume the investment of
the net proceeds received by the Bank in assets which have a risk-weight of 50%
under applicable regulations, as if such net proceeds had been received and so
applied at April 30, 1997.
31
<PAGE> 75
<TABLE>
<CAPTION>
Pro Forma at April 30, 1997 Based on
-------------------------------------------------------
26,309,524 30,952,381
Shares Sold Shares Sold
Historical at at $10.00 at $10.00
April 30, 1997 Per Share Per Share
------------------------ -------------------------- --------------------------
Percent of Percent of Percent of
Amount Assets(1) Amount Assets(1) Amount Assets(1)
---------- ---------- -------- ----------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital(2):
Actual . . . . . . . . $154,040 8.44% $257,336 13.20% $275,824 13.99%
Requirement . . . . . . 27,376 1.50 29,241 1.50 29,574 1.50
-------- ----- -------- ----- -------- -----
Excess . . . . . . . . $126,664 6.94% $228,095 11.70% $246,251 12.49%
======== ===== ======== ===== ======== =====
Core capital(2)(3):
Actual . . . . . . . . $173,838 9.53% $277,134 14.22% $295,622 14.99%
Requirement . . . . . . 54,751 3.00 58,482 3.00 59,148 3.00
-------- ----- -------- ----- -------- -----
Excess . . . . . . . . $119,087 6.53% $218,652 11.22% $236,475 11.99%
======== ===== ======== ===== ======== =====
Risk-based capital(2)(3):
Actual . . . . . . . . $164,539 19.59% $267,835 29.69% $286,323 31.35%
Requirement . . . . . . 67,195 8.00 72,168 8.00 73,056 8.00
-------- ----- -------- ----- -------- -----
Excess . . . . . . . . $ 97,344 11.59% $195,667 21.69% $213,267 23.35%
======== ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Pro Forma at April 30, 1997 Based on
---------------------------------------------------
35,595,238 40,934,524
Shares Sold Shares Sold
at $10.00 at $10.00
Per Share Per Share
------------------------- -----------------------
Percent of Percent of
Amount Assets(1) Amount Assets(1)
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Tangible capital(2):
Actual . . . . . . . . $294,313 14.76% $315,574 15.63%
Requirement . . . . . . 29,907 1.50 30,290 1.50
-------- ----- -------- -----
Excess . . . . . . . . $264,406 13.26% $285,284 14.13%
======== ===== ======== =====
Core capital(2)(3):
Actual . . . . . . . . $314,111 15.75% $335,372 16.61%
Requirement . . . . . . 59,814 3.00 60,580 3.00
-------- ----- -------- -----
Excess . . . . . . . . $254,297 12.75% $274,793 13.61%
======== ===== ======== =====
Risk-based capital(2)(3):
Actual . . . . . . . . $304,812 32.98% $326,073 34.80%
Requirement . . . . . . 73,945 8.00 74,966 8.00
-------- ----- -------- -----
Excess . . . . . . . . $230,867 24.98% $251,107 26.80%
======== ===== ======== =====
</TABLE>
- ---------------------------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
(2) Based on the OTS regulatory capital requirements which became
applicable to the Bank upon its conversion to a federal savings bank
in July 1997.
(3) Does not reflect the interest rate risk component to be added to the
risk-based capital requirements or, in the case of the core capital
requirement, the 4.0% requirement to be met in order for an
institution to be "adequately capitalized" under applicable laws and
regulations. See "Regulation - Regulation of Federal Savings Banks -
Regulatory Capital Requirements."
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<PAGE> 76
CAPITALIZATION
The following table presents the historical consolidated
capitalization of the Savings Bank at April 30, 1997, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion, based upon the sale of the number of shares shown below and the
other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
The Company - Pro Forma
Based Upon Sale at $10.00 Per Share
----------------------------------------
The 26,309,524 Shares 30,952,381 Shares
Bank-Historical (Minimum of (Midpoint of a
Capitalization Range) Range)
----------------- ------------------ -------------------
(In Thousands)
<S> <C> <C> <C>
Deposits(2) . . . . . . . . . . . . . . . . . $1,606,793 $1,606,793 $1,606,793
Borrowings . . . . . . . . . . . . . . . . . 30,043 30,043 30,043
---------- ---------- ----------
Total deposits and borrowings . . . . . . . . $1,636,836 $1,636,836 $1,636,836
========= ========= =========
Stockholders' equity:
Preferred Stock, $.01 par value, 25,000,000
shares authorized; none to be issued . . $ -- $ -- $ --
Common Stock, $.01 par value,
100,000,000 shares authorized; shares to
be issued as reflected(3) . . . . . . . -- 276 325
Additional paid-in capital . . . . . . . . -- 257,094 302,982
Shares issued to Foundation(4) . . . . . . -- 13,155 15,476
Retained earnings(5) . . . . . . . . . . . 173,838 173,838 173,838
Net unrealized gain on marketable
securities . . . . . . . . . . . . . . . 3,457 3,457 3,457
Less:
Expense of contribution to Foundation,
net(6) . . . . . . . . . . . . . . . . . -- (6,972) (8,202)
Common Stock to be acquired by the
ESOP(7) . . . . . . . . . . . . . . . . -- (21,048) (24,762)
Common Stock to be acquired by the
Recognition Plan(8) . . . . . . . . . . -- (10,524) (12,381)
--------- ---------- ---------
Total stockholders' equity . . . . . . . . . $ 177,295 $ 409,276 $ 450,733
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
The Company - Pro Forma
Based Upon Sale at $10.00 Per Share
-------------------------------------------
35,595,238 Shares 40,934,524 Shares(1)
(Maximum of (15% above
Range) Maximum of Range)
------------------ ---------------------
(In Thousands)
<S> <C> <C>
Deposits(2) . . . . . . . . . . . . . . . . . $1,606,793 $1,606,793
Borrowings . . . . . . . . . . . . . . . . . 30,043 30,043
---------- ----------
Total deposits and borrowings . . . . . . . . $1,636,836 $1,636,836
========= =========
Stockholders' equity:
Preferred Stock, $.01 par value, 25,000,000
shares authorized; none to be issued . . $ -- $ --
Common Stock, $.01 par value,
100,000,000 shares authorized; shares to
be issued as reflected(3) . . . . . . . 374 430
Additional paid-in capital(3) . . . . . . 348,870 401,642
Shares issued to Foundation(4) . . . . . . 17,798 20,467
Retained earnings(5) . . . . . . . . . . . 173,838 173,838
Net unrealized gain on marketable
securities . . . . . . . . . . . . . . . 3,457 3,457
Less:
Expense of contribution to Foundation,
net(6) . . . . . . . . . . . . . . . . . (9,433) (10,847)
Common Stock to be acquired by the
ESOP(7) . . . . . . . . . . . . . . . . (28,476) (32,748)
Common Stock to be acquired by the
Recognition Plan(8) . . . . . . . . . . (14,238) (16,374)
---------- ----------
Total stockholders' equity . . . . . . . . . $ 492,190 $ 539,865
========= =========
</TABLE>
(Footnotes on following page)
33
<PAGE> 77
- --------------------------------
(1) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Valuation Price Range of
up to 15% to reflect changes in market and financial conditions
following the commencement of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offerings. Such withdrawals would reduce pro
forma deposits by the amount of such withdrawals.
(3) Reflects the issuance of the shares of Common Stock to be sold in the
Offerings. No effect has been given to the issuance of additional
shares of Common Stock pursuant to the proposed Option Plan. See "Pro
Forma Data," "Management - Management of the Bank - Benefits - Stock
Option Plan." Reflects issuance of additional shares of Common Stock
to the Foundation.
(4) Reflects shares to be contributed to the Foundation at an assumed
value of $10.00 per share.
(5) For purposes of this presentation, includes the Bank's surplus account
and undivided profits. The retained earnings of the Bank will be
substantially restricted after the Conversion by virtue of the
liquidation account to be established in connection with the
Conversion. See "The Conversion -Liquidation Rights." In addition,
certain distributions from the Bank's retained earnings may be treated
as being from its accumulated bad debt reserve for tax purposes, which
would cause the Bank to have additional taxable income. See
"Taxation."
(6) Net of the tax effect of the contribution of Common Stock based upon a
47% marginal tax rate. The realization of the deferred tax benefit is
limited annually to 10% of the Company's annual taxable income,
subject to the ability of the Company to carry forward any unused
portion of the deduction for five years following the year in which
the contribution is made.
(7) Assumes that 8.0% of the Common Stock sold in the Offerings will be
purchased by the ESOP, which is reflected as a reduction of
stockholders' equity. The ESOP shares will be purchased with funds
loaned to the ESOP by the Company. See "Pro Forma Data" and
"Management - Management of the Bank - Benefits - Employee Stock
Ownership Plan."
(8) The Company intends to adopt the Recognition Plan and to submit such
plan to stockholders at an annual or special meeting of stockholders
held at least six months following the consummation of the Conversion.
If the plan is approved by stockholders, the Company intends to
contribute sufficient funds to the trust created under the Recognition
Plan to enable the trust to purchase a number of shares of Common
Stock equal to 4.0% of the Common Stock sold in the Offerings.
Assumes that stockholder approval has been obtained and that the
shares have been purchased in the open market at the Purchase Price.
However, in the event the Company issues authorized but unissued
shares of Common Stock to the Recognition Plan in the amount of 4.0%
of the Common Stock sold in the Offerings, the voting interests of
existing stockholders would be diluted -approximately 3.8%. The
shares are reflected as a reduction of stockholders' equity. See "Pro
Forma Data" and "Management - Management of the Bank - Benefits -
Recognition Plan."
34
<PAGE> 78
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 $257.4 million and $349.2 million (or $402.1
million in the event the Estimated Valuation Range is increased by 15%) based
upon the following assumptions: (i) all shares of Common Stock will be sold in
the Subscription Offering; (ii) no fees will be paid to the Keefe, Bruyette on
shares purchased by (x) the ESOP and any other employee benefit plan of the
Company or the Savings Bank, (y) officers, directors, employees and members of
their immediate families or (z) the Foundation; (iii) Keefe, Bruyette will
receive a fee equal to 1.15% of the aggregate Purchase Price for sales in the
Subscription Offering (excluding the sale of shares to the ESOP, employee
benefit plans, officers, directors and their immediate families and the
Foundation); (iv) the Company will contribute to the Foundation an amount of
Common Stock equal to 5% of the Common Stock sold in the Conversion from
authorized but unissued shares; and (v) total expenses, including the marketing
fees paid to Keefe, Bruyette, will be between $5.7 million and $6.7 million (or
$7.3 million in the event the Estimated Valuation Range is increased by 15%).
Actual expenses may vary from those estimated.
Pro forma consolidated net income and stockholders' equity of the
Company have been calculated for the four months ended April 30, 1997 and the
year ended December 31, 1996 as if the Common Stock to be issued in the
Offerings had been sold at the beginning of the period and the net proceeds had
been invested at 5.89% and 5.49%, respectively, which represents the yield on
one-year U.S. Government securities at April 30, 1997 and December 31, 1996
(which, in light of changes in interest rates in recent periods, are deemed by
the Company and the Bank to more accurately reflect pro forma reinvestment
rates than the arithmetic average method). The effect of withdrawals from
deposit accounts for the purchase of Conversion Stock has not been reflected.
A marginal tax rate of 47% has been assumed for the period, resulting in an
after-tax yield of 3.12% and 2.91%, respectively, for the four months ended
April 30, 1997 and the year ended December 31, 1996. 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 shares purchased by the ESOP and the effect of the issuance of
shares to the Foundation. See Note 3 to the tables below. 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 intends to make a loan to fund the purchase of 8.0% of the Common Stock
by the ESOP and retain 50% of the net proceeds from the Offerings.
No effect has been given in the tables to the issuance of additional
shares of Common Stock pursuant to the proposed Option Plan. See "Management -
Management of the Bank - Benefits - Stock Option Plan" and "Management of the
Bank - Stock Benefit Plans." The table below gives effect to the Recognition
Plan, which is expected to be adopted by the Company following the Conversion
and presented (together with the Stock Option Plan) to stockholders for
approval at an annual or special meeting of stockholders to be held at least
six months following the consummation of the Conversion. If the Recognition
Plan is approved by stockholders, the Recognition Plan intends to acquire an
amount of Common Stock equal to 4.0% of the shares of
35
<PAGE> 79
Common Stock issued in the Offerings, either through open market purchases or
from authorized but unissued shares of Common Stock. The table below assumes
that stockholder approval has been obtained, as to which there can be no
assurance, and that the shares acquired by the Recognition Plan are purchased
in the open market at the Purchase Price. No effect has been given to (i) the
Company's results of operations after the Conversion, (ii) the market price of
the Common Stock after the Conversion, or (iii) a less than 4.0% purchase by
the Recognition Plan.
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 stockholders' equity represents the
difference between the stated amount of assets and liabilities of the Company
computed in accordance with GAAP.
THE FOLLOWING TABLE GIVES EFFECT TO THE ISSUANCE OF AUTHORIZED BUT
UNISSUED SHARES OF THE COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY
WITH THE COMPLETION OF THE CONVERSION. THE PRO FORMA STOCKHOLDERS' EQUITY IS
NOT INTENDED TO REPRESENT THE FAIR MARKET VALUE OF THE COMMON STOCK AND MAY BE
DIFFERENT THAN AMOUNTS THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS
IN THE EVENT OF LIQUIDATION.
36
<PAGE> 80
<TABLE>
<CAPTION>
At or For the Four Months Ended April 30, 1997
------------------------------------------------------------
26,309,524 30,952,381 35,595,238 40,934,524
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00 Per
Per Share Per Share Per Share Share (15%
(Minimum of (Midpoint (Maximum of above Maximum
Range) of Range) Range) of Range)(8)
------------- ----------- ----------- -------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds . . . . . . . . . . . . . . . $263,095 $309,524 $355,952 $409,345
Plus: Shares acquired by Foundation (equal to
5% of the shares issued in the Conversion) 13,155 15,476 17,798 20,467
-------- -------- -------- --------
Pro forma market capitalization . . . . . . $276,250 $325,000 $373,750 $429,813
======= ======= ======= =======
Gross proceeds . . . . . . . . . . . . . . . 263,095 309,524 355,952 409,345
Less offering expenses and commissions . . . 5,726 6,217 6,708 7,273
-------- -------- -------- --------
Estimated net proceeds . . . . . . . . . . $257,369 $303,307 $349,244 $402,072
Less: Shares purchased by the ESOP . . . . . (21,048) (24,762) (28,476) (32,748)
Shares purchased by the
Recognition Plan . . . . . . . . . . (10,524) (12,381) (14,238) (16,374)
-------- -------- -------- --------
Total estimated net proceeds, as adjusted(1) $225,798 $266,164 $306,530 $352,951
======= ======= ======= =======
Net income (2):
Historical . . . . . . . . . . . . . . . . $ 6,888 $ 6,888 $ 6,888 $ 6,888
Pro forma income on net proceeds,
as adjusted . . . . . . . . . . . . . . . 2,350 2,770 3,190 3,673
Pro forma ESOP adjustment(3) . . . . . . . (248) (292) (335) (386)
Pro forma Recognition Plan
adjustment(4) . . . . . . . . . . . . . . (372) (437) (503) (579)
-------- ------- -------- --------
Pro forma net income . . . . . . . . . . . $ 8,618 $ 8,929 $ 9,240 $ 9,596
======= ======= ======= =======
Net income per share(2)(5):
Historical . . . . . . . . . . . . . . . . $0.27 $0.23 $0.20 $0.17
Pro forma income on net proceeds,
as adjusted . . . . . . . . . . . . . . . 0.09 0.09 0.09 0.09
Pro forma ESOP adjustment(3) . . . . . . . (0.01) (0.01) (0.01) (0.01)
Pro forma Recognition Plan
adjustment(4) . . . . . . . . . . . . . . (0.01) (0.01) (0.01) (0.01)
------ ------ ------ ------
Pro forma net income per share(4)(6) . . . $ 0.34 $ 0.30 $ 0.27 $ 0.24
===== ===== ===== =====
Offering price to pro forma net
income per share (5) . . . . . . . . . . . 9.80x 11.11x 12.35x 13.89x
==== ===== ===== =====
Stockholders' equity:
Historical . . . . . . . . . . . . . . . . $177,295 $177,295 $177,295 $177,295
Estimated net proceeds . . . . . . . . . . 257,369 303,307 349,244 402,072
Plus: Shares issued to Foundation . . . . . 13,155 15,476 17,798 20,467
Less: Contribution to Foundation . . . . . (13,155) (15,476) (17,798) (20,467)
Plus: Tax benefit of the contribution
to Foundation . . . . . . . . . . . 6,183 7,274 8,365 9,620
Less: Common Stock acquired
by the ESOP(3) . . . . . . . . . . (21,048) (24,762) (28,476) (32,748)
Common Stock to be acquired by
the Recognition Plan(4) . . . . . . (10,524) (12,381) (14,238) (16,374)
-------- -------- -------- --------
Pro forma stockholders' equity(4)(6)(7) . . $409,276 $450,733 $492,190 $539,865
======= ======= ======= =======
Stockholders' equity per share(5):
Historical . . . . . . . . . . . . . . . . $6.42 $5.46 $4.74 $4.12
Estimated net proceeds . . . . . . . . . . 9.32 9.33 9.34 9.35
Plus: Shares issued to Foundation . . . . . 0.48 0.48 0.48 0.48
Less: Contribution to Foundation . . . . . (0.48) (0.48) (0.48) (0.48)
Plus: Tax benefit of contribution to
Foundation . . . . . . . . . . . . 0.22 0.22 0.22 0.22
Less: Common Stock acquired
by the ESOP(3) . . . . . . . . . . (0.76) (0.76) (0.76) (0.76)
Common Stock to be acquired by
the Recognition Plan(4) . . . . . . (0.38) (0.38) (0.38) (0.38)
------ ------ ------ ------
Pro forma stockholders' equity
per share(4)(6)(7) . . . . . . . . . . . $14.82 $13.87 $13.16 $12.55
===== ===== ===== =====
Offering price as a percentage of pro
forma stockholders' equity per share(5) . . 67.48% 72.10% 75.99% 79.68%
===== ===== ===== =====
Offering price as a percentage of pro forma
tangible stockholders' equity per share(5) 70.92% 75.41% 79.18% 82.71%
===== ===== ===== =====
</TABLE>
(Footnotes on following page)
37
<PAGE> 81
- -------------------
(1) Estimated net proceeds, as adjusted, consist of the estimated net
proceeds from the Offerings minus (i) the proceeds attributable to the
purchase by the ESOP and (ii) the value of the shares to be purchased
by the Recognition Plan, subject to stockholder approval, after the
Conversion at an assumed purchase price of $10.00 per share.
(2) Does not give effect to the non-recurring expense that will be
recognized in 1997 as a result of the establishment of the Foundation.
The Company will recognize an after-tax expense for the amount of the
contribution to the Foundation which is expected to be $6.97 million,
$8.20 million, $9.43 million and $10.85 million at the minimum,
midpoint, maximum and maximum, as adjusted, of the Estimated Valuation
Range, respectively. Assuming the contribution to the Foundation was
expensed during the four months ended April 30, 1997, pro forma net
earnings per share would be $0.07, $0.03, $0.00, and $(0.03), at the
minimum, midpoint, maximum and maximum as adjusted, respectively. Per
share net income data is based on 25,567,011, 30,078,836, 34,590,661
and 39,779,261 shares outstanding which represents shares sold in the
Offerings, shares contributed to the Foundation and shares to be
allocated or distributed under the ESOP and Recognition Plan for the
period presented.
(3) It is assumed that 8.0% of the shares of Common Stock sold in the
Offerings, will be purchased by the ESOP with funds loaned by the
Company. The Company and the Bank intend to make annual contributions
to the ESOP in an amount at least equal to the principal and interest
requirement of the debt. The pro forma net earnings assumes (i) that
the loan to the ESOP is payable over 15 years, with the ESOP shares
having an average fair value of $10.00 per share in accordance with
SOP 93-6, entitled "Employers' Accounting for Employee Stock Ownership
Plans," of the AICPA, and (ii) the effective tax rate was 47% for the
period. See "Management -Management of the Bank - Benefits - Employee
Stock Ownership Plan."
(4) It is assumed that the Recognition Plan will purchase, following
stockholder approval of such plan, a number of shares of Common Stock
equal to 4.0% of the shares of Common Stock for issuance to directors,
officers and employees. Funds used by the Recognition Plan to
purchase the shares initially will be contributed to the Recognition
Plan by the Company. It is further assumed that the shares were
acquired by the Recognition Plan at the beginning of the period
presented in open market purchases at the Purchase Price and that 6.7%
of the amount contributed, net of taxes, was an amortized expense
during the four months ended April 30, 1997. The issuance of
authorized but unissued shares of Common Stock pursuant to the
Recognition Plan in the amount of 4.0% of the Common Stock issued in
the Offerings would dilute the voting interests of existing
stockholders by approximately 3.8% and under such circumstances pro
forma net earnings per share for the four months ended April 30, 1997
would be $0.33, $0.29, $0.26 and $0.24, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, and pro forma stockholders' equity per share at April
30, 1997 would be $14.64, $13.74, $13.06 and $12.47 at the minimum,
midpoint, maximum and 15% above the maximum of such range,
respectively. There can be no assurance that the actual purchase
price of shares purchased by or issued to the Recognition Plan will be
equal to the Purchase Price. See "Management - Management of the Bank
- Benefits - Recognition Plan."
(footnotes continued on following page)
38
<PAGE> 82
(5) The per share calculations are determined by adding the number of
shares assumed to be issued in the Conversion as well as contributed
to the Foundation and for purposes of calculating earnings per share,
in accordance with SOP 93-6, subtracting 2,057,989 shares, 2,421,164
shares, 2,784,339 shares, and 3,201,989 shares, respectively,
representing the ESOP shares which have not been committed for
release during the four months ended April 30, 1997. Thus, it is
assumed at April 30, 1997 that 25,567,011, 30,078,836, 34,590,661 and
39,779,261 shares of Common Stock are outstanding at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively. Assuming the uncommitted ESOP shares were not
subtracted from the number of shares of Common Stock outstanding at
April 30, 1997, the offering price as a multiple of pro forma net
earnings per share would be 10.42x, 11.90x, 13.33x and 14.49x at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. For purposes of calculating pro forma
equity per share, it is assumed that shares outstanding total
27,625,000, 32,500,000, 37,375,000 and 42,981,250 shares at the
minimum, mid-point, maximum and 15% above the maximum of the Estimated
Valuation Range.
(6) No effect has been given to the issuance of additional shares of
Common Stock pursuant to the Option Plan, which will be adopted by the
Company following the Conversion and presented for approval by
stockholders at an annual or special meeting of stockholders of the
Company held at least six months following the consummation of the
Conversion. If the Option Plan is approved by stockholders, an amount
equal to 10% of the Common Stock issued in the Offerings, or
2,630,952, 3,095,238, 3,559,523 and 4,093,452 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the Option Plan. The issuance
of Common Stock pursuant to the exercise of options under the Option
Plan will result in the dilution of existing stockholders' interests.
Assuming stockholder approval of the Option Plan, that all these
options were exercised at the beginning of the period at an exercise
price of $10.00 per share and that the shares to fund the Recognition
Plan are acquired through open market purchases at the Purchase Price,
pro forma net earnings per share for the four months ended April 30,
1997 would be $0.31, $0.28, $0.25 and $0.23 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, and pro forma stockholders' equity per share at April
30, 1997 would be $14.39, $13.52, $12.88 and $12.33 at the minimum,
midpoint, maximum and 15% above the maximum of such range,
respectively. See "Management - Management of the Bank - Benefits -
Stock Option Plan."
(7) The retained earnings of the Bank will be substantially restricted
after the Conversion by virtue of the liquidation account to be
established in connection with the Conversion. See "Dividend Policy"
and "The Conversion - Liquidation Rights." In addition, certain
distributions from the Bank's retained earnings may be treated as
being from its accumulated bad debt reserve for tax purposes, which
would cause the Bank to have additional taxable income. See "Taxation
- Federal Taxation." Pro forma stockholders' equity and pro forma
stockholders' equity per share do not give effect to the liquidation
account or the bad debt reserves established by the Bank for federal
income tax purposes in the event of a liquidation of the Bank.
(8) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Estimated Valuation Range
of up to 15% to reflect changes in market and financial conditions
following the commencement of the Offerings.
39
<PAGE> 83
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
-------------------------------------------------------------
26,309,524 30,952,381 35,595,238 40,934,524
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00 Per
Per Share Per Share Per Share Share (15%
(Minimum of (Midpoint (Maximum of above Maximum
Range) of Range) Range) of Range)(8)
------------- ---------- ------------ ---------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds . . . . . . . . . . . . . . . $263,095 $309,524 $355,952 $409,345
Plus: Shares acquired by Foundation (equal to
5% of the shares issued in the Conversion) 13,155 15,476 17,798 20,467
-------- -------- -------- --------
Pro forma market capitalization . . . . . . $276,250 $325,000 $373,750 $429,813
======= ======= ======= =======
Gross proceeds . . . . . . . . . . . . . . . 263,095 309,524 355,952 409,345
Less offering expenses and commissions . . . 5,726 6,217 6,708 7,273
------- ------- ------- -------
Estimated net proceeds . . . . . . . . . . $257,369 $303,307 $349,244 $402,072
Less: Shares purchased by the ESOP . . . . . (21,048) (24,762) (28,476) (32,748)
Shares purchased by the
Recognition Plan . . . . . . . . . . (10,524) (12,381) (14,238) (16,374)
-------- ------- ------- -------
Total estimated net proceeds, as adjusted(1) $225,798 $266,164 $306,530 $352,951
======= ======= ======= =======
Net income (2):
Historical . . . . . . . . . . . . . . . . $ 21,775 $ 21,775 $ 21,775 $ 21,775
Pro forma income on net proceeds,
as adjusted . . . . . . . . . . . . . . . 6,570 7,745 8,919 10,270
Pro forma ESOP adjustment(3) . . . . . . . (744) (875) (1,006) (1,157)
Pro forma Recognition Plan
adjustment(4) . . . . . . . . . . . . . . (1,116) (1,312) (1,509) (1,736)
-------- ------- -------- --------
Pro forma net income . . . . . . . . . . . $ 26,485 $ 27,333 $ 28,179 $ 29,152
======= ======= ======= =======
Net income per share(2)(5):
Historical . . . . . . . . . . . . . . . . $0.85 $0.72 $0.63 $0.55
Pro forma income on net proceeds,
as adjusted . . . . . . . . . . . . . . . 0.26 0.26 0.26 0.26
Pro forma ESOP adjustment(3) . . . . . . . (0.03) (0.03) (0.03) (0.03)
Pro forma Recognition Plan
adjustment(4) . . . . . . . . . . . . . . (0.04) (0.04) (0.04) (0.04)
------ ------ ------ ------
Pro forma net income per share(4)(6) . . . $ 1.04 $ 0.91 $ 0.82 $ 0.74
===== ===== ===== =====
Offering price to pro forma net
income per share (5) . . . . . . . . . . . 9.62 10.99 12.20 13.51
===== ===== ===== =====
Stockholders' equity:
Historical . . . . . . . . . . . . . . . . $171,080 $171,080 $171,080 $171,080
Estimated net proceeds . . . . . . . . . . 257,369 303,307 349,244 402,072
Plus: Shares issued to Foundation . . . . . 13,155 15,476 17,798 20,467
Less: Contribution to Foundation . . . . . (13,155) (15,476) (17,798) (20,467)
Plus: Tax benefit of the contribution
to Foundation . . . . . . . . . . . 6,183 7,274 8,365 9,620
Less: Common Stock acquired
by the ESOP(3) . . . . . . . . . . (21,048) (24,762) (28,476) (32,748)
Common Stock to be acquired by
the Recognition Plan(4) . . . . . . (10,524) (12,381) (14,238) (16,374)
-------- -------- -------- --------
Pro forma stockholders' equity(4)(6)(7) . . $403,061 $444,518 $485,975 $533,650
======= ======= ======= =======
Stockholders' equity per share(5):
Historical . . . . . . . . . . . . . . . . $6.19 $5.26 $4.58 $3.98
Estimated net proceeds . . . . . . . . . . 9.32 9.33 9.34 9.35
Plus: Shares issued to Foundation . . . . . 0.48 0.48 0.48 0.48
Less: Contribution to Foundation . . . . . (0.48) (0.48) (0.48) (0.48)
Plus: Tax benefit of contribution to
Foundati on . . . . . . . . . . . . 0.22 0.22 0.22 0.22
Less: Common Stock acquired
by the ESOP(3) . . . . . . . . . . (0.76) (0.76) (0.76) (0.76)
Common Stock to be acquired by
the Recognition Plan(4) . . . . . . (0.38) (0.38) (0.38) (0.38)
------ ------ ------ ------
Pro forma stockholders' equity
per share(4)(6)(7) . . . . . . . . . . . $14.59 $13.67 $13.00 $12.41
===== ===== ===== =====
Offering price as a percentage of pro
forma stockholders' equity per share(5) . . 68.54% 73.15% 76.92% 80.58%
===== ===== ===== =====
Offering price as a percentage of pro forma
tangible stockholders' equity per share(5) 72.20% 76.69% 80.32% 83.82%
===== ===== ===== =====
</TABLE>
(Footnotes on following page)
40
<PAGE> 84
- -------------------
(1) Estimated net proceeds, as adjusted, consist of the estimated net
proceeds from the Offerings minus (i) the proceeds attributable to the
purchase by the ESOP and (ii) the value of the shares to be purchased
by the Recognition Plan, subject to stockholder approval, after the
Conversion at an assumed purchase price of $10.00 per share.
(2) Does not give effect to the non-recurring expense that will be
recognized in 1997 as a result of the establishment of the Foundation.
The Company will recognize an after-tax expense for the amount of the
contribution to the Foundation which is expected to be $6.97 million,
$8.20 million, $9.43 million and $10.85 million at the minimum,
midpoint, maximum and maximum, as adjusted, of the Estimated Valuation
Range, respectively. Assuming the contribution to the Foundation was
expensed during the year ended December 31, 1996, pro forma net
earnings per share would be $0.77, $0.64, $0.55, and $0.46, at the
minimum, midpoint, maximum and maximum as adjusted, respectively. Per
share net income data is based on 25,660,556, 30,188,889, 34,717,222
and 39,924,806 shares outstanding which represents shares sold in the
Offerings, shares contributed to the Foundation and shares to be
allocated or distributed under the ESOP and Recognition Plan for the
period presented.
(3) It is assumed that 8.0% of the shares of Common Stock sold in the
Offerings, will be purchased by the ESOP with funds loaned by the
Company. The Company and the Bank intend to make annual contributions
to the ESOP in an amount at least equal to the principal and interest
requirement of the debt. The pro forma net earnings assumes (i) that
the loan to the ESOP is payable over 15 years, with the ESOP shares
having an average fair value of $10.00 per share in accordance with
SOP 93-6, entitled "Employers' Accounting for Employee Stock Ownership
Plans," of the AICPA, and (ii) the effective tax rate was 47% for the
period. See "Management -Management of the Bank - Benefits - Employee
Stock Ownership Plan."
(4) It is assumed that the Recognition Plan will purchase, following
stockholder approval of such plan, a number of shares of Common Stock
equal to 4.0% of the shares of Common Stock for issuance to directors,
officers and employees. Funds used by the Recognition Plan to
purchase the shares initially will be contributed to the Recognition
Plan by the Company. It is further assumed that the shares were
acquired by the Recognition Plan at the beginning of the period
presented in open market purchases at the Purchase Price and that
20.0% of the amount contributed, net of taxes, was an amortized
expense during the year ended December 31, 1996. The issuance of
authorized but unissued shares of Common Stock pursuant to the
Recognition Plan in the amount of 4.0% of the Common Stock issued in
the Offerings would dilute the voting interests of existing
stockholders by approximately 3.8% and under such circumstances pro
forma net earnings per share for the year ended December 31, 1996
would be $1.01, $0.88, $0.79 and $0.71, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, and stockholders' pro forma equity per share at
December 31, 1996 would be $14.43, $13.55, $12.90 and $12.33 at the
minimum, midpoint, maximum and 15% above the maximum of such range,
respectively. There can be no assurance that the actual purchase
price of shares purchased by or issued to the Recognition Plan will be
equal to the Purchase Price. See "Management - Management of the Bank
- Benefits - Recognition Plan."
(footnotes continued on following page)
41
<PAGE> 85
(5) The per share calculations are determined by adding the number of
shares assumed to be issued in the Conversion as well as contributed
to the Foundation and for purposes of calculating earnings per share,
in accordance with SOP 93-6, subtracting 1,964,444 shares, 2,311,111
shares, 2,657,778 shares and 3,056,444 shares, respectively,
representing the ESOP shares which have not been committed for release
during the year ended December 31, 1996. Thus, it is assumed at
December 31, 1996 that 25,660,556, 30,188,889, 34,717,222 and
39,924,806 shares of Common Stock are outstanding at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively. Assuming the uncommitted ESOP shares were not
subtracted from the number of shares of Common Stock outstanding at
December 31, 1996, the offering price as a multiple of pro forma net
earnings per share would be 10.42x, 11.90x, 13.33x and 14.71x at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. For purposes of calculating pro forma
equity per share, it is assumed that shares outstanding total
27,625,000, 32,500,000, 37,375,000 and 42,981,250 shares at the
minimum, mid-point, maximum and 15% above the maximum of the Estimated
Valuation Range.
(6) No effect has been given to the issuance of additional shares of
Common Stock pursuant to the Option Plan, which will be adopted by the
Company following the Conversion and presented for approval by
stockholders at an annual or special meeting of stockholders of the
Company held at least six months following the consummation of the
Conversion. If the Option Plan is approved by stockholders, an amount
equal to 10% of the Common Stock issued in the Offerings, or
2,630,952, 3,095,238, 3,559,524 and 4,093,452 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the Option Plan. The issuance
of Common Stock pursuant to the exercise of options under the Option
Plan will result in the dilution of existing stockholders' interests.
Assuming stockholder approval of the Option Plan, that all these
options were exercised at the beginning of the period at an exercise
price of $10.00 per share and that the shares to fund the Recognition
Plan are acquired through open market purchases at the Purchase Price,
pro forma net earnings per share for the year ended December 31, 1996
would be $0.96, $0.84, $0.76 and $0.68 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, and pro forma stockholders' equity per share at
December 31, 1996 would be $14.18, $13.35, $12.73 and $12.19 at the
minimum, midpoint, maximum and 15% above the maximum of such range,
respectively. See "Management - Management of the Bank - Benefits -
Stock Option Plan."
(7) The retained earnings of the Bank will be substantially restricted
after the Conversion by virtue of the liquidation account to be
established in connection with the Conversion. See "Dividend Policy"
and "The Conversion - Liquidation Rights." In addition, certain
distributions from the Bank's retained earnings may be treated as
being from its accumulated bad debt reserve for tax purposes, which
would cause the Bank to have additional taxable income. See "Taxation
- Federal Taxation." Pro forma stockholders' equity and pro forma
stockholders' equity per share do not give effect to the liquidation
account or the bad debt reserves established by the Bank for federal
income tax purposes in the event of a liquidation of the Bank.
(8) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Estimated Valuation Range
of up to 15% to reflect changes in market and financial conditions
following the commencement of the Offerings.
42
<PAGE> 86
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of
the Conversion, RP Financial has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $335.0 million at the
midpoint, which is approximately $10.0 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is included,
and would result in approximately $25.5 million increase in the amount of
Common Stock offered for sale in the Conversion. The pro forma price to book
ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Company
without the Foundation. Further, assuming the midpoint of the Estimated
Valuation Range, pro forma stockholders' equity per share and pro forma
earnings per share would be substantially the same at $13.87 and $13.90,
respectively, and $0.30 and $0.29, respectively, with the Foundation or without
the Foundation. The pro forma price to book ratio and the pro forma price to
earnings ratio are substantially the same with and without the Foundation at
the midpoint at 72.10% and 71.94%, respectively, and 11.11x and 11.49x,
respectively. There is no assurance that in the event the Foundation was not
formed that the appraisal prepared at the time would have concluded that the
pro forma market value of the Company would be the same as that estimated
herein. Any appraisals prepared at that time would be based on the facts and
circumstances existing at that time, including, among other things, market and
economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Valuation Range, assuming the Conversion
was completed at April 30, 1997.
<TABLE>
<CAPTION>
At the Minimum At the Midpoint
------------------------------- -------------------------------
With No With No
Foundation Foundation Foundation Foundation
--------------- -------------- -------------- -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Estimated offering amount . . . . . . . $ 263,095 $ 284,750 $ 309,524 $ 335,000
Pro forma market capitalization . . . . 276,250 284,750 325,000 335,000
Total assets . . . . . . . . . . . . . 2,080,276 2,092,920 2,121,733 2,136,608
Total liabilities . . . . . . . . . . . 1,636,836 1,636,836 1,636,836 1,636,836
Pro forma stockholders' equity . . . . 409,276 421,920 450,733 465,608
Pro forma consolidated net earnings . . 8,618 8,763 8,929 9,099
Pro forma stockholders' equity per
share . . . . . . . . . . . . . . . . 14.82 14.82 13.87 13.90
Pro forma consolidated net earnings per
share . . . . . . . . . . . . . . . 0.34 0.33 0.30 0.29
Pro forma pricing ratios:
Offering price as a percentage of pro
forma stockholders' equity per
share . . . . . . . . . . . . . . 67.48% 67.48% 72.10% 71.94%
Offering price to pro forma net
earnings per share . . . . . . . . 9.80x(1) 10.10x 11.11x(1) 11.49x
Pro forma market capitalization to
assets . . . . . . . . . . . . . . 13.28% 13.61% 15.32% 15.68%
Pro forma financial ratios:
Return on assets . . . . . . . . . . 1.24%(2) 1.26% 1.26%(2) 1.28%
Return on stockholders' equity . . . 6.32%(3) 6.23% 5.94%(3) 5.86%
Stockholders' equity to assets . . . 19.67% 20.16% 21.24% 21.79%
</TABLE>
<TABLE>
<CAPTION>
At the Maximum,
At the Maximum As Adjusted
------------------------------ -------------------------------
With No With No
Foundation Foundation Foundation Foundation
-------------- ------------ ------------- -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Estimated offering amount . . . . . . . $ 355,952 $ 385,250 $ 409,345 $ 443,038
Pro forma market capitalization . . . . 373,750 385,250 429,813 443,038
Total assets . . . . . . . . . . . . . 2,163,190 2,180,297 2,210,865 2,230,538
Total liabilities . . . . . . . . . . . 1,636,836 1,636,836 1,636,836 1,636,836
Pro forma stockholders' equity . . . . 492,190 509,297 539,865 559,538
Pro forma consolidated net earnings . . 9,240 9,436 9,596 9,822
Pro forma stockholders' equity per
share . . . . . . . . . . . . . . . . 13.16 13.22 12.55 12.63
Pro forma consolidated net earnings per
share . . . . . . . . . . . . . . . 0.27 0.26 0.24 0.24
Pro forma pricing ratios:
Offering price as a percentage of pro
forma stockholders' equity per
share . . . . . . . . . . . . . . 75.99% 75.64% 79.68% 79.18%
Offering price to pro forma net
earnings per share . . . . . . . . 12.35x(1) 12.82x 13.89x(1) 13.89x
Pro forma market capitalization to
assets . . . . . . . . . . . . . . 17.28% 17.67% 19.44% 19.86%
Pro forma financial ratios:
Return on assets . . . . . . . . . . 1.28%(2) 1.30% 1.30%(2) 1.32%
Return on stockholders' equity . . . 5.63%(3) 5.56% 5.33%(3) 5.27%
Stockholders' equity to assets . . . 22.75% 23.36% 24.42% 25.09%
</TABLE>
- ------------------
(1) If the contribution to the Foundation had been expensed during the four
months ended April 30, 1997, the offering price to pro forma net earnings
per share would have been 47.62x, 111.11x, not meaningful and not
meaningful at the minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(2) If the contribution to the Foundation had been expensed during the four
months ended April 30, 1997, return on assets would have been 0.24%,
0.10%, (0.03)% and (0.17)% at the minimum, midpoint, maximum and maximum,
as adjusted, respectively.
(3) If the contribution to the Foundation had been expensed during the four
months ended April 30, 1997, return on stockholders' equity would have
been 1.21%, 0.48%, (0.12)% and (0.70)% at the minimum, midpoint, maximum
and maximum, as adjusted, respectively.
43
<PAGE> 87
STATEN ISLAND SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Set forth below are the consolidated statements of operations of the
Bank and its subsidiaries for the periods indicated. The consolidated
financial statements of the Bank as of December 31, 1996, 1995 and 1994 and for
the years then ended were audited by Arthur Andersen LLP, independent public
accountants. The consolidated statements of operations of the Bank for the
four months ended April 30, 1997 and 1996 were not audited by independent
public accountants but in the opinion of management reflect all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results of operations for those periods. Operating results for the four
months ended April 30, 1997 are not necessarily indicative of the results that
may be expected for any other interim period or the entire year ending December
31, 1997.
<TABLE>
<CAPTION>
(Unaudited)
For the Four Months For the Year Ended
Ended April 30, December 31,
-------------------- -------------------------------------
1997 1996 1996 1995 1994
------- -------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans, including fees . . . . . . . . . . . $26,969 $22,621 $ 73,744 $ 58,136 $45,000
Securities available for sale and held to
maturity . . . . . . . . . . . . . . . . 15,277 16,051 49,083 43,593 44,496
Federal funds sold . . . . . . . . . . . . 679 534 1,603 2,627 788
------- -------- --------- --------- --------
Total interest income . . . . . . . . . . 42,925 39,206 124,430 104,356 90,284
------- -------- -------- -------- -------
Interest expense:
Savings accounts . . . . . . . . . . . . . 7,115 6,972 21,111 20,817 23,813
Time deposits . . . . . . . . . . . . . . . 8,588 8,572 25,760 20,741 10,595
Money market accounts . . . . . . . . . . . 805 817 2,441 1,868 1,541
NOW accounts . . . . . . . . . . . . . . . 107 355 1,038 705 496
Escrow accounts . . . . . . . . . . . . . . 27 25 81 98 87
Borrowed funds . . . . . . . . . . . . . . 261 2 6 5 5
------- --------- ---------- ---------- ---------
Total interest expense . . . . . . . . . 16,903 16,743 50,437 44,234 36,537
------- -------- -------- -------- --------
Net interest income . . . . . . . . . . . 26,022 22,463 73,993 60,122 53,747
Provision for loan losses . . . . . . . . . . 4,667 -- 1,000 -- 76
------- --------- --------- ---------- ---------
Net interest income after provision
for loan losses . . . . . . . . . . . . 21,355 22,463 72,993 60,122 53,671
Other income (loss):
Service and fee income . . . . . . . . . . 2,372 2,031 6,639 4,345 2,807
Securities transactions . . . . . . . . . . (508) 218 (2,710) (305) (759)
------- -------- --------- --------- --------
Total other income . . . . . . . . . . . 1,864 2,249 3,929 4,040 2,048
Other expenses:
Personnel . . . . . . . . . . . . . . . . . 6,617 6,401 19,684 15,635 11,356
Occupancy and equipment . . . . . . . . . . 1,748 1,842 5,397 4,365 3,664
Amortization of intangible assets . . . . . 692 759 2,143 1,155 536
FDIC insurance . . . . . . . . . . . . . . 122 1 2 1,414 2,807
Data processing . . . . . . . . . . . . . . 1,872 1,059 2,842 2,398 1,957
Marketing . . . . . . . . . . . . . . . . . 432 434 1,112 1,141 752
Professional fees . . . . . . . . . . . . . 311 197 1,542 1,051 634
Stationary and supplies . . . . . . . . . . 499 254 875 696 491
Other . . . . . . . . . . . . . . . . . . . 2,459 2,182 6,469 5,098 3,360
------ ------- -------- --------- --------
Total other expenses . . . . . . . . . . 14,752 13,129 40,066 32,953 25,557
------ ------- -------- -------- --------
Income before provision for income taxes 8,467 11,583 36,856 31,209 30,162
Provision for income taxes . . . . . . . . . 1,579 4,715 15,081 13,284 13,958
------- ------- -------- --------- --------
Income before cumulative effect
of accounting change . . . . . . . . . . . 6,888 6,868 21,775 17,925 16,204
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . -- -- -- 4,700 --
------- ------- -------- --------- --------
Net income . . . . . . . . . . . . . . . . . $ 6,888 $ 6,868 $ 21,775 $ 13,225 $ 16,204
======= ======= ======== ======== ========
</TABLE>
44
<PAGE> 88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion is intended to assist in understanding the
financial condition and results of operations of the Bank. The discussion and
analysis does not include any comments relating to the Company since the
Company has had no significant operations. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and the accompanying Notes to Consolidated Financial Statements and
the other sections contained in this Prospectus.
The Bank's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans and mortgage-backed and investment
securities, and interest expense on interest-bearing liabilities which
principally consist of deposits. The Bank's results of operations also are
affected by the provision for loan losses, the level of its noninterest income
and expenses, and income tax expense.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when
the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities, and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect. As of April 30, 1997, the ratio of the Bank's one-year gap to
total assets was a negative 6.89% and its ratio of interest-earning assets to
interest-bearing liabilities maturing or repricing within one year was 79.3%.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Bank's results of operations, the
Bank has adopted asset and liability management policies to better match the
maturities and repricing terms of the Bank's interest-earning assets and
interest-bearing liabilities. The Finance and Planning Committee, a Board
committee, sets and recommends the asset and liability policies of the Bank
which are implemented by the Asset and Liability Management Committee ("ALCO").
The ALCO is
45
<PAGE> 89
chaired by the Chief Financial Officer and comprised of members of the Bank's
management. The purpose of the ALCO is to communicate, coordinate and control
asset/liability management consistent with the Bank's business plan and Board
approved policies. The ALCO establishes and monitors the volume and mix of
assets and funding sources taking into account relative costs and spreads,
interest rate sensitivity and liquidity needs. The objectives are to manage
assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals. The ALCO
generally meets on a quarterly basis to review, among other things, economic
conditions and interest rate outlook, current and projected liquidity needs and
capital positions, anticipated changes in the volume and mix of assets and
liabilities and interest rate risk exposure limits versus current projections
pursuant to gap analysis and income simulations. At each meeting, the ALCO
recommends appropriate strategy changes based on such review. The Chief
Financial Officer or his designate is responsible for reviewing and reporting
on the effects of the policy implementations and strategies to the Finance and
Planning Committee, at least quarterly.
In order to manage its assets and liabilities and achieve the desired
liquidity, credit quality, interest risk, profitability and capital targets,
the Bank has focused its strategies on (i) originating adjustable rate loans,
(ii) originating relatively short-term commercial business and consumer loans
(iii) maintaining a significant level of investment securities and
mortgage-backed and investment securities with maturities or estimated average
lives of less than five years and (iv) managing its deposits to establish
stable deposit relationships.
The ALCO regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income and
market value of portfolio equity ("MVPE"), which is defined as the net present
value of an institution's existing assets, liabilities and off-balance sheet
instruments, and evaluating such impacts against the maximum potential changes
in net interest income and MVPE that is authorized by the Board of Trustees of
the Bank.
46
<PAGE> 90
The following table sets forth as of April 30, 1997 the estimated
percentage change in the Bank's net interest income over a four-quarter period
and MVPE based on the indicated changes in interest rates.
<TABLE>
<CAPTION>
Estimated Change in
-----------------------------------------------------------------
Change (in Basis Points) in Interest Net Interest Income
Rates(1) (next four quarters) MVPE
- -------------------------------------- ---------------------------- ---------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 (38.4)% $(30,070) (32.5)% $(78,512)
+300 (28.5) (22,291) (25.6) (61,870)
+200 (18.6) (14,545) (18.5) (44,592)
+100 ( 9.2) ( 7,205) ( 9.4) (22,698)
0 -- -- -- --
-100 8.1 6,304 4.6 11,059
-200 14.8 11,610 6.6 16,042
-300 16.4 12,841 10.6 25,697
-400 12.3 9,635 20.1 48,461
</TABLE>
- -------------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
The assumptions used by management to evaluate the vulnerability of
the Bank's operations to changes in interest rates in the table above are based
on assumptions provided by the OTS and utilized in the gap table below.
Although management finds these assumptions reasonable, the interest rate
sensitivity of the Bank's assets and liabilities and the estimated effects of
changes in interest rates on the Bank's net interest income and MVPE indicated
in the above table could vary substantially if different assumptions were used
or actual experience differs from such assumptions. Based upon the
above-described changes in the Bank's MVPE, the Bank could be required to
deduct $4.7 million from its total capital if certain OTS regulations were
applicable, although the Bank would continue to be deemed a "well-capitalized"
institution. See "Regulation - Regulation of Federal Savings Banks -
Regulatory Capital Requirements."
47
<PAGE> 91
The following table summarizes the anticipated maturities or repricing
of the Bank's interest-earning assets and interest-bearing liabilities as of
April 30, 1997, based on the information and assumptions set forth in the notes
below.
<TABLE>
<CAPTION>
More Than
Three to More Than Three Years
Within Three Twelve One Year to to Five Over Five
Months Months Three Years Years Years Total
--------------- ----------- ------------- ------------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Loans receivable (2):
Mortgage loans:
Fixed . . . . . . . . . . . . . . . . $ 9,458 $ 29,741 $ 75,853 $ 80,319 $313,852 $ 509,223
Adjustable . . . . . . . . . . . . . 51,472 93,684 110,015 118,521 51,748 425,440
Other loans . . . . . . . . . . . . . . 18,437 5,553 7,601 4,389 353 36,333
Securities:
Non-mortgage (3) . . . . . . . . . . . 7,982 27,405 42,359 22,664 40,870 141,280
Mortgaged-backed fixed (4) . . . . . . 14,883 29,780 68,653 65,866 81,672 260,854
Mortgage-backed adjustable (4) . . . . 22,830 100,685 55,163 51,649 230,327
Other interest-earning assets . . . . . . 74,150 -- -- -- -- 74,150
-------- -------- -------- -------- -------- ----------
Total interest-earning assets . . . . $199,212 $286,848 $359,644 $343,408 $488,495 $1,677,607
======= ======= ======= ======= ======= =========
Interest-bearing liabilities:
Deposits:
NOW accounts (5) . . . . . . . . . . . $ 1,545 $ 4,636 $ 5,681 $ 1,504 $ 3,342 $ 16,708
Savings accounts (5) . . . . . . . . . 34,953 104,860 213,832 139,813 328,973 822,431
Money market deposit accounts (5) . . . 16,180 48,540 9,012 4,301 3,891 81,924
Certificates of deposit . . . . . . . . 137,565 250,049 120,480 19,494 -- 527,588
Other borrowings . . . . . . . . . . . . -- 15,000 15,000 -- 43 30,043
--------- -------- --------- ----------- ---------- ----------
Total interest-bearing liabilities . $190,243 $423,085 $ 364,005 $165,112 $336,249 $1,478,694
======= ======= ======== ======= ======= =========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ 8,969 $(136,237) $ (4,361) $178,296 $152,246 $ 198,913
======= ======== ======== ======= ======= =========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities . . . . . . . . . . . $ 8,969 $(127,268) $(131,629) $ 46,636 $198,913
======= ======== ======== ======= =======
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of
total assets . . . . . . . . . . . . . . 0.49% (6.89)% (7.12)% 2.52% 10.76%
==== ===== ===== ==== =====
</TABLE>
- ---------------
(1) Adjustable-rate loans are included in the period in which interest
rates are next scheduled to adjust rather than in the period in which
they are due, and fixed-rate loans are included in the periods in
which they are scheduled to be repaid, based on scheduled
amortization, as adjusted to take into account estimated prepayments
based on assumptions used by the OTS in assessing the interest rate
sensitivity of savings associations in the Bank's region.
(2) Balances have been reduced for non-performing loans, which amounted to
$24.4 million at April 30, 1997.
(3) Based on contractual maturities.
(footnotes continued on next page)
48
<PAGE> 92
(4) Reflects estimated prepayments in the current interest rate
environment.
(5) Although the Bank's NOW accounts, passbook savings accounts and money
market deposit accounts are subject to immediate withdrawal,
management considers a substantial amount of such accounts to be core
deposits having significantly longer effective maturities. The decay
rates used on these accounts are based on the latest available OTS
assumptions and should not be regarded as indicative of the actual
withdrawals that may be experienced by the Bank. If all of the Bank's
NOW accounts, passbook savings accounts and money market deposit
accounts had been assumed to be subject to repricing within one year,
interest-bearing liabilities which were estimated to mature or reprice
within one year would have exceeded interest-earning assets with
comparable characteristics by $837.6 million or 45.3% of total assets.
Certain assumptions are contained in the above table which affect the
presentation therein. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates of other types of assets and liabilities lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgage loans, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table.
CHANGES IN FINANCIAL CONDITION
GENERAL. The Bank's total assets increased by $66.0 million or 3.7%
to $1.85 billion at April 30, 1997 compared to $1.78 billion at December 31,
1996. Such increase was primarily due to increased investments as the result
of the utilization proceeds from additional borrowings. Total assets increased
to $1.78 billion at December 31, 1996 compared to $1.73 billion at December 31,
1995. The $54.2 million or 3.1% increase was primarily due to a $166.9 million
or 20.8% increase in loans, net to $968.0 million at December 31, 1996 compared
to $801.1 million at December 31, 1995. Such increase was partially offset by
a decrease of $85.5 million or 10.8% in securities available for sale and $24.6
million or 31.9% in cash and cash equivalents.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents, which consist
of cash and due from banks and federal fund sold, amounted to $113.7 million,
$52.6 million and $77.3 million at April 30, 1997, December 31, 1996 and
December 31, 1995, respectively. The decrease of $24.7 million or 32.0% between
December 31, 1995 and December 31, 1996 was primarily due to the use of such
cash to fund loan originations. Conversely, the increase of $61.1 million or
116.2% between December 31, 1996 and April 30, 1997 was primarily due to the
sale of the Bank's $28.2 million automobile lease portfolio during such period
as well as positive deposit inflows.
49
<PAGE> 93
LOANS. The Bank's net loan portfolio increased from $801.1 million at
December 31, 1995 to $968.0 million at December 31, 1996 and to $976.5 million
at April 30, 1997. The increase in the loan portfolio over this time period
was due to increased loan demand, the Bank's efforts to expand its lending
activities, particularly with respect to commercial real estate, construction
and land loans and commercial business lending. The increase in the Bank's
loan portfolio was partially offset by the repayment of $29.8 million of loans
secured by a pledge and assignment of an interest in automobile leases during
the four months ended April 30, 1997. Such efforts have included the expansion
of the Bank's loan products, particularly with respect to loans acquired in the
Gateway acquisition, the hiring of business development officers and commercial
loan officers and further accessing builders and mortgage brokers in its market
area. In addition, the August 1995 acquisition of Gateway added $124.2 million
of loans to the Bank's loan portfolio.
SECURITIES. Securities, including securities available for sale and
securities available for trading, amounted to $788.6 million at December 31,
1995 and $703.1 million and $691.9 million at December 31, 1996 and April 30,
1997, respectively. The decrease of $85.5 million or 10.8% between December
31, 1995 and 1996 was primarily due to the use of funds from maturities,
prepayments and sales to fund the Bank's loan growth. The Bank's securities
portfolio decreased only slightly between December 31, 1996 and April 30, 1997
as the Bank sought to maintain the size of the investment portfolio and instead
use borrowings as a funding source. In 1995 and 1996 and, to a lesser extent,
the four months ended April 30, 1997, the Bank restructured its investment
portfolio to increase the yield and, during 1995, the quality of the Bank's
investment portfolio. See "- Comparison of Results of Operations for the Four
Months Ended April 30, 1997 and 1996 - Other Income," "- Comparison of Results
of Operations for the Years Ended December 31, 1996 and 1995 - Other Income"
and "Comparison of Results of Operations for the Years Ended December 31, 1995
and 1994 - Other Income." The Bank presently intends to maintain its
securities portfolio and use borrowings to supplement deposits as the Bank's
main funding sources.
LIABILITIES. The Bank's total liabilities increased $59.8 million or
3.7% to $1.67 billion at April 30, 1997 compared to December 31, 1996. Such
increase was due primarily to an increase in borrowed funds and, to a lesser
extent, an increase in deposits. During the four months ended April 30, 1997,
the Bank began to use repurchase agreements as an alternative funding source to
deposits. Total liabilities increased $33.2 million or 2.1% to $1.61 billion
at December 31, 1996 compared to $1.58 billion at December 31, 1995.
NET WORTH. Total net worth amounted to $177.3 million at April 30,
1997 and $171.1 million and $150.1 million at December 31, 1996 and 1995,
respectively, or 9.6%, 9.6% and 8.7% of total assets at such dates. The
increase in net worth over the periods was due to continued profitable
operations. The increases in net worth were partially offset by decreases in
the unrealized appreciation on securities available for sale, net from $4.9
million at December 31, 1995 to $4.1 million and $3.5 million at December 31,
1996 and April 30, 1997, respectively.
50
<PAGE> 94
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Bank from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods. The table also reflects the yields on the Bank's
interest-earning assets and costs of the Bank's interest-bearing liabilities at
April 30, 1997.
