<PAGE> 1
As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-36021
PROSPECTUS
[WARWICK COMMUNITY BANCORP, INC. LOGO]
(PROPOSED HOLDING COMPANY FOR THE WARWICK SAVINGS BANK)
5,577,500 SHARES OF COMMON STOCK
$10.00 PER SHARE
Warwick Community Bancorp, Inc. ("Company"), a Delaware corporation, is
offering up to 5,577,500 shares of its common stock, par value $.01 per share
("Common Stock"), in connection with the conversion of The Warwick Savings Bank
("Bank") from a New York mutual savings bank to a New York stock savings bank
pursuant to the Bank's amended plan of conversion ("Plan" or "Plan of
Conversion"). In certain circumstances, the Company may increase the amount of
Common Stock offered hereby to 6,414,125 shares. See footnote 4 to the table
below. The simultaneous conversion of the Bank to stock form, the issuance of
the Bank's stock to the Company, the offer and sale of the Common Stock by the
Company and the additional issuance of Common Stock to The Warwick Savings
Foundation ("Foundation") equal to 3% of the number of shares sold by the
Company in the Offerings (as defined herein) are referred to herein as the
"Conversion." Consummation of the Conversion is subject to, among other things,
the approval of the Plan by the Bank's depositors. See "The Conversion."
(continued on following page)
------------------------
THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL INVESTED. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 17
OF THIS PROSPECTUS.
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 BY ANY OTHER GOVERNMENT AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK, THE
NEW YORK STATE BANKING BOARD, THE NEW YORK STATE BANKING DEPARTMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION OR ANY OTHER
AGENCY, NOR HAS SUCH COMMISSION, SUPERINTENDENT, BOARD, DEPARTMENT, CORPORATION
OR ANY STATE SECURITIES COMMISSION OR OTHER AGENCY PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
ESTIMATED
UNDERWRITING
COMMISSIONS AND ESTIMATED NET
PURCHASE PRICE(1) OTHER EXPENSES(2) PROCEEDS(3)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share.................................................... $10.00 $0.43 $9.57
- ------------------------------------------------------------------------------------------------------------------------------
Midpoint Per Share................................................... $10.00 $0.39 $9.61
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Maximum Per Share.................................................... $10.00 $0.36 $9.64
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Total Minimum(1)..................................................... $41,225,000 $1,781,000 $39,444,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Midpoint(1).................................................... $48,500,000 $1,906,000 $46,594,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Maximum(1)..................................................... $55,775,000 $2,031,000 $53,744,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted(4)........................................ $64,141,250 $2,175,000 $61,966,250
==============================================================================================================================
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by FinPro,
Inc. ("FinPro"), dated as of September 18, 1997 and updated as of October
17, 1997, which states that the aggregate estimated pro forma market value
of the Common Stock ranged from $41,225,000 to $55,775,000 with a midpoint
of $48,500,000 ("Valuation Range"). FinPro's independent appraisal is based
upon estimates and projections that are subject to change, and the valuation
must not be construed as a recommendation as to the advisability of
purchasing the Common Stock nor an assurance that a purchaser will
thereafter be able to sell such shares at or above the $10.00 price per
share ("Purchase Price") to be paid for each share of Common Stock
subscribed for or purchased in the Offerings (as defined herein). Based on
the Valuation Range, the Board of Trustees of the Bank and the Board of
Directors of the Company have established the estimated price range of
$41,225,000 to $55,775,000 ("Estimated Price Range"), or between 4,122,500
and 5,577,500 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 approximately $1.1 million
and marketing fees to be paid to Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill") in connection with the Subscription and Community Offerings (as
defined herein), which fees are estimated to be $681,000 and $931,000,
respectively, at the minimum and the maximum of the Estimated Price Range.
See "The Conversion -- Marketing and Underwriting Arrangements." Such fees
may be deemed to be underwriting fees, and Sandler O'Neill may be deemed to
be an underwriter. See "Pro Forma Data" for the assumptions used to arrive
at these estimates. Actual fees and expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts depending
on the number of shares sold in each of the Offerings and other factors.
Includes the purchase of shares of Common Stock by the Warwick Community
Bancorp, Inc. Employee Stock Ownership Plan and related trust ("ESOP"),
which is intended to be funded by a loan from the Company to the ESOP, which
initially will be deducted from the Company's shareholders' equity. See "Use
of Proceeds" and "Pro Forma Data."
(4) As adjusted to give effect to the sale of up to an additional 15% of the
shares which may be offered at the Purchase Price, without resolicitation of
subscribers or any right of cancellation, due to regulatory considerations,
changes in the market or general financial and economic conditions. See "Pro
Forma Data" and "The Conversion -- Stock Pricing." For a discussion of the
distribution and allocation of the additional shares, if any, see "The
Conversion -- Subscription Offering and Subscription Rights," "-- Community
Offering" and "-- Limitations on Common Stock Purchases."
Sandler O'Neill & Partners, L.P.
------------------------
The date of this Prospectus is November 18, 1997.
<PAGE> 2
(continued from previous page)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK HAVE BEEN
GRANTED, IN ORDER OF PRIORITY, TO EACH OF THE BANK'S ELIGIBLE ACCOUNT HOLDERS,
THE EMPLOYEE PLANS, INCLUDING THE ESOP, THE BANK'S SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS AND CERTAIN OTHER DEPOSITORS (EACH AS DEFINED HEREIN) IN A SUBSCRIPTION
OFFERING ("SUBSCRIPTION OFFERING"). SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE.
PERSONS FOUND TO BE TRANSFERRING OR ATTEMPTING TO TRANSFER SUBSCRIPTION RIGHTS
WILL BE SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS
AND PENALTIES IMPOSED BY THE NEW YORK STATE BANKING DEPARTMENT ("NYSBD"). Upon
completion of the Subscription Offering and subject to other limitations
described herein, any shares of Common Stock not subscribed for in the
Subscription Offering will be subsequently offered by the Company for sale in a
community offering ("Community Offering") to certain members of the general
public to whom a copy of this Prospectus is delivered. The Subscription Offering
and the Community Offering are referred to, together, as the "Subscription and
Community Offerings." It is anticipated that any shares not subscribed for in
the Subscription and Community Offerings will be offered to members of the
general public in a syndicated community offering ("Syndicated Community
Offering") (the Subscription and Community Offerings and the Syndicated
Community Offering are referred to, collectively, as the "Offerings"). If shares
of Common Stock are offered by the Company in a Syndicated Community Offering,
the Company will incur additional commissions, in accordance with agreements to
be entered into at the time of such offering. See "The Conversion -- Syndicated
Community Offering."
The Warwick Community Bancorp, Inc. Employee Stock Ownership Plan ("ESOP"),
which is an Employee Plan, intends to subscribe for 8% of the total number of
shares of Common Stock to be issued in the Conversion, including shares issued
to the Foundation. To the extent not purchased in the Subscription Offering, the
ESOP intends to purchase the remaining portion of such shares in open market
transactions following the Conversion. Shares purchased by the ESOP are
anticipated to be funded by a loan from the Company to be repaid over a period
of up to 10 years at an interest rate of 8%.
No Eligible Account Holder, Supplemental Eligible Account Holder or Other
Depositor, in their capacity as such, may subscribe in the Subscription Offering
for more than $150,000 of the Common Stock offered in the Conversion, except as
otherwise provided herein under "The Conversion -- Subscription Offering and
Subscription Rights;" no person, together with associates of and persons acting
in concert with such person, may purchase in the Community Offering and the
Syndicated Community Offering more than $150,000 of the Common Stock offered in
the Conversion; and, except for the Employee Plans, no person, together with
associates of and persons acting in concert with such person, may purchase in
the aggregate more than the overall maximum purchase limitation of 1.0% of the
total number of shares of Common Stock offered for sale in the Conversion. At
any time during the Conversion, the overall maximum purchase limitation may be
increased up to 5% of the Common Stock offered for sale in the Conversion and
the amount that may be subscribed for may be increased in the sole discretion of
the Bank or the Company without further approval of the Bank's depositors. Prior
to the consummation of 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 Bank may be, given the opportunity to increase their
subscriptions up to the then applicable limit. The minimum purchase is 25
shares. THE COMPANY AND THE BANK RESERVE THE RIGHT, IN THEIR ABSOLUTE
DISCRETION, TO ACCEPT OR REJECT, IN WHOLE OR IN PART, ANY OR ALL SUBSCRIPTIONS
IN THE COMMUNITY OFFERING AND THE SYNDICATED COMMUNITY OFFERING, EITHER AT THE
TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE TERMINATION
OF SUCH OFFERINGS. However, no rejection will be in contravention of any
applicable law or regulation. If an order is rejected, the funds submitted with
such order will be returned promptly with interest. If the Company or the Bank
rejects a subscription in part, the subscriber will not have the right to cancel
the remainder of such person's subscription. See "The Conversion -- Subscription
Offering and Subscription Rights," "-- Community Offering" and "-- Limitations
on Common Stock Purchases."
Pursuant to the Plan, the Company and the Bank intend to establish a
charitable foundation in connection with the Conversion. The Plan provides that
the Bank and the Company will create the Foundation and fund the Foundation with
shares of Common Stock contributed by the Company from authorized but unissued
shares, in an amount equal to 3% of the number of shares of Common Stock sold in
the Conversion. The Foundation will be dedicated to charitable purposes within
the Bank's local community. For a discussion of the Foundation and its effects
on the Conversion, see "Risk Factors -- Establishment of Charitable Foundation,"
"Pro Forma Data" and "The Conversion -- Establishment of The Warwick Savings
Foundation."
2
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(continued from previous page)
The Bank has engaged Sandler O'Neill & Partners, L.P. ("Sandler O'Neill")
to consult with and advise the Company and the Bank in the Offerings, and
Sandler O'Neill has agreed to use its best efforts to assist the Company with
the solicitation of subscriptions and purchase orders for shares of Common Stock
in the Offerings. Sandler O'Neill is not obligated to take or purchase any
shares of Common Stock in the Offerings. The Company and the Bank have agreed to
indemnify Sandler O'Neill against certain liabilities arising under the
Securities Act of 1933, as amended ("Securities Act"). See "The
Conversion -- Marketing and Underwriting Arrangements."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT 12:00 NOON, EASTERN TIME, ON
DECEMBER 15, 1997 ("EXPIRATION DATE") UNLESS EXTENDED BY THE BANK AND THE
COMPANY, WITH THE APPROVAL OF THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW
YORK ("SUPERINTENDENT") AND THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"),
IF NECESSARY. The Community Offering, if any, shall commence upon the completion
of the Subscription Offering and shall terminate 7 days after the close of the
Subscription Offering unless extended by the Bank and the Company, with the
approval of the Superintendent and the FDIC, if necessary. Subscriptions paid by
cash, check, bank draft or money order will be placed in a segregated account at
the Bank and will earn interest at the Bank's rate of interest on passbook
accounts from the date of receipt until completion or termination of the
Conversion. 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 otherwise will be unavailable to the
depositor until such time. Upon completion of the Conversion, funds withdrawn
from depositors' accounts for stock purchases will no longer be insured by the
FDIC. ORDERS SUBMITTED ARE IRREVOCABLE UNTIL THE COMPLETION OR TERMINATION OF
THE CONVERSION; provided, that, if the Conversion is not completed within 45
days after the close of the Subscription Offering, unless such period has been
extended with the consent of the Superintendent and the FDIC, if necessary, all
subscribers will have their funds returned promptly with interest, and all
withdrawal authorizations will be canceled. If an extension of time has been
granted, all subscribers will be notified (i) of such extension, (ii) of any
rights to confirm their subscriptions or to modify or rescind their
subscriptions and have their funds returned promptly with interest and (iii) of
the time period within which the subscribers must notify the Bank of their
intention to confirm, modify or rescind their subscriptions. Each such extension
may not exceed 60 days, and such extensions, in the aggregate, may not last
beyond November 18, 1999. A resolicitation of subscribers will be made if the
pro forma market value of the Common Stock is either more than 15% above the
maximum of the Estimated Price Range or less than the minimum of the Estimated
Price Range. If an affirmative response to any resolicitation is not received by
the Bank and the Company from a subscriber, such subscriber's order will be
rescinded, and all funds will be returned promptly with interest. See "The
Conversion -- Subscription Offering and Subscription Rights" and "-- Procedure
for Purchasing Shares in Subscription and Community Offerings."
The Company has received conditional approval from the Nasdaq Stock Market,
Inc. to have its Common Stock quoted on the Nasdaq National Market of the Nasdaq
Stock Market, Inc. ("Nasdaq National Market") under the symbol "WSBI" upon
completion of the Conversion. One of the requirements for continued quotation of
the Common Stock on the Nasdaq National Market is that there be at least three
market makers for the Common Stock. The Company will seek to encourage and
assist at least three market makers to make a market in the Common Stock.
Sandler O'Neill has advised the Company that it intends to make a market in the
Common Stock, but is under no obligation to do so. Prior to this offering there
has not been a public market for the Common Stock, and there can be no assurance
that an active and liquid trading market for the Common Stock will develop or
that the Common Stock will trade at or above the Purchase Price. The absence or
discontinuance of a market may have an adverse impact on both the price and
liquidity of the Common Stock. See "Risk Factors -- Absence of Market for Common
Stock."
EXPLANATORY NOTE: This Prospectus contains certain forward looking
statements, which statements consist of estimates with respect to the financial
condition, results of operations and business of the Company and the Bank.
Prospective investors are cautioned that such forward looking statements are not
guarantees of future performance and are subject to various factors that could
cause actual results to differ materially from these estimates. These factors
include changes in general economic and market conditions, and the development
of an interest rate environment that adversely affects the interest rate spread
or other income anticipated from the Company's and the Bank's operations and
investments. See "Risk Factors" for a discussion of other factors that might
cause actual results to differ from such estimates.
3
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[LOGO]
[THE WARWICK SAVINGS BANK]
[MAP SHOWING OFFICE LOCATIONS OF
THE WARWICK SAVINGS BANK]
[PRINTER TO PREPARE]
[Should show the following counties: Orange, Rockland, Sullivan, Ulster,
Duchess, Putnam, Passaic, Bergen and Sussex]
[Should separately identify Main Office, 3 Branch Offices and 3 Loan Production
Offices]
[Should show New York State and New Jersey with a blow-up for the counties
listed above]
4
<PAGE> 5
SUMMARY
This summary is qualified in its entirety by the more detailed information
and Financial Statements of the Bank and Notes thereto included elsewhere in
this Prospectus.
WARWICK COMMUNITY BANCORP, INC.
The Company is a Delaware corporation recently organized by the Bank for
the purpose of acquiring all of the capital stock of the Bank to be issued in
the Conversion. 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 proceeds from the
Offerings, with the remaining net proceeds to be retained by the Company. Funds
retained by the Company will be used for general business activities.
Immediately following the Conversion, the only significant assets of the Company
will be the capital stock of the Bank, the loan that the Company intends to make
to the ESOP to enable the ESOP to purchase up to 8% of the Common Stock to be
issued in the Conversion, including shares issued to the Foundation, and the net
conversion proceeds retained by the Company. The net proceeds from the Offerings
are expected to be invested initially in federal funds, government and federal
agency mortgage-backed securities, other debt securities, equity securities,
deposits of or loans to the Bank or a combination thereof. See "Use of
Proceeds." The principal business of the Company will initially consist of
managing its investment in the Bank. See "Business of the Company," "Business of
the Bank" and "Regulation and Supervision -- Holding Company Regulation."
The Company's office is located at the main office of the Bank at 18
Oakland Avenue, Warwick, New York 10990-0591. The Company's telephone number is
(914) 986-2206.
THE WARWICK SAVINGS BANK
General
The Bank was founded in 1875 as a New York mutual savings bank. The Bank is
subject to extensive regulation, supervision and examination by the NYSBD, its
primary regulator, and the FDIC, which insures its deposits. The Bank has been,
and intends to continue to be, a community-oriented savings institution offering
a variety of financial services to meet the needs of the communities it serves.
The Bank maintains its headquarters in the village of Warwick in Orange County,
New York and operates three additional branch offices located in the village of
Monroe, the town of Woodbury and the city of Middletown, Orange County, New
York. The Bank's primary deposit gathering areas are currently concentrated in
proximity to its full service banking offices. The Bank's current primary
lending market includes Orange County, New York and the surrounding New York
counties. The Bank has recently obtained a license from the State of New Jersey
Department of Banking and Insurance to form a mortgage banking subsidiary, WSB
Mortgage Company of New Jersey, Inc. ("WSB Mortgage"), through which the Bank
intends to establish a mortgage banking operation in, and expand its lending
into, northeastern New Jersey. See "Business of the Bank -- Market Area" and
"-- Competition."
The Bank's principal business has been and continues to be attracting
retail deposits from the general public in the areas surrounding its four
branches and investing those deposits, together with funds generated from
operations and borrowings, primarily in one- to four-family residential mortgage
loans, mortgage-backed securities, commercial business and commercial real
estate loans and various debt and equity securities. The Bank's residential
lending activities are conducted through its team of commissioned loan
originators, who regularly call upon realtors, builders and others in the real
estate business to solicit mortgage loan applications. In the normal course of
business, the Bank uses off-balance sheet financial instruments, including put
options purchased and forward commitments to sell mortgage loans, primarily as
part of its mortgage banking hedging strategies. When effectively used, these
instruments are designed to moderate the impact on earnings as interest rates
move up or down. Additionally, the Bank originates home equity loans (Good
Neighbor Home Loans) and lines of credit, consumer loans, student loans and its
own credit card loans.
The Bank's revenues are derived principally from the interest on its
mortgage loans, securities, commercial and consumer loans and, to a lesser
degree, from its mortgage banking activities, loan and securities sales,
servicing fee income and income derived from investment products offered by its
wholly owned subsidiary, WSB Financial
5
<PAGE> 6
Services, Inc. ("WSB Financial"). The Bank's primary sources of funds are
deposits, borrowings, principal and interest payments on loans and securities
and proceeds from the sale of loans and securities.
At August 31, 1997, the Bank had total assets of $290.9 million, of which
$154.7 million was comprised of mortgage and other loans and $116.3 million was
comprised of securities. At such date, total deposits were $221.7 million,
borrowings were $31.3 million and net worth was $29.2 million. At that same
date, the Bank's leverage and total risk-based capital ratios were 9.81% and
20.12%, respectively, which exceeded all applicable regulatory capital
requirements. Additionally, the Bank's regulatory capital was in excess of the
amount necessary to be considered "well-capitalized" under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). See "Regulatory
Capital Compliance," "Capitalization" and "Regulation and Supervision -- Federal
Banking Regulation." The Bank's deposits are insured up to the maximum allowable
amount by the Bank Insurance Fund ("BIF") of the FDIC.
The Bank's net income was $2.9 million, $1.5 million and $504,000 for the
fiscal years ended May 31, 1997, 1996 and 1995, respectively, and $538,000 and
$848,000 for the three months ended August 31, 1997 and 1996, respectively. See
"Selected Financial and Other Data of the Bank," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business of the
Bank."
The Bank is a member of the Federal Home Loan Bank of New York ("FHLBNY"),
which is one of the 12 regional banks which comprise the Federal Home Loan Bank
("FHLB") system.
Business Strategy
The Bank has historically employed an operating strategy that emphasizes
the origination of one- to four-family residential mortgage loans in its market
area, with both fixed and adjustable rates, and, to an increasing degree over
the past 10 years, its commercial lending business, with mostly prime-rate based
loans secured by real estate located mainly in Orange County, New York. Due in
part to this strategy, the Bank historically has had profitable operations,
resulting in a strong regulatory capital position. The Bank's goal of
maintaining this position has led to an overall strategy of managed growth in
both deposits and assets. The major elements of the Bank's operating strategy
are to: (i) grow and diversify the Bank's loan portfolio by continuing to
originate owner-occupied residential mortgage, commercial business and
commercial real estate, construction and consumer loans in its market area (see
"Risk Factors -- Residential and Non-Residential Lending Risks" for a discussion
of certain credit risks associated with these types of loans); (ii) complement
the Bank's mortgage lending activities by investing in mortgage-backed and other
securities; (iii) maintain the Bank's relatively low cost of funds; and (iv)
manage the Bank's level of interest rate risk. From time to time, the Bank
employs a leveraging strategy, whereby borrowings are used to fund specific
investments in order to provide for a reasonable net margin of return. The Bank
also seeks to attract and retain customers by providing a high level of personal
service to its retail and business customers through extended office hours, low
turnover of employees and prompt, flexible and personalized production of a
variety of loan products. In addition, it is a goal of the Bank to increase its
market share in the communities it serves through the acquisition or
establishment of branch offices and, if appropriate, the acquisition of smaller
financial institutions. Additionally, it is a goal of the Bank to penetrate new
markets. For this reason, the Bank has recently obtained a license from the
State of New Jersey Department of Banking and Insurance to establish a mortgage
banking operation in, and expand its lending into, New Jersey through WSB
Mortgage. There can be no assurances, however, that the Bank will be successful
in accomplishing these goals. See "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Management
Strategy" and "Business of the Bank."
In making loans, the Bank considers both the estimated value of the
collateral securing the loans and the creditworthiness of its prospective
borrowers and seeks to minimize risk of loss through its underwriting standards.
As a result of this strategy, historically the Bank has had only minimal loss
experience in its lending operations. The Bank's ratio of non-performing loans
to total loans at year-end ranged from 0.78% to 2.42% during the five-year
period ended May 31, 1997 and was 0.94% at August 31, 1997. The Bank's ratio of
6
<PAGE> 7
allowance for loan losses to non-performing loans was 93.44% at August 31, 1997.
See "Selected Consolidated Financial and Other Data of the Bank" and "Business
of the Bank -- Asset Quality."
The Bank's interest expense consists of the interest paid on savings
deposits and borrowed money. The Bank's savings deposits are derived principally
from the areas surrounding its branch offices. The Bank's strategy has been to
maintain a high level of relatively stable savings deposits by providing quality
service to its customers without significantly increasing its cost of funds. The
Bank's low-cost core deposit base, consisting of passbook accounts, demand
accounts, money market accounts, NOW accounts and interest-on-checking demand
accounts, totaled $146.0 million, or 65.8% of total deposits, and had a weighted
average effective rate of 2.89% at August 31, 1997. The Bank has not used, and
does not currently intend to use, brokered deposits as a source of funds. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business of the
Bank -- Sources of Funds."
THE WARWICK SAVINGS FOUNDATION
In furtherance of the Bank's commitment to its local community, the Plan of
Conversion provides for the establishment of a charitable foundation in
connection with the Conversion, which will be incorporated under Delaware law as
a non-stock corporation. The Foundation will be funded 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 common bond between the Bank and its
community and thereby enables the Bank's community to share in the potential
growth and success of the Company. While the Bank has made charitable
contributions in the past, the Bank has not previously formed a charitable
foundation nor has it made contributions to charitable organizations of the
magnitude of the contribution that will be made to the Foundation in the
Conversion. By further enhancing the Bank's visibility and reputation in its
local community, the Bank believes that the Foundation will enhance the
long-term value of the Bank's community banking franchise. See "The
Conversion -- Establishment of The Warwick Savings Foundation -- Structure of
the Foundation."
The authority for the affairs of the Foundation, including the management
of the Common Stock held by the Foundation, will be vested in the Foundation's
Board of Directors. A majority of the Board of Directors of the Foundation will
consist of individuals who are officers or directors of the Bank, and the
remaining members of the Foundation's Board of Directors will consist of certain
members of the Bank's community. However, establishment of the Foundation is
subject to certain conditions, including a requirement that the Common Stock of
the Company held by the Foundation be voted in the same ratio as all other
shares of the Company's Common Stock on all proposals considered by shareholders
of the Company. See "The Conversion -- Establishment of The Warwick Savings
Foundation -- Regulatory Conditions Imposed on the Foundation." Upon the
establishment of the Foundation, the directors of the Foundation will establish
the Foundation's policies with respect to grants or donations by the Foundation,
consistent with the purposes for which the Foundation was established.
The Company proposes to fund the Foundation by contributing to the
Foundation immediately following the Conversion a number of shares of authorized
but unissued Common Stock equal to 3% of the Common Stock sold in the Offerings,
or 123,675, 145,500 and 167,325 shares at the minimum, midpoint and maximum of
the Estimated Price Range, respectively. Such contribution, once made, will not
be recoverable by the Company or the Bank. Assuming the sale of shares at the
maximum of the Estimated Price Range, the Company will have 5,744,825 shares
issued and outstanding, of which the Foundation will own 167,325 shares, or
2.9%. DUE TO THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK TO THE
FOUNDATION, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 2.9%. SEE "PRO FORMA
DATA."
As a result of the establishment of the Foundation, the Company will
recognize an expense of the full amount of the contribution, offset, in part, by
a corresponding tax benefit, during the quarter in which the contribution is
made, which is expected to be the third quarter of the fiscal year ending May
31, 1998. Such expense will have a material impact on the Company's earnings for
such quarter and for the fiscal year in which such quarter falls. Assuming a
contribution of $1.7 million in Common Stock at such time, based on the maximum
of the Estimated Price Range, the Company estimates a net tax effected expense
of $1.0 million,
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<PAGE> 8
based upon a 40% tax rate and without regard to the annual deduction limitation
of 10% of the Company's taxable income. If the Foundation had been established
in the fiscal year ended May 31, 1997, the Bank would have recorded net income
of $1.9 million, rather than recording net income of $2.9 million, for the
fiscal year ended May 31, 1997, based on the same assumptions. In addition to
the contribution of Common Stock by the Company to the Foundation, the Bank
expects to continue making ordinary charitable contributions within its local
community in the future. 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 of Common Stock in the Conversion, see "Risk
Factors -- Establishment of Charitable Foundation."
The establishment of the Foundation in connection with the Conversion, and
the Superintendent's approval and the FDIC's non-objection to the Plan of
Conversion, may be subject to potential challenges which could result in delays
in the Conversion. See "Risk Factors -- Establishment of Charitable Foundation."
THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
On July 10, 1997, the Board of Trustees of the Bank adopted the Plan of
Conversion (which was amended as of August 19, 1997 and October 21, 1997)
pursuant to which the Bank is converting from a New York mutual savings bank to
a New York stock savings bank, and the Company will acquire all of the
outstanding capital stock of the Bank in exchange for 50% of the net proceeds
from the Offerings. The Conversion and the Offerings are subject to the
Superintendent's approval, the FDIC's non-objection and the approval of the
Bank's depositors at a special meeting to be held on December 22, 1997. The
Superintendent issued an approval letter, and the FDIC issued a notice of intent
not to object to the Conversion, on November 18, 1997. See "The
Conversion -- General." The Bank is converting to increase its capital and to
structure itself in a form used by many commercial banks and other business
entities and a growing number of savings institutions. The Conversion will
enhance the Bank's ability to access capital markets, expand its current
operations, acquire other financial institutions or branch offices, provide
affordable home financing opportunities to the communities it serves and
diversify into other financial services to the extent allowable by applicable
law and regulation. The holding company form of organization will provide the
Bank with additional flexibility to diversify its business activities through
newly-formed subsidiaries or through acquisitions of or mergers with other
financial institutions, as well as other companies. Although there are no
current arrangements, understandings or agreements, written or oral, regarding
any such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. See "The
Conversion -- Purposes of Conversion." The holding company form of organization
also provides certain anti-takeover protections. See "Risk Factors -- Certain
Anti-Takeover Provisions."
The Common Stock will be offered in the Subscription Offering and, upon
completion of the Subscription Offering and subject to other limitations
described herein, to the extent shares are available, in the Community Offering
to certain members of the general public to whom a copy of this Prospectus is
delivered. To the extent that shares are available after the expiration of the
Community Offering, such shares may be offered in the Syndicated Community
Offering. See "The Conversion -- Syndicated Community Offering." Common Stock
offered in the Subscription Offering will be offered in the following order of
priority: (1) to depositors whose deposits in qualifying accounts in the Bank
totaled $100 or more on June 30, 1996 ("Eligible Account Holders"); (2) to the
Company's and the Bank's tax-qualified employee stock benefit plans ("Employee
Plans"), including the ESOP; (3) to depositors whose deposits in qualifying
accounts in the Bank totaled $100 or more on September 30, 1997, other than (i)
those depositors who would otherwise qualify as Eligible Account Holders or (ii)
trustees or executive officers of the Bank or their Associates (as defined
herein, see "The Conversion -- Limitations on Common Stock Purchases")
("Supplemental Eligible Account Holders"); and (4) to depositors whose deposits
in qualifying accounts in the Bank totaled $100 or more on October 31, 1997, the
voting record date ("Voting Record Date") for the special meeting of depositors
to vote on the Conversion, other than those depositors who would otherwise
qualify as Eligible Account Holders or Supplemental Eligible Account Holders
("Other Depositors"). Subscription
8
<PAGE> 9
rights will expire if not exercised by, and the Subscription Offering will
terminate at, 12:00 noon, Eastern time, on the Expiration Date, unless extended
by the Bank and the Company, for an initial period of up to 45 days and, with
the approval of the Superintendent and the FDIC, if necessary, for additional
periods of no more than 60 days each. Subject to the prior rights of holders of
subscription rights, Common Stock not subscribed for in the Subscription
Offering will be offered in the Community Offering to certain members of the
general public upon the completion of the Subscription Offering. The Community
Offering, if any, shall commence upon the completion of the Subscription
Offering and shall terminate 7 days after the close of the Subscription Offering
unless extended by the Bank and the Company, with the approval of the
Superintendent and the FDIC, if necessary. The Company and the Bank reserve the
absolute right to reject or accept any orders in the Community Offering, in
whole or in part, either at the time of receipt of an order or as soon as
practicable following the expiration of the Community Offering. However, no
rejection will be in contravention of any applicable law or regulation.
The Bank and the Company have retained Sandler O'Neill as consultant and
advisor in connection with the Offerings and to assist in soliciting
subscriptions and purchase orders in the Offerings. The Bank and the Company
will pay a fee to Sandler O'Neill, which will be based on the aggregate Purchase
Price of the Common Stock sold in the Offerings. Neither Sandler O'Neill nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of Common Stock in the Offerings. See "The Conversion -- Marketing and
Underwriting Arrangements."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES OF COMMON STOCK
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date (or the expiration of the Community Offering, as the case
may be) in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934,
as amended ("Exchange Act"), no Prospectus will be mailed any later than five
days prior to any such date or hand delivered any later than two days prior to
any such date. Execution of the stock order form will confirm receipt of
delivery in accordance with Rule 15c2-8. Each stock order form distributed will
be accompanied by a Prospectus and certification form. The Company and the Bank
are not obligated to accept or process orders that are submitted on facsimiled
or copied stock order forms. Stock order forms unaccompanied by an executed
certification form will not be accepted. Payment by check, money order, bank
draft, cash or debit authorization to an existing account at the Bank must
accompany the stock order form and certification form. No wire transfers will be
accepted. The Bank is prohibited from lending funds to any person or entity for
the purpose of purchasing shares of Common Stock in the Conversion. See "The
Conversion -- Procedure for Purchasing Shares in Subscription and Community
Offerings."