<TABLE>
<CAPTION>
Four Months Ended
April 30,
--------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------
Average
Yield/Cost Average Yield/ Average
at April 30, 1997 Balance Interest Cost Balance Interest
----------------- ----------- ------------ --------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1):
Real estate loans . . . . . . . . . . . 8.40% $ 936,397 $25,259 8.20% $ 774,295 $20,966
Other loans . . . . . . . . . . . . . . 11.74 63,906 1,710 8.14 57,136 1,655
----------- ------- ---------- -------
Total loans . . . . . . . . . . . . 8.52 1,000,303 26,969 8.20 831,431 22,621
Securities . . . . . . . . . . . . . . . 6.70 689,125 15,277 6.74 760,429 16,051
Other earning assets(2) . . . . . . . . . 5.47 38,264 679 5.40 29,768 534
----------- ------- ---------- -------
Total interest-earning assets . . . . . 7.69 1,727,692 42,925 7.56 1,621,628 39,206
------- -------
Noninterest-earning assets . . . . . . . . 90,029 94,104
----------- ----------
Total assets . . . . . . . . . . . . . $1,817,721 $1,715,732
========= =========
Interest-bearing liabilities:
Deposits:
NOW and money market deposits . . . . . 2.84 $ 99,502 912 2.79 $ 136,660 1,172
Savings deposits . . . . . . . . . . . 2.64 825,097 7,142 2.63 745,170 6,997
Certificates of deposit . . . . . . . . 5.11 515,547 8,588 5.07 481,176 8,572
---------- ------- ---------- -------
Total deposits . . . . . . . . . . . 3.54 1,440,146 16,642 3.51 1,363,006 16,741
Total other borrowings . . . . . . . . . 6.10 13,044 261 6.09 45 2
---------- ------- --------- -------
Total interest-bearing liabilities . . . 3.59 1,453,190 16,903 3.54 1,363,051 16,743
------- -------
Noninterest bearing liabilities (3) . . . . 191,486 201,995
---------- ---------
Total liabilities . . . . . . . . . . 1,644,676 1,565,046
Stockholders' equity . . . . . . . . . . . 173,045 150,686
---------- ---------
Total liabilities and equity . . . . $1,817,721 $1,715,732
========= =========
Net interest-earning assets . . . . . . . . $ 274,502 $ 258,577
========= =========
Net interest income/interest rate spread . $26,022 4.02% $22,463
====== ===== ======
Net interest margin . . . . . . . . . . . . 4.58%
=====
Ratio of average interest-earning assets
to average interest-bearing liabilities . 118.89%
======
<CAPTION>
Four Months Ended
April 30, Year Ended December 31,
------------------ -------------------------------------------------------------
1996 1996 1995
----------------- ------------------------------------------------- ---------
Average Average
Yield/ Average Yield/ Average
Cost Balance Interest Cost Balance
-------- --------------- ------------ --------------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1):
Real estate loans . . . . . . . . . . . 8.24% $ 833,770 $ 68,600 8.23% $ 645,250
Other loans . . . . . . . . . . . . . . 8.81 57,913 5,144 8.88 54,719
---------- ------- ---------
Total loans . . . . . . . . . . . . 8.28 891,683 73,744 8.27 699,969
Securities . . . . . . . . . . . . . . . 6.42 737,796 49,083 6.65 700,048
Other earning assets(2) . . . . . . . . . 5.46 29,853 1,603 5.37 45,646
---------- ------- ---------
Total interest-earning assets . . . . . 7.36 1,659,332 124,430 7.49 1,445,663
-------
Noninterest-earning assets . . . . . . . . 93,611 60,104
---------- ---------
Total assets . . . . . . . . . . . . . $1,752,943 $1,505,767
========= =========
Interest-bearing liabilities:
Deposits:
NOW and money market deposits . . . . . 2.61 $ 134,600 3,479 2.58 $ 100,824
Savings deposits . . . . . . . . . . . 2.86 752,190 21,192 2.82 741,147
Certificates of deposit . . . . . . . . 5.42 493,180 25,760 5.22 391,786
---------- ------- ---------
Total deposits . . . . . . . . . . . 3.74 1,379,970 50,431 3.65 1,233,757
Total other borrowings . . . . . . . . . 13.52 47 6 12.77 46
---------- ------- ---------
Total interest-bearing liabilities . . . 3.74 1,380,017 50,437 3.65 1,233,803
-------
Noninterest bearing liabilities (3) . . . . 217,740 133,275
--------- ---------
Total liabilities . . . . . . . . . . 1,597,757 1,367,078
Stockholders' equity . . . . . . . . . . . 155,186 138,689
---------- ---------
Total liabilities and equity . . . . $1,752,943 $1,505,767
========= =========
Net interest-earning assets . . . . . . . . $ 279,315 $ 211,860
========= =========
Net interest income/interest rate spread . 3.62% $ 73,993 3.84%
===== ======= =====
Net interest margin . . . . . . . . . . . . 4.21% 4.46%
===== =====
Ratio of average interest-earning assets
to average interest-bearing liabilities . 118.97% 120.24%
====== ======
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1995 1994
------------------------ ------------------------------------
Average Average
Yield/ Average Yield/
Interest Cost Balance Interest Cost
------------ --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1):
Real estate loans . . . . . . . . . . . $ 53,265 8.25% $ 528,331 $41,727 7.90%
Other loans . . . . . . . . . . . . . . 4,871 8.90 38,213 3,273 8.57
-------- ---------- -------
Total loans . . . . . . . . . . . . 58,136 8.31 566,544 45,000 7.94
Securities . . . . . . . . . . . . . . . 43,593 6.23 758,320 44,496 5.87
Other earning assets(2) . . . . . . . . . 2,627 5.76 19,230 788 4.10
-------- --------- -------
Total interest-earning assets . . . . . 104,356 7.22 1,344,094 90,284 6.72
-------- -------
Noninterest-earning assets . . . . . . . . 37,620
---------
Total assets . . . . . . . . . . . . . $1,381,714
=========
Interest-bearing liabilities:
Deposits:
NOW and money market deposits . . . . . 2,573 2.55 $ 86,183 2,037 2.36
Savings deposits . . . . . . . . . . . 20,915 2.82 844,334 23,900 2.83
Certificates of deposit . . . . . . . . 20,741 5.29 258,337 10,595 4.10
------- --------- -------
Total deposits . . . . . . . . . . . 44,229 3.58 1,188,854 36,532 3.07
-------
Total other borrowings . . . . . . . . . 5 10.87 54 5 9.26
-------- --------- -------
Total interest-bearing liabilities . . . 44,234 3.59 1,188,908 36,537 3.07
------- -------
Noninterest bearing liabilities (3) . . . . 70,718
---------
Total liabilities . . . . . . . . . . 1,259,626
Stockholders' equity . . . . . . . . . . . 122,088
----------
Total liabilities and equity . . . . $1,381,714
=========
Net interest-earning assets . . . . . . . . $ 155,186
==========
Net interest income/interest rate spread . $ 60,122 3.63% $53,747 3.64%
======= ===== ====== =====
Net interest margin . . . . . . . . . . . . 4.16% 4.00%
===== =====
Ratio of average interest-earning assets
to average interest-bearing liabilities . 117.17% 113.05%
====== ======
</TABLE>
- ------------------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Includes money market accounts, Federal Funds sold and
interest-earning bank deposits.
(3) Consists primarily of demand deposit accounts.
51
<PAGE> 95
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and
volumes on net interest income of the Bank. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
<TABLE>
<CAPTION>
Four Months Ended April 30, 1997
compared to 1996
------------------------------------------------------------------------
Increase (decrease) due to
-------------------------------------------------
Rate/ Total Net Increase
Rate Volume Volume (Decrease)
---------- --------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans . . . . . . . . . . . . . . . . $ (80) $4,389 $ (16) $4,293
Other loans . . . . . . . . . . . . . . . . . . . (126) 196 (15) 55
------ ------- ------ ------
Total loans receivable . . . . . . . . . . . . (206) 4,585 (31) 4,348
Securities . . . . . . . . . . . . . . . . . . . . 807 (1,505) (76) (774)
Federal funds sold . . . . . . . . . . . . . . . . (6) 153 (2) 145
-------- ------- -- ------
Total net change in income on interest-
earning assets . . . . . . . . . . . . . . . . . 595 3,233 (109) 3,719
------
Interest-bearing liabilities:
Deposits:
NOW and money market deposits . . . . . . . . . . . 81 (319) (22) (260)
Savings accounts . . . . . . . . . . . . . . . . . (547) 751 (59) 145
Certificates of deposit . . . . . . . . . . . . . . (555) 612 (40) 17
------ ------ ----- ------
Total deposits . . . . . . . . . . . . . . . . . (1,021) 1,044 (121) (98)
Other borrowings . . . . . . . . . . . . . . . . . . (2) 867 (607) 258
------ ------ ----- ------
Total net change in expense on
interest-bearing liabilities . . . . . . . . . . . (1,023) 1,911 (728) 160
------ ------ ----- ------
Net change in net interest income . . . . . . . . . . $1,618 $1,322 $ 619 $3,559
===== ===== ===== =====
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1996 compared to 1995
-------------------------------------------------------------------------
Increase (decrease) due to
----------------------------------------------------
Rate/ Total Net Increase
Rate Volume Volume (Decrease)
---------- --------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans . . . . . . . . . . . . . . . . . $ (176) $15,562 $ (51) $15,535
Other loans . . . . . . . . . . . . . . . . . . . . (11) 284 -- 273
------ ------- -------- -------
Total loans receivable . . . . . . . . . . . . . (187) 15,846 (51) 15,608
Securities . . . . . . . . . . . . . . . . . . . . . 2,979 2,351 160 5,490
Federal funds sold . . . . . . . . . . . . . . . . . (176) (909) 61 (1,024)
------ ------ ------ ------
Total net change in income on interest-
earning assets . . . . . . . . . . . . . . . . . . 2,616 17,288 170 20,074
------ ------- ------ -------
Interest-bearing liabilities:
Deposits:
NOW and money market deposits . . . . . . . . . . . . 33 862 11 906
Savings accounts . . . . . . . . . . . . . . . . . . (34) 312 (1) 277
Certificates of deposit . . . . . . . . . . . . . . . (277) 5,367 (71) 5,019
------ ------ ------- ------
Total deposits . . . . . . . . . . . . . . . . . . (278) 6,541 (61) 6,202
Other borrowings . . . . . . . . . . . . . . . . . . . 1 -- -- 1
------- ------- --------- ---------
Total net change in expense on
interest-bearing liabilities . . . . . . . . . . . . (277) 6,541 (61) 6,203
------ ------ ------- ------
Net change in net interest income . . . . . . . . . . . $2,893 $10,747 $ 231 $13,871
===== ====== ===== ======
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1995 compared to 1994
--------------------------------------------------------------
Increase (decrease) due to
--------------------------------------
Rate/ Total Net Increase
Rate Volume Volume (Decrease)
---------- ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans . . . . . . . . . . . . . . . . . . . $1,886 $9,234 $418 $11,538
Other loans . . . . . . . . . . . . . . . . . . . . . . 129 1,414 55 1,598
------ ------ ------ -------
Total loans receivable . . . . . . . . . . . . . . . 2,015 10,648 473 13,136
Securities . . . . . . . . . . . . . . . . . . . . . . . 2,726 (3,419) (210) (903)
Federal funds sold . . . . . . . . . . . . . . . . . . . 319 1,082 438 1,839
------ ------ ------ -------
Total net change in income on interest-
earning assets . . . . . . . . . . . . . . . . . . . . 5,060 8,311 701 14,072
------ ------- ---- -------
Interest-bearing liabilities:
Deposits:
NOW and money market deposits . . . . . . . . . . . . . . 162 346 28 536
Savings accounts . . . . . . . . . . . . . . . . . . . . (73) (2,921) 9 (2,985)
Certificates of deposit . . . . . . . . . . . . . . . . . 3,081 5,473 1,592 10,146
------- ------- ------ -------
Total deposits . . . . . . . . . . . . . . . . . . . . 3,170 2,898 1,629 7,697
Other borrowings . . . . . . . . . . . . . . . . . . . . . 1 (1) -- --
-------- ------- -------- -------
Total net change in expense on
interest-bearing liabilities . . . . . . . . . . . . . . 3,171 2,897 1,629 7,697
------ ------ ------- -------
Net change in net interest income . . . . . . . . . . . . . $ 1,889 $5,414 $ 928 $ 6,375
====== ===== ====== ======
</TABLE>
52
<PAGE> 96
COMPARISON OF RESULTS OF OPERATIONS FOR THE FOUR MONTHS ENDED APRIL 30, 1997
AND 1996
GENERAL. The Bank's net income amounted to $6.9 million for both the
four month periods ended April 30, 1997 and the four months ended April 30,
1996. The increase of $3.6 million or 15.8% in net interest income and the
decrease of $3.1 million or 66.5% in the provision for income taxes for the
four months ended April 30, 1997 compared to the same period in 1996 was
substantially offset by an increase of $4.7 million in the provision for
possible loan losses and an increase of $1.6 million or 12.4% in total other
expenses. These and other significant fluctuations in the Bank's results of
operations are discussed below.
NET INTEREST INCOME. Net interest income is determined by the Bank's
interest rate spread (i.e., the difference between the yields earned on the
Bank's interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities. Net interest income increased $3.6 million or
15.8% to $26.0 million for the four months ended April 30, 1997 compared to
$22.5 million for the same period in 1996. The increase was due to an increase
in the Bank's interest rate spread to 4.02% for the four months ended April 30,
1997 compared to 3.62% for the same period in 1996 and an increase in the ratio
of average interest-earning assets to average interest-bearing liabilities to
118.89% for the 1997 period compared to 118.97% for the 1996 period. For the
same time periods, the Bank's net interest margin increased to 4.58% from
4.21%.
INTEREST INCOME. Interest income increased $3.7 million or 9.5% to
$42.9 million for the four months ended April 30, 1997 compared to $39.2
million for the same period in 1996. Such increase was primarily due to an
increase of $4.3 million or 19.2% in interest income on loans receivable to
$27.0 million for the four months ended April 30, 1997 from $22.6 million for
the same period in 1996. The increase in interest income on loans receivable
was partially offset by a decrease in interest income on securities of $774,000
or 4.8% to $15.3 million for the four months ended April 30, 1997 compared to
$16.1 million for the same period in 1996. The increase in interest income on
loans receivable was due to an increase in average balance of such assets of
$168.9 million or 20.3% as a result of increased loan demand, new loan products
and an increased emphasis on commercial and other lending. The average yield
earned on the Bank's loan portfolio decreased to 8.20% for the four months
ended April 30, 1997 from 8.28% for the same period in 1996. The decrease in
the average yield on the Bank's loan portfolio was primarily due to the
increased loan repayment activity on higher yielding loans and the downward
repricing of certain of the Bank's adjustable-rate loans. The decrease in
interest income on securities was due to a decrease in the average balance of
such assets of $71.3 million or 9.4% as a result of maturities and sales of
available for sale securities. In part, the sales of available for sale
securities were conducted in connection with the Bank's restructuring of its
investment securities portfolio to increase the yield and quality of such
portfolio. The decrease in interest income as a result of the decrease in the
average balance of securities was partially offset by an increase in the yield
earned on such assets from 6.42% for the four months ended April 30, 1996 to
6.74% for the four months ended April 30, 1997. Such increase reflects a
general increase in market interest rates and the use of funds from the sale of
lower rate securities to purchase higher
53
<PAGE> 97
yielding securities in connection with the Bank's restructuring of its
investment securities portfolio.
INTEREST EXPENSE. Interest expense increased slightly to $16.9
million for the four months ended April 30, 1997 from $16.7 million for the
same period in 1996, an increase of $160,000 or 1.0%. Such increase was
primarily due to an increase in interest expense on other borrowings,
consisting principally of repurchase agreements. During the four months ended
April 30, 1997, the Bank began to use repurchase agreements as an alternative
funding source to deposits. The Bank intends to continue to use repurchase
agreements and, in the future, FHLB advances to leverage its capital base and
provide funds for its lending activities. Interest expense on deposits
decreased $98,000 due to a decrease in the average rate paid from 3.74% for the
1996 period to 3.51% for the 1997 period which was substantially offset by an
increase in the average balance of such liabilities over the same time periods.
PROVISION FOR LOAN LOSSES. The Bank establishes provisions for loan
losses, which are charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed appropriate to absorb future charge-offs
of loans deemed uncollectible. In determining the appropriate level of the
allowance for loan losses, management considers past and anticipated loss
experience, evaluations of real estate collateral, current and anticipated
economic conditions, volume and type of lending and the levels of nonperforming
and other classified loans. The amount of the allowance is based on estimates
and the ultimate losses may vary from such estimates. Management of the Bank
assesses the allowance for loan losses on a quarterly basis and will make
provisions for loan losses as deemed appropriate by management in order to
maintain the adequacy of the allowance.
For the four months ended April 30, 1997, the provision for loan losses
amounted to $4.7 million. The Bank did not make a provision for loan losses
during the four months ended April 30, 1996. The provision for loan losses
during the four months ended April 30, 1997 was based on management's
continuing review of the risk elements in the Bank's loan portfolio. As part of
its 1997 review, management considered a report prepared by an independent
third-party consultant with respect to the risk elements in the Bank's loan
portfolio and an analysis prepared by the Bank's management with respect to
certain trends affecting the Bank's loan portfolio such as charge-offs,
delinquencies and other external economic factors including interest rates.
Such trend analysis and third-party report indicated certain additional
potential risk factors to be considered in estimating the level of the
allowance for loan losses. In establishing provisions in the 1997 period,
management of the Bank also considered the overall increase in the Bank's loan
portfolio, the potential increased risk of loss generally attributed to
commercial real estate loans, construction and land loans and commercial
business loans as well as management's continuing experience with the loan
portfolio acquired from Gateway (which constituted more than half of the Bank's
total non-performing assets at April 30, 1997). The Bank has experienced a
longer than anticipated work-out period with respect to such Gateway loans, and
despite charge-offs of $405,000 in the four months ended April 30, 1997 and
$2.7 million in 1996, the Bank's total non-performing loans have not been
reduced but have increased slightly since December 31, 1995. Based on the
various factors considered in its 1997 review of risk elements, and in
particular the longer than anticipated work-out periods for the Gateway
portfolio, management also determined that in certain circumstances more
aggressive work-out procedures for non-performing loans would be warranted.
The fact that more aggressive work-out procedures could increase the risk of
loss with respect to such loans also affected management's determination to
increase the provision levels during 1997. While no assurance can be given
that future charge-offs and/or additional provisions will not be necessary,
management of the Bank believes that, as of April 30, 1997, the allowance for
possible loan losses was adequate.
OTHER INCOME. Other income decreased $385,000 or 17.1% to $1.9
million for the four months ended April 30, 1997 from $2.2 million for the four
months ended April 30, 1996. Such decrease was due to a $508,000 loss on
securities transactions during the 1997 period compared
54
<PAGE> 98
to a $218,000 gain during the 1996 period. The loss on securities transactions
was due to the continued restructuring of the Bank's securities portfolio to
increase the quality and yield. As part of the restructuring, the Bank sold
$19.4 million of available for sale securities and purchased $53.3 million of
such securities. In addition, the Bank reclassified $14.6 million of
adjustable rate and intermediate mortgage funds from available for sale to
trading which resulted in the recognition of a $231,000 charge to operations
during the four months ended April 30, 1997. The loss on securities was
partially offset by an increase of $342,000 or 16.8% in service and fee income
to $2.4 million for the four months ended April 30, 1997 from $2.0 million for
the same period in 1996. The increase in service and fee income was due to an
increase in the volume of transactions as well as an increase in demand deposit
accounts.
OTHER EXPENSES. Other expenses increased $1.6 million or 12.4% to
$14.8 million for the four months ended April 30, 1997 from $13.1 million for
the same period in 1996. Such increase was primarily due to an increase of
$813,000 or 76.6% in data processing fees, an increase in other miscellaneous
expenses of $277,000 or 12.7% and an increase of $216,000 or 3.4% in personnel
expenses. The increase in data processing expenses was primarily due to the
write-off of the Bank's investment in its service bureau. The Bank is a
significant stockholder of such service bureau which was organized by a number
of New York savings banks. Given, among other things, consolidation in the
banking industry, the number of bank customers of such service bureau has
decreased significantly in recent years. In addition, the Bank and one other
New York savings bank, which has entered into an agreement to be acquired by
another institution, remain the two sole stockholders of the service bureau.
Given its assessment of the continuing viability of such service bureau, during
the four months ended April 30, 1997, the Bank wrote-off $969,000 with respect
to this investment. The increase in miscellaneous expenses was due to a
variety of increases, including expenses relating to loan collateral and real
estate owned. The increase in personnel expenses was due to normal increases
in compensation and employee benefit costs. The Bank is reevaluating its data
processing needs in general and, in particular, whether it will continue its
relationship with its current service bureau. Although it has made no
decisions with respect to how best to meet its future data processing needs,
any determination by the Bank to enhance its data processing capabilities
and/or to convert its systems to a new service bureau may result in increases
in other expenses.
PROVISION FOR INCOME TAXES. The provision for income taxes amounted
to $1.6 million and $4.7 million for the four months ended April 30, 1997 and
1996, respectively, resulting in effective tax rates of 18.6% and 40.7%,
respectively. The decrease in the provision for income taxes for the four
months ended April 30, 1997 was due to a $2.6 million reversal of previously
deferred income taxes related to bad debt reserves accumulated for New York
City purposes.
Through January 1, 1996, under Section 593 of the Code, thrift
institutions such as the Bank which met certain definitional tests, primarily
relating to their assets and the nature of their business, were permitted to
establish a tax reserve for bad debts and to make annual additions thereto,
which additions could, within specified limitations, be deducted in arriving at
their taxable income. The Bank's deduction with respect to "qualifying loans,
" which are generally loans secured by certain interests in real property, was
computed using an amount based on the
55
<PAGE> 99
Bank's actual loss experience (the "Experience Method"), or a percentage equal
to 8% of the Bank's taxable income the (the "PTI Method"), computed without
regard to this deduction and with additional modifications and reduced by the
amount of any permitted addition to the nonqualifying reserve. Similar
deductions or additions to the Bank's bad debt reserve are permitted under the
New York State Bank Franchise Tax; however, for purposes of these taxes, the
effective allowable percentage under the PTI Method was approximately 32%
rather than 8%.
Effective January 1, 1996, Section 593 was amended, and the Bank is
unable to make additions to its federal tax bad debt reserve, is permitted to
deduct bad debts only as they occur and is additionally required to recapture
or, take into taxable income, over a six year period, beginning with the Bank's
taxable year beginning on January 1, 1996, the excess of the balance of its bad
debt reserves as of December 31, 1995 over the balance of such reserves as of
December 31, 1987, or over a lesser amount if the Bank's loan portfolio has
decreased since December 31, 1987. Such recapture requirements would be
deferred for each of the two successive taxable years beginning January 1,
1996, in which the Bank originates a minimum amount of certain residential
loans based upon the average of the principal amounts of such loans originated
by the Bank during its six taxable years preceding January 1, 1996. The New
York State tax law has been amended to prevent a similar recapture of the
Bank's bad debt reserve, and to permit continued future use of the bad debt
reserve method for purposes of determining the Bank's New York State tax
liability. In connection with this change, which also provides for an
indefinite deferral of the recapture of the bad debt reserves generated for New
York State purposes, the Bank, during 1996, reversed $2.1 million of previously
deferred income taxes related to the bad debt reserves accumulated for New York
State purposes. The New York City law was amended in the first quarter of 1997
to prevent a similar recapture of the Bank's bad debt reserve, and to permit
future use of the experience method for purposes of determining the Bank's New
York City tax liability. In connection with this change, which also provided
for an indefinite deferral of the recapture of the bad debt reserves generated
for New York City purposes, during the four months ended April 30, 1997, the
Bank reversed $2.6 million of previously deferred income taxes related to the
bad debt reserves accumulated for New York City purposes.
Prior to the tax law changes mentioned above, for New York State and
New York City purposes, the bad debt deduction was equal to a multiple of the
federal bad debt deduction, which is approximately four times the federal
amount. In 1995, the Bank began providing for deferred taxes on this state and
city deduction which has accumulated since 1987. The cumulative effect of this
change in accounting principle was approximately $4.7 million and is reflected
on the statement on income for the year ended December 31, 1995.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995.
GENERAL. The Bank reported net income of $21.8 million for the year
ended December 31, 1996 compared to net income of $13.2 million for the year
ended December 31, 1995, an increase of $8.6 million or 64.7%. The $13.2
million of net income for 1995 reflects a $4.7 million reduction due to the
cumulative effect of change in accounting for income taxes as
56
<PAGE> 100
discussed above. In addition to the absence of the $4.7 million change in
accounting for income taxes, the increase in 1996 was due to an increase in net
interest income, which was partially offset by increases in total other
expenses and the provision for income taxes. These and other significant
fluctuations in the Bank's results of operations are discussed below.
NET INTEREST INCOME. Net interest income increased $13.9 million or
23.1% to $74.0 million for 1996 compared to 1995, reflecting a $20.1 million or
19.2% increase in interest income which was partially offset by a $6.2 million
or 14.0% increase in interest expense. The Bank's interest rate spread and net
interest margin increased to 3.84% and 4.46%, respectively, for 1996 compared
to 3.63% and 4.16%, respectively, for 1995. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities increased to
120.24% for 1996 compared to 117.17% for 1995.
INTEREST INCOME. The increase in interest income during the year
ended December 31, 1996 was primarily due to an increase in the average balance
of the Bank's interest-earning assets and, to a lesser extent, the yield earned
on the Bank's securities portfolio. The average balance of the loan portfolio
increased $191.7 million or 27.4% to $891.7 million for 1996 compared to 1995
primarily as a result of the full year impact of the Gateway acquisition and,
to a lesser extent, increased loan demand, new loan products and an increased
emphasis on commercial and other lending. The average balance of the Bank's
securities portfolio increased $37.7 million or 5.4% to $737.8 million for 1996
compared to 1995 primarily as a result of the $123.5 million securities
portfolio acquired in the Gateway acquisition. The average yield earned on the
Bank's loan portfolio remained constant between 1995 and 1996 while the average
yield earned on the Bank's securities portfolio increased from 6.23% for 1995
to 6.65% for 1996. Such increase in the average yield earned on the Bank's
securities portfolio was primarily due to the restructuring of the securities
portfolio and the purchase of higher-yielding securities.
INTEREST EXPENSE. The increase in interest expense during the year
ended December 31, 1996 was primarily due to an increase in the average balance
of deposits, particularly certificates of deposit. The average balance of
deposits increased $146.2 million or 11.9% to $1.38 billion for 1996, $101.4
million of which consisted of an increase in the average balance of
certificates of deposit and $33.8 million of which consisted of an increase in
demand deposits, including noninterest-bearing checking, NOW and money market
accounts. The increase in the average balance of deposits was primarily due to
the full year impact of deposits acquired in the Gateway acquisition. The
average rate paid on deposits increased slightly from 3.58% in 1995 to 3.65% in
1996.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 1996, the
provision for loan losses amounted to $1.0 million. The Bank did not make a
provision for loan losses in 1995. The provision for loan losses during 1996
was due, among other factors, management's continuing review of the risk
elements in the Bank's loan portfolio. In establishing provisions in 1996,
management of the Bank considered the overall increase in the Bank's loan
portfolio, the potential increased risk of loss generally attributed to
commercial real estate loans, construction and land loans and commercial
business loans as well as management's continuing
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<PAGE> 101
experience with the loan portfolio acquired from Gateway and its consideration
that, despite charge-offs of $2.7 million in 1996, the Bank's total
non-performing loans had not been reduced but had increased slightly since
December 31, 1995.
OTHER INCOME. Other income amounted to $3.9 million and $4.0 million
for the years ended December 31, 1996 and 1995, respectively. The increase of
$2.3 million or 52.8% in service and fee income to $6.6 million for 1996 from
$4.3 million for 1995 was offset by a $2.4 million increase in the loss from
securities transactions to a loss of $2.7 million for 1996 from a loss of
$305,000 for 1995. The increase in service and fee income was primarily due to
an increase in the number of transaction accounts as a result of the Gateway
acquisition. The increase in the loss from securities transactions for 1996
was due primarily to a restructuring of the Bank's investment portfolio to
increase the yield of such portfolio. In particular, between September 19,
1996 and November 29, 1996, the Bank sold U.S. Government bonds with a book
value of $193.7 million and an average yield of approximately 6.2% at a loss of
$2.6 million. The Bank used such proceeds to purchase $185.7 million of U.S.
Government bonds with an average yield of 7.1%.
OTHER EXPENSES. Other expenses increased $7.1 million or 21.6% to
$40.1 million for the year ended December 31, 1996 compared to the year ended
December 31, 1995. Such increase was due to increases in personnel expenses,
occupancy and equipment, amortization of intangible assets, professional fees
and other miscellaneous expenses, which were partially offset by a decrease in
FDIC insurance premiums.
Personnel expenses increased $4.0 millon or 25.9% to $19.7 million for
1996 compared to 1995 due to an increase in personnel as a result of the
Gateway acquisition and normal merit and salary increases.
Occupancy and equipment expenses increased $1.0 million or 23.6% to
$5.4 million for 1996 compared to 1995 primarily due to the addition of three
branch offices, a loan production facility and an office for the trust
department as a result of the Gateway acquisition.
Amortization of intangible assets increased $988,000 or 85.5% to $2.1
million for 1996 compared to 1995 due primarily to the Gateway acquisition.
The excess of the purchase price over the fair value of the net assets
acquired was $15.6 million. Such amount was recorded as goodwill and is being
amortized on a straight-line basis over 20 years. The amount of goodwill
amortization for 1996 related to the Gateway acquisition was $781,000.
Professional fees increased $491,000 or 46.7% to $1.5 million for 1996
compared to 1995 primarily as a result of the use of a consulting firm to
resolve various issues from the Gateway acquisition, restructure the commercial
lending function and conduct a technology audit.
Other miscellaneous expenses increased $1.4 million or 26.9% to $6.5
million for 1996 compared to 1995 due to increases in a variety of categories,
including telephone and telecommunications, postage, insurance and legal fees
related to non-performing loans.
58
<PAGE> 102
FDIC insurance premiums decreased $1.4 million or 99.9% to $2,000 for
1996 as a result of the reduction in insurance assessment rates by the FDIC in
September 1995.
PROVISION FOR INCOME TAXES. The provision for income taxes amounted
to $15.1 million and $13.3 million for 1996 and 1995, respectively, resulting
in effective tax rates of 40.9% and 42.6%, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994
GENERAL. The Bank's net income amounted to $13.2 million for the year
ended December 31, 1995 compared to $16.2 million for the year ended December
31, 1994, a decrease of $3.0 million or 18.4%. However, the $13.2 millon of net
income for 1995 reflects a $4.7 million cumulative effect of change in
accounting for income taxes. Without such cumulative effect, net income for
1995 would have been $17.9 million. During 1995 compared to 1994, net interest
income increased $6.4 million or 11.9% and total other income increased $2.0
million or 97.3%. Such increases were partially offset by an increase in total
other expenses of $7.4 million or 28.9%. These and other significant
fluctuations in the Bank's results of operations are discussed below.
NET INTEREST INCOME. The increase in net interest income in 1995
compared to 1994 reflects an increase of $14.1 million or 15.6% in interest
income which was partially offset by an increase of $7.7 million or 21.1% in
interest expense. Although the interest rate spread remained stable at 3.63%
for 1995 compared to 3.64% for 1994, the Bank's net interest margin increased
to 4.16% for 1995 compared to 4.00% for 1994. In addition, the ratio of
average interest-earning assets to average interest-bearing liabilities
increased to 117.17% for 1995 compared to 113.05% for 1994. The increase in
such ratio reflects, in part, the Gateway acquisition which was consummated in
August 1995.
INTEREST INCOME. The increase in interest income of $14.1 million or
15.6% to $104.4 million in 1995 compared to 1994 was primarily due to an
increase in the average volume of loans outstanding and an increase in the
average yield earned on the Bank's loan and securities portfolios, which
increases were partially offset by a decrease in the average volume of
securities. The average balance of the Bank's loan portfolio increased $133.4
million or 23.6% to $700.0 million for the year ended December 31, 1995
compared to $566.5 million for the year ended December 31, 1994 as a result of
the $124.2 million of loans acquired in the Gateway acquisition as well as an
increase in loan demand. In addition, the average yield on the Bank's loan and
securities portfolios increased from 7.94% and 5.87%, respectively, in 1994 to
8.31% and 6.23%, respectively, for 1995. The increase in the average yield
earned on the Bank's loan portfolio was due primarily to the higher yielding
loans acquired in the Gateway acquisition and the adjustment of certain of the
Bank's adjustable-rate loans to the fully indexed rate. The increase in the
average yield earned on the Bank's investment securities portfolio was due to
the maturity and sales of lower yielding securities and the reinvestment of
such funds in higher yielding securities. The average balance of the
securities portfolio decreased $58.3 million or 7.7% to $700.0 million
59
<PAGE> 103
for 1995 compared to 1994. Such decrease resulted from the use of funds from
maturities and sales of certain securities to partially finance the Gateway
acquisition.
INTEREST EXPENSE. The increase in interest expense of $7.7 million or
21.1% to $44.2 million during 1995 compared to 1994 was due to both an increase
in the average balance of deposits and an increase in the average rate paid
thereon, primarily with respect to certificates of deposit. The average
balance of deposits increased $44.9 million or 3.8% to $1.23 billion for 1995
primarily as a result of deposits acquired in the Gateway acquisition. In
addition, the average rate paid on deposits increased to 3.58% for 1995
compared to 3.07% for 1994 due primarily to the increasing balance of higher
rate certificate of deposit accounts. The average balance of and rate paid on
certificate of deposit accounts were $258.3 million and 4.10%, respectively,
for 1994 and increased to 5.29% and $391.8 million, respectively, for 1995.
The increase in the average rate paid on deposits primarily reflects both an
increase in general market rates of interest and a shift into higher rate
deposit accounts.
OTHER INCOME. The increase in other income to $4.0 million for 1995
compared to $2.0 million for 1994 was due to an increase of $1.5 million or
54.8% in service and fee income and a decrease in the loss from securities
transactions to $305,000 in 1995 compared to $759,000 in 1994. The increase in
service and fee income was due to an increase in transaction accounts as a
result of the Gateway acquisition. The loss from securities transactions in
1995 was due to the Bank's restructuring of its investment portfolio. In
December 1995, the Bank sold corporate bonds with a book value of $99.1 million
and an average yield of 5.26% for a loss of $335,000. The Bank used such
proceeds to buy $99.1 million of U.S. Government agency securities with an
average yield of 6.41%.
OTHER EXPENSES. The increase in other expenses to $33.0 million in
1995 from $25.6 million in 1994 was primarily due to increases in personnel
expenses, occupancy and equipment, amortization of intangible assets,
professional fees and other miscellaneous expenses. Such increases were
partially offset by a decrease in FDIC insurance premiums.
Personnel expenses increased $4.3 million or 37.7% to $15.6 million
for 1995 compared to 1994 as a result of the additional personnel retained in
the Gateway acquisition, severance and retention bonuses related to the Gateway
acquisition and normal merit and salary increases.
Occupancy and equipment expenses increased $701,000 or 19.1% to $4.4
million in 1995 compared to 1994 primarily as a result of the addition of three
branch offices, one loan production facility and one office for the trust
department in the Gateway acquisition.
Amortization of intangible assets increased $619,000 or 115.5% to $1.2
million in 1995 compared to 1994 due primarily to $260,000 of goodwill
amortization relating to the Gateway acquisition.
Professional fees increased $417,000 or 65.8% to $1.1 million for 1995
compared to 1994 primarily as a result of an increase in consulting fees in
connection with a review of necessary
60
<PAGE> 104
lending policies and procedures, infrastructure and personnel relating to
increased commercial lending activity.
Other miscellaneous expenses increased $1.7 million or 51.7% to $5.1
million for 1995 compared to 1994 as a result of an increase in a variety of
categories primarily as the result of the acquisition of Gateway, including
postage, legal fees due to the increase in non-performing loans and checking
account supplies.
FDIC insurance fees decreased $1.4 million or 49.6% to $1.4 million in
1995 compared to 1994 due to a reduction in the assessment rate by the FDIC.
PROVISION FOR INCOME TAXES. The provision for income taxes amounted
to $13.3 million and $14.0 million for the years ended December 31, 1995 and
1994, respectively, resulting in effective tax rates of 42.6% and 46.3%,
respectively.
LIQUIDITY AND COMMITMENTS
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's
primary sources of funds are deposits, amortization, prepayments and maturities
of outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-related
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Bank invests excess funds in federal funds sold
and other short-term interest-earning assets which provide liquidity to meet
lending requirements. Historically, the Bank has been able to generate
sufficient cash through its deposits and has only utilized borrowings to a very
limited degree. During the four months ended April 30, 1997, the Bank entered
into repurchase agreements as an alternative funding source. At April 30.
1997, such borrowings amounted to $30.0 million. The Bank intends to continue
to utilize repurchase agreements and, in the future, FHLB advances, to leverage
its capital base and provide funds for its lending activities.
Liquidity management is both a daily and long-term function of
business management. Excess liquidity is generally invested in short-term
investments such as federal funds sold or U.S. Treasury securities. On a
longer term basis, the Bank maintains a strategy of investing in various
lending products as described in greater detail under "Business - Lending
Activities." The Bank uses its sources of funds primarily to meet its ongoing
commitments, to pay maturing certificates of deposit and savings withdrawals,
fund loan commitments and maintain a portfolio of mortgage-backed and
mortgage-related securities and investment securities. At April 30, 1997, the
total approved loan origination commitments outstanding amounted to $55.3
million. At the same date, the unadvanced portion of construction loans
approximated $8.1 million. Certificates of deposit scheduled to mature in one
year or less at April 30, 1997, totaled $387.6 million. Investment securities
scheduled to mature in one year or less at April 30, 1997 totalled $36.4
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<PAGE> 105
million. Based on historical experience, management believes that a
significant portion of maturing deposits will remain with the Bank. The Bank
anticipates that it will continue to have sufficient funds, together with
borrowings, to meet its current commitments.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes
in relative purchasing power over time due to inflation. Unlike most
industrial companies, virtually all of the Bank's assets and liabilities are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than does the
effect of inflation.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, which requires
debt and equity securities to be classified in one of three categories and to
be accounted for as follows: debt securities which the company has the positive
intent and ability to hold to maturity are classified as "securities held to
maturity" and reported at amortized cost; debt and equity securities that are
bought and held principally for the purpose of selling them in the near term
are classified as "trading securities" and reported at fair value with
unrealized gains and losses included in earnings; and debt and equity
securities not classified as either held-to maturity or trading securities are
classified as "securities available for sale" and reported at fair value with
unrealized gains and losses, net of related tax effect, excluded from earnings
and reported as a separate component of shareholders' equity. The Bank adopted
SFAS No. 115 as of December 31, 1993. However, on November 15, 1995, the FASB
issued a guide to implementation of SFAS No. 115 which permitted institutions
on a one time basis, to move securities from one category to another (i.e.,
from held to maturity to available for sale) without penalty until December 31,
1995. Management of the Bank changed the classification of $314.6 million of
the Bank's securities in accordance with this pronouncement, resulting in an
unrealized gain of $1.1 million. At April 30, 1997, the unrealized
appreciation on securities available for sale, net of related taxes, amounted
to $3.5 million.
In November 1993, the AICPA issued SOP 93-6, "Employers' Accounting
for Employee Stock Ownership Plans," which is effective for years beginning
after December 15, 1993. SOP 93-6 requires the application of its guidance for
shares acquired by ESOPs after December 31, 1992 but not yet committed to be
released as of the beginning of the year SOP 93-6 is adopted. SOP 93-6 changes
the measure of compensation expense recorded by employers for leveraged ESOPs
from the cost of ESOP shares to the fair value of ESOP shares. The Company has
adopted an ESOP in connection with the Conversion, which is expected to
purchase 8% of the Common Stock sold in the Conversion. Under SOP 93-6, the
Company will recognize compensation cost equal to the fair value of the ESOP
shares during the periods in which they
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<PAGE> 106
become committed to be released. To the extent that the fair value of the
Company's ESOP shares differ from the cost of such shares, this differential
will be charged or credited to equity. Employers with internally leveraged
ESOPs such as the Company will not report the loan receivable from the ESOP as
an asset and will not report the ESOP debt from the employer as a liability.
However, the effects of SOP 93-6 on future operating results cannot be
determined at this time.
In February 1997, the FASB released SFAS No. 128 "Earnings Per Share."
SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, Earnings Per Share
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. SFAS No. 128 requires restatement of all prior-period EPS
data presented.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." Statement No. 129 continues the existing
requirements to disclose the pertinent rights and privileges of all securities
other than ordinary common stock but expands the number of companies subject to
portions of its requirements. Specifically, the Statement requires all
entities to provide the capital structure disclosures previously required by
Opinion 15. Companies that were exempt from the provisions of Opinion 15 will
now need to make those disclosures.
In July 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." Statement 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events during the period other than transactions with owners
("Comprehensive income"). Comprehensive income is the total of net income and
all other nonowner changes in equity. The Statement is effective for fiscal
years beginning after December 15, 1997 with earlier application permitted.
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In July 1997, the FASB issued SFAS No. 131 "Disclosures About Segments
of an Enterprise and Related Information." Statement No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. The Statement
is effective for fiscal year beginning after December 15, 1997 with earlier
application permitted.
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BUSINESS
GENERAL
Staten Island Savings is a traditional, full-service, community
oriented savings bank headquartered in Staten Island, New York. The Bank was
organized in 1864 as a New York-chartered savings bank and in August 1997
converted to a federally-chartered mutual savings bank. The Bank is primarily
engaged in attracting deposits from the general public and using those funds,
together with borrowings, to originate loans and invest in securities. The
Bank's primary lending emphasis has been, and continues to be, loans secured by
first liens on single-family (one- to four-units) residential properties
located in Staten Island and, to a lesser extent, Brooklyn, New York. The Bank
also originates loans secured by commercial real estate, construction and land
loans (primarily to developers operating in Staten Island), home equity loans,
multi-family residential loans and other loans. Commencing with its
acquisition of Gateway in August 1995, the Bank has diversified, to a certain
extent, its business activities by increasing its emphasis on attracting
commercial customers. In addition to continuing Gateway's traditional
commercial bank business, which emphasized commercial real estate and
construction and land loans, in recent periods the Bank has increased its
business development efforts, including the hiring of additional experienced
commercial loan officers, and has commenced a program designed to cross-sell
services to existing customers as well as attract new customers. In addition
to its loan and deposit products, the Bank also provides trust services and
savings bank life insurance ("SBLI").
MARKET AREA AND COMPETITION
The Bank maintains a network of 16 full-service branch offices located
in Staten Island and one branch office located in the Bay Ridge area of
Brooklyn, New York as well as three limited service branch offices and its
Trust Department office in Staten Island. Based on data as of June 30, 1996,
the Bank had the greatest amount of deposits of any financial institution
located in Staten Island with a 30% market share. Historically, the Bank also
has been among the leaders in loans originated in Staten Island. Because of
the Bank's significant market position in Staten Island, the Bank may consider
expansion of its branch network through the establishment of additional
branches in Brooklyn and/or entry into additional markets in New Jersey. Such
expansion, if undertaken, may be accomplished through internal growth or
acquisitions. The Bank has no specific plans, arrangements or understandings
regarding any such expansions or acquisitions at this time.
The Bank faces significant competition both in making loans and in
attracting deposits. There are a significant number of financial institutions
located within the Bank's market area, many of which have greater financial
resources than the Bank. The Bank's competition for loans comes principally
from commercial banks, other savings banks, savings associations and
mortgage-banking companies. The Bank's most direct competition for deposits
has historically come from savings associations, other savings banks,
commercial banks and credit unions. The
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<PAGE> 109
Bank faces additional competition for deposits from short-term money market
funds and other corporate and government securities funds and from other
non-depository financial institutions such as brokerage firms and insurance
companies. Competition for banking services may increase as a result of, among
other things, the elimination of restrictions on interstate operations of
financial institutions.
LENDING ACTIVITIES
GENERAL. At April 30, 1997, Staten Island Savings' total loans
amounted to $995.4 million or 53.9% of the Bank's total assets at such date.
The Bank's primary emphasis has been, and continues to be, the origination of
loans secured by first liens on single-family residences located primarily in
Staten Island and, to a lesser extent, Brooklyn and other areas in New York.
At April 30, 1997, $776.2 million or 78.0% of the Bank's total mortgage loans
were secured by properties located in Staten Island and an additional $96.3
million or 9.7% of total mortgage loans were secured by properties located in
other areas of New York.
In addition to loans secured by single-family residential real estate,
the Bank's mortgage loan portfolio includes loans secured by commercial real
estate, which amounted to $112.3 million or 11.5% of the net loan portfolio at
April 30, 1997, construction and land loans, which totaled $31.4 million or
3.2% at April 30, 1997, home equity loans, which totaled $29.9 million or 3.1%
at April 30, 1997, and loans secured by multi-family (over four units)
residential properties, which amounted to $29.0 million or 3.0% of the net loan
portfolio at April 30, 1997. In addition to mortgage loans, the Bank
originates various other loans including commercial business loans and consumer
loans. At April 30, 1997, the Bank's total other loans amounted to $37.3
million or 3.8% of the net loan portfolio.
The types of loans that the Bank may originate are subject to federal
and state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans and the supply of money
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, the monetary
policy of the federal government, including the Federal Reserve Board,
legislative tax policies and governmental budgetary matters.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
April 30,
1997 1996 1995
------------------------- ----------------------- ----------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential:
Conventional . . . . . . . . $743,143 76.10% $707,481 73.09% $578,626 72.23%
FHA/VA . . . . . . . . . . . 12,354 1.27 13,392 1.38 16,285 2.03
Multi-family residential . . . 28,983 2.97 26,444 2.73 25,977 3.24
Commercial real estate . . . . 112,270 11.50 115,593 11.94 99,000 12.36
Construction and land . . . . . 31,417 3.22 28,779 2.97 18,123 2.26
Home equity . . . . . . . . . . 29,935 3.07 29,680 3.07 25,246 3.15
-------- ------ -------- ------ -------- ------
Total mortgage loans . . . . 958,102 98.12 921,369 95.18 763,257 95.27
Other loans:
Student loans . . . . . . . . . 4,999 0.51 4,522 0.47 6,072 0.76
Automobile leases (1) . . . . . -- -- 28,249 2.92 18,705 2.33
Passbook loans . . . . . . . . 6,382 0.65 5,933 0.61 5,683 0.71
Discounted loans . . . . . . . 7,118 0.73 6,731 0.70 5,528 0.69
Commercial business loans . . . 8,266 0.85 8,264 0.85 9,729 1.21
Other . . . . . . . . . . . . . 10,537 1.08 9,712 1.00 9,079 1.13
-------- ------ -------- ------ -------- ------
Total other loans . . . . . . 37,302 3.82 63,411 6.55 54,796 6.84
-------- ------ -------- ------ -------- ------
Total loans receivable . . . 995,404 101.94% 984,780 101.73% 818,053 102.11%
Less:
Discount on loans purchased . . (803) (0.08) (3,475) (0.36)% (2,911) (0.36)%
Allowance for loan losses . . . (14,687) (1.50) (9,977) (1.03) (10,704) (1.34)
Deferred loan fees . . . . . . (3,413) (0.35) (3,313) (0.34) (3,301) (0.41)
-------- ------ -------- ------ -------- ------
Loans receivable, net . . . . . . $976,501 100.00% $968,015 100.00% $801,137 100.00%
- ------------- ======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------
1994 1993 1992
------------------------ ------------------------- ------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential:
Conventional . . . . . . . . $478,848 78.63% $394,892 76.86% $330,470 72.63%
FHA/VA . . . . . . . . . . . 19,165 3.15 24,027 4.68 30,588 6.72
Multi-family residential . . . 24,347 4.00 24,190 4.71 19,367 4.26
Commercial real estate . . . . 30,037 4.93 26,002 5.06 25,534 5.61
Construction and land . . . . . 3,003 0.49 2,626 0.51 2,150 0.47
Home equity . . . . . . . . . . 18,042 2.96 12,548 2.44 12,616 2.77
-------- ------ -------- ------ -------- ------
Total mortgage loans . . . . 573,442 94.17 484,285 94.25 420,725 92.46
Other loans:
Student loans . . . . . . . . . 23,398 3.84 22,607 4.40 22,691 4.99
Automobile leases (1) . . . . . 8,344 1.37 -- -- -- --
Passbook loans . . . . . . . . 4,673 0.77 3,927 0.76 4,464 0.98
Discounted loans . . . . . . . -- 0.00 -- -- -- --
Commercial business loans . . . 200 0.03 -- -- -- --
Other . . . . . . . . . . . . . 5,972 0.98 8,601 1.67 11,545 2.54
-------- ------ -------- ------ -------- ------
Total other loans . . . . . . 42,587 6.99 35,135 6.84 38,700 8.51
-------- ------ -------- ------ -------- ------
Total loans receivable . . . 616,029 101.16% 519,420 101.09% 459,725 100.98%
Less:
Discount on loans purchased . . (1,134) (0.19)% (15) --% (6) --%
Allowance for loan losses . . . (3,124) (0.51) (3,180) (0.62) (2,303) (0.51)
Deferred loan fees . . . . . . (2,817) (0.46) (2,422) (0.47) (2,134) (0.47)
-------- ------ ------- ------ -------- ------
Loans receivable, net . . . . . . $608,954 100.00% $513,803 100.00% $454,982 100.00%
- ------------- ======= ====== ======= ====== ======= ======
</TABLE>
(1) Consists of loans secured by assignments of automobile lease payments.
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth scheduled contractual amortization of the Bank's loans at
April 30, 1997, as well as the dollar amount of such loans which are scheduled
to mature after one year which have fixed or adjustable interest rates. Demand
loans, loans having no schedule of repayments and no stated maturity and
overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
Principal Repayments Contractually Due
in Year(s) Ended April 30,
--------------------------------------
Total at
April 30,
1997 1998 1999 2000
--------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential . . . . . $755,497 $16,047 $16,372 $17,689
Multi-family residential . . . . . 28,983 1,033 1,131 1,238
Commercial real estate . . . . . . 112,270 5,303 5,847 6,447
Construction and land . . . . . . . 31,417 28,324 -- --
Home equity . . . . . . . . . . . . 29,935 1,828 1,964 2,081
Other loans . . . . . . . . . . . . . 37,302 19,892 5,275 3,765
-------- ------- ------- -------
Total(1) . . . . . . . . . . . . $995,404 $72,427 $30,589 $31,220
======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Principal Repayments Contractually Due
in Year(s) Ended April 30,
---------------------------------------------------
2001- 2003- 2009- There-
2002 2008 2014 after
-------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential . . . . . $39,765 $46,427 $ 81,298 $537,899
Multi-family residential . . . . . 2,838 3,400 6,407 12,936
Commercial real estate . . . . . . 14,944 18,086 31,449 30,194
Construction and land . . . . . . . -- -- -- 3,093
Home equity . . . . . . . . . . . . 4,299 4,432 5,038 10,293
Other loans . . . . . . . . . . . . . 3,013 230 114 5,013
------- -------- -------- --------
Total(1) . . . . . . . . . . . . $64,859 $72,575 $124,306 $599,428
====== ====== ======= =======
</TABLE>
- ------------------
(1) Of the $923.0 million of loan principal repayments contractually due
after April 30, 1998, $519.7 million have fixed rates of interest and
$403.3 million have adjustable rates of interest.
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Scheduled contractual amortization of loans does not reflect the
expected term of the Bank's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give the Bank the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher yielding loans are repaid or
refinanced at lower rates.
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ACTIVITY IN LOANS. The following table shows the activity in the
Bank's loans during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
Four Months Ended -------------------------------------
April 30, 1997 1996 1995 1994
----------------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Total loans held at beginning
of period . . . . . . . . . . . . . . $984,780 $818,053 $616,029 $519,420
Originations of loans:
Mortgage loans:
Single-family residential . . . . . 56,590 181,200 105,359 120,190
Multi-family residential . . . . . 3,155 2,087 3,587 5,832
Commercial real estate . . . . . . 4,882 35,677 13,557 6,083
Construction and land . . . . . . . 11,250 32,080 15,425 1,654
Home equity . . . . . . . . . . . . 853 1,224 887 1,113
Other loans:
Student loans . . . . . . . . . . . 1,620 3,469 3,449 10,517
Automobile leases . . . . . . . . . 3,697 14,078 13,000 8,829
Passbook loans . . . . . . . . . . 2,471 5,995 5,926 5,303
Discounted loans . . . . . . . . . 387 1,203 5,528 --
Commercial business loans . . . . . 3,041 7,806 2,766 200
Other consumer loans(1) . . . . . . 1,944 3,131 1,236 5,281
-------- -------- ------- --------
Total originations . . . . . . . 89,890 287,950 170,720 165,002
-------- -------- ------- --------
Purchases of loans:
Mortgage loans:
Single-family residential . . . . -- -- 39,172 699
Multi-family residential . . . . . -- -- 319 --
Commercial real estate . . . . . . -- -- 60,495 --
Construction and land . . . . . . . -- -- 15,925 --
Home equity . . . . . . . . . . . . -- -- -- --
Other loans:
Student loans . . . . . . . . . . . -- -- -- --
Automobile leases . . . . . . . . . -- -- -- --
Passbook loans . . . . . . . . . . -- -- -- --
Discounted loans . . . . . . . . . -- -- 7,456 --
Commercial business loans . . . . . -- -- 8,947 --
Other consumer loans . . . . . . . -- -- 2,517 --
-------- -------- -------- --------
Total purchases . . . . . . . . . -- -- 134,831(2) 699
-------- -------- -------- --------
Total originations and purchases 89,890 287,950 305,551 165,701
-------- -------- -------- --------
Loans sold:
Mortgage loans:
Single-family residential . . . . . 410 -- -- --
Multi-family residential . . . . . -- -- -- --
Commercial real estate . . . . . . -- -- -- --
Construction and land . . . . . . . -- -- -- --
Home equity . . . . . . . . . . . . -- -- -- --
Other loans:
Student loans . . . . . . . . . . . 838 3,340 21,858 --
Automobile leases . . . . . . . . . -- -- -- --
Passbook loans . . . . . . . . . . -- -- -- --
Discounted loans . . . . . . . . . -- -- -- --
Commercial business loans . . . . . -- -- -- --
Other consumer loans . . . . . . . -- -- -- --
-------- -------- -------- --------
Total sold . . . . . . . . . . . 1,248 3,340 21,858 --
Transfers to real estate owned . . 725 1,629 1,147 373
Charge-offs . . . . . . . . . . . . . . 293 2,373 615 277
Repayments . . . . . . . . . . . . . . 77,000 113,881 79,907 68,442
-------- -------- -------- --------
Net activity in loans . . . . . . . . . 10,624 166,727 202,024 96,609
-------- -------- -------- --------
Gross loans held at end of period . . . $995,404 $984,780 $818,053 $616,029
- ------------ ======== ======== ======== ========
</TABLE>
(1) Includes amounts drawn on overdraft accounts.
(2) Includes $124.2 million of loans acquired from Gateway.
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The lending activities of Staten Island Savings are subject to written
underwriting standards and loan origination procedures established by the
Bank's Board of Trustees and management. Applications for mortgage and other
loans are taken at all of the Bank's branch offices. In addition, the Bank's
business development officers, loan officers and branch managers call on
individuals in the Bank's market area in order to solicit new loan originations
as well as other banking relationships. The Bank also relies on independent
mortgage brokers, a group of whom are authorized to accept and process
mortgage loan applications on the Bank's behalf, and a non-employee commercial
loan solicitor in order to obtain new loan applications. All loan applications
are forwarded to the Bank's loan origination center for underwriting and
approval. The Bank's employees at the loan origination center supervise the
process of obtaining credit reports, appraisals and other documentation
involved with a loan. The Bank requires that a property appraisal be obtained
in connection with all new mortgage loans. Property appraisals are performed
by an independent appraiser from a list approved by the Bank's Board of
Trustees. Staten Island Savings requires that title insurance and hazard
insurance be maintained on all security properties (except for home equity
loans) and that flood insurance be maintained if the property is within a
designated flood plain.
Certain officers of the Bank have been authorized by the Board of
Trustees to approve loans up to certain designated amounts. Provided that the
total amount outstanding to a borrower would not exceed $8.9 million, the Loan
Review Committee of the Board of Trustees must approve all loans where new
monies advanced would increase borrowers or guarantors total outstanding credit
with the Bank above $750,000. Loans in excess of $2.5 million must be approved
by the full Board of Trustees of the Bank.
A federal savings association generally may not make loans to one
borrower and related entities in an amount which exceeds 15% of its unimpaired
capital and surplus, although loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. However, with certain exceptions,
the Bank generally has adhered to a more restrictive limit of loans to one
borrower and related entities of 5% of the Bank's net worth or $8.9 million at
April 30, 1997. At such date, the Bank had one relationship in excess of its
internal lending limit consisting of an aggregate of $12.3 million of loans to
a local developer and related persons or entities, all of which were performing
in accordance with their terms at April 30, 1997. Subsequent to the
Conversion, the Bank may reconsider its internal lending limit due to its
increased capital, but does not currently anticipate increasing such limit to
an amount significantly more than the current dollar limit.
SINGLE-FAMILY RESIDENTIAL AND HOME EQUITY LOANS. Substantially all of
the Bank's single-family residential mortgage loans consist of conventional
loans. Conventional loans are loans that are neither insured by the Federal
Housing Administration ("FHA") or partially guaranteed by the Department of
Veterans Affairs ("VA"). The vast majority of the Bank's single-family
residential mortgage loans are secured by properties located in Staten Island
and, to a lesser extent, Brooklyn and other areas of New York. Historically,
the Bank has retained substantially all mortgage loans which it has originated
and has not
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<PAGE> 115
engaged in sales of residential mortgage loans. As of April 30, 1997, $755.5
million, or 77.4%, of the Bank's net loans consisted of single-family
residential mortgage loans. The Bank originated $56.6 million of single-family
residential mortgage loans in the four months ended April 30, 1997 and $181.2
million, $105.4 million and $120.2 million in 1996, 1995 and 1994, respectively.
The Bank anticipates that a significant portion of its future new loan
originations will continue to be single-family residential mortgage loans.
The Bank's residential mortgage loans have either fixed rates of
interest or interest rates which adjust periodically during the term of the
loan. Fixed-rate loans generally have maturities ranging from 15 to 30 years
and are fully amortizing with monthly or bi-monthly loan payments sufficient to
repay the total amount of the loan with interest by the end of the loan term.
The Bank's fixed-rate loans generally are originated under terms, conditions
and documentation which permit them to be sold to U.S. Government-sponsored
agencies, such as the Federal Home Loan Mortgage Corporation ("FHLMC"), and
other investors in the secondary market for mortgages. At April 30, 1997,
$448.7 million, or 59.4%, of the Bank's single-family residential mortgage
loans were fixed-rate loans. Substantially all of the Bank's single-family
residential mortgage loans contain due-on-sale clauses, which permit the Bank
to declare the unpaid balance to be due and payable upon the sale or transfer
of any interest in the property securing the loan. The Bank enforces such
due-on-sale clauses.
The adjustable-rate single-family residential mortgage ("ARM") loans
currently offered by the Bank have interest rates which adjust every one, three
or five years in accordance with a designated index such as one-, three- or
five-year U.S. Treasury obligations adjusted to a constant maturity ("CMT"),
plus a stipulated margin. In addition, the Bank offers an ARM with a
fixed-rate for the first ten years and which adjusts on an annual basis
thereafter. At April 30, 1997, the Bank's five-year and ten-year ARM loans
amounted to $170.2 million and $32.2 million, respectively. The Bank's
adjustable-rate single-family residential real estate loans generally have a
cap of 2% or 3% on any increase or decrease in the interest rate at any
adjustment date, and include a specified cap on the maximum interest rate over
the life of the loan, which cap generally is 5% or 6% above the initial rate.
From time to time, based on prevailing market conditions, the Bank may offer
ARM loans with initial rates which are below the fully indexed rate. Such
loans generally are underwritten based on the fully indexed rate. The Bank's
adjustable-rate loans require that any payment adjustment resulting from a
change in the interest rate of an adjustable-rate loan be sufficient to result
in full amortization of the loan by the end of the loan term and, thus, do not
permit any of the increased payment to be added to the principal amount of the
loan, or so-called negative amortization. At April 30, 1997, $306.8 million or
40.6% of the Bank's single-family residential mortgage loans were
adjustable-rate loans.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase, the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. The Bank believes that these risks, which have not had a material
adverse
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<PAGE> 116
effect on the Bank to date, generally are less than the risks associated with
holding fixed-rate loans in an increasing interest rate environment.
The volume and types of ARMs originated by the Bank have been affected
by such market factors as the level of interest rates, competition, consumer
preferences and availability of funds. In recent periods, demand for
single-family ARMs has been relatively weak due to the prevailing low interest
rate environment and consumer preference for fixed-rate loans. Accordingly,
although the Bank will continue to offer single-family ARMs, there can be no
assurance that in the future the Bank will be able to originate a sufficient
volume of single-family ARMs to increase or maintain the proportion that these
loans bear to total loans.
The Bank's single-family residential mortgage loans generally do not
exceed $500,000. In addition, the maximum loan-to-value ("LTV") ratio for the
Bank's single-family residential mortgage loans generally is 95% of the
appraised value of the security property, provided, however, that private
mortgage insurance is obtained on the portion of the principal amount that
exceeds 80% of the appraised value.
At April 30, 1997, the Bank's home equity loans amounted to $29.9
million or 3.1% of the Bank's net loans. The preponderance of the Bank's home
equity loans are structured as fixed-rate, fixed-term loans, although the Bank
also offers floating rate home equity lines of credit. Home equity loans, like
single-family residential mortgage loans, are secured by the underlying equity
in the borrower's residence. However, the Bank generally obtains a second
mortgage position to secure its home equity loans. The Bank's home equity
loans generally require LTV ratios of 80% or less after taking into
consideration any first mortgage loan.
COMMERCIAL REAL ESTATE LOANS AND MULTI-FAMILY RESIDENTIAL LOANS. At
April 30, 1997, the Bank's commercial real estate loans and multi-family
residential mortgage loans amounted to $112.3 million and $29.0 million,
respectively, or 11.5% and 3.0%, respectively, of the Bank's net loan
portfolio. A substantial portion of the Bank's commercial real estate loans
were acquired from Gateway. While the Bank retained all of the commercial loan
personnel from Gateway, the Bank has revised and strengthened the loan
underwriting standards with respect to commercial real estate and multi-family
residential mortgage loans.
The Bank's commercial real estate loans generally are secured by small
office buildings, retail and industrial use buildings, strip shopping centers
and other commercial uses located in the Bank's market area. The Bank's
commercial real estate loans seldom exceed $1.0 million and, as of April 30,
1997, the average size of the Bank's commercial real estate loans was $305,000.
The Bank originated $4.8 million of commercial real estate loans during the
four months ended April 30, 1997 compared to $35.7 million, $13.6 million and
$6.1 million, respectively, of commercial real estate loan originations in
1996, 1995 and 1994.
The Bank's multi-family residential real estate loans are concentrated
in Brooklyn and, to a lesser extent, Staten Island. The Bank originated $3.2
million of multi-family
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<PAGE> 117
residential real estate loans during the four months ended April 30, 1997
compared to $2.1 million, $3.6 million and $5.8 million, respectively, of
originations in 1996, 1995 and 1994. The Bank generally has not been a
substantial originator of multi-family residential real estate loans due to,
among other factors, the relatively limited amount of apartment and other
multi-family properties in Staten Island.
The Bank's commercial real estate and multi-family residential loans
generally are three- or five-year adjustable-rate loans indexed to three-or
five-year U.S. Treasury obligations adjusted to a CMT, plus a margin.
Generally, fees of between 50 basis points and 1.50% of the principal loan
balance are charged to the borrower upon closing. The Bank generally charges
prepayment penalties on commercial real estate and multi-family residential
mortgage loans. Although terms for multi-family residential and commercial
real estate loans may vary, the Bank's underwriting standards generally provide
for terms of up to 25 years with amortization of principal over the term of the
loan and LTV ratios of not more than 75%. Generally, the Bank obtains personal
guarantees of the principals as additional security for any commercial real
estate and multi-family residential loans.
The Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the market, location and physical
condition. The Bank has also generally imposed a debt coverage ratio (the
ratio of net cash from operations before payment of debt service to debt
service) of not less than 125%. The underwriting analysis also includes credit
checks and a review of the financial condition of the borrower and guarantor,
if applicable. An appraisal report is prepared by an independent appraiser
commissioned by the Bank to substantiate property values for every commercial
real estate and multi-family loan transaction. All appraisal reports are
reviewed by the Bank prior to the closing of the loan.
Commercial real estate and multi-family residential lending entails
substantially different risks when compared to single-family residential
lending because such loans often involve large loan balances to single
borrowers and because the payment experience on such loans is typically
dependent on the successful operation of the project or the borrower's
business. These risks can also be significantly affected by supply and demand
conditions in the local market for apartments, offices, warehouses, or other
commercial space. The Bank attempts to minimize its risk exposure by limiting
such lending to proven businesses, only considering properties with existing
operating performance which can be analyzed, requiring conservative debt
coverage ratios, and periodically monitoring the operation and physical
condition of the collateral.
As of April 30, 1997, $8.9 million or 7.9% of the Bank's commercial
real estate loans and $1.5 million or 5.0% of its multi-family residential real
estate loans were considered non-performing loans.
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<PAGE> 118
CONSTRUCTION AND LAND LOANS. The Bank originates primarily
residential construction loans to local (primarily Staten Island) real estate
builders, generally with whom it has an established relationship. To a
significantly lesser extent, the Bank originates such loans to individuals who
have a contract with a builder for the construction of their residence. The
Bank's construction loans are secured by property located primarily in the
Bank's market area. At April 30, 1997, construction and land loans amounted to
$31.4 million or 3.2% of the Bank's net loan portfolio of which $20.6 million
consisted of construction loans and $10.5 million consisted of land loans. In
addition, at such date, the Bank had $8.1 million of undisbursed funds for
construction loans in process. The Bank originated $11.3 million of
construction and land loans during the four months ended April 30, 1997,
compared to $32.1 million, $15.4 million and $1.7 million of construction loans
in 1996, 1995 and 1994, respectively. Prior to its acquisition of Gateway, the
Bank generally was not an active originator of construction and land loans.
The Bank's construction loans generally have floating rates of
interest for a term of up to two years. Construction loans to builders are
typically made with a maximum loan to value ratio of 75%. The Bank's
construction loans to local builders are made on either a pre-sold or
speculative (unsold) basis. However, the Bank generally limits the number of
unsold homes under construction to its builders, with the amount dependent on
the reputation of the builder, the present outstanding obligations of the
builder, the location of the property and prior sales of homes in the
development and the surrounding area. The Bank generally limits the number of
construction loans for speculative units to two to four model homes per
project.
Prior to making a commitment to fund a construction loan, the Bank
requires an appraisal of the property by independent appraisers approved by the
Board of Trustees. The Bank's staff also reviews and inspects each project at
the commencement of construction and prior to every disbursement of funds
during the term of the construction loan. Loan proceeds are disbursed after
inspections of the project based on a percentage of completion. The Bank
requires monthly interest payments during the construction term.
The Bank originates land loans to local developers for the purpose of
holding or developing the land (i.e., roads, sewer and water) for sale. Such
loans are secured by a lien on the property, are generally limited to 60% of
the appraised value of the secured property and are typically made for a period
of up to two years with a floating interest rate based on the prime rate. The
Bank requires monthly interest payments during the term of the land loan. The
principal of the loan is reduced as lots are sold and released. All of the
Bank's land loans are secured by property located in its market area. In
addition, the Bank generally obtains personal guarantees from its borrowers and
originates such loans to developers with whom it has established relationships.
Construction and land lending generally is considered to involve a
higher level of risk as compared to permanent single-family residential
lending, due to the concentration of principal in a limited number of loans and
borrowers and the effects of general economic conditions on developers and
builders. Moreover, a construction loan can involve additional
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<PAGE> 119
risks because of the inherent difficulty in estimating both a property's value
at completion of the project and the estimated cost (including interest) of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. In addition, speculative construction loans
to a builder are not pre-sold and thus pose a greater potential risk to the
Bank than construction loans to individuals on their personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction and land lending generally and
by limiting its construction and land lending to primarily residential
properties. In addition, the Bank has adopted underwriting guidelines which
impose lower loan-to-value and higher debt service ratios than typically
utilized by Gateway and other requirements for loans which are believed to
involve higher elements of credit risk, by limiting the geographic area in
which the Bank will do business to its existing market and by working with
builders with whom it has established relationships. It is also the Bank's
policy to obtain personal guarantees from the principals of its corporate
borrowers on its construction and land loans.
OTHER LOANS. The Bank offers a variety of other or non-mortgage
loans. Such other loans, which include commercial business loans, discounted
loans, passbook loans, student loans, overdraft loans and a variety of other
personal loans, amounted to $37.3 million or 3.8% of the Bank's loan portfolio
at April 30, 1997. Prior to April 1997, the Bank engaged in a program of
advancing funds to a national automobile leasing company on a non-recourse
basis, with the Bank's advances secured by a pledge and assignment of the
leasing company's interests in automobile leases made to its customers. Under
the program, the leasing company extended automobile leases to customers and
then presented such leases to the Bank for its underwriting, document review
and acceptance or rejection. The Bank only accepted lease assignments which
met the Bank's underwriting guidelines. The leasing company recently was
purchased by another financial institution which resulted in a termination of
the Bank's automobile leasing activities during the four months ended April 30,
1997 and the repayment of the $29.8 million of loans secured by automobile
leases then outstanding at no loss to the Bank.
At April 30, 1997, the Bank's commercial business loans amounted to
$8.3 million or 0.9% of the Bank's loan portfolio. The Bank's commercial
business loans have a term of up to five years and may have either fixed-rates
of interest or, to a lesser extent, floating rates tied to the prime rate. The
Bank's commercial business loans are made to small- to medium-sized businesses
within the Bank's market area. A substantial portion of the Bank's small
business loans are unsecured with the remainder generally secured by perfected
security interests in accounts receivable and inventory or other corporate
assets. In addition, the Bank generally obtains personal guarantees from the
principals of the borrower with respect to all commercial business loans. In
addition, the Bank may extend loans for a commercial business purpose which are
secured by a mortgage on the proprietor's home or the business property. In
such cases, the loan, while underwritten to commercial business loan standards,
is reported as a single-family or commercial real estate mortgage loan, as the
case may be. The Bank estimates that, at April 30, 1997, it had $23.9 million
and $112.3 million outstanding in loans for commercial business purposes which
were classified as
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single-family residential mortgage loans and commercial real estate mortgage
loans, respectively. Commercial business loans generally are deemed to involve
a greater degree of risk than single-family residential mortgage loans. See
"Risk Factors - Risks Related to Commercial Real Estate Loans, Construction and
Land Loans and Commercial Business Loans."
The Bank's other loans also include discounted loans, which amounted
to $7.1 million or 0.7% of the Bank's loans at such date. The Bank's
discounted loans, which are made primarily to local businesses, are designed to
provide an interim source of financing and require no payment of principal or
interest until the due date of the loan, which may be up to one year but
generally is 60 or 90 days from the date of origination. While the borrower is
contractually obligated to repay the entire face amount of the loan at
maturity, the Bank advances only a portion of the face amount with the
difference constituting the interest component. In addition to personal
guarantees, discounted loans may also be secured by perfected security
interests in receivables. However, due to the lack of an amortization schedule
and, in certain cases, the absence of perfected security interests, discounted
loans generally may be deemed to involve a greater risk of loss than
single-family residential mortgage loans.
At April 30, 1997, the Bank had $5.0 million of student loans in
portfolio. The Bank has been and continues to be an active originator of
student loans. Substantially, all of these loans are originated under the
auspices of the New York State Higher Education Services Corporation
("NYSHESC"). Under the terms of these loans, no repayment is due until the
student's graduation, with 98% of the principal guaranteed by the NYSHESC. The
terms and rates of these loans are established by the NYSHESC. Commencing in
1995, the Bank's general practice is to sell its student loans into the
secondary market as the loans reach repayment status.
The balance of the Bank's other loans consist of loans secured by
passbook accounts, loans on overdraft accounts, home improvement loans and
various other personal loans.
LOAN ORIGINATION AND LOAN FEES. In addition to interest earned on
loans, the Bank receives loan origination fees or "points" for many of the
loans it originates. Loan points are a percentage of the principal amount of
the mortgage loan and are charged to the borrower in connection with the
origination of the loan.
In accordance with SFAS No. 91, which addresses the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as
interest income over the contractual life, adjusted for prepayments, of the
related loans as an adjustment to the yield of such loans. At April 30, 1997,
the Bank had $3.4 million of such deferred loan fees.
ASSET QUALITY
GENERAL. As a part of the Bank's efforts to improve its asset
quality, it has developed and implemented an asset classification system. All
of the Bank's assets are subject to review under this classification system.
Loans are periodically reviewed and the classifications are reviewed by the
Board of Trustees on at least a quarterly basis. In addition, the Bank has
retained an independent third party consultant to, among other things, review
the Bank's classifications on a periodic basis.
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<PAGE> 121
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made 16 days after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency continues, late charges are
assessed and additional efforts are made to collect the loan. While the Bank
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest
income. As a matter of policy, the Bank does not accrue interest on loans past
due 90 days or more. See Note 1 of the Notes to Consolidated Financial
Statements.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
Pursuant to SOP 92-3 issued by the AICPA in April 1992, which provides guidance
on determining the balance sheet treatment of foreclosed assets in annual
financial statements for periods ending on or after December 15, 1992, there is
a rebuttable presumption that foreclosed assets are held for sale and such
assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value. The Bank's accounting for its real estate owned
complies with the guidance set forth in SOP 92-3.
DELINQUENT LOANS. The following table sets forth information
concerning delinquent mortgage loans at April 30, 1997, in dollar amounts and
as a percentage of each category of the Bank's loan portfolio. The amounts
presented represent the total outstanding principal balances of the related
loans, rater than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
April 30, 1997
-----------------------------------------------------------------
30-59 Days 60-89 Days
------------------------------ ------------------------------
Percent of Loan Percent of Loan
Amount Category Amount Category
---------- --------------- ---------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential:
Single-family . . . . . . . . . $5,523 0.73% $3,272 0.43%
Multi-family . . . . . . . . . 113 0.39 421 1.45
Commercial real estate . . . . . 2,112 1.88 862 0.77
Construction and land . . . . . . -- -- -- --
Home equity . . . . . . . . . . . 164 .55 302 1.00
------ ------
Total . . . . . . . . . . . . . $7,912 .83% $4,857 0.51%
====== ======
</TABLE>
In addition to delinquent mortgage loans, at April 30, 1997, $1.2
million or 3.2% of the Bank's other loans were delinquent 30 days or more but
less than 90 days.
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<PAGE> 122
NON-PERFORMING ASSETS. The following table sets forth information
with respect to non-performing assets identified by the Bank, including
non-accrual loans and other real estate owned.
<TABLE>
<CAPTION>
At December 31,
At April 30, -----------------------------------------------------------------
1997 1996 1995(1) 1994 1993 1992
-------------- -------- ---------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Accruing loans 90 days or more
past due:
Mortgage loans . . . . . . . $ -- $ -- $ -- $ -- $ -- $ --
Other loans . . . . . . . . . -- 1 302 415 262 544
--------- --------- --------- --------- --------- ---------
Total accruing loans -- 1 302 415 262 544
--------- --------- --------- --------- --------- ---------
Non-accrual loans:
Mortgage loans:
Single-family residential 9,984 10,417 11,159 6,692 7,240 3,848
Multi-family residential 1,461 322 98 86 58 --
Commercial real estate . 8,876 11,102 11,653 560 -- --
Construction and land . . 2,714 -- 379 240 -- --
Home equity . . . . . . . 556 644 124 -- -- 132
Other loans:
Automobile leases . . . . -- 15 18 -- -- --
Commercial business loans 300 81 49 -- -- --
Discounted loans . . . . 247 25 126 -- -- --
Other loans . . . . . . . 277 144 307 61 157 191
-------- --------- --------- --------- --------- ---------
Total non-accruing
loans . . . . . . 24,415 22,750 23,913 7,639 7,455 4,169
-------- --------- --------- --------- --------- ---------
Total non-performing loans . . . 24,415 22,751 24,215 8,054 7,717 4,713
-------- --------- --------- --------- --------- ---------
Other real estate owned, net . . 1,317 1,103 627 373 766 1,755
-------- --------- --------- --------- --------- ---------
Total non-performing assets . . . 25,732 23,854 24,842 8,427 8,483 6,468
-------- --------- --------- --------- --------- ---------
Total non-performing assets . . . $ 25,732 $ 23,854 $ 24,842 $ 8,427 $ 8,483 $ 6,468
======== ======== ======== ======== ======== ========
Non-performing assets to total
loans . . . . . . . . . . . . . 2.59% 2.42% 3.04% 1.37% 1.63% 1.41%
Non-performing assets to total
assets . . . . . . . . . . . . 1.39% 1.34% 1.44% 0.61% 0.62% 0.48%
Non-performing loans to total
loans . . . . . . . . . . . . . 2.45% 2.31% 2.96% 1.31% 1.49% 1.03%
Non-performing loans to total
assets . . . . . . . . . . . . 1.32% 1.28% 1.40% 0.59% 0.57% 0.35%
</TABLE>
- ------------------
(1) The acquisition of Gateway occurred in August 1995.
The primary reason for the increase in non-performing assets at April
30, 1997 and December 31, 1996 and 1995 compared to earlier periods was the
continuing non-performance of certain loans obtained as part of the
acquisition of Gateway. Of the Bank's $25.7 million of non-performing assets
at April 30, 1997, $14.3 million or 55.5% relate to loans underwritten by
Gateway and acquired by the Bank in August 1995. Gateway was an active
originator of commercial real estate loans, construction and land loans and, to
a lesser extent, commercial business loans, all of which generally are deemed
to involve more risk than the single-family residential loans which the Bank
traditionally has emphasized. While the Bank has continued to originate
commercial real estate loans, construction and land loans and commercial
business loans, and intends to increase its level of originations of such
loans, management has implemented loan underwriting policies and procedures
which it believes are more conservative than those previously utilized by
Gateway.
The interest income that would have been recorded during the four
months ended April 30, 1997 and the year ended December 31, 1996, if all of the
Bank's non-performing
79
<PAGE> 123
loans at the end of such period had been current in accordance with their terms
during such periods was $504,000 and $696,000, respectively. The actual amount
of interest recorded as income (on a cash basis) on such loans during the
periods amounted to $141,000 and $925,000, respectively.
CLASSIFIED AND CRITICIZED ASSETS. Federal regulations require that
each insured institution classify its assets on a regular basis. Furthermore,
in connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three 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 insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic 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 continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. At April 30, 1997, the Bank had an aggregate of
$30.2 million of classified assets, all of which were classified substandard.
In addition, at such date the Bank had $2.4 million of assets which were deemed
special mention.
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The Bank's policy is to establish
reserves for estimated losses on delinquent loans when it determines that
losses are expected to be incurred on such loans. The allowance for losses on
loans is maintained at a level believed adequate by management to absorb
potential losses in the portfolio. Management's determination of the adequacy
of the allowance is based on an evaluation of the portfolio, past loss
experience, current economic conditions, volume, growth and composition of the
portfolio, and other relevant factors. The allowance is increased by
provisions for loan losses which are charged against income. As shown in the
table below, at April 30, 1997, the Bank's allowance for loan losses amounted
to $14.7 million or 60.2% and 1.5% of the Bank's non-performing loans and total
loans receivable, respectively. The Bank's provision to the allowance for
possible loan losses amounted to $4.7 million for the four months ended April
30, 1997 and $1.0 million during 1996. Such provisions during the 1997 period
and in 1996 were substantially higher than the Bank traditionally made in
earlier periods and were the result of, among other things, management's
continuing review of the risk elements in the Bank's loan portfolio. As part
of its 1997 review, management considered a report prepared by an independent
third-party consultant with respect to the risk elements in the Bank's loan
portfolio and an analysis prepared by the Bank's management with respect to
certain trends affecting the Bank's loan portfolio such as charge-offs,
delinquencies and other external economic factors including interest rates.
Such trend analysis and third-party report indicated certain additional
potential risk factors to be considered in estimating the level of the
allowance for loan losses. In establishing provisions in the 1997 period and
in 1996, management of the Bank also considered the overall increase in the
Bank's loan portfolio, the potential increased risk of loss generally
attributed to commercial real estate loans, construction and land loans and
commercial business loans as well as management's continuing experience with
the loan portfolio acquired from Gateway (which constituted more than half of
the Bank's total non-performing assets at April 30, 1997). The Bank has
experienced a longer than anticipated work-out period with respect to such
Gateway loans, and despite charge-offs of $405,000 in the four months ended
April 30, 1997 and $2.7 million in 1996, the Bank's total non-performing loans
have not been reduced but
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<PAGE> 124
have increased slightly since December 31, 1995. Based on the various
factors considered in its 1997 review of risk elements, and in particular the
longer than anticipated work-out periods for the Gateway portfolio, management
also determined that in certain circumstances more aggressive work-out
procedures for non-performing loans would be warranted. The fact that more
aggressive work-out procedures could increase the risk of loss with respect to
such loans also affected management's determination to increase the provision
levels during 1997. While no assurance can be given that future charge-offs
and/or additional provisions will not be necessary, management of the Bank
believes that, as of April 30, 1997, the allowance for possible loan losses was
adequate.
Effective December 21, 1993, the OTS, in conjunction with the Office
of the Comptroller of the Currency, the FDIC and the Federal Reserve Board,
issued a Policy Statement regarding an institution's allowance for loan and
lease losses. The Policy Statement, which reflects the position of the issuing
regulatory agencies and does not necessarily constitute GAAP, includes guidance
(i) on the responsibilities of management for the assessment and establishment
of an adequate allowance and (ii) for the agencies' examiners to use in
evaluating the adequacy of such allowance and the policies utilized to
determine such allowance. The Policy Statement also sets forth quantitative
measures for the allowance with respect to assets classified substandard and
doubtful and with respect to the remaining portion of an institution's loan
portfolio. Specifically, the Policy Statement sets forth the following
quantitative measures which examiners may use to determine the reasonableness
of an allowance: (i) 50% of the portfolio that is classified doubtful; (ii)
15% of the portfolio that is classified substandard; and (iii) for the portions
of the portfolio that have not been classified (including loans designated
special mention), estimated credit losses over the upcoming 12 months based on
facts and circumstances available on the evaluation date. While the Policy
Statement sets forth this quantitative measure, such guidance is not intended
as a "floor" or "ceiling." The Bank's policy for establishing loan losses is
not inconsistent with the Policy Statement.
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<PAGE> 125
The following table sets forth the activity in the Bank's allowance
for possible loan losses during the periods indicated.
<TABLE>
<CAPTION>
Four Months Ended
April 30, Year Ended December 31,
-------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance at beginning of
period . . . . . . . . . . $9,977 $10,704 $10,704 $ 3,124 $ 3,180 $ 2,303 $ 950
----- ------ ------ ------ ------ ------- -----
Allowance from acquisition . -- -- -- 8,026 -- -- --
Provisions . . . . . . . . . 4,667 -- 1,000 -- 76 1,286 2,243
Charge-offs:
Mortgage loans:
Single-family
residential . . . . . . 175 30 1,590 606 107 463 443
Multi-family
residential . . . . . . -- -- -- -- 36 67 --
Commercial real estate. 116 10 376 -- -- -- --
Other loans . . . . . . . 114 30 729 176 275 386 698
---- --- ------ ----- ----- ----- ------
Total charge-offs . . . 405 70 2,695 782 418 916 1,141
Recoveries:
Mortgage loans:
Single-family
residential . . . . . . 164 156 408 198 166 335 79
Multi-family
residential . . . . . . -- -- -- -- 10 43 --
Commercial real estate. 194 360 413 19 -- -- --
Other loans . . . . . . . 90 31 147 119 110 129 172
------- ------- ------ ------- ------- ------ -------
Total recoveries . . . 448 547 968 336 286 507 251
------- ------- ------ ------- ------- ------ -------
Allowance at end of period . $14,687 $11,181 $9,977 $10,704 $ 3,124 $3,180 $ 2,303
====== ====== ===== ====== ====== ===== ======
Allowance for possible loan
losses to total
nonperforming loans
at end of period . . . . . . . 60.16% 40.84% 43.85% 44.20% 38.79% 41.21% 48.86%
===== ===== ===== ===== ===== ===== =====
Allowance for possible loan
losses to total
loans at end of period . . . . 1.48% 1.34% 1.02% 1.32% 0.51% 0.62% 0.50%
==== ==== ==== ==== ==== ==== ====
</TABLE>
82
<PAGE> 126
The following table sets forth information concerning the allocation
of the Bank's allowance for loan losses by loan category at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
April 30, 1997 1996 1995
----------------------- ---------------------- -----------------------
Percent Percent Percent
of of of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to to to
Total Total Total
Amount Loans Amount Loans Amount Loans
---------- ----------- ---------- ----------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential . . . . $ 7,132 80.34% $3,192 77.20% $ 2,002 77.50%
Other . . . . . . . . 7,066 17.79 5,842 17.98 7,735 17.77
Other loans . . . . . . 489 3.82 943 6.55 967 6.84
---- ------ ----- ------ ----- ------
Total . . . . . . $14,687 101.94% $9,977 101.73% $10,704 102.11%
====== ====== ===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1994 1993 1992
----------------------- ---------------------- -----------------------
Percent Percent Percent
of of of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to to to
Total Total Total
Amount Loans Amount Loans Amount Loans
---------- ----------- ---------- ----------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential . . . . $2,100 85.78% $2,031 86.25% $1,451 83.61%
Other . . . . . . . . -- 8.39 -- 8.00 -- 8.85
Other loans . . . . . . 1,024 6.99 1,149 6.84 852 8.51
----- ------ ----- ------ ----- ------
Total . . . . . . $3,124 101.16% $3,180 101.09% $2,303 100.98%
===== ====== ===== ====== ===== ======
</TABLE>
83
<PAGE> 127
The Bank will continue to monitor and modify its allowance for
possible loan losses as conditions dictate. While management believes that,
based on information currently available, the Bank's allowance for possible
loan losses is sufficient to cover losses inherent in its loan portfolio at
this time, no assurance will be given that the Bank's level of allowance for
loan losses will be sufficient to absorb future possible loan losses incurred
by the Bank or that future adjustments to the allowance for possible loan
losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for possible loan losses. In
addition, the OTS as an integral part of its examination process periodically
reviews the Bank's allowance for possible loan losses. Such agency may require
the Bank to make additional provisions for estimated possible loan losses based
upon judgments different from those of management.
SECURITIES ACTIVITIES
GENERAL. As of April 30, 1997, the Bank had an aggregate of $691.9
million of securities, or 37.4% of the Bank's total assets at such date. At
such date, the unrealized appreciation on the Bank's securities available for
sale amounted to $3.5 million, net of income taxes. The securities investment
policy of the Bank, which has been established by the Board of Trustees, is
designed, among other things, to assist the Bank in its asset/liability
management policies. The Bank's investment policy emphasizes principal
preservation, favorable returns on investment, maintaining liquidity within
designated guidelines, minimizing credit risk and maintaining flexibility.
Interest and dividend income from the Bank's securities portfolio generally
provides the second largest source of income to the Bank after interest on
loans. The Bank's current securities investment policy permits investments in
various types of liquid assets including obligations of the U.S. Treasury and
federal agencies, investment grade corporate obligations, various types of
mortgage-backed and mortgage-related securities, commercial paper, certificates
of deposit, and federal funds sold to financial institutions approved by the
Board of Trustees.
The Bank converted to a federally chartered mutual savings bank in
July 1997. Prior to that date, the Bank operated as a New York-chartered
mutual savings bank. While operating under its New York charter, the Bank was
permitted to make certain investments in equity securities and stock mutual
funds. At April 30, 1997, these equity investments totaled $52.8 million,
comprised primarily of a $23.0 million investment in a common stock mutual fund
designed specifically for New York State savings banks, a $14.4 million
investment divided among two additional mutual funds (which are designated as
trading account securities), $10.5 million of preferred stocks (generally
issued by U.S. Government agencies or government sponsored enterprises such as
the FNMA and FHLMC) and $4.9 million of various other equity securities.
Pursuant to current law, the Bank is required to divest or transfer such
securities except for preferred stock issued by U.S. Government agencies and
government sponsored enterprises. The Bank expects that it will either dispose
of such securities to a third-party or sell or transfer such securities to the
Company.
The Bank currently does not participate in hedging programs, interest
rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. These
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<PAGE> 128
activities require the prior approval of the Board of Trustees under the
Bank's securities investment policy. Similarly, the Bank has not and does not
invest in mortgage derivative securities which are deemed to be "high risk," or
purchase privately issued securities which are not rated investment grade. The
Bank tests its securities on at least a semi-annual basis to ensure that they
would not be considered "high risk" securities under Federal banking laws.
At April 30, 1997, $677.5 million of the Bank's securities were
classified as available for sale and $14.4 million were classified as trading
account. In December 1995, the Bank, pursuant to SFAS No. 115, reviewed its
securities portfolio and reclassified all of its securities then classified as
held to maturity as available for sale. Such classification as available for
sale provides the Bank with the flexibility to sell securities if deemed
appropriate in response to, among other factors, changes in interest rates.
Securities which are held to maturity are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts using a method which
approximates a level yield. Securities classified as available for sale are
carried at fair value. Unrealized gains and losses on available for sale
securities are recognized as direct increases or decreases in equity, net of
applicable income taxes. See Notes 1 and 4 of the Notes to Consolidated
Financial Statements. Securities classified as trading account are carried at
market value with any increase or decrease in unrealized appreciation or
depreciation included in the Bank's income statement. In the four months ended
April 30, 1997 and the years ended December 31, 1996 and 1995, the Bank
recognized losses on securities transactions of $508,000, $2.7 million and
$305,000, respectively.
The Bank's investment policy provides management with the authority to
periodically sell securities provided, among other things, any losses on such
sales do not exceed $500,000, in which event prior approval of the Board of
Trustees is required. Generally, management will enter into such securities
sales only if it believes that it can replace the securities sold with newly
purchased securities that, due to their higher yield, will offset the losses
within a twelve month period. In addition, during the fourth quarter of each
of 1996 and 1995, management and the Board of Trustees reviewed the Bank's
entire securities portfolio and authorized extensive sales as part of its
securities restructuring efforts. In each case, the Bank substantially
replaced the securities sold with securities having a significantly higher
(over 75 basis points) projected yield without, in management's view,
sacrificing credit quality or liquidity. In addition, sales in the fourth
quarter of 1995 included certain lower grade ("A rated") corporate debt
securities. Subsequent to the Conversion, the Bank does not anticipate that it
will, as a matter of course, continue to authorize similar amounts of losses in
its securities activities.
85
<PAGE> 129
The following table sets forth the activity in the Bank's aggregate
securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
Four Months Ended
April 30, Year Ended December 31,
----------------------- ----------------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Securities at beginning of period . . $703,134 $788,622 $788,622 $699,470 $773,636
Purchases:
U.S. government and agencies . . . 15,073 -- 29,670 215,948 998
State and municipals . . . . . . . -- -- -- 11,591 --
Agency mortgage-backed securities . 15,452 60,476 212,634 136,610 98,983
Agency CMOs . . . . . . . . . . . . 17,976 9,975 35,079 19,944 --
Private CMOs . . . . . . . . . . . -- 29,843 53,258 116 --
Other debt securities . . . . . . . -- -- -- 350 70,608
Marketable equity securities . . . 4,780 8,389 15,059 4,614 24,471
--------- --------- --------- --------- ---------
Total purchases . . . . . . . . . 53,281 108,683 345,700 389,173 195,060
Sales:
U.S. government and agencies . . . 9,956 9,500 71,051 5,000 6,084
State and municipals . . . . . . . 3,045 -- 70 12,132 113
Agency mortgage-backed securities . -- 8,115 113,617 -- --
Agency CMOs . . . . . . . . . . . . -- -- 16,332 -- --
Private CMOs . . . . . . . . . . . -- -- -- -- --
Other debt securities . . . . . . . -- 1,359 36,042 99,122 2,530
Marketable equity securities . . . 6,364 3,275 3,305 5,272 18,462
--------- --------- --------- --------- ---------
Total sales . . . . . . . . . . . 19,365 22,249 240,417 121,526 27,189
Repayments and prepayments:
U.S. government and agencies . . . 6,750 17,300 46,800 53,610 37,300
State and municipals . . . . . . . -- -- -- 100 --
Agency mortgage-backed securities . 31,411 34,724 102,748 54,430 68,208
Agency CMOs . . . . . . . . . . . . 1,712 1,028 4,399 3 --
Private CMOs . . . . . . . . . . . 3,667 926 3,466 24 --
Other debt securities . . . . . . . -- 26,340 31,767 86,470 112,325
Marketable equity securities . . . -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total repayments and prepayments 43,540 80,318 189,180 194,637 217,833
Accretion of discount and amortization
of premium . . . . . . . . . . . . (93) (403) (692) (4,421) (7,306)
Unrealized gains or (losses) on
available-for-sale securities . . . (1,294) (10,779) (899) 20,563 (16,898)
Realized gains and losses on trading
assets . . . . . . . . . . . . . . (231) -- -- -- --
---------- ----------- ----------- ----------- -----------
Securities at end of period . . . . . $691,892 $783,556 $703,134 $788,622 $699,470
======= ======= ======= ======= =======
</TABLE>
86
<PAGE> 130
MORTGAGE-BACKED AND MORTGAGE-RELATED SECURITIES. At April 30, 1997,
the Bank's securities included $395.0 million, or 21.4% of total assets, of
mortgage participation certificates (which are also known as mortgage-backed
securities).
Mortgage-backed securities represent a participation interest in a
pool of single-family or multi-family mortgages. The principal and interest
payments on mortgage-backed securities are passed from the mortgage
originators, as servicer, through intermediaries (generally U.S. Government
agencies and government-sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such U.S. Government agencies and government sponsored enterprises,
which guarantee the payment of principal and interest to investors, primarily
include the FHLMC, the FNMA and the Government National Mortgage Association
("GNMA").
The FHLMC is a private corporation chartered by the U.S. Government.
The FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. The FNMA is a
private corporation chartered by the U.S. Congress with a mandate to establish
a secondary market for mortgage loans. The FNMA guarantees the timely payment
of principal and interest on FNMA securities. FHLMC and FNMA securities are
not backed by the full faith and credit of the United States, but because the
FHLMC and the FNMA are U.S. Government-sponsored enterprises, these securities
are considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans,
and the timely payment of principal and interest on GNMA securities are
guaranteed by the GNMA and backed by the full faith and credit of the U.S.
Government. Because the FHLMC, the FNMA and the GNMA were established to
provide support for low- and middle-income housing, there are limits to the
maximum size of loans that qualify for these programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
The Bank's mortgage-backed securities portfolio includes investments in
mortgage-backed securities backed by ARMs or securities which otherwise have an
adjustable rate feature.
The Bank's securities also include $96.2 million in interests in
collateralized mortgage obligations ("CMOs") (which are also known as
mortgage-related securities). CMOs have been developed in response to investor
concerns regarding the uncertainty of cash flows associated with the prepayment
option of the underlying mortgagor and are typically issued by governmental
agencies, governmental sponsored enterprises and special purpose entities, such
as trusts, corporations or partnerships, established by financial institutions
or other
87
<PAGE> 131
similar institutions. A CMO can be collateralized by loans or securities which
are insured or guaranteed by the FNMA, the FHLMC or the GNMA. As of April 30,
1997, $50.2 million of the Bank's CMOs were insured or guaranteed by the GNMA,
FNMA or FHLMC and the remaining $45.9 million of the Bank's CMOs were rated
"AAA" by national rating agencies. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders,
the cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the
underlying collateral among the separate CMO classes, different classes of
bonds are created, each with its own stated maturity, estimated average life,
coupon rate and prepayment characteristics. The regular interests of some CMOs
are like traditional debt instruments because they have stated principal
amounts and traditionally defined interest rate terms. Purchasers of certain
other CMOs are entitled to the excess, if any, of the issuer's cash inflows,
including reinvestment earnings, over the cash outflows for debt service and
administrative expenses. These CMOs may include instruments designated as
residual interests, which represent an equity ownership interest in the
underlying collateral, subject to the first lien of the investors in the other
classes of the CMO. Certain residual CMO interests may be riskier than many
regular CMO interests to the extent that they could result in the loss of a
portion of the original investment. Moreover, cash flows from residual
interests are very sensitive to prepayments and, thus, contain a high degree of
interest rate risk. As of April 30, 1997, the Bank's CMOs did not include any
residual interests or interest-only or principal-only securities. As a matter
of policy, the Bank does not invest in residual interests of CMOs or
interest-only and principal-only securities.
Mortgage-backed and mortgage-related securities generally yield less
than the loans which underlie such securities because of their payment
guarantees or credit enhancements which offer nominal credit risk. In
addition, mortgage-backed and related securities are more liquid than
individual mortgage loans and may be used to collateralize borrowings of the
Bank. Mortgage-backed securities issued or guaranteed by the FNMA or the FHLMC
(except interest-only securities or the residual interests in CMOs) are
weighted at no more than 20.0% for risk-based capital purposes, compared to a
weight of 50.0% to 100.0% for residential loans.
The Bank generally does not invest in mortgage-backed and
mortgage-related securities with estimated average lives exceeding 10 years.
At April 30, 1997, the estimated weighted average life of the Bank's
mortgage-backed and mortgage-related securities was approximately 3.6 years.
The actual maturity of a mortgage-backed or mortgage-related security may be
less than its stated maturity due to prepayments of the underlying mortgages.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management." Prepayments that are faster than
anticipated may shorten the life of the security and adversely affect its yield
to maturity. The yield is based upon the interest income and the amortization
of any premium or discount related to the mortgage-backed security. In
accordance with GAAP, premiums are amortized and discounts are accreted over
the estimated lives of the loans, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
88
<PAGE> 132
mortgage-backed or mortgage-related security, and these assumptions are
reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is
the most significant determinant of the rate of prepayments.
During periods of rising mortgage interest rates, if the coupon rates
of the underlying mortgages are less than the prevailing market interest rates
offered for mortgage loans, refinancings generally decrease and slow the
prepayment of the underlying mortgages and the related securities. Conversely,
during periods of falling mortgage interest rates, if the coupon rates of the
underlying mortgages exceed the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages and the related securities. Under such
circumstances, the Bank may be subject to reinvestment risk because to the
extent that the Bank's mortgage-backed and mortgage-related securities amortize
or prepay faster than anticipated, the Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate. At April 30,
1997, of the $489.4 million of mortgage-backed and mortgage-related securities,
an aggregate of $244.6 million were secured by fixed-rate securities and an
aggregate of $244.8 million were secured by adjustable-rate securities.
OTHER SECURITIES. Other than mortgage-backed and mortgage-related
securities, the Bank's securities consist primarily of U.S. Treasury and
Federal agency obligations, which amounted to $140.1 million at April 30, 1997,
marketable equity securities, which amounted to $41.8 million at April 30,
1997, and trading account securities, which amounted to $14.4 million at April
30, 1997. The Bank currently is in the process of liquidating its trading
account securities. In addition, as previously discussed, the Bank intends to
sell or transfer its marketable equity securities with the exception of agency
issued preferred stocks. As with its mortgage-backed and mortgage-related
securities, the Bank attempts to maintain a high degree of liquidity in its
other securities and generally does not invest in debt securities with terms to
maturity in excess of 10 years. As of April 30, 1997, the estimated term to
maturity of the Bank's other securities was 3.3 years.
The following table sets forth certain information regarding the
maturities of the Bank's other securities (all of which were classified as
available for sale) at April 30, 1997.
<TABLE>
<CAPTION>
Contractually Maturing
------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average 1-5 Average 6-10 Average Over 10 Average
Year Yield Years Yield Years Yield Years Yield
---------- ---------- --------- ----------- ------- ----------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency obligations. $29,399 6.33% $69,898 6.51% $40,832 6.92% $ -- --%
Other . . . . . . . . . . . . 1,010 5.77 100 8.13 -- -- -- --
------- ------- ------- ------
$30,409 $69,998 $40,832 $ --
====== ====== ====== =====
</TABLE>
89
<PAGE> 133
SOURCES OF FUNDS.
GENERAL. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank
derives funds from loan principal repayments and prepayments and borrowings.
Loan repayments are a relatively stable source of funds, while deposit inflows
and outflows are significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also
be used on a longer term basis for general business purposes.
DEPOSITS. The Bank's deposit products include a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") accounts,
money market accounts, non-interest bearing checking accounts, regular savings
accounts and term certificate accounts. Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.
The Bank utilizes traditional marketing methods to attract new
customers and savings deposits. The Bank does not advertise for deposits
outside of its market area and management believes that an insignificant number
of deposit accounts were held by non-residents of New York at April 30, 1997.
The Bank does not utilize the services of deposit brokers. The Bank
traditionally has relied on customer service and convenience in marketing its
deposit products, and the Bank generally has not sought to be a price leader on
its deposits. The Bank is the largest depository institution, by deposit
market share, in Staten Island and the Bank's acquisition of Gateway, which had
$276.6 million in deposits at the time of acquisition, added to the Bank's
deposit base. Despite its strong market presence, during each of 1996, 1995
(excluding the effect of the Gateway acquisition) and 1994 the Bank experienced
disintermediation of deposits. Management attributes such disintermediation in
large part to certain higher rate competing investment products being offered
by non-depository institutions. During the four months ended April 30, 1997,
the Bank reversed the outflow of deposits and reported a net increase in
deposits before interest credited of $14.4 million. Such increase during the
1997 period is, in management's view, primarily the result of the Bank's
business development efforts. Commencing in April 1996, the Bank's business
development officers have actively solicited, through individual meetings and
other contacts, increased deposits particularly commercial transaction
accounts, with businesses and individuals in the Bank's Staten Island and
Brooklyn, New York, market areas. In addition, in recent periods, the Bank's
lending officers and branch managers have increased their efforts to solicit
new deposits from the Bank's loan customers and other residents in its market
area.
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<PAGE> 134
The following table sets forth the activity in the Bank's deposits
during the periods indicated. Year Ended December 31,
<TABLE>
<CAPTION>
Four Months Year Ended December 31,
Ended ----------------------------------------------
April 30, 1997 1996 1995 1994
------------------ ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Beginning balance . . . . . . . . $1,577,748 $1,535,617 $1,225,918 $1,223,708
Net increase (decrease) before
interest (credited) . . . . . . 14,426 (8,397) 265,485(1) (34,298)
Interest credited . . . . . . . . 14,619 50,528 44,214 36,508
Net increase in deposits . . . . 29,045 42,131 309,699 2,210
----------- ---------- ---------- ----------
Ending balance . . . . . . . . . $1,606,793 $1,577,748 $1,535,617 $1,225,918
========= ========= ========= =========
</TABLE>
- ---------------
(1) Includes $276.6 million of deposits acquired from Gateway.
The following table sets forth by various interest rate categories the
certificates of deposit with the Bank at the dates indicated.
<TABLE>
<CAPTION> December 31,
April 30, ---------------------------------------------
1997 1996 1995 1994
--------------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
0.00% to 2.99% . . . . . . . . . . . $ -- $ -- $ -- $ 13,573
3.00% to 3.99% . . . . . . . . . . . 11,082 12,314 20,138 90,046
4.00% to 4.99% . . . . . . . . . . . 177,868 223,234 103,882 83,239
5.00% to 6.99% . . . . . . . . . . . 336,505 262,924 334,922 93,136
7.00% to 8.99% . . . . . . . . . . . 2,133 2,098 8,420 6,216
9.00% to 10.99% . . . . . . . . . . . -- -- -- --
11.00% and over . . . . . . . . . . . -- -- -- --
----------- --------- --------- ----------
Total . . . . . . . . . . . . . . $527,588 $500,570 $467,362 $286,210
======= ======= ======= =======
</TABLE>
91
<PAGE> 135
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit at April 30, 1997.
<TABLE>
<CAPTION>
Over Six Months Over One Year Over Two Years
Six Months Through One Through Two Through Three Over Three
and Less Year Years Years Years
-------------- ------------------- -------------- ---------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
0.00% to 1.99% . . . . . $ -- $ -- $ -- $ -- $ --
2.00% to 2.99% . . . . . -- -- -- -- --
3.00% to 3.99% . . . . . 9,995 1,087 -- -- --
4.00% to 4.99% . . . . . 138,768 5,549 32,669 882 --
5.00% to 6.99% . . . . . 122,670 109,545 67,877 17,054 19,359
7.00% to 8.99% . . . . . -- -- -- 1,998 135
9.00% to 10.99% . . . . -- -- -- -- --
11.00% & over . . . . . . -- -- -- -- --
----------- ---------- ---------- ---------- ----------
Total . . . . . . . . $271,433 $116,181 $100,546 $19,934 $19,494
======= ======= ======= ====== ======
</TABLE>
As of April 30, 1997, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000, was
approximately $108.1 million. The following table presents the maturity of
these time certificates of deposit at such dates.
<TABLE>
<CAPTION>
April 30, 1997
---------------
(In Thousands)
<S> <C>
3 months or less . . . . . . . . . . . . . . . . . . . . $ 45,947
Over 3 months through 6 months . . . . . . . . . . . . . 25,260
Over 6 months through 12 months . . . . . . . . . . . . . 12,812
Over 12 months . . . . . . . . . . . . . . . . . . . . . 24,055
--------
$108,074
=======
</TABLE>
The following table sets forth the dollar amount of deposits in
various types of deposits offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
April 30, December 31,
------------------------ ----------------------------------------------------------------------
1997 1996 1995 1994
------------------------ --------------------- --------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
----------- ----------- ---------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts . . . $822,431 51.2% $832,584 52.77% $739,697 48.17% $793,753 64.74%
Certificates of deposit 527,588 32.8 500,570 31.73 467,362 30.43 286,210 23.35
Money market accounts . 81,924 5.1 79,704 5.05 83,343 5.43 58,086 4.74
NOW accounts . . . . . 16,708 1.0 14,298 0.91 55,124 3.59 24,878 2.03
Demand deposits . . . . 158,142 9.8 150,592 9.54 190,091 12.38 62,991 5.14
---------- ----- ---------- ------ ---------- ------ ---------- ------
Total . . . . . . . $1,606,793 100.0% $1,577,748 100.00% $1,535,617 100.00% $1,225,918 100.00%
========= ===== ========= ====== ========= ====== ========= ======
</TABLE>
BORROWINGS. Traditionally, the Bank made very limited use of
borrowings. During 1997, the Bank determined to increase its use of leverage
through increased utilization of borrowings. At April 30, 1997, the Bank had
$30.0 million of borrowed funds, substantially all of which consisted of
reverse repurchase agreements with established brokerage firms.
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<PAGE> 136
Reverse repurchase agreements represent agreements to sell securities under
terms which require the Bank to repurchase the same or substantially similar
securities by a specified date (generally less than one year). In addition, in
August 1997, the Bank became eligible to obtain advances from the Federal Home
Loan Bank ("FHLB") of New York upon the security of the common stock it owns in
that bank and certain of its residential mortgage loans, provided certain
standards related to creditworthiness have been met. Such advances are
available pursuant to several credit programs, each of which has its own
interest rate and range of maturities. The Bank intends to continue to utilize
borrowings as a source of funds subsequent to the Conversion.
TRUST ACTIVITIES
Staten Island Savings also provides a full range of trust and
investment services, and acts as executor or administrator of estates and as
trustee for various types of trusts. Trust and investment services are
offered through the Bank's Trust Department which was acquired as part of the
Gateway acquisition. Fiduciary and investment services are provided primarily
to persons and entities located in Staten Island, New York. Services offered
include fiduciary services for trusts and estates, money management, custodial
services and pension and employee benefits consulting. As of April 30, 1997,
the Trust Department maintained approximately 179 trust/fiduciary accounts,
with an aggregate principal balance of $77.0 million at such date. Revenues
from the Trust Department amounted to $85,000 in the four months ended April
30, 1997, and $258,000 and $280,000 in 1996 and 1995, respectively.
Historically, the operation of the Trust Department has not been profitable.
The accounts maintained by the Trust/Investment Services Division
consist of "managed" and "non-managed" accounts. "Managed accounts" are those
accounts under custody for which the Bank has responsibility for administration
and investment management and/or investment advice. "Non-managed" accounts are
those accounts for which the Bank merely acts as a custodian. The Company
receives fees dependent upon the level and type of service provided. The Trust
Department administers various trust accounts (revocable, irrevocable and
charitable trusts, and trusts under wills), agency accounts (various investment
fund products), estate accounts, and employee benefit plan accounts (assorted
plans and IRA accounts). Two trust officers and related staff are assigned to
the Trust Department. The administration of trust and fiduciary accounts are
monitored by the Trust Committee of the Board of Trustees of States Island
Savings.
SAVINGS BANK LIFE INSURANCE
The Bank has a Savings Bank Life Insurance ("SBLI") department which
issues life insurance to individuals. The SBLI Department's activities are
segregated from the Bank and, while they do not directly affect the Bank's
earnings, management believes that offering SBLI is beneficial to the Bank's
relationship with its depositors and the general public. The SBLI Department
pays its own expenses and reimburses the Bank for expenses incurred on its
behalf. At April 30, 1997, the SBLI Department had policies totaling $1.7
billion millon in force.
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<PAGE> 137
SUBSIDIARIES
The Bank currently has one inactive subsidiary which is in the process
of dissolution.
LEGAL PROCEEDINGS
The Bank is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by management
to be immaterial to the financial condition of the Bank.
EMPLOYEES
The Bank had 500 full-time employees and 107 part-time employees at
April 30, 1997. None of these employees is represented by a collective
bargaining agent, and the Bank believes that it enjoys good relations with its
personnel.
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<PAGE> 138
OFFICE AND PROPERTIES
At April 30, 1997, the Bank conducted its business from its executive
and administrative offices in Staten Island, New York, and 16 full service
branch offices in Staten Island, one full service branch office in Brooklyn as
well as three limited service branch offices, a loan origination center and its
Trust Department in Staten Island. In addition, the Bank maintains 36
automated teller machines ("ATMs"), with at least two ATMs at each of the
Bank's branch offices, and an office for its SBLI activities.
The following table sets forth certain information relating to the
Bank's offices at April 30, 1997.
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date April 30, 1997 April 30, 1997
- ---------------------------------- ----------- -------------- ------------------- ------------------
(In Thousands)
<S> <C> <C> <C>
EXECUTIVE OFFICE:
15 Beach Street Owned $1,659 $ --
Staten Island, NY 10304
BRANCH OFFICES:
81-91 Water Street Owned 215 127,087
Staten Island, NY 10304
15 Hyatt Street Owned 43 63,403
Staten Island, NY 10301
257 New Dorp Lane Owned 26 135,242
Staten Island, NY 10305
260 New Dorp Lane Owned 516 --(1)
Staten Island, NY 10305
1837 Victory Boulevard Owned 231 155,957
Staten Island, NY 10314
1850 Victory Boulevard Owned 171 --(2)
Staten Island, NY 10314
1320 Hylan Boulevard Owned 594 156,409
Staten Island, NY 10305
461-465, 475 Forest Avenue Owned 1,209 109,701
Staten Island, NY 10310
3150 Amboy Road Owned $ 446 $ 99,273
Staten Island, NY 10308
</TABLE>
95
<PAGE> 139
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date April 30, 1997 April 30, 1997
- ---------------------------------- ----------- -------------- ------------------- ------------------
(In Thousands)
<S> <C> <C> <C> <C>
900 Huguenot Avenue Leased 2000 (3) 385 66,743
Staten Island, NY 10312
5840 Amboy Road Owned 924 --(4)
Staten Island, NY 10309
2700 Hylan Boulevard Leased 2005 (3) 425 118,522
Staten Island, NY 10306
4025 Amboy Road Owned 323 100,121
Staten Island, NY 10308
6975 Amboy Road Owned 1,446 58,889
Staten Island, NY 10309
1630 Forest Avenue Owned 770 76,479
Staten Island, NY 10302
43 Richmond Hill Road Leased 1999 (3) 543 64,056
Staten Island, NY 10314
800 Forest Avenue Owned 826 53,848
Staten Island, NY 10310
1630 Richmond Road Owned 1,091 137,240
Staten Island, NY 10304
4310-4312-4320 Amboy Road Leased 1998 (3) 110 47,630
Staten Island, NY 10312
9512-20 3rd Avenue Leased 1999 (3) 331 43,133
Brooklyn, NY 11209
OTHER OFFICES:
45 Beach Street Owned 455 --(5)
Staten Island, NY 10304
260 Christopher Lane Leased 2003 (3) 252 --(6)
Staten Island, NY 10314
96 Prospect Street Owned 330 --(5)
Staten Island, NY 10304
1591 Richmond Road Owned $ 651 $ --(7)
Staten Island, NY 10304
</TABLE>
96
<PAGE> 140
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date April 30, 1997 April 30, 1997
- ---------------------------------- ----------- -------------- ------------------- ------------------
(In Thousands)
<S> <C> <C> <C> <C>
176 Broadway Leased 2000 -- --(8)
New York, NY 10038
</TABLE>
- ---------------
(1) Consists of two ATMs and a manned drive-in facility.
(2) Consists of three ATMs and a manned drive-in facility.
(3) Excludes options to extend term.
(4) An automated drive through facility with two ATMs.
(5) Administrative office.
(6) Loan origination center.
(7) Trust Department office.
(8) SBLI Department.
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<PAGE> 141
REGULATION
GENERAL
The Bank is a federally chartered and insured savings bank subject to
extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the
BIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Company or the Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals.
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
Holding Company Acquisitions. The Company, as a savings and loan
holding company within the meaning of the Home Owners' Loan Act, as amended
("HOLA"), will be required to register with the OTS. The HOLA and OTS
regulations generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring, directly or indirectly, the ownership or
control of any other savings association or savings and loan holding company,
or all, or substantially all, of the assets or more than 5% of the voting
shares thereof. These provisions also prohibit, among other things, any
director or officer of a savings and loan holding company, or any individual
who owns or controls more than 25% of the voting shares of such holding
company, from acquiring control of any savings association not a subsidiary of
such savings and loan holding company, unless the acquisition is approved by
the OTS.
Holding Company Activities. The Company will operate as a unitary
savings and loan holding company. Generally, there are limited restrictions on
the activities of a unitary savings and loan holding company and its
non-savings association subsidiaries. If the Company ceases to be a unitary
savings and loan holding company, the activities of the Company and its
non-savings association subsidiaries would thereafter be subject to substantial
restrictions.
The HOLA requires every savings association subsidiary of a savings
and loan holding company to give the OTS at least 30 days' advance notice of
any proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid. See
"--Regulation of Federal Savings Banks--Capital Distribution Regulation."
Affiliate Restrictions. Transactions between a savings association
and its "affiliates" are subject to quantitative and qualitative restrictions
under Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
98
<PAGE> 142
In general, Sections 23A and 23B and OTS regulations issued in
connection therewith limit the extent to which a savings association or its
subsidiaries may engage in certain "covered transactions" with affiliates to an
amount equal to 10% of the association's capital and surplus, in the case of
covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings association and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction"
is defined to include a loan or extension of credit to an affiliate; a purchase
of investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings association and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings association or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe
and sound banking practices. With certain exceptions, each loan or extension of
credit by a savings association to an affiliate must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations
may be required to give the OTS prior notice of affiliate transactions.
REGULATION OF FEDERAL SAVINGS BANKS
Regulatory System. As part of the Conversion, the Bank will convert
from a federally chartered mutual savings bank to a federally chartered stock
savings bank. As a federally insured savings bank, lending activities and
other investments of the Bank must comply with various statutory and regulatory
requirements. The Bank is regularly examined by the OTS and must file periodic
reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the BIF, up to applicable limits.
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<PAGE> 143
Federal Home Loan Banks. The Bank is a member of the FHLB System.
Among other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal to the greater of: (i) 1% of its aggregate outstanding principal amount
of its residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, (ii) .3% of total assets,
or (iii) 5% of its FHLB advances (borrowings).
Liquid Assets. Under OTS regulations, for each calendar month, a
savings bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during
the preceding calendar month. This liquidity requirement, which is currently at
5.0%, may be changed from time to time by the OTS to any amount between 4.0% to
10.0%, depending upon certain factors. OTS regulations also require each
savings association to maintain an average daily balance of short-term liquid
assets equal to not less than 1.0% of the average daily balance of its net
withdrawable accounts and short-term borrowings during the preceding calendar
month. The Bank maintains liquid assets in compliance with these regulations.