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Depositors are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1996), the Supplemental Eligibility Record Date (September 30, 1997) and the
Voting Record Date (October 31, 1997) must list all accounts on the stock order
form, giving all names on each account and the account numbers. Failure to list
all such account numbers may result in the inability of the Company and the Bank
to fill all or part of a subscription order. See "The Conversion -- Procedure
for Purchasing Shares in Subscription and Community Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES OF COMMON STOCK
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. Certificates representing shares
of Common Stock purchased in the Subscription Offering must be registered in the
name of the Eligible Account Holder, Supplemental Eligible Account Holder or
Other Depositor, as the case may be. Joint registrations will be allowed only if
the qualifying deposit account is so registered. Each person exercising
subscription rights will be required to certify that any purchase of Common
Stock will be solely for the purchaser's own account and that there is no
agreement or understanding regarding the sale or transfer of any shares
purchased as a result of the exercise. The Company and the Bank will pursue any
and all legal and equitable remedies in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve
9
<PAGE> 10
the transfer of such rights. See "The Conversion -- Restrictions on Transfer of
Subscription Rights and Shares of Common Stock."
PURCHASE LIMITATIONS
The minimum purchase in the Offerings is 25 shares. Pursuant to the
subscription rights granted under the Plan, the ESOP intends to subscribe for 8%
of the shares of Common Stock to be issued in the Conversion, including shares
issued to the Foundation. No Eligible Account Holder, Supplemental Eligible
Account Holder or Other Depositor, in their capacity as such, may subscribe in
the Subscription Offering for more than $150,000 of the Common Stock offered; no
person, together with associates of or persons acting in concert with such
person, may purchase in the Community Offering and the Syndicated Community
Offering in the aggregate more than $150,000 of the Common Stock offered in the
Conversion; and, except for the Employee Plans, no person, together with
associates of or persons acting in concert with such person, may purchase more
than the overall maximum purchase limitation of 1.0% of the total number of
shares of Common Stock offered for sale in the Offerings. At any time during the
Conversion and without further approval of the Bank's depositors, the Company
and the Bank may, in their sole discretion, increase the overall maximum
purchase limitation and increase the amount that may be subscribed for in the
Offerings to up to 5% of the shares offered for sale in the Conversion. It is
currently anticipated that the overall maximum purchase limitation may be
increased if, after the Subscription and Community Offerings, the Company has
not received subscriptions for an aggregate amount equal to at least the minimum
of the Estimated Price Range. Prior to consummation of 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 Bank may be, given the
opportunity to increase their subscriptions up to the then applicable limit. See
"The Conversion -- Limitations on Common Stock Purchases" and "The
Conversion -- Community Offering." In the event of an increase in the total
number of shares to up to 15% above the maximum of the Estimated Price Range,
the additional shares will be distributed and allocated to fill unfilled orders
in the Subscription Offering and Community Offering, if any, without any
resolicitation of subscribers, as described in "The Conversion -- Subscription
Offering and Subscription Rights" and "-- Limitations on Common Stock
Purchases."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
State and federal regulations require that the aggregate purchase price of
the Common Stock to be issued in the Conversion be consistent with an
independent appraisal of the estimated pro forma market value of the Common
Stock following the Conversion. FinPro, Inc. ("FinPro"), an independent
appraiser, has advised the Bank that, in its opinion, the aggregate estimated
pro forma market value of the Common Stock ranged from $41,225,000 to
$55,775,000, with a midpoint of $48,500,000. See "The Conversion -- Stock
Pricing." FinPro's appraisal report, dated as of September 18, 1997 and updated
as of October 17, 1997, is included as an exhibit to the Company's Registration
Statement ("Registration Statement") filed with the Securities and Exchange
Commission ("SEC" or "Commission"), of which this Prospectus is a part. See
"Additional Information." Based upon FinPro's appraisal, the Board of Trustees
of the Bank and the Board of Directors of the Company have established the
Estimated Price Range of $41,225,000 to $55,775,000, assuming the issuance of
between 4,122,500 and 5,577,500 shares of Common Stock at the Purchase Price of
$10.00 per share. THE APPRAISAL OF THE COMMON STOCK IS NOT INTENDED TO BE AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY
OF PURCHASING SUCH SHARES, NOR CAN ANY ASSURANCE BE GIVEN THAT PURCHASERS OF THE
COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH SHARES AFTER THE
COMPLETION OF THE CONVERSION AT OR ABOVE THE PURCHASE PRICE.
All shares of Common Stock issued in the Conversion will be sold at the
Purchase Price. The actual number of shares to be issued in the Conversion will
be determined by the Company and the Bank based upon FinPro's 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 to be issued is expected to range from a minimum of 4,122,500 shares to a
maximum of 5,577,500 shares. Subject to approval of the Superintendent, the
Estimated Price Range may be increased or decreased to reflect market and
economic conditions prior to the completion of the Conversion, and, under such
circumstances, the Company may
10
<PAGE> 11
increase or decrease the number of shares of Common Stock to be issued in the
Conversion. The maximum of the Estimated Price Range may be increased by up to
15% and the number of shares of Common Stock to be issued in the Conversion may
be increased to 6,414,125 shares due to regulatory considerations, changes in
the market and general financial and economic conditions. No resolicitation of
subscribers will be made, and subscribers will not be permitted to modify or
cancel their subscriptions, unless the gross proceeds from the sale of the
Common Stock are less than the minimum or more than 15% above the maximum of the
current Estimated Price Range. See "Pro Forma Data," "Risk Factors -- Possible
Increase in Estimated Price Range and Number of Shares Issued" and "The
Conversion -- Stock Pricing" and "-- Number of Shares to be Issued."
The Company will issue an amount of Common Stock to the Foundation from
authorized but unissued shares equal to 3% of Common Stock sold in the
Conversion (or 123,675 to 167,325 shares based on the minimum and maximum of the
Estimated Price Range, respectively) immediately following completion of the
Conversion. As a result, the Company will have a total of 5,744,825 shares of
Common Stock outstanding (assuming the sale of shares at the maximum of the
Estimated Price Range), which will have the effect of diluting the ownership and
voting interests of persons purchasing shares in the Conversion by 2.9% because
a greater number of shares will be outstanding upon completion of the
Conversion. See "Pro Forma Data" and "Risk Factors -- Establishment of
Charitable Foundation."
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock (after the expenses of the
Conversion are deducted) are estimated to be between $39.4 million and $53.7
million, with a midpoint of $46.6 million, depending on the number of shares
sold and the expenses of the Conversion. In the event that the Estimated Price
Range is increased by 15%, the net proceeds from the sale of the Common Stock
(after the expenses of the Conversion are deducted) are estimated to be $62.0
million. See "Pro Forma Data." The Company will use the net proceeds from the
sale of the Common Stock as follows:
1. 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 proceeds of the
Offerings.
2. The remaining net proceeds will be retained by the Company. Net
proceeds to be retained by the Company after the purchase of the capital
stock of the Bank are estimated to be between $19.7 million and $26.9
million, with a midpoint of $23.3 million. In the event that the Estimated
Price Range is increased by 15%, the net proceeds retained by the Company
are estimated to be $31.0 million. Such net proceeds will be used for
general business activities and will initially be invested primarily in
federal funds, government and federal agency mortgage-backed securities,
other debt securities, equity securities, deposits of or loans to the Bank,
or a combination thereof.
3. The Company intends to use a portion of the retained net proceeds
to make a loan directly to the ESOP to enable the ESOP to purchase 8% of
the shares to be issued in the Conversion, including shares issued to the
Foundation. The amount of the loan to the ESOP is estimated to be between
$3.4 million and $4.6 million (or $5.3 million if the Estimated Price Range
is increased by 15%), if the shares are acquired at the Purchase Price, to
be repaid over a period of up to 10 years at an interest rate of 8%. See
"Management of the Bank -- Benefits -- Employee Stock Ownership Plan and
Trust."
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory restrictions and other requirements. In the event the Company
determines to repurchase stock, of which there can be no assurance, such
repurchases will be made at market prices, which could be in excess of the
Purchase Price in the Conversion. Any stock repurchases will be subject to the
determination of the Company's Board of Directors that both the Company and the
Bank will be capitalized in excess of all applicable regulatory requirements
after any such repurchases and that such capital will be adequate, taking into
account, among other things, the level of non-performing and other risk assets,
the Company's and the Bank's current and projected results of operations and
asset/liability structure, the economic environment and tax and other
considerations.
11
<PAGE> 12
The portion of the net proceeds received by the Bank from the Company's
purchase of the Bank's capital stock, estimated to be between $19.7 million at
the minimum of the Estimated Price Range and $26.9 million at the maximum of the
Estimated Price Range, will be added to the Bank's general funds to be used for
general corporate purposes, including: investment in one- to four-family
residential mortgage loans and other loans; investment in federal funds, short-
to intermediate-term, investment-grade marketable securities and mortgage-backed
securities; and to fund the purchase of stock to be awarded under the Company's
Recognition and Retention Plan ("RRP"), which the Company and the Bank intend to
adopt subsequent to the Conversion, to the extent that such plan is not funded
with authorized but unissued Common Stock of the Company. The Bank may also use
such funds for the expansion of its facilities, the relocation of its Middletown
branch and to expand operations through acquisitions of other financial
institutions, branch offices or other financial services companies. See
"Business of the Bank -- Properties." The net proceeds may also be used to
purchase or lease additional branch or office facilities inside or outside of
Orange County, New York. See "Use of Proceeds."
DIVIDENDS
The Board of Directors of the Company intends to consider a policy of
paying cash dividends on the Common Stock in the future. However, no decision
has been made as to the amount or timing of such dividends, if any. Declarations
of dividends by the Board of Directors will depend upon a number of factors,
including the amount of the net proceeds from the Offerings retained by the
Company, investment opportunities available to the Company or the Bank, capital
requirements, regulatory limitations, the Company's and the Bank's financial
condition and results of operations, tax considerations and general economic
conditions. See "Dividend Policy."
BENEFITS TO MANAGEMENT AND DIRECTORS
The Board of Trustees of the Bank received information about various types
of benefit plans typically utilized by public companies in general and
converting thrift institutions in particular. After reviewing the anticipated
costs of establishing a customary program of benefits and the anticipated
benefits to the Company, the Board of Trustees determined that the benefit plans
to be adopted by the Company and the Bank and described herein would help
significantly by providing a means to retain and attract executives of the
caliber needed to run a successful public company, to maintain their attention
and loyalty in change of control situations and to align their interests with
those of the Company's shareholders. Finally, the Board of Trustees concluded
that the cost of establishing and maintaining these benefit plans would be
justified by these benefits to the Company.
Stock Option Plan. Following the Conversion, the Company intends to adopt
a stock option plan ("Stock Option Plan"). If implemented within one year
following the Conversion, the adoption of the Stock Option Plan will be subject
to shareholder approval to be obtained at a meeting of shareholders to be held
no earlier than six months after the completion of the Conversion. Assuming such
implementation, a number of shares of Common Stock equal to 10% of the Common
Stock to be issued in the Conversion, including shares issued to the Foundation
(424,617 shares and 574,482 shares at the minimum and maximum of the Estimated
Price Range, respectively), is expected to be reserved for issuance under the
Stock Option Plan. Upon exercise of options, shares will be acquired either from
treasury shares acquired through open market purchases, subject to the
Superintendent's approval, if necessary, or from authorized but unissued Common
Stock. See "Risk Factors -- Possible Dilutive Effect of Stock Options and
Recognition and Retention Plan." No determination has been made by the Company
as to the specific terms of the Stock Option Plan or the amount of awards to be
made thereunder. Applicable regulations provide that no individual employee may
receive more than 25% of the options granted, and that non-employee directors
may not receive more than 5% individually, or 30% in the aggregate, of the
options granted, under option plans implemented within one year following the
Conversion. See "Management of the Bank -- Benefits -- Stock Option Plan."
Recognition and Retention Plan. Following the Conversion, the Company also
intends to adopt the RRP for the benefit of officers, employees and non-employee
directors of the Company and the Bank. If implemented within one year following
the Conversion, the adoption of the RRP will be subject to shareholder approval
to be obtained at a meeting of shareholders to be held no earlier than six
months after the completion
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<PAGE> 13
of the Conversion. Assuming such implementation, the Bank expects to contribute
funds to the RRP to enable its related trust to acquire, in the aggregate, up to
4% of the shares of Common Stock to be issued in the Conversion, including
shares issued to the Foundation (169,847 shares and 229,793 shares at the
minimum and maximum of the Estimated Price Range, respectively). These shares
will be acquired either through open market purchases, subject to the
Superintendent's approval, if necessary, or from authorized but unissued Common
Stock and will be awarded at no cost to the recipient of awards under the RRP.
See "Risk Factors -- Possible Dilutive Effect of Stock Options and Recognition
and Retention Plan." No determination has been made by the Company as to the
specific terms of the RRP or the amount of awards to be made thereunder.
Applicable regulations provide that no individual employee may receive more than
25% of the shares of any plan, and that non-employee directors may not receive
more than 5% of the shares individually, or 30% in the aggregate, in the case of
plans implemented within one year following the Conversion. Under the
anticipated terms of the RRP, recipients would vote any shares allocated to
them, and an independent trustee would vote unallocated shares in the same
proportion as the instructions it receives from recipients with respect to
allocated shares which have not vested and been distributed. See "Management of
the Bank -- Benefits -- Recognition and Retention Plan."
ESOP. The Bank and the Company have established the ESOP for the benefit
of eligible employees, including officers. The ESOP intends to subscribe for up
to 8% of the Common Stock to be issued in the Conversion, including shares
issued to the Foundation, and to finance its subscription with funds anticipated
to be borrowed from the Company for a period of up to 10 years at an interest
rate of 8% per annum. The Bank and the Company intend to make cash contributions
to the ESOP as required for debt service. The Common Stock acquired by the ESOP
will initially be held in a suspense account and will be allocated to eligible
employees as the loan is repaid. See "Management of the Bank --
Benefits -- Employee Stock Ownership Plan and Trust."
401(k) Plan. The Bank has amended The Warwick Savings Bank 401(k) Savings
Plan ("401(k) Plan") in connection with the Conversion to provide that the
Bank's matching contributions will be invested in an investment fund consisting
primarily of Common Stock. In addition, participating employees may elect to
invest all or a portion of their remaining account balances in such investment
fund or the other investment funds provided under the 401(k) Plan. Common Stock
held by the 401(k) Plan may be newly issued or treasury shares acquired from the
Company or shares purchased in the open market or in private transactions. See
"Management of the Bank -- Benefits -- 401(k) Plan."
Employment Agreements and Retention Agreements. The Company intends to
enter into employment agreements ("Employment Agreements"), effective as of the
closing of the Conversion, with four senior officers of the Bank that will
provide for, among other things, certain cash payments to be made, and certain
benefits to be continued, in the event of their termination of employment in
certain circumstances and upon a change of control of the Bank or the Company.
The provisions of these agreements may have the effect of increasing the cost of
acquiring the Company, thereby discouraging future attempts to take over the
Company or the Bank. Based on current compensation and benefit costs, cash
payments to be made in the event of a change of control of the Bank or the
Company pursuant to the terms of the Employment Agreements would be
approximately $3,474,000, of which approximately $1,677,000 would be payable to
Mr. Dempsey, $795,000 would be payable to Mr. Gentile, $572,000 would be payable
to Mr. Budich and $430,000 would be payable to Ms. Sobotor-Littell. However, the
actual amount to be paid under the Employment Agreements in the event of a
change of control of the Bank or the Company cannot be estimated at this time
because the actual amount is based on the compensation and benefit costs
applicable to these individuals and other factors existing at the time of the
change of control, which cannot be determined at this time. Such figures do not
include any estimate as to amounts that may be payable on account of the Stock
Option Plan or RRP because no options or shares have been allocated under such
plans. See "Management of the Bank -- Employment Agreements."
The Bank also intends to enter into employee retention agreements
("Retention Agreements"), effective as of the closing of the Conversion, with
four other key employees of the Bank. Based on current compensation and benefit
costs applicable to the four key employees expected to be covered by the
Retention Agreements,
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<PAGE> 14
certain cash payments to be made, and certain benefits to be continued, in the
event of a change of control of the Bank or the Company would be approximately
$580,000. However, the actual amount to be paid under the Retention Agreements
in the event of a change of control of the Bank or the Company cannot be
estimated at this time because the actual amount is based on the compensation
and benefit costs applicable to such key employees and other factors existing at
the time of the change of control, which cannot be determined at this time. Such
figures do not include any estimate as to amounts that may be payable on account
of the Stock Option Plan or RRP because no options or shares have been allocated
under such plans. See "Management of the Bank -- Employee Retention Agreements."
Other Change of Control Provisions. Certain anticipated provisions of the
Stock Option Plan and the RRP (which the Company intends to adopt and which will
become effective prior to the first anniversary of the Conversion only upon
shareholder approval obtained at a meeting of shareholders to be held no earlier
than six months after completion of the Conversion) provide for cash payments
and/or accelerated vesting in the event of a change of control of the Company or
the Bank. The ESOP also provides for accelerated vesting in the event of a
change of control. These provisions may also have the effect of increasing the
cost of acquiring the Company. In addition, the existence of these provisions
could result in shareholders receiving less for their shares of Common Stock
than might otherwise be available in the event of an acquisition of the Company.
See "Restrictions on Acquisition of the Company and the Bank -- Anti-Takeover
Effects of the Company's Certificate of Incorporation and By-Laws and Management
Remuneration Plans Adopted in the Conversion," "Management of the
Bank -- Benefits -- Employee Stock Ownership Plan and Trust," "--
Benefits -- Stock Option Plan" and "-- Benefits -- Recognition and Retention
Plan."
Subscriptions by Executive Officers and Trustees. The Bank's executive
officers and trustees and their Associates (as defined herein under "The
Conversion -- Limitations on Common Stock Purchases") propose to purchase Common
Stock in the Offerings in an aggregate amount equal to $2,280,000 or 5.53%
(based on the minimum of the Estimated Price Range) or $2,280,000 or 4.09%
(based on the maximum of the Estimated Price Range) of the shares to be sold in
the Offerings. If the trustees emeritus of the Bank are included, the foregoing
amounts and percentages are $2,380,000 and 5.77%, and $2,380,000 and 4.27%,
respectively. See "Management of the Bank -- Subscriptions by Executive Officers
and Trustees."
The proposed purchases of shares of Common Stock by management of the Bank
and the Company and their Associates and the potential acquisition of Common
Stock through the ESOP, RRP and the Stock Option Plan could result in management
having voting control of approximately 24% of the Common Stock on a fully
diluted basis at the maximum of the Estimated Price Range, including shares
issued to the Foundation (or 26% if the FDIC and the Superintendent were to
waive the Foundation's voting restriction (see "The Conversion -- Establishment
of The Warwick Savings Foundation -- Regulatory Conditions Imposed on the
Foundation")).
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors in deciding whether to purchase the Common
Stock offered hereby, including, among other factors: the potential impact of
changes in interest rates on the Bank's financial condition and results of
operations and the Bank's interest rate sensitivity; the risks associated with
residential and non-residential lending activities; the impact of declines in
the local or national economy or real estate market on the Bank; competition for
savings deposits and loan originations; concentration of a significant amount of
the Bank's assets in securities; the establishment of the Foundation in
connection with the Conversion, including dilution of shareholders' interests,
impact on earnings, tax considerations, comparison of valuation and other
factors assuming the Foundation is not established as part of the Conversion and
the potential anti-takeover effect of the Foundation; the impact of
technological advances on the Bank; certain anti-takeover provisions, including
provisions in the Company's and the Bank's governing instruments, the ability of
the Board of Directors of the Company to consider non-economic factors in
evaluating any acquisition offer, the voting control of directors and officers
of the Company and the Bank and provisions in management contracts and benefit
plans; the absence of an established market for the Common Stock; the possible
increase in the Estimated Price Range and number of shares issued in the
Conversion; the possible dilutive effect of the Stock Option Plan and the RRP;
and the possible adverse tax consequences of the distribution of subscription
rights.
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<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank set forth
below is derived in part from, and should be read in conjunction with, the
audited consolidated financial statements of the Bank and notes thereto
presented elsewhere in this Prospectus. The selected consolidated financial and
other data of the Bank at and for the three months ended August 31, 1997 and
1996 were derived from unaudited financial statements and reflect, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for such periods.
The results at and for the three-month period ended August 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
May 31, 1998.
<TABLE>
<CAPTION>
AT MAY 31,
AT AUGUST 31, ------------------------------------------------------------
1997 1997 1996 1995(8) 1994(8) 1993(8)
------------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets................... $ 290,868 $286,545 $274,053 $258,679 $234,048 $224,851
Loans receivable, net(1)....... 154,665 138,323 108,897 122,663 108,598 108,848
Investment securities.......... 116,328 126,393 144,284 110,333 105,433 93,013
Real estate owned, net......... 167 224 330 493 306 --
Deposits....................... 221,763 221,211 232,965 229,011 207,527 200,564
FHLB advances.................. 8,270 5,250 3,600 -- -- --
Securities sold under
repurchase agreements........ 23,045 23,090 4,700 -- -- --
Retained earnings.............. 29,212 28,114 24,770 23,076 21,910 20,147
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED AUGUST 31, FOR THE YEAR ENDED MAY 31,
-------------------- --------------------------------------------------------
1997 1996 1997 1996 1995 1994(8) 1993(8)
------ ------ -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income............... $5,232 $4,912 $ 20,691 $ 18,333 $ 16,253 $ 15,786 $ 16,549
Interest expense.............. 2,358 2,281 9,376 8,717 6,828 5,922 6,710
------ ------ -------- -------- -------- -------- --------
Net interest income......... 2,874 2,631 11,315 9,616 9,425 9,864 9,839
Less provision for loan
losses.................... (304) (20) (130) (140) (261) (415) (548)
------ ------ -------- -------- -------- -------- --------
Net interest income after
provision for loan
losses.................... 2,570 2,611 11,185 9,476 9,164 9,449 9,291
Other income:
Service and fee income...... 492 447 1,915 1,768 1,369 1,996 536
Securities transactions..... 154 696 816 356 (429) 845 243
Loan transactions........... 23 17 137 119 14 123 113
Other income or (loss)...... 8 (176) (89) (159) (79) (17) 120
------ ------ -------- -------- -------- -------- --------
Total other income,
net................ 677 984 2,779 2,084 875 2,947 1,012
------ ------ -------- -------- -------- -------- --------
Other expense:
Salaries and employee
benefits.................. 1,295 1,276 5,256 5,050 3,958 3,877 3,572
F.D.I.C. insurance.......... 7 1 12 53 466 456 427
Occupancy and equipment..... 332 287 1,308 1,238 1,202 1,143 1,258
Data processing............. 157 164 640 484 414 341 318
Advertising................. 47 22 152 129 112 69 119
Professional fees........... 80 67 240 325 222 270 324
Other operating expenses.... 432 411 1,735 1,791 1,722 1,606 1,129
------ ------ -------- -------- -------- -------- --------
Total other
expenses........... 2,350 2,228 9,343 9,070 8,096 7,762 7,147
Income before provision for
income taxes and cumulative
effect of change in
accounting principle........ 897 1,367 4,621 2,490 1,943 4,634 3,156
Provision for income taxes.... 359 519 1,756 1,024 794 2,115 1,370
------ ------ -------- -------- -------- -------- --------
Income before cumulative
effect of change in
accounting principle........ 538 848 2,865 1,466 1,149 2,519 1,786
Cumulative effect of change in
accounting principle........ -- -- -- -- (645) -- --
------ ------ -------- -------- -------- -------- --------
Net income........... $ 538 $ 848 $ 2,865 $ 1,466 $ 504 $ 2,519 $ 1,786
====== ====== ========= ========= ========= ========= =========
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
AT OR FOR
THE THREE
MONTHS ENDED AT OR FOR THE
AUGUST 31, YEAR ENDED MAY 31,
SELECTED FINANCIAL RATIOS AND --------------- ---------------------------------------------------
OTHER DATA(2): 1997 1996 1997 1996 1995(8) 1994(8) 1993(8)
----- ----- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets.......... 0.75% 1.20% 1.00% 0.56% 0.21% 1.11% 0.83%
Return on average retained
earnings........................ 7.62 13.74 11.02 6.29 2.32 12.11 9.33
Average retained earnings to
average assets.................. 9.89 8.76 9.12 8.94 9.18 9.14 8.91
Retained earnings to total
assets.......................... 10.04 8.97 9.81 9.04 8.92 9.36 8.96
Core deposits to total
deposits(3)..................... 65.84 65.35 66.08 63.28 59.49 77.25 74.38
Net interest spread(4)............ 3.63 3.40 3.62 3.48 3.84 3.92 4.08
Net interest margin(5)............ 4.27 3.97 4.20 3.98 4.27 4.35 4.51
Operating expense to average
assets.......................... 3.29 3.16 3.28 3.48 3.42 3.41 3.33
Average interest-earning assets to
average interest-bearing
liabilities..................... 1.18 1.16 1.17 1.14 1.14 1.16 1.13
Efficiency ratio(6)............... 69.65 76.80 71.10 80.80 75.56 65.54 68.10
REGULATORY CAPITAL RATIOS(7):
Tangible capital.................. 9.81 9.07 9.53 9.51 9.79 9.95 9.38
Core capital...................... 19.19 19.27 19.46 17.52 16.00 20.00 17.00
Risk-based capital................ 20.12 20.27 20.33 18.45 16.00 20.00 17.00
ASSET QUALITY RATIOS:
Non-performing loans to total
loans........................... 0.94 1.16 1.02 0.78 1.78 2.02 2.42
Non-performing loans to total
assets.......................... 0.50 0.49 0.50 0.31 0.85 0.95 1.18
Non-performing assets to total
assets.......................... 0.56 0.56 0.58 0.44 1.04 1.08 1.18
Allowance for loan losses to total
loans........................... 0.88 1.10 0.88 1.18 0.97 0.83 0.74
Allowance for loan losses to non-
performing loans................ 93.44 94.72 86.09 151.22 54.77 41.06 30.38
OTHER DATA:
Branch offices.................... 4 4 4 4 4 4 4
</TABLE>
- ---------------
(1) Loans receivable, net represents total loans less net deferred loan fees and
the allowance for loan losses.
(2) Regulatory Capital Ratios and Asset Quality Ratios are end of period ratios.
With the exception of period-end ratios, all ratios are based on average
monthly balances during the periods indicated.
(3) The Bank considers the following to be core deposits: checking accounts,
passbook accounts, NOW accounts and money market accounts.
(4) The interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(6) The efficiency ratio represents non-interest expense as a percentage of the
sum of net interest income and non-interest income excluding any gains or
losses on sales of assets.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation and Supervision -- Federal Banking
Regulation -- Capital Requirements." See "Regulatory Capital Compliance" for
the Bank's pro forma capital levels as a result of the Offerings.
(8) The selected financial data of the Bank as of May 31, 1995, 1994 and 1993,
and for each year in the two-year period ended May 31, 1994 are not derived
from audited financial statements.
16
<PAGE> 17
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by prospective investors in deciding
whether to purchase the Common Stock offered hereby.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
Effect on Net Interest Income. The Bank's profitability, like that of most
financial institutions, is dependent to a large extent upon its net interest
income, which is equal to the difference between the interest income that the
Bank earns on its interest-earning assets, such as loans and securities, and the
interest expense that the Bank pays on its interest-bearing liabilities, such as
savings deposits and borrowings. A substantial portion of the Bank's assets
consists of mortgage loans that have rates of interest that are fixed for the
term of the loan, while the Bank generally accepts savings deposits that have
significantly shorter terms to maturity than its fixed-rate mortgage loans. At
August 31, 1997, the Bank's total interest-bearing liabilities maturing or
repricing within one year exceeded its total interest-earning assets maturing or
repricing in the same time period, resulting in a negative interest rate
sensitivity gap of 13.9%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Management of Interest Rate Risk -- Gap
Analysis." As a result of the Bank's negative gap position, the yield that the
Bank earns on its interest-earning assets can be expected to adjust more slowly
to changes in interest rates than the cost of the Bank's interest-bearing
liabilities. Therefore, any significant increase in interest rates can be
expected to adversely affect the Bank's net interest income.
Effect on Value of Interest-Earning Assets. Interest rate increases also
may adversely affect the fair value of the Bank's securities and other earning
assets. Generally, the fair value of fixed-rate instruments fluctuates inversely
with changes in interest rates. Therefore, increases in interest rates could
result in decreases in the fair value of interest-earning assets, which could
adversely affect the Bank's results of operations if the Bank then sells these
assets or, in the case of interest-earning assets classified as available-for-
sale, the Bank's equity if the Bank retains these assets. Interest rate
increases also can affect the type (fixed-rate or adjustable-rate) and amount of
loans that the Bank originates and the average maturity of loans and securities,
which can adversely impact the yields earned on the Bank's loan and securities
portfolio.
Effect on Loan Sale and Servicing. The Bank's loan sale and servicing
activity may be adversely affected by decreases in interest rates. At August 31,
1997, the Bank was servicing $126.2 million of loans for others and at such date
recorded an $861,000 mortgage servicing rights asset. Declining interest rates
may result in increased prepayments of serviced loans. To the extent that
borrowers prepay loans that the Bank services, the Bank's mortgage servicing
rights would be reduced, which would adversely affect net income. Declining
interest rates may also result in lost profits in connection with the use of
forward commitment loan sale contracts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Management of
Interest Rate Risk."
RESIDENTIAL AND NON-RESIDENTIAL LENDING RISKS
The Bank has historically used an operating strategy that emphasized the
origination of one- to four-family residential mortgage loans. The profitability
of this strategy could be adversely impacted by competitive market forces and
technological advances of the Bank's competitors. See "-- Competition" and
"-- Impact of Technological Advances; Year 2000 Compliance." At August 31, 1997,
substantially all of the Bank's loans were secured by properties or made to
borrowers located in the Bank's primary lending area. See "Business of the
Bank -- Lending Activities." This lack of geographic diversification could have
an adverse impact on the Bank's profitability if there were a substantial
economic decline or a natural disaster in the Bank's lending area.
In addition to one- to four-family residential mortgage loans, the Bank
originates commercial business and commercial real estate loans, and
construction, land, development, multi-family residential and other loans in its
lending area. These loans are generally considered to involve a higher degree of
credit risk than one- to four-family residential mortgage loans because, among
other reasons, (i) there is a higher concentration of principal in a limited
number of loans and borrowers, (ii) general and local economic conditions may
adversely affect income-producing properties, (iii) it is more difficult to
evaluate and monitor these types of loans and (iv) repayment is more dependent
upon the underlying financial condition of the
17
<PAGE> 18
borrower and the value of, or cash flow from, the property securing the loan or
the business being financed. See "Business of the Bank -- Lending Activities."
IMPACT OF THE ECONOMY ON OPERATIONS
If the local economy, national economy or real estate market declines, the
financial condition and results of operations of the Bank could be adversely
affected by, among other things, decreasing demand for loans, increasing
competition for good loans and increasing non-performing loans and loan losses.
Although management of the Bank believes that the current allowance for loan
losses is adequate in light of current economic conditions, many factors may
require additions to the allowance for loan losses in future periods. These
factors include: (i) adverse changes in economic conditions and changes in
interest rates that may affect the ability of borrowers to make payments on
loans, (ii) changes in the financial capacity of individual borrowers, (iii)
changes in the local real estate market and the value of the Bank's loan
collateral and (iv) future review and evaluation of the Bank's loan portfolio,
internally or by the Bank's regulators. The amount of the allowance for loan
losses at any time represents estimates made by management that could change
significantly if there are changes in values of collateral, national and
regional economic conditions, prevailing interest rates and other factors. The
Bank may have to make adjustments to the allowance for loan losses in the future
if economic or other conditions differ substantially from those underlying the
assumptions used in making such estimates.