Regulatory Capital Requirements. OTS capital regulations require
savings banks to satisfy minimum capital standards: risk-based capital
requirements, a leverage requirement and a tangible capital requirement.
Savings banks must meet each of these standards in order to be deemed in
compliance with OTS capital requirements. In addition, the OTS may require a
savings association to maintain capital above the minimum capital levels.
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings bank is required to maintain
core capital equal to a minimum of 3% of adjusted total assets. (In addition,
under the prompt corrective action provisions of the OTS regulations, all but
the most highly-rated institutions must maintain a minimum leverage ratio of 4%
in order to be adequately capitalized. See "--Prompt Corrective Action.") A
savings bank is also required to maintain tangible capital in an amount at
least equal to 1.5% of its adjusted total assets.
Under OTS regulations, a savings bank with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is
measured, generally, as the decline in an institution's net portfolio value
that would result from a 200 basis point increase or decrease in market
interest rates (whichever would result in lower net portfolio value), divided
by the estimated economic value of the savings association's assets. The
interest rate risk component to be deducted from total capital is equal to
one-half of the difference between an institution's measured exposure and
"normal" IRR exposure (which is
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defined as 2%), multiplied by the estimated economic value of the institution's
assets. In August 1995, the OTS indefinitely delayed implementation of its IRR
regulation. Based on internal measures of interest rate risk at April 30,
1997, the Bank would have been required to deduct $4.7 million pursuant to the
IRR component in calculating total risk-based capital had the IRR component of
the capital regulations been in effect. However, even in the event of such a
deduction, the Bank would still be deemed to be a "well-capitalized"
institution.
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion
of off-balance sheet risk; (2) a savings association is growing, either
internally or through acquisitions, at such a rate that supervisory problems
are presented that are not dealt with adequately by OTS regulations; and (3) a
savings association may be adversely affected by activities or condition of its
holding company, affiliates, subsidiaries or other persons or savings
associations with which it has significant business relationships. The Bank is
not subject to any such individual minimum regulatory capital requirement.
The Bank's tangible capital ratio was 8.44%, its core capital ratio
was 9.53% and its total risk-based capital ratio was 19.59% at April 30, 1997.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources."
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements. A savings bank's failure to maintain capital at or above the
minimum capital requirements may be deemed an unsafe and unsound practice and
may subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is required
to submit a capital plan that addresses the bank's need for additional capital
and meets certain additional requirements. While the capital plan is being
reviewed by the OTS, the savings bank must certify, among other things, that it
will not, without the approval of its appropriate OTS Regional Director, grow
beyond net interest credited or make capital distributions. If a savings bank's
capital plan is not approved, the bank will become subject to additional growth
and other restrictions. In addition, the OTS, through a capital directive or
otherwise, may restrict the ability of a savings bank not in compliance with
the capital requirements to pay dividends and compensation, and may require
such a bank to take one or more of certain corrective actions, including,
without limitation: (i) increasing its capital to specified levels, (ii)
reducing the rate of interest that may be paid on savings accounts, (iii)
limiting receipt of deposits to those made to existing accounts, (iv) ceasing
issuance of new accounts of any or all classes or categories except in exchange
for existing accounts, (v) ceasing or limiting the purchase of loans or the
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making of other specified investments, and (vi) limiting operational
expenditures to specified levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound practices
or conditions.
Prompt Corrective Action. The prompt corrective action regulation of
the OTS, promulgated under FDICIA, requires certain mandatory actions and
authorizes certain other discretionary actions to be taken by the OTS against a
savings bank that falls within certain undercapitalized capital categories
specified in the regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Under the
regulation, the ratio of total capital to risk-weighted assets, core capital to
risk-weighted assets and the leverage ratio are used to determine an
institution's capital classification. The Bank meets the capital requirements
of a "well capitalized" institution under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an
insured depository institution from declaring any dividends, making any other
capital distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept brokered deposits only with a waiver from the FDIC and
are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll-over
brokered deposits.
Institutions that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the institution and periodic review
of the institution's efforts to restore its capital, (ii) a requirement that
the institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time it received notice of being undercapitalized, or the amount
necessary to bring the institution into compliance with applicable capital
standards at the time it fails to comply with the plan, and (iii) a limitation
on the institution's ability to make any acquisition, open any new branch
offices, or engage in any new line of business without the prior approval of
the appropriate federal banking agency for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are
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necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund. These supervisory actions
include: (i) requiring the institution to raise additional capital or be
acquired by another institution or holding company if certain grounds exist,
(ii) restricting transactions between the institution and its affiliates, (iii)
restricting interest rates paid by the institution on deposits, (iv)
restricting the institution's asset growth or requiring the institution to
reduce its assets, (v) requiring replacement of senior executive officers and
directors, (vi) requiring the institution to alter or terminate any activity
deemed to pose excessive risk to the institution, (vii) prohibiting capital
distributions by bank holding companies without prior approval by the FRB,
(viii) requiring the institution to divest certain subsidiaries, or requiring
the institution's holding company to divest the institution or certain
affiliates of the institution, and (ix) taking any other supervisory action
that the agency believes would better carry out the purposes of the prompt
corrective action provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a
timely, acceptable capital restoration plan or fail to implement such a plan
are subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The
regulation also makes mandatory for significantly undercapitalized institutions
certain of the supervisory actions that are discretionary for institutions
classified as undercapitalized, creates a presumption in favor of certain
discretionary supervisory actions, and subjects significantly undercapitalized
institutions to additional restrictions, including a prohibition on paying
bonuses or raises to senior executive officers without the prior written
approval of the appropriate federal bank regulatory agency. In addition,
significantly undercapitalized institutions may be subjected to certain of the
restrictions applicable to critically undercapitalized institutions.
The regulation requires that an institution be placed into
conservatorship or receivership within 90 days after it becomes critically
undercapitalized, unless the OTS, with concurrence of the FDIC, determines that
other action would better achieve the purposes of the prompt corrective action
provisions of FDICIA. Any such determination must be renewed every 90 days. A
depository institution also must be placed into receivership if the institution
continues to be critically undercapitalized on average during the fourth
quarter after the institution initially became critically undercapitalized,
unless the institution's federal bank regulatory agency, with concurrence of
the FDIC, makes certain positive determinations with respect to the
institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized
institutions and to a number of other severe restrictions. For example,
beginning 60 days after becoming critically undercapitalized, such institutions
may not pay principal or interest on subordinated debt without the prior
approval of the FDIC. (However, the regulation does not prevent unpaid
interest from accruing on subordinated debt under the terms of the debt
instrument, to the extent otherwise permitted by law.) In addition, critically
undercapitalized institutions may be prohibited from engaging in a number of
activities, including entering into certain transactions or paying interest
above a certain rate on new or renewed liabilities.
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If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
Conservatorship/Receivership. In addition to the grounds discussed
under "--Prompt Corrective Action," the OTS (and, under certain circumstances,
the FDIC) may appoint a conservator or receiver for a savings association if
any one or more of a number of circumstances exist, including, without
limitation, the following: (i) the institution's assets are less than its
obligations to creditors and others, (ii) a substantial dissipation of assets
or earnings due to any violation of law or any unsafe or unsound practice,
(iii) an unsafe or unsound condition to transact business, (iv) a willful
violation of a final cease-and-desist order, (v) the concealment of the
institution's books, papers, records or assets or refusal to submit such items
for inspection to any examiner or lawful agent of the appropriate federal
banking agency or state bank or savings association supervisor, (vi) the
institution is likely to be unable to pay its obligations or meet its
depositors' demands in the normal course of business, (vii) the institution has
incurred, or is likely to incur, losses that will deplete all or substantially
all of its capital, and there is no reasonable prospect for the institution to
become adequately capitalized without federal assistance, (viii) any violation
of law or unsafe or unsound practice that is likely to cause insolvency or
substantial dissipation of assets or earnings, weaken the institution's
condition, or otherwise seriously prejudice the interests of the institution's
depositors or the federal deposit insurance fund, (ix) the institution is
undercapitalized and the institution has no reasonable prospect of becoming
adequately capitalized, fails to become adequately capitalized when required to
do so, fails to submit a timely and acceptable capital restoration plan, or
materially fails to implement an accepted capital restoration plan, (x) the
institution is critically undercapitalized or otherwise has substantially
insufficient capital, or (xi) the institution is found guilty of certain
criminal offenses related to money laundering.
Enforcement Powers. The OTS and, under certain circumstances, the
FDIC, have substantial enforcement authority with respect to savings
associations, including authority to bring various enforcement actions against
a savings association and any of its "institution-affiliated parties" (a term
defined to include, among other persons, directors, officers, employees,
controlling stockholders, agents and stockholders who participate in the
conduct of the affairs of the institution). This enforcement authority
includes, without limitation: (i) the ability to terminate a savings
association's deposit insurance, (ii) institute cease-and-desist proceedings,
(iii) bring suspension, removal, prohibition and criminal proceedings against
institution-affiliated parties, and (iv) assess substantial civil money
penalties. As part of a cease-and-desist order, the agencies may require a
savings association or an institution-affiliated party to take affirmative
action to correct conditions resulting from that party's actions, including to
make restitution or provide reimbursement, indemnification or guarantee against
loss; restrict the growth of the institution; and rescind agreements and
contracts.
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Capital Distribution Regulation. In addition to the prompt corrective
action restriction on paying dividends, OTS regulations limit certain "capital
distributions" by OTS-regulated savings associations. Capital distributions are
defined to include, in part, dividends and payments for stock repurchases and
cash-out mergers.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has not
been notified by the OTS that it is in need of more than normal supervision (a
"Tier 1 association") may, after prior notice to but without the approval of
the OTS, make capital distributions during a calendar year up to the higher of:
(i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its surplus capital ratio at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four-quarter
period. A Tier 1 association may make capital distributions in excess of the
above amount if it gives notice to the OTS and the OTS does not object to the
distribution. A savings association that meets its regulatory capital
requirements both before and after a proposed distribution but does not meet
its fully phased-in capital requirement (a "Tier 2 association") is authorized,
after prior notice to the OTS but without OTS approval, to make capital
distributions in an amount up to 75% of its net income over the most recent
four-quarter period, taking into account all prior distributions during the
same period. Any distribution in excess of this amount must be approved in
advance by the OTS. A savings association that does not meet its current
regulatory capital requirements (a "Tier 3 association") cannot make any
capital distribution without prior approval from the OTS, unless the capital
distribution is consistent with the terms of a capital plan approved by the
OTS.
The Bank qualifies as a Tier 1 association for purposes of the capital
distribution rule. The OTS may prohibit a proposed capital distribution that
would otherwise be permitted if the OTS determines that the distribution would
constitute an unsafe or unsound practice. The requirements of the capital
distribution regulation supersede less stringent capital distribution
restrictions in earlier agreements or conditions.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation. Under
the proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a
holding company, would be required to provide notice to the OTS prior to making
a capital distribution. "Troubled" associations and undercapitalized
associations would be allowed to make capital distributions only by filing an
application and receiving OTS approval, and such applications would be approved
under certain limited circumstances.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain
qualified thrift investments (which consist primarily of loans and other
investments related to residential real estate and certain other assets). A
savings association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
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Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the Internal Revenue Code as a "domestic building and loan
association." The Bank is a domestic building and loan association as defined
in the Internal Revenue Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At April 30, 1997, under the
expanded QTL test, approximately 86.2% of the Bank's portfolio assets were
qualified thrift investments.
FDIC Assessments. The deposits of the Bank are insured to the maximum
extent permitted by the BIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to
pose a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which would
result in termination of the Bank's deposit insurance.
The BIF fund met its target reserve level in September 1995, but the
SAIF was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for
BIF member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance
premiums for SAIF members were maintained at their existing levels (23 basis
points for institutions in the lowest risk category).
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On September 30, 1996, President Clinton signed into law legislation
to eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders
of SAIF-assessable deposits pay a one-time special assessment to recapitalize
the SAIF. The legislation also provided for the merger of the BIF and the
SAIF, with such merger being conditioned upon the prior elimination of the
thrift charter. Effective October 8, 1996, FDIC regulations imposed a one-time
special assessment equal to 65.7 basis points for all SAIF-assessable deposits
as of March 31, 1995, which was collected on November 27, 1996.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective BIF and SAIF rates both range from zero basis points to 27 basis
points. From 1997 through 1999, FDIC-insured institutions will pay
approximately 1.3 basis points of their BIF-assessable deposits and 6.4 basis
points of their SAIF-assessable deposits to fund the Financing Corporation.
The Bank's insurance premiums, which had amounted to the minimum $2,000 annual
fee for its BIF-insured deposits, were increased to 1.3 basis points. Based
upon the $1.59 billion of assessable deposits at April 30, 1997, the Bank would
expect to pay $50,000 in insurance premiums per quarter during 1997.
Thrift Charter. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. Recent legislation required the
Treasury Department to prepare for Congress a comprehensive study on
development of a common charter for federal savings associations and commercial
banks; and, in the event that the thrift charter was eliminated by January 1,
1999, would require the merger of the BIF and the SAIF into a single Deposit
Insurance Fund on that date. The Bank cannot determine whether, or in what
form, such legislation may eventually be enacted and there can be no assurance
that any legislation that is enacted would not adversely affect the Bank and
its parent holding company.
Community Reinvestment Act and the Fair Lending Laws. Savings
associations have a responsibility under CRA and related regulations of the OTS
to help meet the credit needs of their communities, including low-and
moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act
and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders
from discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Fair Lending Laws could result in
enforcement actions by the OTS, as well as other federal regulatory agencies
and the Department of Justice.
New Safety and Soundness Guidelines. The OTS and the other federal
banking agencies have established guidelines for safety and soundness,
addressing operational and managerial, as well as compensation matters for
insured financial institutions. Institutions failing to meet these standards
are required to submit compliance plans to their appropriate federal
regulators. The
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OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
Change of Control. Subject to certain limited exceptions, no company
can acquire control of a savings association without the prior approval of the
OTS, and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a
savings association or savings and loan holding company, or controls in any
manner the election of a majority of the directors of the company. In addition,
a rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and
loan holding company's voting stock (or 25% of any class of stock) and, in
either case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding
Company Act that acquire or own savings associations are no longer defined as
savings and loan holding companies under the HOLA and, therefore, are not
generally subject to supervision and regulation by the OTS. OTS approval is no
longer required for a bank holding company to acquire control of a savings
association, although the OTS has a consultative role with the FRB in
examination, enforcement and acquisition matters.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank will be subject to federal income
taxation in the same general manner as other corporations with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Bank. The Bank's
federal income tax returns have been audited or closed without audit by the
Internal Revenue Service through 1993.
METHOD OF ACCOUNTING. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its consolidated federal
income tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective tax taxable years beginning after 1995.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use
the specific chargeoff method in computing its bad debt deduction
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beginning with its 1996 Federal tax return. In addition, the federal
legislation requires the recapture (over a six year period) of the excess of
tax bad debt reserves at December 31, 1995 over those established as of
December 31, 1987. The amount of such reserve subject to recapture as of
December 31, 1996 is approximately $8.4 million.
As discussed more fully below, the Bank and subsidiaries file combined
New York State Franchise and New York City Financial Corporation tax returns.
The basis of the determination of each tax is the greater of a tax on entire
net income (or on alternative entire net income) or a tax computed on taxable
assets. However, for state purposes, New York State enacted legislation in
1996, which among other things, decoupled the Federal and New York State tax
laws regarding thrift bad debt deductions and permits the continued use of the
bad debt reserve method under section 593. Thus, provided the Bank continues
to satisfy certain definitional tests and other conditions, for New York State
and City income tax purposes, the Bank is permitted to continue to use the
special reserve method for bad debt deductions. The deductible annual addition
to the state reserve may be computed using a specific formula based on the
Bank's loss history ("Experience Method") or a statutory percentage equal to
32% of the Bank's New York State or City taxable income ("Percentage Method").
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into
taxable income should the Bank fail to meet certain thrift asset and
definitional tests. New federal legislation eliminated these thrift related
recapture rules. However, under current law, pre-1988 reserves remain subject
to recapture should the Bank make certain non-dividend distributions or cease
to maintain a bank charter.
At December 31, 1996 the Bank's total federal pre-1988 reserve was
approximately $11.7 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision
has been made.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years. The
Bank has not been subject to the alternative minimum tax and has no such
amounts available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 1996, the Bank had no net
operating loss carryforwards for federal income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of
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corporations. The corporate dividends-received deduction is 80% in the case of
dividends received from corporations with which a corporate recipient does not
file a consolidated tax return, and corporations which own less than 20% of the
stock of a corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf.
STATE AND LOCAL TAXATION
NEW YORK STATE AND NEW YORK CITY TAXATION. The Company and the Bank
will report income on a combined calendar year basis to both New York State and
New York City. New York State Franchise Tax on corporations is imposed in an
amount equal to the greater of (a) 9% of "entire net income" allocable to New
York State (b) 3% of "alternative entire net income" allocable to New York
State (c) 0.01% of the average value of assets allocable to New York State or
(d) nominal minimum tax. Entire net income is based on federal taxable income,
subject to certain modifications. Alternative entire net income is equal to
entire net income without certain modifications. The New York City Corporation
Tax is imposed using similar alternative taxable income methods and rates.
A temporary Metropolitan Transportation Business Tax Surcharge on
Banking corporations doing business in the Metropolitan District has been
applied since 1982. The Bank transacts a significant portion of its business
within this District and is subject to this surcharge. For the tax year ended
December 31, 1996, the surcharge rate is 17% of the State franchise tax
liability. For 1996, an additional 2.5% tax surcharge on the New York State
Franchise Tax is also imposed on the Company. New York City does not impose
surcharges applicable to the Company.
DELAWARE STATE TAXATION. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax
but is required to file an annual report with and pay an annual franchise tax
to the State of Delaware. The tax is imposed as a percentage of the capital
base of the Company with an annual maximum of $150,000.
MANAGEMENT
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes,
each of which contains approximately one-third of the Board. The directors
shall be elected by the stockholders of the Company for staggered three year
terms, or until their successors are elected and qualified. One class of
directors, consisting of Messrs. Bartels, Coyle, Morris and Nelson has a term
of office expiring at the first annual meeting of stockholders, a second class,
consisting of Messrs. Banks, Kelleher and Mehrberg has a term of office
expiring at the second annual meeting of stockholders and a third class,
consisting of Messrs. Doherty, Horn and O'Mara has a term of office expiring at
the third annual meeting of stockholders. Their names and biographical
information are set forth under "- Management of the Bank."
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The following individuals are executive officers of the Company and
hold the offices set forth below opposite their names.
<TABLE>
<CAPTION>
EXECUTIVE POSITION HELD WITH COMPANY
-------------------------- --------------------------------------------------
<S> <C>
Harry P. Doherty Chairman of the Board and Chief Executive Officer
James R. Coyle President and Chief Operating Officer
Edward J. Klingele Senior Vice President and Chief Financial Officer
Patricia J. Villani Corporate Secretary
</TABLE>
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation 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" and "- Executive Officers
Who Are Not Trustees." Directors of the Company initially will not be
compensated by the Company but will serve and be compensated by the Bank. It
is not anticipated that separate compensation will be paid to directors of the
Company until such time as such persons devote significant time to the separate
management of the Company's affairs, which is not expected to occur until the
Company becomes actively engaged in additional businesses other than holding
the stock of the Bank. The Company may determine that such compensation is
appropriate in the future.
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<PAGE> 155
MANAGEMENT OF THE BANK
The following table sets forth certain information regarding the
Board of Trustees of the Bank.
<TABLE>
<CAPTION>
Positions Held
With Trustee
Name Age(1) the Bank Since
-------------------------------------- ---------- ------------------------------------- ----------
<S> <C> <C> <C>
Harold Banks 73 Trustee 1983
Charles J. Bartels 73 Trustee 1964
James R. Coyle 50 Trustee, President and Chief 1990
Operating Officer
Harry P. Doherty 55 Chairman of the Board and Chief 1989
Executive Officer
William G. Horn 73 Trustee 1968
Dennis P. Kelleher 58 Trustee 1988
Julius Mehrberg 68 Trustee 1996
John R. Morris 58 Trustee 1986
Kenneth W. Nelson 74 Trustee 1977
William E. O'Mara 66 Trustee 1994
</TABLE>
- ------------
(1) As of June 30, 1997.
Set forth below is information with respect to the principal
occupations during at least the last five years for the trustees of the Bank.
Harold Banks. Mr. Banks is a cemetarian and Executive Director,
Secretary and Treasurer of Ocean View The Cemetery Beautiful, Staten Island,
New York, since 1979. Mr. Banks also serves on the Boards of the Elmweir
Cemetery Association and Mt. Zion Cemetery.
Charles J. Bartels. Mr. Bartels is President and Chief Executive
Officer of Bartels & Eleford, Inc., a real estate appraisal firm located in
Staten Island, New York.
James R. Coyle. Mr. Coyle has served as President and Chief Operating
Officer of the Bank since June 1990. Previously, Mr. Coyle served as Executive
Vice President from 1987 to 1990 and as Chief Financial Officer from 1989 to
1990. Mr. Coyle has been employed by the Bank since 1970. Mr. Coyle is a
member of the Board of the Center for Financial Studies, Fairfield, Connecticut,
and is a member of the Community Bankers Association of New York State
("CBANYS").
Harry P. Doherty. Mr. Doherty has served as Chairman of the Board and
Chief Executive Officer of the Bank since May 1990. Previously, Mr. Doherty
served as President and Chief Operating Officer from 1989 to 1990 and Executive
Vice President from 1987 to 1989. Mr.
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<PAGE> 156
Doherty has been employed by the Bank since 1966. Mr. Doherty serves as a
director of the Institutional Investors Capital Appreciation Mutual Fund as
well as the MSB Fund. Mr. Doherty currently is serving as Chairman of CBANYS
and as a director of America's Community Bankers ("ACB").
William G. Horn. Mr. Horn is currently retired. Previously, Mr. Horn
was a Senior Account Agent for the Allstate Insurance Company.
Dennis P. Kelleher. Mr. Kelleher is Chief Executive Officer of Wall
Street Access (formerly Wall Street Investors Services), a financial services
company and member firm of the NYSE, located in New York City. Mr. Kelleher
also serves as a director of the Irish Investment Fund, a closed end investment
company listed on the NYSE having a main investment focus in Irish-based
securities.
Julius Mehrberg. Mr. Mehrberg is a principal and partner in various
real estate development and management companies, primarily Fingerboard Estates
Corp., located in Staten Island, New York.
John R. Morris. Mr. Morris retired from Merrill Lynch in May 1997
where he served as a Vice President of the Capital Markets and Private Client
groups. Mr. Morris has over 35 years of experience in the financial services
area. Mr. Morris currently is a private investor and is self-employed as a
consultant.
Kenneth W. Nelson. Mr. Nelson is President and Chief Executive
Officer of Tech Products, Inc., a manufacturing and marketing company located
in Staten Island, New York. Mr. Nelson is also Chairman of Methods Research
Corp., importing and marketing company located in Farmingdale, New Jersey, and
President and Chief Executive Officer of Carey Realty Corp., a real estate
holding company located in Staten Island, New York. Mr. Nelson also serves as
a director of American Centurion Life Assurance Co., a subsidiary of American
Express Insurance and Annuities, and of First Fortis Life Insurance Company, a
subsidiary of Fortis, Inc. Insurance and Annuities.
William E. O'Mara. Mr. O'Mara is a partner in the firm of Wohl and
O'Mara, civil engineers and land surveyors, located in Staten Island, New York.
EXECUTIVE OFFICERS WHO ARE NOT TRUSTEES
Set forth below is information with respect to the principal
occupations during the last five years for the executive officers of the Bank
who do not serve as trustees.
John P. Brady. Age 46 years. Mr. Brady has served as Executive Vice
President and Chief Lending Officer of the Bank since May 1987. Mr. Brady has
been employed by the Bank since 1982 and previously served as Vice President
and mortgage officer and as the Community Reinvestment Act officer for the
Bank.
Frank J. Besignano. Age 42 years. Mr. Besignano has served as Senior
Vice President of the Bank for Marketing, Business Development and Compliance
since May 1991. Mr.
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<PAGE> 157
Besignano has been employed by the Bank since 1982 and previously served as
Vice President and marketing officer since 1987.
Edward J. Klingele. Age 44 years. Mr. Klingele has served as Senior
Vice President and Chief Financial Officer of the Bank since May 1990. Mr.
Klingele has been employed by the Bank since 1976 and previously served as
Controller of the Bank from 1984 to 1990.
Deborah Pagano. Age 42 years. Ms. Pagano has served as Senior Vice
President - Branch Administration for the Bank since May 1989. Ms. Pagano has
been employed by the Bank since 1976 and previously served as Vice President
of the Bank from 1984 to 1989.
Donald C. Fleming. Age 48 years. Mr. Fleming has served as Senior
Vice President of the Bank for Strategic Planning and Technical Services since
January 1997. Previously, Mr. Fleming served as Director, Executive Vice
President and Chief Financial Officer of North Side Savings Bank, Floral Park,
New York, from 1988 to 1996.
TRUSTEES' COMPENSATION
Members of the Bank's Board of Trustees, except for Messrs. Doherty
and Coyle, receive $1,800 per meeting attended of the Board and $1,200 per
committee meeting ($600 in the case of the Loan Review Committee) attended.
The Chairman of each committee of the Board also receives $1,500 per meeting
attended ($750 in the case of the Loan Review Committee). Board fees are
subject to periodic adjustment by the Board of Trustees. In addition to fees
paid to trustees for Board and committee meetings, the Bank's trustees are
expected to participate in the Stock Option Plan and the Recognition Plan. See
"- Benefits - Stock Option Plan" and "- Recognition and Retention Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Determinations regarding compensation of the Bank's employees are made
by the Compensation Committee of the Board of Trustees. Harry P. Doherty,
Chief Executive Officer and James R. Coyle, President and Chief Operating
Officer, as well as Dennis E. Knudsen, a trustee emeritus who formerly served
as Chief Executive Officer of the Bank until his retirement in 1990, serve as
members of the Compensation Committee.
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<PAGE> 158
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of certain information
concerning the compensation paid by the Bank (including amounts deferred to
future periods by the officers) for services rendered in all capacities during
the year ended December 31, 1996 to the Chairman and Chief Executive Officer
of the Bank and the four other most highly compensated officers of the Bank.
<TABLE>
<CAPTION>
==================================================================================================================================
Annual Compensation Long Term Compensation
--------------------------------------- ---------------------------------------
Awards Payouts
Other ------------------------ ------------
Name and Annual Securities LTIP All Other
Principal Position Year Salary Bonus Compensation(1) Restricted Underlying Payouts Compensation(2)
Stock Options
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harry P. Doherty
Chairman and
Chief Executive
Officer 1996 $356,457 -- -- -- -- -- $43,500
- ----------------------------------------------------------------------------------------------------------------------------------
James R. Coyle
President and
Chief Operating
Officer 1996 275,715 -- -- -- -- -- 35,680
- ----------------------------------------------------------------------------------------------------------------------------------
John P. Brady
Executive Vice
President 1996 137,909 -- -- -- -- -- 20,500
- ----------------------------------------------------------------------------------------------------------------------------------
Deborah Pagano
Senior Vice
President 1996 117,394 -- -- -- -- -- 18,053
- ----------------------------------------------------------------------------------------------------------------------------------
Edward J. Klingele
Senior Vice
President 1996 116,833 -- -- -- -- -- 15,876
==================================================================================================================================
</TABLE>
- ---------------
(1) Does not include amounts attributable to miscellaneous benefits
received by the named executive officer. In the opinion of management
of the Bank, the costs to the Bank of providing such benefits to the
named executive officer during the year ended December 31, 1996 did
not exceed the lesser of $50,000 or 10% of the total of annual salary
and bonus reported for the individual.
(2) Consists of the Bank's contributions to the Bank's 401(k) profit
sharing plan to the account of the named executive officers, as well
as $13,500 and $5,680 allocated to Messrs. Doherty and Coyle,
respectively, pursuant to the Bank's Supplemental Executive Retirement
Plan ("SERP").
EMPLOYMENT AGREEMENTS
In connection with the Conversion, the Company and the Bank (the
"Employers") intend to enter into employment agreements with each of Messrs.
Doherty, Coyle and the Other Senior Officers . The Employers have agreed to
employ the executives for a term of three years, in each case in their current
respective positions. The agreements with the executives will be initially at
their current salary levels. The executives' compensation and expenses shall
be paid by the
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<PAGE> 159
Company and the Bank in the same proportion as the time and services actually
expended by the Executives on behalf of each respective Employer. With respect
to Messrs. Doherty and Coyle, the employment agreements will be reviewed
annually, and with respect to the Other Senior Officers, the employment
agreements will be reviewed prior to the second anniversary and each
anniversary thereafter by the Boards of Directors of the Employers. At such
times, the term of the executives' employment agreements shall be extended each
year for a successive additional one-year period upon the approval of the
Employers' Boards of Directors, unless either party elects, not less than 30
days prior to the annual anniversary date, not to extend the employment term.
Each of the employment agreements shall be terminable with or without
cause by the Employers. The executives shall have no right to compensation or
other benefits pursuant to the employment agreements for any period after
voluntary termination or termination by the Employers for cause, disability or
retirement. The agreements provide for certain benefits in the event of the
executive's death. In the event that (i) the executive terminates his or her
employment because of failure to comply with any material provision of the
employment agreement or the Employers change the executive's title or duties or
(ii) the employment agreement is terminated by the Employers other than for
cause, disability, retirement or death or by the executive as a result of
certain adverse actions which are taken with respect to the executive's
employment following a change in control of the Company, as defined, Messrs.
Doherty and Coyle will be entitled to a cash severance amount equal to three
times their average annual compensation, as defined, plus an amount to
reimburse the executives for certain tax obligations, and the Other Senior
Officers will be entitled to a cash severance amount equal to two times their
average annual compensation, as defined.
A change in control is generally defined in the employment agreements
to include any change in control of the Company required to be reported under
the federal securities laws, as well as (i) the acquisition by any person of
20% or more of the Company's outstanding voting securities and (ii) a change in
a majority of the directors of the Company during any three-year period without
the approval of at least two-thirds of the persons who were directors of the
Company at the beginning of such period.
With respect to the employment agreements with the Other Senior
Officers, each employment agreement provides that in the event that any of the
payments to be made thereunder or otherwise upon termination of employment are
deemed to constitute "excess parachute payments," within the meaning Section
280G of the Code, then such payments and benefits received thereunder shall be
reduced, with the manner determined by the executive, by the amount, if any,
which is the minimum necessary to result in no portion of the payments
generally are payments in excess of three times the recipient's average annual
compensation from the employer includable in the recipient's gross income
during the most recent five taxable years ending before the date on which a
change in control of the employer occurred. Recipients of excess parachute
payments are subject to a 20% excise tax on the amount by which such payments
exceed the base amount, in addition to regular income taxes, and payments in
excess
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<PAGE> 160
of the base amount are not deductible by the employer as compensation expense
for federal income tax purposes.
Although the above-described employment agreements could increase the
cost of any acquisition of control of the Company, management of the Company
does not believe that the terms thereof would have a significant anti-takeover
effect. The Company and/or the Bank may determine to enter into similar
employment agreements with other officers in the future.
BENEFITS
EMPLOYEE STOCK OWNERSHIP PLAN. The Company has established the ESOP
for employees of the Company and the Bank to become effective upon the
Conversion. Full-time employees of the Company and the Bank who have been
credited with at least 1,000 hours of service during a twelve month period are
eligible to participate in the ESOP.
As part of the Conversion, in order to fund the purchase of up to 8%
of the Common Stock to be issued in the Conversion, it is anticipated that the
ESOP will borrow funds from the Company. It is anticipated that such loan will
equal 100% of the aggregate purchase price of the Common Stock acquired by the
ESOP. The loan to the ESOP will be repaid principally from the Company's and
the Bank's contributions to the ESOP over a period of not less than 15 years,
and the collateral for the loan will be the Common Stock purchased by the ESOP.
The interest rate for the ESOP loan is expected to be a fixed rate of 8.5%.
The Bank also intends to use matching contributions made with respect to ESOP
participants' 401(k) profit sharing plan contributions to satisfy the ESOP loan
obligation. The Company may, in any plan year, make additional discretionary
contributions for the benefit of plan participants in either cash or shares of
Common Stock, which may be acquired through the purchase of outstanding shares
in the market or from individual stockholders, upon the original issuance of
additional shares by the Company or upon the sale of treasury shares by the
Company. Such purchases, if made, would be funded through additional
borrowings by the ESOP or additional contributions from the Company. The
timing, amount and manner of future contributions to the ESOP will be affected
by various factors, including prevailing regulatory policies, the requirements
of applicable laws and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be
held in a suspense account and released to participants on a pro rata basis as
debt service payments are made. Shares released from the ESOP will be
allocated to the accounts of ESOP participants pursuant to two methods. First,
for each eligible ESOP participant, a portion of the shares released for the
plan year will be allocated to a special "matching" account under the ESOP
equal in value to the amount matching the contribution, if any, that such
participant would be entitled to under the terms of the Bank's 401(k) profit
sharing plan for the plan year. Second, the remaining shares which have been
released for the plan year will be allocated to each eligible participant's
general ESOP account based on the ratio of each such participant's base
compensation to the total base compensation of all eligible ESOP participants.
Forfeitures will be reallocated among remaining participating employees and may
reduce any amount the Company might otherwise
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<PAGE> 161
have contributed to the ESOP. Upon the completion of two years of service, the
account balances of participants within the ESOP will become 20% vested and
will continue to vest at the rate of 20% for each additional year of service
completed by the participant, such that a participant will become 100% vested
upon the completion of six years of service. Credit is given for years of
service with the Bank prior to adoption of the ESOP. In the case of a "change
in control," as defined, however, participants will become immediately fully
vested in their account balances. Benefits may be payable upon retirement or
separation from service. The Company's contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated.
Messrs. Bartels, Horn, Morris, Doherty and Coyle will serve as
trustees of the ESOP. Under the ESOP, the trustees must vote all allocated
shares held in the ESOP in accordance with the instructions of the
participating employees, and unallocated shares will be voted in the same ratio
on any matter as those allocated shares for which instructions are given.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Impact Accounting Pronouncements" for a discussion of
SOP 93-6, which addresses the measure of compensation expense recorded by
employers for leveraged ESOPs from the cost of ESOP shares to the fair value of
ESOP shares.
GAAP requires that any third party borrowing by the ESOP be reflected
as a liability on the Company's statement of financial condition. Since the
ESOP is borrowing from the Company, such obligation is not treated as a
liability, but will be excluded from stockholders' equity. If the ESOP
purchases newly issued shares from the Company, total stockholders' equity
would neither increase nor decrease, but per share stockholders' equity and per
share net earnings would decrease as the newly issued shares are allocated to
the ESOP participants.
The ESOP will be subject to the requirements of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the
regulations of the IRS and the Department of Labor thereunder.
STOCK OPTION PLAN. Following consummation of the Conversion, the
Board of Directors of the Company intends to adopt a Stock Option Plan, which
will be designed 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
reward key employees for outstanding performance. The Stock Option Plan will
provide for the grant of incentive stock options intended to comply with the
requirements of Section 422 of the Code ("incentive stock options"),
non-incentive or compensatory stock options, stock appreciation rights and
limited rights which will be exercisable only upon a change in control of the
Company or the Bank (collectively "Awards"). Awards may be granted to
directors and key employees of the Company and any subsidiaries. The Stock
Option Plan will be administered and interpreted by a committee of the Board of
Directors ("Committee"). Unless sooner terminated, the Stock Option Plan shall
continue in effect for a period of 10 years from the date the Stock Option Plan
is adopted by the Board of Directors. Subject to any applicable OTS
regulations, upon exercise of "Limited Rights" in the event of a change in
control, the employee
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<PAGE> 162
will be entitled to receive a lump sum cash payment equal to the difference
between the exercise price of the related option and the fair market value of
the shares of common stock subject to the option on the date of exercise of the
right in lieu of purchasing the stock underlying the option.
Under the Stock Option Plan, the Committee will determine which
directors, officers and key employees will be granted Awards, whether options
will be incentive or compensatory options, the number of shares subject to each
Award, the exercise price of each option, whether options may be exercised by
delivering other shares of Common Stock and when such options become
exercisable. The per share exercise price of an incentive stock option must at
least equal the fair market value of a share of Common Stock on the date the
option is granted (110% of fair market value in the case of incentive stock
options granted to employees who are 5% stockholders). The granting or vesting
of stock options may be conditioned upon the achievement of individual or
company-wide performance goals, which could include goals such as the
achievement by the Company or the Bank of specified levels of net income, asset
growth, return on assets, return on equity or other specific performance goals.
At a meeting of stockholders of the Company following the Conversion,
which under applicable OTS regulations may be held no earlier than six months
after the completion of the Conversion, the Board of Directors intends to
present the Stock Option Plan to stockholders for approval and to reserve an
amount equal to 10% of the shares of Common Stock issued in the Offerings (or
3,559,523 shares based upon the issuance of 35,595,238 shares), for issuance
under the Stock Option Plan. OTS regulations provide that, in the event such
plan is implemented within the one year following the Conversion, no individual
officer or employee of the Bank may receive more than 25% of the options
granted under the Stock Option Plan and non-employee directors may not receive
more than 5% individually, or 30% in the aggregate of the options granted under
the Stock Option Plan. OTS regulations also provide that exercise price of any
options granted under any such plan must be the fair market value of the Common
Stock as of the date of grant. Each stock option or portion thereof will be
exercisable at any time on or after it vests and will be exercisable until 10
years after its date of grant or for periods of up to one year following the
death, disability or other termination of the optionee's employment or service
as a director. However, failure to exercise incentive stock options within
three months after the date on which the optionee's employment terminates may
result in adverse tax consequences to the optionee.
At the time an Award is granted pursuant to the Stock Option Plan, the
recipient will not be required to make any payment in consideration for such
grant. With respect to incentive or compensatory stock options, the optionee
will be required to pay the applicable exercise price at the time of exercise
in order to receive the underlying shares of Common Stock. The shares reserved
for issuance under the Stock Option Plan may be authorized but previously
unissued shares, treasury shares, or shares purchased by the Company on the
open market or from private sources. In the event of a stock split, reverse
stock split or stock dividend, the number of shares of Common Stock under the
Stock Option Plan, the number of shares to which any Award relates and the
exercise price per share under any option or stock appreciation right shall be
adjusted to reflect such increase or decrease in the total number of shares of
Common Stock outstanding.
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<PAGE> 163
In the event the Company declares a special cash dividend or return of capital
following the implementation of the Stock Option Plan in an amount per share
which exceeds 10% of the fair market value of a share of Common Stock as of the
date of declaration, the per share exercise price of all previously granted
options which remain unexercised as of the date of such declaration shall,
subject to certain limitations, be proportionately adjusted to give effect to
such special cash dividend or return of capital as of the date of payment of
such special cash dividend or return of capital.
Under current provisions of the Code, the federal income tax treatment
of incentive stock options and compensatory stock options is different. As
regards incentive stock options, an optionee who meets certain holding period
requirements will not recognize income at the time the option is granted or at
the time the option is exercised, and a federal income tax deduction generally
will not be available to the Company at any time as a result of such grant or
exercise. With respect to compensatory stock options, the difference between
the fair market value on the date of exercise and the option exercise price
generally will be treated as compensation income upon exercise, and the Company
will be entitled to a deduction in the amount of income so recognized by the
optionee. Upon the exercise of a stock appreciation right, the holder will
realize income for federal income tax purposes equal to the amount received by
him, whether in cash, shares of stock or both, and the Company will be entitled
to a deduction for federal income tax purposes in the same amount.
It is currently expected that the Stock Option Plan will provide that
no individual officer will be able to receive stock options for more than 25%
of the shares available under the Stock Option Plan, or 889,880 shares if the
amount of Common Stock sold in the Conversion is equal to the maximum of the
Valuation Range, vesting over a five-year period (or 3,559,523 shares per year
based upon the maximum of the Valuation Range).
RECOGNITION PLAN. Following consummation of the Conversion, the Board
of Directors of the Company intends to adopt a Recognition Plan for directors,
officers and employees. The objective of the Recognition Plan will be to
enable the Company to provide directors, officers and employees with a
proprietary interest in the Company as an incentive to contribute to its
success. The Company intends to present the Recognition Plan to stockholders
for their approval at a meeting of stockholders which, pursuant to applicable
OTS regulations, may be held no earlier than six months subsequent to
completion of the Conversion.
The Recognition Plan will be administered by a committee of the Board
of Directors, which will have the responsibility to invest all funds
contributed to the trust created for the Recognition Plan (the "Trust"). The
Company will contribute sufficient funds to the Trust so that the Trust can
purchase, following the receipt of stockholder approval, a number of shares
equal to an aggregate of 4% of the Common Stock sold in the Conversion
(1,423,809 shares, based on the sale of 35,595,238 shares at the maximum of the
Valuation Range). Shares of Common Stock granted pursuant to the Recognition
Plan generally will be in the form of restricted stock vesting at the rate of
20% per year over the five years following the date of grant. For accounting
purposes, compensation expense in the amount of the fair market value of the
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<PAGE> 164
Common Stock at the date of the grant to the recipient will be recognized pro
rata over the period during which the shares are payable. A recipient will be
entitled to all voting and other stockholder rights, except that the shares,
while restricted, may not be sold, pledged or otherwise disposed of and are
required to be held in the Trust. Under the terms of the Recognition Plan,
recipients of awards will be entitled to instruct the trustee of the
Recognition Plan as to how the underlying shares should be voted, and the
trustee will be entitled to vote all unallocated shares in its discretion. If
a recipient's employment is terminated as a result of death or disability, all
restrictions will expire and all allocated shares will become unrestricted.
The Board of Directors of the Company can terminate the Recognition Plan at any
time, and if it does so, any shares not allocated will revert to the Company.
Recipients of grants under the Recognition Plan will not be required to make
any payment at the time of grant or when the underlying shares of Common Stock
become vested, other than payment of withholding taxes.
It is currently expected that the Recognition Plan will provide that
no individual officer will be able to receive an award for more than 25% of the
shares available under the Recognition Plan, or 355,952 shares if the amount of
Common Stock sold in the Conversion is equal to the maximum of the Valuation
Range, vesting over a five-year period (or 71,190 shares per year based upon
the maximum of the Valuation Range).
RETIREMENT PLAN. The Bank maintains a non-contributory, tax-qualified
defined benefit pension plan (the "Retirement Plan") for eligible employees.
All salaried employees at least age 21 who have completed at least one year of
service are eligible to participate in the Retirement Plan. The Retirement
Plan provides for a benefit for each participant, including executive officers
named in the Executive Compensation Table above, equal to 2% of the
participant's final average compensation (average annual compensation during
the 36 consecutive calendar months during the final 120 consecutive calendar
months of employment) multiplied by the participant's years (and any fraction
thereof) of eligible employment (up to a maximum of 30 years). A participant
is fully vested in his or her benefit under the Retirement Plan after five
years of service. The Retirement Plan is funded by the Bank on a actuarial
basis and all assets are held in trust by the Retirement Plan trustee.
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The following table illustrates the annual benefit payable upon normal
retirement at age 65 (in single life annuity amounts with no offset for Social
Security benefits) at various levels of compensation and years of service under
the Retirement Plan and the Supplemental Executive Retirement Plan ("SERP")
maintained by the Bank.
<TABLE>
<CAPTION>
Years of Service
-----------------------------------------------------------------------------------
Remuneration 15 20 25 30 35
---------------- ----------- ------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
$125,000 $37,500 $50,000 $62,500 $75,000 $75,000
150,000 45,000 60,000 75,000 90,000 90,000
175,000 52,500 70,000 87,500 105,000 105,000
200,000 60,000 80,000 100,000 120,000 120,000
225,000 67,500 90,000 112,500 135,000 135,000
250,000 75,000 100,000 125,000 150,000 150,000
300,000 90,000 120,000 150,000 180,000 180,000
400,000 120,000 160,000 200,000 240,000 240,000
450,000 135,000 180,000 225,000 270,000 270,000
</TABLE>
- ------------
(1) The annual retirement benefits shown in the table do not reflect a
deduction for Social Security benefits and there are no other offsets
to benefits.
(2) For the fiscal year of the Retirement Plan beginning on January 1,
1997, the average final compensation for computing benefits under the
Retirement Plan cannot exceed $160,000 (as adjusted for subsequent
years pursuant to Code provisions). Benefits in excess of the
limitation are provided through the SERP.
(3) For the fiscal year of the Retirement Plan beginning on January 1,
1997, the maximum annual benefit payable under the Retirement Plan
cannot exceed $125,000 (as adjusted for subsequent years pursuant to
Code provisions).
(4) The maximum years of service credited for benefit purposes is 30
years.
The following table sets forth the years of credited service and the
average annual earnings (as defined above) determined as of December 31, 1996,
the end of the 1996 plan year, for each of the individuals named in the
Executive Compensation Table.
<TABLE>
<CAPTION>
Years of Average Annual
Credited Earnings
Service
------------ --------------
<S> <C> <C>
Harry P. Doherty . . . . . . . . . . . . . . 30 years $293,500
James R. Coyle . . . . . . . . . . . . . . . 26 years 221,944
John P. Brady . . . . . . . . . . . . . . . . 13 years 93,071
Deborah Pagano . . . . . . . . . . . . . . . 19 years 71,723
Edward J. Klingele . . . . . . . . . . . . . 20 years 73,577
</TABLE>
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401(k) PLAN. The Bank maintains the 401(k) Plan, which is a
tax-qualified defined contribution plan which permits salaried employees with
at least one year of service to make pre-tax salary deferrals under section
401(k) of the Code. Salary deferrals are made by the election and are limited
to 15% of compensation up to $9,500 (for 1997). The Bank generally makes
matching contributions equal to 100% of deferred amounts up to 6% of salary,
with an annual limit of $3,000. Employees are fully vested in their salary
deferrals, and become 20% vested in the Bank's contribution after two years of
employment and an additional 20% vested in each of the next four years of
employment. The 401(k) Plan provides that employees select the investment of
their accounts among several options.
The Bank has amended the 401(k) Plan in connection with the Conversion
to provide for option to invest 401(k) Plan assets in Common Stock. In
addition, participating employees may elect to invest all or any part of their
401(k) Plan account balances in Common Stock. Common Stock held by the 401(k)
Plan may be newly issued or treasury shares acquired from the Company or
outstanding shares purchased on the open market or in privately negotiated
transactions. All Common Stock held by the 401(k) Plan will be held by an
independent trustee and allocated to the accounts of individual participants.
Participants will control the exercise of voting and tender rights relating to
the Common Stock held in their accounts.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank has adopted the SERP
to provide for eligible employees benefits that would be due under its
Retirement Plan and 401(k) Plan if such benefits were not limited under the
Code. SERP benefits provided with respect to the Retirement Plan are reflected
in the pension table. The Board of Trustees of the Bank intends to adopt an
amendment to the SERP to provide eligible employees with benefits that would be
due under the ESOP if such benefits were not limited under the Code.
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PROPOSED MANAGEMENT PURCHASES
The following table sets forth, for each of the Company's directors
and executive officers and for all of the directors and executive officers as a
group, the proposed purchases of Common Stock, assuming sufficient shares are
available to satisfy their subscriptions. The amounts include shares that may
be purchased through individual retirement accounts and by associates.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES AMOUNT
-------------------------------------- ------------ ------------
<S> <C> <C>
Harold Banks 10,000 $100,000
Charles J. Bartels 15,000 150,000
James R. Coyle 90,000 900,000
Harry P. Doherty 90,000 900,000
William G. Horn 10,000 100,000
Dennis P. Kelleher 100,000 1,000,000
Julius Mehrberg 18,000 180,000
John R. Morris 50,000 500,000
Kenneth W. Nelson 50,000 500,000
William E. O'Mara 52,000 525,000
All directors and executive officers
as a group (15 persons) 618,500 6,185,000
</TABLE>
In addition, the ESOP currently intends to purchase 8% of the Common
Stock issued in the Conversion for the benefit of officers and employees.
Stock options and stock grants may also be granted in the future to directors,
officers and employees upon the receipt of stockholder approval of the
Company's proposed stock benefit plans. See "Management - Management of the
Bank - Benefits" for a description of these plans.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE COMPANY AND THE BOARD OF TRUSTEES OF THE
BANK HAVE APPROVED THE PLAN OF CONVERSION, AS HAS THE OTS, SUBJECT TO APPROVAL
BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION
OF CERTAIN OTHER CONDITIONS. SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE
A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH AGENCY.
GENERAL
On April 16, 1997, the Board of Trustees of the Bank unanimously
adopted the Plan, pursuant to which the Bank will be converted from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank and the Company will offer and sell the Common Stock. It is intended that
all of the common stock of the Bank following the Conversion will be held by
the Company, which is incorporated under Delaware law. The Plan has been
approved by the OTS, subject to, among other things, approval of the Plan by
the members of the Bank. A Special Meeting has been called for this purpose to
be held on ______, 1997.
In adopting the Plan, the Board of Directors of the Bank determined
that the Conversion was advisable and in the best interests of its members and
the Bank and further determined that the interests of certain holders of its
deposit accounts in the net worth of the Bank would be equitably provided for
and that the Conversion would not have any adverse impact on the reserves and
net worth of the Bank.
The Company has received approval from the OTS to become a savings and
loan holding company and to acquire all of the common stock of the Bank to be
issued in connection with the Conversion. The Company plans to retain 50% of
the net proceeds from the sale of the Common Stock, with all the remaining
proceeds used to purchase all of the then to be issued and outstanding capital
stock of the Bank. Based on the minimum and maximum of the Estimated Valuation
Range, approximately $21.0 million and $28.5 million, respectively, of the net
proceeds retained by the Company are intended to be used to loan funds to the
ESOP to enable the ESOP to purchase up to 8% of the Common Stock. The
Conversion will be effected only upon completion of the sale of all of the
shares of Common Stock to be issued pursuant to the Plan.
The Plan provides generally that, in connection with the Conversion,
the Company will offer shares of Common Stock for sale in the Subscription
Offering to the Bank's Eligible Account Holders (defined as depositors of the
Bank with account balances of $50.00 or more as of the close of business on
March 31, 1996), ESOP, Supplemental Eligible Account Holders (defined as
depositors of the Bank with account balances of $50.00 or more as of the close
of business on June 30, 1997), Other Members, (defined as depositors of the
Bank as of the close of business on ______ ______, 1997), officers, directors
and employees of the Bank. Any shares remaining upon completion of the
Subscription Offering are expected to be offered in a Community Offering to
certain members of the general public, subject to the prior rights of holders
of subscription rights. See "- Subscription Offering and Subscription Rights"
and "- Community Offering." It is
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anticipated that all shares not subscribed for in the Subscription and
Community Offerings will be offered for sale by the Company to the general
public in a Syndicated Community Offering. See "- Syndicated Community
Offering." The Company and the Bank will have the right to accept or reject,
in whole or in part, any orders to purchase shares of Common Stock received in
the Community Offering or in the Syndicated Community Offering.
The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Valuation Range, currently estimated to be
between $263.1 million and $356.0 million, will be determined based upon an
independent appraisal of the estimated pro forma market value of the Common
Stock. All shares of Common Stock to be issued and sold in the Conversion will
be sold at the same price. The independent appraisal will be affirmed or, if
necessary, updated at the completion of the Subscription Offering, if all
shares are subscribed for, or at the completion of the Community Offering
and/or Syndicated Community Offering. The appraisal has been performed by RP
Financial, a consulting firm experienced in the valuation and appraisal of
savings institutions. See "- Stock Pricing and Number of Shares to be Issued"
for more information as to the determination of the estimated pro forma market
value of the Common Stock.
In furtherance of the Bank's commitment to the community which it
serves, the Plan provides for the establishment of the Foundation as part of
the Conversion. As is described in greater detail in the following section,
the Foundation is intended to complement the Bank's existing community
reinvestment activity and is a means of establishing a common bond between the
Bank and the communities that it serves and thereby enable such communities to
share in the growth and profitability of the Company over the long term.
Consistent with the Bank's goal, the Company intends to donate to the
Foundation immediately following the Conversion a number of shares of its
authorized, but unissued Common Stock, in an amount equal to 5% of the number
of shares of Common Stock issued in the Conversion.
The following is a brief summary of pertinent aspects of the
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan. A copy of the Plan is available for inspection at the
offices of the Bank and at the offices of the OTS. The Plan is also filed as
an exhibit to the Registration Statement of which this Prospectus is a part,
copies of which may be obtained from the SEC. See "Additional Information."
ESTABLISHMENT OF THE FOUNDATION
GENERAL. In furtherance of the Bank's commitment to the communities
that it serves, the Plan provides that the Bank and the Company will establish
the Foundation, which will be incorporated under Delaware law as a non-stock
corporation, and will fund the Foundation with Common Stock of the Company. By
further enhancing the Bank's visibility and reputation in the communities that
it serves, the Bank believes that the Foundation will enhance the long-term
value of the Bank's community banking franchise. The Foundation
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will be dedicated to charitable purposes within the communities served by the
Bank, including community development activities.
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to
provide funding to support charitable causes and community development
activities. In recent years, the Bank has emphasized community lending and
community development activities within the communities that it serves. The
Foundation is being formed as a complement to the Bank's existing community
activities, not as a replacement for such activities. While the Bank intends
to continue to emphasize community lending and community development activities
following the Conversion, such activities are not the Bank's sole corporate
purpose. The Foundation, conversely, will be completely dedicated to community
activities and the promotion of charitable causes, and may be able to support
such activities in ways that are not currently available to the Bank. The Bank
believes that the Foundation will enable the Company and the Bank to assist
their local community in areas beyond community development and lending. The
Bank believes the establishment of the Foundation will enhance its current
activities under the CRA. In this regard, the Board of Directors believes the
establishment of a charitable foundation is consistent with the Bank's
commitment to community service. The Board further believes that the funding
of the Foundation with Common Stock of the Company is a means of enabling the
communities served by the Bank to share in the growth and success of the
Company long after completion of the Conversion. The Foundation will
accomplish that goal by providing for continued ties between the Foundation and
Bank, thereby forming a partnership with the Bank's community. The
establishment of the Foundation will also enable the Company and the Bank to
develop a unified charitable donation strategy and will centralize the
responsibility for administration and allocation of corporate charitable funds.
Charitable foundations have been formed by other financial institutions for
this purpose, among others. The Bank, however, does not expect the
contribution to the Foundation to take the place of the Bank's traditional
community lending activities.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated
under Delaware law as a non-stock corporation. Pursuant to the Foundation's
Bylaws, the Foundation's initial Board of Directors will be comprised of
members of the Company's Board of Directors and certain other individuals
chosen in light of their commitment and service to charitable and community
purposes. A Nominating Committee of the Foundation's Board will nominate
individuals eligible for election to the Board of Directors. The members of
the Foundation, who are comprised of its Board members, will elect the
directors at the annual meeting of the Foundation from those nominated by the
Nominating Committee. Only persons serving as directors of the Foundation
qualify as members of the Foundation, with voting authority. Directors will be
divided into three classes with each class appointed for three-year terms. The
certificate of incorporation of the Foundation provides that the corporation is
organized exclusively for charitable purposes, including community development,
as set forth in Section 501(c)(3) of the Code. The Foundation's certificate of
incorporation further provides that no part of the net earnings of the
Foundation will inure to the benefit of, or be distributable to its directors,
officers or members.
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The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The Directors of the Foundation will be
responsible for establishing the policies of the Foundation will respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt such
a policy upon establishment of the Foundation. As directors of a nonprofit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established. The Directors of the
Foundation will also be responsible for directing the activities of the
Foundation, including the management of the Common Stock of the Company held by
the Foundation. However, it is expected that as a condition to receiving the
approval of the OTS to the Bank's Conversion, that the Foundation will be
required to commit to the OTS that all shares of Common Stock held by the
Foundation will be voted in the same ratio as all other shares of the Company's
Common Stock on all proposals considered by stockholders of the Company;
provided, however, that, consistent with the such expected condition, the OTS
would waive this voting restriction under certain circumstances if compliance
with the voting restriction would: (i) cause a violation of the law of the
State of Delaware and the OTS determines that federal law would not preempt the
application of the laws of Delaware to the Foundation; (ii) would cause the
Foundation to lose its tax-exempt status, or cause the Internal Revenue Service
to deny the Foundation's request for a determination that it is an exempt
organization or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) would cause the Foundation to be subject to an excise tax
under Section 4941 of the Code. In order for the OTS to waive such voting
restriction, the Company's or the Foundation's legal counsel would be required
to render an opinion satisfactory to the OTS that compliance with the voting
requirement would have the effect described in clauses (i), (ii) or (iii)
above. Under those circumstances, the OTS would grant a waiver of the voting
restriction upon submission of such legal opinions(s) by the Company or the
Foundation that are satisfactory to the OTS. In the event that the OTS were to
waive the voting requirement, the directors would direct the voting of the
Common Stock held by the Foundation.
The Foundation's place of business will be located at the Bank's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Company or the Bank.
The Board of Directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. In this regard, it is
expected that the Bank will be required to provide the OTS with a commitment
that, to the extent applicable, the Bank will comply with the affiliate
restrictions set forth in Sections 23A and 23B of the Federal Reserve Act with
respect to any transactions between the Bank and the Foundation.
The Company intends to capitalize the Foundation with Common Stock of
the Company in an amount equal to 5.0% of the total amount of the Common Stock
to be sold in connection with the Conversion. At the minimum, midpoint and
maximum of the
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Estimated Price Range, the contribution to the Foundation would equal
1,315,476, 1,547,619 and 1,779,762 shares, which would have a market value of
$13.2 million, $15.5 million and $17.8 million, respectively, based on the
Purchase Price of $10.00 per share. The Company and the Bank determined to
fund the Foundation with Common Stock rather than cash because it desired to
form a bond with the communities it serves in a manner that would allow them to
share in the growth and success of the Company and the Bank over the long term.
The funding of the Foundation with stock also provides the Foundation with a
potentially larger endowment than if the Company contributed cash to the
Foundation since, as a stockholder, the Foundation will share in the growth and
success of the Company. As such, the contribution of Common Stock to the
Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Company, if it were not making the
stock donation, would have to contribute to the Foundation in future years in
order to maintain a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that
may be paid on the Common Stock in the future, and subject to applicable
federal and state laws, loans collateralized by the Common Stock or from the
proceeds of the sale of any of the Common Stock in the open market from time to
time as may be permitted to provide the Foundation with additional liquidity.
As a private foundation under Section 501(c)(3) of the Code, the Foundation
will be required to distribute annually in grants or donations, a minimum of 5%
of the average fair market value of its net investment assets. One of the
conditions imposed on the gift of Common Stock by the Company is that the
amount of Common Stock that may be sold by the Foundation in any one year shall
not exceed 5% of the average market value of the assets held by the Foundation,
except where the Board of Directors of the Foundation determines that the
failure to sell an amount of common stock greater than such amount would result
in a longer-term reduction of the value of the Foundation's assets and as such
would jeopardize the Foundation's capacity to carry out its charitable
purposes. Upon completion of the Conversion and the contribution of shares to
the Foundation immediately following the Conversion, the Company would have
27,625,000, 32,500,000 and 37,375,000 shares issued and outstanding at the
minimum, midpoint and maximum of the Estimated Price Range. Because the
Company will have an increased number of shares outstanding, the voting and
ownership interests of shareholders in the Company's Common Stock would be
diluted by 4.8%, as compared to their interests in the Company if the
Foundation was not established. For additional discussion of the dilutive
effect, see "Pro Forma Data."
TAX CONSIDERATIONS. The Company and the Bank have been advised by
their independent tax advisors that an organization created and operated for
the above charitable purposes would generally qualify as a Section 501(c)(3)
exempt organization under the Code, and further that such an organization would
likely be classified as a private foundation. This opinion presumes that the
Foundation will submit a timely request to the IRS to be recognized as an
exempt organization. As long as the Foundation files its application for
recognition of tax-exempt status within 15 months from the date of its
organization, and provided the IRS approves the application, the effective date
of the
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Foundation's status as a Section 501(c)(3) organization will be the date of its
organization. The Company's and the Bank's independent tax advisor, however,
has not rendered any advice on the condition to the contribution to be agreed
to by the Foundation which requires that all shares of Common Stock of the
Company held by the Foundation must be voted in the same ratio as all other
outstanding shares of Common Stock of the Company on all proposals considered
by stockholders of the Company. Consistent with the expected condition, in the
event that the Company or the Foundation receives an opinion of its legal
counsel that compliance with this voting restriction would have the effect of
causing the Foundation to lose its tax-exempt status or otherwise have a
material and adverse tax consequence on the Foundation, or subject the
Foundation to an excise tax under Section 4941 of the Code, it is expected that
the OTS would waive such voting restriction upon submission of a legal
opinion(s) by the Company or the Foundation satisfactory to the OTS. See
"--Regulatory Conditions Imposed on the Foundation."
Under Delaware law, the Company is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must be within reasonable limits as to amount
and purpose to be valid. Under the Code, the Company is generally allowed a
deduction for charitable contributions made to qualifying donees within the
taxable year of up to 10% of its taxable income (with certain modifications)
for such year. Charitable contributions made by the Company in excess of the
annual deductible amount will be deductible over each of the five succeeding
taxable years, subject to certain limitations. The Company and the Bank
believe that the Conversion presents a unique opportunity to establish and fund
a charitable foundation given the substantial amount of additional capital
being raised in the Conversion. In making such a determination, the Company
and the Bank considered the dilutive impact of the contribution of Common Stock
to the Foundation on the amount of Common Stock available to be offered for
sale in the Conversion. Based on such consideration, the Company and Bank
believe that the contribution to the Foundation in excess of the 10% annual
deduction limitation is justified given the Bank's capital position and its
earnings, the substantial additional capital being raised in the Conversion and
the potential benefits of the Foundation to the communities served by the Bank.
In this regard, assuming the sale of the Common Stock at the midpoint of the
Estimated Price Range, the Company would have pro forma stockholders' equity of
$450.7 million or 21.2% of pro forma consolidated assets and the Bank's pro
forma tangible, core and total risk-based capital ratios would be 14.0%, 15.0%
and 31.4%, respectively. See "Regulatory Capital Compliance,"
"Capitalization," and "Comparison of Valuation and Pro Forma Information with
No Foundation." Thus, the amount of the contribution will not adversely impact
the financial condition of the Company and the Bank and the Company and the
Bank therefore believe that the amount of the charitable contribution is
reasonable given the Company's and the Bank's pro forma capital positions. As
such, the Company and the Bank believe that the contribution does not raise
safety and soundness concerns.
The Company and the Bank have received an opinion of their independent
tax advisors that the Company's contribution of its own stock to the Foundation
would not
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constitute an act of self-dealing, and that the Company will be entitled to a
deduction in the amount of the fair market value of the stock at the time of
the contribution, subject to the annual deduction limitation described above.
The Company, however, would be able to carry forward any unused portion of the
deduction for five years following the contribution, subject to certain
limitations. The Company's and the Bank's independent tax advisor, however,
has not rendered advice as to fair market value for purposes of determining the
amount of the tax deduction. If the Foundation would have been established in
1996, the Company would have received a tax benefit of approximately $8.4
million (based on the Bank's pre-tax income for 1996, an assumed marginal tax
rate of 47% and a deduction for the contribution of Common Stock equal to $17.8
million). The Company is permitted under the Code to carry over the excess
contribution over the five-year period following the contribution to the
Foundation. Assuming the close of the Offering at the midpoint of the
Estimated Price Range, the Company estimates that all of the contributions
should be deductible over the six-year period. Neither the Company nor the
Bank expect to make any further contributions to the Foundation within the
first five years following the initial contribution. After that time, the
Company and the Bank may consider future contributions to the Foundation. Any
such decisions would be based on an assessment of, among other factors, the
financial condition of the Company and the Bank at that time, the interests of
shareholders and depositors of the Company and the Bank, and the financial
condition and operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent tax advisors that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that a deduction
for the charitable contribution will be allowed. In such event, the Company's
tax benefit related to the contribution to the Foundation would be expensed
without tax benefit, resulting in a reduction in earnings in the year in which
the IRS makes such a determination. See "Risk Factors-Establishment of the
Foundation."
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The Foundation will be required to make an
annual filing with the IRS within four and one-half months after the close of
the Foundation's fiscal year to maintain its tax-exempt status. The Foundation
will be required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of such
public notice. The information return for a private foundation must include,
among other things, an itemized list of all grants made or approved, showing
the amount of each grant, the recipient, any relationship between a grant
recipient and the Foundation's managers and a concise statement of the purpose
of each grant. The Foundation will also be required to file an annual report
with the Charities Bureau of the Office of the Attorney General of the State of
New York.
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REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is expected to be subject to the following conditions being agreed
to by the Foundation in writing as a condition to receiving the OTS' approval
of the Conversion: (i) the Foundation will be subject to examination by the
OTS; (ii) the Foundation must comply with supervisory directives imposed by the
OTS; (iii) the Foundation will operate in accordance with written policies
adopted by the Board of Directors, including a conflict of interest policy; and
(iv) any shares of Common Stock held by the Foundation must be voted in the
same ratio as all other outstanding shares of Common Stock all proposals
considered by stockholders of the Company; provided, however, that, consistent
with the condition, the OTS would waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (a) cause a
violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of Delaware to the
Foundation; (b) would cause the Foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the Foundation; or (c)
would cause the Foundation to be subject to an excise tax under Section 4941 of
the Code. In order for the OTS to waive such voting restriction, the Company's
or the Foundation's legal counsel would be required to render an opinion
satisfactory to the OTS. While there is no current intention for the Company
or the Foundation to seek a waiver from the OTS from such restrictions, there
can be no assurances that a legal opinion addressing these issues could be
rendered, or if rendered, that the OTS would grant an unconditional waiver of
the voting restriction. In no event would the voting restriction survive the
sale of shares of the Common Stock held by the Foundation.
PURPOSES OF CONVERSION
The Bank, as a federally-chartered mutual savings bank, does not have
stockholders and has no authority to issue capital stock. By converting to the
capital stock form of organization, the Bank will be structured in the form
used by commercial banks, most business entities and a growing number of
savings institutions. The Conversion will result in an increase in the capital
base of the Bank and the Company, which will support the operations of the Bank
and Company.
The Conversion will permit the Bank's customers and members of the
local community and of the general public to become equity owners and to share
in the future of the Company and the Bank. The Conversion will also provide
additional funds for lending and investment activities, facilitate future
access to the capital markets, enhance the ability of the Company to diversify
and expand into other markets and enable the Bank to compete more effectively
with other financial institutions.
The holding company form of organization will provide additional
flexibility to diversify the Company's and the Bank's business activities
through existing or newly formed subsidiaries, or through acquisition of or
mergers with other financial institutions, as well as other companies.
Although there are no current arrangements, understandings or agreements
regarding any such opportunities, the Company will be in a position after the
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise.
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After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and applicable regulatory approvals, to
raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present
time, the Company has no plans with respect to additional offerings of
securities, other than the possible issuance of additional shares to the
Recognition Plan or upon exercise of stock options. Following the Conversion,
the Company will also be able to use stock-related incentive programs to
attract and retain executive and other personnel for itself and its
subsidiaries. See "Management - Benefits."
EFFECTS OF CONVERSION
GENERAL. Prior to the Conversion, each depositor in the Bank has both
a deposit account in the institution and a pro rata ownership interest in the
net worth of the Bank based upon the balance in his account, which interest may
only be realized in the event of a liquidation of the Bank. However, this
ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. Any person who opens a
deposit account obtains a pro rata ownership interest in the net worth of the
Bank without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the Bank, which is lost to the extent that the balance in the account is
reduced.
Consequently, the depositors of the Bank normally have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the Bank is liquidated. In such event, the
depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves of the Bank after other claims, including claims
of depositors to the amount of their deposits, are paid.
When the Bank converts to stock form, permanent nonwithdrawable
capital stock will be created to represent the ownership of the net worth of
the Bank, and the Bank will become a wholly owned subsidiary of the Company.
THE COMMON STOCK OF THE BANK AND THE COMPANY IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS OF THE BANK AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of the
permanent stock of the Bank and the Company. The stock certificates are
transferable, and therefore the stock may be sold or traded if a purchaser is
available with no effect on any account the seller may hold in the Bank.
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by
the OTS and the FDIC. After the Conversion, the Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff.
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The directors and officers of the Bank at the time of the Conversion
will continue to serve as directors and officers of the Bank after the
Conversion. The directors and officers of the Company consist of individuals
currently serving as directors and officers of the Bank, and they will retain
their positions in the Bank after the Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the
Bank at the time of the Conversion will automatically continue as a depositor
after the Conversion, and each such deposit account will remain the same with
respect to deposit balance, interest rate and other terms, except to the extent
that funds in the account are withdrawn to purchase the Common Stock and except
with respect to voting and liquidation rights. Each such account will be
insured by the FDIC to the same extent as before the Conversion. Depositors
will continue to hold their existing certificates, passbooks and other
evidences of their accounts.
EFFECT ON LOANS. No loan outstanding from the Bank will be affected
by the Conversion, and the amount, interest rate, maturity and security for
each loan will remain as they were contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors of the
Bank are members of, and have voting rights in, the Bank as to all matters
requiring membership action. Upon completion of the Conversion, depositors
will cease to be members and will no longer be entitled to vote at meetings of
the Bank. Upon completion of the Conversion, all voting rights in the Bank
will be vested in the Company as the sole stockholder of the Bank. Exclusive
voting rights with respect to the Company will be vested in the holders of
Common Stock. Depositors of the Bank will not have voting rights in the
Company after the Conversion, except to the extent that they become
stockholders of the Company.
TAX EFFECTS. Consummation of the Conversion is conditioned on prior
receipt by the Company and the Bank of rulings or opinions with regard to
federal and New York income taxation which indicate that the adoption and
implementation of the Plan of Conversion described herein will not be taxable
for federal or New York income tax purposes to the Company and the Bank or the
Bank's Eligible Account Holders or Supplemental Eligible Account Holders,
except as discussed below. The Bank has received favorable opinions regarding
the federal and New York income tax consequences of the Conversion. See "- Tax
Aspects."
EFFECT ON LIQUIDATION RIGHTS. Were the Bank to liquidate, all claims
of the Bank's creditors (including those of depositors, to the extent of their
deposit balances) would be paid first. Thereafter, if there were any assets
remaining, members of the Bank would receive such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts at the Bank
immediately prior to liquidation. In the unlikely event that the Bank were to
liquidate after the Conversion, all claims of creditors (including those of
depositors, to the extent of their deposit balances) would also be paid first,
followed by distribution of the "liquidation account" to certain depositors
(see "- Liquidation Rights"), with any assets
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remaining thereafter distributed to the Company as the holder of the Bank's
capital stock. Pursuant to the rules and regulations of the OTS, a
post-Conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not
be considered a liquidation and, in such a transaction, the liquidation account
would be required to be assumed by the surviving institution.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Plan of Conversion requires that the purchase price of the Common
Stock must be based on the appraised pro forma market value of the Common
Stock, as determined on the basis of an independent valuation. The Bank has
retained RP Financial to make such valuation. For its services in making such
appraisal, RP Financial's fees and out-of-pocket expenses are estimated to be
$80,000. The Bank has agreed to indemnify RP Financial and any employees of RP
Financial who act for or on behalf of RP Financial in connection with the
appraisal against any and all loss, cost, damage, claim, liability or expense
of any kind (including claims under federal and state securities laws) arising
out of any misstatement or untrue statement of a material fact or an omission
to state a material fact in the information supplied by the Bank to RP
Financial, unless RP Financial is determined to be negligent or otherwise at
fault.
An appraisal has been made by RP Financial in reliance upon the
information contained in this Prospectus, including the Financial Statements.
RP Financial also considered the following factors, among others: the present
and projected operating results and financial condition of the Company and the
Bank and the economic and demographic conditions in the Bank's existing
marketing area; certain historical, financial and other information relating to
the Bank; a comparative evaluation of the operating and financial statistics of
the Bank with those of other similarly situated publicly traded savings
institutions located in New York and New Jersey; the aggregate size of the
offering of the Common Stock; the impact of the Conversion on the Bank's net
worth and earnings potential; the proposed dividend policy of the Company and
the Bank; and the trading market for securities of comparable institutions and
general conditions in the market for such securities. In its review of the
appraisal provided by RP Financial, the Board of Directors reviewed the
methodologies and the appropriateness of the assumptions used by RP Financial
in addition to the factors enumerated above, and the Board of Directors
believes that such assumptions were reasonable.
On the basis of the foregoing, RP Financial has advised the Company
and the Bank that in its opinion, dated July 17, 1997, the estimated pro forma
market value of the Common Stock ranged from a minimum of $263.1 million to a
maximum of $356.0 million with a midpoint of $309.5 million. The Boards of
Directors of the Company and the Bank determined that the Common Stock should
be sold at $10.00 per share, resulting in a range of 26,309,524 to 35,595,238
shares of Common Stock being offered. The Estimated Valuation Range may be
amended with the approval of the OTS, if required, or if necessitated by
subsequent developments in the financial condition of the Company and the
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Bank or market conditions generally, or to fill the order of the ESOP. In the
event the Estimated Valuation Range is updated to amend the value of the Bank
below $263.1 million or above $409.3 million (the maximum of the Estimated
Valuation Range, as adjusted by 15%), the new appraisal will be filed with the
SEC by post-effective amendment.
Based upon current market and financial conditions and recent
practices and policies of the OTS, in the event the Company receives orders for
Common Stock in excess of $356.0 million (the maximum of the Estimated
Valuation Range) and up to $409.3 million (the maximum of the Estimated
Valuation Range, as adjusted by 15%), the Company may be required by the OTS to
accept all such orders. No assurances, however, can be made that the Company
will receive orders for Common Stock in excess of the maximum of the Estimated
Valuation Range or that, if such orders are received, that all such orders will
be accepted because the Company's final valuation and number of shares to be
issued are subject to the receipt of an updated appraisal from RP Financial
which reflects such an increase in the valuation and the approval of such
increase by the OTS. In addition, an increase in the number of shares above
35,595,238 shares will first be used, if necessary, to fill the order of the
ESOP. There is no obligation or understanding on the part of management to
take and/or pay for any shares in order to complete the Conversion.
RP FINANCIAL'S VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED,
AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH
SHARES. RP FINANCIAL DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID RP FINANCIAL
VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE VALUATION
CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH
VALUATION 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 COMMON STOCK IN THE CONVERSION WILL THEREAFTER
BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE
RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE THEREOF.
Prior to completion of the Conversion, the maximum of the Estimated
Valuation Range may be increased up to 15% and the number of shares of Common
Stock may be increased to up to 40,934,524 shares to reflect changes in market
and financial conditions or to fill the order of the ESOP, without the
resolicitation of subscribers. See "- Limitations on Common Stock Purchases"
as to the method of distribution and allocation of additional shares that may
be issued in the event of an increase in the Estimated Valuation Range to fill
unfilled orders in the Subscription Offering.
No sale of shares of Common Stock in the Conversion may be consummated
unless prior to such consummation RP Financial confirms that nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause it to conclude that the Purchase Price is materially incompatible
with the estimate of the pro forma market value of a share of Common Stock upon
consummation of the Conversion. If such is not the case,
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a new Estimated Valuation Range may be set and a new Subscription and Community
Offering and/or Syndicated Community Offering may be held or such other action
may be taken as the Company and the Bank shall determine and the OTS may permit
or require.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares of Common
Stock may be increased or decreased without a resolicitation of subscribers,
provided that the product of the total number of shares times the Purchase
Price is not below the minimum or more than 15% above the maximum of the
Estimated Valuation Range. In the event market or financial conditions change
so as to cause the aggregate Purchase Price of the shares to be below the
minimum of the Estimated Valuation Range or more than 15% above the maximum of
such range, purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to modify or rescind their
subscriptions). Any change in the Estimated Valuation Range must be approved
by the OTS. If the number of shares of Common Stock issued in the Conversion
is increased due to an increase of up to 15% in the Estimated Valuation Range
to reflect changes in market or financial conditions or to fill the order of
the ESOP, persons who subscribed for the maximum number of shares will be given
the opportunity to subscribe for the adjusted maximum number of shares. See "-
Limitations on Common Stock Purchases."
An increase in the number of shares of Common Stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and the Company's pro forma net income and
stockholders' equity on a per share basis while increasing pro forma net income
and stockholders' equity on an aggregate basis. A decrease in the number of
shares of Common Stock would increase both a subscriber's ownership interest
and the Company's pro forma net income and stockholders' equity on a per share
basis while decreasing pro forma net income and stockholders' equity on an
aggregate basis. See "Risk Factors - Possible Increase in Number of Shares
Issued in the Conversion" and "Pro Forma Data."
Copies of the appraisal report of RP Financial, including any
amendments thereto, and the detailed report of the appraiser setting forth the
method and assumptions for such appraisal are available for inspection at the
main office of the Bank and the other locations specified under "Additional
Information."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) Eligible
Account Holders, (2) the ESOP, (3) Supplemental Eligible Account Holders, (4)
Other Members, and (5) directors, officers and employees of the Bank. All
subscriptions received will be subject to the availability of
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Common Stock after satisfaction of all subscriptions of all persons having
prior rights in the Subscription Offering and to the maximum and minimum
purchase limitations set forth in the Plan of Conversion and as described below
under "- Limitations on Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder
will receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of (i) $300,000 of Common Stock, (ii) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock 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 Eligible Account Holder's qualifying deposit and
the denominator of which is the total amount of qualifying deposits of all
Eligible Account Holders, in each case as of the close of business on March 31,
1996 (the "Eligibility Record Date"), subject to the overall purchase
limitations. See "- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated among subscribing Eligible
Account Holders so as to permit each such Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Thereafter, any shares remaining after each subscribing Eligible
Account Holder has been allocated the lesser of the number of shares subscribed
for or 100 shares will be allocated among the subscribing Eligible Account
Holders whose subscriptions remain unfilled in the proportion that the amounts
of their respective eligible deposits bear to the total amount of eligible
deposits of all subscribing Eligible Account Holders whose subscriptions remain
unfilled, provided that no fractional shares shall be issued. Subscription
Rights of Eligible Account Holders will be subordinated to the priority rights
of Tax-Qualified Employee Stock Benefit Plans to purchase shares in excess of
the maximum of the Estimated Valuation Range.
To ensure proper allocation of stock, each Eligible Account Holder
must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in fewer shares
being allocated than if all accounts had been disclosed. The subscription
rights of Eligible Account Holders who are also directors or officers of the
Bank or their associates will be subordinated to the subscription rights of
other Eligible Account Holders to the extent attributable to increased deposits
in the year preceding March 31, 1996.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. The ESOP will receive,
without payment therefor, second priority, nontransferable subscription rights
to purchase, in the aggregate, up to 10% of the Common Stock, including any
increase in the number of shares of Common Stock after the date hereof as a
result of an increase of up to 15% in the maximum of the Estimated Valuation
Range. The ESOP intends to purchase 8% of the shares of Common Stock, or
2,104,761 shares and 2,847,619 shares based on the minimum
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and maximum of the Estimated Valuation Range, respectively. Subscriptions by
the ESOP will not be aggregated with shares of Common Stock purchased directly
by or which are otherwise attributable to any other participants in the
Subscription and Community Offerings, including subscriptions of any of the
Bank's directors, officers, employees or associates thereof. In the event that
the total number of shares offered in the Conversion is increased to an amount
greater than the number of shares representing the maximum of the Estimated
Valuation Range ("Maximum Shares"), the ESOP will have a priority right to
purchase any such shares exceeding the Maximum Shares up to an aggregate of 10%
of the Common Stock. See "Management - Benefits - Employee Stock Ownership
Plan."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders and the ESOP, each Supplemental Eligible Account
Holder will receive, without payment therefor, third priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of (i) $300,000 of Common Stock, (ii) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock 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 Supplemental Eligible Account Holder's
qualifying deposit and the denominator of which is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders, in each case
as of the close of business on June 30, 1997 (the "Supplemental Eligibility
Record Date"), subject to the overall purchase limitations. See "- Limitations
on Common Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of all Supplemental Eligible Account Holders, available shares
first will be allocated among subscribing Supplemental Eligible Account Holders
so as to permit each such Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Thereafter, any shares remaining available will be allocated among the
Supplemental Eligible Account Holders whose subscriptions remain unfilled in
the proportion that the amounts of their respective eligible deposits bear to
the total amount of eligible deposits of all subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled, provided that no
fractional shares shall be issued.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the ESOP and Supplemental Eligible Account Holders, each Other Member
will receive, without payment therefor, fourth priority, nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greater of (i) $300,000 of Common Stock or (ii) one-tenth of one
percent (0.10%) of the total offering of shares of Common Stock, subject to the
overall purchase limitations. See "- Limitations on Common Stock Purchases."
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In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the ESOP
and Supplemental Eligible Account Holders, is in excess of the total number of
shares of Common Stock offered in the Conversion, available shares first will
be allocated so as to permit each subscribing Other Member, to the extent
possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Thereafter, any remaining shares will be allocated among such
subscribing Other Members on a pro rata basis in the same proportion as each
Other Member's subscription bears to the total subscriptions of all subscribing
Other Members, provided that no fractional shares shall be issued.
PRIORITY 5: DIRECTORS, OFFICERS AND EMPLOYEES. To the extent that
there are sufficient shares remaining after satisfaction of all subscriptions
by Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders
and Other Members, then directors, officers and employees of the Bank will
receive, without payment therefor, fifth priority, nontransferable subscription
rights to subscribe for, in this category, an aggregate of up to 15% of the
shares of Common Stock offered in the Subscription Offering. The ability of
directors, officers and employees to purchase Common Stock under this category
is in addition to rights which are otherwise available to them under the Plan
as they may fall within higher priority categories, and the Plan generally
allows such persons to purchase in the aggregate up to 25% of Common Stock sold
in the Conversion. See "- Limitations on Common Stock Purchases."
In the event of an oversubscription in this category, subscription
rights will be allocated among the individual directors, officers and employees
on a point system basis, whereby such individuals will receive subscription
rights in the proportion that the number of points assigned to each of them
bears to the total points assigned to all directors, officers and employees,
provided that no fractional shares shall be issued. One point will be assigned
for each year of service with the Bank, one point for each salary increment of
$5,000 per annum and five points for each office presently held in the Bank,
including directorships. For information as to the number of shares proposed
to be purchased by certain of the directors and officers, see "Proposed
Management Purchases."
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription
Offering will expire at 12:00, noon, Eastern Time, on ________, 1997 (the
"Subscription Expiration Date"), unless extended for up to 45 days or for such
additional periods by the Company and the Bank as may be approved by the OTS.
The Subscription Offering may not be extended beyond ________, 1999.
Subscription rights which have not been exercised prior to the Subscription
Expiration Date (unless extended) will become void.
The Company and the Bank will not execute orders until at least the
minimum number of shares of Common Stock (26,309,524 shares) have been
subscribed for or otherwise sold. If all shares have not been subscribed for
or sold within 45 days after the Subscription Expiration Date, unless such
period is extended with the consent of the OTS,
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all funds delivered to the Bank pursuant to the Subscription Offering will be
returned promptly to the subscribers with interest and all withdrawal
authorizations will be cancelled. If an extension beyond the 45-day period
following the Subscription Expiration Date is granted, the Company and the Bank
will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders, Other Members and directors, officers
and employees of the Bank, the Company and the Bank anticipate that they will
offer shares pursuant to the Plan to certain members of the general public,
with preference given to natural persons residing in Richmond and Kings
Counties, New York (such natural persons referred to as "Preferred
Subscribers"). Such persons, together with associates of and persons acting in
concert with such persons, may purchase up to the greater of (i) $300,000 or
30,000 shares of Common Stock, or (ii) one-tenth of one percent (0.10%) of the
total offering of shares of Common Stock, subject to the maximum purchase
limitations. See "- Limitations on Common Stock Purchases." THIS AMOUNT MAY
BE INCREASED AT THE SOLE DISCRETION OF THE COMPANY AND THE BANK UP TO 5%
(PROVIDED THAT ANY SUCH INCREASED AMOUNT MAY NOT EXCEED THE MAXIMUM PURCHASE
LIMIT PROVIDED TO SUBSCRIBERS IN THE SUBSCRIPTION OFFERINGS. SEE "-
LIMITATIONS ON COMMON STOCK PURCHASES"). THE OPPORTUNITY TO SUBSCRIBE FOR
SHARES OF COMMON STOCK IN ANY COMMUNITY OFFERING CATEGORY WILL BE SUBJECT TO
THE RIGHT OF THE COMPANY AND THE BANK, IN THEIR SOLE DISCRETION, TO ACCEPT OR
REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN
ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Community Offering, such stock
will be allocated first to each Preferred Subscriber whose order is accepted by
the Company, in an amount equal to the lesser of 100 shares or the number of
shares subscribed for by each such Preferred Subscriber, if possible.
Thereafter, unallocated shares will be allocated among the Preferred
Subscribers whose accepted orders remain unsatisfied on an equal number of
shares basis per order until all orders have been filled or the remaining
shares have been allocated, provided that no fractional shares shall be issued.
Orders for Common Stock in the Community Offering will first be filled to a
maximum of 2% of the total number of shares of Common Stock sold in the
Conversion and thereafter any remaining shares shall be allocated on an equal
number of shares basis per order until all orders have been filled. If there
are any shares remaining, shares will be allocated to other members of the
general public who subscribe in the Community Offering applying the same
allocation described above for Preferred Subscribers.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if
feasible, all shares of Common Stock not purchased in the Subscription and
Community Offerings may be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of
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registered broker-dealers to be formed. The Company and the Bank expect to
market any shares which remain unsubscribed after the Subscription and
Community Offerings through a Syndicated Community Offering. The Company and
the Bank have the right to reject orders in whole or part in their sole
discretion in the Syndicated Community Offering. Neither Keefe, Bruyette nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of Common Stock in the Syndicated Community Offering; however, Keefe,
Bruyette has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be the same price at which shares are offered and sold in the
Subscription and Community Offerings. No person will be permitted to subscribe
in the Syndicated Community Offering for more than $300,000 or 30,000 shares of
Common Stock, subject to the maximum purchase limitations. See "- Limitations
on Common Stock Purchases." This amount may be increased to up to 5% of the
total offering of shares in the Subscription Offering, provided that orders for
Common Stock in the Syndicated Community Offering will first be filled to a
maximum of 2% of the total number of shares of Common Stock sold in the
Conversion. Thereafter, any remaining shares will be allocated on an equal
number of shares basis per order until all orders have been filled.
Keefe, Bruyette may enter into agreements with broker-dealers
("Selected Dealers") to assist in the sale of the shares in the Syndicated
Community Offering, although no such agreements exist as of the date of this
Prospectus. No orders may be placed or filled by or for a Selected Dealer
during the Subscription Offering. After the close of the Subscription
Offering, Keefe, Bruyette will instruct Selected Dealers as to the number of
shares to be allocated to each Selected Dealer. Only after the close of the
Subscription Offering and upon allocation of shares to Selected Dealers may
Selected Dealers take orders from their customers. During the Subscription and
Community Offerings, Selected Dealers may only solicit indications of interest
from their customers to place orders with the Company as of a certain date
("Order Date") for the purchase of shares of Common Stock. When and if Keefe,
Bruyette and the Company believe that enough indications of interest and orders
have not been received in the Subscription and Community Offerings to
consummate the Conversion, Keefe, Bruyette will request, as of the Order Date,
Selected Dealers to submit orders to purchase shares for which they have
previously received indications of interest from their customers. Selected
Dealers will send confirmations of the orders to such customers on the next
business day after the Order Date. Selected Dealers will debit the accounts of
their customers on the "Settlement Date" which date will be three business days
from the Order Date. Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Settlement Date. On the Settlement Date, Selected
Dealers will remit funds to the account established by the Bank for each
Selected Dealer. Each customer's funds so forwarded to the Bank, along with
all other accounts held in the same title, will be insured by the FDIC up to
$100,000 in accordance with applicable FDIC regulations. After payment has
been received by the Bank from Selected Dealers, funds will earn interest at
the Bank's passbook
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rate until the consummation or termination of the Conversion. Funds will be
promptly returned, with interest, in the event the Conversion is not
consummated as described above.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company and
the Bank with the approval of the OTS. See "- Stock Pricing and Number of
Shares to be Issued" above for a discussion of rights of subscribers, if any,
in the event an extension is granted.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Bank will make reasonable efforts to comply with
the securities laws of all states in the United States in which persons
entitled to subscribe for stock pursuant to the Plan reside. However, the
Company and the Bank are not required to offer stock in the Subscription
Offering to any person who resides in a foreign country or resides in a state
of the United States with respect to which: (a) the number of persons
otherwise eligible to subscribe for shares under the Plan who reside in such
jurisdiction is small; (b) the granting of subscription rights or the offer or
sale of shares of Common Stock to such persons would require any of the Company
and the Bank or their officers, directors or employees, under the laws of such
jurisdiction, to register as a broker, dealer, salesman or selling agent or to
register or otherwise qualify its securities for sale in such jurisdiction or
to qualify as a foreign corporation or file a consent to service of process in
such jurisdiction; and (c) such registration, qualification or filing in the
judgment of the Company and the Bank would be impracticable or unduly
burdensome for reasons of costs or otherwise. Where the number of persons
eligible to subscribe for shares in one state is small, the Company and the
Bank will base their decision as to whether or not to offer the Common Stock in
such state on a number of factors, including but not limited to the size of
accounts held by account holders in the state, the cost of registering or
qualifying the shares or the need to register the Company, its officers,
directors or employees as brokers, dealers or salesmen.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased in the Conversion:
(1) No fewer than 25 shares of Common Stock may be
purchased, to the extent such shares are available;
(2) Each Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of (i)
$300,000 or 30,000 shares of Common Stock, (ii) one-tenth of one
percent (0.10%) of the total offering of shares of Common Stock 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
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of the Eligible Account Holder and the denominator is the total amount
of qualifying deposits of all Eligible Account Holders, in each case
as of the close of business on the Eligibility Record Date, subject to
the overall limitation in clause (7) below;
(3) The ESOP may purchase in the aggregate up to 10% of
the shares of Common Stock, including any additional shares issued in
the event of an increase in the Estimated Valuation Range; although at
this time it intends to purchase only 8% of such shares;
(4) Each Supplemental Eligible Account Holder may
subscribe for and purchase in the Subscription Offering up to the
greater of (i) $300,000 or 30,000 shares of Common Stock, (ii)
one-tenth of one percent (0.10%) of the total offering of shares of
Common Stock 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 Supplemental Eligible Account
Holder and the denominator is the total amount of qualifying deposits
of all Supplemental Eligible Account Holders, in each case as of the
close of business on the Supplemental Eligibility Record Date, subject
to the overall limitation in clause (7) below;
(5) Each Other Member or any Person purchasing shares of
Common Stock in the Community Offering may subscribe for and purchase
in the Subscription Offering or Community Offering, as the case may
be, up to the greater of (i) $300,000 or 30,000 shares of Common Stock
or (ii) one-tenth of one percent (0.10%) of the total offering of
shares of Common Stock, subject to the overall limitation in clause
(7) below;
(6) Persons purchasing shares of Common Stock in the
Community Offering or Syndicated Community Offering may purchase in
the Community Offering or Syndicated Community Offering up to $300,000
or 30,000 shares of Common Stock, subject to the overall limitation in
clause (7) below;
(7) Except for the ESOP and certain Eligible Account
Holders and Supplemental Eligible Account Holders whose subscription
rights are based upon the amount of their deposits, the maximum number
of shares of Common Stock subscribed for or purchased in all
categories of the Conversion by any person, together with associates
of and groups of persons acting in concert with such persons, shall
not exceed 1.0% of the total number of shares of Common Stock issued
in the Conversion; and
(8) No more than 15% of the total number of shares
offered for sale in the Subscription Offering may be purchased by
directors and officers of the Bank in the fourth priority category in
the Subscription Offering. No more than 25% of the total number of
shares offered for sale in the Conversion may be purchased by
directors
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and officers of the Bank and their associates in the aggregate,
excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, the individual amount permitted to be subscribed for may be increased
up to a maximum of 5% of the number of shares sold in the Conversion. If such
amount is increased, subscribers for the maximum amount will be, and certain
other large subscribers in the sole discretion of the Company and the Bank may
be, given the opportunity to increase their subscriptions up to the then
applicable limit.
The term "associate" of a person is defined to mean (i) any
corporation or other organization (other than the Company and the Bank or a
majority-owned subsidiary of the Bank) of which such person is a director,
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, provided, however, that
such term shall not include any tax-qualified employee stock benefit plan of
the Company and the Bank in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; and (iii)
any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Company and the Bank or any of their subsidiaries.
The term "acting in concert" is defined to mean (1) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement, or (2) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
The Company and the Bank may presume that certain persons are acting in concert
based upon, among other things, joint account relationships and the fact that
such persons have filed joint Schedules 13D with the SEC with respect to other
companies.
MARKETING ARRANGEMENTS
The Company and the Bank have retained Keefe, Bruyette to consult with
and to advise the Bank and the Company, and to assist the Company, on a best
efforts basis, in the distribution of the shares of Common Stock in the
Subscription and Community Offering. The services that Keefe, Bruyette will
provide include, but are not limited to (i) training the employees of the Bank
who will perform certain ministerial functions in the Subscription and
Community Offering regarding the mechanics and regulatory requirements of the
stock offering process, (ii) managing the Stock Information Center by assisting
interested stock subscribers and by keeping records of all stock orders, (iii)
preparing marketing materials, and (iv) assisting in the solicitation of
proxies from the Bank's members for use at the Special Meeting. For its
services, Keefe, Bruyette will receive a management fee of $50,000
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and a success fee of 1.15% of the aggregate Purchase Price of the shares
of Common Stock sold in the Subscription Offering and Community Offering
excluding shares purchased by the ESOP, and officers, directors and employees
of the Bank and members of their immediate families as well as shares issued to
the Foundation. The success fee paid to Keefe, Bruyette will be reduced by the
amount of the management fee. In the event that selected dealers are used to
assist in the sale of shares of Common Stock in the Community Offering, such
dealers will be paid a fee of up to 5.5% of the aggregate Purchase Price of the
shares sold by such dealers. The Company and the Bank have agreed to reimburse
Keefe, Bruyette for its out-of-pocket expenses, and its legal fees and to
indemnify Keefe, Bruyette against certain claims or liabilities, including
certain liabilities under the Securities Act, and will contribute to payments
Keefe, Bruyette may be required to make in connection with any such claims or
liabilities.
Sales of shares of Common Stock will be made primarily by registered
representatives affiliated with Keefe, Bruyette or by the broker-dealers
managed by Keefe, Bruyette. A Stock Information Center will be established at
the main office of the Bank. The Company will rely on Rule 3a4-1 of the
Exchange Act and sales of Common Stock will be conducted within the
requirements of such Rule, so as to permit officers, directors and employees to
participate in the sale of the Common Stock in those states where the law so
permits. No officer, director or employee of the Company or the Bank will be
compensated directly or indirectly by the payment of commissions or other
remuneration in connection with his or her participation in the sale of Common
Stock.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours
before the Subscription Expiration Date (unless extended) in accordance with
Rule 15c2-8 of the Exchange Act, no prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date. Execution of the order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will only be distributed with a
prospectus.
To purchase shares in the Subscription Offering, an executed order
form with the required payment for each share subscribed for, or with
appropriate authorization for withdrawal from a deposit account at the Bank
(which may be given by completing the appropriate blanks in the order form),
must be received by the Bank by 12:00 noon, Eastern Time, on the Subscription
Expiration Date (unless extended). In addition, the Company and the Bank will
require a prospective purchaser to execute a certification in the form required
by applicable OTS regulations in connection with any sale of Common Stock.
Order forms which are not received by such time or are executed defectively or
are received without full payment (or appropriate withdrawal instructions) are
not required to be accepted. In addition, the Bank will not accept orders
submitted on photocopied or facsimilied order forms nor order forms
unaccompanied by an executed certification form. The Company and the Bank have
the right to waive or permit the correction of incomplete or improperly
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executed forms, but do not represent that they will do so. Once received, an
executed order form may not be modified, amended or rescinded without the
consent of the Company and the Bank, unless the Conversion has not been
completed within 45 days after the end of the Subscription Offering, unless
such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are properly identified as to their
stock purchase priority, depositors as of the close of business on the
Eligibility Record Date (March 31, 1996) or the Supplemental Eligibility Record
Date (June 30, 1997) and depositors and borrowers as of the close of business
on the Voting Record Date (__________, 1997) must list all accounts on the
stock order form giving all names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in
person, (ii) by check or money order, or (iii) by authorization of withdrawal
from deposit accounts maintained with the Bank. No wire transfers will be
accepted. Interest will be paid on payments made by cash, check or money order
at the Bank's passbook rate of interest from the date payment is received until
completion or termination of the Conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Conversion, but a hold
will be placed on such funds, thereby making them unavailable to the depositor
until completion or termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the
effective date of the Conversion. The Bank will waive any applicable penalties
for early withdrawal from certificate accounts. If the remaining balance in a
certificate account is reduced below the applicable minimum balance requirement
at the time that the funds actually are transferred under the authorization,
the certificate will be cancelled at the time of the withdrawal, without
penalty, and the remaining balance will earn interest at the passbook rate.
If the ESOP subscribes for shares during the Subscription Offering,
the ESOP will not be required to pay for the shares subscribed for at the time
it subscribes, but rather, may pay for such shares of Common Stock subscribed
for by it at the Purchase Price upon consummation of the Subscription and
Community Offerings, if all shares are sold, or upon consummation of the
Syndicated Community Offerings if shares remain to be sold in such offering,
provided that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Company
to lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of Common Stock in the Subscription and Community Offerings.
ERISA provisions and IRS regulations require that officers, directors and 10%
stockholders who use self-directed IRA funds to purchase shares of Common Stock
in the Offerings make such purchases for the
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exclusive benefit of the IRAs. Any interested parties wishing to use IRA funds
for stock purchases are advised to contact the Stock Sales Center at (718)
___-____ for additional information.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Bank, or to such other address as may be specified in properly
completed order forms, as soon as practicable following consummation of the
Conversion. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding
to transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for his account. Each person exercising such subscription rights will be
required to certify that he is purchasing shares solely for his own account and
that he has no agreement or understanding regarding the sale or transfer of
such shares. Federal 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 COMPANY AND THE BANK WILL REFER TO THE OTS ANY SITUATIONS THAT
THEY BELIEVE MAY INVOLVE A TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR
ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor of the Bank would receive his pro rata
share of any assets of the Bank remaining after payment of claims of all
creditors (including the claims of all depositors to the withdrawal value of
their accounts). Each depositor's pro rata share of such remaining assets
would be in the same proportion as the value of his deposit account was to the
total value of all deposit accounts in the Bank at the time of liquidation.
After the Conversion, each depositor, in the event of a complete liquidation of
the Bank, would have a claim as a creditor of the same general priority as the
claims of all other general creditors of the Bank. However, except as
described below, his claim would be solely in the amount of the balance in his
deposit account plus accrued interest. He would not have an interest in the
value or assets of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the Bank's net worth as of the date of its
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latest statement of financial condition contained in the final prospectus
utilized in the Conversion. As of April 30, 1997, the initial balance of the
liquidation account would be approximately $177.3 million. Each Eligible
Account Holder and Supplemental Eligible Account Holder, if he were to continue
to maintain his deposit account at the Bank, would be entitled, upon a complete
liquidation of the Bank after the Conversion, to an interest in the liquidation
account prior to any payment to the Company as the sole stockholder of the
Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder
would have an initial interest in such liquidation account for each deposit
account, including passbook accounts, NOW accounts, money market deposit
accounts, and certificates of deposit, held in the Bank at the close of
business on March 31, 1996 or June 30, 1997, as the case may be. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account for each of his deposit accounts
based on the proportion that the balance of each such deposit account on the
March 31, 1996 Eligibility Record Date (or the December 31, 1997 Supplemental
Eligibility Record Date, as the case may be) bore to the balance of all deposit
accounts in the Bank on such dates.
If, however, on any December 31 annual closing date of the Bank,
commencing December 31, 1997, the amount in any deposit account is less than
the amount in such deposit account on March 31, 1997 or June 30, 1997, as the
case may be, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the claims of general creditors (including
the claims of all depositors to the withdrawal value of their accounts) and 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.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon prior
receipt of either a ruling or an opinion of counsel with respect to federal tax
laws, and either a ruling or an opinion with respect to New York tax laws, to
the effect that consummation of the transactions contemplated hereby will not
result in a taxable reorganization under the provisions of the applicable codes
or otherwise result in any adverse tax consequences to the Bank, the Company or
to account holders receiving subscription rights, except to the extent, if any,
that subscription rights are deemed to have fair market value on the date such
rights are issued.
Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., has issued an
opinion to the Company and the Bank to the effect that, for federal income tax
purposes: (i) the Bank's change in form from mutual to stock ownership will
constitute a reorganization under Section 368(a)(1)(F) of the Code and neither
the Bank nor the Company will recognize any
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gain or loss as a result of the Conversion; (ii) no gain or loss will be
recognized by the Bank or the Company upon the purchase of the Bank's capital
stock by the Company; (iii) no gain or loss will be recognized by Eligible
Account Holders and Supplemental Eligible Account Holders upon the issuance to
them of deposit accounts in the Bank in its stock form plus their interests in
the liquidation account in exchange for their deposit accounts in the mutual
Bank; (iv) assuming the non-transferable subscription rights to purchase Common
Stock have no value, the tax basis of the depositors' deposit accounts in the
Bank immediately after the Conversion will be the same as the basis of their
deposit accounts immediately prior to the Conversion; (v) assuming the
non-transferable subscription rights to purchase Common Stock have no value,
the tax basis of each Eligible Account Holder's and Supplemental Eligible
Account Holder's interest in the liquidation account will be zero; and (vi) the
tax basis to the stockholders of the Common Stock of the Company purchased in
the Conversion will be the amount paid therefor, and the holding period for the
shares of Common Stock purchased by such persons will begin on the date of
consummation of the Conversion if purchased through the exercise of
subscription rights and on the day after the date of purchase if purchased in
the Community Offering. KPMG Peat Marwick, New York, New York, has also
rendered an opinion to the effect that the foregoing tax effects of the
Conversion under New York law are substantially the same as they are under
federal law.
The Company and the Bank have received a letter from RP Financial
stating its belief that the subscription rights do not have any value, based on
the fact that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the unsubscribed
shares of Common Stock. If the subscription rights granted to eligible
subscribers are deemed to have an ascertainable value, receipt of such rights
would be taxable probably only to those eligible subscribers who exercise the
subscription rights (either as a capital gain or ordinary income) in an amount
equal to such value, and the Company and the Bank could recognize gain on such
distribution. Eligible subscribers are encouraged to consult with their own
tax advisor as to the tax consequences in the event that such subscription
rights are deemed to have an ascertainable value.
Unlike private rulings, the letter of RP Financial is not binding on
the IRS, and the IRS could disagree with conclusions reached therein. In the
event of such disagreement, there can be no assurance that the IRS would not
prevail in a judicial or administrative proceeding.
DELIVERY OF CERTIFICATES
Certificates representing Common Stock issued in the Conversion will
be mailed by the Company's transfer agent to the persons entitled thereto at
the addresses of such persons appearing on the stock order form as soon as
practicable following consummation of the Conversion. Any certificates
returned as undeliverable will be held by the Company until claimed by persons
legally entitled thereto or otherwise disposed of in accordance with applicable
law. Until certificates for Common Stock are available and delivered to
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subscribers, such subscribers may not be able to sell the shares of Common
Stock for which they have subscribed, even though trading of the Common Stock
may have commenced.
REQUIRED APPROVALS
Various approvals of the OTS are required in order to consummate the
Conversion. The OTS has approved the Plan of Conversion, subject to approval
by the Bank's members and other standard conditions. The Company's holding
company application is currently pending.
The Company is required to make certain filings with state securities
regulatory authorities in connection with the issuance of Common Stock in the
Conversion.
JUDICIAL REVIEW
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves a plan of conversion may obtain review of
such action by filing in the court of appeals of the United States for the
circuit in which the principal office or residence of such person is located,
or in the United States Court of Appeals for the District of Columbia, a
written petition praying that the final action of the OTS be modified,
terminated or set aside. Such petition must be filed within 30 days after the
publication of notice of such final action in the Federal Register, or 30 days
after the mailing by the applicant of the notice to members as provided for in
12 C.F.R. Section 563b.6(c), whichever is later. The further procedure for
review is as follows: A copy of the petition is forthwith transmitted to the
OTS by the clerk of the court and thereupon the OTS files in the court the
record in proceeding, as provided in Section 2112 of Title 28 of the United
States Code. Upon the filing of the petition, the court has jurisdiction,
which upon the filing of the record is exclusive, to affirm, modify, terminate,
or set aside in whole or in part, the final action of the OTS. Review of such
proceedings is as provided in Chapter 7 of Title 5 of the United States Code.
The judgment and decree of the court is final, except that they are subject to
review by the Supreme Court upon certiorari as provided in Section 1254 of
Title 28 of the United States Code.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE CONVERSION
All shares of Common Stock purchased in connection with the Conversion
by a director or an executive officer of the Company and the Bank will be
subject to a restriction that the shares not be sold for a period of one year
following the Conversion, except in the event of the death of such director or
executive officer or pursuant to a merger or similar transaction approved by
the OTS. Each certificate for restricted shares will bear a legend giving
notice of this restriction on transfer, and instructions will be issued to the
effect that any transfer within such time period of any certificate or record
ownership of such shares other than as provided above is a violation of the
restriction. Any shares of Common Stock
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issued at a later date within this one year period as a stock dividend, stock
split or otherwise with respect to such restricted stock will be subject to the
same restrictions.
Purchases of Common Stock of the Company by directors, executive
officers and their associates during the three-year period following completion
of the Conversion may be made only through a broker or dealer registered with
the SEC, except with the prior written approval of the OTS. This restriction
does not apply, however, to negotiated transactions involving more than 1% of
the Company's outstanding Common Stock or to certain purchases of stock
pursuant to an employee stock benefit plan.
Pursuant to OTS regulations, the Company will generally be prohibited
from repurchasing any shares of the Common Stock within one year following
consummation of the Conversion, although the OTS under its current policies may
approve a request to repurchase shares of Common Stock following the six-month
anniversary of the Conversion. During the second and third years following
consummation of the Conversion, the Company may not repurchase any shares of
its Common Stock other than pursuant to (i) an offer to all stockholders on a
pro rata basis which is approved by the OTS; (ii) the repurchase of qualifying
shares of a director, if any; (iii) purchases in the open market by a
tax-qualified or non-tax-qualified employee stock benefit plan in an amount
reasonable and appropriate to fund the plan; or (iv) purchases that are part of
an open-market stock repurchase program not involving more than 5% of its
outstanding capital stock during a 12-month period, if the repurchases do not
cause the Bank to become undercapitalized and the Bank provides to the Regional
Director of the OTS no later than 10 days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
The OTS may permit stock repurchases in excess of such amounts prior to the
third anniversary of the Conversion if exceptional circumstances are shown to
exist.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
As described below, certain provisions in the Company's Certificate of
Incorporation and Bylaws and in the Company's and the Bank's benefit plans,
together with provisions of Delaware corporate law, may have anti-takeover
effects. In addition, regulatory restrictions may make it difficult for
persons or companies to acquire control of either the Company or the Bank.
Below is a summary of certain material restrictions on acquisitions of the
Company and the Bank.
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RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
General. A number of provisions of the Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of
certain provisions of the Company's Certificate of Incorporation and Bylaws
which might be deemed to have a potential "anti-takeover" effect. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the Board of Directors but which individual Company
stockholders may deem to be in their best interests or in which stockholders
may receive a substantial premium for their shares over then current market
prices. As a result, stockholders who might desire to participate in such a
transaction may not have an opportunity to do so. Such provisions will also
render the removal of the current Board of Directors or management of the
Company more difficult. The following description of certain of the provisions
of the Certificate of Incorporation and Bylaws of the Company is necessarily
general and reference should be made in each case to such Certificate of
Incorporation and Bylaws, which are incorporated herein by reference. See
"Additional Information" as to how to obtain a copy of these documents.
Limitation on Voting Rights. Article 12.B. of the Company's
Certificate of Incorporation provides that no person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of (i) more
than 10% of the issued and outstanding shares of any class of an equity
security of the Company, or (ii) any securities convertible into, or
exercisable for, any equity securities of the Company if, assuming conversion
or exercise by such person of all securities of which such person is the
beneficial owner which are convertible into, or exercisable for, such equity
securities (but of no securities convertible into, or exercisable for, such
equity securities of which such person is not the beneficial owner), such
person would be the beneficial owner of more than 10% of any class of an equity
security of the Company. The terms "person" and "beneficial ownership" are
broadly defined to prevent circumvention of this restriction.
The foregoing restrictions do not apply to (i) any offer with a view
toward public resale made exclusively to the Company by underwriters or a
selling group acting on its behalf, (ii) any tax-qualified employee benefit
plan or arrangement established by the Company or the Bank and any trustee of
such a plan or arrangement, and (iii) any other offer or acquisition approved
in advance by the affirmative vote of two-thirds of the Company's entire Board
of Directors. In the event that shares are acquired in violation of Article
12.B., all shares beneficially owned by any person in excess of 10% shall be
considered "Excess Shares" and shall not be counted as shares entitled to vote
and shall not be voted by any person or counted as voting shares in connection
with any matters submitted to stockholders for a vote, and the Board of
Directors may cause such Excess Shares to be transferred to an independent
trustee for sale on the open market or otherwise, with the expenses of such
trustee to be paid out of the proceeds of sale. In addition, the Company may
refuse to recognize any transfer or attempted transfer of the Company's
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equity securities which would result in the transferee becoming the beneficial
owner of Excess Shares.
Board of Directors. Article 7.A. of the Certificate of Incorporation
of the Company contains provisions relating to the Board of Directors and
provides, among other things, that the Board of Directors shall be divided into
three classes as nearly equal in number as possible, with the term of office of
one class expiring each year. See "Management - Management of the Company."
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Company.
Cumulative voting in the election of directors is not permitted.
Directors may be removed only for cause at a duly constituted meeting
of stockholders called expressly for that purpose upon the vote of the holders
of at least 80% of the total votes eligible to be cast by stockholders. Cause
for removal shall exist only if the director whose removal is proposed has been
either declared incompetent by order of a court, convicted of a felony or of an
offense punishable by imprisonment for a term of more than one year by a court
of competent jurisdiction, or deemed liable by a court of competent
jurisdiction for gross negligence or misconduct in the performance of such
director's duties to the Company. Any vacancy occurring in the Board of
Directors for any reason (including an increase in the number of authorized
directors) may be filled by the affirmative vote of a majority of the remaining
directors, whether or not a quorum of the Board of Directors is present, or the
sole remaining director of the Company, and a director appointed to fill a
vacancy shall serve until the expiration of the term to which he was appointed.
The Company's Bylaws govern nominations for election to the Board, and
requires all nominations for election to the Board of Directors other than
those made by the Board to be made by a stockholder eligible to vote at an
annual meeting of stockholders who has complied with the notice provisions in
that section. Written notice of a stockholder nomination must be delivered to,
or mailed to and received at, the principal executive offices of the Company
not later than 120 days prior to the anniversary date of the immediately
preceding annual meeting, provided that, with respect to the first scheduled
annual meeting following completion of the Conversion, notice must be received
no later than the close of business on January 2, 1998. Each such notice shall
set forth certain information as specified in Section 4.15 of the Bylaws,
including (a) as to each person whom the stockholder proposes to nominate as a
director, and as to the stockholder giving the notice, (i) the name, age,
business address and residence address of such person; (ii) the principal
occupation or employment of such person; (iii) the class and number of shares
of the Company's stock beneficially owned by such person; and (iv) such other
information regarding such person as would be required to be included in a
proxy statement filed pursuant to the proxy rules of the SEC; and (b) the name
and address of any other stockholders supporting such nominees and/or those
affiliated with, controlling or under
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common control with such persons, and the class and number of shares of the
Company's stock beneficially owned by such other stockholders.
The Company's Certificate of Incorporation provides that the personal
liability of the directors and officers of the Company for monetary damages
shall be eliminated to the fullest extent permitted by the General Corporation
Law of the State of Delaware as it exists on the effective date of the
Certificate of Incorporation or as such law may be thereafter in effect.
Section 102(b)(7) of the Delaware General Corporation Law currently provides
that directors (but not officers) of corporations that have adopted such a
provision will not be so liable, except (i) for any breach of the director's
duty of loyalty to the corporation or its shareholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) for the payment of certain unlawful dividends and the
making of certain stock purchases or redemptions, or (iv) for any transaction
from which the director derived an improper personal benefit. This provision
would absolve directors of personal liability for negligence in the performance
of their duties, including gross negligence. It would not permit a director to
be exculpated, however, for liability for actions involving conflicts of
interest or breaches of the traditional "duty of loyalty" to the Company and
its stockholders, and it would not affect the availability of injunctive or
other equitable relief as a remedy.
The Company's Bylaws provide that the Company shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director, officer or employee of the Company or any
predecessor of the Company, or is or was serving at the request of the Company
or any predecessor of the Company as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines, excise taxes and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding to the fullest extent
authorized by the General Corporation Law of the State of Delaware, provided
that the Company shall not be liable for any amounts which may be due in
connection with a settlement of any action, suit or proceeding effected without
its prior written consent or any action, suit or proceeding initiated by any
person seeking indemnification thereunder without its prior written consent.
The indemnification provisions also permit the Company to pay reasonable
expenses in advance of the final disposition of any action, suit or proceeding
as authorized by the Company's Board of Directors, provided that the
indemnified person undertakes to repay the Company if it is ultimately
determined that such person was not entitled to indemnification. The rights of
indemnification provided in the Company's Certificate of Incorporation are not
exclusive of any other rights which may be available under the Company's
Bylaws, any insurance or other agreement, by vote of stockholders or directors
(regardless of whether directors authorizing such indemnification are
beneficiaries thereof) or otherwise. In addition, the Certificate of
Incorporation authorizes the Company to maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Company,
whether or not the Company would
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have the power to provide indemnification to such person. These provisions are
designed to reduce, in appropriate cases, the risks incident to serving as a
director, officer, employee or agent and to enable the Company to attract and
retain the best personnel available.
The provisions regarding director elections and other provisions in
the Certificate of Incorporation and Bylaws are generally designed to protect
the ability of the Board of Directors to negotiate with the proponent of an
unfriendly or unsolicited proposal to take over or restructure the Company by
making it more difficult and time-consuming to change majority control of the
Board, whether by proxy contest or otherwise. The general effect of these
provisions will be to generally require at least two (and possibly three)
annual stockholders' meetings, instead of one, to effect a change in control of
the Board of Directors of the Company even if holders of a majority of the
Company's capital stock believed that a change in the composition of the Board
of Directors was desirable. Because a majority of the directors at any given
time will have prior experience as directors, these requirements will help to
ensure continuity and stability of the Company's management and policies and
facilitate long-range planning for the Company's business. The provisions
relating to removal of directors and filling of vacancies are consistent with
and supportive of a classified board of directors.
The procedures regarding stockholder nominations will provide the
Board of Directors with sufficient time and information to evaluate a
stockholder nominee to the Board and other relevant information, such as
existing stockholder support for the nominee. The proposed procedures,
however, will provide incumbent directors advance notice of a dissident slate
of nominees for directors, and will make it easier for the Board to solicit
proxies resisting such nominees. This may make it easier for the incumbent
directors to retain their status as directors, even when certain stockholders
view the stockholder nominations as in the best interests of the Company or its
stockholders.
Authorized Shares. Article 4 of the Certificate of Incorporation
authorizes the issuance of 100,000,000 shares of Common Stock and 25,000,000
shares of Preferred Stock. The shares of Common Stock and Preferred Stock were
authorized in an amount greater than that to be issued in the Conversion to
provide the Company's Board of Directors with as much flexibility as possible
to effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and 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
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shares, other than the issuance of additional shares pursuant to stock benefit
plans and to the Foundation.