COMPETITION
The Bank faces significant and increasing competition both in making loans
and in attracting savings deposits. The Bank's market area has many financial
institutions, some of which have greater financial resources, name recognition
and market presence than the Bank, and all of which are competitors of the Bank
to varying degrees. Trends toward the consolidation of the banking industry and
the lifting of interstate banking and branching restrictions may make it more
difficult for smaller institutions, such as the Bank, to compete effectively
with large national and regional banking institutions. See "Business of the
Bank -- Competition" for a description of the Bank's competitors.
CONCENTRATION IN SECURITIES
The Bank has invested a significant portion of its assets in
mortgage-backed and other securities, including mortgage-backed securities that
the Bank has created by the securitization of loans that the Bank has
originated. The Bank's securities consist of securities that management intends
to hold to maturity and also securities available-for-sale. See "Business of the
Bank -- Investment Activities." The average yield that the Bank earns on its
securities has been lower than the average yield that the Bank earns on its
loans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Analysis of Net Interest Income -- Average Balance
Sheets."
The Bank expects to invest a portion of the net Conversion proceeds in
securities and, therefore, expects that income from securities will initially
represent an even greater percentage of total interest income after the
Conversion than in prior periods. The Bank also expects that these securities
will earn interest at rates lower than the interest rates that would generally
be earned on loans. In addition, securities held as available-for-sale are
required to be held at the lower of cost or market value. Therefore, changes in
interest rates could cause changes in the value of such securities. See
"-- Potential Impact of Changes in Interest Rates." For these reasons, the Bank
intends to begin investing the net Conversion proceeds in mortgage loans,
commercial loans and consumer loans as soon as practicable after consummation of
the Conversion. However, there can be no assurance that the economy of the
counties in the Bank's market area will continue to grow at a rate that will
generate sufficient loan demand or that, even if sufficient loan demand exists
in such market area, the Bank will have the competitive ability to invest the
net Conversion proceeds in loans that meet the Bank's credit quality standards.
18
<PAGE> 19
ESTABLISHMENT OF CHARITABLE FOUNDATION
Pursuant to the Plan, the Company intends to voluntarily establish a
charitable foundation in connection with the Conversion. The Foundation will be
incorporated under Delaware law as a non-stock corporation and will be funded
with shares of Common Stock contributed by the Company. The establishment and
funding of a charitable foundation as part of a conversion of a mutual savings
institution to stock form has, to the Bank's knowledge, been done on several
prior occasions. Nevertheless, the Foundation and the Superintendent's approval
of the Conversion and the FDIC's non-objection to the Conversion may be subject
to potential challenges notwithstanding that the Board of Directors of the
Company and the Board of Trustees of the Bank have carefully considered the
various factors involved in establishing the Foundation. See "The Conversion --
Establishment of The Warwick Savings Foundation -- Purpose of the Foundation"
for a discussion of the factors considered. If challenges to the establishment
of the Foundation are raised, no assurances can be made that the resolution of
such challenges would not delay the closing of the Conversion or that the
Company and the Bank would be successful in defending against such challenges.
Additionally, if the Company and the Bank are forced to eliminate the
Foundation, the Company may be required to resolicit subscribers in the
Offerings. The establishment of the Foundation will also have the other effects
described below.
Dilution of Shareholders' Interests. The Company's contribution of Common
Stock to the Foundation will dilute the ownership and voting interests of
persons purchasing shares of Common Stock in the Conversion by 2.9%. See "The
Conversion -- Establishment of The Warwick Savings Foundation -- Structure of
the Foundation" and "Pro Forma Data."
Impact on Earnings. The contribution of Common Stock to the Foundation
will also adversely impact the Company's and the Bank's reported earnings in the
quarter and fiscal year in which the contribution is made, which is expected to
be the third quarter of the fiscal year ending May 31, 1998. Assuming a
contribution of $1.7 million in Common Stock (based on the maximum of the
Estimated Price Range), the Company estimates a net tax-effected expense of $1.0
million (based upon a 40% tax rate and without regard to the annual deduction
limitation of 10% of the Company's annual taxable income). Based on these
assumptions, if the Foundation had been established in the fiscal year ended May
31, 1997, the Bank would have reported net income of $1.9 million, rather than
$2.9 million, for such year.
Tax Considerations. The expense that the Company will recognize in
connection with the contribution to the Foundation will be partially offset by
the related tax benefit. The Company and the Bank have received the opinion of
Thacher Proffitt & Wood that the Company will be entitled to a tax deduction for
the charitable contribution. However, there can be no assurances that the
Internal Revenue Service ("IRS") will recognize the Foundation as an exempt
organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended ("Code"), or that the deduction will be permitted. If the deduction is
not permitted, the Company's tax benefit related to the Foundation would have to
be fully expensed, resulting in a further reduction in earnings in the year in
which the IRS makes such a determination. See "The Conversion -- Establishment
of The Warwick Savings Foundation -- Tax Considerations."
Comparison of Valuation Assuming the Foundation is Not Established. Based
on the estimated pro forma market value of the Common Stock (assuming the
establishment of the Foundation) provided by FinPro, the amount of Common Stock
being offered for sale in the Conversion, at the maximum of the Estimated Price
Range, is approximately $3.4 million less than the estimated amount of Common
Stock that would be offered in the Conversion without the Foundation.
Accordingly, in the event of an oversubscription, certain account holders of the
Bank who subscribe to purchase Common Stock in the Subscription Offering will
receive fewer shares depending on the size of the depositor's stock order, the
amount of the depositor's qualifying deposits in the Bank and the overall level
of subscriptions than they would have received had the Company and the Bank not
established the Foundation. See "Comparison of Valuation and Pro Forma
Information with No Foundation." This estimate by FinPro was prepared solely for
purposes of providing Eligible Account Holders, Supplemental Eligible Account
Holders, Other Depositors and other subscribers with information with which to
make an informed decision on the Conversion. The decrease in the amount of
19
<PAGE> 20
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's or the Bank's
capital position.
Potential Anti-Takeover Effect. Upon completion of the Conversion, the
Foundation will own 2.9% of the total shares of the Common Stock outstanding. In
connection with the establishment of the Foundation, the FDIC and the
Superintendent imposed the condition, which will be agreed to by the Foundation,
that the shares of Common Stock held by the Foundation must be voted in the same
proportion as all other shares of Common Stock on all proposals considered by
the Company's shareholders. See "The Conversion -- Establishment of The Warwick
Savings Foundation -- Regulatory Conditions Imposed on the Foundation." If this
condition is waived in the future, the Foundation's Board of Directors, a
majority of which will be comprised of individuals who are officers or directors
of the Bank, would exercise sole voting power over such shares. As a result,
management of the Company and the Bank may benefit if the Foundation's Board of
Directors determines to vote the shares of Common Stock held by the Foundation
in favor of proposals supported by the Company and the Bank. However, if the
Foundation sells its shares of Common Stock in the future, its ownership
interest and voting power in the Company may decrease.
IMPACT OF TECHNOLOGICAL ADVANCES; YEAR 2000 COMPLIANCE
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to improving customer services, the effective use of technology
increases efficiency and enables financial institutions to reduce costs. The
Company's future success will depend, in part, on its ability to address the
needs of its customers by using technology to provide products and services that
will satisfy customer demands for convenience, as well as to create additional
efficiencies in the Bank's operations. Many of the Bank's competitors have
substantially greater resources than the Bank to invest in technological
improvements. There can be no assurance that the Bank will be able to
effectively implement new technology-driven products and services or be
successful in marketing such products and services to the public.
The Bank's operations are dependent on computers and computer systems,
whether internally maintained or outsourced under contract. The Bank has taken
steps to ensure that such systems will properly recognize information when the
year changes to 2000. Systems that do not properly recognize the correct year
could generate erroneous data or cause a system to fail. The Bank has also taken
steps to ensure that it is in compliance with federal bank regulatory directives
in this area. There can be no assurance, however, that the Bank will be able to
effectively implement program changes to all of its systems to ensure such
compliance.
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions in the Company's and the Bank's Governing Instruments. Certain
provisions in the Company's Certificate of Incorporation and By-Laws, the Bank's
Restated Organization Certificate and By-Laws, the DGCL and certain federal
regulations assist the Company in maintaining its status as an independent
publicly owned corporation. These provisions provide for, among other things,
supermajority voting on certain matters, a staggered board of directors,
non-cumulative voting for directors, limits on the calling of special meetings,
certain uniform price provisions for certain business combinations, the ability
of the Board of Directors of the Company to issue up to 5,000,000 shares of
preferred stock without shareholder action, limits on the ability to vote shares
held in excess of 10% of the outstanding shares, prohibitions on the acquisition
of beneficial ownership of more than 10% of the outstanding stock of the Bank
and the Board of Directors' ability to consider non-economic factors when it
evaluates certain acquisition proposals. These provisions may have the effect of
discouraging proxy contests and future takeover attempts that are not approved
by the Board of Directors, but which individual shareholders of the Company may
deem to be in their best interests or in which shareholders may receive a
premium for their shares over then current market prices. See "Restrictions on
Acquisition of the Company and the Bank -- Restrictions in the Company's
Certificate of Incorporation and By-Laws" and " -- Restrictions in the Bank's
Restated Organization Certificate and By-Laws."
20
<PAGE> 21
Voting Control of Officers and Directors. The proposed purchases of shares
of Common Stock by the ESOP, management of the Bank and the Company, and their
Associates (as defined in "The Conversion -- Limitations on Common Stock
Purchases"), and the potential acquisition of Common Stock through the RRP and
Stock Option Plan could result in management having voting control of
approximately 24% of the Common Stock on a fully diluted basis at the maximum of
the Estimated Price Range, including shares issued to the Foundation (or 26% if
the FDIC and the Superintendent were to waive the Foundation's voting
restriction (see "The Conversion -- Establishment of The Warwick Savings
Foundation -- Regulatory Conditions Imposed on the Foundation")). Such control
could enable management to prevent or impede the approval of transactions and
other corporate actions requiring a supermajority vote of shareholders, such as
certain business combinations and the amendment of certain charter provisions.
Furthermore, in the event that the FDIC and the Superintendent were to waive the
Foundation's voting restriction, the aggregate of the Foundation's shares,
shares purchased directly by management of the Company, shares held by the RRP
trust and shares held by the ESOP trust could approach 20% of the outstanding
Common Stock, which could enable management to defeat shareholder proposals
requiring 80% approval. Therefore, such potential voting control might preclude
takeover attempts that certain shareholders deem to be in their best interest
and might tend to perpetuate existing management. However, management of the
Company does not expect to have voting control over all shares held by the ESOP
and in other benefit plans, because, among other things, unallocated ESOP shares
are voted by an independent trustee and awards under such proposed plans may be
granted to employees other than executive officers and directors. See
"Restrictions on Acquisition of the Company and the Bank."
Provisions in Management Contracts and Benefit Plans. Certain provisions
contained in the proposed management contracts and benefit plans that provide
for cash payments or the vesting of benefits upon a change of control of the
Company or the Bank may have an anti-takeover effect and could result in
shareholders receiving less for their shares of Common Stock than otherwise
might be available in the event of an acquisition of the Company. See
"Management of the Bank -- Employment Agreements," "-- Employee Retention
Agreements" and "-- Benefits -- Employee Stock Ownership Plan and Trust,"
"-- Benefits -- Stock Option Plan" and "-- Benefits -- Recognition and Retention
Plan."
ABSENCE OF MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital stock,
and, therefore, there is no established market for the Common Stock at this
time. The Company has received conditional approval from the Nasdaq Stock Market
to have the Common Stock approved for quotation on the Nasdaq National Market
under the symbol "WSBI" upon completion of the Conversion. One of the
requirements for continued quotation of the Common Stock on the Nasdaq National
Market is that there be at least three market makers for the Common Stock.
Sandler O'Neill has advised the Company that it intends to make a market in the
Company's Common Stock, but is under no obligation to do so. While the Company
anticipates that there will be other broker-dealers to act as market maker for
the Common Stock, there can be no assurance that there will be three or more
market makers for the Common Stock. See "Market for the Common Stock."
There can also be no assurance that an active and liquid trading market for
the Common Stock will develop, or, once developed, will continue, nor can there
be any assurances that purchasers of the Common Stock will be able to sell their
shares at or above the Purchase Price. The absence or discontinuance of a market
for the Common Stock may have an adverse impact on both the price and liquidity
of the Common Stock. See "Market for the Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription Offering or Community Offering, if any. An increase in the number
of shares issued would decrease a subscriber's pro forma net earnings per share
and shareholders' equity per share, but would increase the Company's pro forma
consolidated shareholders' equity and net earnings. Such
21
<PAGE> 22
an increase would also increase the Purchase Price as a percentage of pro forma
shareholders' equity per share and net earnings per share. See "Pro Forma Data."
POSSIBLE DILUTIVE EFFECT OF STOCK OPTIONS AND RECOGNITION AND RETENTION PLAN
Subject to obtaining any necessary shareholder approval, the Company
intends to implement the Stock Option Plan and the RRP after the Conversion is
completed. If all of the options intended to be granted under the Stock Option
Plan were to be exercised using authorized but unissued shares of Common Stock,
the voting interests of existing shareholders would be diluted by approximately
9.1%. If the RRP is funded by the issuance of authorized but unissued shares,
the interests of existing shareholders would be diluted by approximately 3.8%
(assuming no options are exercised). See "Pro Forma Data" for information on the
effect that the issuance of stock under the Stock Option Plan and grant of
awards under the RRP will have on pro forma net earnings per share and
shareholders' equity per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion from FinPro that subscription rights
granted to Eligible Account Holders, Supplemental Eligible Account Holders and
Other Depositors have no value. However, this opinion is not binding on the IRS.
If such subscription rights are deemed to have an ascertainable value, Eligible
Account Holders, Supplemental Eligible Account Holders and Other Depositors
could be taxed upon the receipt or exercise of the subscription rights in an
amount equal to such value. Additionally, the Bank could recognize a gain for
tax purposes on the distribution of the subscription rights. See "The
Conversion -- Effects of Conversion" and "-- Effects of Conversion -- Tax
Aspects."
22
<PAGE> 23
WARWICK COMMUNITY BANCORP, INC.
The Company was recently organized at the direction of the Board of
Trustees of the Bank for the purpose of acquiring all of the capital stock to be
issued by the Bank in the Conversion. The Company has received approval from the
Board of Governors of the Federal Reserve System ("FRB") to become a bank
holding company and, as such, will be subject to regulation by the FRB. See
"Regulation and Supervision -- Holding Company Regulation" and "The
Conversion -- General." Upon consummation of the Conversion, the Company's
assets will consist of all of the outstanding shares of the Bank's capital stock
issued to the Company in the Conversion and 50% of the net proceeds of the
Offerings. The Company intends to use part of the retained net proceeds to make
a loan directly to the ESOP to enable the ESOP to purchase 8% of the Common
Stock to be issued in the Conversion, including shares issued to the Foundation.
See "Use of Proceeds." The Company will have no significant liabilities. The
management of the Company is set forth under "Management of the Company."
Initially, the Company will neither own nor lease any property, but instead will
use the premises and equipment of the Bank. At the present time, the Company
does not intend to employ any persons other than officers, but will utilize the
support staff of the Bank from time to time. Additional employees will be hired
as appropriate to the extent the Company expands its business in the future. See
"Business of the Company."
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify its business activities, should
it decide to do so, through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. Although there are no current arrangements, understandings or
agreements, written or oral, 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 Conversion proceeds retained
by the Company and earnings thereon or, alternatively, through dividends from
the Bank.
The Company's office is located at the main office of the Bank at 18
Oakland Avenue, Warwick, New York 10990-0591. The Company's telephone number is
(914) 986-2206.
THE WARWICK SAVINGS BANK
The Bank was founded in 1875 as a New York mutual savings bank. The Bank is
a community-oriented savings institution providing a variety of financial
services to meet the needs of the communities which it serves. The Bank conducts
business from its headquarters in the village of Warwick, New York and its
branches in the village of Monroe, the town of Woodbury and the city of
Middletown, New York. The Bank's primary deposit gathering areas are currently
concentrated in proximity to its full service banking offices. The Bank's
current primary lending market includes Orange County, New York and the
surrounding New York counties. The majority of the Bank's mortgage loans are
secured by properties located in its lending area. See "Business of the
Bank -- Market Area" and " -- Competition."
The Bank's principal business consists of gathering savings deposits from
the general public within its market area and investing those savings deposits
primarily in one- to four-family residential mortgage loans, mortgage-backed
securities and obligations of the U.S. Government. To a lesser extent, the Bank
makes commercial business and commercial real estate loans, multi-family
residential loans, land, construction and development loans, consumer loans
(including loans secured by savings deposits and home improvement loans) and
other loans. At August 31, 1997, the Bank had total assets of $290.9 million, of
which $154.7 million was comprised of mortgage and other loans and $116.3
million was comprised of securities. At such date, total deposits were $221.7
million, borrowings were $31.3 million and retained earnings were $29.2 million.
The Bank's savings deposits are insured up to the maximum allowable amount by
the BIF. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business of the Bank."
The Bank is subject to extensive regulation, supervision and examination by
the NYSBD, its primary regulator, and the FDIC, which insures its savings
deposits. At August 31, 1997, the Bank exceeded all
23
<PAGE> 24
regulatory capital requirements with leverage and total risk-based capital
ratios of 9.81% and 20.12%, respectively. Additionally, the Bank's regulatory
capital was in excess of the amount necessary to be "well-capitalized" under
FDICIA. See "Regulation and Supervision -- Federal Banking Regulation." The Bank
is a member of the FHLBNY, which is one of the 12 regional banks which comprise
the FHLB system.
The Bank's main office is located at 18 Oakland Avenue, Warwick, New York
10990-0591. The Bank's telephone number is (914) 986-2206.
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 (after the expenses of
the Conversion are deducted) will be between $39.4 million and $53.7 million,
with a midpoint of $46.6 million. In the event that the Estimated Price Range is
increased by 15%, the net proceeds from the sale of the Common Stock (after the
expenses of the Conversion are deducted) are estimated to be $62.0 million. See
"Pro Forma Data" and "The Conversion -- Stock Pricing" for a discussion of the
assumptions used to arrive at such amounts. The Company will be unable to
utilize any of the net proceeds of the Offerings until the consummation of the
Conversion.
The Company will use the net proceeds from the sale of Common Stock as
follows:
1. 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 proceeds of the
Offerings.
2. The remaining net proceeds will be retained by the Company. Net
proceeds to be retained by the Company after the purchase of the capital
stock of the Bank are estimated to be between $19.7 million and $26.9
million, with a midpoint of $23.3 million. In the event that the Estimated
Price Range is increased by 15%, the net proceeds retained by the Company
are estimated to be $31.0 million. The net proceeds retained by the Company
will be used for general business activities and will initially be invested
primarily in federal funds, government and federal agency mortgage-backed
securities, other debt securities, equity securities, deposits of or loans
to the Bank, or a combination thereof.
3. The Company intends to use a portion of the retained net proceeds
to make a loan directly to the ESOP to enable the ESOP to purchase 8% of
the Common Stock to be issued in the Conversion, including shares issued to
the Foundation. Based upon the issuance of 4,122,500 shares or 5,577,500
shares at the minimum and maximum of the Estimated Price Range,
respectively, the amount of the loan to the ESOP (if the loan is made by
the Company and not a third party) would be $3.4 million or $4.6 million,
respectively (or $5.3 million if the Estimated Price Range is increased by
15%), if shares are acquired at the Purchase Price, to be repaid over a
period of up to 10 years at an interest rate of 8%. See "Management of the
Bank -- Benefits -- Employee Stock Ownership Plan and Trust."
The portion of the net proceeds received by the Bank from the Company's
purchase of the Bank's capital stock, estimated to be between $19.7 million at
the minimum of the Estimated Price Range and $26.9 million at the maximum of the
Estimated Price Range, will be added to the Bank's general funds to be used for
general corporate purposes, including: investment in one- to four-family
residential mortgage loans, commercial and other loans; investment in federal
funds, short- to intermediate-term investment-grade marketable securities,
mortgage-backed and equity securities; and to fund the RRP. The Bank may also
use such funds for the expansion of its facilities, the relocation of its
Middletown branch and to expand operations through acquisitions of other
financial institutions, branch offices or other financial services companies.
See "Business of the Bank -- Properties." The net proceeds may also be used to
purchase or lease additional branch or office facilities inside or outside of
Orange County, New York. The Bank has recently obtained a license from the New
Jersey Department of Banking and Insurance to establish a mortgage banking
operation in Bergen, Passaic and Sussex Counties, New Jersey through its
mortgage banking subsidiary, WSB Mortgage. Except for the establishment of
mortgage banking operations in New Jersey, the Bank has no current agreements,
arrangements or understandings regarding any establishment or acquisition or any
other transaction related to the possible expansion of its operations.
24
<PAGE> 25
The net proceeds retained by the Company may also be used to support the
future expansion of the Bank's operations through branch acquisitions and the
acquisition of other financial institutions or diversification into other
banking related businesses and for other business or investment purposes,
including possibly the payment of dividends and the repurchase of the Company's
Common Stock as permitted by the Superintendent. See "Dividend Policy" and
"Regulation and Supervision -- New York Banking Regulation -- Dividends." The
Company has no current arrangements, understandings or agreements, written or
oral, regarding any such transactions. The Company, upon completion of the
Conversion, will be a bank holding company under federal law, which, under
existing laws, generally would be restricted as to the types of business
activities in which it may engage. See "Regulation and Supervision -- Holding
Company Regulation" for a description of certain regulations applicable to the
Company. In determining the amount of net proceeds to be used to purchase the
capital stock of the Bank, consideration was given to such factors as the
regulatory capital position of the Bank, both before and after giving effect to
the Conversion, and the rules and regulations and policies of the New York
Banking Board ("NYBB") and the FDIC governing the amount of proceeds that may be
retained by the Company.
Upon completion of the Conversion, the Company's Board of Directors will
have the authority to adopt stock repurchase plans, subject to statutory and
regulatory restrictions and other requirements. Based upon facts and
circumstances that may arise following the Conversion, and subject to applicable
regulatory requirements, the Company's Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include: (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 improvement in the Company's return on equity;
(ii) the avoidance of dilution to shareholders 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 under which repurchases would be in the
best interests of the Company and its shareholders. In the event the Company
determines to repurchase stock, such repurchases will generally be made at
market prices, which could be in excess of the Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the Company's
Board of Directors that both the Company and the Bank will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
that such capital will be adequate, taking into account, among other things, the
level of non-performing and other risk assets, the Company's and the Bank's
current and projected results of operations and asset/liability structure, the
economic environment and tax and other considerations. In addition, the FDIC
prohibits an insured mutual state savings bank that has converted from mutual to
stock form of ownership from repurchasing its capital stock within one year
following the date of its conversion to stock form, except that stock
repurchases of no greater than 5% of a bank's outstanding capital stock may be
repurchased during this one-year period where compelling and valid business
reasons are established to the satisfaction of the FDIC. NYBB regulations also
include restrictions on repurchases of stock within the first three years
following conversion. Further, the Company may not repurchase any of its Common
Stock if the repurchases would cause the Bank to become "undercapitalized"
within the meaning of the FDIC prompt corrective action regulation. See
"Regulation and Supervision -- Federal Banking Regulation -- Prompt Corrective
Action."
The Board of Directors of the Company intends to consider a policy of
paying cash dividends on the Common Stock in the future. However, no decision
has been made as to the amount or timing of such dividends, if any. The payment
of dividends or repurchase of stock, however, would be prohibited if
shareholders' equity would be reduced below the amount required to maintain the
Bank's liquidation account. See "Dividend Policy," "The Conversion -- Certain
Restrictions on Purchase or Transfer of Shares After Conversion" and "-- Effects
of Conversion -- Liquidation Rights."
Neither the Bank nor the Company has yet determined the approximate amount
of net proceeds to be used for each of the purposes mentioned above.
25
<PAGE> 26
DIVIDEND POLICY
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to declare dividends on the Common Stock. The Board of
Directors intends to consider a policy of paying cash dividends on the Common
Stock in the future. However, no decision has been made as to the timing or
amount of such dividends, if any. In the future, declarations of dividends by
the Board of Directors, if any, will depend upon a number of factors, including
the amount of net proceeds retained by the Company in the Conversion, investment
opportunities available to the Company or the Bank, capital requirements,
regulatory limitations, the Company's and the Bank's financial condition and
results of operations, tax considerations, general economic conditions, industry
standards and other factors. No assurances can be given, however, that any
dividends will be paid or, if payment is commenced, that such dividends will
continue to be paid.
As the principal asset of the Company, the Bank will provide the principal
source of funds for the payment of dividends by the Company. The Bank will not
be permitted to pay dividends on its capital stock if, among other things, its
shareholders' equity would be reduced below the amount required for the
liquidation account. See "The Conversion -- Effects of Conversion -- Liquidation
Rights." Under the Banking Law of the State of New York ("Banking Law"),
dividends may be declared and paid only out of the net profits of the Bank. The
approval of the Superintendent is required if the total of all dividends
declared in any calendar year will exceed net profits for that year plus the
retained net profits of the preceding two years, less any required transfer to
surplus or a fund for the retirement of any preferred stock. In addition, no
dividends may be declared, credited or paid if the effect thereof would cause
the Bank's capital to be reduced below the amount required by the Superintendent
or the FDIC. See "Regulation and Supervision." As of August 31, 1997, the Bank
had $4.7 million available for the payment of dividends without prior approval
of the Superintendent. Dividends or any repurchase by the Bank of its stock in
excess of the Bank's current and accumulated earnings could result in the
realization by the Bank of taxable income. See "Federal and State
Taxation -- Federal Taxation."
Unlike the Bank, the Company is not subject to the restrictions imposed by
the Banking Law on the payment of dividends to its shareholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Bank. The Company is subject, however, to the requirements which generally
limit dividends to an amount equal to the excess of the net assets of the
Company (the amount by which total assets exceed total liabilities) over its
statutory capital, or if there is no such excess, to its net profits for the
current and/or immediately preceding fiscal year.
Additionally, in connection with the Conversion, the Company and the Bank
have committed to the FDIC that during the one-year period following the
consummation of the Conversion, the Company will not declare an extraordinary
dividend to shareholders which would be treated by recipient shareholders as a
tax-free return of capital for federal income tax purposes without prior
approval of the FDIC. The Company has also committed to the FRB that it will not
use the net proceeds from the Conversion that are retained by the Company for
the purposes of funding any special or extraordinary dividends or for a return
of capital to shareholders.
26
<PAGE> 27
MARKET FOR THE COMMON STOCK
The Company and the Bank have not previously issued capital stock and,
consequently, there is currently no established market for the Common Stock. The
Company has received conditional approval from the Nasdaq National Market to
have the Common Stock quoted under the symbol "WSBI" upon completion of the
Conversion. One of the requirements for continued quotation of the Common Stock
on the Nasdaq National Market is that there be at least three market makers for
the Common Stock. The Company will seek to encourage and assist at least three
market makers to make a market in the Common Stock. Making a market involves
maintaining bid and asked quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements. Sandler O'Neill has advised
the Company that it intends to make a market in the Common Stock, but is under
no obligation to do so. While the Company anticipates that there will be other
broker-dealers to act as market makers for the Common Stock, there can be no
assurance that there will be three or more market makers for the Common Stock.
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. 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 on short notice and should not view the Common Stock as a
short-term investment. 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 will be able
to sell such shares at or above the Purchase Price or that quotations will be
available on the Nasdaq National Market as contemplated. See "Risk
Factors -- Absence of Market for Common Stock."
27
<PAGE> 28
REGULATORY CAPITAL COMPLIANCE
At August 31, 1997, the Bank exceeded all regulatory capital requirements.
See "Regulation and Supervision -- Federal Banking Regulation -- Capital
Requirements." Set forth below is a summary of the Bank's compliance with
regulatory capital standards at August 31, 1997, on a historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net Conversion proceeds. For purposes of the
table below, the amount expected to be borrowed by the ESOP and the cost of the
shares expected to be acquired by the RRP are deducted from pro forma regulatory
capital.
<TABLE>
<CAPTION>
PRO FORMA AT AUGUST 31, 1997 BASED UPON THE SALE AT $10.00 PER SHARE
-----------------------------------------------------------------------------------------------------------
6,414,125 SHARES
4,122,500 SHARES 4,850,000 SHARES 5,577,500 SHARES
(15% ABOVE MAXIMUM
HISTORICAL AT (MINIMUM OF THE (MIDPOINT OF THE (MAXIMUM OF THE OF THE ESTIMATED
ESTIMATED PRICE ESTIMATED PRICE ESTIMATED PRICE
AUGUST 31, 1997 RANGE) RANGE) RANGE) PRICE RANGE)(1)
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP(3) Capital..... $29,212 10.04% $44,334 14.49% $47,096 15.25% $49,858 16.01% $53,036 16.85%
======= ========= ======= ========= ======= ========= ======= ========= ======= =========
Leverage Capital:
Capital
Level(4)........ $28,033 9.81% $43,155 14.34% $45,918 15.12% 48,680 15.89% $51,858 16.75%
Requirement(5).... 11,430 4.00 12,035 4.00 12,146 4.00 12,256 4.00 12,383 4.00
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
Excess............ $16,603 5.81% 31,120 10.34% $33,772 11.12% $36,424 11.89% $39,475 12.75%
======= ========= ======= ========= ======= ========= ======= ========= ======= =========
Risk-Based Capital:
Capital
Level(4)(6)..... $29,400 20.12% $44,522 27.61% $47,285 28.83% $50,047 30.01% $53,225 31.32%
Requirement....... 11,689 8.00 12,900 8.00 13,121 8.00 13,342 8.00 13,596 8.00
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
Excess............ $17,711 12.12% $31,622 19.61% $34,164 20.83% $36,705 22.01% $39,629 23.32%
======= ========= ======= ========= ======= ========= ======= ========= ======= =========
</TABLE>
- ---------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, changes in the market or general
financial and economic conditions following the commencement of the
Subscription Offering or the Community Offering, if any.
(2) Leverage capital levels are shown as a percentage of "total assets," and
risk-based capital levels are calculated on the basis of a percentage of
"risk-weighted assets," each as defined in the FDIC regulations.
(3) GAAP is defined as Generally Accepted Accounting Principles.
(4) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the shares of Common Stock sold at the minimum, midpoint and
maximum of the Estimated Price Range. These levels assume funding by the
Bank of the RRP equal to 4% of the Common Stock issued, including shares
issued to the Foundation, and repayment of the Company's loan to the ESOP to
enable the ESOP to purchase 8% of the Common Stock issued, including shares
issued to the Foundation, valued at the minimum, midpoint and maximum of the
Estimated Price Range. See "Management of the Bank -- Benefits" for a
discussion of the RRP and ESOP.
(5) The current leverage capital requirement for savings banks is 3% of total
adjusted assets for savings banks that receive the highest supervisory
ratings for safety and soundness and that are not experiencing or
anticipating significant growth. The current leverage capital ratio
applicable to all other savings banks is 4% to 5%. See "Regulation and
Supervision -- Federal Banking Regulation -- Capital Requirements."
(6) Assumes net proceeds are invested in assets that carry risk-weighting equal
to the actual risk weighting of the Bank's assets as of August 31, 1997.
28
<PAGE> 29
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
August 31, 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 indicated in the table and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
---------------------------------------------------------------
4,122,500 5,577,500
SHARES 4,850,000 SHARES 6,414,125
(MINIMUM OF SHARES (MAXIMUM OF SHARES (15% ABOVE
ESTIMATED (MIDPOINT OF ESTIMATED MAXIMUM OF
BANK PRICE ESTIMATED PRICE ESTIMATED
HISTORICAL RANGE) PRICE RANGE) RANGE) PRICE RANGE)(1)
---------- ----------- ------------ ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2)................. $ 221,763 $ 221,763 $221,763 $ 221,763 $ 221,763
======== ======== ======== ======== ========
Total deposits and borrowed
funds..................... $ 253,078 $ 253,078 $253,078 $ 253,078 $ 253,078
======== ======== ======== ======== ========
Shareholders' equity:
Preferred Stock, $.01 par
value, 5,000,000 shares
authorized; none to be
issued................. $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, 15,000,000
shares authorized; to
be issued as
reflected.............. -- 42 50 57 66
Additional paid-in
capital(3)............. -- 40,639 47,999 55,360 63,824
Retained earnings(4)...... 28,033 28,033 28,033 28,033 28,033
Less:
Expense of contributions
to Foundation.......... -- (1,237) (1,455) (1,673) (1,924)
Plus:
Tax effect of contribution
to Foundation(5)....... -- 495 582 669 770
Net unrealized gain on
securities
available-for-sale, net
of taxes............... 1,179 1,179 1,179 1,179 1,179
Less:
Common Stock acquired by
the ESOP(6)............ -- (3,397) (3,996) (4,596) (5,285)
Common Stock acquired by
the RRP(7)............. (1,698) (1,998) (2,298) (2,643)
-------- -------- -------- -------- --------
Total shareholders'
equity.................... $ 29,212 $ 64,056 $ 70,394 $ 76,731 $ 84,020
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, changes in the market or general
financial and economic conditions following the commencement of the
Subscription Offering or the Community Offering, if any.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of shares sold in the Offerings and the issuance of
additional shares of Common Stock to the Foundation at a value of $10.00 per
share. No effect has been given to the issuance of additional shares of
Common Stock pursuant to the Company's proposed Stock Option Plan intended
to be adopted by the Company and presented for approval of shareholders at a
meeting of shareholders to be held no earlier than six months following the
Conversion. The Stock Option Plan would provide for the grant of stock
options to purchase an amount of Common Stock equal to 10% of the shares of
Common
29
<PAGE> 30
Stock issued in the Conversion, including shares issued to the Foundation.
See "Management of the Bank -- Benefits -- Stock Option Plan."
(4) The retained earnings of the Bank will be substantially restricted after the
Conversion. See "The Conversion -- Effects of Conversion -- Liquidation
Rights."
(5) Represents the tax effect of the contribution of Common Stock to the
Foundation based on a 40% tax rate. The realization of the deferred tax
benefit is limited annually to 10% of the Company's annual taxable income,
subject to the ability of the Company to carry forward any unused portion of
the deduction for five years following the year in which the contribution is
made.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP and
the funds used to acquire the ESOP shares will be borrowed from the Company.
The Common Stock acquired by the ESOP is reflected as reduction of
shareholders' equity. See "Management of the Bank -- Benefits -- ESOP."
(7) Assumes that, subsequent to the Conversion, an amount equal to 4% of the
shares of Common Stock issued in the Conversion, including shares issued to
the Foundation, is purchased by the RRP through open market purchases. The
Common Stock purchased by the RRP is reflected as a reduction of
shareholders' equity. See "Risk Factors -- Possible Dilutive Effect of Stock
Options and Recognition and Retention Plan," footnote 2 to the tables under
"Pro Forma Data" and "Management of the Bank -- Benefits -- Recognition and
Retention Plan."
30
<PAGE> 31
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 $39.4 million and $53.7 million (or $62.0
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription Offering, as follows: all of the shares of Common Stock will
be sold to Eligible Account Holders, Supplemental Eligible Account Holders and
Other Depositors in the Subscription Offering, other than 8%, which will be sold
to the ESOP; (ii) Sandler O'Neill will receive a fee equal to 1.875% of the
aggregate actual purchase price of the shares sold to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Depositors in the Subscription
Offering, excluding shares purchased by trustees, trustees emeritus, officers,
employees and their families and shares purchased by the ESOP for which there is
no fee; and (iii) Conversion expenses, excluding the fees paid to Sandler
O'Neill, will be approximately $1.1 million. Actual Conversion expenses may vary
from these estimates.
Pro forma net income has been calculated assuming the Common Stock had been
sold at the beginning of the periods and the net proceeds had been invested at
an average yield of 5.59% for the three months ended August 31, 1997, which was
the one-year U.S. Treasury bill rate in effect as of August 29, 1997, and 5.78%
for the fiscal year ended May 31, 1997, which was the one-year U.S. Treasury
bill rate in effect as of May 30, 1997. The one-year U.S. Treasury bill rate,
rather than an arithmetic average of the average yield on interest-earning
assets and average rate paid on interest-bearing liabilities, has been used to
estimate income on net proceeds, because management believes that the one-year
U.S. Treasury bill rate provides a more accurate estimate of the rate that would
be obtained on an initial investment of the net proceeds from the Offerings. The
pro-forma after-tax yield is assumed to be 3.35% for the three months ended
August 31, 1997, and 3.47% for the fiscal year ended May 31, 1997, based on an
effective tax rate of 40% for each such period. The effect of withdrawals from
deposit accounts for the purchase of Common Stock has not been reflected.
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 (in the case of pro forma net income per share) to give
effect to the purchase of shares by the ESOP. Pro forma shareholders' equity
amounts have been calculated as if the Common Stock had been sold on August 31,
1997 and May 31, 1997, respectively, and, accordingly, no effect has been given
to the assumed earnings effect of the transactions.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated shareholders' equity represents
the difference between the projected amount of assets and liabilities of the
Company computed in accordance with GAAP. The pro forma shareholders' equity is
not intended to represent the fair market value of the Common Stock and may be
greater than amounts that would be available for distribution to shareholders in
the event of liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the three months ended August 31, 1997 and at or
for the fiscal year ended May 31, 1997, based on the assumptions set forth above
and in the tables, and should not be used as a basis for projections of market
value of the Common Stock following the Conversion. The tables below give effect
to the RRP, which is expected to be adopted by the Company following the
Conversion and which, if implemented prior to the first anniversary of the
Conversion, will be presented to shareholders for approval at a meeting of
shareholders to be held no earlier than six months after completion of the
Conversion. See footnote 3 to the tables. No effect has been given in the tables
to the possible issuance of additional shares reserved for future issuance
pursuant to the Stock Option Plan to be adopted by the Board of Directors of the
Company, nor does book value give any effect to the liquidation account to be
established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders or the bad debt reserve in liquidation. See footnote 4
to the tables below and "The Conversion -- Effects of Conversion -- Liquidation
Rights" and "Management of the Bank -- Benefits -- Stock Option Plan."
31
<PAGE> 32
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED AUGUST 31, 1997
----------------------------------------------------------------
6,414,125
4,122,500 4,850,000 SHARES SOLD
SHARES SOLD SHARES SOLD 5,577,500 AT $10.00 PER
AT $10.00 AT $10.00 SHARES SOLD AT SHARE (15%
PER SHARE PER SHARE $10.00 PER ABOVE MAXIMUM
(MINIMUM OF (MIDPOINT OF SHARE (MAXIMUM OF ESTIMATED
ESTIMATED ESTIMATED OF ESTIMATED PRICE
PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE)(7)
------------ ------------ --------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 41,225 $ 48,500 $55,775 $64,141
Plus: Value of shares issued to Foundation (equal to
3% of stock sold in Conversion)................. 1,237 1,455 1,673 1,924
------------ ------------ --------------- -------------
Pro forma market capitalization..................... $ 42,462 $ 49,955 $57,448 $66,065
============ ============ ============== ===============
Gross proceeds...................................... $ 41,225 $ 48,500 $55,775 $64,141
Less: Offering expenses and commissions............. (1,781) (1,906) (2,031) (2,175)
------------ ------------ --------------- -------------
Estimated net proceeds.............................. $ 39,444 $ 46,594 $53,744 $61,966
Less: Common Stock purchased by ESOP................ (3,397) (3,996) (4,596) (5,285)
Common Stock purchased by RRP.................. (1,698) (1,998) (2,298) (2,643)
------------ ------------ --------------- -------------
Estimated net proceeds, as adjusted............... $ 34,349 $ 40,600 $46,850 $54,038
============ ============ ============== ===============
Net income(1):
Historical........................................ $ 538 $ 538 $ 538 $ 538
Pro forma income on net proceeds, as
adjusted........................................ 288 340 392 453
Less: Pro forma ESOP adjustment(2)................ (51) (60) (69) (79)
Pro forma RRP adjustment(3)................... (51) (60) (69) (79)
------------ ------------ --------------- -------------
Pro forma net income............................ $ 724 $ 758 $ 792 $ 833
============ ============ ============== ===============
Per share net income(1):
Historical........................................ $ 0.14 $ 0.12 $ 0.10 $ 0.09
Pro forma income on net proceeds, as
adjusted........................................ 0.07 0.07 0.07 0.07
Pro forma ESOP adjustment(2)...................... (0.01) (0.01) (0.01) (0.01)
Pro forma RRP adjustment(3)....................... (0.01) (0.01) (0.01) (0.01)
------------ ------------ --------------- -------------
Pro forma net income per share.................. $ 0.19 $ 0.17 $ 0.15 $ 0.14
============ ============ ============== ===============
Shareholders' equity:
Historical........................................ $ 29,212 $ 29,212 $29,212 $29,212
Estimated net proceeds............................ 39,444 46,594 53,744 61,966
Plus: Shares issued to Foundation................. 1,237 1,455 1,673 1,924
Less: Contribution to the Foundation.............. (1,237) (1,455) (1,673) (1,924)
Plus: Tax benefits of the contribution to the
Foundation................................... 495 582 669 770
Less: Common Stock acquired by ESOP(2)............ (3,397) (3,996) (4,596) (5,285)
Common Stock acquired by RRP(3)............... (1,698) (1,998) (2,298) (2,643)
------------ ------------ --------------- -------------
Pro forma shareholders' equity(3)(4)(5)......... $ 64,056 $ 70,394 $76,731 $84,020
============ ============ ============== ===============
Shareholders' equity per share(6):
Historical........................................ $ 6.88 $ 5.85 $ 5.08 $ 4.42
Estimated net proceeds............................ 9.29 9.33 9.36 9.38
Plus: Tax benefit of the contribution to the
Foundation................................... 0.12 0.12 0.12 0.12
Less: Common Stock acquired by ESOP(2)............ (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by RRP(3)............... (0.40) (0.40) (0.40) (0.40)
------------ ------------ --------------- -------------
Pro forma shareholders' equity per share........ $ 15.09 $ 14.10 $ 13.36 $ 12.72
============ ============ ============== ===============
Offering price as a percentage of pro forma
shareholders' equity per share.................... 66.27% 70.92% 74.85% 78.62%
Offering price to pro forma net earnings per
share............................................. 13.16x 14.71x 16.67x 17.86x
</TABLE>
(See footnotes following tables)
32
<PAGE> 33
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MAY 31, 1997
------------------------------------------------------------
6,414,125
4,122,500 4,850,000 5,577,500 SHARES SOLD
SHARES SOLD SHARES SOLD SHARES SOLD AT AT $10.00 PER
AT $10.00 AT $10.00 $10.00 SHARE (15%
PER SHARE PER SHARE PER SHARE ABOVE MAXIMUM
(MINIMUM (MIDPOINT OF (MAXIMUM OF OF ESTIMATED
OF ESTIMATED ESTIMATED ESTIMATED PRICE
PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE)(7)
------------ ------------ -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 41,225 $ 48,500 $ 55,775 $64,141
Plus: Value of shares issued to Foundation (equal to
3% of stock sold in Conversion)..................... 1,237 1,455 1,673 1,924
------- ------- ------- -------
Pro forma market capitalization..................... $ 42,462 $ 49,955 $ 57,448 $66,065
======= ======= ======= =======
Gross proceeds...................................... $ 41,225 $ 48,500 $ 55,775 $64,141
Less: Offering expenses and commissions............. (1,781) (1,906) (2,031) (2,175)
------- ------- ------- -------
Estimated net proceeds.............................. $ 39,444 $ 46,594 $ 53,744 $61,966
Less: Common Stock purchased by ESOP................ (3,397) (3,996) (4,596) (5,285)
Common Stock purchased by RRP.................. (1,698) (1,998) (2,298) (2,643)
------- ------- ------- -------
Estimated net proceeds, as adjusted............... $ 34,349 $ 40,600 $ 46,850 $54,038
======= ======= ======= =======
Net income(1):
Historical........................................ $ 2,866 $ 2,866 $ 2,866 $ 2,866
Pro forma income on net proceeds, as adjusted..... 1,192 1,409 1,626 1,875
Less: Pro forma ESOP adjustment(2)................ (204) (240) (276) (317)
Pro forma RRP adjustment(3).................. (204) (240) (276) (317)
------- ------- ------- -------
Pro forma net income............................ $ 3,650 $ 3,795 $ 3,940 $ 4,107
======= ======= ======= =======
Per share net income(1):
Historical........................................ $ 0.73 $ 0.62 $ 0.54 $ 0.47
Pro forma income on net proceeds, as adjusted..... 0.30 0.30 0.31 0.31
Pro forma ESOP adjustment(2)...................... (0.05) (0.05) (0.05) (0.05)
Pro forma RRP adjustment (3)...................... (0.05) (0.05) (0.05) (0.05)
------- ------- ------- -------
Pro forma net income per share.................. $ 0.93 $ 0.82 $ 0.75 $ 0.68
======= ======= ======= =======
Shareholders' equity:
Historical........................................ $ 28,114 $ 28,114 $ 28,114 $28,114
Estimated net proceeds............................ 39,444 46,594 53,744 61,966
Plus: Shares issued to Foundation................. 1,237 1,455 1,673 1,924
Less: Contribution to the Foundation.............. (1,237) (1,455) (1,673) (1,924)
Plus: Tax benefit of the contribution to the
Foundation................................... 495 582 669 770
Less: Common Stock acquired by ESOP(2)............ (3,397) (3,996) (4,596) (5,285)
Common Stock acquired by RRP (3)............. (1,698) (1,998) (2,298) (2,643)
------- ------- ------- -------
Pro forma shareholders' equity(3)(4)(5)......... $ 62,958 $ 69,296 $ 75,633 $82,922
======= ======= ======= =======
Shareholders' equity per share(6):
Historical........................................ $ 6.62 $ 5.63 $ 4.89 $ 4.26
Estimated net proceeds............................ 9.29 9.33 9.36 9.38
Plus: Tax benefit of the contribution to the
Foundation................................... 0.12 0.12 0.12 0.12
Less: Common Stock acquired by ESOP(2)............ (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by RRP(3).............. (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma shareholders' equity per share........ $ 14.83 $ 13.88 $ 13.17 $ 12.56
======= ======= ======= =======
Offering price as a percentage of pro forma
shareholders' equity per share.................... 67.43% 72.05% 75.93% 79.62%
Offering price to pro forma net earnings per
share............................................. 10.75x 12.20x 13.33x 14.71x
(See footnotes on next page)
</TABLE>
33
<PAGE> 34
- ---------------
(1) Does not give effect to the non-recurring expense that will be recognized in
the fiscal year ending May 31, 1998 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 approximately
$742,000, $873,000, $1.0 million and $1.2 million at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively. Assuming the contribution to the Foundation was expensed
during the fiscal year ended May 31, 1997, pro forma net income per share
would be $0.74, $0.63, $0.55 and $0.47 for such period, and, assuming the
contribution to the Foundation was expensed during the three months ended
August 31, 1997, pro forma net loss per share would be $(0.01), $(0.02),
$(0.04) and $(0.06) for such period, at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Price Range, respectively. Per share
net income data is based on 3,940,450, 4,635,824, 5,331,198 and 6,130,877
shares outstanding, which represents shares sold in the Conversion, shares
contributed to the Foundation and shares to be allocated under the ESOP for
the period presented.
(2) It is assumed that 8% of the shares of Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to acquire
such shares are assumed to have been borrowed by the ESOP from the Company.
The amount to be borrowed is reflected as a reduction of shareholders'
equity. The Bank intends to make annual contributions to the ESOP in an
amount at least equal to the principal and interest requirement of the debt.
The Bank's total annual payment of the ESOP debt is based upon 10 equal
annual installments of principal, with an assumed interest rate at 8.00%.
The pro forma net income assumes: (i) that the Bank's contribution to the
ESOP is equivalent to the debt service requirement for the three months
ended August 31, 1997 and the year ended May 31, 1997, and was made at the
end of the respective period; (ii) that 33,969, 39,964, 45,959 and 52,852
shares at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively, were committed to be released during
the year ended May 31, 1997 (8,492, 9,991, 11,490 and 13,213 shares during
the three months ended August 31, 1997) at an average fair value of $10.00
per share in accordance with SOP 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the net
income per share calculations. See "Management of the Bank --
Benefits -- Employee Stock Ownership Plan and Trust."
(3) Gives effect to the RRP expected to be adopted by the Company following the
Conversion and presented for approval at a meeting of shareholders. The RRP
intends to acquire an amount of Common Stock equal to 4% of the shares of
Common Stock issued in connection with the Conversion, including shares
issued to the Foundation, or 169,847, 199,820, 229,793 and 264,261 shares of
Common Stock at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Price Range, respectively, either through open market
purchases, if permissible, or from authorized but unissued shares of Common
Stock or treasury stock of the Company, if any. In calculating the pro forma
effect of the RRP, it is assumed that the shares were acquired by the RRP at
the beginning of the periods presented in open market purchases at the
Purchase Price and that 5% and 20% of the amount contributed was amortized
as an expense during the three months ended August 31, 1997 and the year
ended May 31, 1997. The issuance of authorized but unissued shares of the
Company's Common Stock to the RRP instead of open market purchases would
dilute the voting interests of existing shareholders by approximately 3.8%,
and pro forma net income per share for the year ended May 31, 1997 would be
$0.90, $0.80, $0.72 and $0.66 ($0.18, $0.16, $0.15 and $0.13 for the three
months ended August 31, 1997) at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively, and pro forma
shareholders' equity per share at May 31, 1997 would be $14.26, $13.34,
$12.66 and $12.07 ($14.51, $13.55, $12.84 and $12.23 at August 31, 1997) at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively. There can be no assurance that the actual
purchase price of the shares granted under the RRP will be equal to the
Purchase Price. See "Management of the Bank -- Benefits -- Recognition and
Retention Plan."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plan for approval at a meeting of shareholders. Under the Stock
Option Plan, an amount equal to 10% of the Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, or 424,617,
499,550, 574,482 and 660,654 shares at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Price Range, respectively, will be
reserved for future issuance upon the exercise of options to be granted
under the Stock Option Plan. The issuance of Common Stock pursuant to the
exercise of options under the Stock Option Plan will result in the dilution
of existing shareholders' interests by approximately 9.1%. Assuming all
options were exercised at the end of the respective periods at an exercise
price of $10.00 per share, the pro forma net income per share for the year
ended May 31, 1997 would be $0.84, $0.74, $0.67 and $0.60, respectively
($0.17, $0.15, $0.13 and $0.12 for the three months ended August 31, 1997),
and the pro forma shareholders' equity per share at May 31, 1997 would be
$14.39, $13.52, $12.88 and $12.32, respectively ($14.62, $13.72, $13.05 and
$12.47 at August 31, 1997). See "Management of the Bank -- Benefits -- Stock
Option Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion -- Effects of Conversion -- Liquidation Rights" and "Regulation
and Supervision -- New York Banking Regulation."
(6) Shareholders' equity per share data is based upon 4,246,175, 4,995,500,
5,744,825 and 6,606,549 shares outstanding, representing shares sold in the
Conversion, shares contributed to the Foundation and shares purchased by the
ESOP and the RRP.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, changes in the market or general
financial and economic conditions following the commencement of the
Subscription Offering or the Community Offering, if any.
34
<PAGE> 35
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT FOUNDATION
Assuming that the Foundation was not being established as part of the
Conversion, FinPro has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $51.5 million at the
midpoint of the Estimated Price Range, which is approximately $1.5 million
greater than the pro forma aggregate market capitalization of the Company
including the Foundation, and would result in a $3.0 million increase in the
amount of Common Stock offered for sale in the Conversion. However, assuming the
midpoint, the pro forma price to book ratio would be the same under both the
current appraisal and the estimate of the value of the Company without the
Foundation. Further, pro forma shareholders' equity per share would be the same
at $14.10, with or without the Foundation. There is no assurance that, in the
event the Foundation was not formed, the appraisal prepared at that time would
have concluded that the pro forma market value of the Company would be the same
as that estimated herein. Any appraisal prepared at that time would be based on
the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Price Range, assuming the Conversion was completed at
August 31, 1997.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
---------------------- ---------------------- ---------------------- ----------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount.... $ 41,225 $ 43,733 $ 48,500 $ 51,450 $ 55,775 $ 59,186 $ 64,141 $ 68,043
Pro forma market
capitalization............. 42,462 43,733 49,955 51,450 57,448 59,168 66,065 68,043
Total assets................. 325,712 327,527 332,050 334,185 338,387 340,843 345,676 348,500
Total liabilities............ 261,656 261,656 261,656 261,656 261,656 261,656 261,656 261,656
Pro forma shareholders'
equity..................... 64,056 65,871 70,394 72,529 76,731 79,187 84,020 86,844
Pro forma consolidated net
income..................... 724 741 758 777 792 815 833 857
Pro forma shareholders'
equity per share........... 15.09 15.06 14.10 14.10 13.36 13.39 12.72 12.76
Pro forma consolidated net
income per share........... 0.19 0.19 0.17 0.17 0.15 0.16 0.14 0.15
Pro Forma Pricing Ratios:
Offering price as a
percentage of pro forma
shareholders' equity per
share.................... 66.27% 66.40% 70.92% 70.92% 74.85% 74.68% 78.62% 78.37%
Offering price to pro forma
net income per share..... 13.16x 13.16x 14.71x 14.71x 16.67x 15.63x 17.86x 16.67x
Pro Forma Market
Capitalization to
assets................... 13.04% 13.35% 15.04% 15.40% 16.98% 17.36% 19.11% 19.52%
Pro Forma Financial Ratios:
Return on assets........... 0.89% 0.90% 0.91% 0.93% 0.94% 0.96% 0.96% 0.98%
Return on shareholders'
equity................... 4.52% 4.50% 4.31% 4.29% 4.13% 4.12% 3.97% 3.95%
Shareholders' equity to
assets................... 19.67% 20.11% 21.20% 21.70% 22.68% 23.23% 24.31% 24.92%
</TABLE>
35
<PAGE> 36
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank for each of the
years in the three-year period ended May 31, 1997 have been audited by Arthur
Andersen LLP, independent public accountants, whose report thereon appears
elsewhere herein. These statements should be read in conjunction with the other
financial statements and notes thereto included elsewhere in this Prospectus.
The Consolidated Statements of Income for the three-month periods ended August
31, 1997 and 1996 are unaudited, but, in the opinion of management, reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results for such periods. The results for the
three-month period ended August 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending May 31, 1998.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE FISCAL YEAR
ENDED AUGUST 31, ENDED MAY 31,
------------------------ -----------------------------------------
1997 1996 1997 1996 1995
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest on mortgage loans...................... $2,210,437 $1,590,541 $ 7,151,702 $ 8,098,219 $ 6,922,109
Interest on other loans......................... 870,431 779,910 3,457,460 3,149,131 2,833,349
Interest and dividends on securities............ 2,107,009 2,530,026 10,049,163 6,728,913 6,228,600
Interest on federal funds sold.................. 38,243 6,884 14,504 321,903 264,966
Interest on short-term money market
instruments................................... 6,274 4,339 18,290 34,870 3,633
---------- ---------- ----------- ----------- -----------
Total interest income....................... 5,232,394 4,911,700 20,691,119 18,333,036 16,252,657
---------- ---------- ----------- ----------- -----------
Interest expense:
Time deposits................................... 981,043 1,081,331 3,984,829 5,108,712 2,808,198
Money market deposits........................... 218,784 234,778 882,979 936,218 1,041,512
Savings deposit................................. 653,708 670,373 2,550,704 2,580,121 2,862,319
Mortgagors' deposits............................ 42,071 19,059 49,588 68,165 61,198
Interest on borrowings.......................... 463,064 275,021 1,908,062 23,882 54,556
---------- ---------- ----------- ----------- -----------
Total interest expense...................... 2,358,670 2,280,562 9,376,162 8,717,098 6,827,783
---------- ---------- ----------- ----------- -----------
Net interest income......................... 2,873,724 2,631,138 11,314,957 9,615,938 9,424,874
Provision for loan losses........................... (304,000) (20,000) (130,000) (140,000) (261,000)
---------- ---------- ----------- ----------- -----------
Net interest income after provision for loan
losses........................................ 2,569,724 2,611,138 11,184,957 9,475,938 9,163,874
---------- ---------- ----------- ----------- -----------
Other income (loss):
Service and fee income.......................... 492,331 446,538 1,915,139 1,767,610 1,369,288
Securities transactions......................... 154,231 696,155 816,304 356,266 (428,611)
Loan transactions............................... 23,428 17,420 137,403 118,807 14,107
Other income (loss)............................. 7,148 (175,918) (89,079) (158,713) (79,105)
---------- ---------- ----------- ----------- -----------
Total other income, net..................... 677,138 984,195 2,779,767 2,083,970 875,679
---------- ---------- ----------- ----------- -----------
Other expenses:
Salaries and employee benefits.................. 1,294,884 1,275,822 5,255,869 5,049,942 3,958,063
FDIC insurance.................................. 6,865 501 12,447 53,226 466,497
Occupancy....................................... 331,823 287,361 1,307,727 1,237,485 1,201,723
Data processing................................. 156,843 164,201 639,654 483,572 413,961
Advertising..................................... 46,427 22,461 152,529 129,227 112,278
Professional fees............................... 80,349 67,119 240,513 325,392 221,754
Other........................................... 432,206 411,077 1,734,616 1,791,244 1,721,934
---------- ---------- ----------- ----------- -----------
Total other expenses........................ 2,349,397 2,228,542 9,343,355 9,070,088 8,096,210
---------- ---------- ----------- ----------- -----------
Income before provision for income taxes and
cumulative effect of change in accounting
principle..................................... 897,465 1,366,791 4,621,369 2,489,820 1,943,343
Provision for income taxes.......................... 358,986 519,381 1,755,866 1,024,240 794,394
---------- ---------- ----------- ----------- -----------
Income before cumulative effect of change in
accounting principle.......................... 538,479 847,410 2,865,503 1,465,580 1,148,949
Cumulative effect of change in accounting
principle......................................... -- -- -- -- (645,184)
---------- ---------- ----------- ----------- -----------
Net income.................................. $ 538,479 $ 847,410 $ 2,865,503 $ 1,465,580 $ 503,765
========= ========= ========== ========== ==========
</TABLE>
See the accompanying notes to the consolidated financial statements.
36
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
its interest-earning assets, such as loans and securities, and the interest
expense on its interest-bearing liabilities, such as deposits and borrowed
funds. The Bank also generates other income, such as service charges and other
fees, which are primarily servicing fees received from residential mortgage
loans sold with servicing retained. Other expenses primarily consist of employee
compensation and benefits, occupancy expenses, federal deposit insurance
premiums, net costs of real estate owned, data processing fees and other
operating expenses. The Bank's results of operations are also significantly
affected by general economic and competitive conditions (particularly changes in
market interest rates), government policies, changes in accounting standards and
actions of regulatory agencies. See "Risk Factors." The Bank exceeded all of its
regulatory capital requirements at August 31, 1997. See "Regulatory Capital
Compliance" for a discussion of the historical and pro forma capital of the Bank
and capital requirements.
MANAGEMENT STRATEGY
The Bank has historically employed an operating strategy that emphasizes
the origination of one- to-four-family residential mortgage loans in its market
area with both fixed and variable rates and, to an increasing degree over the
past 10 years, its commercial lending business, with mostly prime-rate based
loans secured by real estate located mainly in Orange County, New York. Due in
part to this strategy, the Bank historically has had profitable operations,
resulting in a strong regulatory capital position. The Bank's goal of
maintaining this position has lead to an overall strategy of managed growth in
both deposits and assets. The major elements of the Bank's operating strategy
are to: (i) grow and diversify the Bank's loan portfolio by continuing to
originate owner-occupied residential mortgage, commercial business and
commercial real estate, construction and consumer loans in its market area (see
"Risk Factors -- Residential and Non-Residential Lending Risks" for a discussion
of certain credit risks associated with these types of loans); (ii) complement
the Bank's mortgage lending activities by investing in mortgage-backed and other
securities; (iii) maintain the Bank's relatively low cost of funds and (iv)
manage the Bank's level of interest rate risk. From time to time, the Bank
employs a leveraging strategy, whereby borrowings are used to fund specific
investments in order to provide for a reasonable net margin of return. The Bank
also seeks to attract and retain customers by providing a high level of personal
service to its retail and business customers through extended office hours, low
turnover of employees and prompt, flexible and personalized production of a
variety of loan products. In addition, it is a goal of the Bank to increase its
market share in the communities it serves through the acquisition or
establishment of branch offices and, if appropriate, the acquisition of smaller
financial institutions. Additionally, it is a goal of the Bank to penetrate new
markets. For this reason, the Bank has recently received a license from the
State of New Jersey Department of Banking and Insurance to expand its mortgage
banking operations and lending into New Jersey. There can be no assurances,
however, that the Bank will be successful in accomplishing these goals. See "Use
of Proceeds" and "Business of the Bank."
MANAGEMENT OF INTEREST RATE RISK
The principal objectives of the Bank's interest rate risk management
activities are to: (i) evaluate the interest rate risk included in certain
balance sheet accounts, (ii) determine the level of risk appropriate given the
Bank's business focus, operating environment, capital and liquidity requirements
and performance objectives, (iii) establish prudent asset concentration
guidelines and (iv) manage the risk consistent with Board approved policies and
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operating results to changes in interest rates and to manage the ratio of
interest rate sensitive assets to interest rate sensitive liabilities within
specified maturities or repricing dates. The Bank closely monitors its interest
rate risk as such risk relates to its operating strategies. The extent of the
movement of interest rates, higher or lower, is an uncertainty that could have a
negative impact on the earnings of the Bank.
37
<PAGE> 38
Historically, the Bank had been a traditional thrift lender, but
differentiated itself from other thrifts by also focusing on commercial lending
since the late 1980's and commission-based mortgage banking operations since
1995. The Bank also adopted a more competitive pricing policy, more efficient
lock-in policies to close loans faster and more streamlined Federal National
Mortgage Association ("FNMA") approved processing and underwriting procedures.