Meetings of Stockholders. The Company's Certificate of Incorporation
provides that any action required or permitted by the General Corporation Law
of the State of Delaware or the Certificate of Incorporation to be approved by
or consented to by the stockholders of the Company, must be effected at a duly
called annual or special meeting of stockholders and may not be effected by
written consent by stockholders in lieu of a meeting of stockholders. The
Certificate of Incorporation further provides that, with limited exceptions,
special meetings of stockholders may be called only by a three-fourths vote of
the Board of Directors.
Stockholder Proposals. The Company's Bylaws provide that only such
business as shall have been properly brought before an annual meeting of
stockholders shall be conducted at the annual meeting. In order to be properly
brought before an annual meeting following completion of the Conversion,
business must be (a) brought before the meeting by or at the direction of the
Board of Directors or (b) otherwise properly brought before the meeting by a
stockholder who has given timely and complete notice thereof in writing to the
Company. For stockholder proposals to be included in the Company's proxy
materials, the stockholder must comply with all the timing and informational
requirements of Rule 14a-8 of the Exchange Act. With respect to stockholder
proposals to be considered at the annual meeting of stockholders but not
included in the Company's proxy materials, the stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 120 days prior to the anniversary date of the immediately
preceding annual meeting; provided, however, that with respect to the first
scheduled annual meeting following completion of the Conversion, such written
notice must be received by the Company not later than the close of business on
January 2, 1998. A stockholder's notice shall set forth as to each matter the
stockholder proposes to bring before the annual meeting certain information as
specified in Section 2.14 of the Bylaws, including (a) a brief description of
the proposal desired to be brought before the annual meeting, (b) the name and
address, as they appear on the Company's books, of the stockholder proposing
such business, and, to the extent known, any other stockholders known by such
stockholder to be supporting such proposal, (c) the class and number of shares
of the Company which are beneficially owned by the stockholder; and, to the
extent known, by any other stockholders known by such stockholder to be
supporting such proposal on the date of such stockholder notice, (d) the
identification of any person retained to make stockholder solicitations or
recommendations with respect to such proposal, and (e) any material interest of
the stockholder in such proposal. Any such proposal not made in accordance
with the Bylaws may be rejected.
The procedures regarding stockholder proposals are designed to provide
the Board with sufficient time and information to evaluate a stockholder
proposal and other relevant information, such as existing stockholder support
for the proposal. The proposed procedures, however, will give incumbent
directors advance notice of a stockholder proposal.
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This may make it easier for the incumbent directors to defeat a stockholder
proposal, even when certain stockholders view such proposal as in the best
interests of the Company or its stockholders.
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 the Company from another party 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, consistent with the exercise of its fiduciary duties and 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
the extent permitted by law not only to the price or other consideration being
offered, but also to all other relevant factors, including, without limitation,
the financial and managerial resources and future prospects of the other party,
the possible effects on the business of the Company and its subsidiaries and on
the employees, customers, suppliers and creditors of the Company and its
subsidiaries, and the effects on the communities in which the Company's and its
subsidiaries' facilities are located. 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.
Stockholder Approval of Mergers and Certain Other Extraordinary
Transactions. Article 11 of the Company's Certificate of Incorporation
provides that any action taken by stockholders under Subchapter IX of the
Delaware General Corporation Law (which relates to merger or consolidation
transactions) and Subchapter X (which relates to sale of assets, dissolution
and winding up transactions) shall, with certain exceptions, generally require
the affirmative vote of at least 80% of the votes eligible to be cast by
stockholders. The supermajority 80% vote requirement of Article 11 of the
Certificate of Incorporation shall not be applicable to any transaction
approved in advance by at least two-thirds of the entire Board of Directors of
the Company, in which case the transaction will require only such stockholder
approval as specified under Delaware law. The Delaware General Corporation Law
requires the approval of the Board of Directors and the holders of a majority
of the outstanding stock of the Company entitled to vote thereon for mergers of
consolidations, and for sales, leases or exchanges of all substantially all of
the Company's assets. The Delaware General Corporation Law permits the Company
to merge with another corporation without obtaining the approval of the
Company's stockholders if: (i) the Company is the surviving corporation of the
merger; (ii) the merger agreement does not amend the Company's Certificate of
Incorporation; (iii) each share of the Company's stock outstanding immediately
prior to the effective date of the merger is to be an identical outstanding or
treasury share of the Company after the merger; and (iv) any authorized but
unissued shares or treasury shares of Common Stock to be issued or delivered
under the plan of merger plus those initially issuable upon conversion of any
other securities or
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obligations to be issued or delivered under such plan do not exceed 20% of the
shares of the Common Stock outstanding immediately prior to the effective date
of the merger.
Amendment of Certificate of Incorporation and Bylaws. Article 13 of
the Company's Certificate of Incorporation generally provides that any
amendment of the Certificate of Incorporation must be approved first by a
majority of the Board of Directors and then by the holders of 80% of the shares
of the Company entitled to vote in an election of directors, except that the
approval of only a majority of the shares of the Company entitled to vote in an
election of directors is required for any amendment previously approved by at
least two-thirds of the entire Board of Directors.
The Bylaws of the Company may be amended by a majority of the Board of
Directors or by the affirmative vote of a majority of the total shares entitled
to vote in an election of directors, except that the affirmative vote of at
least 80% of the total shares entitled to vote in an election of directors
shall be required to amend, adopt, alter, change or repeal any provision
inconsistent with certain specified provisions of the Bylaws.
DELAWARE CORPORATE LAW
In addition to the provisions contained in the Company's Certificate
of Incorporation, the Delaware General Corporation Law ("GCL") includes certain
provisions applicable to Delaware corporations, such as the Company, which may
be deemed to have an anti-takeover effect. Such provisions include
requirements relating to certain business combinations.
Section 203 of the GCL ("Section 203") imposes certain restrictions on
business combinations between the Company and large shareholders.
Specifically, Section 203 prohibits a "business combination" (as defined in
Section 203, generally including mergers, sales and leases of assets, issuances
of securities and similar transactions) between the Company or a subsidiary and
an "interested shareholder" (as defined in Section 203, generally the
beneficial owner of 15% or more of the Company Common Stock) within three years
after the person or entity becomes an interested shareholder, unless (i) prior
to the person or entity becoming an interested shareholder, the business
combination or the transaction pursuant to which such person or entity became
an interested shareholder shall have been approved by the Company's Board of
Directors, (ii) upon consummation of the transaction in which the interested
shareholder became such, the interested shareholder holds at least 85% of the
Company Common Stock (excluding shares held by persons who are both officers
and directors and shares held by certain employee benefit plans), or (iii) the
business combination is approved by the Company's Board of Directors and by the
holders of at least two-thirds of the outstanding Company Common Stock,
excluding shares owned by the interested shareholders.
One of the effects of Section 203 may be to prevent highly leveraged
takeovers, which depend upon getting access to the acquired corporation's
assets to support or repay
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acquisition indebtedness and certain coercive acquisition tactics. By
requiring approval of the holders of two-thirds of the shares held by
disinterested shareholders for business combinations involving an interested
shareholder, Section 203 may prevent any interested shareholder from taking
advantage of its position as a substantial, if not controlling, shareholder and
engaging in transactions with the Company that may not be fair to the Company's
other shareholders or that may otherwise not be in the best interests of the
Company, its shareholders and other constituencies.
For similar reasons, however, these provisions may make more difficult
or discourage an acquisition of the Company, or the acquisition of control of
the Company by a principal shareholder, and thus the removal of incumbent
management. In addition, to the extent that Section 203 discourages takeovers
that would result in the change of the Company's management, such a change may
be less likely to occur.
ANTI-TAKEOVER EFFECTS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS AND
MANAGEMENT REMUNERATION ADOPTED IN THE CONVERSION
The foregoing provisions of the Certificate of Incorporation and
Bylaws of the Company and Delaware law could have the effect of discouraging an
acquisition of the Company or stock purchases in furtherance of an acquisition,
and could accordingly, under certain circumstances, discourage transactions
which might otherwise have a favorable effect on the price of the Company's
Common Stock. In addition, such provisions may result in the Company being
deemed to be less attractive to a potential acquiror and/or might result in
stockholders receiving a lesser amount of consideration for their shares of
Common Stock than otherwise could have been available.
In addition, the Company and the Bank have also entered into
agreements with certain of their officers which provide such officers with
additional payments upon the officers' termination in connection with a change
in control of the Company or the Bank. See "Management - Management of the
Bank" and "- Employment Agreements." The foregoing provisions and limitations
may make it more difficult for companies or persons to acquire control of the
Bank. Additionally, the provisions could deter offers to the stockholders
which might be viewed by such stockholders to be in their best interests.
The Board of Directors believes that the provisions described above
are prudent and will reduce vulnerability to takeover attempts and certain
other transactions that are not negotiated with and approved by the Board of
Directors of the Company. The Board of Directors believes that these
provisions are in the best interests of the Company and its future
stockholders. In the Board of Directors' judgment, the Board of Directors is
in the best position to determine the true value of the Company and to
negotiate more effectively for what may be in the best interests of its
stockholders. Accordingly, the Board of Directors believes that it is in the
best interests of the Company and its future stockholders to encourage
potential acquirors to negotiate directly with the Board of Directors and that
these provisions will encourage such negotiations and discourage hostile
takeover attempts.
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It is also the Board of Directors' view that these provisions should not
discourage persons from proposing a merger or other transaction at prices
reflective of the true value of the Company and where the transaction is in the
best interests of all stockholders.
Despite the Board of Directors' belief as to the benefits to the
Company's stockholders of the foregoing provisions, these provisions also may
have the effect of discouraging a future takeover attempt in which stockholders
might receive a substantial premium for their shares over then current market
prices and may tend to perpetuate existing management. As a result,
stockholders who might desire to participate in such a transaction may not have
an opportunity to do so. The Board of Directors, however, has concluded that
the potential benefits of these provisions outweigh their possible
disadvantages.
The Board of Directors of the Company and the Bank are not aware of
any effort that might be made to acquire control of the Bank or the Company.
REGULATORY RESTRICTIONS
The Change in Bank Control Act provides that no person, acting
directly or indirectly or through or in concert with one or more other persons,
may acquire control of a savings and loan holding company unless the OTS has
been given 60 days' prior written notice. The HOLA provides that no company
may acquire "control" of a savings and loan holding company without the prior
approval of the OTS. Any company that acquires such control becomes a savings
and loan holding company subject to registration, examination and regulation by
the OTS. Pursuant to federal regulations, control of a savings and loan
holding company is conclusively deemed to have been acquired by, among other
things, the acquisition of more than 25% of any class of voting stock of the
institution or the ability to control the election of a majority of the
directors of an institution. Moreover, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock, or of more than 25% of any class of stock, of a savings
and loan holding company where certain enumerated "control factors" are also
present in the acquisition. The OTS may prohibit an acquisition if (i) it
would result in a monopoly or substantially lessen competition, (ii) the
financial condition of the acquiring person might jeopardize the financial
stability of the institution, or (iii) the competence, experience or integrity
of the acquiring person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of control by such
person. The foregoing restrictions do not apply to the acquisition of a
savings institution's capital stock by one or more tax-qualified employee stock
benefit plans, provided that the plan or plans do not have beneficial ownership
in the aggregate of more than 25% of any class of equity security.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 100,000,000 shares of Common Stock
having a par value of $0.01 per share and 25,000,000 shares of preferred stock
having a par value of $0.01 per share (the "Preferred Stock"). The Company
currently expects to issue up to a maximum of 35,595,238 shares (40,934,524
shares in the event that the maximum of the Valuation Range is increased by
15%) of Common Stock and no shares of Preferred Stock in the Conversion. 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. Presented below is a description of all aspects of the
Company's capital stock which are deemed material to an investment decision
with respect to the Conversion.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED
BY THE FDIC.
COMMON STOCK
Distributions. The Company can pay dividends if, as and when declared
by its Board of Directors, subject to compliance with limitations which are
imposed by law. See "Dividend Policy." 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 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 the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Each holder of Common Stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. Cumulative
voting means that holders of stock of a corporation are entitled, in the
election of directors, to cast a number of votes equal to the number of shares
which they own multiplied by the number of directors to be elected Because a
stockholder entitled to cumulative voting may cast all of his votes for one
nominee or disperse his votes among nominees as he chooses, cumulative voting
is generally considered to increase the ability of minority stockholders to
elect nominees to a corporation's board of directors. Under certain
circumstances, shares in excess of 10.0% of the issued and outstanding shares
of Common Stock may be considered "Excess Shares" and, accordingly, not be
entitled to vote. See
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"Restrictions on Acquisition of the Company and the Bank." If the Company
issues Preferred Stock, holders of the Preferred Stock may also possess voting
rights.
Liquidation. In the event of any liquidation, dissolution or winding
up of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion - Liquidation Rights"), all assets of the Bank available
for distribution. In the event of liquidation, dissolution or winding up of
the Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all 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. 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.
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 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 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
has no present plans to issue Preferred Stock.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank authorizes the issuance of
capital stock consisting of 1,000 shares of common stock, par value $0.01 per
share. 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. Upon Conversion, all of the issued and outstanding common stock
of the Bank will be held by the Company as the Bank's sole stockholder. The
capital stock of the Bank will represent nonwithdrawable capital, will not be
an account of an insurable type, and will not be insured by the FDIC.
Presented below is a description of all aspects of the Bank's capital stock
which are deemed material to an investment decision with respect to the
Conversion.
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DIVIDENDS
The Company, as the holder of the Bank's common stock will be entitled
to receive and to share equally in such dividends as may be declared by the
Board of Directors of the Bank out of funds legally available therefore. See
"Dividend Policy" for certain restrictions on the payment of dividends.
VOTING RIGHTS
Immediately after the Conversion, the holders of the Bank's common
stock, which will consist solely of the Company, 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 and there shall be no right to cumulate votes.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the
Bank, the holders of common stock will be entitled to receive, after payment of
all debts and liabilities of the Bank (including all deposit accounts and
accrued interest thereon), and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or
in kind. If additional preferred stock is issued subsequent to the Conversion,
the holders thereof may also have priority over the holders of common stock in
the event of liquidation or dissolution.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
_________________.
EXPERTS
The financial statements of the Bank as of December 31, 1996 and
1995, and for each of the years in the three-year period ended December 31,
1996, included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report, with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
RP Financial 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.
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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 the Company
by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., special counsel to
the Bank and the Company. The New York income tax consequences of the
Conversion will be passed upon for the Bank and the Company by KPMG Peat
Marwick. The federal income tax consequences of certain matters relating to
establishment of the Foundation will be passed upon for the Bank and the
Company by Potter Anderson & Corroon. Certain legal matters will be passed
upon for Keefe, Bruyette & Woods, Inc. by Silver, Freedman & Taff, L.L.P.,
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 Conversion Valuation Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of such material can be obtained from the SEC at prescribed
rates. In addition, the SEC maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including the
Company. The statements contained in this Prospectus as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are, of necessity, brief descriptions thereof and are not necessarily complete;
each such statement is qualified by reference to such contract or document.
The Bank has filed an Application for Conversion with the OTS with
respect to the Conversion. 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 Northeast
Regional Office of the OTS located at 10 Exchange Place, 18th Floor, Jersey
City, New Jersey 07302.
The Company has filed with the Office of Thrift Supervision an
Application to Form a Holding Company. This Prospectus omits certain
information contained in such Application. Such Application may be inspected
at the principal office of the OTS, 1700 G Street, N.W., Washington, D.C.
20552, and at the Northeast Regional Office of the OTS located at 10 Exchange
Place, 18th Floor, Jersey City, New Jersey 07302.
In connection with the Conversion, the Company will register its
Common Stock with the SEC under Section 12 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
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requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Exchange Act. Under the Plan, the
Company has undertaken that it will not terminate such registration for a
period of at least three years following the Conversion.
A copy of the Plan of Conversion and 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. Requests for such information
should be directed to: _______________________, Staten Island Savings Bank, 15
Beach Street, Staten Island, New York 10304.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . F-2
Statements of Condition as of April 30, 1997 (Unaudited)
and December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Income for the Four Months Ended
April 30, 1997 and 1996 (Unaudited) and the Years Ended 44
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Changes in Net Worth for the Four Months Ended
April 30, 1997 (Unaudited) and the Years Ended F-4
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows for the Four Months Ended
April 30, 1997 and 1996 (Unaudited) and the Years Ended F-5
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
</TABLE>
All schedules are omitted as the required information is not applicable or the
information is presented in the Consolidated Financial Statements.
The financial statements of Staten Island Bancorp, Inc. have been omitted
because Staten Island Bancorp, Inc. has not yet issued any stock, has no assets
or liabilities, and has not conducted any business other than of an
organizational nature.
F-1
<PAGE> 211
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees of
Staten Island Savings Bank:
We have audited the accompanying statements of condition of Staten Island
Savings Bank (a mutual savings bank chartered by the State of New York) (the
"Bank") as of December 31, 1996 and 1995, and the related statements of income,
changes in net worth and cash flows for each of the years in the three-year
period ended December 31, 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 Staten Island Savings Bank as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As explained in Note 9 to the financial statements, effective January 1, 1995,
the Bank changed its method of accounting for New York State and New York City
income taxes.
/s/ Arthur Andersen LLP
New York, New York
January 28, 1997
F-2
<PAGE> 212
STATEN ISLAND SAVINGS BANK
STATEMENTS OF CONDITION
APRIL 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION> December 31
April 30 -------------------------------
ASSETS 1997 1996 1995
------ -------------- -------------- --------------
(Unaudited) (000's omitted)
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 39,594 $ 43,522 $ 57,663
Federal funds sold 74,150 9,100 19,600
Securities available for sale 677,486 703,134 788,622
Trading securities 14,406 - -
Loans, net 976,501 968,015 801,137
Accrued interest receivable 11,892 11,739 13,775
Bank premises and equipment, net 19,521 18,675 16,680
Intangible assets, net 19,798 20,490 22,633
Other assets 14,947 7,648 8,020
-------------- -------------- --------------
Total assets $ 1,848,295 $ 1,782,323 $ 1,728,130
============== ============== ==============
LIABILITIES AND NET WORTH
-------------------------
LIABILITIES:
Due depositors-
Savings $ 822,431 $ 832,584 $ 739,697
Time 527,588 500,570 467,362
Money market 81,924 79,704 83,343
NOW accounts 16,708 14,298 55,124
Demand deposits 158,142 150,592 190,091
-------------- -------------- --------------
1,606,793 1,577,748 1,535,617
Borrowed Funds 30,043 54 46
Advances from borrowers for taxes and insurance 6,940 4,563 3,354
Accrued interest and other liabilities 27,224 28,878 39,031
-------------- -------------- --------------
Total liabilities 1,671,000 1,611,243 1,578,048
-------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 10)
NET WORTH:
Surplus 32,777 32,070 30,007
Undivided profits 141,061 134,880 115,168
Unrealized appreciation on securities available for sale, net 3,457 4,130 4,907
-------------- -------------- --------------
Total net worth 177,295 171,080 150,082
-------------- -------------- --------------
Total liabilities and net worth $ 1,848,295 $ 1,782,323 $ 1,728,130
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 213
STATEN ISLAND SAVINGS BANK
STATEMENTS OF CHANGES IN NET WORTH
FOR THE FOUR MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Appreciation
(Depreciation)
on Securities
Undivided Available for
Surplus Profits Sale, net Total
---------- ------------ ------------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 $ 27,064 $ 88,682 $ 2,873 $ 118,619
Net income - 1994 - 16,204 - 16,204
Statutory transfer to surplus fund 1,620 (1,620) - -
Net change in unrealized depreciation on
securities available for sale - - (9,379) (9,379)
---------- ------------ ---------- ------------
BALANCE, December 31, 1994 28,684 103,266 (6,506) 125,444
Net income - 1995 - 13,225 - 13,225
Statutory transfer to surplus fund 1,323 (1,323) - -
Net change in unrealized appreciation on
securities available for sale - - 11,413 11,413
---------- ------------ ---------- ------------
BALANCE, December 31, 1995 30,007 115,168 4,907 150,082
Net income - 1996 - 21,775 - 21,775
Statutory transfer to surplus fund 2,178 (2,178) - -
Net change in unrealized depreciation on
securities available for sale - - (777) (777)
---------- ------------ ---------- ------------
BALANCE, December 31, 1996 32,185 134,765 4,130 171,080
Net income - four months ended
April 30, 1997 - 6,888 - 6,888
Statutory transfer to surplus fund 592 (592) - -
Net change in unrealized depreciation on
securities available for sale - - (673) (673)
---------- ------------ ---------- ------------
BALANCE, April 30, 1997 $ 32,777 $ 141,061 $ 3,457 $ 177,295
========== ============ ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 214
STATEN ISLAND SAVINGS BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
Four Months Ended April 30 December 31
---------------------------- -------------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Unaudited) (000's omitted)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,888 $ 6,868 $ 21,775 $ 13,225 $ 16,204
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 562 502 1,581 1,436 1,252
Amortization of bond and mortgage premiums (2,511) 146 1,053 4,724 6,831
Amortization of intangible assets 692 759 2,143 1,155 536
Loss on sale of available for sale securities 277 (218) 2,710 305 487
Other noncash expense (income) 174 155 (1,717) 161 3,047
Provision for possible loan losses 4,667 - 1,000 - 76
Change in depreciation (appreciation)
on available for sale securities 1,294 10,779 899 (20,562) 16,896
Increase in deferred loan fees 100 160 578 105 395
Decrease in accrued interest receivable (153) (349) 2,036 2,043 711
Decrease (increase) in other assets (6,291) (7,230) 197 (2,271) 856
(Decrease) increase in accrued interest and
other liabilities 2,594 (8,688) (8,023) 6,471 1,326
(Increase) decrease in deferred income taxes (2,199) 6,088 (190) 4,340 (72)
Recoveries 448 547 966 336 241
------------ ------------ ------------ ------------ ------------
Net cash provided by
operating activities 3,585 3,595 23,076 20,616 41,269
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities
and time deposits - - - 110,258 114,968
Purchases of investment securities and
time deposits - - - - (131,371)
Maturities of available for sale securities 43,540 80,318 189,180 84,379 102,865
Sales of available for sale securities 19,365 22,249 240,417 121,526 27,189
Purchases of available for sale securities (53,281) (108,683) (345,700) (178,036) (63,689)
(Decrease) increase in unrealized appreciation
on available for sale securities, net (673) (5,972) (777) 11,413 (9,379)
Principal collected on loans 154,908 112,662 282,337 170,057 96,050
Loans made to customers (166,550) (137,817) (453,066) (239,012) (192,610)
Mortgage loans purchased - - - (10,061) (699)
Capital expenditures (1,183) (1,106) (3,448) (2,481) (1,290)
Acquisition of Gateway Bancorp, Inc.,
net of cash acquired - - - 13,564 -
------------ ------------ ------------ ------------ -----------
Net cash used in investing
activities (3,874) (38,349) (91,057) (6,042) (57,966)
------------- ------------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 31,422 15,085 43,340 32,705 2,526
Borrowings 29,989 - - - -
------------ ------------ ------------ ------------ -----------
61,411 15,085 43,340 32,705 2,526
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in
cash and cash equivalents 61,122 (19,669) (24,641) 47,279 (14,171)
CASH AND CASH EQUIVALENTS, beginning of year 52,622 77,263 77,263 29,984 44,155
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 113,744 $ 57,594 $ 52,622 $ 77,263 $ 29,984
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 14,619 $ 14,727 $ 50,450 $ 44,200 $ 36,545
Income taxes 3,340 3,110 14,381 14,081 12,263
============ ============ ============ ============ ============
Acquisition of Gateway Bancorp, Inc.-
Fair value of assets acquired $ - $ - $ - $ 338,978 $ -
Fair value of liabilities assumed - - - (281,726) -
------------ ------------ ------------ ------------ -----------
Net cash payments $ - $ - $ - $ 57,252 $ -
============ ============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 215
STATEN ISLAND SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
FOUR MONTHS ENDED APRIL 30, 1997 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION
Staten Island Savings Bank (the "Bank") was a state chartered mutual savings
bank founded in 1864. The Bank operates 16 branches in Staten Island, New York
and one branch in Brooklyn, New York and followed regulations promulgated by the
New York State Department of Banking and the Federal Deposit Insurance
Corporation. The Bank is a community bank providing a complete line of retail
and commercial banking services along with trust services. Individual customer
deposits of up to $100,000 are insured by the Federal Deposit Insurance
Corporation.
Acquisition
On August 18, 1995, the Bank acquired all of the outstanding shares of Gateway
Bancorp, Inc., a Staten Island commercial bank with over $300 million in total
assets, for cash consideration totaling $57,933,000, including deal costs.
The acquisition has been accounted for using the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was $15,613,000 and has been recorded as goodwill, which is
being amortized on a straight-line basis over 20 years. The amount of goodwill
amortization for 1996 and 1995 was $781,000 and $272,000, respectively, and is
included in other expense.
Results of operations after the acquisition date are included in the 1995
statement of income. The following pro forma information has been prepared
assuming that this acquisition had taken place at the beginning of 1994 after
giving effect to certain pro forma adjustments, including, among others, the
implied cost of capital and the amortization of intangibles resulting from the
transaction. The pro forma financial information is not necessarily indicative
of the results of operations as they would have been if the Bank and Gateway
Bancorp, Inc. had been a single entity during all of 1995 and 1994, nor is it
necessarily indicative of the results of operations which may occur in the
future.
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Net interest and dividend income $ 70,336 $ 68,065
Net income 13,583 17,390
</TABLE>
2 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
F-6
<PAGE> 216
The accounting and reporting policies of the Bank conform to general practices
within the banking industry. The following footnotes describe the most
significant of these policies. In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported assets,
liabilities, revenues and expenses as of the dates of the financial statements.
Actual results could differ significantly from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and federal funds sold.
Trading Securities
Trading securities are carried at fair value, with unrealized gains and losses
included in earnings.
Securities Held to Maturity
Debt securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts. Mortgage-backed certificates are stated at the unpaid
principal amount net of unearned discount and premiums. Premiums are amortized
over the period to maturity or earlier call date and discounts are accreted to
maturity date using a method which approximates the level-yield method.
Securities Available For Sale
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," debt and
equity securities used as part of the Bank's asset/liability management that may
be sold in response to changes in interest rates, prepayments and other factors
have been classified as available for sale. Such securities are reported at fair
value, with unrealized gains and losses excluded from earnings and reported on
an after-tax basis in a separate component of net worth. Gains and losses on the
disposition of securities are recognized on the specific-identification method
in the period in which they occur.
On November 15, 1995, the Financial Accounting Standards Board issued a special
report entitled, "A Guide to Implementation of Statement No. 115 on Accounting
for Certain Investments in Debt and Equity Securities, Questions and Answers"
(the "Guide"). The Guide permitted a one-time reassessment and related
reclassification from the held to maturity category that will not call into
question the intent of the enterprise to hold other debt securities to maturity
in the future. In December 1995, the Bank reassessed its securities portfolio
resulting in the reclassification of all securities held to maturity (amortized
cost of $314,588,000 with a corresponding market value of $316,725,000) to the
available for sale category. The reclassification resulted in a $1,122,000
increase in net worth at December 31, 1995, due to unrealized gains on
securities transferred to available for sale amounting to $2,137,000 less
estimated taxes of $1,015,000.
Mortgage Premiums and Discounts
Premiums and discounts on purchased mortgages are amortized over the average
life of the loan using a method which approximates the level-yield method.
F-7
<PAGE> 217
Loans
Loans are stated at the principal amount outstanding, net of unearned income.
Loan origination fees are recognized in interest income as an adjustment to
yield over the life of the loan. Loans are placed on nonaccrual status when
management has determined that the borrower will be unable to meet contractual
principal or interest obligations or when unsecured interest or principal
payments are 90 days past due. When a loan is classified as nonaccrual, the
recognition of interest income ceases. Interest previously accrued and remaining
unpaid is reversed against income. Cash payments received are applied to
principal, and interest income is not recognized unless management determines
that the financial condition and payment record of the borrower warrant the
recognition of income.
Effective January 1, 1995, the Bank adopted the accounting and disclosure
guidance in SFAS No. 114, entitled, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118, entitled, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." Both pronouncements
establish the accounting by creditors for impairment of certain loans with the
latter adding as to how a creditor recognizes interest income related to those
impaired loans. The Bank has defined its impaired loans as its nonaccrual loans.
Pursuant to this accounting guidance, a valuation allowance is recorded on
impaired loans to reflect the difference, if any, between the loan face value
and the present value of projected cash flows, observable fair value or
collateral value. This valuation allowance is reported within the overall
allowance for loan losses. Such change in accounting was not material to the
financial statements.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established by management to absorb
future charge-offs of loans deemed uncollectible. The allowance is increased or
decreased by charges to operations and reduced by net charge-offs. The amount of
the allowance is based on estimates and the ultimate losses may vary from the
current estimates. These estimates are evaluated periodically and, as
adjustments become necessary, they are reflected in operations in the periods in
which they become known. Considerations in this evaluation include past and
anticipated loss experience, evaluation of real estate collateral, as well as
current and anticipated economic conditions and maintenance of the allowance at
a level adequate to absorb unforeseeable losses inherent in the portfolio at
the reporting date.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less allowance for depreciation
and amortization applied on a straight-line basis over the estimated useful
lives of 10 to 50 years for buildings and improvements and 3 to 10 years for
furniture, fixtures and equipment.
Core Deposit Intangibles
Core deposit intangibles, which resulted from acquisitions, are being amortized
on a straight-line basis to expense over the estimated periods benefited, not
exceeding six years. Core deposit intangibles of $ 5,056,000, $5,444,000 and
$6,600,000 as of April 30, 1997, December 31, 1996 and 1995, respectively, are
included in intangible assets in the accompanying financial statements.
F-8
<PAGE> 218
Investments in Real Estate
Investments in real estate consist of real estate acquired through foreclosure
or by deed in lieu of foreclosure ("real estate owned" or "REO"). REO properties
are carried at the lower of cost or fair value at the date of foreclosure (new
cost basis) and at the lower of the new cost basis or fair value less estimated
selling costs thereafter.
Interest Income
Interest Income includes interest income on loans and investment securities and
dividend income received on investment securities.
The operations of the Bank are substantially dependent on its net interest
income, which is the difference between the interest income earned on its
interest earning assets and the interest expense paid on its interest bearing
liabilities. Like most savings institutions, the Bank's earnings are affected
by changes in market interest rates and the economic factors beyond its
control. Decreases in the Bank's average interest rate spread could adversely
affect the Bank's net interest income.
Income Taxes
Deferred income taxes provide for temporary differences between items of income
or expense reported in the financial statements and those reported for income
tax purposes.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
entitled, "Accounting for the Impairment of Long-Lived Assets to Be Disposed
Of." This statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. The pronouncement is effective for fiscal years
beginning after December 15, 1995, although earlier implementation is permitted.
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122,
entitled, "Accounting for Mortgage Servicing Rights," which is an amendment to
SFAS No. 65, entitled, "Accounting for Certain Mortgage Banking Activities."
This statement requires the recognition as separate assets rights to service
mortgage loans for others, no matter how those servicing rights are acquired.
The pronouncement is effective for fiscal years beginning after December 15,
1995, although earlier implementation is permitted.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." This statement is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996.
The adoption of SFAS Nos. 121, 122 and 125 did not have a material effect on the
Bank's financial statements.
Net Worth
The surplus fund primarily represents accumulated mandatory transfers from
undivided profits required by New York State banking regulations. Such mandatory
transfers are computed as 10% of "net earnings," as defined, and are required in
each quarter so long as the net worth of the Bank is less than 10% of the amount
due depositors.
Unaudited Financial Information
All information as of April 30, 1997 and for the four-month periods ended April
30, 1997 and 1996
F-9
<PAGE> 219
is unaudited. The unaudited information furnished reflects all adjustments,
which consist solely of normal recurring accruals, which are, in the opinion of
management, necessary for a fair presentation of the financial position at April
30, 1997 and the results of operations and cash flows for four-month periods
ended April 30, 1997 and 1996. The results of the four-month periods are not
necessarily indicative of the results of the Bank which may be expected for the
entire year.
Reclassifications
Certain reclassifications have been made to the December 1996, 1995 and 1994
financial statements to conform with the April 30, 1997 presentation.
3. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 2 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the following
table (000's omitted):
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------------------- ----------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk $155,287 18.8% $66,260 greater than 8.0% $82,826 greater than 10.0%
weighted assets)
Tier 1 capital (to risk 145,310 17.5 33,130 greater than 4.0 49,695 greater than 6.0
weighted assets)
Tier 1 capital (to average 145,310 8.3 70,029 greater than 4.0 87,536 greater than 5.0
assets)
As of December 31, 1995:
Total capital (to risk 132,461 17.3 61,145 greater than 8.0 76,432 greater than 10.0
weighted assets)
</TABLE>
F-10
<PAGE> 220
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital (to risk 121,757 15.9 30,573 greater than 4.0 45,859 greater than 6.0
weighted assets)
Tier 1 capital (to average 121,757 8.1 60,231 greater than 4.0 75,288 greater than 5.0
assets)
</TABLE>
4. INVESTMENT SECURITIES
The amortized cost and approximate market value of securities available for sale
and trading securities are summarized as follows:
<TABLE>
<CAPTION>
April 30, 1997
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
(000's omitted)
<S> <C> <C> <C> <C>
Securities available for sale
Debt securities:
U.S. Government and agencies $ 140,158 $ 197 $ 226 $ 140,129
State and municipals-
GNMA, FNMA and FHLMC mortgage 395,026 5,998 1,797 399,227
participation certificates
Agency CMOs 50,216 - 321 49,895
Privately issued CMOs 45,939 22 595 45,366
Other 1,122 - 12 1,110
------------ ------------ ------------ ------------
632,461 6,217 2,951 635,727
------------ ------------ ------------ ------------
Marketable Equity Securities:
Common Stock $ 4,898 $ 709 $ 361 $ 5,246
Preferred Stock 10,511 195 25 10,681
IIMF Capital App 22,967 2,865 - 25,832
------------ ------------ ------------ ------------
38,376 3,769 386 41,759
------------ ------------ ------------ ------------
Total Securities Available for
Sale 670,837 9,986 3,337 677,486
Trading Securities
- ------------------
Adjustable Rate and Intermediate Mortgage Fund 14,637 - 231 14,406
------------ ------------ ------------ ------------
Total Trading Securities $ 685,474 $ 9,986 $ 3,568 $ 691,892
============ ============ ============ ============
<CAPTION>
December 31, 1996
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
(000's omitted)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government and agencies $ 141,833 $ 821 $ (101) $ 142,553
State and municipals 3,045 30 - 3,075
GNMA, FNMA and FHLMC mortgage participation
certificates
408,424 6,578 (502) 414,500
Agency CMOs 33,956 104 (4) 34,056
Privately issued CMOs 49,495 75 (326) 49,244
Other 3,841 - (16) 3,825
------------ ------------ ------------ ------------
</TABLE>
F-11
<PAGE> 221
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
(000's omitted)
<S> <C> <C> <C> <C>
640,594 7,608 (949) 647,253
------------ ------------ ------------ ------------
Marketable equity securities:
Common stocks $ 1 $ 352 $ - $ 353
Preferred stocks 10,682 150 (47) 10,785
IIMF capital appreciation 22,914 1,400 (124) 24,190
Adjustable rate and intermediate mortgage
funds 21,000 - (447) 20,553
------------ ------------ ------------ ------------
54,597 1,902 (618) 55,881
------------ ------------ ------------ ------------
Total securities available for
sale $ 695,191 $ 9,510 $ (1,567) $ 703,134
============ ============ ============ ============
<CAPTION>
December 31, 1995
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
(000's omitted)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government and agencies $ 230,648 $ 2,849 $ (73) $ 233,424
State and municipals 3,115 73 - 3,188
Utilities 3,128 96 - 3,224
Corporate 60,600 663 (58) 61,205
GNMA, FNMA and FHLMC mortgage participation
certificates 434,897 6,594 (658) 440,833
Other 4,551 164 (24) 4,691
------------ ------------ ------------ ------------
736,939 10,439 (813) 746,565
------------ ------------ ------------ ------------
Marketable equity securities:
Common stocks 21,033 607 (1,235) 20,405
Preferred stocks 808 34 (50) 792
Adjustable rate and intermediate mortgage
funds 21,000 - (140) 20,860
------------ ------------ ------------ ------------
42,841 641 (1,425) 42,057
------------ ------------ ------------ ------------
Total securities available for
sale $ 779,780 $ 11,080 $ (2,238) $ 788,622
============ ============ ============ ============
</TABLE>
The amortized cost and market value of debt securities available for sale at
December 31, 1996 and 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
April 30, 1997 December 31, 1996 December 31, 1995
----------------------- ------------------------ -------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- ---------- ---------- ----------
(000's omitted)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 30,338 $ 30,409 $ 22,995 $ 23,008 $ 77,890 $ 78,100
Due after one year through five
years 70,020 69,998 94,056 94,652 191,822 194,807
Due after five years through ten
years 40,922 40,832 25,917 26,012 29,122 29,545
Due after ten years - - 3,045 3,075 3,208 3,280
--------- --------- --------- ---------- ---------- ----------
141,280 141,239 146,013 146,747 302,042 305,732
GNMA, FNMA and FHLMC mortgage
participation certificates 491,181 494,488 494,581 500,506 434,897 440,833
--------- --------- --------- ---------- ---------- ----------
$ 632,461 $ 635,727 $ 640,594 $ 647,253 $ 736,939 $ 746,565
========= ========= ========= ========== ========== ==========
</TABLE>
F-12
<PAGE> 222
Proceeds from sales of securities available for sale during the four-month
periods ended April 30, 1997 and 1996 were $19,365,000 and $22,249,000 with
realized gross gains of $30,000 and $257,000 and realized gross losses of
$306,000 and $39,000, respectively.
Proceeds from sales of securities available for sale during 1996, 1995 and 1994
were $240,417,000, $115,641,000 and $27,189,000 with realized gross gains of
$488,000, $181,000 and $60,000 and realized gross losses of $3,198,000, $486,000
and $547,000, respectively.
Other
Under a securities lending agreement, the Bank's investment custodian made loans
of the Bank's available for sale securities with a market value of approximately
$17,800,000, $24,200,000 and $21,796,000 as of April 30, 1997, December 31, 1996
and 1995, respectively. Cash collateral received for such loans exceeded 100% of
the market value of all loaned securities.
5. LOANS, NET
A significant portion of the Bank's loans are to borrowers who are domiciled on
Staten Island. The income of many of those customers is dependent on the New
York City economy. In addition, most of the Bank's real estate loans involve
mortgages on Staten Island properties. Thus, the Bank's loan portfolio is
susceptible to the economy of Staten Island, a borough of New York City, which
is its primary market place.
While management uses available information to provide for losses of value on
loans and foreclosed properties, future loss provisions may be necessary based
on changes in economic conditions. In addition, the Bank's regulators, as an
integral part of their examination process, periodically review the valuation of
the Bank's loans and foreclosed properties. Such regulators may require the Bank
to recognize write-downs based on judgments different from those of management.
F-13
<PAGE> 223
Loans, net consist of the following at April 30, 1997, December 31, 1996 and
1995:
<TABLE>
<CAPTION>
December 31
April 30 ---------------------------
1997 1996 1995
------------ ------------ ------------
(000's omitted)
<S> <C> <C> <C>
Loans secured by mortgages on real estate:
1-4 family residential $ 755,497 $ 720,873 $ 594,911
Multifamily properties 28,983 26,444 25,977
Commercial properties 112,270 115,593 98,462
Home equity 29,935 29,680 25,246
Construction and land 31,417 28,779 18,661
Less- Deferred origination fees and unearned
income, net (4,216) (6,788) (6,212)
------------ ------------ ------------
Net loans secured by mortgages on real estate 953,886 914,581 757,045
------------ ------------ ------------
Other loans:
Student 4,999 4,522 6,072
Automobile leases - 28,249 18,705
Passbook 6,382 5,933 5,683
Discounted loans 7,118 6,731 5,528
Commercial business loans 8,266 8,264 9,729
Other 10,537 9,712 9,079
------------ ------------ ------------
Net other loans 37,302 63,411 54,796
------------ ------------ ------------
Net loans before the allowance for possible
loan losses 991,188 977,992 811,841
Allowance for possible loan losses (14,687) (9,977) (10,704)
------------ ------------ ------------
Net loans $ 976,501 $ 968,015 $ 801,137
============ ============ ============
</TABLE>
A summary of activity in the allowance for possible loan losses for the four
months ended April 30, 1997, and 1996 and for the years ended December 31, 1996
and 1995, is as follows:
<TABLE>
<CAPTION>
April 30 December 31
------------------------ ---------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(000's omitted)
<S> <C> <C> <C> <C> <C>
Beginning balance $ 9,977 $ 10,704 $ 10,704 $ 3,124 $ 3,180
Increase as a result of acquisition - - - 8,026 -
Provision charged to operations 4,667 - 1,000 - 76
Charge-offs (405) (70) (2,695) (782) (418)
Recoveries 448 547 968 336 286
---------- ---------- ---------- ---------- ----------
Ending balance $ 14,687 $ 11,181 $ 9,977 $ 10,704 $ 3,124
========== ========== ========== ========== ==========
</TABLE>
Nonaccrual loans totaled approximately $24,415,000 and $22,751,000 at April 30,
1997 and December 31, 1996, which is also the Bank's recorded investment in
loans for which impairment has been recognized in accordance with SFAS No. 114
and SFAS No. 118. Nonaccrual loans totaled approximately $24,215,000 at December
31, 1995. The loss of interest income associated with loans on nonaccrual status
was approximately $507,000 and $409,000 for the four months ended April 30, 1997
and 1996 and $696,000, $727,000 and $397,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
At April 30, 1997 and December 31, 1996, the general valuation allowance
allocated to all impaired loans
F-14
<PAGE> 224
totaled $7,074,000 and $5,609,000, respectively, and is included in the
allowance for loan losses shown on the balance sheets. The average recorded
investment in impaired loans for the four-month periods ended April 30, 1997
and 1996 was approximately $23,572,000 and $24,872,000 respectively. The
average recorded investment in impaired loans for the twelve months ended
December 31, 1996, was approximately $24,763,000.
At April 30, 1997, December 31, 1996 and 1995, the Bank has other real estate
totaling approximately $1,317,000, $1,103,000 and $628,000, respectively,
classified in other assets.
At April 30, 1997, December 31, 1996 and 1995, the Bank was servicing mortgages
for others totaling approximately $149,425,000 and $148,422,000 and
$160,219,000, respectively.
At April 30, 1997, December 31, 1996 and 1995, the Bank has balances outstanding
from various officers totaling approximately $2,559,000 and $2,424,000 and
$2,082,000, respectively.
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment at April 30, 1997, December 31, 1996 and 1995, are
summarized as follows:
<TABLE>
<CAPTION>
December 31
April 30 -------------------------
1997 1996 1995
---------- ----------- ----------
(000's omitted)
<S> <C> <C> <C>
Land, building and leasehold improvements $ 20,122 $ 19,969 $ 18,580
Furniture, fixtures and equipment 11,958 10,928 8,869
---------- ---------- ----------
32,080 30,897 27,449
Less- Accumulated depreciation and amortization (12,559) (12,222) (10,769)
---------- ---------- ----------
$ 19,521 $ 18,675 $ 16,680
========== ========== ==========
</TABLE>
7. DUE DEPOSITORS
Scheduled maturities of time deposits at April 30, 1997 and December 31, 1996,
are summarized as follows (000's omitted):
<TABLE>
<CAPTION>
April 30 1997 December 31 1996
------------- ----------------
<S> <C> <C>
1997 $326,080 $ 381,740
1998 151,733 75,119
1999 20,228 17,255
2000 20,778 20,643
2001 and thereafter 8,769 5,813
--------- -----------
$527,588 $ 500,570
========= ===========
</TABLE>
The aggregate amounts of outstanding time certificates of deposit in
denominations of $100,000 or more at April 30, 1997, December 31, 1996 and 1995,
were approximately $108,074,000, $98,204,000 and $77,880,000, respectively.
F-15
<PAGE> 225
8. ACCOUNTING FOR PENSION COSTS AND
OTHER POSTRETIREMENT BENEFITS
The pension and postretirement benefit plans of Gateway Bancorp, Inc. were
terminated upon the Bank's acquisition of Gateway. The assets of these plans and
the accrued benefits attributable to former Gateway employees were rolled into
the Bank's existing plans.
Pension Plan
The Bank maintains a noncontributory defined benefit pension plan (the "Plan")
covering substantially all full-time employees 21 years of age or older. The
benefits are computed as 2% of the highest three-year average annual earnings
multiplied by credited service, to a maximum of 60% of average annual earnings.
The annual benefit is reduced by 5% for each year the benefit payments commence
before age 65. The amounts contributed to the Plan are determined annually on
the basis of (a) the maximum amount that can be deducted for federal income tax
purposes, or (b) the amount certified by a consulting actuary as necessary to
avoid an accumulated funding deficiency in accordance with federal law and
regulations. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future. Assets of the Plan are primarily invested in various equity and fixed
income funds.
Costs of the Bank's retirement plan are accounted for in accordance with SFAS
No. 87. The following table sets forth the Plan's funded status and amounts
recognized in the Bank's financial statements at April 30, 1997, December 31,
1996 and 1995, based upon the latest available actuarial measurement dates of,
September 30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
December 31
April ------------------------
1997 1996 1995
---------- ---------- ----------
(000's omitted)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $13,416, $13,240 and $11,584, respectively $ 13,654 $ 13,948 $ 12,201
========== ========== ==========
Projected benefit obligation for service rendered to date $ 16,884 $ 17,237 $ 15,057
Plan assets at fair value 20,108 18,582 15,638
---------- ---------- ----------
Plan assets in excess of projected benefit obligation 3,224 1,345 581
Amount contributed during fourth quarter 1996 330 330 220
Unrecognized net (asset) at transition being recognized over
11.08 years (277) (320) (449)
Unrecognized past service liability 471 486 (275)
Unrecognized net (gain) loss (2,342) (551) 425
---------- ---------- ----------
Prepaid pension cost $ 1,406 $ 1,290 $ 502
========== ========== ==========
</TABLE>
F-16
<PAGE> 226
<TABLE>
<CAPTION>
For the Four Months For the Years December 31
Ended April 30 ------------------------------------
-----------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net pension cost included the following components:
Service cost-benefits earned during the $ 327 $ 303 $ 908 $ 555 $ 599
period
Interest cost on projected benefit
obligation 414 402 1,206 911 768
Actual return on plan assets (1,147) (925) (2,275) (2,398) (6)
Amortization of-
Unrecognized past service liability 16 15 48 (27) 3
Unrecognized transition asset (43) (43) (129) (129) (129)
Deferred investment gain 647 503 1,007 1,476 (928)
---------- ---------- ---------- ---------- ----------
Net pension cost included in $ 214 $ 255 $ 765 $ 388 $ 307
personnel expenses ========== ========== ========== ========== ==========
</TABLE>
Major assumptions utilized:
<TABLE>
<CAPTION>
December 31
April 30 ----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.75% 7.50% 7.50%
Rate of increase in compensation levels 5.50 5.50 5.50
Expected long-term rate of return on Plan assets 8.00 8.00 8.00
</TABLE>
Postretirement Benefits
The Bank provides postretirement benefits, including medical care and life
insurance, which cover substantially all active employees upon their retirement.
The following table reconciles the Plan's status to the accrued postretirement
benefit cost included in other liabilities on the statements of condition as of
April 30, 1997, December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31
April 30 ----------------------
1997 1996 1995
------- --------- ---------
(000's omitted)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 2,069 $ 2,084 $ 1,864
Other fully eligible participants 2,065 1,954 3,448
Unrecognized (loss) (941) (954) (1,263)
Unrecognized past service liability 707 732 (486)
------- --------- ---------
Accrued postretirement benefit cost $ 3,900 $ 3,816 $ 3,563
======= ========= =========
</TABLE>
F-17
<PAGE> 227
Net periodic postretirement benefit cost for 1996 and 1995 included the
following components:
<TABLE>
<CAPTION>
For the Four
Months Ended For the Years Ended
April 30 December 31
--------------------- --------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- --------
(000's omitted)
<S> <C> <C> <C> <C> <C>
Service cost - benefits attributed to service $ 58 $ 58 $ 175 $ 219 $ 103
during period
Interest cost on accumulated postretirement 106 99 297 346 209
benefit obligation
Amortization of:
Unrecognized loss 13 17 51 22 -
Unrecognized past service liability (25) (25) (75) 11 -
--------- --------- --------- --------- ---------
Net periodic postretirement $ 152 $ 149 $ 448 $ 598 $ 312
benefit cost ========= ========= ========= ========= =========
</TABLE>
The average health care cost trend rate assumption significantly affects the
amounts reported. For example, a 1% increase in this rate would increase the
accumulated benefit obligation by $131,000, $128,200 and $319,000 at April 30,
1997, December 31, 1996 and 1995, respectively, and increase the net periodic
cost by $8,000 $7,000, $18,000 and $200 for the periods ended April 30, 1997,
December 31, 1996, 1995 and 1994, respectively. The postretirement benefit cost
components for 1996 were calculated assuming average health care cost trend
rates ranging up to 10.5% and grading to 5.5% in 2005 and thereafter.
401(k) Plan
The Bank has a 401(k) plan (the "Plan") covering substantially all full-time
employees. The Plan provides for employer matching contributions subject to a
specified maximum, and also contains a profit-sharing feature which provides for
contributions at the discretion of the Bank. Amounts charged to operations for
the four-month periods ended April 30, 1997 and 1996, were approximately
$513,000 and $461,000, respectively. Amounts charged to operations for the years
ended December 31, 1996, 1995 and 1994 were approximately $1,427,000, $1,142,000
and $815,000, respectively.
Supplemental Executive Retirement Plan
In 1993, the Bank adopted a Supplemental Executive Retirement Plan (the
"Executive Plan") for certain senior officers that provides for payments upon
retirement, death or disability. The annual benefit is based upon annual salary
(as defined) plus interest. Amounts charged to operations for the four-month
periods ended April 30, 1997 and 1996, were approximately $60,000 and $28,500,
respectively. Amounts charged to operations for the years ended December 31,
1996, 1995 and 1994 were approximately $255,000, $54,000 and $51,000,
respectively.
F-18
<PAGE> 228
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the Four-Months Ended For the Years Ended December 31
April 30 -----------------------------------------
-----------------------
1997 1996 1996 1995 1994
-------- -------- -------- ---------- ------------
(000's omitted)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 4,235 $ 3,443 $ 11,213 $ 9,242 $ 8,091
New York State 1,068 855 2,489 2,865 2,771
New York City (1,589) 739 3,294 2,780 2,664
-------- -------- -------- ---------- ----------
3,714 5,037 16,996 14,887 13,526
Deferred (2,135) (322) (1,915) (1,603) 432
-------- -------- -------- ---------- ----------
$ 1,579 $ 4,715 $ 15,081 $ 13,284 $ 13,958
======== ======== ======== ========== ==========
</TABLE>
The following table reconciles the federal statutory rate to the Bank's
effective tax rate (000's omitted):
<TABLE>
<CAPTION>
For the Four-Months December 31, 1996
Ended April 30 --------------------------------------
--------------------------- Percentage of
1997 1996 Amount Pretax Income
------------ ----------- -------------- --------------------
<S> <C> <C> <C> <C>
Federal tax at statutory rate $ 2,963 $ 4,054 $ 13,022 35.0%
State and local income taxes, net of (1,555) 997 1,781 4.8
federal tax benefit
Tax-exempt interest from obligations of
state and political subdivisions -- 23 (69) (.2)
Amortization of goodwill 106 129 308 .8
Other 65 (488) 39 .1
----------- ----------- ---------- ----
Income tax provision $ 1,579 $ 4,715 $ 15,081 40.5%
=========== =========== ========== ====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------
Percentage of
Amount Pretax Income
--------------- -------------
<S> <C> <C>
Federal tax at statutory rate $ 10,923 35.0%
State and local income taxes, net of federal tax benefit 2,872 9.2
Tax-exempt interest from obligations of state and political subdivisions (101) (.3)
Other (410) (1.3)
---------- ----
Income tax provision $ 13,284 42.6%
========== ====
<CAPTION>
December 31, 1994
---------------------------------
Percentage of
Amount Pretax Income
--------------- -------------
<S> <C> <C>
Federal tax at statutory rate $ 10,564 35.0%
State and local income taxes, net of federal tax benefit 3,533 11.7
Tax-exempt interest from obligations of state and political subdivisions (84) (.3)
Other (55) (.1)
---------- ----
Income tax provision $ 13,958 46.3%
========== ====
</TABLE>
F-19
<PAGE> 229
The following is a summary of the income tax (liability) receivable at April 30,
1997, December 31, 1996 and 1995 (000's omitted):
<TABLE>
<CAPTION>
December 31
April 30 ----------------------------
1997 1996 1995
------- ---------- ----------
<S> <C> <C> <C>
Current taxes $(1,962) $ 632 $ (574)
Deferred taxes 908 (4,248) (6,370)
------- ---------- ----------
$(1,054) $ (3,616) $ (6,944)
======= ========== ==========
</TABLE>
The components of the net deferred tax (liability) asset at April 30, 1997,
December 31, 1996 and 1995, are as follows (000's omitted):
<TABLE>
<CAPTION>
Deferred tax assets 4/30/97 12/31/96 12/31/95
------- -------- --------
<S> <C> <C> <C>
Allowance for Loan Losses $ 7,029 $ 4,789 $ 3,235
Post Retirement Accrual 1,861 1,815 1,710
Nonaccrual Loans 1,015 957 967
Deferred Compensation 830 762 608
Deferred Loan Fees 571 581 775
Other 1,781 1,468 1,345
---------- ---------- ----------
Gross Deferred Tax Asset 13,033 10,372 8,640
Valuation Allowance - - -
---------- ---------- ----------
Total Deferred Tax Asset 13,033 10,372 8,640
Deferred tax liabilities
Bad Debt Recapture Under Section 593 2,950 5,550 7,650
Deposit Premium 2,427 2,613 3,168
Unrealized Gain on AFS Securities 3,191 3,813 3,904
Purchase accounting and other 3,063 2,208 47
Pension Plan 494 436 241
---------- ---------- ----------
Gross Deferred Tax Liability 12,125 14,620 15,010
Net Deferred Tax Asset (Liability) $ 908 $ (4,248) $ (6,370)
========== ========== ==========
</TABLE>
At April 30, 1997 the deferred tax asset is included in other assets. The
deferred tax liability as of December 31, 1996 and 1995 is included in other
liabilities.
Income taxes are deferred as a result of differences in the timing of the
recognition of certain income and expense items for income tax and financial
reporting purposes. The primary sources of these differences are unrealized
appreciation/depreciation on securities available for sale, post retirement
benefits, deferred loan fees, accelerated tax depreciation, bond discount
amortization, deferred trustee fees, nonaccrual interest, bad debt deductions,
and book-tax differences resulting from the Gateway Bancorp, Inc. acquisition.
Bad Debt Deduction
Through January 1, 1996, under Section 593 of the Internal Revenue Code, thrift
institutions such as the Bank which met certain definitional tests, primarily
relating to their assets and the nature of their business, were permitted to
establish a tax reserve for bad debts and to make annual additions thereto,
which additions may, within specified limitations, be deducted in arriving at
their taxable income. The Bank's deduction with respect to "qualifying loans,"
which are generally loans secured by certain interests in real property, was
computed using an amount based on the Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8% of the Bank's taxable income
(the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the nonqualifying reserve. Similar deductions or additions to the Bank's bad
debt reserve are permitted under the New York State Bank Franchise Tax and New
York City Corporate Tax; however, for purposes of these taxes, the effective
allowable percentage under the PTI Method was approximately 32% rather than 8%.
Effective January 1, 1996, Section 593 was amended, and the Bank is unable to
make additions to its federal tax bad debt reserve, is permitted to deduct bad
debts only as they occur and is additionally required to recapture (that is,
take into taxable income) over a six year period,
F-20
<PAGE> 230
beginning with the Bank's taxable year beginning on January 1, 1996, the excess
of the balance of its bad debt reserves as of December 31, 1995 over the balance
of such reserves as of December 31, 1987, or over a lesser amount if the Bank's
loan portfolio has decreased since December 31, 1987. Such recapture
requirements would be deferred for each of the two successive taxable years
beginning January 1, 1996, in which the Bank originates a minimum amount of
certain residential loans based upon the average of the principal amounts of
such loans originated by the Bank during its six taxable years preceding January
1, 1996. The New York State tax law has been amended to prevent a similar
recapture of the Bank's bad debt reserve, and to permit continued future use of
the bad debt reserve method for purposes of determining the Bank's New York
State tax liability. In connection with this change, which also provides for an
indefinite deferral of the recapture of the bad debt reserves generated for New
York State purposes, the Bank reversed $2.1 million of previously deferred
income taxes related to the bad debt reserves accumulated for New York State
purposes. The New York City tax law was amended in the first quarter of 1997 to
prevent a similar recapture of the Bank's bad debt reserve, and to permit future
use of the experience method for purposes of determining the Bank's New York
change, which also provided for an indefinite deferral of the recapture of the
bad debt reserves generated for New York City purposes, the Bank reversed $2.6
million of previously deferred income taxes related to the bad debt reserves
accumulated for New York City purposes. The amount of the bad debt reserve
recapture amount for federal tax purposes is $2.9 million, which is included in
the gross deferred tax liability.
Prior to the tax law changes mentioned above, for New York State and New York
City purposes, the bad debt deduction was equal to a multiple of the federal bad
debt deduction, which is approximately four times the federal amount. In 1995,
the Bank began providing for deferred taxes on this state and city deduction
which has accumulated since 1987 (the base year as defined by SFAS No. 109,
"Accounting for Income Taxes"). The cumulative effect of this change in
accounting principle was approximately $4,700,000 and is reflected on the
statement of income.