Additionally, the Bank's array of products has expanded to include Federal
Housing Authority ("FHA"), Veterans Administration ("VA") and State of New York
Mortgage Association ("SONYMA") loans. As a result, the Bank has invested a
relatively large amount of its earning assets in fixed-rate loans and fixed-rate
mortgage-backed securities with contractual maturities of up to 30 years. At
August 31, 1997, an aggregate of $120.5 million, or 45.0% of total earning
assets, were invested in such assets. Based upon the assumptions used in the
following table, at August 31, 1997, the Bank's total interest-bearing
liabilities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing in the same time period by $40.4
million, representing a one year cumulative "gap," as defined below, as a
percentage of total assets of negative 13.90%. Accordingly, management views the
Bank as having a manageable gap position, but still slightly vulnerable to a
rising interest rate environment.
The Bank has taken several actions, under various market conditions,
designed to manage its level of interest rate risk. These actions have included:
(i) increasing the percentage of the loan portfolio consisting of
adjustable-rate mortgage loans and prime-rate based commercial loans through
originations, as market conditions permit, (ii) selling fixed-rate loans, but
retaining the servicing rights, (iii) purchasing shorter-term investment
securities and (iv) seeking to maintain a relatively high percentage of checking
accounts in its deposit base. Additionally, in the normal course of business,
the Bank uses off-balance sheet financial instruments primarily as part of
mortgage banking hedging strategies. Such instruments generally include put
options purchased and forward commitments to sell mortgage loans. As a result of
interest rate fluctuations, these financial instruments will develop unrealized
gains or losses that mitigate changes in the underlying hedged portion of the
balance sheet. When effectively used, these instruments are designed to moderate
the impact on earnings as interest rates move up or down.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate sensitivity "gap."
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, therefore, a negative gap would tend to
adversely affect net interest income. Conversely, during a period of falling
interest rates, a negative gap position would tend to result in an increase in
net interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at August 31, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
were determined based on the earlier of term to repricing or the term to
repayment of the asset or liability. The table is intended to provide an
approximation of the projected repricing of assets and liabilities at August 31,
1997 on the basis of contractual maturities, anticipated prepayments and
scheduled rate adjustments within a three-month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be reinvested and/or repriced as a result of contractual
amortization and anticipated early payoffs of adjustable-rate loans and fixed-
rate loans, and as a result of contractual rate adjustments on adjustable-rate
loans. For loans on one- to four-family residential properties and
mortgage-backed securities, assumed average annual prepayment rates of
38
<PAGE> 39
19.05% and 15.43%, respectively, were utilized. See "Business of the
Bank -- Lending Activities," "-- Investment Activities" and "-- Sources of
Funds."
<TABLE>
<CAPTION>
AT AUGUST 31, 1997
------------------------------------------------------------------------------------------------
THREE MORE THAN MORE THAN MORE THAN MORE THAN
MONTHS THREE MONTHS TO ONE YEAR THREE YEARS FIVE YEARS MORE THAN
OR LESS TWELVE MONTHS TO THREE YEARS TO FIVE YEARS TO TEN YEARS TEN YEARS TOTAL
------- --------------- -------------- ------------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans(1)(2)........... $20,968 $ 14,131 $ 12,337 $13,135 $ 2,796 $40,282 $103,649
Other loans (3)................ 12,409 7,145 5,745 14,907 10,232 2,339 52,777
Mortgage-backed securities,
fixed(2)..................... 9,909 346 -- 971 1,382 51,609 64,217
Mortgage-backed securities,
variable(2).................. 741 3,985 78 -- -- -- 4,804
Mutual funds and preferred
stock........................ -- 2,000 -- -- -- 2,804 4,804
Investment securities,
held-to-maturity............. 300 3,041 2,655 106 -- -- 6,102
Investment securities,
available-for-sale........... 3,507 4,001 3,299 4,103 21,492 -- 36,402
------- -------- -------- ------- ------- ------- -------
Total interest-earning
assets............... 47,834 34,649 24,114 33,222 35,902 97,034 272,755
Net deferred loan fees and
costs(4)..................... (16) (29) (25) (37) (16) (61) (184)
------- -------- -------- ------- ------- ------- -------
Net interest-earning
assets............... 47,818 34,620 24,089 33,185 35,886 96,973 272,571
------- -------- -------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Passbook accounts(5)........... -- 15,815 -- -- -- 63,258 79,073
Escrow accounts................ -- -- -- -- -- 2,256 2,256
NOW accounts................... -- -- -- -- -- 15,748 15,748
Money market accounts.......... 25,811 -- -- -- -- -- 25,811
Certificates of deposit........ 16,782 53,505 3,385 2,074 -- -- 75,746
Borrowed funds................. 8,365 2,600 15,350 5,000 -- -- 31,315
------- -------- -------- ------- ------- ------- -------
Total interest-bearing
liabilities.......... 50,958 71,920 18,735 7,074 -- 81,262 229,949
------- -------- -------- ------- ------- ------- -------
Interest rate sensitivity
gap.......................... $(3,140) $ (37,300) $ 5,354 $26,111 $ 35,886 $15,711 $ 42,622
======= ======== ======== ======= ======= ======= =======
Cumulative interest rate
sensitivity gap.............. $(3,140) $ (40,440) $(35,086) $(8,975) $ 26,911 $42,622
======= ======== ======== ======= ======= =======
Cumulative interest rate
sensitivity gap as a
percentage of total assets... (1.08)% (13.90)% (12.06)% (3.09)% 9.25% 14.65%
Cumulative net interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities.................. 93.84% 67.09% 75.22% 93.96% 118.10% 118.54%
</TABLE>
- ---------------
(1) Mortgage and other loans are not reduced for the allowance for loan losses
and non-performing loans.
(2) For loans on residential properties an average prepayment rate of 19.05% is
utilized. Mortgage-backed securities are assumed to prepay at an average
annual rate of 15.43%.
(3) Second mortgage loans are included in the "Other loans" category.
(4) Unearned fees and deferred loan origination costs are pro-rated.
(5) Based upon the Bank's historical experience, management has assumed that 20%
of the Bank's total savings account balances reprice in the twelve month
time horizon. The remaining 80% are viewed as long-term deposits.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types of assets may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates both on a
short-term basis and over the life of the asset. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to make scheduled payments on their adjustable-rate
loans may decrease in the event of an interest rate increase.
39
<PAGE> 40
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
Average Balance Sheets. The following tables set forth certain information
relating to the Bank at August 31, 1997, for the three months ended August 31,
1997 and 1996 and for the years ended May 31, 1997, 1996 and 1995. The yields
and costs were derived by dividing interest income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. Average
balances were computed based on month-end balances. Management believes that the
use of average monthly balances instead of average daily balances does not have
a material effect on the information presented. The yields include deferred fees
and discounts which are considered yield adjustments.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED AUGUST 31,
-------------------------------------------------------------
1997 1996
AT AUGUST 31, 1997 ----------------------------- -----------------------------
----------------------- AVERAGE AVERAGE
WEIGHTED AVERAGE YIELD/ AVERAGE YIELD/
BALANCE AVERAGE RATE BALANCE INTEREST COST BALANCE INTEREST COST
-------- ------------ -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1)............... $117,297 7.59% $110,332 $ 2,210 8.01% $ 83,006 $ 1,591 7.67%
Consumer and other loans, net(1)..... 37,368 8.87 36,434 870 9.55 32,260 781 9.68
Mortgage-backed securities........... 69,055 7.72 69,181 1,293 7.48 79,545 1,436 7.22
Federal funds sold................... -- -- 2,786 38 5.46 549 7 5.10
Interest earning accounts at banks... 539 4.82 475 6 5.06 338 4 5.09
Investment securities................ 49,039 7.50 49,823 815 6.54 69,755 1,094 6.27
-------- -------- -------- -------- --------
Total interest-earning
assets....................... 273,298 7.78 269,031 5,232 7.78 265,453 4,913 7.40
-------- --------
Non-interest-earning assets............ 17,570 16,711 16,201
-------- -------- --------
Total assets................... $290,868 $285,742 $281,654
======== ======== ========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Passbook accounts.................... $ 79,072 2.98% $ 79,570 $ 594 2.99% $ 81,267 $ 610 3.00%
Escrow deposits...................... 2,256 2.00 1,819 42 9.24 1,518 19 5.01
NOW accounts......................... 15,748 1.61 14,769 60 1.62 14,761 60 1.63
Money market accounts................ 25,811 3.29 26,421 219 3.31 28,600 235 3.29
Certificate accounts................. 75,746 5.17 75,329 981 5.21 84,339 1,081 5.13
-------- -------- -------- -------- --------
Total deposits................. 198,633 3.81 197,908 1,896 3.83 210,485 2,005 3.81
Borrowed funds....................... 31,315 6.15 29,218 463 6.34 17,647 275 6.23
-------- -------- -------- -------- --------
Total interest-bearing
liabilities.................. 229,948 4.07 227,126 2,359 4.15 228,132 2,280 4.00
-------- --------
Non-interest-bearing liabilities....... 31,708 30,357 28,841
-------- -------- --------
Total liabilities.............. 261,656 257,483 256,973
Retained earnings...................... 29,212 28,259 24,681
-------- -------- --------
Total liabilities and retained
earnings..................... $290,868 $285,742 $281,654
======== ======== ========
Net interest income/interest rate
spread(2)............................ 3.71% $ 2,873 3.63% $ 2,633 3.40%
============ ======= ======= ======= =======
Net interest-earning assets/net
interest margin(3)................... $ 43,350 $ 41,905 4.27% $ 37,321 3.97%
======== ======== ======= ======== =======
Ratio of interest-earning assets to
interest-bearing liabilities......... 118.85% 118.45% 116.36%
============ ======= =======
</TABLE>
(See footnotes on next page)
40
<PAGE> 41
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net(1).......... $ 90,771 $ 7,152 7.88% $103,854 $ 8,098 7.80% $ 84,338 $ 6,922 8.21%
Consumer and other loans,
net(1)........................ 36,160 3,457 9.56 33,127 3,150 9.51 30,027 2,834 9.44
Mortgage-backed securities...... 80,255 5,897 7.35 19,612 1,617 8.24 16,165 938 5.80
Federal funds sold.............. 283 15 5.30 6,058 322 5.32 5,031 265 5.27
Interest earning accounts at
banks......................... 395 18 4.56 93 5 5.38 17 1 5.88
Investment securities........... 61,508 4,152 6.75 78,681 5,141 6.53 85,344 5,293 6.20
-------- ------- -------- ------ -------- ------
Total interest-earning
assets.................. 269,372 20,691 7.68 241,425 18,333 7.59 220,922 16,253 7.36
------- ------ ------
Non-interest earning assets....... 15,856 19,149 15,578
-------- -------- --------
Total assets.............. $285,228 $260,574 $236,500
======== ======== ========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Passbook accounts............... $ 78,132 $ 2,323 2.97% $ 77,868 $ 2,365 3.04% $ 87,962 $ 2,677 3.04%
Escrow deposits................. 1,020 50 4.90 2,345 68 2.90 2,122 61 2.87
NOW accounts.................... 14,117 227 1.61 12,638 215 1.70 9,856 186 1.89
Money market accounts........... 27,016 883 3.27 28,674 936 3.26 34,225 1,042 3.04
Certificate accounts............ 79,155 3,985 5.03 89,831 5,109 5.69 59,005 2,808 4.76
-------- ------- -------- ------ -------- ------
Total deposits............ 199,440 7,468 3.74 211,356 8,693 4.11 193,170 6,774 3.51
Borrowed funds.................. 31,249 1,908 6.11 489 24 4.91 906 54 5.96
-------- ------- -------- ------ -------- ------
Total interest-bearing
liabilities............. 230,689 9,376 4.06 211,845 8,717 4.11 194,076 6,828 3.52
------- ------ ------
Non-interest bearing
liabilities..................... 28,528 25,432 20,716
-------- -------- --------
Total liabilities......... 259,217 237,277 214,792
Retained earnings................. 26,011 23,297 21,708
-------- -------- --------
Total liabilities and
retained earnings....... $285,228 $260,574 $236,500
======== ======== ========
Net interest income/interest rate
spread(2)....................... $ 11,315 3.62% $ 9,616 3.48% $ 9,425 3.84%
======= ====== ====== ====== ====== ======
Net interest-earning assets/net
interest margin(3).............. $ 38,683 4.20% $ 29,580 3.98% $ 26,846 4.27%
======== ====== ======== ====== ======== ======
Ratio of interest-earning assets
to interest-bearing
liabilities..................... 116.77% 113.96% 113.83%
====== ====== ======
</TABLE>
- ---------------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin on interest-earning assets represents net interest
income as a percentage of average interest-earning assets.
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate), (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume) and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
41
<PAGE> 42
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31, 1997 COMPARED
TO
THREE MONTHS ENDED YEAR ENDED MAY 31, 1997 YEAR ENDED MAY 31, 1996
AUGUST 31, 1996 COMPARED TO COMPARED TO
------------------------ YEAR ENDED MAY 31, 1996 YEAR ENDED MAY 31, 1995
--------------------------- -------------------------
INCREASE
(DECREASE) INCREASE INCREASE
IN NET (DECREASE) (DECREASE)
INTEREST IN NET INTEREST IN NET INTEREST
INCOME DUE TO INCOME DUE TO INCOME DUE TO
-------------- ---------------- ---------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------ ---- ------ ------- ----- ------- ------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, net.................... $ 524 $ 96 $ 620 $(1,020) $ 74 $ (946) $1,602 $(426) $1,176
Consumer and other loans, net.......... 102 (12) 90 288 19 307 292 24 316
Mortgage-backed securities............. (187) 44 (143) 5,000 (720) 4,280 200 479 679
Federal funds sold..................... 29 2 31 (307) -- (307) 54 3 57
Interest earning accounts at banks..... 2 1 3 16 (3) 13 5 (1) 4
Investment securities.................. (313) 33 (280) (1,122) 133 (989) (413) 261 (152)
------ ---- ------ ------- ----- ------- ------ ----- ------
Total.......................... 157 164 321 2,855 (497) 2,358 1,740 340 2,080
------ ---- ------ ------- ----- ------- ------ ----- ------
INTEREST-BEARING LIABILITIES:
Passbook accounts...................... (13) (3) (16) 8 (50) (42) (307) (5) (312)
Escrow accounts........................ 4 19 23 (39) 20 (19) 6 1 7
NOW accounts........................... -- (1) (1) 25 (13) 12 53 (24) 29
Money market accounts.................. (18) 2 (16) (54) 1 (53) (169) 63 (106)
Certificates of deposits............... (115) 15 (100) (607) (517) (1,124) 1,467 834 2,301
Borrowed funds......................... 180 8 188 1,510 374 1,884 (25) (5) (30)
------ ---- ------ ------- ----- ------- ------ ----- ------
Total.......................... 38 40 78 843 (185) 658 1,025 864 1,889
------ ---- ------ ------- ----- ------- ------ ----- ------
Net change in net interest income...... $ 119 $124 $ 243 $2,012 $(312) $ 1,700 $ 715 $(524) $ 191
======= ==== ====== ======= ===== ======= ======= ===== ======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT AUGUST 31, 1997 AND MAY 31, 1997
Total assets increased $4.4 million to $290.9 million at August 31, 1997,
from $286.5 million at May 31, 1997, reflecting the Bank's ongoing strategy of
managed growth. The asset growth was funded primarily through borrowings, which
increased $3.0 million to $31.3 million at August 31, 1997. As of August 31,
1997, the Bank had $23.0 million in securities sold under repurchase agreements
and $8.3 million in term loans from the FHLBNY. Deposit liabilities increased by
$552,000 to $221.8 million at August 31, 1997 from $221.2 million at May 31,
1997. FHLBNY advances and other borrowings are used by the Bank as an
alternative to traditional retail deposits and take the form of overnight
advances, repriced daily, and one-month lines of credit, repriced daily.
Asset growth was concentrated in mortgage loans, net, which increased $14.7
million to $117.0 million at August 31, 1997 from $102.3 million at May 31,
1997. In addition, other loans, net, increased $1.5 million to $37.6 million at
August 31, 1997 from $36.1 million at May 31, 1997. Total securities were $116.3
million at August 31, 1997 compared to $126.4 million at May 31, 1997,
reflecting the reinvestment of funds from the securities portfolio into higher
yielding loans. Securities held-to-maturity at August 31, 1997 totaled $6.1
million, remaining essentially unchanged from May 31, 1997. The Bank had $110.2
million of securities available-for-sale at August 31, 1997, representing a
decline of $10.1 million from $120.3 million of securities available-for-sale at
May 31, 1997. The Bank's available-for-sale portfolio was adjusted for a net
unrealized gain of $1.2 million for the quarter ended August 31, 1997. See
"-- Impact of Accounting Standards."
Other assets decreased by $415,000 to $2.4 million at August 31, 1997,
primarily due to the reduction in the deferred tax asset account.
Other real estate owned ("OREO"), which represents properties acquired
through legal foreclosure, decreased $57,000 to $167,000 at August 31, 1997,
from $224,000 at May 31, 1997. The Bank's OREO has historically involved only a
few properties, representing a relatively insignificant percentage of total
assets.
42
<PAGE> 43
In the fiscal year ending May 31, 1996, the Bank prospectively adopted SFAS
No. 122 "Accounting for Mortgage Servicing Rights." SFAS No. 122 required that a
mortgage banking enterprise recognize rights to service mortgage loans for
others, however those servicing rights are acquired. As a result of adopting
SFAS No. 122, the Bank capitalized $861,000 of originated mortgage servicing
rights at August 31, 1997, representing an increase of $26,000 from May 31,
1997. The cost of mortgage servicing rights (purchased or originated rights with
related loans sold) is amortized in proportion to, and over the period of,
estimated net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. For purposes of measuring
impairment, the servicing rights are stratified based on the predominant risk
characteristics of the underlying loans, i.e., loan type and origination or
securitization date.
Total net worth increased $1.1 million to $29.2 million at August 31, 1997
from $28.1 million at May 31, 1997, resulting from net income of $538,000 and
$559,000 of unrealized appreciation on securities available for sale, net of
taxes.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED AUGUST 31, 1997 AND
1996
General. Net income for the three months ended August 31, 1997 was
$538,000, compared to $848,000 for the three months ended August 31, 1996. The
decrease of $310,000 resulted principally from an increase in the Bank's
provision for loan losses to $304,000 from $20,000 and a reduction of $542,000
in gains realized from securities sales, which were partially offset by an
increase in net interest income before provision for loan losses of $243,000,
increased service and fee income of $46,000, elimination of $176,000 of other
loss and $160,000 reduced provision for income taxes for the three months ended
August 31, 1997, as compared to the three months ended August 31, 1996.
Net Interest Income. Net interest income, or the difference between
interest income and interest expense, for the quarter ended August 31, 1997
increased $243,000, or 9.2%, from the quarter ended August 31, 1996, to $2.9
million. This increase reflects the overall rise in the Bank's average interest
rate spread of 23 basis points to 3.63%, and a rise in the Bank's net interest
margin of 30 basis points to 4.27% for the quarter ended August 31, 1997, as
well as a greater increase in interest-earning assets than interest-bearing
liabilities. While the Bank realized a higher overall yield of 38 basis points
on its average interest-earning assets for the quarter ended August 31, 1997,
the cost of the Bank's interest-bearing liabilities increased 15 basis points,
as compared to the quarter ended August 31, 1996.
Interest Income. Interest income totaled $5.2 million for the quarter ended
August 31, 1997, compared to $4.9 million for the quarter ended August 31, 1996.
This increase of $320,000, or 6.5%, reflects an increase of $620,000 in interest
on mortgage loans. The increase in interest on mortgage loans was offset, in
part, by a decline of $423,000 in interest and dividends on securities.
Interest Expense. Interest expense on deposits and borrowings increased
$78,000 to $2.4 million for the quarter ended August 31, 1997, compared to $2.3
million for the quarter ended August 31, 1996. This increase reflects an
increase in the average rate paid on such liabilities of 15 basis points over
the same period. The increase in the average cost of interest-bearing
liabilities is primarily attributable to an increase in the average balance of
borrowed funds to $29.2 million for the quarter ended August 31, 1997 as
compared to $17.6 million for the quarter ended August 31, 1996. Average
certificate of deposit accounts declined by approximately $9.0 million in the
quarter ended August 31, 1997, partially due to the Bank's strategy of not
offering premium rates in a highly competitive rate environment. While there was
a 10.7% decline in average certificate of deposit accounts, there was a 9.3%
decline in the interest expense associated with such accounts, from $1.1 million
in the quarter ended August 31, 1996 to $981,000 in the quarter ended August 31,
1997. However, due to increased borrowings and higher attendant costs, the
Bank's total cost of funds increased from 4.00% for the quarter ended August 31,
1996 to 4.15% for the quarter ended August 31, 1997.
Provision for Loan Losses. The Bank's provision for loan losses totaled
$304,000 for the three months ended August 31, 1997, as compared to $20,000 for
the three months ended August 31, 1996, an increase of $284,000. The Bank
increased its monthly provision to $20,000 per month beginning in April of 1997,
and in June and August 1997, the Bank took additional charges of $44,000 and
$200,000, respectively. Such additional provisions were taken because loan
charge-offs for the three month period ended August 31, 1997
43
<PAGE> 44
were $171,000 as compared to $0 for the same period in 1996, and the level of
non-performing loans in the Bank's portfolio increased from $1.4 million at May
31, 1997 to $1.5 million at August 31, 1997. Management has continued to provide
loan loss reserves due to the increase in the Bank's loan portfolio, including
continued originations of commercial business and commercial real estate loans
and management's evaluation of the adequacy of such reserves in the context of
the Bank's historical loan loss experience. The Bank's allowance for loan losses
at August 31, 1997 was $1.37 million, as compared to $1.23 million at May 31,
1997. At August 31, 1997, the Bank's allowance for loan losses as a percentage
of total loans was 0.88%, compared to 1.10% at August 31, 1996, and the Bank's
allowance for loan losses as a percentage of non-performing loans was 93.44% at
August 31, 1997, compared to 86.09% at August 31, 1996.
Other Income. Other income, net, for the quarter ended August 31, 1997
decreased $307,000 to $677,000, as compared to $984,000 as of August 31, 1996.
This decrease was primarily attributable to reduced gains on sales of
mortgage-backed securities. Total service and fee income increased by 10.3% to
$492,000 as of the quarter ended August 31, 1997, due to service charges and
other fees reflecting increased loan and loan servicing activity.
Other Expenses. Other expenses increased $121,000 to $2.3 million for the
quarter ended August 31, 1997 from $2.2 million for the quarter ended August 31,
1996. The increase in other expenses primarily reflects increases in salaries
and employee benefits and occupancy costs. The Bank's ratio of other expenses to
average assets increased to 3.28% (annualized) in the quarter ended August 31,
1997, as compared to 3.16% (annualized) at August 31, 1996.
Income Tax Expense. Income tax expense decreased $160,000 for the quarter
ended August 31, 1997 due to reduced taxable income.
COMPARISON OF FINANCIAL CONDITION AT MAY 31, 1997 AND MAY 31, 1996
Total assets increased $12.4 million to $286.5 million at May 31, 1997,
from $274.1 million at May 31, 1996, reflecting the Bank's ongoing strategy of
managed growth. The asset growth was funded primarily through borrowings, which
increased $20.0 million to $28.3 million at May 31, 1997. As of May 31, 1997,
the Bank had $23.1 million in securities sold under repurchase agreements and
$5.2 million in term loans from the FHLBNY. Deposit liabilities declined by
$11.8 million to $221.2 million at May 31, 1997 from $233.0 million at May 31,
1996, primarily due to continued decreases in rollovers of a February 1995
offering of a nine-month certificate of deposit account, initially priced
slightly above local market rates to provide the Bank with additional liquidity
at the time of the failure of Nationar, one of the Bank's correspondent banks
("Premium Certificates"). See "-- Liquidity and Capital Resources." FHLBNY
advances and other borrowings are used by the Bank as an alternative to
traditional retail deposits and take the form of overnight advances, repriced
daily, and one-month lines of credit, repriced monthly.
Asset growth was concentrated in mortgage loans, net, which increased $25.5
million to $97.4 million at May 31, 1997 from $71.9 million at May 31, 1996.
This loan growth (net of amortizations and satisfactions) contrasts to a
decrease of $17.6 million for the year ended May 31, 1996. In addition, other
loans, net increased $4.1 million to $36.1 million at May 31, 1997 from $32.0
million at May 31, 1996. Total securities were $126.4 million at May 31, 1997
compared to $144.3 million at May 31, 1996, reflecting the reinvestment of funds
from the securities portfolio into higher yielding loans. Securities
held-to-maturity at May 31, 1997 totaled $6.1 million, representing a $1.0
million decline from $7.1 million of securities held-to-maturity at May 31,
1996. The Bank had $120.3 million of securities available-for-sale at May 31,
1997, representing a decline of $14.9 million from $135.2 million of securities
available-for-sale at May 31, 1996. The Bank's available-for-sale portfolio was
adjusted for an unrealized gain of $1.1 million ($500,000 after-tax) for the
fiscal year ended May 31, 1997. See "-- Impact of Accounting Standards."
Other assets decreased by $4.3 million to $2.8 million at May 31, 1997,
primarily due to the satisfactory liquidation of the Bank's $3.9 million claim
against the Superintendent, as receiver for Nationar, regarding the
Superintendent's seizure of Nationar in early February 1995.
OREO decreased $106,000 to $224,000 at May 31, 1997, from $330,000 at May
31, 1996.
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As a result of adopting SFAS No. 122, the Bank capitalized $444,000 of
originated mortgage servicing rights during fiscal year 1996.
Total net worth increased $3.3 million to $28.1 million at May 31, 1997
from $24.8 million at May 31, 1996, resulting from net income of $2.8 million
and approximately $500,000 of unrealized appreciation on securities available
for sale, net of taxes.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MAY 31, 1997 AND 1996
General. Net income for the fiscal year ended May 31, 1997 was $2.9
million, compared to $1.5 million for the fiscal year ended May 31, 1996. The
increase of $1.3 million resulted primarily from an 18% increase in the Bank's
net interest margin and greater profits on sales of mortgage-backed securities.
Also contributing to the increase in net income was a decline in the Bank's
provision for income taxes due to a change in tax regulations from an effective
tax rate of 41% in fiscal 1996 to 38% in fiscal 1997.
Net Interest Income. Net interest income, or the difference between
interest income and interest expense, for the fiscal year ended May 31, 1997
increased $1.7 million, or 17.7%, to $11.3 million. This increase reflects the
overall rise in the Bank's average interest rate spread of 14 basis points to
3.62%, and a rise in the Bank's net interest margin of 22 basis points to 4.20%
for the 1997 fiscal year, as well as a greater increase in interest-earning
assets than interest-bearing liabilities.
Market interest rates were slightly higher in the 1997 fiscal year across
the entire U.S. Treasury yield curve than in the 1996 fiscal year. While the
Bank realized a higher overall yield of nine basis points on its average
interest-earning assets, yields on the Bank's interest-bearing liabilities
declined by five basis points.
Interest Income. Interest income totaled $20.7 million for the fiscal year
ended May 31, 1997, compared to $18.3 million for the fiscal year ended May 31,
1996. This increase of $2.4 million, or 13.1%, reflects an increase of more than
$3.3 million in interest and dividends on securities due to the securitization
of approximately $50 million of the Bank's mortgages in April and May of 1996,
offset, in part, by a decrease in the average yield of the Bank's
mortgage-backed securities of 89 basis points. The increase in interest was
offset, in part, by a decline of over $600,000 in interest income on mortgage
and other loans due to the decreased volume of such loans resulting mainly from
such securitization, mitigated somewhat by an increase of 13 basis points in the
average yield of such loans. Interest income on federal funds sold decreased
substantially in the fiscal year ended May 31, 1997, as compared to the prior
years, due to management's focus on extending maturities slightly, in its
efforts to increase yield in a flattening yield curve environment.
Interest Expense. Interest expense on deposits and borrowings increased
$660,000 to $9.4 million for the fiscal year ended May 31, 1997, compared to
$8.7 million for the fiscal year ended May 31, 1996. This increase reflects an
increase in average interest-bearing liabilities of $18.8 million during the
1997 fiscal year and a decrease in the average rate paid on such liabilities of
five basis points over the same period. The increase in average interest-bearing
liabilities is primarily attributable to an increase in the average balance of
borrowed funds to $31.2 million for the 1997 fiscal year from $489,000 for the
1996 fiscal year. Average certificate of deposit accounts declined by
approximately $10.7 million in fiscal year 1997, partially due to the maturity
of the Premium Certificates, attributable to the Bank's decision not to offer
premium rates in a highly competitive rate environment. While there was a 12%
decline in average certificate of deposit accounts, there was a 22% decline in
the interest expense associated with such accounts, from $5.1 million in the
fiscal year ended 1996 to $4.0 million in the 1997 fiscal year. As a result, the
Bank's total cost of funds decreased by five basis points, from 4.11% to 4.06%,
despite the increases in market interest rates in fiscal year 1997.
Provision for Loan Losses. The provision for loan losses decreased to
$130,000 for the fiscal year ended May 31, 1997 from $140,000 for the fiscal
year ended May 31, 1996, although there was an increase in non-performing loans
(consisting of loans over 90 days past due and non-accrual loans) to $1.4
million at May 31, 1997, from $863,000 at May 31, 1996. At May 31, 1997, the
percentage of the allowance for loan losses to total loans was 0.88%, as
compared to 1.18% as of May 31, 1996. However, management's analysis indicated
that the majority of the non-performing loans were one- to four-family
residential mortgage loans. Moreover,
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management believes that most of these loans are adequately secured by
properties affording low loan-to-value ratios, based upon current evaluations.
In addition, management performs a quarterly in-depth analysis of its allowance
for loan losses. Based upon loan types and volumes, loan review and
classification systems, and the factors described above and various other
factors, management has made regular determinations that its allowance and
monthly provisions are adequate. See "Business of the Bank -- Asset Quality."
Other Income. Other income, net, for the fiscal year ended May 31, 1997
increased $696,000 to $2.8 million from $2.1 million for the fiscal year ended
May 31, 1996. This increase was primarily attributable to increased gains on
sales of mortgage-backed securities, emanating from the Bank's mortgage banking
operation. Total service and fee income increased by 8% to $1.9 million in the
fiscal year ended May 31, 1997, due to service charges and other fees reflecting
increased loan and loan servicing activity, as well as increases in certain
transaction fees during the 1997 fiscal year.
Other Expenses. Other expenses increased $273,000 to $9.3 million for the
fiscal year ended May 31, 1997 from $9.1 million for the fiscal year ended May
31, 1996. The increase in other expenses primarily reflects increases in
salaries and employee benefits and occupancy costs. Salaries and employee
benefits expense increased $206,000 to $5.3 million for the 1997 fiscal year
compared to $5.0 million for the 1996 fiscal year. This increase was primarily
attributable to a general increase in salaries. Data processing costs and
advertising costs increased by $156,000, or 32%, and $23,000, or 18%,
respectively. The Bank's ratio of other expenses to average assets decreased to
3.28% in the 1997 fiscal year from 3.48% in the 1996 fiscal year.
Income Tax Expense. Income tax expense increased $732,000, or 71%, for the
fiscal year ended May 31, 1997 from slightly more than $1.0 million for the
fiscal year ended May 31, 1996. This increase was due to the increase of $2.1
million, or 86%, in pre-tax income, offset by savings due to a change in the
Bank's effective tax rate from 41% in fiscal 1996 to 38% in fiscal 1997.