10. COMMITMENTS AND CONTINGENCIES
AND RELATED PARTY TRANSACTIONS
In the normal course of business, there are various outstanding commitments and
contingent liabilities, such as standby letters of credit and commitments to
extend credit, which are not reflected in the accompanying financial statements.
The Bank uses the same policies in making commitments as it does for on-balance
sheet instruments. No material losses are anticipated as a result of these
transactions. The Bank is contingently liable under standby letters of credit in
the amount of $1,293,000, $1,424,000 and $1,597,000 at April 30, 1997, December
31, 1996 and 1995, respectively. In addition, at April 30, 1997, December 31,
1996 and 1995, mortgage loan commitments and unused balances under revolving
credit lines approximated $57,013,000, $54,260,000 and $18,308,000,
respectively.
F-21
<PAGE> 231
Total operating rental commitments on branch facilities, which expire at various
dates through September 2005, exclusive of renewal options, are as follows as of
April 30, 1997 (000's omitted):
<TABLE>
<S> <C>
1997 $ 617
1998 623
1999 564
2000 390
2001 and thereafter 1,186
---------
$ 3,380
=========
</TABLE>
Rental expense included in the statements of income was approximately $230,000
and $238,000 for the four-month periods ended April 30, 1997 and 1996.
Rental expense included in the statements of income was approximately $708,000,
$452,000 and $282,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
In 1973, the Bank entered into an agreement with a company to provide data
processing services. Such agreement expires in May 1998. The commitment for
future payments fluctuates with the level of service provided. The costs
incurred in connection with this agreement are included in data processing
expenses in the accompanying statements of income.
11. DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Due from Banks
and Federal Funds Sold
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Accrued Interest
The carrying amount is a reasonable estimate of fair value.
Securities Available for Sale
Fair values for securities are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans
For certain homogeneous categories of loans, such as some residential
mortgages and other consumer loans, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted
for differences in loan characteristics.
For other loan types, fair value is based on the credit and interest
rate characteristics of individual loans. These loans are stratified by
type, maturity, interest rate, underlying collateral where applicable,
and credit quality ratings. Fair value is estimated by discounting
scheduled cash flows through estimated maturities using discount rates
which
F-22
<PAGE> 232
in management's opinion best reflect current market interest rates that
would be charged on loans with similar characteristics and credit
quality. Credit risk concerns are reflected by adjusting cash flow
forecasts, by adjusting the discount rate or by adjusting both.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
Demand deposits, savings accounts and certain money market deposits are
valued at their carrying values. In the Bank's opinion, these deposits
could be sold at a premium based on management's knowledge of the
results of recent sales of financial institutions in the New York City
area.
Advances from Borrowers for Taxes and Insurance
The carrying amount is a reasonable estimate of fair value.
Commitments to Extend Credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
April 30, 1997
------------------------------
Carrying Fair
Amount Value
------------ -------------
(000's omitted)
<S> <C> <C>
Financial assets:
Cash and due from banks $ 39,594 $ 39,594
Federal funds sold 74,150 74,150
Securities available for sale 677,486 677,486
Trading securities 14,406 14,406
Loans 991,188 1,002,096
Less- Allowance for possible loan losses (14,687) -
Accrued interest receivable 11,892 11,892
Financial liabilities:
Savings and demand deposits 1,079,205 1,079,205
Time deposits 527,588 538,584
Advances from borrowers for taxes and insurance 6,940 6,940
Accrued interest payable 2,245 2,245
Unrecognized financial instruments:
Commitments to extend credit - 147
</TABLE>
F-23
<PAGE> 233
<TABLE>
<CAPTION>
December 31, 1996
------------------------------
Carrying Fair
Amount Value
------------ -------------
(000's omitted)
<S> <C> <C>
Financial assets:
Cash and due from banks $ 43,522 $ 43,522
Federal funds sold 9,100 9,100
Securities available for sale 703,134 703,134
Loans 968,015 980,643
Less- Allowance for possible loan losses (9,977) -
Accrued interest receivable 11,739 11,739
Financial liabilities:
Savings and demand deposits 832,582 832,582
Time deposits 500,570 507,543
Advances from borrowers for taxes and insurance 4,563 4,563
Accrued interest payable 34 34
Unrecognized financial instruments:
Commitments to extend credit - 145
<CAPTION>
December 31, 1995
------------------------------
Carrying Fair
Amount Value
------------ -------------
(000's omitted)
<S> <C> <C>
Financial assets:
Cash and due from banks $ 57,663 $ 57,663
Federal funds sold 19,600 19,600
Securities available for sale 788,622 788,622
Loans 811,841 809,031
Less- Allowance for possible loan losses (10,704) -
Accrued interest receivable 13,775 13,775
Financial liabilities:
Savings and demand deposits 1,068,255 1,068,255
Time deposits 467,362 468,264
Advances from borrowers for taxes and insurance 3,354 3,354
Accrued interest payable 47 47
Unrecognized financial instruments:
Commitments to extend credit - 122
</TABLE>
12. SUBSEQUENT EVENT
On January 1, 1997, Bank assumed the responsibility for operating the Savings
Bank Life Insurance ("SBLI") Department of the former Northside Savings Bank.
The Bank will now be an issuing bank for SBLI.
F-24
<PAGE> 234
13. EVENTS OCCURRING SUBSEQUENT TO THE DATE
OF THE AUDITOR'S REPORT (UNAUDITED)
(i) Conversion to Stock-Form of Ownership
On April 16, 1997, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from mutual to stock form. As part of the conversion, the
Bank will form a holding company (the "Company") and will be incorporated under
Delaware law, for the purpose of acquiring and holding all of the outstanding
stock of the Bank.
At the time of conversion, the Bank will establish a liquidation account in an
amount equal to the retained earnings of the Bank as of the date of the most
recent financial statements contained in the final conversion prospectus. The
liquidation account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements, the
amount required for the liquidation account, or if such declaration and payment
would otherwise violate regulatory requirements.
Pursuant to the Plan of Conversion, the Company intends to establish a
Charitable Foundation (the "Foundation"), Employee Stock Ownership Plan
("ESOP"), Stock Option Plan, Recognition and Retention Plan, and Employee
Agreements as discussed below.
The Company proposes to fund the Foundation by contributing to the Foundation,
immediately following the Conversion, a number of shares of authorized but
unissued shares of Common Stock equal to 5.0% of the Common Stock sold in the
Offering. Such contribution, once made, will not be recoverable by the Company
or the Bank.
The Company plans to establish an ESOP, a tax-qualified benefit plan for
officers and employees of the Company and the Bank. It is anticipated that
8.0% of the shares of Common Stock sold in the Offering will be purchased by
the ESOP with funds loaned by the Company. The Company and the Bank intend to
make annual contributions to the ESOP in an amount equal to the principal and
interest requirement of the debt.
Following consummation of the Conversion, the Company intends to adopt a Stock
Option Plan and a Recogniation and Retention Plan, pursuant to which the
Company intends to reserve a number of shares of Common Stock equal to an
aggregate of 10% and 4%, respectively of the Common Stock issued in the
Conversion for issuance pursuant to stock options and stock appreciation rights
and stock. The Stock Option Plan and Recognition and Retention Plan will not
be implemented prior to receipt of stockholder approval of the Plan of
Conversion.
Upon consummation of the Conversion, the Company and the Bank intend to enter
into three-year employment agreements with certain Senior management personnel.
Conversion costs will be deferred and reduce the proceeds from the shares sold
in the Conversion. If the Conversion is not completed, all costs will be
charged as an expense. As of April 30, 1997, Conversion costs of approximately
$89,000 had been incurred.
(ii) Change to OTS Charter
Effective June 1997, the Bank converted to a Federal Charter and is regulated by
the Office of Thrift Supervision.
As required by the Office of Thrift Supervision ("OTS"), the Bank is required to
maintain minimum regulatory capital requirements which include a "leverage
limit," a "tangible capital requirement" and a "risk-based capital requirement."
The leverage limit requires a savings institution to maintain "core capital" in
an amount not less than 3% of the savings institution's "adjusted total assets."
The tangible capital requirements call for a savings institution to maintain
"tangible capital" in an amount not less than 1.5% of the savings institution's
"adjusted total assets." The ability to include qualifying supervisory goodwill
for purposes of the core capital requirement has been phased out as of January
1, 1995.
The risk-based capital requirement calls for a savings institution to maintain
capital in an amount equal to 8.0% of the value of its risk-weighted assets.
In December 1992, the prompt corrective action provision under the Federal
Deposit Insurance Corporation Improvement Act of 1991 became effective. Those
regulations established capital standards in five categories ranging from
"critically undercapitalized" to "well capitalized," and defined "adequately
capitalized" as at least 4% for core (leverage) capital. Institutions with a
core capital level less than 4% or risk-based capital less than 8% are
considered "undercapitalized," and subject to increasingly stringent prompt
corrective action measures.
The OTS has implemented an interest rate risk component into its risk-based
capital rules, which is designed to calculate on a quarterly basis the extent
to which the value of an institution's assets and liabilities would change if
interest rates increase or decrease. If the net portfolio value of an
institution would decline by more than 2% of the estimated market value of the
institution's assets in the event of a 200 basis point increase or decrease in
interest rates, then the institution is deemed to be subject to a greater than
normal interest rate risk and must deduct from its capital 50% of the amount by
which the decline in net portfolio value exceeds 2% of the estimated market
value of the institution's assets, as of an effective date to be determined.
F-25
<PAGE> 235
The Company's management believes that, under the current and proposed
regulations, the Bank will continue to meet its minimum capital requirements in
the foreseeable future. However, events beyond the control of the Company, such
as increased interest rates or a downturn in the economy in areas where the
Company has most of its loans, could adversely affect future earnings and,
consequently, the ability of the Bank to meet its future minimum capital
requirements.
The information below is based upon the Bank's understanding of the applicable
regulations and related interpretations.
At April 30, 1997, December 31, 1996 and 1995, the Bank had the following
capital ratios:
<TABLE>
<CAPTION>
April 30, 1997 December 31, 1996 December 31, 1995
------------------------------- ---------------------------------- -------------------------------
Actual % Required % Actual % Required % Actual % Required %
------- ----- ------ ---- ------- ----- ------ ---- ------- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $154,040 8.44% $27,376 1.50% $146,460 8.33% $26,366 1.50% $122,542 7.21% $25,509 1.50%
Core capital 173,838 9.53 54,751 3.00 166,950 9.50 52,731 3.00 145,175 8.54 51,018 3.00
Risk-based capital 164,539 19.59 67,195 8.00 156,437 18.89 66,260 8.00 132,091 17.29 61,114 8.00
</TABLE>
The following is a reconciliation of the Bank's stockholders' equity to
regulatory capital:
<TABLE>
<CAPTION>
December 31
April 30, ------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Bank's stockholders' equity $177,295 $171,080 $150,082
Add (subtract)- Unrealized losses (gains) on securities available (3,457) (4,130) (4,907)
for sale ----------- ----------- -----------
OTS core capital $ 173,838 $ 166,950 $ 145,175
(subtract) Intangible Assets (19,798) (20,490) (22,633)
========== ========== ==========
OTS tangible capital $ 154,040 $ 146,460 $ 122,542
Add- Allowable supplementary capital-
General loan loss reserves on loans 10,499 9,977 9,549
---------- ---------- ----------
OTS risk-based capital $ 164,539 $ 156,437 $ 132,091
========== ========== ==========
</TABLE>
(iii) New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
128, "Earnings per Share," superseding Opinion 15. The main goals of the
Statement is to harmonize the EPS calculation in the United States with those
common in other countries and with International Accounting Standard No. 33 and
to address criticisms from consultants that Opinion 15 contained unnecessarily
complex and arbitrary provisions. The Statement is effective for fiscal years
after December 15, 1997.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information About
Capital Structure." Statement 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements. Specifically, the Statement requires all entities to provide
the capital structure disclosures previously required by Opinion 15. Companies
that were exempt from the provisions of Opinion 15 will now need to make those
disclosures. The Statement is effective for financial statements for periods
ending after December 15, 1997.
In July 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income."
Statement 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The objective of the Statement is to report a measure of all changes in equity
of an enterprise that result from transactions and other economic
F-26
<PAGE> 236
events of the period other than transactions with owners ("Comprehensive
income"). Comprehensive income is the total of net income and all other nonowner
changes in equity. The Statement is effective for fiscal years beginning after
December 15, 1997 with earlier application permitted.
In July 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." Statement No. 131 requires disclosures for
each segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader geographic
regions as permitted under current standards. The Statement is effective for
fiscal years beginning after December 15, 1997 with earlier application
permitted.
In management's opinion, SFAS Nos. 128, 129, 130 and 131 when adopted, will not
have a material effect on the Bank's financial statements.
F-27
<PAGE> 237
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE BANK OR KEEFE, BRUYETTE. 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 THE COMPANY OR THE
BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR
SINCE THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary . . . . . . . . . . . . . . . . . . . . 2
Selected Consolidated Financial and
Other Data . . . . . . . . . . . . . . . . . . 12
Summary of Recent Developments . . . . . . . . 13
Risk Factors . . . . . . . . . . . . . . . . . 13
Staten Island Bancorp, Inc. . . . . . . . . . . 26
Staten Island Savings Bank . . . . . . . . . . 26
Use of Proceeds . . . . . . . . . . . . . . . . 27
Dividend Policy . . . . . . . . . . . . . . . . 29
Market for Common Stock . . . . . . . . . . . . 30
Regulatory Capital . . . . . . . . . . . . . . 31
Capitalization . . . . . . . . . . . . . . . . 33
Pro Forma Data . . . . . . . . . . . . . . . . 35
Comparison of Valuation and Pro Forma
Information With No Foundation . . . . . . . . 43
Statements of Income . . . . . . . . . . . . . 44
Management's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . 45
Business . . . . . . . . . . . . . . . . . . . 65
Regulation . . . . . . . . . . . . . . . . . . 98
Taxation . . . . . . . . . . . . . . . . . . .108
Management . . . . . . . . . . . . . . . . . .110
Proposed Management Purchases . . . . . . . . .124
The Conversion . . . . . . . . . . . . . . . .125
Restrictions on Acquisition of the
Company and the Bank . . . . . . . . . . . . .152
Description of Capital Stock of the
Company . . . . . . . . . . . . . . . . . . .162
Description of Capital Stock of the
Bank . . . . . . . . . . . . . . . . . . . . .163
Transfer Agent and Registrar . . . . . . . . .164
Experts . . . . . . . . . . . . . . . . . . . .164
Legal and Tax Opinions . . . . . . . . . . . .165
Additional Information . . . . . . . . . . . .165
Index to Financial Statements . . . . . . . . .F-1
</TABLE>
UNTIL ________ __, 1997, OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, 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.
35,595,238 SHARES
(ANTICIPATED MAXIMUM)
STATEN ISLAND BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
STATEN ISLAND SAVINGS BANK)
COMMON STOCK
--------------------------
PROSPECTUS
--------------------------
KEEFE, BRUYETTE & WOODS, INC.
______________ __, 1997
<PAGE> 238
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1).
<TABLE>
<S> <C>
SEC filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,246
OTS filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,400
NYSE filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,000
Printing, postage and mailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
Blue Sky filing fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Accounting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000
Appraiser's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Fees and expenses related to business plan . . . . . . . . . . . . . . . . . . . . . . . 20,000
Conversion agent fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Transfer agent fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Conversion center telephone, temporary support staff and equipment . . . . . . . . . . . 400,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,354
---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000,000
=========
</TABLE>
In addition to the foregoing expenses, Keefe, Bruyette & Woods, Inc.
will receive fees based on the number of shares of Common Stock sold in the
Conversion, plus expenses. Based upon the assumptions and the information set
forth under "Pro Forma Data" and "The Conversion - Marketing Arrangements" in
the Prospectus, it is estimated that such fees will amount to $2,726,056,
$3,217,264, $3,708,472 and $4,273,370 in the event that 26,309,524 shares,
30,952,381 shares, 35,595,238 shares and 40,934,524 shares of Common Stock are
sold by the Bank in the Conversion, respectively.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law sets forth
circumstances under which directors, officers, employees and agents may be
insured or indemnified against liability which they may incur in their capacity
as such. The Certificate of Incorporation and the Bylaws of the Company
provide that the directors, officers, employees and agents of the Company shall
be indemnified to the full extent permitted by law. Such indemnity shall
extend to expenses, including attorney's fees, judgments, fines and amounts
paid in the settlement, prosecution or defense of the foregoing actions.
Article 10 of the Registrant's Certificate of Incorporation provides
as follows:
ARTICLE 10. INDEMNIFICATION. The Corporation shall indemnify its
directors, officers, employees, agents and former directors, officers,
employees and agents, and any other persons serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
association, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees, judgments, fines and amounts paid in
settlement) incurred in connection with any pending or threatened action, suit
or proceeding, whether civil, criminal,
<PAGE> 239
administrative or investigative, with respect to which such director, officer,
employee, agent or other person is a party, or is threatened to be made a
party, to the full extent permitted by the General Corporation Law of the State
of Delaware, provided, however, that the Corporation shall not be liable for
any amounts which may be due to any person in connection with a settlement of
any action, suit or proceeding effected without its prior written consent or
any action, suit or proceeding initiated by any person seeking indemnification
hereunder without its prior written consent. The indemnification provided
herein (i) shall not be deemed exclusive of any other right to which any person
seeking indemnification may be entitled under any bylaw, agreement or vote of
stockholders or disinterested directors or otherwise, both as to action in his
or her official capacity and as to action in any other capacity, and (ii) shall
inure to the benefit of the heirs, executors and administrators of any such
person. The Corporation shall have the power, but shall not be obligated, to
purchase and maintain insurance on behalf of any person or persons enumerated
above against any liability asserted against or incurred by them or any of them
arising out of their status as corporate directors, officers, employees, or
agents whether or not the Corporation would have the power to indemnify them
against such liability under the provisions of this Article 10.
Article VI of the Company's Bylaws provides as follows:
6.1 Indemnification. The Corporation shall provide indemnification
to its directors, officers, employees, agents and former directors, officers,
employees and agents and to others in accordance with the Corporation's
Certificate of Incorporation.
6.2 Advancement of Expenses. Reasonable expenses (including
attorneys' fees) incurred by a director, officer or employee of the Corporation
in defending any civil, criminal, administrative or investigative action, suit
or proceeding described in Section 6.1 may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors only upon receipt of an undertaking by or
on behalf of such person to repay such amount if it shall ultimately be
determined that the person is not entitled to be indemnified by the
Corporation.
6.3 Other Rights and Remedies. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article VI
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under the
Corporation's Certificate of Incorporation, any agreement, vote of stockholders
or disinterested directors or otherwise, both as to actions in their official
capacity and as to actions in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer or
employee and shall inure to the benefit of the heirs, executors and
administrators of such person.
6.4 Insurance. Upon resolution passed by the Board of Directors,
the Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer of employee of the Corporation, or is or was
serving at the request of the corporation as a director, officer or employee of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him or incurred by him in any such
capacity or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of its Certificate of Incorporation or this Article VI.
<PAGE> 240
6.5 Modification. The duties of the Corporation to indemnify and
to advance expenses to a director, officer or employee provided in this Article
VI shall be in the nature of a contract between the Corporation and each such
person, and no amendment or repeal of any provision of this Article VI shall
alter, to the detriment of such person, the right of such person to the advance
of expenses or indemnification related to a claim based on an act or failure to
act which took place prior to such amendment or repeal.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) LIST OF EXHIBITS (filed herewith unless otherwise noted)
1.1* Engagement Letter with Keefe, Bruyette & Woods, Inc.
1.2 Form of Agency Agreement with Keefe, Bruyette & Woods, Inc.
2.0* Plan of Conversion
3.1* Certificate of Incorporation of Staten Island Bancorp, Inc.
3.2* Bylaws of Staten Island Bancorp, Inc.
4.0* Form of Stock Certificate of Staten Island Bancorp, Inc.
5.0 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: legality
8.1* Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: Federal tax
matters
8.2** Opinion of KPMG Peat Marwick re: New York tax matters
8.3* Letter of RP Financial, LC re: Subscription Rights
10.1* Form of Employment Agreement to be entered into among Staten Island
Bancorp, Inc., Staten Island Savings Bank and certain executive
officers.
10.2* Form of Employment Agreement to be entered into between Staten Island
Bancorp, Inc. and each of Harry P. Doherty and James R. Coyle.
10.3* Form of Employment Agreement to be entered into between Staten Island
Savings Bank and each of Harry P. Doherty and James R. Coyle
23.1* Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in Exhibits
5.0 and 8.1, respectively)
23.2 Consent of Arthur Andersen LLP
23.3* Consent of RP Financial, LC.
23.4 Consent of Potter Anderson Corroon
23.5** Consent of KPMG Peat Marwick
24.0 Power of Attorney (previously included in Signature Page of this
Registration Statement)
99.1* Appraisal Report of RP Financial, LC.
99.2* Subscription Order Form and Instructions
99.3* Additional Solicitation Material
99.4 Form of the SISB Foundation Gift Instrument
- -----------
* Previously filed.
** To be filed by Amendment.
<PAGE> 241
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as not applicable or not required
under the rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of the securities offered would not exceed that which was
registered) and any deviation from the low or high and the estimated
maximum offering range may be reflected in the form of Prospectus
filed with the Commission pursuant to Rule 424 (b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the Offering.
The undersigned Registrant hereby undertakes to furnish stock
certificates to or in accordance with the instructions of the respective
purchasers of the Common Stock, so as to make delivery to each purchaser
promptly following the closing under the Plan of Conversion.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and
<PAGE> 242
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE> 243
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Pre-Effective Amendment No. 1 to the Form S-1
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the State of New York on September 2, 1997.
STATEN ISLAND BANCORP, INC.
By: /s/ HARRY P. DOHERTY
-------------------------------------
Harry P. Doherty
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------------------- ---------------------------------------- -------------
<S> <C> <C>
/s/ HARRY P. DOHERTY Chairman and Chief Executive Officer September 2, 1997
--------------------------------
Harry P. Doherty
/s/ JAMES R. COYLE Director, President and Chief Operating September 2, 1997
-------------------------------- Officer
James R. Coyle
/s/ EDWARD J. KLINGELE Senior Vice President and Chief September 2, 1997
-------------------------------- Financial Officer (principal financial
Edward J. Klingele and accounting officer)
/s/ HAROLD BANKS * Director September 2, 1997
--------------------------------
Harold Banks
/s/ CHARLES J. BARTELS Director September 2, 1997
--------------------------------
Charles J. Bartels
</TABLE>
<PAGE> 244
<TABLE>
<S> <C> <C>
/s/ WILLIAM G. HORN * Director September 2, 1997
--------------------------------
William G. Horn
/s/ DENIS P. KELLEHER * Director September 2, 1997
--------------------------------
Denis P. Kelleher
/s/ JULIUS MEHRBERG * Director September 2, 1997
--------------------------------
Julius Mehrberg
/s/ JOHN R. MORRIS * Director September 2, 1997
--------------------------------
John R. Morris
/s/ KENNETH W. NELSON Director September 2, 1997
--------------------------------
Kenneth W. Nelson
/s/ WILLIAM E. O'MARA * Director September 2, 1997
--------------------------------
William E. O'Mara
- -----------------------
* By Harry P. Doherty, attorney in fact.
</TABLE>
<PAGE> 1
EXHIBIT 1.2
STATEN ISLAND BANCORP, INC.
35,595,238 Shares
COMMON SHARES
(Par Value $.01 Per Share)
Subscription Price $10.00 Per Share
AGENCY AGREEMENT
__________ __, 1997
Keefe, Bruyette & Woods, Inc.
2 World Trade Center
85th Floor
New York, New York 10048
Ladies and Gentlemen:
Staten Island Bancorp, Inc., a Delaware corporation (the "Company")
and Staten Island Savings Bank, a federally chartered mutual savings bank
(reference to the "Bank" includes the Bank in the mutual or stock form, as
indicated by the context) with its deposit accounts insured by the Bank
Insurance Fund ("BIF") administered by the Federal Deposit Insurance
Corporation ("FDIC"), hereby confirm their agreement with Keefe, Bruyette &
Woods, Inc. ("KBW" or "the Agent"), as follows:
SECTION 1. THE OFFERING. The Bank, in accordance with its plan of
conversion adopted by its Board of Trustees (the "Plan"), intends to convert
from a federally chartered mutual savings bank to a federally chartered stock
savings bank, and will issue all of its issued and outstanding capital stock to
the Company in exchange for 50% of the net conversion proceeds. The Company
will retain the other 50% of net conversion proceeds. In addition, pursuant to
the Plan, the Company will offer and sell up to 35,595,238 shares of its common
stock, par value, $.01 per share (the "Shares" or "Common Shares"), in a
subscription offering (the "Subscription Offering") to (1) depositors of the
Bank with account balances of $50.00 or more as of March 31, 1996 ("Eligible
Account Holders"), (2) the Staten Island Bancorp, Inc. Employee Stock Ownership
Plan (the "ESOP"), (3) depositors of the Bank with account balances of $50.00
or more as of June 30, 1997 ("Supplemental Eligible Account Holders"), (4)
depositors of the Bank as of the close of business on ________, 1997 (other
than Eligible Account Holders and Supplemental Eligible Account Holders)
("Other Members"), and (5) employees, officers and directors of the Bank. To
<PAGE> 2
the extent Shares remain unsold in the Subscription Offering, the Company is
offering for sale in a community offering (the "Community Offering" and when
referred to together with the Subscription Offering, the "Subscription and
Community Offering"), the Shares not so subscribed for or ordered in the
Subscription Offering to members of the general public to whom a copy of the
Prospectus (as hereinafter defined) is delivered ("Other Subscribers"), (all
such offerees being referred to in the aggregate as "Eligible Offerees"). It
is anticipated that shares not subscribed for in the Subscription and Community
Offering will be offered to certain members of the general public on a best
efforts basis through a selected dealers arrangement (the "Syndicated Community
Offering") (the Subscription Offering, Community Offering and Syndicated
Community Offering are collectively referred to as the "Offering"). It is
acknowledged that the purchase of Shares in the Offering is subject to the
maximum and minimum purchase limitations as described in the Plan and that the
Company and the Bank may reject, in whole or in part, any orders received in
the Community Offering or Syndicated Community Offering. Collectively, these
transactions are referred to herein as the "Conversion."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333-_____) (the
"Registration Statement") containing a prospectus relating to the Offering for
the registration of the Shares under the Securities Act of 1933 (the "1933
Act"), and has filed such amendments thereof and such amended prospectuses as
may have been required to the date hereof. The term "Registration Statement"
shall include all exhibits thereto, as amended, including post-effective
amendments. The prospectus, as amended, on file with the Commission at the
time the Registration Statement initially became effective is hereinafter
called the "Prospectus," except that if any Prospectus is filed by the Company
pursuant to Rule 424(b) or (c) of the rules and regulations of the Commission
under the 1933 Act (the "1933 Act Regulations") differing from the prospectus
on file at the time the Registration Statement initially becomes effective, the
term "Prospectus" shall refer to the prospectus filed pursuant to Rule 424(b)
or (c) from and after the time said prospectus is filed with the Commission.
In accordance with Title 12, Part 563b of the Code of Federal
Regulations (the "Conversion Regulations"), the Bank has filed with the Office
of Thrift Supervision (the "OTS") an Application for Approval of Conversion on
Form AC (the "Conversion Application"), including the Prospectus and the
Conversion Valuation Appraisal Report prepared by RP Financial, LC (the
"Appraisal") and has filed such amendments thereto as may have been required by
the OTS. The Conversion Application has been approved by the OTS and the
related Prospectus has been authorized for use by the OTS. In addition, the
Company has filed with the OTS its application on Form H-(e)1 (the "Holding
Company Application") to become a registered savings and loan holding company
under the Home Owners' Loan Act, as amended ("HOLA"); and it has been approved.
SECTION 2. RETENTION OF AGENT; COMPENSATION; SALE AND DELIVERY OF THE
SHARES. Subject to the terms and conditions herein set forth, the Company and
the Bank have retained Keefe, Bruyette & Woods, Inc. to consult with and to
advise the Bank and the Company, and to assist the Company, on a best efforts
basis, in the distribution of the shares of Common Stock
2
<PAGE> 3
in the Subscription and Community Offering. The services that Keefe, Bruyette
& Woods, Inc. will provide include, but are not limited to (i) training the
employees of the Bank who will perform certain ministerial functions in the
Subscription and Community Offering regarding the mechanics and regulatory
requirements of the stock offering process, (ii) managing the Stock Information
Center by assisting interested stock subscribers and by keeping records of all
stock orders, (iii) preparing marketing materials and (iv) assisting in the
solicitation of proxies from the Bank's members for use at the Special Meeting.
On the basis of the representations, warranties, and agreements herein
contained, but subject to the terms and conditions herein set forth, the Agent
accepts such appointment and agrees to consult with and advise the Company and
the Bank as to the matters set forth in the letter agreement ("Letter
Agreement"), dated _________ __, 1997 between the Bank and KBW (a copy of which
is attached hereto as Exhibit A). It is acknowledged by the Company and the
Bank that the Agent shall not be required to take or purchase any Shares or be
obligated to take any action which is inconsistent with all applicable laws,
regulations, decisions or orders.
The obligations of the Agent pursuant to this Agreement (other than
those set forth in Sections 2(d), 8 and 9 hereof) shall terminate upon the
completion or termination or abandonment of the Plan by the Company or upon
termination of the Offering, but in no event later than the date (the "End
Date") which is 45 days after the Closing Date (as hereinafter defined). All
fees or expenses due to the Agent but unpaid will be payable to the Agent in
next day funds at the earlier of the Closing Date (as hereinafter defined) or
the End Date. In the event the Offering is extended beyond the End Date, the
Company, the Bank and the Agent may agree to renew this Agreement under
mutually acceptable terms.
In the event the Company is unable to sell a minimum of 26,309,524
Shares within the period herein provided, this Agreement shall terminate and
the Company shall refund to any persons who have subscribed for any of the
Shares, the full amount which it may have received from them plus accrued
interest as set forth in the Prospectus; and none of the parties to this
Agreement shall have any obligation to the other parties hereunder, except as
set forth in this Section 2 and in Sections 6, 8 and 9 hereof.
In the event the Offering is terminated, the Agent shall be reimbursed
for its actual accountable out-of-pocket expenses.
If all conditions precedent to the consummation of the Conversion,
including, without limitation, the sale of all Shares required by the Plan to
be sold, are satisfied, the Company agrees to issue, or have issued, the Shares
sold in the Offering and to release for delivery certificates for such Shares
on the Closing Date (as hereinafter defined) against payment to the Company by
any means authorized by the Plan; provided, however, that no funds shall be
released to the Company until the conditions specified in Section 7 hereof
shall have been complied with to the reasonable satisfaction of the Agent and
their counsel. The release of Shares against payment therefor shall be made on
a date and at a place acceptable to the Company, the Bank and the Agent.
Certificates for shares shall be delivered directly to the
3
<PAGE> 4
purchasers in accordance with their directions. The date upon which the
Company shall release or deliver the Shares sold in the Offering, in accordance
with the terms herein, is called the "Closing Date."
The Agent shall receive the following compensation for its services
hereunder:
(a) A management fee of $50,000. Should the Conversion be
terminated for any reason not attributable to the action or
inaction of the Agent, the Agent shall have earned and be
entitled to be paid fees accruing through the stage at which
the termination occurred.
(b) A Success Fee of 1.15% of the aggregate Actual Purchase Price
of the shares of Common Stock sold in the Subscription
Offering and Community Offering excluding shares purchased by
the Bank's officers, directors, or employees (or members of
their immediate families) plus any ESOP, tax-qualified or
stock based compensation plans (except IRA's) or similar plan
created by the Bank for some or all of its directors or
employees. The success fee paid to KBW will be reduced by the
amount of the management fee.
(c) If any of the shares remain available after the Subscription
and Community Offerings, at the request of the Bank, KBW will
seek to form a syndicate of registered broker-dealers to
assist in the sale of such Common Shares on a best efforts
basis, subject to the terms and conditions set forth in the
selected dealers agreement. KBW will endeavor to distribute
the Common Shares among dealers in a fashion which best meets
the distribution objectives of the Bank and the Plan of
Conversion. KBW will be paid a fee not to exceed 5.5% of the
aggregate Purchase Price of the Shares sold by them. KBW will
pass onto selected broker-dealers, who assist in the
syndicated community, an amount competitive with gross
underwriting discounts charged at such time for comparable
amounts of stock sold at a comparable price per share in a
similar market environment. Fees with respect to purchases
affected with the assistance of a broker/dealer other than KBW
shall be transmitted by KBW to such broker/dealer. The
decision to utilize selected broker-dealers will be made by
the Bank upon consultation with KBW. In the event, with
respect to any purchases of Shares, fees are paid pursuant to
this subparagraph 2(c), such fees shall be in lieu of, and not
in addition to, payment pursuant to subparagraph 2(a) and
2(b).
(d) The Company and the Bank have agreed to reimburse KBW for its
out-of-pocket expenses, and its legal fees and to indemnify
KBW against certain claims or liabilities, including certain
liabilities under the Securities Act, and will contribute to
payments KBW may be required to make in connection with any
such claims or liabilities; and the fees set forth under this
Section 2.
4
<PAGE> 5
SECTION 3. PROSPECTUS; OFFERING. The Shares are to be initially
offered in the Offering at the Purchase Price as defined and set forth on the
cover page of the Prospectus.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
BANK. The Company and the Bank jointly and severally represent and warrant to
and agree with the Agent as follows:
(a) The Registration Statement which was prepared by the Company
and the Bank and filed with the Commission was declared
effective by the Commission on ________ __, 1997. At the time
the Registration Statement, including the Prospectus contained
therein (including any amendment or supplement), became
effective, the Registration Statement contained all statements
that were required to be stated therein in accordance with the
1933 Act and the 1933 Act Regulations, complied in all
material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and the Registration Statement,
including the Prospectus contained therein (including any
amendment or supplement thereto), and any information
regarding the Company or the Bank contained in Sales
Information (as such term is defined in Section 8 hereof)
authorized by the Company or the Bank for use in connection
with the Offering, did not contain an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading, and at the time any Rule 424(b) or (c) Prospectus
was filed with the Commission and at the Closing Date referred
to in Section 2, the Registration Statement, including the
Prospectus contained therein (including any amendment or
supplement thereto), and any information regarding the Company
or the Bank contained in Sales Information (as such term is
defined in Section 8 hereof) authorized by the Company or the
Bank for use in connection with the Offering will contain all
statements that are required to be stated therein in
accordance with the 1933 Act and the 1933 Act Regulations and
will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the
representations and warranties in this Section 4(a) shall not
apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company
or the Bank by the Agent or its counsel expressly regarding
the Agent for use in the Prospectus under the caption "The
Conversion- Marketing Arrangements" or statements in or
omissions from any Sales Information or information filed
pursuant to state securities or blue sky laws or regulations
regarding the Agent.
5
<PAGE> 6
(b) The Conversion Application which was prepared by the Company
and the Bank and filed with the OTS was approved by the OTS on
________ __, 1997 and the related Prospectus has been
authorized for use by the OTS. At the time of the approval of
the Conversion Application, including the Prospectus
(including any amendment or supplement thereto), by the OTS
and at all times subsequent thereto until the Closing Date,
the Conversion Application, including the Prospectus
(including any amendment or supplement thereto), will comply
in all material respects with the Conversion Regulations,
except to the extent waived in writing by the OTS. The
Conversion Application, including the Prospectus (including
any amendment or supplement thereto), does not include any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however,
that the representations and warranties in this Section 4(b)
shall not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to
the Company or the Bank by the Agent or its counsel expressly
regarding the Agent for use in the Prospectus contained in the
Conversion Application under the caption "The
Conversion-Marketing Arrangements" or statements in or
omissions from any sales information or information filed
pursuant to state securities or blue sky laws or regulations
regarding the Agent. The Holding Company Application for
approval pursuant to the HOLA and the regulations promulgated
thereunder (the "Control Act Regulations"), has been prepared
by the Bank and the Company in material conformity with the
requirements of the Control Act Regulations and has been filed
with and approved by the OTS. A conformed copy of the Holding
Company Application has been delivered to the Agent.
(c) The Company has filed with the OTS the Holding Company
Application, and such Application was deemed complete by the
OTS. As of the Closing Date, approval of the Company's
acquisition of the Bank will have been obtained from the OTS.
(d) No order has been issued by the OTS or the FDIC (hereinafter
any reference to the FDIC shall include the BIF) preventing or
suspending the use of the Prospectus, and no action by or
before any such government entity to revoke any approval,
authorization or order of effectiveness related to the
Conversion is, to the best knowledge of the Company or the
Bank, pending or threatened.
(e) At the Closing Date, the Plan will have been adopted by the
Boards of Directors of the Company and the Board of Trustees
of the Bank and approved by the members of the Bank, and the
offer and sale of the Shares
6
<PAGE> 7
will have been conducted in all material respects in
accordance with the Plan, the Conversion Regulations, and all
other applicable laws, regulations, decisions and orders,
including all terms, conditions, requirements and provisions
precedent to the Conversion imposed upon the Company or the
Bank by the OTS, the Commission, or any other regulatory
authority and in the manner described in the Prospectus. No
person has sought to obtain review of the final action of the
OTS in approving the Plan or in approving the Conversion or
the Holding Company Application pursuant to the HOLA, or any
other statute or regulation.
(f) The Bank has been organized and is a validly existing
federally chartered Savings Bank in mutual form of
organization and upon the Conversion will become a duly
organized and validly existing federally chartered savings
Bank in capital stock form of organization, in both instances
duly authorized to conduct its business and own its property
as described in the Registration Statement and the Prospectus;
the Bank has obtained all material licenses, permits and other
governmental authorizations currently required for the conduct
of its business; all such licenses, permits and governmental
authorizations are in full force and effect, and the Bank is
in all material respects complying with all laws, rules,
regulations and orders applicable to the operation of its
business; the Bank is existing under the laws of the federal
government and is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction
in which its ownership of property or leasing of property or
the conduct of its business requires such qualification,
unless the failure to be so qualified in one or more of such
jurisdictions would not have a material adverse effect on the
condition, financial or otherwise, or the business, operations
or income of the Bank. The Bank does not own equity securities
or any equity interest in any other business enterprise except
as described in the Prospectus or as would not be material to
the operations of the Bank. Upon completion of the sale by
the Company of the Shares contemplated by the Prospectus, (i)
the Bank will be converted pursuant to the Plan to a federally
chartered stock savings bank, (ii) all of the issued and
outstanding capital stock of the Bank will be owned by the
Company, and (iii) the Company will have no direct
subsidiaries other than the Bank. The Conversion will have
been effected in all material respects in accordance with all
applicable statutes, regulations, decisions and orders; and,
except with respect to the filing of certain post-sale,
post-Conversion reports, and documents in compliance with the
1933 Act Regulations, the OTS' resolutions or letters of
approval, all terms, conditions, requirements and provisions
with respect to the Conversion imposed by the Commission, the
OTS, and the FDIC, if any, will have been complied with by the
Company and the Bank in all material respects or appropriate
waivers will
7
<PAGE> 8
have been obtained and all material notice and waiting periods
will have been satisfied, waived or elapsed.
(g) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State
of Delaware with corporate power and authority to own, lease
and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus,
and at the Closing Date the Company will be qualified to do
business as a foreign corporation in each jurisdiction in
which the conduct of its business requires such qualification,
except where the failure to so qualify would not have a
material adverse effect on the condition, financial or
otherwise, or the business, operations or income of the
Company. The Company has obtained all material licenses,
permits and other governmental authorizations currently
required for the conduct of its business; all such licenses,
permits and governmental authorizations are in full force and
effect, and the Company is in all material respects complying
with all laws, rules, regulations and orders applicable to the
operation of its business.
(h) The Bank has no active subsidiaries.
(i) The Bank is a member of the Federal Home Loan Bank of New York
("FHLB-New York"). The deposit accounts of the Bank are
insured by the FDIC up to the applicable limits; and no
proceedings for the termination or revocation of such
insurance are pending or, to the best knowledge of the Company
or the Bank, threatened. Upon consummation of the Conversion,
the liquidation account for the benefit of Eligible Account
Holders will be duly established in accordance with the
requirements of the Conversion Regulations.
(j) The Company and the Bank have good and marketable title to all
real property and good title to all other assets material to
the business of the Company and the Bank, taken as a whole,
and to those properties and assets described in the
Registration Statement and Prospectus as owned by them, free
and clear of all liens, charges, encumbrances or restrictions,
except such as are described in the Registration Statement and
Prospectus, or are not material to the business of the Company
and the Bank, taken as a whole; and all of the leases and
subleases material to the business of the Company and the
Bank, taken as a whole, under which the Company or the Bank
hold properties, including those described in the Registration
Statement and Prospectus, are in full force and effect.
(k) The Company and the Bank have received an opinion of their
special counsel, Elias, Matz, Tiernan & Herrick L.L.P. with
respect to the federal
8
<PAGE> 9
income tax consequences of the Conversion and an opinion of
KPMG Peat Marwick LLP with respect to New York income tax
consequences of the Conversion; all material aspects of the
opinions of Elias, Matz, Tiernan & Herrick L.L.P. and KPMG
Peat Marwick LLP are accurately summarized in the Registration
Statement and will be accurately summarized in the Prospectus;
and further represent and warrant that the facts upon which
such opinions are based are truthful, accurate and complete.
(l) The Company and the Bank have all such power, authority,
authorizations, approvals and orders as may be required to
enter into this Agreement, to carry out the provisions and
conditions hereof and to issue and sell the Shares to be sold
by the Company as provided herein and as described in the
Prospectus except approval or confirmation by the OTS of the
final appraisal of the Bank. The consummation of the
Conversion, the execution, delivery and performance of this
Agreement and the consummation of the transactions herein
contemplated have been duly and validly authorized by all
necessary corporate action on the part of the Company and the
Bank and this Agreement has been validly executed and
delivered by the Company and the Bank and is the valid, legal
and binding agreement of the Company and the Bank enforceable
in accordance with its terms (except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws relating to or affecting the
enforcement of creditors' rights generally or the rights of
creditors of savings and loan holding companies, the accounts
of whose subsidiaries are insured by the FDIC or by general
equity principles regardless of whether such enforceability is
considered in a proceeding in equity or at law, and except to
the extent if any, that the provisions of Sections 8 and 9
hereof may be unenforceable as against public policy).
(m) The Company and the Bank are not in violation of any directive
received from the OTS, the FDIC, or any other agency to make
any material change in the method of conducting their
businesses so as to comply in all material respects with all
applicable statutes and regulations (including, without
limitation, regulations, decisions, directives and orders of
the OTS, and the FDIC) and, except as may be set forth in the
Registration Statement and the Prospectus, there is no suit or
proceeding or charge or action before or by any court,
regulatory authority or governmental agency or body, pending
or, to the knowledge of the Company or the Bank, threatened,
which might materially and adversely affect the Conversion,
the performance of this Agreement or the consummation of the
transactions contemplated in the Plan and as described in the
Registration Statement and the Prospectus or which might
result in any material adverse change in the condition
(financial or otherwise), earnings, capital or properties of
9
<PAGE> 10
the Company or the Bank, or which would materially affect
their properties and assets.
(n) The financial statements, schedules and notes related thereto
which are included in the Prospectus fairly present the
consolidated balance sheet, income statement, statement of
changes in equity and cash flows of the Bank at the respective
dates indicated and for the respective periods covered thereby
and comply as to form in all material respects with the
applicable accounting requirements of Title 12 of the Code of
Federal Regulations and generally accepted accounting
principles (including those requiring the recording of certain
assets at their current market value). Such financial
statements, schedules and notes related thereto have been
prepared in accordance with generally accepted accounting
principles consistently applied through the periods involved,
present fairly in all material respects the information
required to be stated therein and are consistent with the most
recent financial statements and other reports filed by the
Bank with the OTS. The other financial, statistical and pro
forma information and related notes included in the Prospectus
present fairly the information shown therein on a basis
consistent with the audited and unaudited financial statements
of the Bank included in the Prospectus, and as to the pro
forma adjustments, the adjustments described therein have been
properly applied on the basis described therein.
(o) Since the respective dates as of which information is given in
the Registration Statement including the Prospectus: (i) there
has not been any material adverse change, financial or
otherwise, in the condition of the Company or the Bank and its
subsidiaries considered as one enterprise, or in the earnings,
capital or properties of the Company or the Bank, whether or
not arising in the ordinary course of business; (ii) there has
not been any material increase in the long-term debt of the
Bank or in the principal amount of the Bank's assets which are
classified by the Bank as substandard, doubtful or loss or in
loans past due 90 days or more or real estate acquired by
foreclosure, by deed-in-lieu of foreclosure or deemed
in-substance foreclosure or any material decrease in retained
earnings or total assets of the Bank nor has the Company or
the Bank issued any securities (other than in connection with
the incorporation of the Company) or incurred any liability or
obligation for borrowing other than in the ordinary course of
business; (iii) there have not been any material transactions
entered into by the Company or the Bank; (iv) there has not
been any material adverse change in the aggregate dollar
amount of the Bank's deposits or its consolidated net worth;
(v) there has been no material adverse change in the Company's
or the Bank's relationship with its insurance carriers,
including, without limitation, cancellation or other
termination of the Company's or the Bank's fidelity bond or
any other type
10
<PAGE> 11
of insurance coverage; (vi) except as disclosed in the
Prospectus there has been no material change in management of
the Company or the Bank, neither of which has any material
undisclosed liability of any kind, contingent or otherwise;
(vii) the Company or the Bank has not sustained any material
loss or interference with its respective business or
properties from fire, flood, windstorm, earthquake, accident
or other calamity, whether or not covered by insurance; (viii)
the Company or the Bank is not in default in the payment of
principal or interest on any outstanding debt obligations;
(ix) the capitalization, liabilities, assets, properties and
business of the Company and the Bank conform in all material
respects to the descriptions thereof contained in the
Prospectus; and (x) neither the Company, the Bank nor its
wholly owned subsidiary has any material contingent
liabilities, except as set forth in the Prospectus. All
documents made available to or delivered or to be made
available to or delivered by the Bank or the Company or their
representatives in connection with the issuance and sale of
the Shares, including records of account holders, depositors,
borrowers and other members of the Bank, or in connection with
the Agent's exercise of due diligence, except for those
documents which were prepared by parties other than the Bank,
the Company or their representatives, to the best knowledge of
the Bank and the Company, were on the dates on which they were
delivered, or will be on the dates on which they are to be
delivered, true, complete and correct in all material
respects.
(p) As of the date hereof and as of the Closing Date, neither the
Company nor the Bank is (i) in violation of its articles of
incorporation or charter or bylaws, respectively (and the Bank
will not be in violation of its charter or bylaws in capital
stock form upon consummation of the Conversion), or (ii) in
default in the performance or observance of any material
obligation, agreement, covenant, or condition contained in any
material contract, lease, loan agreement, indenture or other
instrument to which it is a party or by which it or any of its
property may be bound; the consummation of the Conversion, the
execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated have been
duly and validly authorized by all necessary corporate action
on the part of the Company and the Bank and this Agreement has
been validly executed and delivered by the Company and the
Bank and is a valid, legal and binding Agreement of the
Company and the Bank enforceable in accordance with its terms,
except as the enforceability thereof may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium,
conservatorship, receivership or other similar laws now or
hereafter in effect relating to or affecting the enforcement
of creditors' rights generally or the rights of creditors of
federal savings institutions, (ii) general equitable
principles, (iii) laws relating to the safety and soundness of
11
<PAGE> 12
insured depository institutions, and (iv) applicable law or
public policy with respect to the indemnification and/or
contribution provisions contained herein, and except that no
representation or warranty need be made as to the effect or
availability of equitable remedies or injunctive relief
(regardless of whether such enforceability is considered in a
proceeding in equity or at law). The consummation of the
transactions herein contemplated will not: (i) conflict with
or constitute a breach of, or default under, or result in the
creation of any material lien, charge or encumbrance (with the
exception of the liquidation account established in the
Conversion) upon any of the assets of the Company or the Bank
pursuant to the articles of incorporation of the Company or
the charter and bylaws of the Bank (in either mutual or
capital stock form), or any material contract, lease or other
instrument to which the Company or the Bank has a beneficial
interest, or any applicable law, rule, regulation or order;
(ii) violate any authorization, approval, judgement, decree,
order, statute, rule or regulation applicable to the Company
or the Bank, except for such violations which would not have a
material adverse effect on the financial condition and results
of operations of the Company and the Bank on a consolidated
basis; or (iii) with the exception of the liquidation account
established in the Conversion, result in the creation of any
material lien, charge or encumbrance upon any property of the
Company or the Bank.
(q) No default exists, and no event has occurred which with notice
or lapse of time, or both, would constitute a default, on the
part of the Company or the Bank in the due performance and
observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, note, bank loan or credit
agreement or any other instrument or agreement to which the
Company or the Bank is a party or by which any of them or any
of their property is bound or affected, except such defaults
which would not have a material adverse affect on the
financial condition or results of operations of the Company
and the Bank on a consolidated basis; such agreements are in
full force and effect; and no other party to any such
agreements has instituted or, to the best knowledge of the
Company and the Bank, threatened any action or proceeding
wherein the Company or the Bank would or might be alleged to
be in default thereunder.
(r) Upon consummation of the Conversion, the authorized, issued
and outstanding equity capital of the Company will be within
the range set forth in the Prospectus under the caption
"Capitalization," and no Shares have been or will be issued
and outstanding prior to the Closing Date; the Shares will
have been duly and validly authorized for issuance and, when
issued and delivered by the Company pursuant to the Plan
against payment of the consideration calculated as set forth
in the Plan and in the Prospectus, will be duly and validly
issued, fully paid and non-assessable,
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<PAGE> 13
except for shares purchased by the ESOP with funds borrowed
from the Company to the extent payment therefor in cash has
not been received by the Company; except to the extent that
subscription rights and priorities pursuant thereto exist
pursuant to the Plan, no preemptive rights exist with respect
to the Shares; and the terms and provisions of the Shares will
conform in all material respects to the description thereof
contained in the Registration Statement and the Prospectus.
To the best knowledge of the Company and the Bank, upon the
issuance of the Shares, good title to the Shares will be
transferred from the Company to the purchasers thereof against
payment therefor, subject to such claims as may be asserted
against the purchasers thereof by third-party claimants.
(s) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and
delivery of this Agreement or the issuance of the Shares,
except for the approval of the Commission, the OTS and any
necessary qualification, notification, registration or
exemption under the securities or blue sky laws of the various
states in which the Shares are to be offered, and except as
may be required under the rules and regulations of the NASD
and/or the New York Stock Exchange ("NYSE").
(t) Arthur Andersen LLP which has certified the consolidated
audited financial statements and schedules of the Bank
included in the Prospectus, has advised the Company and the
Bank in writing that they are, with respect to the Company and
the Bank, independent public accountants within the meaning of
the Code of Professional Ethics of the American Institute of
Certified Public Accountants and Title 12 of the Code of
Federal Regulations and Section 571.2(c)(3).
(u) RP Financial LC, which has prepared the Bank's Conversion
Valuation Appraisal Report as of July 17, 1997 (as amended or
supplemented, if so amended or supplemented) (the
"Appraisal"), has advised the Company in writing that it is
independent of the Company and the Bank within the meaning of
the Conversion Regulations.
(v) The Company and the Bank have timely filed all required
federal, state and local tax returns; the Company and the Bank
have paid all taxes that have become due and payable in
respect of such returns, except where permitted to be
extended, have made adequate reserves for similar future tax
liabilities and no deficiency has been asserted with respect
thereto by any taxing authority.
(w) The Bank is in compliance in all material respects with the
applicable financial record-keeping and reporting requirements
of the Currency and
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<PAGE> 14
Foreign Transactions Reporting Act of 1970, as amended, and
the regulations and rules thereunder.
(x) To the knowledge of the Company and the Bank, neither the
Company, the Bank nor employees of the Company or the Bank
have made any payment of funds of the Company or the Bank as a
loan for the purchase of the Shares or made any other payment
of funds prohibited by law, and no funds have been set aside
to be used for any payment prohibited by law.
(y) Prior to the Conversion, neither the Company nor the Bank has:
(i) issued any securities within the last 18 months (except
for notes to evidence other bank loans and reverse repurchase
agreements or other liabilities in the ordinary course of
business or as described in the Prospectus, and except for any
shares issued in connection with the incorporation of the
Company); (ii) had any material dealings within the 12 months
prior to the date hereof with any member of the NASD, or any
person related to or associated with such member, other than
discussions and meetings relating to the proposed Offering and
routine purchases and sales of United States government and
agency securities; (iii) entered into a financial or
management consulting agreement except as contemplated
hereunder; and (iv) engaged any intermediary between the Agent
and the Company and the Bank in connection with the offering
of the Shares, and no person is being compensated in any
manner for such service. Appropriate arrangements have been
made for placing the funds received from subscriptions for
Shares in a special interest-bearing account with the Bank
until all Shares are sold and paid for, with provision for
refund to the purchasers in the event that the Conversion is
not completed for whatever reason or for delivery to the
Company if all Shares are sold.
(z) The Company and the Bank have not relied upon the Agent or its
legal counsel or other advisors for any legal, tax or
accounting advice in connection with the Conversion.
(aa) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(bb) Any certificates signed by an officer of the Company or the
Bank pursuant to the conditions of this Agreement and
delivered to the Agent or their counsel that refers to this
Agreement shall be deemed to be a representation and warranty
by the Company or the Bank to the Agent as to the matters
covered thereby with the same effect as if such representation
and warranty were set forth herein.
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<PAGE> 15
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE AGENT.
KBW represents and warrants to the Company and the Bank that:
(i) it is a corporation and is validly existing in good
standing under the laws of the State of New York and licensed to
conduct business in the State of _____ and it has the full power and
authority to provide the services to be furnished to the Bank and the
Company hereunder.
(ii) The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary action on the part of the
Agent, and this Agreement has been duly and validly executed and
delivered by the Agent and is a legal, valid and binding agreement of
the Agent, enforceable in accordance with its terms.
(iii) Each of the Agent and its employees, agents and
representatives who shall perform any of the services hereunder shall
be duly authorized and empowered, and shall have all licenses,
approvals and permits necessary to perform such services.
(iv) The execution and delivery of this Agreement
by the Agent, the consummation of the transactions contemplated hereby
and compliance with the terms and provisions hereof will not conflict
with, or result in a breach of, any of the terms, provisions or
conditions of, or constitute a default (or an event which with notice
or lapse of time or both would constitute a default) under, the
articles of incorporation of the Agent or any agreement, indenture or
other instrument to which the Agent is a party or by which it or its
property is bound.
(v) No approval of any regulatory or supervisory
or other public authority is required in connection with the Agent's
execution and delivery of this Agreement, except as may have been
received.
(vi) There is no suit or proceeding or charge or
action before or by any court, regulatory authority or government
agency or body or, to the knowledge of the Agent, pending or
threatened, which might materially adversely affect the Agent's
performance of this Agreement.
SECTION 5.1 COVENANTS OF THE COMPANY AND THE BANK. The Company and
the Bank hereby jointly and severally covenant with KBW as follows:
(a) The Company will not, at any time after the date the
Registration Statement is declared effective, file any
amendment or supplement to the Registration Statement without
providing the Agent and its counsel an
15
<PAGE> 16
opportunity to review such amendment or supplement or file any
amendment or supplement to which amendment or supplement the
Agent or its counsel shall reasonably object.
(b) The Bank will not, at any time after the Conversion
Application is approved by the OTS, file any amendment or
supplement to such Conversion Application without providing
the Agent and its counsel an opportunity to review such
amendment or supplement or file any amendment or supplement to
which amendment or supplement the Agent or its counsel shall
reasonably object.
(c) The Company will not, at any time before the Holding Company
Application is approved by the OTS, file any amendment or
supplement to such Holding Company Application without
providing the Agent and its counsel an opportunity to review
the nonconfidential portions of such amendment or supplement
or file any amendment or supplement to which amendment or
supplement the Agent or its counsel shall reasonably object.
(d) The Company and the Bank will use their best efforts to cause
any post-effective amendment to the Registration Statement to
be declared effective by the Commission and any post-effective
amendment to the Conversion Application to be approved by the
OTS and will immediately upon receipt of any information
concerning the events listed below notify the Agent: (i) when
the Registration Statement, as amended, has become effective;
(ii) when the Conversion Application, as amended, has been
approved by the OTS; (iii) any comments from the Commission,
the OTS or any other governmental entity with respect to the
Conversion or the transactions contemplated by this Agreement;
(iv) of the request by the Commission, the OTS or any other
governmental entity for any amendment or supplement to the
Registration Statement, the Conversion Application or for
additional information; (v) of the issuance by the Commission,
the OTS or any other governmental entity of any order or other
action suspending the Offering or the use of the Registration
Statement or the Prospectus or any other filing of the Company
or the Bank under the Conversion Regulations, or other
applicable law, or the threat of any such action; (vi) the
issuance by the Commission, the OTS or any authority of any
stop order suspending the effectiveness of the Registration
Statement or of the initiation or threat of initiation or
threat of any proceedings for that purpose; or (vii) of the
occurrence of any event mentioned in paragraph (h) below. The
Company and the Bank will make every reasonable effort (i) to
prevent the issuance by the Commission, the OTS or any state
authority of any such order and, if any such order shall at
any time be issued, (ii) to obtain the lifting thereof at the
earliest possible time.
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<PAGE> 17
(e) The Company and the Bank will deliver to the Agent and to its
counsel two conformed copies of the Registration Statement,
the Conversion Application and the Holding Company
Application, as originally filed and of each amendment or
supplement thereto, including all exhibits. Further, the
Company and the Bank will deliver such additional copies of
the foregoing documents to counsel to the Agent as may be
required for any NASD and "blue sky" filings.
(f) The Company and the Bank will furnish to the Agent, from time
to time during the period when the Prospectus (or any later
prospectus related to this offering) is required to be
delivered under the 1933 Act or the Securities Exchange Act of
1934 (the "1934 Act"), such number of copies of such
Prospectus (as amended or supplemented) as the Agent may
reasonably request for the purposes contemplated by the 1933
Act, the 1933 Act Regulations, the 1934 Act or the rules and
regulations promulgated under the 1934 Act (the "1934 Act
Regulations"). The Company authorizes the Agent to use the
Prospectus (as amended or supplemented, if amended or
supplemented) in any lawful manner contemplated by the Plan in
connection with the sale of the Shares by the Agent.