COMPARISON OF FINANCIAL CONDITION AT MAY 31, 1996 AND MAY 31, 1995
Total assets increased $15.3 million to $274.0 million at May 31, 1996 from
$258.7 million at May 31, 1995, reflecting the Bank's ongoing strategy of
controlled growth. The asset growth was funded primarily through borrowings, in
the form of securities sold under repurchase agreements and FHLBNY advances,
which increased by $4.7 million and $3.6 million, respectively. Deposit
liabilities increased $4.0 million to $233.0 million at May 31, 1996 from $229.0
million at May 31, 1995.
Asset growth was concentrated in securities, which increased $34.0 million
to $144.3 million. Loans, net, showed a decrease of $13.8 million to $108.9
million at May 31, 1996. These changes resulted in part from the Bank's
securitization in April and May of 1996 of approximately $50 million in
self-originated residential mortgages, which had the effect of reducing loans,
net, and increasing securities. The securitization represented the pooling of
the Bank's own residential mortgages into FNMA mortgage-backed securities, held
in the Bank's investment securities portfolio, to reduce the Bank's credit risk
inherent with respect to those residential mortgage loans.
Real estate owned, net decreased $163,000 to $330,000 at May 31, 1996 from
$493,000 at May 31, 1995.
The Bank's total net worth increased $1.7 million to $24.8 million at May
31, 1996 from $23.1 million at May 31, 1995, primarily due to net income for the
fiscal year.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MAY 31, 1996 AND 1995
General. Net income for the fiscal year ended May 31, 1996 was $1.5 million
compared to $504,000 for the fiscal year ended May 31, 1995. The $1.0 million
increase was due mainly to the effect of the cumulative effect of a change in
accounting principle in fiscal 1995, which reduced net income by $645,000. Total
other income increased $1.2 million, reflecting gains on sales of securities of
$356,000 in fiscal year 1996 as compared to losses on sales of securities of
$429,000 for fiscal year 1995. Additionally, the Bank reduced its provision for
loan losses by $121,000 for the 1996 fiscal year to $140,000 from $261,000 in
fiscal year 1995. Other expenses increased $974,000, primarily reflecting an
increase of $1.1 million in salaries and employee benefits.
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Net Interest Income. Net interest income for the fiscal year ended May 31,
1996 increased $191,000 to $9.6 million. This increase occurred despite a
decline in the Bank's interest rate spread and margin from 3.84% and 4.27%,
respectively, for the fiscal year ended May 31, 1995 to 3.48% and 3.98%,
respectively, for the fiscal year ended May 31, 1996, due, in part, to
management's offering of the slightly higher costing Premium Certificates in
February 1995, which increased the Bank's average cost and balances on
certificates of deposit by 93 basis points and $30.8 million, respectively.
Interest Income. Interest income increased $2.1 million to $18.3 million
for the fiscal year ended May 31, 1996, compared to $16.2 million for the fiscal
year ended May 31, 1995. This increase reflects an increase of 23 basis points
in the average yield on the Bank's interest-earning assets to 7.59% for the 1996
fiscal year from 7.36% for the 1995 fiscal year, as well as an increase of $20.5
million in the average balance of interest-earning assets, due primarily to an
increase of $19.5 million in the average balance of mortgage loans, net. While
the level of overall interest rates was declining in fiscal year 1996, the
effects of lower rates were partially offset by the Bank's sales of lower
yielding securities and purchases of higher yielding securities in the Bank's
investment securities portfolio, which served to increase average investment
securities yields by 33 basis points from the 1995 fiscal year. In addition, the
average yields on mortgage-backed securities increased to 8.24%, and the average
balance of such securities increased $3.4 million in the 1996 fiscal year as
compared to the year earlier period.
Interest Expense. Interest expense on deposits and borrowings increased
$1.9 million to $8.7 million for the fiscal year ended May 31, 1996, compared to
$6.8 million for the fiscal year ended May 31, 1995. This increase primarily
reflects an increase in the average rate paid on interest-bearing liabilities of
59 basis points during the 1996 fiscal year compared to the 1995 fiscal year,
due to the higher costing Premium Certificates offered by the Bank in February
1995. As a result of this offering, the average cost of all certificates of
deposit in fiscal year 1996 increased to 5.69% from 4.76% in fiscal year 1995.
While the average cost of passbook accounts remained unchanged between fiscal
years 1995 and 1996, average balances in this type of account declined by $10.1
million, essentially shifting to the higher cost Premium Certificates, the
average balances of which increased by more than $30.8 million in fiscal year
1996, as compared to fiscal year 1995.
Provision for Loan Losses. The provision for loan losses decreased to
$140,000 for the fiscal year ended May 31, 1996 from $261,000 for the fiscal
year ended May 31, 1995. This was attributable to a decrease in non-performing
loans to $863,000 at May 31, 1996 from $2.2 million at May 31, 1995. At May 31,
1996, the percentage of the allowance for loan losses to non-performing loans
was 151.22%, representing an increase from 54.77% at May 31, 1995. As a
percentage of total loans, the allowance for loan losses was 1.18% at May 31,
1996 compared to 0.97% at May 31, 1995. The percentage of non-performing loans
to total loans decreased to 0.78% at May 31, 1996 from 1.78% at May 31, 1995.
See "Business of the Bank -- Asset Quality."
Other Income. Other income for the fiscal year ended May 31, 1996 increased
$1.2 million to $2.1 million, an increase from $876,000 for the fiscal year
ended May 31, 1995. This increase was primarily attributable to a net gain on
sale of securities of $356,000 for the 1996 fiscal year compared to a net loss
on sale of securities of $429,000 for the 1995 fiscal year. Other income was
also affected by an increase of $399,000, or 29%, in service and fee income
associated with a newly introduced value added checking account and increased
loan servicing fees from the mortgage banking operation. Gains on loan sales
also increased by about $105,000 in fiscal year 1996, as compared to the year
earlier period.
Other Expenses. Other expenses increased $974,000 to $9.1 million for the
fiscal year ended May 31, 1996 from $8.1 million for the fiscal year ended May
31, 1995. The Bank's other expenses increased because of the start-up costs
associated with adding additional capacity to the Bank's mortgage origination
operations, including back office costs, which, in part, caused a $1.1 million
increase in salaries and employee benefits. Other operating expenses, such as
data processing fees, increased by $70,000 in fiscal year ended 1996 to
$484,000, and professional fees increased $103,000 to $325,000 for the 1996
fiscal year, compared to $414,000 and $222,000, respectively, for the 1995
fiscal year. These items were partially offset by a decline of $413,000 in FDIC
assessments to $53,000 in fiscal 1996.
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Income Tax Expense. Income tax expense increased $230,000 to $1.0 million
for the fiscal year ended May 31, 1996 from $794,000 for the fiscal year ended
May 31, 1995. This increase was primarily due to the $546,000 increase in
pre-tax income.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Bank changed its method of accounting for the cost of post-retirement
health care and life insurance benefits in the fiscal year ended May 31, 1995
upon adoption of SFAS No. 106, "Employers' Accounting for Post-retirement
Benefits Other Than Pensions." The cumulative effect of this accounting change
was fully recognized as a liability in fiscal year ended 1995 equal to the full
amount of the Bank's accumulated benefit obligation. Under SFAS No. 106, the
cost of post-retirement health care and life insurance benefits is recognized on
an accrual basis as such benefits are earned by active employees. Prior to
fiscal 1995, the Bank recognized the cost of these benefits on a pay-as-you-go
(cash) basis.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are retail deposits, wholesale funding
from FHLBNY or other bank borrowings, securities sold under repurchase
agreements, principal and interest payments on loans and securities and, to a
lesser extent, proceeds from the sale of securities. While maturities and
scheduled amortization of loans and securities provide an indication of the
timing of the receipt of funds, changes in interest rates, economic conditions,
and competition strongly influence mortgage prepayment rates and deposit flows,
reducing the predictability of the timing of sources of funds.
The Bank has no required regulatory liquidity ratios or balances to
maintain, however, it does adhere to a Liquidity and Funds Management policy
approved by its Board of Trustees, which sets minimum internal guidelines for
liquidity purposes. The Bank remits monthly reports to the NYSBD, including a
liquidity calculation.
The primary investing activities of the Bank are the origination of one- to
four-family residential mortgage loans, commercial real estate and commercial
business loans, a variety of consumer loans, and the purchase of mortgage-backed
securities and debt and equity securities. During the three months ended August
31, 1997 and the fiscal years ended May 31, 1997, 1996 and 1995, the Bank's
disbursements for loan originations totaled $33.2 million, $100.6 million,
$108.4 million and $41.9 million, respectively. Purchases of mortgage-backed
securities totaled $10.1 million, $23.2 million and $12.1 million for the three
months ended August 31, 1997 and the fiscal years ended May 31, 1997 and 1996,
respectively; no such purchases were made in the fiscal year ended May 31, 1995.
Other debt and equity securities purchased during the three months ended August
31, 1997 and the fiscal years ended May 31, 1997, 1996, and 1995 were $8.5
million, $26.0 million, $23.4 million and $33.4 million, respectively. The
Bank's investing activities are funded primarily by borrowings, net deposit
inflows, sales of loans and securities and principal repayments on loans and
securities. The Bank increased borrowings at May 31, 1997 and 1996 by $20
million and $8.3 million, respectively, to fund its investments. For the fiscal
year ended May 31, 1995, the Bank experienced a net increase in deposits of
$21.5 million. This increase reflects the general increase in market interest
rates which made deposit products a more attractive investment alternative for
the Bank's customers, as well the offering of the above market Premium
Certificates to increase the Bank's liquidity at the time of the failure of
Nationar and the lack of a viable liquidity source at that time, since the Bank
had not yet become a member of the FHLBNY. During the month of February 1995,
the Bank accepted nearly $44 million in a nine-month certificate of deposit at a
cost of 6.82%, due to extensive advertising.
As a member of the FHLBNY, the Bank has the availability of two lines of
credit for borrowings in the amounts of $14.4 million each, one on an overnight
and the other on a 30-day term basis. In accordance with the FHLBNY's credit
policy, the Bank now has total facilities available of $86.5 million, inclusive
of the aforementioned amounts, before the delivery of qualifying collateral is
required. Additionally, the Bank has other sources of liquidity if the need
arises. One source is to borrow up to $5 million from a commercial bank on an
unsecured basis and the other is the ability to sell securities under repurchase
agreements in an amount up to $10 million from a securities investment company.
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On February 6, 1995, the Superintendent took possession of Nationar, a
check-clearing and trust company, freezing all of Nationar's assets. On that
date, the Bank had demand accounts with Nationar of approximately $3.9 million.
Management charged-off approximately $97,000 and of its investment in Nationar
securities in the fiscal year ended in 1995. On June 27, 1996, the Bank received
payment of $3.5 million and subsequently received additional payments totaling
$291,000 later in 1996 and early 1997. The Bank does not expect to receive any
further payments in any material amounts with respect to Nationar.
At August 31, 1997, the Bank had outstanding loan origination commitments
of $28.6 million and unadvanced/unused commercial lines of credit of $5.0
million. The Bank anticipates that it will have sufficient funds available to
meet its current origination and other lending commitments. Certificates of
deposit scheduled to mature in one year or less from August 31, 1997 totaled
$70.3 million and based upon recent experience and pricing strategy, management
believes that a significant portion of such deposits will remain with the Bank.
At August 31, 1997, the Bank exceeded all of its regulatory capital
requirements with a Tier 1 capital level of $28.0 million, or 9.81% of average
assets, which is well above the required level of $11.4 million, or 4% of
average assets. The Bank's ratio of Tier 1 capital to risk weighted assets of
19.19% at August 31, 1997 is also well above the required level of 4%. The
Bank's ratio of total capital to risk weighted assets is 20.12%, which is well
above the required level of 8%. See "Regulatory Capital Compliance" and
"Regulation and Supervision -- Federal Banking Regulation -- Capital
Requirements."
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Bank's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Long Lived Assets. In 1995, the FASB issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets to be Disposed of" ("SFAS No. 121"). This Statement established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. This Statement became effective for fiscal years beginning after
December 15, 1995, although earlier implementation was permitted. Adoption of
this Statement did not have a material effect on the Bank's financial
statements.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("SFAS No. 125"), which supersedes SFAS No. 122. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with a pledge of collateral. The Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and should be applied
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prospectively. Earlier or retroactive application of this Statement is not
permitted. Adoption of this Statement did not have a material effect on the
Bank's financial statements.
Accounting for Earnings per Share. In March 1997, the FASB issued SFAS No.
128, "Earnings per Share." SFAS No. 128 specifies the computations,
presentation, and disclosure requirements for Earnings per Share by all entities
with publicly held common stock or potential stock. SFAS 128 supersedes
Accounting Principles Board Opinion No. 15 "Earnings per Share." SFAS No. 128 is
effective for financial statements for interim and annual periods ending after
December 15, 1997.
Accounting for the Disclosure of Information about Capital Structure. In
March 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." SFAS No. 129 is effective for financial statements for
periods ending after December 15, 1997. SFAS No. 129 does not change disclosure
requirements for the Bank.
Accounting for Reporting Comprehensive Income and Disclosures about
Segments of an Enterprise and Related Information. In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." These Statements are
effective for fiscal years beginning after December 15, 1997 and restatement of
financial statements or information for earlier periods provided for comparative
purposes is required. The provisions of these Statements will not affect the
Bank's results of operations or financial condition.
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BUSINESS OF THE COMPANY
GENERAL
The Company was organized as a Delaware corporation on September 10, 1997
at the direction of the Board of Trustees of the Bank for the purpose of
becoming the holding company to own all of the outstanding capital stock of the
Bank upon consummation of the Conversion. The Company has received the approval
of the FRB to acquire the Bank and become a bank holding company, and, as such,
the Company will be subject to the regulations of the FRB. See "Regulation and
Supervision -- Holding Company Regulation."
BUSINESS
The Company is not an operating company. Following the Conversion, in
addition to directing, planning and coordinating the business activities of the
Bank, the Company will initially invest primarily in federal funds, government
and federal agency mortgage-backed securities, other debt securities, equity
securities, deposits of or loans to the Bank or a combination thereof. In
addition, the Company intends to fund the loan to the ESOP to enable the ESOP to
purchase up to 8% of the Common Stock to be issued in the Conversion, including
shares issued to the Foundation. In the future, the Company may acquire or
organize other operating subsidiaries, including other financial institutions,
or it may merge with or acquire other financial institutions and financial
services related companies, although there are no current arrangements,
understandings or agreements, written or oral, regarding any such expansion. See
"Use of Proceeds." Initially, the Company will neither own nor lease any
property but will instead use the premises, equipment and furniture of the Bank.
At the present time, the Company does not intend to employ any persons other
than certain officers of the Bank who will not be separately compensated by the
Company. The Company may utilize the support staff of the Bank from time to
time, if needed. Additional employees will be hired as appropriate to the extent
the Company expands its business in the future.
BUSINESS OF THE BANK
GENERAL
The Bank is a community-oriented savings bank, which was chartered by the
State of New York in 1875. The Bank's principal business has been and continues
to be attracting retail deposits from the general public in the area surrounding
its four branch offices and investing those deposits, together with funds
generated from operations and borrowings, primarily in one- to four-family
residential mortgage loans, mortgage-backed securities, commercial business and
commercial real estate loans and various debt and equity securities. The Bank
also originates home equity loans (Good Neighbor Home Loans) and lines of
credit, consumer loans, student loans and its own credit card loans.
Additionally, the Bank sells Savings Bank Life Insurance.
The Bank's revenues are derived principally from the interest on its
mortgage loans, securities, commercial and consumer loans and, to a lesser
degree, from its mortgage banking activities, loan and securities sales,
servicing fee income and income derived from non-traditional investment products
offered through its wholly owned subsidiary, WSB Financial. The Bank's primary
sources of funds are deposits, borrowings, principal and interest payments on
loans and securities and proceeds from the sale of loans and securities.
MARKET AREA
The Bank has been, and intends to continue to be, a community-oriented
savings institution offering a variety of financial services to meet the needs
of the communities it serves. The Bank maintains its headquarters in the village
of Warwick in Orange County, New York and operates three additional branch
offices located in the village of Monroe, the town of Woodbury and the city of
Middletown, Orange County, New York. The Bank's primary deposit gathering areas
are currently concentrated in proximity to its full service banking offices. The
Bank's current primary lending market includes not only Orange County, New York,
but also Rockland, Dutchess, and to a lesser extent, Westchester, Putnam and
Sullivan Counties, New York, by virtue of the various loan originators servicing
these areas. In addition, with the proposed
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establishment of the Bank's mortgage banking subsidiary, WSB Mortgage, and its
attendant loan production office in West Milford, Passaic County, New Jersey,
the Bank anticipates that it will penetrate into the northeastern New Jersey
market.
Although the Bank's market area is predominantly rural with many small
towns, many of the area's residents work in northern New Jersey, western
Connecticut and New York City. Some of the county's major employers are ShopRite
Supermarkets, the Arden Hill Hospital and related life care complex, Horton
Memorial Hospital, Yellow Freight, the Wakefern Corporation and the United
States Military Academy at West Point.
The Bank's market area grew significantly in population during the 1980's
as rising housing prices closer to New York City, coupled with the abundance of
vacant land in Orange County, led to a boom in housing construction. As the
economy throughout the region declined in the late 1980's and early 1990's,
communities surrounding the Bank's offices, particularly in the Warwick area,
continued to experience growth, but more slowly. The conversion of Stewart
International Airport, approximately 20 miles to the northeast of the Bank's
main office in Warwick, into a full-service commercial airport in 1990 gave the
Bank's market area an additional boost. However, the health of the economy in
the New York City metropolitan area has, and will continue to have, a direct
impact on the economic well-being of residents and businesses in the Bank's
market area.
COMPETITION
The Bank faces substantial competition for both deposits and loans. The
deregulation of the financial services industry has led to increased competition
among savings banks and other financial institutions for a significant portion
of the deposit and lending activity that had traditionally been the arena of
savings banks and savings and loan associations. The Bank competes for savings
deposits with other savings banks, savings and loan associations, commercial
banks, credit unions, money market mutual funds, insurance companies, brokerage
firms and other financial institutions, many of which are substantially larger
in size than the Bank.
The Bank's competition for loans comes principally from savings banks,
savings and loan associations, commercial banks, mortgage bankers, finance
companies and other institutional lenders, many of whom maintain offices in the
Bank's market area. The Bank's principal methods of competition include
providing personal customer service, a variety of financial services and
competitive loan and deposit pricing, as well as implementing advertising and
marketing programs.
While the Bank is subject to competition from other financial institutions,
some of which have much greater financial and marketing resources, the Bank
believes it benefits by its community bank orientation as well as its relatively
high core deposit base. See "Risk Factors -- Competition." Management believes
that the variety, depth and stability of the communities in which the Bank is
located support the service and lending activities conducted by the Bank. The
relative economic stability of the Bank's lending area is reflected in the small
number of mortgage delinquencies experienced by the Bank.
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one- to four-family residences. At
August 31, 1997, the Bank had total gross loans outstanding of $156.2 million
(before deducting the allowance for loan losses and net deferred loan fees), of
which $96.7 million, or 61.93%, were one- to four-family, owner-occupied
residential first mortgage loans. The remainder consisted of $25.1 million of
commercial business and commercial real estate loans, or 16.04% of total loans,
$14.4 million in home equity loans, or 9.20% of total loans, $3.9 million in
residential construction mortgage loans (net of undisbursed portion), or 2.52%
of total loans, and $13.3 million in consumer loans, or 8.54% of total loans.
Additionally, the Bank originates VA guaranteed loans and FHA insured loans. For
the three months ended August 31, 1997 and the fiscal year ended May 31, 1997,
the Bank originated $1.2 million and $5.9 million, respectively, of such loans.
The Bank is active in the origination of SONYMA loans, which are subject to
certain customer eligibility requirements and are subsequently sold to the State
of New York. For the three months ended August 31, 1997 and the fiscal year
ended May 31, 1997, the Bank originated
52
<PAGE> 53
$2.6 million and $8.2 million, respectively, in SONYMA loans. The Bank continues
to service these loans for such agency and, instead of a servicing fee, the Bank
obtains a state (franchise) income tax credit.
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are in turn
affected by, among other things, economic conditions, monetary policies of the
federal government, including the FRB, and legislative tax policies.
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated:
<TABLE>
<CAPTION>
AT MAY 31,
------------------------------------------------------------
AT AUGUST 31,
1997 1997 1996 1995
------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Conventional one- to four-family
loans............................... $ 96,748 61.93% $ 81,803 58.56% $ 61,936 56.18% $ 78,562 63.34%
Mortgage loans held for sale......... 2,028 1.30 4,832 3.46 5,054 4.59 2,968 2.39
VA or FHA loans...................... 729 0.47 749 0.54 376 0.34 182 0.15
Home equity loans.................... 14,369 9.20 13,449 9.63 11,040 10.02 9,714 7.83
Residential construction loans....... 6,127 3.92 4,110 2.94 961 0.87 2,901 2.34
Undisbursed portion of construction
loans............................... (2,193) (1.40) (2,118) (1.52) (1,838) (1.67) (1,307) (1.05)
-------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans.............. 117,808 75.42 102,825 73.61 77,529 70.33 93,020 75.00
-------- ------ -------- ------ -------- ------ -------- ------
CONSUMER AND OTHER LOANS:
Commercial........................... 25,065 16.04 23,418 16.76 19,385 17.59 17,772 14.33
Automobile........................... 7,632 4.89 7,738 5.54 7,496 6.80 7,483 6.03
Student.............................. 1,345 0.86 1,332 0.95 1,533 1.39 1,732 1.40
Credit card.......................... 1,346 0.86 1,334 0.95 1,195 1.08 1,165 0.94
Other consumer loans................. 3,020 1.93 3,054 2.19 3,102 2.81 2,855 2.30
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer and other loans.... 38,408 24.58 36,876 26.39 32,711 29.67 31,007 25.00
-------- ------ -------- ------ -------- ------ -------- ------
Total loans................... 156,216 100.00% 139,701 100.00% 110,240 100.00% 124,027 100.00%
====== ====== ====== ======
Discounts, premiums and deferred loan
fees, net........................... (184) (146) (38) (158)
Allowance for loan losses............ (1,367) (1,232) (1,305) (1,206)
-------- -------- -------- --------
Total loans, net.............. $154,665 $138,323 $108,897 $122,663
======== ======== ======== ========
<CAPTION>
1994 1993
------------------ ------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ------- -------- -------
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
Conventional one- to four-family
loans............................... $ 71,762 65.42% $ 78,489 71.40%
Mortgage loans held for sale......... -- 0.00 -- 0.00
VA or FHA loans...................... 211 0.19 695 0.63
Home equity loans.................... 10,051 9.16 7,660 6.96
Residential construction loans....... 1,613 1.47 1,801 1.64
Undisbursed portion of construction
loans............................... (1,169) (1.06) (685) (0.62)
-------- ------ -------- ------
Total mortgage loans.............. 82,468 75.18 87,960 80.01
-------- ------ -------- ------
CONSUMER AND OTHER LOANS:
Commercial........................... 15,472 14.10 10,992 10.00%
Automobile........................... 6,621 6.04 6,388 5.81
Student.............................. 1,438 1.31 1,457 1.33
Credit card.......................... 1,285 1.17 1,035 0.94
Other consumer loans................. 2,410 2.20 2,100 1.91
-------- ------ -------- ------
Total consumer and other loans.... 27,226 24.82 21,972 19.99
-------- ------ -------- ------
Total loans................... 109,694 100.00% 109,932 100.00%
====== ======
Discounts, premiums and deferred loan
fees, net........................... (187) (276)
Allowance for loan losses............ (909) (808)
-------- --------
Total loans, net.............. $108,598 $108,848
======== ========
</TABLE>
53
<PAGE> 54
Loan Maturity. The following table shows the contractual maturity of the
Bank's loans at August 31, 1997. The table reflects the entire unpaid principal
balance in the maturity period that includes the final loan payment date and,
accordingly, does not give effect to periodic principal repayments or possible
prepayments. Principal repayments and prepayments totaled $2.0 million for the
three months ended August 31, 1997 and $18.4 million, $23.4 million and $10.4
million for the fiscal years ended May 31, 1997, 1996 and 1995, respectively.
Additionally, since the Bank regularly sells and securitizes residential
mortgage loans as part of its mortgage banking operation, these activities have
resulted in $6.2 million and $21.6 million in loan sales and securitizations,
respectively, for the fiscal year ended in 1997 and $3.7 million and $74.7
million, respectively, for the fiscal year ended in 1996. Loan sales and
securitizations totaled $6.6 million for the three months ended August 31, 1997.
There were no loan sales or securitizations for the fiscal year ended May 31,
1995, the year in which the Bank commenced mortgage banking operations.
<TABLE>
<CAPTION>
AT AUGUST 31, 1997
--------------------------------------------------------------------------------
MORTGAGE LOANS
---------------------- HOME
ADJUSTABLE EQUITY
FIXED RATE RATE COMMERCIAL LINES OF CONSUMER OTHER TOTAL LOANS
MORTGAGES MORTGAGES LOANS CREDIT LOANS LOANS RECEIVABLE
---------- --------- ---------- -------- -------- ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year......................... $ 2,965 $ 307 $ 4,774 $ -- $ 544 $ -- $ 8,590
------- ------- ------- ------ ------- ------ --------
After one year:
One to three years.................... 322 -- 5,024 -- 5,711 1,382 12,439
Three to five years................... 797 32 9,395 -- 6,114 -- 16,338
Five to 10 years...................... 2,465 876 4,419 349 6,374 -- 14,483
Over 10 years......................... 49,742 45,933 1,453 4,618 1,189 1,431 104,366
------- ------- ------- ------ ------- ------ --------
Total due after one year............ 53,326 46,841 20,291 4,967 19,388 2,813 147,626
------- ------- ------- ------ ------- ------ --------
Total amounts due............... $ 56,291 $47,148 $ 25,065 $4,967 $19,932 $2,813 $ 156,216
======= ======= ======= ====== ======= ======
Discounts, premiums and deferred loan
fees, net............................. (184)
Allowance for loan losses............... (1,367)
--------
Loans receivable, net................... $ 154,665
========
</TABLE>
The following table sets forth the dollar amounts in each loan category at
August 31, 1997 that are contractually due after August 31, 1998, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER AUGUST 31, 1998
-----------------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans...................................... $53,326 $ 46,841 $100,167
Commercial loans.................................... 12,658 7,633 20,291
Home equity lines of credit......................... -- 4,967 4,967
Consumer loans...................................... 19,106 282 19,388
Other loans......................................... 2,813 -- 2,813
------- ------- -------
Total loans....................................... $87,903 $ 59,723 $147,626
======= ======= =======
</TABLE>
Origination, Purchase, Sale and Servicing of Loans. The Bank's residential
lending activities are conducted through its team of commissioned loan
originators, who regularly call upon realtors, builders and others in the real
estate business in an effort to solicit mortgage loan applications. The loans
are all self-originated, as the Bank does not use mortgage brokers, with
applications taken at the Bank's various branch offices and loan production
offices. Thereafter, the applications are processed, underwritten and prepared
for closing at the Monroe branch office, and the data is electronically linked
together during the various stages of the application process to facilitate
tracking and monitoring at the Bank's Warwick office.
54
<PAGE> 55
The Bank originates both adjustable-rate and fixed-rate mortgage loans. Its
ability to originate loans is dependent upon the relative customer demand for
fixed-rate or adjustable-rate mortgage loans, which is affected by the current
and expected future levels of interest rates. During the fiscal year ended May
31, 1997, the Bank experienced a decrease in fixed-rate mortgage loan
originations, as compared to a slight increase in originations of
adjustable-rate mortgage loans. This was attributable to the increased
refinancing activity that occurred during the 1996 fiscal year following the
generally higher interest rate environment during the 1995 fiscal year. During
the three months ended August 31, 1997, the Bank's fixed-rate mortgage loan
originations amounted to $18.6 million, as compared to $12.0 million during the
three months ended August 31, 1996, and the Bank's adjustable-rate mortgage loan
originations during the three months ended August 31, 1997 totaled $4.1 million,
as compared to $8.9 million during the three months ended August 31, 1996. The
Bank currently holds for its portfolio all adjustable-rate, bi-weekly mortgage
loans and any non-conforming loans it originates. Periodically, the Bank
considers the possible sale of its jumbo loans; however, management believes it
has the ability to build relationships with jumbo mortgage customers to create
cross-selling opportunities. Similarly, management seeks to originate bi-weekly
mortgage loans, due to the requirement that deposit accounts be established to
enable automatic deduction from customer accounts for loan payments.
The residential loan products currently offered by the Bank include VA
guaranteed and FHA insured mortgage loans, a variety of loans that conform to
the underwriting standards specified by FNMA ("conforming loans"), SONYMA loans
and, to a much lesser extent, non-conforming loans, i.e., jumbo loans. The Bank
sells most of the conforming mortgage loans it originates to FNMA in exchange
for FNMA mortgage-backed securities through purchase and guarantee programs
sponsored by FNMA. The Bank then sells such FNMA mortgage-backed securities to
private investors and retains the servicing rights. In those cases in which
non-conforming loans are sold to private institutional investors, servicing
rights are typically released. SONYMA loans are all originated for sale back to
SONYMA, with servicing retained (in exchange for tax credits).
During the time between the processing of a residential mortgage loan
application and the final disposition or sale of such loan after it is closed,
the Bank is exposed to movements in the market price due to changes in market
interest rates. The Bank attempts to manage this risk by utilizing forward sales
of mortgage-backed securities and put options on mortgage-backed securities to
securities brokers and dealers, as well as cash sales to FNMA. Depending upon
market conditions, interest rate expectations, economic data and other factors,
the Bank's Hedging Committee, comprised of various members of senior operating
management, which meets daily, attempts to cover certain percentages of its
pipeline and warehouse. However, there can be no assurance that the Bank will be
successful in its efforts to mitigate the risk of interest rate fluctuation
between the time of application origination and the ultimate disposition or sale
of such loans. At August 31, 1997, the Bank had $1.0 million of forward sale
commitments representing approximately 20% of closed loans and 30-year fixed
rate conforming loan commitments, at specified interest rates at such date. See
"Risk Factors -- Potential Impact of Changes in Interest Rates."
Currently, the Bank services all of its one- to four-family loans,
commercial business and commercial real estate, home equity and consumer loans.
All FHA and VA loans are sold on a servicing-released basis, as are other
selected loans sold to private institutional investors. Additionally, the Bank
services a large volume of conforming fixed-rate and adjustable-rate loans that
it has previously securitized and kept in its securities portfolio or sold to
private investors. At August 31, 1997, the Bank was servicing $126.2 million of
residential mortgage loans for others. For the three months ended August 31,
1997 and 1996 and the fiscal years ended May 31, 1997, 1996 and 1995, loan
servicing fees totaled $94,000 and $66,000, $335,000, $158,000 and $97,000,
respectively. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, making inspections as required of
mortgaged premises, contacting delinquent mortgagors, supervising foreclosures
and property dispositions in the event of unremedied defaults, ensuring the
status of insurance and tax payments on behalf of the borrowers and generally
administering the loans.
55
<PAGE> 56
The following table sets forth the Bank's loan originations, repayments and
other portfolio activity for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED AUGUST
31, FOR THE YEAR ENDED MAY 31,
------------------- --------------------------------
1997 1996 1997 1996 1995
-------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS (GROSS):
At beginning of period................. $ 89,376 $66,489 $ 66,489 $ 83,306 $ 72,417
Mortgage loans originated:
Fixed rate mortgages................... 18,581 12,021 50,250 69,928 13,910
Adjustable rate mortgages.............. 4,077 8,893 18,776 15,133 7,392
-------- ------- -------- -------- --------
Total mortgage loans
originated................... 22,658 20,914 69,026 85,061 21,302
Principal repayments................... (1,967) (3,512) (18,375) (23,403) (10,413)
Sale of loans.......................... (2,632) (2,256) (6,172) (3,731) --
Securitizations........................ (4,006) (6,927) (21,592) (74,744) --
-------- ------- -------- -------- --------
At end of period....................... $103,429 $74,708 $ 89,376 $ 66,489 $ 83,306
======== ======= ======== ======== ========
OTHER LOANS (GROSS):
At beginning of period................. $ 50,325 $43,751 $ 43,751 $ 40,721 $ 37,277
Commercial loans originated............ 7,062 3,049 14,966 12,326 11,585
Consumer loans originated.............. 3,434 4,163 16,774 10,936 8,918
Commercial repayments.................. (5,415) (3,439) (10,933) (10,573) (9,368)
Consumer repayments.................... (2,619) (1,678) (9,038) (9,659) (7,691)
Other loans sold....................... -- -- (5,195) -- --
-------- ------- -------- -------- --------
At end of period....................... $ 52,787 $45,846 $ 50,325 $ 43,751 $ 40,721
======== ======= ======== ======== ========
</TABLE>
One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate and
adjustable-rate mortgage and construction loans, with maturities up to 30 years,
which are secured by one- to four-family, owner-occupied residences. The
majority of such loans are secured by property located in Orange County, New
York, however, there are a number of loans secured by property located in
Rockland and Dutchess Counties, New York, and to a lesser extent in Westchester,
Putnam and Sullivan Counties, New York. See "-- Origination, Purchase, Sale and
Servicing of Loans."
At August 31, 1997, the Bank's total gross loans outstanding were $156.2
million, of which $103.4 million, or 66.20%, were one- to four-family
residential mortgage loans. Of the one- to four-family residential mortgage
loans outstanding at that date, 54.5%, or $56.3 million, were fixed-rate loans
and 45.5%, or $47.1 million, were adjustable-rate loans. The interest rates for
the majority of the Bank's adjustable-rate mortgage loans are indexed to the
yield on one-year U.S. Treasury securities. The Bank currently offers
adjustable-rate mortgage loan programs with interest rates that adjust either
every one or three years. An adjustable-rate mortgage loan may carry an initial
interest rate that is less than the fully-indexed rate for the loan. All
adjustable-rate mortgage loans offered have lifetime interest rate caps or
ceilings. Generally, adjustable-rate mortgage loans pose credit risks somewhat
greater than the credit risk inherent in fixed-rate loans primarily because, as
interest rates rise, the underlying payments of the borrowers rise, increasing
the potential for default. The Bank currently has no mortgage loans that are
subject to negative amortization.
Commercial Lending. As part of the Bank's commercial lending program, the
Bank originates various types of secured and unsecured commercial business loans
and lines of credit and commercial real estate and
56
<PAGE> 57
construction loans. The Bank's commercial loan portfolio consisted of the
following types of commercial loans at the dates indicated.
<TABLE>
<CAPTION>
AT MAY 31,
-----------------------------------------------------------------------------
AT AUGUST 31,
1997 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL LOANS BY TYPE:
Non-farm and
non-residential.............. $11,555 7.40% $10,372 7.42% $8,288 7.52% $6,749 5.44% $5,046 4.60%
One-to four-family............ 1,145 0.73 1,157 0.83 1,161 1.05 1,387 1.12 1,593 1.45
Multi-family.................. 3,712 2.38 3,022 2.16 1,565 1.42 501 0.41 390 0.36
Farm.......................... 416 0.27 318 0.23 156 0.14 471 0.38 491 0.45
Acquisition, development &
construction................. 3,059 1.96 2,781 1.99 2,414 2.19 2,819 2.27 2,393 2.18
Term loans.................... 345 0.22 258 0.18 108 0.10 188 0.15 494 0.45
Installment loans............. 2,304 1.47 1,796 1.29 1,617 1.47 1,542 1.24 1,920 1.75
Demand loans.................. 333 0.21 498 0.36 444 0.40 456 0.37 627 0.57
Time loans.................... 95 0.06 300 0.21 174 0.16 150 0.12 306 0.28
S.B.A. loans.................. 599 0.38 636 0.46 546 0.50 657 0.53 223 0.20
Lines-of-credit............... 1,434 0.92 2,166 1.55 2,861 2.60 2,763 2.23 1,922 1.75
Loans and draws disbursed..... 37 0.02 88 0.06 -- -- -- -- -- --
Non-accrual................... 31 0.02 26 0.02 51 0.04 89 0.07 67 0.06
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total...................... $25,065 16.04% $23,418 16.76% $19,385 17.59% $17,772 14.33% $15,472 14.10%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
<CAPTION>
1993
------------------
PERCENT
OF
TOTAL
AMOUNT LOANS
-------- -------
<S> <C<C> <C>
COMMERCIAL LOANS BY TYPE:
Non-farm and
non-residential.............. $ 2,495 2.27%
One-to four-family............ 1,297 1.18
Multi-family.................. 148 0.14
Farm.......................... 258 0.23
Acquisition, development &
construction................. 625 0.57
Term loans.................... 563 0.51
Installment loans............. 1,477 1.34
Demand loans.................. 218 0.20
Time loans.................... 109 0.10
S.B.A. loans.................. 391 0.36
Lines-of-credit............... 3,235 2.94
Loans and draws disbursed..... -- --
Non-accrual................... 176 0.16
Total...................... $10,992 10.00%
</TABLE>
Commercial business loans generally carry greater credit risks than
residential mortgage loans because their repayment is more dependent on (i) the
underlying financial condition of the borrower and/or the value of any property
or the cash flow from any property securing the loan or the business being
financed and (ii) general as well as local economic conditions. See "Risk
Factors -- Residential and Non-Residential Lending Risks." Mortgage loans
secured by commercial real estate properties, including construction and
development lending, are generally larger and involve a higher degree of risk
than one- to four-family residential mortgage loans. This risk is attributable
to the uncertain realization of projected income-producing cash flows, which are
affected by vacancy rates, the ability to maintain rent levels against
competitively-priced properties and the ability to collect rent from tenants on
a timely basis. Also, in the case of construction and development lending, risk
is largely dependent upon the accuracy of the initial estimate of the property's
value at completion of construction or development compared to the estimated
cost (including interest payments) of construction and other assumptions. In
addition, commercial construction loans are subject to many of the same risks as
residential construction loans. See "-- Residential Construction Lending."
Commercial Business Lending. The Bank also offers various types of
short-term and medium-term commercial business loans on a secured and unsecured
basis to borrowers located in the Bank's market area. Borrowers in the
commercial market are generally local companies engaged in retailing and
construction that require traditional working capital financing with cyclical
repayments coming primarily from asset conversion. These loans include time and
demand loans, term loans and lines of credit. The Bank is also an approved Small
Business Administration ("SBA") lender. At August 31, 1997, the Bank's
commercial business loan portfolio amounted to $5.6 million, or 3.6% of total
gross loans outstanding. The largest commercial business loan outstanding at
August 31, 1997 was a $499,000 loan to a borrower whose business in Monroe, New
York, specializes in industrial flooring. In addition, the Bank has committed a
line of credit of $2.5 million to the Warwick Valley Telephone Company. At
August 31, 1997, there was no amount of this line outstanding. See "Management
of the Bank -- Transactions with Related Persons."
The Bank's lines of credit are typically established for one year and are
subject to renewal upon satisfactory review of the borrower's financial
statements and credit history. Secured short-term commercial business loans are
usually collateralized by real estate and are generally guaranteed by a
principal of the borrower. Interest on these loans is usually payable monthly at
fixed rates or rates that fluctuate based on a
57
<PAGE> 58
spread above the prime rate. The Bank offers term loans with terms generally not
exceeding five years. Typically, term loans have floating interest rates based
on a spread above the prime rate. The Bank also offers business loans on a
revolving basis, whereby the borrower pays interest only. Interest on such loans
fluctuates based on the prime rate. Normally these loans require periodic
interest payments during the loan term, with full repayment of principal and
interest at maturity. The Bank offers business and merchant credit cards to its
corporate customers, however, these services are provided through third party
vendors. The Bank bears the credit risk in the case of business credit cards,
but credit risk is borne by the third party on merchant credit cards, with the
Bank receiving a fee in the latter case. In approving commercial business loans
the Bank will consider the borrower's sources of cash flow to repay the loan, a
secondary source of repayment and the borrowers' credit standing.
Commercial Real Estate and Construction Lending. The Bank originates
commercial real estate mortgage loans that are generally secured by a
combination of residential property for development and retail facilities and
properties used for business purposes, such as small office buildings and
apartment buildings located in the Bank's market area. Loans are also made to
develop land and for land acquisition. The Bank's loan policy and underwriting
procedures provide that commercial real estate loans may be made in amounts up
to the lesser of (i) 80% of the lesser of the appraised value or purchase price
of the property, in the case of improved, existing commercial, investment type,
(ii) 75% of the lesser of the appraised value or purchase price of the property,
in the case of commercial, multi-family and non-residential construction types,
(iii) 70% of the lesser of the appraised value or purchase price of the
property, in the case of commercial land development, generally for subdivision
or industrial park land development types and (iv) 60% of the lesser of the
appraised value or purchase price of the property in the case of raw land. In
addition to restrictions on loan to value, the Bank's underwriting procedures
provide that commercial real estate loans may be made in amounts up to the
lesser of (i) $2.5 million or (ii) the Bank's current loans-to-one borrower
limit. Regarding (iii) and (iv), the Bank usually engages in this type of
lending only with experienced local developers operating in the Bank's primary
market. Such loans are typically offered for the construction of properties that
are pre-sold or for which permanent financing has been secured. At August 31,
1997, the Bank had $3.1 million in a variety of acquisition, development and
construction ("ADC") loans in its commercial lending area. The Bank's policy is
not to make construction loans for purposes of speculation, so that the borrower
must have secured permanent financing commitments from generally recognized
lenders for an amount greater than the amount of the loan. In most cases, the
Bank itself provides the permanent financing. While the number and volume of
this type of specialized lending is presently limited, it should be noted that
the Bank intends to continue to emphasize its commercial real estate, including
ADC loan activity, as it expands its mortgage origination operations into New
Jersey through WSB Mortgage. The largest commercial real estate loan in the
Bank's portfolio as of August 31, 1997 was a $2.3 million loan secured by a
rental apartment complex known as Highland Park Village in Middletown, New York.
The Bank's commercial mortgage loans are generally prime-based and may be
made with terms up to ten years, generally with a five-year or ten-year balloon
maturity and a 30-year amortization schedule. In reaching its decision as to
whether to make a commercial real estate loan, the Bank considers the
qualifications of the borrower as well as the underlying property. Some of the
factors considered are: the net operating income of the mortgaged premises
before debt service and depreciation, the debt service ratio (the ratio of the
property's net cash flow to debt service requirements), which must be a minimum
of 1.25, the ratio of loan amount to appraised value and the credit worthiness
of the borrower.
Residential Construction Lending. The Bank originates loans for the
acquisition and development of property to individuals in its market area. The
Bank's residential construction loans primarily have been made to finance the
construction of one- to four-family, owner-occupied residential properties. The
Bank offers construction to permanent financing loans with one or two closings,
and will not make residential construction loans unless the borrower has been
approved for permanent financing. The interest rate charged during the
construction phase of the loan is based on the 30-year fixed mortgage rate. The
Bank's policies provide that construction loans may be made in amounts up to 95%
of the appraised value of the completed property. At August 31, 1997, the Bank
had $3.9 million of residential construction loans (net of undisbursed portion),
which amounted to 2.52% of the Bank's gross loans outstanding.
58
<PAGE> 59
Construction lending generally involves additional risks to the lender as
compared with residential mortgage lending. These risks are attributable to the
fact that loan funds are advanced upon the security of the project under
construction, predicated on the present value of the property and the
anticipated future value of the property upon completion of construction or
development. Moreover, because of the uncertainties inherent in delays resulting
from labor problems, materials shortages, weather conditions and other
contingencies, it is relatively difficult to evaluate the total funds required
to complete a project and to establish the loan-to-value ratio. If the Bank's
initial estimate of the property's value at completion is inaccurate, the Bank
may be confronted with a project that, when completed, has an insufficient value
to assure full repayment. See "Risk Factors -- Residential and Non-Residential
Lending."
Home Equity Lending. The Bank offers fixed-rate, fixed-term home equity
loans, called the Good Neighbor Home Loan, and adjustable-rate home equity lines
of credit in its market area. Both the loan and line of credit are offered in
amounts up to 80% of the appraised value of the property (including the first
mortgage) with a maximum loan amount of up to $100,000. The fixed-rate,
fixed-term Good Neighbor Home Loan is offered with terms of up to 15 years. The
home equity line of credit is offered for terms up to 20 years, with the first
five years being offered on a revolving basis, requiring payments of interest
only; thereafter, the line converts to an amortizing loan. As of August 31,
1997, $14.4 million, or 9.20%, of the Bank's gross loans were home equity loans.
Consumer Lending. The Bank offers various types of secured and unsecured
consumer loans, including automobile loans, home improvement loans, personal
loans, student loans and credit cards (VISA). The Bank's consumer loans have
original maturities of not more than five years. Interest rates charged on such
loans are set at competitive rates, taking into consideration the type and term
of the loan. Consumer loan applications are reviewed and approved in conformance
with the Bank's board-approved lending policy. At August 31, 1997, the Bank's
consumer loan portfolio totaled $13.3 million, or 8.54% of the total gross loans
outstanding.
Loan Approval Procedures and Authority. The Board of Trustees establishes
the lending policies and loan approval limits of the Bank. Conforming
residential mortgage loans are approved in accordance with FNMA guidelines by
the Bank's underwriting group. Certain conforming loans and all non-conforming
loans are approved by either the Bank's Executive Vice President or President.
The Board of Trustees has established the following lending authority for
commercial lending, including commercial real estate lending: (i) various
officers have limited individual authority up to $25,000; (ii) certain officers
have joint authority up to $100,000; and (iii) the Bank's Commercial Loan
Committee has authority to approve loans of up to $500,000. All of the
aforementioned loans are subsequently ratified by the Executive Committee of the
Board of Trustees. Loans in excess of $500,000 but not more than $1 million must
be approved by the Executive Committee of the Board of Trustees, which meets on
a weekly basis. Loans in excess of $1 million must be approved by the full Board
of Trustees, which meets on a monthly basis. The approval of consumer loans
generally requires the dual authorization of two lending officers for loans over
certain amounts ($5,000-unsecured and $10,000-secured for consumer). Likewise,
home equity loans or lines of credit also require dual authorizations. The
foregoing lending limits are reviewed and reaffirmed annually by the Board of
Trustees.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and certain
other information is verified by an independent credit agency, and, if
necessary, additional financial information is required to be submitted by the
borrower. An appraisal of any real estate intended to secure the proposed loan
is required, which appraisal currently is performed by an independent appraiser
designated and approved by the Bank. The Board of Trustees annually approves the
independent appraisers used by the Bank and approves the Bank's appraisal
policy. It is the Bank's policy to obtain title and hazard insurance on all real
estate loans. In connection with a borrower's request for a renewal of a
multi-family or commercial mortgage loan with a balloon maturity, the Bank
evaluates both the borrower's ability to service the renewed loan applying an
interest rate that reflects prevailing market conditions, as well as the value
of the underlying collateral property. The reevaluation of the property
typically requires a new appraisal, depending upon the loan amount and other
factors. It is the Bank's policy to note all exceptions to policy in the
respective credit files and report such exceptions to the original
decision-making
59
<PAGE> 60
body (i.e., Commercial Loan Committee, Executive Committee or Board of Trustees)
prior to closing if a condition of the original approval is not met.
ASSET QUALITY
Non-Performing Loans. Management and the Board of Trustees perform a
monthly review of delinquent loans. The actions taken by the Bank with respect
to delinquencies vary depending on the nature of the loan and period of
delinquency. The Bank's policies on residential mortgage loans provide that
delinquent mortgage loans be reviewed and that a late charge notice be mailed no
later than the 15th day of delinquency, with the delinquency charge assessed on
the 16th day. The Bank's collection policies on residential mortgage loans
essentially mirror those shown in the FNMA servicing agreements. On other loans,
telephone contact and various delinquency notices at different intervals are the
methods used to collect past due loans.
It is the Bank's general policy to discontinue accruing interest on all
loans when management has determined that the borrower will be unable to meet
contractual obligations or when 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. If a
foreclosure action is commenced and the loan is not brought current, paid in
full or an acceptable workout arrangement is not agreed upon before the
foreclosure sale, the real property securing the loan is generally sold at
foreclosure. Property acquired by the Bank as a result of foreclosure on a
mortgage loan is classified as "real estate owned" and is recorded at the lower
of the unpaid balance or fair value less costs to sell at the date of
acquisition and thereafter. Upon foreclosure, it is the Bank's policy to
generally require an appraisal of the property and, thereafter, appraise the
property on an as-needed basis.
The following table sets forth information regarding non-accrual loans,
other past due loans and OREO. There were no troubled debt restructurings within
the meaning of SFAS No. 15 at any of the dates presented below.
<TABLE>
<CAPTION>
AT MAY 31,
AT AUGUST 31, ----------------------------------------------
1997 1997 1996 1995 1994 1993
------------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual mortgage loans delinquent
more than 90 days.................... $ 1,349 $1,111 $ 582 $1,093 $1,217 $ 165
Non-accrual other loans delinquent more
than 90 days......................... 47 83 82 131 69 176
------ ------ ------ ------ ------ ------
Total non-accrual loans................ 1,396 1,194 664 1,224 1,286 341
Total 90 days or more delinquent and
still accruing interest.............. 68 237 199 978 928 2,319
------ ------ ------ ------ ------ ------
Total non-performing loans............. 1,464 1,431 863 2,202 2,214 2,660
Total foreclosed real estate, net of
related allowance for losses......... 167 224 330 493 306 --
------ ------ ------ ------ ------ ------
Total non-performing assets............ $ 1,631 $1,655 $1,193 $2,695 $2,520 $2,660
====== ====== ====== ====== ====== ======
Non-performing loans to total loans.... 0.94% 1.02% 0.78% 1.78% 2.02% 2.42%
Total non-performing assets to total
assets............................... 0.56% 0.58% 0.44% 1.04% 1.08% 1.18%
</TABLE>
The amounts of additional interest that would have been recorded on
non-accrual loans, had they been current, totaled $32,000 and $14,000,
respectively, for the three months ended August 31, 1997 and 1996 and for the
fiscal years ended May 31, 1997, 1996 and 1995 totaled $79,400, $53,500 and
$112,200, respectively. Of these amounts $6,000, $1,000, $9,000, $62,000 and
$31,000 was included in interest income for the respective periods.
60
<PAGE> 61
Other Real Estate Owned. At August 31, 1997, the Bank's OREO, net, which
consisted of two single family residential properties, totaled $167,000 and was
held directly by the Bank.
Classified Assets. Federal regulations and the Bank's Internal Loan Review
and Grading System, which is a part of the Bank's loan policy, require that the
Bank utilize an internal asset classification system as a means of reporting
problem and potential problem assets. The Bank limits its loan review procedure
to the higher risk commercial and commercial real estate loans, commercial loans
greater than $25,000 and jumbo residential mortgage loans.
At each regularly scheduled Board of Trustees meeting, a watch list is
presented, showing all loans listed as "Special Mention," "Substandard,"
"Doubtful" and "Loss." An asset is considered Substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets included those characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Assets classified as Doubtful have all the
weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and viewed as non-bankable assets, worthy of charge-off. Assets
which do not currently expose the Bank to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses
which may or may not be out of the control of management, are deemed to be
"Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances, which is a regulatory term, represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to specific problem assets. When an insured institution classifies one
or more assets, or proportions thereof, as "Loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge-off such amount.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the FDIC and the
NYSBD, which can order the establishment of additional general or specific loss
allowances. The FDIC, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that (i) institutions have effective systems and controls
to identify, monitor and address asset quality problems; (ii) management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and (iii) management has established acceptable
allowance evaluation processes that meet the objectives set forth in the policy
statement. Management believes it has established an adequate allowance for
possible loan and lease losses and analyzes its process regularly, with
modifications made if needed, and reports those results four times per year at
the Bank's Board of Trustees meetings. However, there can be no assurance that
the regulators, in reviewing the Bank's loan portfolio, will not request the
Bank to materially increase its allowance for loan and lease losses at that
time. Although management believes that adequate specific and general loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of specific and general loan loss
allowances may become necessary.
At August 31, 1997, the Bank had $503,000 of assets classified as
Substandard and $616,000 of assets classified as Special Mention. There were no
assets classified as Doubtful or Loss as of August 31, 1997. The $503,000 of
loans classified as Substandard were also impaired under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition
Disclosures," which the Bank adopted in fiscal 1995. SFAS No. 114 defines an
impaired loan as a loan for which it is probable, based on current information,
that the lender will not collect all amounts due under the contractual terms of
the loan agreement.
61
<PAGE> 62
The following table sets forth delinquencies in the Bank's loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
AT AUGUST 31, 1997 AT MAY 31, 1997
------------------------------------------- -------------------------------------------
60-89 DAYS 90 DAYS MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- -------------------- -------------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family....... 7 $ 383 17 $ 1,349 7 $ 475 16 $ 1,214
Multi-family.............. -- -- -- -- -- -- -- --
Commercial loans.......... 4 576 4 78 5 724 5 121
Home equity lines of
credit.................. 1 8 1 16 -- -- 2 57
Other loans............... 5 9 4 21 8 16 17 39
-- -- -- --
------ ------ ------ ----
Total loans..... 17 $ 976 26 $ 1,464 20 $ 1,215 40 $ 1,431
== ====== == ====== == ====== == ====
</TABLE>
<TABLE>
<CAPTION>
AT MAY 31, 1996 AT MAY 31, 1995
------------------------------------------- -------------------------------------------
60-89 DAYS 90 DAYS MORE 60-89 DAYS 90 DAYS MORE
-------------------- -------------------- -------------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family....... 11 $ 792 11 $ 692 13 $ 495 25 $ 1,497
Multi-family.............. -- -- -- -- -- -- -- --
Commercial loans.......... 7 710 4 58 3 167 2 586
Home equity lines of
credit.................. 1 11 2 57 -- -- 3 43
Other loans............... 9 33 28 56 13 38 29 76
-- ---- -- ------ -- ----- -- -------
Total loans..... 28 $ 1,546 45 $ 863 29 $ 700 59 $ 2,202
== ==== == ====== == ===== == =======
</TABLE>
Allowance for Loan and Lease Losses. The allowance for loan and lease
losses is based upon management's periodic evaluation of the loan portfolio
under current economic conditions, considering factors such as asset
classifications, the Bank's past loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay and the estimated value of the underlying collateral. The allowance for
loan and lease losses is maintained at an amount management considers adequate
to cover loan and lease losses that are deemed probable and estimable. At August
31, 1997, the Bank's allowance for loan and lease losses was $1.4 million, or
0.88% of total loans, as compared to $1.2 million, or 0.88%, at May 31, 1997.
The Bank had non-performing loans of $1.5 million and $1.4 million at August 31,
1997 and May 31, 1997, respectively. The Bank will continue to monitor and
modify its allowance for loan losses as conditions dictate. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. These agencies may require the Bank to
establish additional valuation allowances, based on their judgments of the
information available at the time of the examination.
62
<PAGE> 63
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED AUGUST AT OR FOR THE
31, YEAR ENDED MAY 31,
--------------- ------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of
period...................... $1,232 $1,305 $1,305 $1,206 $ 909 $ 808 $ 381
CHARGE-OFFS:
Real estate mortgage loans..... (101) -- (119) (24) (61) (195) --
Commercial loans............... (1) -- -- -- -- (126) (113)
Consumer loans................. (69) -- (94) (125) (47) (58) (53)
------ ------ ------ ------ ------ ----- -----
Total charge-offs...... (171) -- (213) (149) (108) (379) (166)
RECOVERIES:
Real estate mortgage loans..... 2 -- -- 18 123 8 --
Commercial loans............... -- -- -- 74 13 33 38
Consumer loans................. -- 2 10 16 8 24 6
------ ------ ------ ------ ------ ----- -----
Total recoveries....... 2 2 10 108 144 65 44
Provision for loan losses...... 304 20 130 140 261 415 549
------ ------ ------ ------ ------ ----- -----
Balance at end of period....... $1,367 $1,327 $1,232 $1,305 $1,206 $ 909 $ 808
====== ====== ====== ====== ====== ===== =====
Ratio of net charge-offs during
the period to average loans
outstanding................. 0.11% N/A 0.16% 0.03% N/A 0.29% 0.11%
Ratio of allowance for loan
losses to total loans at end
of period................... 0.88% 1.10% 0.88% 1.18% 0.97% 0.83% 0.74%
Ratio of allowance for loan
losses to non-performing
loans....................... 93.44% 94.72% 86.09% 151.22% 54.77% 41.06% 30.38%
</TABLE>
The following table sets forth the Bank's allowance for loan losses
allocated by loan category, the percent of the allocated allowances to the total
allowance and the percent of loans in each category to total loans at the dates
indicated.
<TABLE>
<CAPTION>
AT MAY 31,
-------------------------------------------------------------------------------------------------
AT AUGUST 31, 1997 1997 1996 1995 1994 1993
------------------ ----------------- ----------------- ----------------- ----------------- -----------------
% OF % OF % OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ --------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance
for
mortgage
loan
loss...... $ 398 75.41% $ 224 73.60% $ 393 70.33% $ 403 75.00% $288 75.18% $504 80.01%
Allowance
for
consumer
loan
loss...... 358 8.55 436 9.64 310 12.09 311 10.67 258 10.72 18 9.99
Allowance
for
commercial
loan
loss...... 611 16.04 572 16.76 602 17.58 492 14.33 363 14.10 286 10.00
------ ------- ------ ------- ------ ------- ------ ------- ----- ------- ---- ------
Total
allowances
for loan
loss...... $1,367 100.00% $1,232 100.00% $1,305 100.00% $1,206 100.00% $909 100.00% $808 100.00%
====== ======= ====== ======= ====== ======= ====== ======= ===== ======= ==== ======
</TABLE>
ENVIRONMENTAL ISSUES
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for costs
of cleaning up hazardous materials found on
63
<PAGE> 64
properties securing their loans. In addition, the existence of hazardous
materials may make it unattractive for a lender to foreclose on such properties.
Although environmental risks are usually associated with loans secured by
commercial real estate, risks also may be substantial for residential real
estate loans if environmental contamination makes security property unsuitable
for use. As of August 31, 1997, the Bank was not aware of any environmental
issues that would subject the Bank to material liability. No assurance, however,
can be given that the values of properties securing loans in the Bank's
portfolio will not be adversely affected by unforseen environmental
contamination.
INVESTMENT ACTIVITIES
Investment Policies. The investment policy of the Bank, which is
established by the Board of Trustees, is contained in the Bank's Liquidity and
Funds Management Policy. It is based upon asset/liability management goals and
emphasizes high credit quality and diversified investments while seeking to
optimize net interest income within acceptable limits of safety and liquidity.
The Bank also considers the investment advice it receives from some of its
outside investment advisers. Recently the Bank has engaged in leveraging
activities to enhance returns on equity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Management
Strategy," "-- Management of Interest Rate Risk" and "-- Liquidity and Capital
Resources." The policy is designed to provide and maintain liquidity to meet
day-to-day, cyclical and long-term changes in the Bank's asset/liability
structure, and to provide needed flexibility to meet loan demand. Approximately
95% of the Bank's debt security portfolio at August 31, 1997 is classified as
available-for-sale.
The Bank's investment policy permits it to invest in U.S. government
obligations, securities of various government-sponsored agencies, including
mortgage-backed securities issued/guaranteed by FNMA, the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Government National Mortgage Association
("GNMA"), certain types of equity securities (such as institutional mutual
funds), certificates of deposit of insured banks, federal funds and investment
grade corporate debt securities and commercial paper.
The Bank's investment policy prohibits investment in certain types of
mortgage derivative securities that management considers to be high risk. The
Bank generally purchases only short- and medium-term classes of CMOs guaranteed
by FNMA or FHLMC. At August 31, 1997, the Bank held no securities issued by any
one entity with a total carrying value in excess of 10% of the Bank's equity at
that date, except for obligations of the U.S. government and
government-sponsored agencies and certain mortgage-backed securities, which are
fully collateralized by mortgages held by single purpose entities and guaranteed
by government-sponsored agencies.
Mortgage-Backed Securities. The Bank invests in mortgage-backed securities
and uses such investments to complement its mortgage lending activities. At
August 31, 1997, the amortized cost of mortgage-backed securities totaled $67.8
million, or 23.3% of total assets. The market value of all mortgage-backed
securities totaled $69.0 million at August 31, 1997. All of the Bank's
mortgage-backed securities are included in its available-for-sale portfolio.
Additionally, at August 31, 1997, the Bank's securities portfolio included CMOs,
with an amortized cost of $107,000 and a market value of $107,000. A CMO is a
special type of debt security in which the stream of principal and interest
payments on the underlying mortgages or mortgage-backed securities is used to
create classes with different maturities and, in some cases, amortization
schedules as well as a residual interest, with each class possessing different
risk characteristics. However, management regularly monitors the risks inherent
in its CMOs and has reduced its investment in these securities over time. As of
the date of this Prospectus, the Bank did not have any investments in CMOs.
At August 31, 1997, all securities in the Bank's mortgage-backed securities
portfolio were directly or indirectly insured or guaranteed by GNMA, FNMA or
FHLMC. The Bank's mortgage-backed securities portfolio had a weighted average
yield of 7.72% at August 31, 1997.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
borrowings of the Bank. In general, mortgage-backed securities issued or
guaranteed by GNMA, FNMA and FHLMC are
64
<PAGE> 65
weighted at no more than 20% for risk-based capital purposes, compared to the
50% risk weighting assigned to most non-securitized residential mortgage loans.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors, such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed and value of such
securities. In contrast to mortgage-backed pass-through securities in which cash
flow is received (and, hence, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying CMOs are segmented and paid in accordance with a
pre-determined priority to investors holding various tranches of such securities
or obligations. A particular tranche of a CMO may therefore carry prepayment
risk that differs from that of both the underlying collateral and other
tranches. It is the Bank's strategy to purchase tranches of CMOs that are
categorized as "planned amortization classes," "targeted amortization classes"
or "very accurately defined maturities" and are intended to produce stable cash
flows in different interest rate environments.