(g) The Company and the Bank will comply with any and all material
terms, conditions, requirements and provisions with respect to
the Conversion and the transactions contemplated thereby
imposed by the Commission, the OTS or the Conversion
Regulations, and by the 1933 Act, the 1933 Act Regulations,
the 1934 Act and the 1934 Act Regulations to be complied with
prior to or subsequent to the Closing Date and when the
Prospectus is required to be delivered, and during such time
period the Company and the Bank will comply, at their own
expense, with all material requirements imposed upon them by
the Commission, the OTS or the Conversion Regulations, and by
the 1933 Act, the 1933 Act Regulations, the 1934 Act and the
1934 Act Regulations, including, without limitation, Rule
10b-5 under the 1934 Act, in each case as from time to time in
force, so far as necessary to permit the continuance of sales
or dealing in the Common Shares during such period in
accordance with the provisions hereof and the Prospectus.
(h) If, at any time during the period when the Prospectus relating
to the Shares is required to be delivered, any event relating
to or affecting the Company or the Bank shall occur, as a
result of which it is necessary or appropriate, in the opinion
of counsel for the Company and the Bank or in the reasonable
opinion of the Agent's counsel, to amend or supplement the
Registration Statement or Prospectus in order to make the
Registration Statement or Prospectus not misleading in light
of the circumstances
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<PAGE> 18
existing at the time the Prospectus is delivered to a
purchaser, the Company and the Bank will immediately so inform
the Agent and prepare and file, at their own expense, with the
Commission, the OTS and furnish to the Agent a reasonable
number of copies of an amendment or amendments of, or a
supplement or supplements to, the Registration Statement or
Prospectus (in form and substance reasonably satisfactory to
the Agent and its counsel after a reasonable time for review)
which will amend or supplement the Registration Statement or
Prospectus so that as amended or supplemented it will not
contain an untrue statement of a material fact or omit to
state a material fact necessary in order to make the
statements therein, in light of the circumstances existing at
the time the Prospectus is delivered to a purchaser, not
misleading. For the purpose of this Agreement, the Company
and the Bank each will timely furnish to the Agent such
information with respect to itself as the Agent may from time
to time reasonably request.
(i) The Company and the Bank will take all necessary actions, in
cooperating with the Agent, and furnish to whomever the Agent
may direct, such information as may be required to qualify or
register the Shares for offering and sale by the Company or to
exempt such Shares from registration, or to exempt the Company
as a broker-dealer and its officers, directors and employees
as broker-dealers or agents under the applicable securities or
blue sky laws of such jurisdictions in which the Shares are
required under the Conversion Regulations to be sold or as the
Agent and the Company and the Bank may reasonably agree upon;
provided, however, that the Company shall not be obligated to
file any general consent to service of process, to qualify to
do business in any jurisdiction in which it is not so
qualified, or to register its directors or officers as
brokers, dealers, salesmen or agents in any jurisdiction. In
each jurisdiction where any of the Shares shall have been
qualified or registered as above provided, the Company will
make and file such statements and reports in each fiscal
period as are or may be required by the laws of such
jurisdiction.
(j) The liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders will be duly
established and maintained in accordance with the requirements
of the OTS, and such Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain their
savings accounts in the Bank will have an inchoate interest in
their pro rata portion of the liquidation account which shall
have a priority superior to that of the holders of the Common
Shares in the event of a complete liquidation of the Bank.
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<PAGE> 19
(k) The Company and the Bank will not sell or issue, contract to
sell or otherwise dispose of, for a period of 90 days after
the Closing Date, without the Agent's prior written consent,
any Common Shares other than the Shares or other than in
connection with any plan or arrangement described in the
Prospectus, including existing stock benefit plans.
(l) The Company shall register its Common Stock under Section
12(b) of the 1934 Act on or prior to the Closing Date pursuant
to the Plan and shall request that such registration be
effective prior to or upon completion of the Conversion. The
Company shall maintain the effectiveness of such registration
for not less than three years or such shorter period as may be
required by the OTS.
(m) During the period during which the Company's Common Shares are
registered under the 1934 Act or for three (3) years from the
date hereof, whichever period is greater, the Company will
furnish to its shareholders as soon as practicable after the
end of each fiscal year an annual report of the Company
(including a consolidated balance sheet and statements of
consolidated income, shareholders' equity and cash flows of
the Company and its subsidiaries as at the end of and for such
year, certified by independent public accountants in
accordance with Regulation S-X under the 1933 Act and the 1934
Act).
(n) During the period of three years from the date hereof, the
Company will furnish to the Agent: (i) as soon as practicable
after such information is publicly available, a copy of each
report of the Company furnished to or filed with the
Commission under the 1934 Act or any national securities
exchange or system on which any class of securities of the
Company is listed or quoted (including, but not limited to,
reports on Forms 10-K, 10-Q and 8-K and all proxy statements
and annual reports to stockholders), (ii) a copy of each other
non-confidential report of the Company mailed to its
stockholders or filed with the Commission, the OTS or any
other supervisory or regulatory authority or any national
securities exchange or system on which any class of securities
of the Company is listed or quoted, each press release and
material news items and additional documents and information
with respect to the Company or the Bank as the Agent may
reasonably request; and (iii) from time to time, such other
nonconfidential information concerning the Company or the Bank
as the Agent may reasonably request.
(o) The Company and the Bank will use the net proceeds from the
sale of the Shares in the manner set forth in the Prospectus
under the caption "Use of Proceeds."
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<PAGE> 20
(p) Other than as permitted by the Conversion Regulations, the
HOLA, the 1933 Act, the 1933 Act Regulations, and the laws of
any state in which the Shares are registered or qualified for
sale or exempt from registration, neither the Company nor the
Bank will distribute any prospectus, offering circular or
other offering material in connection with the offer and sale
of the Shares.
(q) The Company will use its best efforts to (i) encourage and
assist a market maker to establish and maintain a market for
the Shares and (ii) list and maintain quotation of the Shares
on a national or regional securities exchange or on the Nasdaq
Stock Market ("Nasdaq") effective on or prior to the Closing
Date.
(r) The Bank will maintain appropriate arrangements for depositing
all funds received from persons mailing subscriptions for or
orders to purchase Shares in the Offering on an
interest-bearing basis at the rate described in the Prospectus
until the Closing Date and satisfaction of all conditions
precedent to the release of the Bank's obligation to refund
payments received from persons subscribing for or ordering
Shares in the Offering in accordance with the Plan and as
described in the Prospectus or until refunds of such funds
have been made to the persons entitled thereto or withdrawal
authorizations canceled in accordance with the Plan and as
described in the Prospectus. The Bank will maintain such
records of all funds received to permit the funds of each
subscriber to be separately insured by the FDIC (to the
maximum extent allowable) and to enable the Bank to make the
appropriate refunds of such funds in the event that such
refunds are required to be made in accordance with the Plan
and as described in the Prospectus.
(s) The Company will promptly take all necessary action to
register as a savings and loan holding company under the HOLA
within 90 days of the Closing Date.
(t) The Company and the Bank will take such actions and furnish
such information as are reasonably requested by the Agent in
order for the Agent to ensure compliance with the NASD's
"Interpretation Relating to Free Riding and Withholding."
(u) Neither the Company nor the Bank will amend the Plan of
Conversion without notifying the Agent prior thereto.
(v) The Company shall assist the Agent, if necessary, in
connection with the allocation of the Shares in the event of
an oversubscription and shall
20
<PAGE> 21
provide the Agent with any information necessary to assist the
Company in allocating the Shares in such event and such
information shall be accurate and reliable in all material
respects.
(w) Prior to the Closing Date, the Company and the Bank will
inform the Agent of any event or circumstances of which it is
aware as a result of which the Registration Statement and/or
Prospectus, as then amended or supplemented, would contain an
untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements
therein not misleading.
(x) Subsequent to the date the Registration Statement is declared
effective by the Commission and prior to the Closing Date,
except as otherwise may be indicated or contemplated therein
or set forth in an amendment or supplement thereto, neither
the Company nor the Bank will have: (i) issued any securities
or incurred any liability or obligation, direct or contingent,
for borrowed money, except borrowings from the same or similar
sources indicated in the Prospectus in the ordinary course of
its business, or (ii) entered into any transaction which is
material in light of the business and properties of the
Company and the Bank, taken as a whole.
(y) The facts and representations provided to Elias, Matz, Tiernan
& Herrick L.L.P. by the Bank and the Company and upon which
Elias, Matz, Tiernan & Herrick L.L.P. will base its opinion
under Section 7(c)(1) are and will be truthful, accurate and
complete.
SECTION 6. PAYMENT OF EXPENSES. Whether or not the Conversion is
completed or the sale of the Shares by the Company is consummated, the Company
and the Bank jointly and severally agree to pay or reimburse the Agent for the
Company and the Bank have agreed to reimburse KBW for its out-of-pocket
expenses, and its legal fees and to indemnify KBW against certain claims or
liabilities, including certain liabilities under the Securities Act, and will
contribute to payments KBW may be required to make in connection with any such
claims or liabilities; and the fees set forth under this Section 2. In the
event the Company is unable to sell a minimum of 26,309,524 Shares or the
Conversion is terminated or otherwise abandoned, the Company and the Bank shall
promptly reimburse the Agent in accordance with Section 2 hereof.
SECTION 7. CONDITIONS TO THE AGENT'S OBLIGATIONS. The obligations of
the Agent hereunder, as to the Shares to be delivered at the Closing Date, are
subject, to the extent not waived in writing by the Agent, to the condition
that all representations and warranties of the Company and the Bank herein are,
at and as of the commencement of the Offering and at and as of the Closing
Date, true and correct in all material respects, the condition that the Company
and the Bank shall have performed all of their obligations hereunder to be
performed on or before such dates, and to the following further conditions:
21
<PAGE> 22
(a) At the Closing Date, the Company and the Bank shall have
conducted the Conversion in all material respects in
accordance with the Plan, the Conversion Regulations, and all
other applicable laws, regulations, decisions and orders,
including all terms, conditions, requirements and provisions
precedent to the Conversion imposed upon them by the OTS.
(b) The Registration Statement shall have been declared effective
by the Commission and the Conversion Application approved by
the OTS not later than 5:30 p.m. on the date of this
Agreement, or with the Agent's consent at a later time and
date; and at the Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefore initiated
or threatened by the Commission or any state authority, and no
order or other action suspending the authorization of the
Prospectus or the consummation of the Conversion shall have
been issued or proceedings therefore initiated or, to the
Company's or the Bank's knowledge, threatened by the
Commission, the OTS, the FDIC, or any state authority.
(c) At the Closing Date, the Agent shall have received:
(1) The favorable opinion, dated as of the Closing Date and
addressed to the Agent and for its benefit, of Elias, Matz,
Tiernan & Herrick, L.L.P., special counsel for the Company and
the Bank, in form and substance to the effect that:
(i) The Company has been duly
incorporated and is validly existing as a corporation
under the laws of the state of Delaware.
(ii) The Company has corporate power and
authority to own, lease and operate its properties
and to conduct its business as described in the
Registration Statement and the Prospectus.
(iii) The Bank has been organized and is a
validly existing federally chartered savings bank in
capital stock form of organization, authorized to
conduct its business and own its property as
described in the Registration Statement and the
Prospectus. All of the outstanding capital stock of
the Bank upon completion of the Conversion will be
duly authorized and, upon payment therefor, will be
validly issued, fully paid and non-assessable and
will be owned by the Company, free and clear of any
liens, encumbrances, claims or other restrictions.
(iv) The Bank has no active subsidiaries.
(v) The Bank is a member of the FHLB-New
York. The deposit accounts of the Bank are insured by
the FDIC up to the maximum amount
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<PAGE> 23
allowed under law and no proceedings for the
termination or revocation of such insurance are
pending or, to such counsel's Actual Knowledge,
threatened; the description of the liquidation
account as set forth in the Prospectus under the
captions "The Conversion - Liquidation Rights," to
the extent that such information constitutes matters
of law and legal conclusions, has been reviewed by
such counsel and is accurately described in all
material respects.
(vi) Upon consummation of the Conversion,
the authorized, issued and outstanding capital stock
of the Company will be within the range set forth in
the Prospectus under the caption "Capitalization,"
and no shares of Common Stock have been issued prior
to the Closing Date; at the time of the Conversion,
the Shares subscribed for pursuant to the Offering
will have been duly and validly authorized for
issuance, and when issued and delivered by the
Company pursuant to the Plan against payment of the
consideration calculated as set forth in the Plan and
Prospectus, will be duly and validly issued and fully
paid and non-assessable; the issuance of the Shares
is not subject to preemptive rights and the terms and
provisions of the Shares conform in all material
respects to the description thereof contained in the
Prospectus. To such counsel's Actual Knowledge, upon
the issuance of the Shares, good title to the Shares
will be transferred by the Company to the purchasers
thereof against payment therefor, subject to such
claims as may be asserted against the purchasers
thereof by third-party claimants.
(viii) The execution and delivery of this
Agreement and the consummation of the transactions
contemplated hereby have been duly and validly
authorized by all necessary action on the part of the
Company and the Bank; and this Agreement is a valid
and binding obligation of the Company and the Bank,
enforceable in accordance with its terms, except as
the enforceability thereof may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium,
conservatorship, receivership or other similar laws
now or hereafter in effect relating to or affecting
the enforcement of creditors' rights generally or the
rights of creditors of savings institutions, the
deposits of which are insured by the FDIC and their
holding companies, (ii) general equitable principles,
(iii) laws relating to the safety and soundness of
insured depository institutions and their holding
companies, and (iv) applicable law or public policy
with respect to the indemnification and/or
contribution provisions contained herein, including
without limitation the provisions of Sections 23A and
23B of the Federal Reserve Act and except that no
opinion need be expressed as to the effect or
availability of equitable remedies or injunctive
relief (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
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<PAGE> 24
(ix) The Conversion Application has been
approved by the OTS and the Prospectus has been
authorized for use by the OTS. The OTS has approved
the Holding Company Application and issued its order
of approval under the savings and loan holding
company provisions of the HOLA, the purchase by the
Company of all of the issued and outstanding capital
stock of the Bank has been authorized by the OTS and
no action has been taken, and to such counsel's
Actual Knowledge none is pending or threatened, to
revoke any such authorization or approval.
(x) The Plan has been duly adopted by
the required vote of the directors of the Company and
the Bank, and based upon the certificate of the
inspector of election, by the members of the Bank.
(xi) Subject to the satisfaction of the
conditions to the OTS' approval of the Conversion, no
further approval, registration, authorization,
consent or other order of any federal regulatory
agency is required in connection with the execution
and delivery of this Agreement, the issuance of the
Shares and the consummation of the Conversion, except
as may be required under the securities or blue sky
laws of various jurisdictions (as to which no opinion
need be rendered) and except as may be required under
the rules and regulations of the NASD and/or the NYSE
(as to which no opinion need be rendered). To such
counsel's Actual Knowledge, the Conversion has been
consummated in all material respects in accordance
with all applicable provisions of the HOLA and the
Conversion Regulations, except that no opinion is
rendered with respect to (a) the Conversion
Application, the Registration Statement or
Prospectus, which are covered by other clauses of
this opinion, (b) the satisfaction of the
post-Conversion conditions in the OTS Regulations or
in the OTS approvals of the Conversion Application
and the Holding Company Application, (c) the
securities of "blue sky" laws of various
jurisdictions, and (d) the rules and regulations of
the NASD and/or NYSE.
(xii) The Registration Statement is
effective under the 1933 Act, and no stop order
suspending the effectiveness has been issued under
the 1933 Act or proceedings therefor initiated or, to
such counsel's Actual Knowledge, threatened by the
Commission.
(xiii) At the time the Conversion
Application, including the Prospectus contained
therein, was approved by the OTS, the Conversion
Application, including the Prospectus contained
therein, complied as to form in all material respects
with the requirements of the Conversion Regulations,
federal law and all applicable rules and regulations
promulgated thereunder (other than the financial
statements, the notes thereto, and other tabular,
24
<PAGE> 25
financial, statistical and appraisal data included
therein, as to which no opinion need be rendered).
(xiv) At the time that the Registration
Statement became effective, (i) the Registration
Statement (as amended or supplemented, if so amended
or supplemented) (other than the financial
statements, the notes thereto, and other tabular,
financial, statistical and appraisal data included
therein, as to which no opinion need be rendered),
complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act
Regulations, and (ii) the Prospectus (other than the
financial statements, the notes thereto, and other
tabular, financial, statistical and appraisal data
included therein, as to which no opinion need be
rendered) complied as to form in all material
respects with the requirements of the 1933 Act, the
1933 Act Regulations, the Conversion Regulations and
federal law.
(xv) The terms and provisions of the
Shares of the Company conform, in all material
respects, to the description thereof contained in the
Registration Statement and Prospectus, and the form
of certificate used to evidence the Shares is in due
and proper form.
(xvi) There are no legal or governmental
proceedings pending or, to such counsel's Actual
Knowledge, threatened which are required to be
disclosed in the Registration Statement and
Prospectus, other than those disclosed therein, and
to such counsel's Actual Knowledge, all pending legal
and governmental proceedings to which the Company or
the Bank is a party or of which any of their property
is the subject, which are not described in the
Registration Statement and the Prospectus, including
ordinary routine litigation incidental to the
Company's or the Bank's business, are, considered in
the aggregate, not material.
(xvii) To such counsel's Actual Knowledge,
there are no material contracts, indentures,
mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to
in the Conversion Application, the Registration
Statement or the Prospectus or required to be filed
as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto in
the Conversion Application, the Registration
Statement or the Prospectus. The description in the
Conversion Application, the Registration Statement
and the Prospectus of such documents and exhibits is
accurate in all material respects and fairly presents
the information required to be shown.
(xviii) To such counsel's Actual Knowledge,
the Company and the Bank have conducted the
Conversion, in all material respects, in accordance
with all applicable requirements of the Plan and
applicable federal law, except
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<PAGE> 26
that no opinion is rendered with respect to (a) the
Conversion Application, the Registration Statement or
Prospectus, which are covered by other clauses of
this opinion, (b) the satisfaction of the
post-Conversion conditions in the OTS Regulations or
in the OTS approvals of the Conversion Application
and the Holding Company Application, (c) the
securities or "blue sky" laws of various
jurisdictions, and (d) the rules and regulations of
the NASD and/or the NYSE. The Plan complies in all
material respects with all applicable federal laws,
rules, regulations, decisions and orders including,
but not limited to, the Conversion Regulations; no
order has been issued by the OTS, the Commission, the
FDIC, or any state authority to suspend the Offering
or the use of the Prospectus, and no action for such
purposes has been instituted or, to such counsel's
Actual Knowledge, threatened by the OTS, the
Commission, the FDIC, or any state authority and, to
such counsel's Actual Knowledge, no person has sought
to obtain regulatory or judicial review of the final
action of the OTS, approving the Plan, the Conversion
Application, the Holding Company Application or the
Prospectus.
(xix) To such counsel's Actual Knowledge, the
Company and the Bank have obtained all material
licenses, permits and other governmental
authorizations currently required for the conduct of
their businesses and all such licenses, permits and
other governmental authorizations are in full force
and effect, and the Company and the Bank are in all
material respects complying therewith, except where
the failure to have such licenses, permits and other
governmental authorizations or the failure to be in
compliance therewith would not have a material
adverse effect on the business or operations of the
Bank and the Company, taken as a whole.
(xx) To such counsel's Actual Knowledge,
neither the Company nor the Bank is in violation of
its articles of incorporation and bylaws or its
Charter and bylaws, as appropriate or, to such
counsel's Actual Knowledge, in default or violation
of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which
it is a party or by which it or its property may be
bound, except for such defaults or violations which
would not have a material adverse impact on the
financial condition or results of operations of the
Company and the Bank on a consolidated basis; to
such counsel's Actual Knowledge, the execution and
delivery of this Agreement, the occurrence of the
obligations herein set forth and the consummation of
the transactions contemplated herein will not
conflict with or constitute a breach of, or default
under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or
assets of the Company or the Bank pursuant to any
material contract, indenture, mortgage, loan
agreement, note, lease or other
26
<PAGE> 27
instrument to which the Company or the Bank is a
party or by which any of them may be bound, or to
which any of the property or assets of the Company or
the Bank are subject (other than the establishment of
the liquidation account); and, such action will not
result in any violation of the provisions of the
certificate of incorporation or bylaws of the Company
or the Charter or bylaws of the Bank or, to such
counsel's Actual Knowledge, result in any violation
of any applicable federal law, act, regulation
(except that no opinion with respect to the
securities and blue sky laws of various jurisdictions
or the rules or regulations of the NASD need be
rendered) or order or court order, writ, injunction
or decree.
(xxi) The Company's articles of
incorporation and bylaws comply in all material
respects with the Delaware General Corporation Law
("GCL"). The Bank's charter and bylaws comply in all
material respects with the rules and regulations of
the OTS.
(xxii) To such counsel's Actual Knowledge,
neither the Company nor the Bank is in violation of
any directive from the OTS or the FDIC to make any
material change in the method of conducting its
respective business.
(xxiii) The information in the Prospectus
under the captions "Regulation," "The Conversion,"
"Restrictions on Acquisition of the Company and the
Bank" and "Description of Capital Stock of the
Company," to the extent that such information
constitutes matters of law, summaries of legal
matters, documents or proceedings, or legal
conclusions, has been reviewed by such counsel and is
correct in all material respects. The description of
the Conversion process under the caption "The
Conversion" in the Prospectus has been reviewed by
such counsel and fairly describes such process in all
material respects. The discussion of statutes or
regulations described or referred to in the
Prospectus are accurate summaries and fairly present
the information required to be shown. The
information under the caption "The Conversion - Tax
Aspects" has been reviewed by such counsel and fairly
describes the opinions rendered by Elias, Matz,
Tiernan & Herrick L.L.P. and Arthur Andersen LLP to
the Company and the Bank with respect to such
matters.
In addition, such counsel shall state that
during the preparation of the Conversion Application,
the Registration Statement and the Prospectus, they
participated in conferences with certain officers of,
the independent public and internal accountants for,
and other representatives of the Company and the
Bank, at which conferences the contents of the
Conversion Application, the Registration Statement
and the Prospectus and related matters were discussed
and, while such counsel have not confirmed the
accuracy or completeness of or otherwise verified the
information
27
<PAGE> 28
contained in the Conversion Application, the
Registration Statement or the Prospectus, and do not
assume any responsibility for such information, based
upon such conferences and a review of documents
deemed relevant for the purpose of rendering their
view (relying as to materiality as to factual matters
on certificates of officers and other factual
representations by the Company and the Bank), nothing
has come to their attention that would lead them to
believe that the Conversion Application, the
Registration Statement, the Prospectus, or any
amendment or supplement thereto (other than the
financial statements, the notes thereto, and other
tabular, financial, statistical and appraisal data
included therein as to which no view need be
rendered) contained an untrue statement of a material
fact or omitted to state a material fact required to
be stated therein or necessary to make the statements
therein, in light of the circumstances under which
they were made, not misleading.
In giving such opinion, such counsel may rely
as to all matters of fact on certificates of officers
or directors of the Company and the Bank and
certificates of public officials. Such counsel's
opinion shall be limited to matters governed by
federal banking and securities laws. The opinion of
Elias, Matz, Tiernan & Herrick L.L.P. shall be
governed by the Legal Opinion Accord ("Accord") of
the American Bar Association Section of Business Law
(1991). The term "Actual Knowledge" as used herein
shall have the meaning set forth in the Accord. For
purposes of such opinion, no proceedings shall be
deemed to be pending, no order or stop order shall be
deemed to be issued, and no action shall be deemed to
be instituted unless, in each case, a director or
executive officer of the Company or the Bank shall
have received a copy of such proceedings, order, stop
order or action. In addition, such opinion may be
limited to present statutes, regulations and judicial
interpretations and to facts as they presently exist;
in rendering such opinion, such counsel need assume
no obligation to revise or supplement it should the
present laws be changed by legislative or regulatory
action, judicial decision or otherwise; and such
counsel need express no view, opinion or belief with
respect to whether any proposed or pending
legislation, if enacted, or any proposed or pending
regulations or policy statements issued by any
regulatory agency, whether or not promulgated
pursuant to any such legislation, would affect the
validity of the Conversion or any aspect thereof.
Such counsel may assume that any agreement is the
valid and binding obligation of any parties to such
agreement other than the Company or the Bank.
The favorable opinion, dated as of the
Closing Date and addressed to the Agent and for their
benefit, of the Bank's local counsel, in form and
substance to the effect that, to the best of such
counsel's knowledge, (i) the Company and the Bank
have good and marketable title to all properties
28
<PAGE> 29
and assets which are material to the business of the
Company and the Bank and to those properties and
assets described in the Registration Statement and
Prospectus, as owned by them, free and clear of all
liens, charges, encumbrances or restrictions, except
such as are described in the Registration Statement
and Prospectus, or are not material in relation to
the business of the Company and the Bank considered
as one enterprise; (ii) all of the leases and
subleases material to the business of the Company and
the Bank under which the Company and the Bank hold
properties, as described in the Registration
Statement and Prospectus, are in full force and
effect; and (iii) the Bank is duly qualified as a
foreign corporation to transact business and is in
good standing in each jurisdiction in which its
ownership of property or leasing of property or the
conduct of its business requires such qualification,
unless the failure to be so qualified in one or more
of such jurisdictions would not have a material
adverse effect on the condition, financial or
otherwise, or the business, operations or income of
the Bank.
(d) At the Closing Date, the Agent shall have received
the favorable opinion, dated as of the Closing Date,
of Silver, Freedman & Taff, L.L.P., the Agent's
counsel, with respect to such matters as the Agent
may reasonably require. Such opinion may rely upon
the opinions of counsel to the Company and the Bank,
and as to matters of fact, upon certificates of
offers and directors of the Company and the Bank
delivered pursuant hereto or as such counsel shall
reasonably request.
(e) At the Closing Date, the Agent shall receive a
certificate of the Chief Executive Officer and the
Principal Accounting Officer of the Company and the
Bank in form and substance reasonably satisfactory to
the Agent's Counsel, dated as of such Closing Date,
to the effect that: (i) they have carefully reviewed
the Prospectus and, in their opinion, at the time the
Prospectus became authorized for final use, the
Prospectus did not contain any untrue statement of a
material fact or omit to state a material fact
necessary in order to make the statements therein, in
light of the circumstances under which they were
made, not misleading; (ii) since the date the
Prospectus became authorized for final use, no event
has occurred which should have been set forth in an
amendment or supplement to the Prospectus which has
not been so set forth, including specifically, but
without limitation, any material adverse change in
the condition, financial or otherwise, or in the
earnings, capital, properties or business of the
Company or the Bank, and the conditions set forth in
this Section 7 have been satisfied; (iii) since the
respective dates as of which information is given in
the Registration Statement and the Prospectus, there
has been no material adverse change in the condition,
financial or otherwise, or in the earnings, capital
or properties of the Company or the Bank,
independently,
29
<PAGE> 30
or of the Company and the Bank, considered as one
enterprise, whether or not arising in the ordinary
course of business; (iv) the representations and
warranties in Section 4 are true and correct with the
same force and effect as though expressly made at and
as of the Closing Date; (v) the Company and the Bank
have complied in all material respects with all
agreements and satisfied all conditions on their part
to be performed or satisfied at or prior to the
Closing Date and will comply in all material respects
with all obligations to be satisfied by them after
the Conversion; (vi) no stop order suspending the
effectiveness of the Registration Statement has been
initiated or, to the best knowledge of the Company or
the Bank, threatened by the Commission or any state
authority; (vii) no order suspending the Offering,
the Conversion, the acquisition of all of the shares
of the Bank by the Company or the effectiveness of
the Prospectus has been issued and no proceedings for
that purpose are pending or, to the best knowledge of
the Company or the Bank, threatened by the OTS, the
Commission, the FDIC, or any state authority; and
(viii) to the best knowledge of the Company or the
Bank, no person has sought to obtain review of the
final action of the OTS approving the Plan.
(f) Prior to and at the Closing Date: (i) in the
reasonable opinion of the Agent, there shall have
been no material adverse change in the condition,
financial or otherwise, or in the earnings or
business of the Company or the Bank independently, or
of the Company and the Bank, considered as one
enterprise, from that as of the latest dates as of
which such condition is set forth in the Prospectus
other than transactions referred to or contemplated
therein; (ii) the Company or the Bank shall not have
received from the OTS or the FDIC any direction (oral
or written) to make any material change in the method
of conducting their business with which it has not
complied (which direction, if any, shall have been
disclosed to the Agent) or which materially and
adversely would affect the business, operations or
financial condition or income of the Company and the
Bank taken as a whole; (iii) the Company and the Bank
shall not have been in default (nor shall an event
have occurred which, with notice or lapse of time or
both, would constitute a default) under any provision
of any agreement or instrument relating to any
outstanding indebtedness; (iv) no action, suit or
proceeding, at law or in equity or before or by any
federal or state commission, board or other
administrative agency, shall be pending or, to the
knowledge of the Company or the Bank, threatened
against the Company or the Bank or affecting any of
their properties wherein an unfavorable decision,
ruling or finding would materially and adversely
affect the business, operations, financial condition
or income of the Company and the Bank taken as a
whole; and (v) the Shares have been qualified or
registered for offering and sale or exempted
therefrom under
30
<PAGE> 31
the securities or blue sky laws of the jurisdictions
as the Agent shall have reasonably requested and as
agreed to by the Company and the Bank.
(g) Concurrently with the execution of this Agreement,
the Agent shall receive a letter from KPMG Peat
Marwick LLP dated as of the date of the Prospectus
and addressed to the Agent: (i) confirming that KPMG
Peat Marwick LLP is a firm of independent public
accounts within the meaning of Rule 101 of the Code
of Professional Ethics of the American Institute of
Certified Public Accountants and applicable
regulations of the OTS and stating in effect that in
its opinion the consolidated financial statements,
schedules and related notes of the Bank as of
December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996, as are
included in the Prospectus and covered by their
opinion included therein, comply as to form in all
material respects with the applicable accounting
requirements and related published rules and
regulations of the OTS and the 1933 Act; (ii) stating
in effect that, on the basis of certain agreed upon
procedures (but not an audit in accordance with
generally accepted auditing standards) consisting of
a reading of the latest available unaudited interim
consolidated financial statements of the Bank
prepared by the Bank, a reading of the minutes of the
meetings of the Board of Directors and members of the
Bank and consultations with officers of the Bank
responsible for financial and accounting matters,
nothing came to their attention which caused them to
believe that: (A) the unaudited financial statements
included in the Prospectus are not in conformity with
the 1933 Act, applicable accounting requirements of
the OTS and generally accepted accounting principles
applied on a basis substantially consistent with that
of the audited financial statements included in the
Prospectus; or (B) during the period from the date of
the latest unaudited consolidated financial
statements included in the Prospectus to a specified
date not more than three business days prior to the
date of the Prospectus, except as has been described
in the Prospectus, there was any increase in
borrowings, other than normal deposit fluctuations,
by the Bank; or (c) there was any decrease in the
consolidated net assets of the Bank at the date of
such letter as compared with amounts shown in the
latest unaudited consolidated statement of condition
included in the Prospectus; and (iii) stating that,
in addition to the audit referred to in their opinion
included in the Prospectus and the performance of the
procedures referred to in clause (ii) of this
subsection (f), they have compared with the general
accounting records of the Bank, which are subject to
the internal controls of the Bank, the accounting
system and other data prepared by the Bank, directly
from such accounting records, to the extent specified
in such letter, such amounts and/or percentages set
forth in the Prospectus as the Agent may reasonably
request; and they have reported on the results of
such comparisons.
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<PAGE> 32
(h) At the Closing Date, the Agent shall receive a letter
dated the Closing Date, addressed to the Agent,
confirming the statements made by Arthur Andersen LLP
in the letter delivered by it pursuant to subsection
(f) of this Section 7, the "specified date" referred
to in clause (ii) of subsection (f) thereof to be a
date specified in such letter, which shall not be
more than three business days prior to the Closing
Date.
(i) At the Closing Date, the Agent shall receive a letter
from RP Financial LC, dated the date thereof and
addressed to counsel for the Agent (i) confirming
that said firm is independent of the Company and the
Bank and is experienced and expert in the area of
corporate appraisals within the meaning of Title 12
of the Code of Federal Regulations, Section
563b.7(f)(1)(i), (ii) stating in effect that the
Appraisal prepared by such firm complies in all
material respects with the applicable requirements of
Title 12 of the Code of Federal Regulations, and
(iii) further stating that their opinion of the
aggregate pro forma market value of the Company and
the Bank expressed in their Appraisal dated as of
July 17, 1997, and most recently updated, remains in
effect.
(j) The Company and the Bank shall not have sustained
since the date of the latest financial statements
included in the Prospectus any material loss or
interference with its business from fire, explosion,
flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than
as set forth or contemplated in the Registration
Statement and Prospectus and since the respective
dates as of which information is given in the
Registration Statement and Prospectus, there shall
not have been any change in the long-term debt of the
Company or the Bank other than debt incurred in
relation to the purchase of Shares by the Bank's
Eligible Plans, or any change, or any development
involving a prospective change, in or affecting the
general affairs, management, financial position,
stockholders' equity or results of operations of the
Company or the Bank, otherwise than as set forth or
contemplated in the Registration Statement and
Prospectus, the effect of which, in any such case
described above, is in KBW's reasonable judgment
sufficiently material and adverse as to make it
impracticable or inadvisable to proceed with the
Subscription Offering or the delivery of the Shares
on the terms and in the manner contemplated in the
Prospectus.
(k) At or prior to the Closing Date, the Agent shall
receive: (i) a copy of the letters from the OTS
approving the Conversion Application and authorizing
the use of the Prospectus; (ii) a copy of the order
from the Commission declaring the Registration
Statement effective; (iii) certificate of good
standing from the State of Delaware evidencing the
good standing of the Company; (iv) a certificate from
the FDIC evidencing the Bank's insurance
32
<PAGE> 33
of accounts; (v) a certificate of the FHLB-New York
evidencing the Bank's membership thereof; (vi) a copy
of the letter from the OTS approving the Company's
Holding Company Application; and (vii) a copy of the
Bank's federal stock charter.
(l) Subsequent to the date hereof, there shall not have
occurred any of the following: (i) a suspension or
limitation in trading in securities generally on the
NYSE or in the over-the-counter market, or quotations
halted generally on the Nasdaq Stock Market, or
minimum or maximum prices for trading have been
fixed, or maximum ranges for prices for securities
have been required by either of such exchanges or the
NASD or by order of the Commission or any other
governmental authority; (ii) a general moratorium on
the operations of commercial banks, federal savings
institutions or a general moratorium on the
withdrawal of deposits from commercial banks or
federal savings institutions declared by federal
authorities; (iii) the engagement by the United
States in hostilities which have resulted in the
declaration, on or after the date hereof, of a
national emergency or war; or (iv) a material decline
in the price of equity or debt securities if the
effect of such a declaration or decline, in the
Agent's reasonable judgement, makes it impracticable
or inadvisable to proceed with the Offering or the
delivery of the shares on the terms and in the manner
contemplated in the Registration Statement and the
Prospectus.
(m) At or prior to the Closing Date, counsel to the Agent
shall have been furnished with such documents and
opinions as they may reasonably require for the
purpose of enabling them to pass upon the sale of the
Shares as herein contemplated and related proceedings
or in order to evidence the occurrence or
completeness of any of the representations or
warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings
taken by the Company or the Bank in connection with
the Conversion and the sale of the Shares as herein
contemplated shall be satisfactory in form and
substance to KBW and its counsel.
SECTION 8. INDEMNIFICATION.
(a) The Company and the Bank jointly and severally agree
to indemnify and hold harmless the Agent, its
respective officers and directors, employees and
agents, and each person, if any, who controls the
Agent within the meaning of Section 15 of the 1933
Act or Section 20(a) of the 1934 Act, against any and
all loss, liability, claim, damage or expense
whatsoever (including but not limited to settlement
expenses), joint or several, that the Agent or any of
them may suffer or to which the Agent and any such
persons may become subject under all applicable
federal or state laws or otherwise, and to promptly
reimburse the Agent and any such persons upon
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<PAGE> 34
written demand for any expense (including reasonable
fees and disbursements of counsel) incurred by the
Agent or any of them in connection with
investigating, preparing or defending any actions,
proceedings or claims (whether commenced or
threatened) to the extent such losses, claims,
damages, liabilities or actions: (i) arise out of or
are based upon any untrue statement or alleged untrue
statement of a material fact contained in the
Registration Statement (or any amendment or
supplement thereto), preliminary or final Prospectus
(or any amendment or supplement thereto), the
Conversion Application (or any amendment or
supplement thereto), the Holding Company Application
or any instrument or document executed by the Company
or the Bank or based upon written information
supplied by the Company or the Bank filed in any
state or jurisdiction to register or qualify any or
all of the Shares or to claim an exemption therefrom,
or provided to any state or jurisdiction to exempt
the Company as a broker-dealer or its officers,
directors and employees as broker-dealers or agent,
under the securities laws thereof (collectively, the
"Blue Sky Application"), or any document,
advertisement, oral statement or communication
("Sales Information") prepared, made or executed by
or on behalf of the Company or the Bank with their
consent or based upon written or oral information
furnished by or on behalf of the Company or the Bank,
whether or not filed in any jurisdiction, in order to
qualify or register the Shares or to claim an
exemption therefrom under the securities laws
thereof; (ii) arise out of or are based upon the
omission or alleged omission to state in any of the
foregoing documents or information, a material fact
required to be stated therein or necessary to make
the statements therein, in light of the circumstances
under which they were made, not misleading; or (iii)
arise from any theory of liability whatsoever
relating to or arising from or based upon the
Registration Statement (or any amendment or
supplement thereto), preliminary or final Prospectus
(or any amendment or supplement thereto), the
Conversion Application (or any amendment or
supplement thereto), any Blue Sky Application or
Sales Information or other documentation distributed
in connection with the Conversion; provided, however,
that no indemnification is required under this
paragraph (a) to the extent such losses, claims,
damages, liabilities or actions arise out of or are
based upon any untrue material statement or alleged
untrue material statement in, or material omission or
alleged material omission from, the Registration
Statement (or any amendment or supplement thereto),
preliminary or final Prospectus (or any amendment or
supplement thereto), the Conversion Application, any
Blue Sky Application or Sales Information made in
reliance upon and in conformity with information
furnished in writing to the Company or the Bank by
the Agent or its counsel regarding the Agent
provided, that it is agreed and understood that the
only information furnished in writing to the Company
or the Bank by the Agent regarding the Agent is set
forth in the Prospectus
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<PAGE> 35
under the caption "The Conversion--Marketing
Arrangements"; and, provided further, that such
indemnification shall be to the extent permitted by
the Commissioner, the OTS, the FDIC and the Board of
Governors of the Federal Reserve. The
indemnification provided for in this paragraph (a)
shall not be applicable with respect to any loss,
liability, claim, damage, or expense whatsoever if it
is determined by final judgment of a court having
jurisdiction over the matter that such loss,
liability, claim, damage or expense was primarily a
result of the Agent's willful misconduct or gross
negligence.
(b) The Agent agrees to indemnify and hold harmless the
Company and the Bank, their directors and officers
and each person, if any, who controls the Company or
the Bank within the meaning of Section 15 of the 1933
Act or Section 20(a) of the 1934 Act against any and
all loss, liability, claim, damage or expense
whatsoever (including but not limited to settlement
expenses), joint or several, which they, or any of
them, may suffer or to which they, or any of them may
become subject under all applicable federal and state
laws or otherwise, and to promptly reimburse the
Company, the Bank, and any such persons upon written
demand for any expenses (including reasonable fees
and disbursements of counsel) incurred by them, or
any of them, in connection with investigating,
preparing or defending any actions, proceedings or
claims (whether commenced or threatened) to the
extent such losses, claims, damages, liabilities or
actions: (i) arise out of or are based upon any
untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement
(or any amendment or supplement thereto), the
Conversion Application (or any amendment or
supplement thereto), the preliminary or final
Prospectus (or any amendment or supplement thereto),
any Blue Sky Application or Sales Information, (ii)
are based upon the omission or alleged omission to
state in any of the foregoing documents a material
fact required to be stated therein or necessary to
make the statements therein, in the light of the
circumstances under which they were made, not
misleading, or (iii) arise from any theory of
liability whatsoever relating to or arising from or
based upon the Registration Statement (or any
amendment or supplement thereto), preliminary or
final Prospectus (or any amendment or supplement
thereto), the Conversion Application (or any
amendment or supplement thereto), or any Blue Sky
Application or Sales Information or other
documentation distributed in connection with the
Conversion; provided, however, that the Agent's
obligations under this Section 8(b) shall exist only
if and only to the extent (i) that such untrue
statement or alleged untrue statement was made in, or
such material fact or alleged material fact was
omitted from, the Registration Statement (or any
amendment or supplement thereto), the preliminary or
final Prospectus (or any amendment or supplement
thereto), the Conversion Application (or any
35
<PAGE> 36
amendment or supplement thereto), any Blue Sky
Application or Sales Information in reliance upon and
in conformity with information furnished in writing
to the Company or the Bank by the Agent or its
counsel regarding the Agent. Provided, that it is
agreed and understood that the only information
furnished in writing to the Company or the Bank by
the Agent regarding the Agent is set forth in the
Prospectus under the caption "The
Conversion--Marketing Arrangements". The
indemnification provided for in this paragraph (b)
shall not be applicable with respect to any loss,
liability, claim, damage, or expense whatsoever if it
is determined by final judgment of a court having
jurisdiction over the matter that such loss,
liability, claim, damage or expense was primarily a
result of the Company's or the Bank's willful
misconduct or gross negligence.
(c) Each indemnified party shall give prompt written
notice to each indemnifying party of any action,
proceeding, claim (whether commenced or threatened),
or suit instituted against it in respect of which
indemnity may be sought hereunder, but failure to so
notify an indemnifying party shall not relieve it
from any liability which it may have on account of
this Section 8 or otherwise. An indemnifying party
may participate at its own expense in the defense of
such action. In addition, if it so elects within a
reasonable time after receipt of such notice, an
indemnifying party, jointly with any other
indemnifying parties receiving such notice, may
assume defense of such action with counsel chosen by
it and approved by the indemnified parties that are
defendants in such action, unless such indemnified
parties reasonably object to such assumption on the
ground that there may be legal defenses available to
them that are different from or in addition to those
available to such indemnifying party. If an
indemnifying party assumes the defense of such
action, the indemnifying parties shall not be liable
for any fees and expenses of counsel for the
indemnified parties incurred thereafter in connection
with such action, proceeding or claim, other than
reasonable costs of investigation. In no event shall
the indemnifying parties be liable for the fees and
expenses of more than one separate firm of attorneys
(and any special counsel that said firm may retain)
for each indemnified party in connection with any one
action, proceeding or claim or separate but similar
or related actions, proceedings or claims in the same
jurisdiction arising out of the same general
allegations or circumstances.
(d) The agreements contained in this Section 8 and in
Section 9 hereof and the representations and
warranties of the Company and the Bank set forth in
this Agreement shall remain operative and in full
force and effect regardless of: (i) any investigation
made by or on behalf of agent or their officers,
directors or controlling persons, agent or employees
or by or on
36
<PAGE> 37
behalf of the Company or the Bank or any officers,
directors or controlling persons, agent or employees
of the Company or the Bank; (ii) delivery of and
payment hereunder for the Shares; or (iii) any
termination of this Agreement.
SECTION 9. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company, the Bank or the Agent, the Company,
the Bank and the Agent shall contribute to the aggregate losses, claims,
damages and liabilities (including any investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding of any claims asserted, but after deducting any contribution
received by the Company, the Bank or the Agent from persons other than the
other party thereto, who may also be liable for contribution) in such
proportion so that the Agent is responsible for that portion represented by the
percentage that the fees paid to the Agent pursuant to Section 2 of this
Agreement (not including expenses) bears to the gross proceeds received by the
Company from the sale of the Shares in the Offering, and the Company and the
Bank shall be responsible for the balance. If, however, the allocation
provided above is not permitted by applicable law or if the indemnified party
failed to give the notice required under Section 8 above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative fault of the Company and the Bank on the one hand and the Agent on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions, proceedings or claims in
respect thereto), but also the relative benefits received by the Company and
the Bank on the one hand and the Agent on the other from the Offering (before
deducting expenses). The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company and/or the Bank on the one hand
or the Agent on the other and the parties' relative intent, good faith,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Bank and the Agent agree that it would
not be just and equitable if contribution pursuant to this Section 9 were
determined by pro-rata allocation or by any other method of allocation which
does not take into account the equitable considerations referred to above in
this Section 9. The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions, proceedings or
claims in respect thereof) referred to above in this Section 9 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action, proceeding
or claim. It is expressly agreed that the Agent shall not be liable for any
loss, liability, claim, damage or expense or be required to contribute any
amount which in the aggregate exceeds the amount paid (excluding reimbursable
expenses) to the Agent under this Agreement. It is understood that the above
stated limitation on the Agent's liability is essential to the Agent and that
the Agent would not have entered into this Agreement if such limitation had not
been agreed to by the parties to this Agreement. No person found guilty of any
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not found guilty
of such fraudulent
37
<PAGE> 38
misrepresentation. The obligations of the Company and the Bank under this
Section 9 and under Section 8 shall be in addition to any liability which the
Company and the Bank may otherwise have. For purposes of this Section 9, each
of the Agent's, the Company's or the Bank's officers and directors and each
person, if any, who controls the Agent or the Company or the Bank within the
meaning of the 1933 Act and the 1934 Act shall have the same rights to
contribution as the Agent, the Company or the Bank. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action,
suit, claim or proceeding against such party in respect of which a claim for
contribution may be made against another party under this Section 9, will
notify such party from whom contribution may be sought, but the omission to so
notify such party shall not relieve the party from whom contribution may be
sought from any other obligation it may have hereunder or otherwise than under
this Section 9.
SECTION 10. SURVIVAL OF AGREEMENTS, REPRESENTATIONS AND INDEMNITIES.
The respective indemnities of the Company, the Bank and the Agent and the
representations and warranties and other statements of the Company, the Bank
and the Agent set forth in or made pursuant to this Agreement shall remain in
full force and effect, regardless of any termination or cancellation of this
Agreement or any investigation made by or on behalf of the Agent, the Company,
the Bank or any controlling person referred to in Section 8 hereof, and shall
survive the issuance of the Shares, and any successor or assign of the Agent,
the Company, the Bank, and any such controlling person shall be entitled to the
benefit of the respective agreements, indemnities, warranties and
representations.
SECTION 11. TERMINATION. The Agent may terminate this Agreement by
giving the notice indicated below in this Section 11 at any time after this
Agreement becomes effective as follows:
(a) In the event the Company fails to sell the required
minimum number of the Shares by ________ __, 199_,
and in accordance with the provisions of the Plan or
as required by the Conversion Regulations, and
applicable law, this Agreement shall terminate upon
refund by the Company to each person who has
subscribed for or ordered any of the Shares the full
amount which it may have received from such person,
together with interest as provided in the Prospectus,
and no party to this Agreement shall have any
obligation to the other hereunder, except for payment
by the Company and/or the Bank as set forth in
Sections 2(a), 6, 8 and 9 hereof.
(b) If any of the conditions specified in Section 7 shall
not have been fulfilled when and as required by this
Agreement unless waived in writing, or by the Closing
Date, this Agreement and all of the Agent's
obligations hereunder may be cancelled by the Agent
by notifying the Company and the Bank of such
cancellation in writing or by telegram at any time at
or prior to the Closing Date, and any such
cancellation shall be without liability of any party
to any other party except as otherwise provided in
Sections 2(a), 6, 8 and 9 hereof.
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<PAGE> 39
(c) If the Agent elects to terminate this Agreement as
provided in this Section, the Company and the Bank
shall be notified promptly by telephone or telegram,
confirmed by letter.
The Company and the Bank may terminate this Agreement in the event the
Agent is in material breach of the representations and warranties or covenants
contained in Section 5 and such breach has not been cured after the Company and
the Bank have provided KBW with notice of such breach.
This Agreement may also be terminated by mutual written consent of the
parties hereto.
SECTION 12. NOTICES. All communications hereunder, except as herein
otherwise specifically provided, shall be mailed in writing and if sent to the
Agent shall be mailed, delivered or telegraphed and confirmed to Keefe,
Bruyette & Woods, Inc., 2 World Trade Center, 85th Floor, New York, New York
10048, Attention: Robert Adams (with a copy to Silver, Freedman & Taff,
L.L.P., Attention: Martin L. Meyrowitz, P.C. and, if sent to the Company and
the Bank, shall be mailed, delivered or telegraphed and confirmed to the
Company and the Bank at 15 Beach Street, Staten Island, New York 10304,
Attention: James R. Coyle, President (with a copy to Elias, Matz, Tiernan &
Herrick L.L.P., Attention: Hugh T. Wilkinson, Esq.).
SECTION 13. PARTIES. The Company and the Bank shall be entitled to
act and rely on any request, notice, consent, waiver or agreement purportedly
given on behalf of the Agent when the same shall have been given by the
undersigned. The Agent shall be entitled to act and rely on any request,
notice, consent, waiver or agreement purportedly given on behalf of the Company
or the Bank, when the same shall have been given by the undersigned or any
other officer of the Company or the Bank. This Agreement shall inure solely to
the benefit of, and shall be binding upon, the Agent, the Company, the Bank,
and their respective successors and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
It is understood and agreed that this Agreement is the exclusive agreement
among the parties hereto, and supersedes any prior agreement among the parties
and may not be varied except in writing signed by all the parties.
SECTION 14. CLOSING. The closing for the sale of the Shares shall
take place on the Closing Date at such location as mutually agreed upon by the
Agent and the Company and the Bank. At the closing, the Company and the Bank
shall deliver to the Agent in next day funds the commissions, fees and expenses
due and owing to the Agent as set forth in Sections 2 and 6 hereof and the
opinions and certificates required hereby and other documents deemed reasonably
necessary by the Agent shall be executed and delivered to effect the sale of
the Shares as contemplated hereby and pursuant to the terms of the Prospectus.
SECTION 15. PARTIAL INVALIDITY. In the event that any term,
provision or covenant herein or the application thereof to any circumstance or
situation shall be invalid or unenforceable, in whole or in part, the remainder
hereof and the application of said term, provision or covenant to
39
<PAGE> 40
any other circumstances or situation shall not be affected thereby, and each
term, provision or covenant herein shall be valid and enforceable to the full
extent permitted by law.
SECTION 16. CONSTRUCTION. This Agreement shall be construed in
accordance with the laws of the State of New York.
SECTION 17. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute but one and the same instrument.
If the foregoing correctly sets forth the arrangement among the
Company, the Bank and the Agent, please indicate acceptance thereof in the
space provided below for that purpose, whereupon this letter and the Agent's
acceptance shall constitute a binding agreement.
40
<PAGE> 41
SECTION 18. ENTIRE AGREEMENT. This Agreement, including schedules
and exhibits hereto, which are integral parts hereof and incorporated as though
set forth in full, constitutes the entire agreement between the parties
pertaining to the subject matter hereof superseding any and all prior or
contemporaneous oral or prior written agreements, proposals, letters of intent
and understandings, and cannot be modified, changed, waived or terminated
except by a writing which expressly states that it is an amendment,
modification or waiver, refers to this Agreement and is signed by the party to
be charged. No course of conduct or dealing shall be construed to modify,
amend or otherwise affect any of the provisions hereof.
Very truly yours,
STATEN ISLAND BANCORP, INC. STATEN ISLAND SAVINGS BANK
By Its Authorized By Its Authorized
Representative: Representative:
- ---------------------------------- ---------------
- ---------------
James R. Coyle James R. Coyle
President and Chief Operating Officer President and Chief Operating Officer
Accepted as of the date first above written
KEEFE, BRUYETTE & WOODS, INC.
By Its Authorized
Representative:
- -------------------------------------------
41
<PAGE> 1
LAW OFFICES
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
-----
TIMOTHY B. MATZ Telephone: (202) 347-0300 JEFFREY D. HAAS
STEPHEN M. EGE Facsimile: (202) 347-2172 KEVIN M. HOULIHAN
RAYMOND A. TIERNAN WWW.EMTH.COM KENNETH B. TABACH
W. MICHAEL HERRICK PATRICIA J. WOHL*
GERARD L. HAWKINS JEFFREY R. HOULE
NORMAN B. ANTIN DAVID N. PARDYS
JOHN P. SOUKENIK*
GERALD F. HEUPEL, JR. ------------
JEFFREY A. KOEPPEL OF COUNSEL
DANIEL P. WEITZEL
PHILIP ROSS BEVAN ALLIN P. BAXTER
HUGH T. WILKINSON JACK I. ELIAS
SHERYL JONES ALU
*NOT ADMITTED IN D.C.
September 2, 1997
VIA EDGAR
Board of Directors
Staten Island Bancorp, Inc.
15 Beach Street
Staten Island, New York 10304
Gentlemen:
We have acted as special counsel to Staten Island Bancorp, Inc. (the
"Company") in connection with the preparation and filing with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended, of
the Registration Statement on Form S-1 (the "Registration Statement"), relating
to the issuance of up to 42,981,250 shares of the Company's common stock, par
value $.01 per share (the "Common Stock"), in connection with the conversion of
Staten Island Savings Bank (the "Bank") from mutual to stock form and the
reorganization of the Bank as a subsidiary of the Company (the "Conversion").
In this regard, we have examined the Certificate of Incorporation and Bylaws of
the Company, resolutions of the Board of Directors of the Company and the Bank,
the Plan of Conversion ("Plan of Conversion"), and such other documents and
matters of law as we deemed appropriate for the purposes of this opinion.
Based upon the foregoing, we are of the opinion as of the date hereof
that the Common Stock has been duly and validly authorized, and when issued in
accordance with the terms of the Plan of Conversion and upon the receipt of the
consideration required thereby, will be legally issued, fully paid and
non-assessable.
<PAGE> 2
Board of Directors
September 2, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Company's Registration Statement and to the references to this firm under the
headings "The Conversion - Tax Aspects" and "Legal and Tax Opinions" in the
Prospectus contained in the Registration Statement.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK
By: /s/ HUGH T. WILKINSON
----------------------------------
Hugh T. Wilkinson, a Partner
<PAGE> 1
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made part of this Prospectus
which is included in the Application for Conversion of Staten Island Savings
Bank on Form AC, the Holding Company Application for Staten Island Bancorp,
Inc. on Form H-(e)I and the Registration Statement on Form S-1 of Staten
Island Bancorp, Inc. as amended to date.
/s/ ARTHUR ANDERSEN LLP
New York, NY
July 25, 1997
<PAGE> 1
EXHIBIT 23.4
[POTTER ANDERSON & CORROON LETTERHEAD]
September 3, 1997
Board of Directors
Staten Island Savings Bank
15 Beach Street
Staten Island, New York 10304
Gentlemen:
We hereby consent to the references to this firm and our opinions in the
Registration Statement on form S-1 filed by Staten Island Bancorp, Inc. (the
"Company") and all amendments thereto, the Application for Conversion filed by
Staten Island Savings Bank, Staten Island, New York (the "Bank") with the
Office of Thrift Supervision and all amendments thereto, relating to the
conversion of the Bank from the mutual to stock form, the concurrent issuance
of the Bank's outstanding capital stock to the Company, and the offering of the
Company's common stock.
Very truly yours,
/s/ POTTER ANDERSON & CORROON
<PAGE> 1
EXHIBIT 99.4
GIFT INSTRUMENT
CHARITABLE GIFT TO THE SISB COMMUNITY FOUNDATION
Staten Island Bancorp, Inc., 15 Beach Street, Staten Island, New York
(the "Company"), desires to make a gift of its common stock, par value $.01 per
share (the "Common Stock"), to the SISB Community Foundation (the
"Foundation"), a non-stock corporation organized under the laws of the State of
Delaware. The purpose of the donation is to establish a bond between Staten
Island Bancorp, Inc. and the community in which it and its affiliates operate
to enable the community to share in the potential growth and success of the
Company and its affiliates over the long term. To that end, the Company now
gives, transfers, and delivers to the Foundation _____ shares of its Common
Stock, for consideration of $.01 per share, or total consideration of $_____,
subject to the following conditions:
1. The Foundation shall use the donation solely for charitable
purposes as provided by Section 503(c)(3) of the Internal Revenue Code of 1986,
as amended (the "Code"), including, but not limited to, community development,
in the communities in which the Company and its affiliates operate in
accordance with the provisions of the Foundation's Certificate of
Incorporation;
2. Consistent with the Company's intent to form a long-term bond
between the Company and the community, the amount of Common Stock that may be
sold by the Foundation in any one year shall not exceed 5% of the market value
(measured as of the first business day of each year), of the assets held by the
Foundation or such amount as may be necessary to maintain the Foundation's
designation as a tax-exempt organization under Section 501(c)(3) of the Code,
except that this restriction shall not prohibit the Board of Directors of the
Foundation from selling a greater amount of Common Stock in any one year if the
Board of Directors of the Foundation determines that the failure to sell a
greater amount of the Common Stock held by the Foundation would result in the
long-term reduction in the value of the Foundation's assets relative to their
then current value that would jeopardize the Foundation's capacity to carry out
its charitable purposes; and
3. The Common Stock contributed to the Foundation by the Company
shall, for so long as such shares are held by the Foundation, be considered by
the Company to be voted in the same ratio as all other shares of Common Stock
of the Company which are voted on each and every proposal considered by
stockholders of the Company, provided, however, that if this Condition No. 3 is
waived by the Office of Thrift Supervision pursuant to Office of Thrift
Supervision Order No. ____, dated ________, 1997 (a copy of which is attached
hereto), then this Condition No. 3 shall become void and of no effect.
Dated:____________, 1997 Staten Island Bancorp, Inc.
By:
-------------------------------
Harry P. Doherty
Chairman of the Board and Chief
Executive Officer