The following table sets forth activity in the Bank's securities portfolio
for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS FOR THE YEAR
ENDED AUGUST 31, ENDED MAY 31,
------------------- ------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BEGINNING BALANCE...................................... $126,393 $144,284 $144,284 $110,333 $105,433
-------- -------- -------- -------- --------
Debt securities purchased -- held-to-maturity.......... -- -- 200 526 347
Debt securities purchased -- available-for-sale........ 6,510 10,991 23,687 18,723 27,780
Equity securities purchased -- available-for-sale...... 2,007 712 2,277 4,723 5,632
Mortgage-backed securities
purchased -- held-to-maturity........................ -- -- -- -- --
Mortgage-backed securities
purchased -- available-for-sale...................... 10,100 17,297 23,221 12,101 --
Mortgage-backed securities formed by securitizing
originated mortgage loans............................ 3,956 6,856 21,358 72,325 --
LESS:
Sale of debt securities -- available-for-sale.......... 5,298 5,088 18,199 7,184 9,500
Sale of equity securities -- available-for-sale........ 3,476 1,018 5,317 1,876 4,355
Sale of mortgage-backed securities
available-for-sale................................... 15,218 18,661 25,375 -- --
Sale of mortgage-backed securities formed by
securitizing originated mortgage loans -- trading.... 3,956 2,983 17,486 22,668 --
Principal repayments on mortgage-backed securities and
debt securities...................................... 2,638 2,593 10,469 3,637 3,421
Maturities and called debt securities.................. 3,000 3,000 12,425 39,576 12,067
Accretion of discount/amortization of (premium)........ (8) (16) (83) 75 (643)
Change in gross unrealized gains (losses) on
available-for-sale securities........................ 956 (1,061) 720 419 1,127
-------- -------- -------- -------- --------
ENDING BALANCE......................................... $116,328 $145,720 $126,393 $144,284 $110,333
======== ======== ======== ======== ========
</TABLE>
65
<PAGE> 66
The following table sets forth the amortized cost and market value of the
Bank's securities by accounting classification category and by type of security,
at the dates indicated:
<TABLE>
<CAPTION>
AT MAY 31,
------------------------------------------------------------------
AT AUGUST 31, 1997 1997 1996 1995
-------------------- -------------------- -------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities held-to-maturity:
U.S. Government obligations.... $ 721 $ 728 $ 720 $ 725 $ 717 $ 658 $ 16,891 $ 17,474
Agency securities.............. 4,975 4,980 4,965 4,981 5,887 5,910 17,249 17,205
Municipal bonds................ 406 409 407 410 432 437 485 494
Other debt obligations......... -- -- -- -- 82 83 14,187 14,201
--------- -------- --------- -------- --------- -------- --------- --------
Total debt securities
held-to-maturity........... 6,102 6,117 6,092 6,116 7,118 7,088 48,812 49,374
--------- -------- --------- -------- --------- -------- --------- --------
Debt securities
available-for-sale:
U.S. Government obligations.... 6,580 6,681 9,079 9,165 21,684 21,716 11,201 11,228
Agency securities.............. 23,508 23,730 20,822 20,856 15,328 15,206 8,461 8,419
Other debt obligations......... 5,945 5,991 7,991 8,029 16,203 16,256 20,102 20,255
--------- -------- --------- -------- --------- -------- --------- --------
Total debt securities
available-for-sale......... 36,033 36,402 37,892 38,050 53,215 53,178 39,764 39,902
--------- -------- --------- -------- --------- -------- --------- --------
Equity securities
available-for-sale:
Preferred stock................ 102 104 204 204 305 277 305 281
Mutual funds................... 4,230 4,700 5,597 6,091 8,636 8,821 5,789 5,648
--------- -------- --------- -------- --------- -------- --------- --------
Total equity securities
available-for-sale......... 4,332 4,804 5,801 6,295 8,941 9,098 6,094 5,929
--------- -------- --------- -------- --------- -------- --------- --------
Total debt and equity
securities................. 46,467 47,323 49,785 50,461 69,274 69,364 94,670 95,205
--------- -------- --------- -------- --------- -------- --------- --------
Mortgage-backed securities
trading FNMA................... -- -- -- -- 1,992 1,934 -- --
--------- -------- --------- -------- --------- -------- --------- --------
Total mortgage-backed
securities trading......... -- -- -- -- 1,992 1,934 -- --
--------- -------- --------- -------- --------- -------- --------- --------
Mortgage-backed securities
held-to-maturity
GNMA........................... -- -- -- -- -- -- 20 20
FNMA........................... -- -- -- -- -- -- 137 131
--------- -------- --------- -------- --------- -------- --------- --------
Total mortgage-backed
securities
held-to-maturity........... -- -- -- -- -- -- 157 151
--------- -------- --------- -------- --------- -------- --------- --------
Mortgage-backed securities
available-for-sale
FHLMC.......................... 12,486 12,642 11,062 11,029 10,395 10,322 7,231 7,272
GNMA........................... 29,183 29,415 29,230 29,190 4,396 4,348 640 657
FNMA........................... 26,027 26,856 32,519 33,052 52,871 53,336 -- --
CMOs........................... 107 107 2,696 2,685 4,973 4,950 7,672 7,603
--------- -------- --------- -------- --------- -------- --------- --------
Total mortgage-backed
securities
available-for-sale......... 67,803 69,020 75,507 75,956 72,635 72,956 15,543 15,532
--------- -------- --------- -------- --------- -------- --------- --------
Total mortgage-backed
securities................. 67,803 69,020 75,507 75,956 74,627 74,890 15,700 15,683
Net unrealized (losses) gains on
trading securities............. -- -- (58) --
Net unrealized (losses) gains on
available-for-sale
securities..................... 2,058 1,101 441 (37)
--------- -------- --------- -------- --------- -------- --------- --------
Total securities......... $116,328 $116,343 $126,393 $126,417 $144,284 $144,254 $110,333 $110,888
========= ======== ========= ======== ========= ======== ========= ========
</TABLE>
66
<PAGE> 67
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT MAY 31,
AT AUGUST 31, ---------------------------------------------------------------------
1997 1997 1996 1995
--------------------- --------------------- --------------------- ---------------------
PERCENT OF CARRYING PERCENT OF CARRYING PERCENT OF CARRYING PERCENT OF
AMOUNT TOTAL VALUE TOTAL VALUE TOTAL VALUE TOTAL
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government obligations.... $ 7,402 6.36% $ 9,885 7.82% $ 22,433 15.55% $ 28,119 25.49%
Agency securities.............. 28,705 24.68 25,821 20.43 21,093 14.62 25,669 23.27
Municipal bonds................ 406 0.35 407 0.32 432 0.30 485 0.44
Other debt obligations......... 5,991 5.15 8,029 6.35 16,338 11.32 34,441 31.21
-------- ------ -------- ------ -------- ------ -------- ------
Total debt securities........ 42,504 36.54 44,142 34.92 60,296 41.79 88,714 80.41
-------- ------ -------- ------ -------- ------ -------- ------
Equity securities:
Preferred stock................ 104 0.09 204 0.16 277 0.19 281 0.25
Mutual funds................... 4,700 4.04 6,091 4.82 8,821 6.12 5,648 5.12
-------- ------ -------- ------ -------- ------ -------- ------
Total equity securities...... 4,804 4.13 6,295 4.98 9,098 6.31 5,929 5.37
-------- ------ -------- ------ -------- ------ -------- ------
Mortgage-backed securities
FHLMC.......................... 12,642 10.87 11,029 8.73 10,322 7.15 7,273 6.59
GNMA........................... 29,415 25.28 29,190 23.09 4,348 3.01 677 0.61
FNMA........................... 26,856 23.09 33,052 26.15 55,270 38.31 137 0.13
CMOs........................... 107 0.09 2,685 2.13 4,950 3.43 7,603 6.89
-------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities................. 69,020 59.33 75,956 60.10 74,890 51.90 15,690 14.22
-------- ------ -------- ------ -------- ------ -------- ------
Total securities......... $116,328 100.00% $126,393 100.00% $144,284 100.00% $110,333 100.00%
======== ====== ======== ====== ======== ====== ======== ======
Debt and equity securities
available-for-sale........... $ 41,206 35.42% $ 44,345 35.08% $ 62,276 43.16% $ 45,831 41.54%
Debt and equity securities
held-to-maturity............. 6,102 5.25 6,092 4.82 7,118 4.94 48,813 44.24
-------- ------ -------- ------ -------- ------ -------- ------
Total debt and equity
securities................. 47,308 40.67 50,437 39.90 69,394 48.10 94,644 85.78
-------- ------ -------- ------ -------- ------ -------- ------
Mortgage-backed securities
trading...................... -- -- -- -- 1,934 1.34 -- --
Mortgage-backed securities
available-for-sale........... 69,020 59.33 75,956 60.10 72,956 50.56 15,532 14.08
Mortgage-backed securities
held-to-maturity............. -- -- -- -- -- -- 157 0.14
-------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities................. 69,020 59.33 75,956 60.10 74,890 51.90 15,689 14.22
-------- ------ -------- ------ -------- ------ -------- ------
Total securities......... $116,328 100.00% $126,393 100.00% $144,284 100.00% $110,333 100.00%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
67
<PAGE> 68
The following table sets forth certain information regarding the carrying
value and weighted average yield of the Bank's securities at August 31, 1997, by
remaining period to contractual maturity. Actual maturities may differ from
contractual maturities because certain security issuers may have the right to
call or prepay their obligations.
<TABLE>
<CAPTION>
AT AUGUST 31, 1997
-----------------------------------------------------------------------------------------------------------
MORE THAN MORE THAN
ONE YEAR FIVE YEARS MORE THAN
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS TEN YEARS TOTAL
------------------- ------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Municipal bonds.... $ 300 4.93% $ 106 6.89% $ -- --% $ -- --% $ 406 5.44%
U.S. Government
obligations...... 65 4.89 656 5.98 -- -- -- -- 721 5.88
Agency
securities....... -- -- 4,975 6.16 -- -- -- -- 4,975 6.16
------- ------- ------- ------- --------
Total
held-to-
maturity..... 365 4.93 5,737 6.15 -- -- -- -- 6,102 6.08
------- ------- ------- ------- --------
Available-for-sale:
Mortgage backed
securities:
Variable Rate:
FHLMC.......... 1,048 7.18 97 7.30 -- -- -- -- 1,145 7.19
GNMA........... 1,115 6.82 -- -- -- -- -- -- 1,115 6.82
FNMA........... 2,544 7.13 -- -- -- -- -- -- 2,544 7.13
CMOs........... -- -- -- -- -- -- -- -- -- --
Fixed Rate:
FHLMC.......... 409 6.00 1,142 5.75 608 7.25 9,339 7.40 11,498 7.18
GNMA........... -- -- 6 8.00 58 7.86 28,235 7.84 28,299 7.84
FNMA........... -- -- -- -- 862 8.17 23,450 7.65 24,312 7.66
CMOs........... -- -- -- -- 107 4.90 -- -- 107 4.90
------- ------- ------- ------- --------
Total
mortgage-
backed
securities. 5,116 6.98 1,245 5.88 1,635 7.61 61,024 7.70 69,020 7.61
------- ------- ------- ------- --------
Debt securities:
U.S. Government
obligations...... 2,507 7.01 4,174 7.79 -- -- -- -- 6,681 7.49
Agency
securities....... -- -- 3,006 7.11 20,724 7.52 -- -- 23,730 7.46
Other debt
obligations...... 5,001 6.06 222 4.92 768 7.06 -- -- 5,991 6.15
------- ------- ------- ------- --------
Total debt
securities. 7,508 6.38 7,402 7.42 21,492 7.50 -- -- 36,402 7.25
------- ------- ------- ------- --------
Equity Securities:
Preferred stock.... -- -- -- -- -- -- 104 6.65 104 6.65
Mutual funds....... 2,000 6.11 -- -- -- -- 2,700 11.52 4,700 9.22
------- ------- ------- ------- --------
Total equity
securities. 2,000 6.11 -- -- -- -- 2,804 11.34 4,804 9.16
------- ------- ------- ------- --------
Total
available-
for-sale. . 14,624 6.55 8,647 7.20 23,127 7.51 63,828 7.86 110,226 7.56
------- ------- ------- ------- --------
Total
securi-
ties..... $14,989 6.51 $14,384 6.78 $23,127 7.51 $63,828 7.86 $116,328 7.48
======= ======= ======= ======= ========
</TABLE>
68
<PAGE> 69
SOURCES OF FUNDS
General. Deposits, borrowings, loan and security repayments and
prepayments, proceeds from sales of securities and cash flows generated from
operations are the primary sources of the Bank's funds for use in lending,
investing and for other general purposes. Management intends to increase its
deposit base through competitive pricing but continually evaluates wholesale
funding through FHLBNY advances and other sources, depending upon market
conditions. The Bank has only been a member of the FHLBNY since 1995, so this
additional source of funding was not historically available.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of regular (passbook)
savings accounts, statement savings accounts, checking accounts, NOW accounts,
basic banking accounts, money market accounts and certificates of deposit. In
recent years, the Bank has offered certificates of deposit with maturities of up
to 60 months. At August 31, 1997, the Bank's core deposits, which the Bank
considers to consist of checking accounts, NOW accounts, money market accounts,
regular savings accounts and statement savings accounts, constituted 65.8% of
total deposits. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. The Bank's deposits are obtained predominantly from the areas
in proximity to its office locations. The Bank relies primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Bank's ability to attract and
retain deposits. Certificate accounts in excess of $100,000 are not actively
solicited by the Bank, nor does the Bank use brokers to obtain deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED AUGUST 31, FOR THE YEARS ENDED MAY 31,
-------------------- -----------------------------------
1997 1996 1997 1996 1995
-------- -------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits............ $197,400 $198,704 $ 777,214 $ 817,610 $ 770,794
Withdrawals......... (198,553) (208,806) (796,578) (822,470) (755,487)
-------- -------- --------- --------- ---------
(Withdrawals) in
excess of
deposits.......... (1,153) (10,102) (19,364) (4,860) 15,307
Interest credited on
deposits.......... 1,705 2,147 7,610 8,814 6,177
-------- -------- --------- --------- ---------
Net increase
(decrease) in
deposits.......... $ 552 $ (7,955) $ (11,754) $ 3,954 $ 21,484
======== ======== ========= ========= =========
</TABLE>
At August 31, 1997 the Bank had $5.8 million in certificate of deposit
accounts in amounts of $100,000 or more, maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maturity Period:
Three months or less................................. $1,730 4.71%
Over 3 through 6 months.............................. 2,762 5.26
Over 6 through 12 months............................. 945 5.26
Over 12 months....................................... 341 5.32
------
Total............................................. $5,778 5.14%
====== ====
</TABLE>
69
<PAGE> 70
The following table sets forth the distribution of the Bank's deposit
accounts and the related weighted average interest rates for the periods
indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-----------------------------------------
FOR THE THREE MONTHS ENDED
AUGUST 31, 1997 1997 1996
------------------------------ ------------------------------ --------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
AVERAGE OF TOTAL NOMINAL AVERAGE OF TOTAL NOMINAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Checking accounts................................ $ 18,786 8.67% --% $ 18,629 8.54% --% $ 18,834
Passbook accounts................................ 79,570 36.72 3.00 78,132 35.83 3.00 77,868
NOW accounts..................................... 7,348 3.39 2.25 7,040 3.23 2.25 7,095
Interest-on-checking accounts.................... 7,421 3.42 1.00 7,077 3.24 1.00 5,543
-------- -------- -------- -------- --------
Total passbook, NOW and interest-on-checking
accounts....................................... 94,339 43.53 2.78 92,249 42.30 2.79 90,506
-------- -------- -------- -------- --------
Money market accounts............................ 26,421 12.19 3.29 27,017 12.39 3.27 28,674
-------- -------- -------- -------- --------
Certificate accounts:
Certificates of deposit -- one year and less... 56,448 26.05 5.16 59,118 27.11 4.98 69,453
IRA Certificates of deposit -- one year and
less......................................... 6,526 3.01 5.17 7,330 3.36 5.13 7,200
Certificates of deposit -- more than one
year......................................... 8,160 3.77 5.15 7,603 3.49 5.16 7,595
IRA Certificates of deposit -- more than one
year......................................... 4,195 1.94 5.11 5,104 2.34 5.35 5,584
-------- -------- -------- -------- --------
Total certificates........................... 75,329 34.77 5.16 79,155 36.30 5.03 89,832
-------- -------- -------- -------- --------
Escrow deposits............................ 1,819 0.84 2.00 1,020 0.47 2.00 2,346
-------- -------- -------- -------- --------
Total deposits........................... $216,694 100.00% 3.42% $218,070 100.00% 3.42% $230,192
======== ======== ======== ======== ========
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-----------------------------------------------------
1996 1995
-------------------- ------------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL AVERAGE OF TOTAL NOMINAL
DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Checking accounts................................ 8.18% --% $ 18,362 8.68% --%
Passbook accounts................................ 33.83 3.00 87,962 41.58 3.00
NOW accounts..................................... 3.08 2.25 6,902 3.26 2.25
Interest-on-checking accounts.................... 2.41 1.00 2,955 1.40 1.00
-------- -------- --------
Total passbook, NOW and interest-on-checking
accounts....................................... 39.32 2.82 97,819 46.24 2.89
-------- -------- --------
Money market accounts............................ 12.46 3.26 34,225 16.18 3.02
-------- -------- --------
Certificate accounts:
Certificates of deposit -- one year and less... 30.17 5.74 40,825 19.30 5.35
IRA Certificates of deposit -- one year and
less......................................... 3.12 5.83 5,970 2.82 4.82
Certificates of deposit -- more than one
year......................................... 3.30 5.17 6,879 3.25 4.29
IRA Certificates of deposit -- more than one
year......................................... 2.43 5.53 5,331 2.52 4.95
-------- -------- --------
Total certificates........................... 39.02 5.69 59,005 27.89 5.12
-------- -------- --------
Escrow deposits............................ 1.02 2.00 2,122 1.01 2.00
-------- -------- --------
Total deposits........................... 100.00% 3.76% $211,533 100.00% 3.27%
======== ======== ========
</TABLE>
70
<PAGE> 71
The following table presents, by interest rate ranges, the amount and
period to maturity from August 31, 1997 of certificate accounts outstanding at
August 31, 1997 and the amount of certificate accounts outstanding at May 31,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM AUGUST 31, 1997
------------------------------------------------- AT AUGUST AT MAY 31,
LESS THAN ONE TO TWO TO OVER 31, ---------------------------
ONE YEAR TWO YEARS THREE YEARS THREE YEARS 1997 1997 1996 1995
--------- --------- ----------- ----------- ---------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate
accounts:
3.99% or less... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 7,098
4.00% to
4.99%........ 13,715 694 5 -- 14,414 8,505 34,167 10,469
5.00% to
5.99%........ 56,227 2,299 350 2,103 60,979 65,816 47,516 25,846
6.00% to
6.99%........ 353 -- -- -- 353 717 3,091 48,032
7.00% to
7.99%........ -- -- -- -- -- -- 776 1,120
8.00% to
8.99%........ -- -- -- -- -- -- -- 201
--------- --------- ----------- ----------- ---------- ------- ------- -------
Total... $70,295 $ 2,993 $ 355 $ 2,103 $ 75,746 $75,038 $85,550 $92,766
======= ======== ========= ========= ======== ======= ======= =======
</TABLE>
Borrowings. The Bank historically had not used borrowings as a source of
funds. However, the Bank became a member of the FHLBNY in 1995 and has used this
source considerably since. FHLBNY advances may also be used to acquire certain
other assets as may be deemed appropriate for investment purposes, including
leveraging opportunities. This form of leveraging allows for a reasonable net
margin of return, the majority of which is locked in for a specified period.
Since the locked-in period might cover only a part of the investment's term (up
to its call date in the majority of the transactions), such a practice might
result in a limited degree of interest rate risk, since the earlier maturing
borrowings are required to be rolled over to fund the remaining lives of the
particular investments. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Management of Interest Rate Risk." FHLBNY
advances are to be collateralized primarily by certain of the Bank's mortgage
loans and mortgage-backed securities and secondarily by the Bank's investment in
capital stock of the FHLBNY. See "Regulation and Supervision -- Federal Home
Loan Bank System." Such advances may be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLBNY will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the FHLBNY. At August 31, 1997, the Bank had $5.3 million
in FHLBNY advances and $3 million in overnight lines of credit outstanding with
the FHLBNY. The Bank also has the capability to borrow additional funds of $28.8
million upon complying with the FHLBNY collateral requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Bank at times sells securities under agreements to repurchase, which
transactions are treated as financings, and the obligation to repurchase the
securities sold is reflected as a liability in the statements of financial
condition. The dollar amount of securities underlying the agreements remains in
the asset account and are held in safekeeping. There were $23.1 million, $4.7
million and $0 of securities sold under repurchase agreements outstanding at May
31, 1997, 1996 and 1995, respectively, and $23.0 million of such securities
outstanding at August 31, 1997.
71
<PAGE> 72
The following table sets forth certain information regarding borrowed funds
for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED AUGUST AT OR FOR THE YEAR ENDED MAY
31, 31,
------------------- -----------------------------
1997 1996 1997 1996 1995
------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLBNY Advances:
Average balance outstanding............. $ 6,137 $ 4,898 $11,563 $ 388 $ --
Maximum amount outstanding at any month-
end during the period................ 8,270 7,050 17,450 3,600 --
Balance outstanding at end of period.... 8,270 7,050 5,250 3,600 --
Weighted-average interest rate during
the period........................... 5.93% 4.66% 5.53% 5.41% --
Weighted-average interest rate at end of
period............................... 5.91% 5.48% 5.71% 6.00% --
Other Borrowings:
Average balance outstanding............. $23,081 $12,799 $19,685 $ 101 $ 875
Maximum amount outstanding at any month-
end during the period................ 23,090 18,450 23,300 4,700 4,500
Balance outstanding at end of period.... 23,045 18,450 23,090 4,700 --
Weighted-average interest rate during
the period........................... 6.42% 6.42% 6.20% 6.32% 5.82%
Weighted-average interest rate at end of
period............................... 6.28% 6.42% 6.50% 6.32% --
Total Borrowings:
Average balance outstanding............. $29,218 $17,647 $31,249 $ 489 $ 875
Maximum amount outstanding at any month-
end.................................. 31,315 25,500 38,850 8,300 4,500
Balance outstanding at end of period.... 31,315 25,500 28,340 8,300 --
Weighted-average interest rate during
the period........................... 6.32% 5.94% 6.10% 5.60% 5.89%
Weighted-average interest rate at end of
period............................... 6.29% 6.16% 6.30% 6.18% --
</TABLE>
SUBSIDIARY ACTIVITIES
The Bank has three wholly owned subsidiaries, WSB Financial, Warsave
Development, Inc. ("Warsave") and WSB Mortgage. The Bank offers mutual funds and
tax deferred annuities through WSB Financial to the Bank's customers and members
of the community. WSB Financial contributed $23,000, $92,000, $90,000 and
$151,000 in net income, before taxes, to the Bank's net income in the three
months ended August 31, 1997 and the fiscal years ended May 31, 1997, 1996 and
1995, respectively.
Warsave was formed to acquire and hold real estate. Its single asset as of
August 31, 1997 is a two-story house situated adjacent to the Bank's Warwick
office. The building, which may ultimately be used for future expansion, is
presently rented for the purpose of generating rental income.
WSB Mortgage was recently formed and has received a license from the New
Jersey Department of Banking and Insurance to commence mortgage banking
operations in New Jersey.
PROPERTIES
The Bank conducts its business through its main office in Warwick, New York
and its three branch offices located in Monroe, Woodbury and Middletown, New
York. On August 29, 1997, the Bank acquired a five-acre parcel of land located
approximately one-half mile from its present Middletown location. The Bank
intends to construct a new 14,000 square foot building and maintain a
full-service branch office with drive-up
72
<PAGE> 73
and ATM facilities and ample parking to serve its commercial and retail
customers. Upon receipt of required regulatory approvals, the Bank intends to
close its existing Middletown branch and relocate to the new facility, which is
expected to be completed and available for occupancy during the first quarter of
fiscal 1998. In addition, the Bank intends to relocate its commercial lending
operations from its Warwick office to this new facility. Management expects
approximately 7,000 square feet of the building will be rented to professional
companies, including a local accounting firm that management believes will help
to complement its business. The costs associated with the Bank's relocation of
its Middletown branch are estimated to be approximately $3.4 million.
Management believes that the Bank's current facilities, including the
relocation of the Middletown branch office, are adequate to meet the present and
immediately foreseeable needs of the Bank and the Company. However, the Bank has
plans to open additional branch offices and intends to conduct comprehensive
market studies shortly following the Conversion for the purpose of identifying
locations for the establishment or acquisition of other branch offices to expand
the Bank's activities.
The following sets forth the Bank's branches and loan production offices at
August 31, 1997, including the loan production office opened in New Jersey in
connection with its application to the New Jersey Department of Banking and
Insurance to commence mortgage banking activities in New Jersey.
<TABLE>
<CAPTION>
LEASED DATE LEASE NET BOOK
OR LEASED OR EXPIRATION VALUE AT
OWNED ACQUIRED DATE AUGUST 31, 1997
-------- ---------- ---------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Main Office:
18 Oakland Avenue
Warwick, New York 10990................... Owned 1972 N/A $ 760.6
Branches:
591 Route 17M
Monroe, New York 10950.................... Owned 1976 N/A 455.0
556 Route 32
Highland Mills, New York 10930............ Owned 1979 N/A 202.1
The Galleria at Crystal Run
1N Galleria Drive, Suite 137
Middletown, New York 10941................ Leased 1991 06/30/98 175.7
Loan Production Offices:
Taconic Plaza Shopping Center,
Store # 10
Route 52
East Fishkill, New York 12533............. Leased 1997 01/31/98 --
151 South Main Street, Suite 104
New City, New York........................ Leased 1997 04/30/98 --
1435 Union Valley Road, 1st Floor
West Milford, New Jersey.................. Leased 1997 04/30/98 --
</TABLE>
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Bank's and Company's financial condition and results of
operations.
PERSONNEL
As of August 31, 1997, the Bank had 99 full-time and 37 part-time
employees. The Bank has experienced a very low turnover rate among its employees
and, as of August 31, 1997, 54 of the Bank's employees had been with the Bank
for more than five years. The employees are not represented by a collective
bargaining unit, and the Bank considers its relationship with its employees to
be good. See "Management of the Bank -- Benefits" for a description of certain
compensation and benefit programs offered to the Bank's employees.
73
<PAGE> 74
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The following is a discussion of material federal income tax
matters and does not purport to be a comprehensive description of the federal
income tax rules applicable to the Bank or the Company. The Bank has been
audited by the IRS for the tax years ending December 31, 1993 and December 31,
1995 (in progress). For federal income tax purposes, after the Conversion, the
Company and the Bank may file consolidated income tax returns and report their
income on a fiscal year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Bank's tax reserve for bad debts,
discussed below.
Tax Bad Debt Reserves. The Small Business Job Protection Act of 1996 ("the
1996 Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Code relating to a savings institution's use of bad debt
reserves for federal income tax purposes and requires such institutions to
recapture (i.e., take into income) certain portions of their accumulated bad
debt reserves. The effect of the 1996 Act on the Bank is discussed below. Prior
to the enactment of the 1996 Act, the Bank was permitted to establish tax
reserves for bad debts and to make annual additions thereto, which additions,
within specified formula limits, were deducted in arriving at the Bank's taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, was permitted to
be computed using an amount based on a six-year moving average of the Bank's
charge-offs for actual losses ("Experience Method"), or a percentage equal to 8%
of the Bank's taxable income ("PTI Method"), computed without regard to this
deduction and with additional modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. The Bank's deduction with
respect to non-qualifying loans was required to be computed under the Experience
Method. Each year the Bank reviewed the most favorable way to calculate the
deduction attributable to an addition to the tax bad debt reserves.
The 1996 Act. Under the 1996 Act, the PTI Method was repealed for thrifts
and the Bank, as a "small bank" (one with assets having an adjusted basis of
$500 million or less) will be required to use the Experience Method of computing
additions to its bad debt reserves for the tax year beginning January 1, 1996.
In addition, the Bank will be required to recapture (i.e., take into income)
over a six-year period the excess of the balance of its bad debt reserves for
losses on non-qualifying and qualifying loans as of December 31, 1995 over the
greater of (a) the balance of such reserves as of December 31, 1987 or (b) an
amount that would have been the balance of such reserves as of December 31, 1995
had the Bank always computed the additions to its reserves using the Experience
Method. However, such recapture requirements were suspended for each of the two
successive taxable years beginning January 1, 1996 in which the Bank originates
a minimum amount of certain residential loans during such years that is not less
than the average of the principal amounts of such loans made by the Bank during
its six taxable years preceding January 1, 1996. The Bank's post-December 31,
1987 nonqualifying and qualifying bad debt reserves at August 31, 1997 was
approximately $850,000 which will require the Bank to report an additional tax
liability of approximately $289,000. As of August 31, 1997, this liability has
already been provided and will not require an adverse impact to the Bank's
financial condition or results of operations.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) and then from the Bank's
supplemental reserve for losses on loans, to the extent thereof, and an amount
based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. Non-dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after
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the Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such distribution (but not in
excess of the amount of such reserves) would be includible in income for federal
income tax purposes, assuming a 34% federal corporate income tax rate. See
"Regulation and Supervision" and "Dividend Policy" for limits on the payment of
dividends by the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is also adjusted by determining the tax treatment of certain items in
a manner that negates the deferral of income resulting from the regular tax
treatment of those items. Thus, the Bank's AMTI is increased by an amount equal
to 75% of the amount by which the Bank's adjusted current earnings exceeds its
AMTI (determined without regard to this adjustment and prior to reduction for
net operating losses). The Bank does not expect to be subject to the AMT.
Elimination of Dividends; 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 corporations.
STATE TAXATION
New York State Taxation. The Bank is subject to the New York State
Franchise Tax on Banking Corporations in an annual amount equal to the greater
of (i) 9% of the Bank's "entire net income" allocable to New York State during
the taxable year, or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greatest of (a) 0.01% of the value of
the taxable assets allocable to New York State with certain modifications, (b)
3% of the Bank's "alternative entire net income" allocable to New York State or
(c) $250. Entire net income is similar to federal taxable income, subject to
certain modifications and alternative entire net income is equal to entire net
income without certain adjustments. For purposes of computing its entire net
income, the Bank is permitted a deduction for an addition to the reserve for
losses on qualifying real property loans. For New York State purposes, the
applicable percentage to calculate bad debt deduction under the percentage of
taxable income method is 32%.
New York State passed legislation in August 1996 that incorporated into New
York State tax law provisions for the continued use of bad debt reserves in a
manner substantially similar to the provisions that applied under federal law
prior to the enactment of the 1996 Act discussed above. This legislation enabled
the Bank to avoid the recapture of the New York State tax bad debt reserves that
otherwise would have occurred as a result of the changes in federal law and to
continue to utilize the reserve method for computing its bad debt deduction.
However, the New York bad debt reserve is subject to recapture for "non-dividend
distributions" in a manner similar to the recapture of federal bad debt reserves
for such distributions. See "-- Federal Taxation -- Distributions." Also, the
New York bad debt reserve is subject to recapture in the event that the Bank
fails to satisfy certain definitional tests relating to its assets and the
nature of its business.
A Metropolitan Business District Surcharge on banking corporations doing
business in the metropolitan district has been applied since 1982. The Bank does
all of its business within this District and is subject to this surcharge. For
the tax year ending December 31, 1997 the surcharge rate is 17%.
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file annual returns and pay annual fees and a franchise tax to the
State of Delaware.
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REGULATION AND SUPERVISION
GENERAL
The Bank is a New York mutual savings bank, and its deposit accounts are
insured up to applicable limits by the FDIC under the BIF. The Bank is subject
to extensive regulation by the NYSBD as its chartering agency, and by the FDIC
as the deposit insurer. The Bank must file reports with the NYSBD and the FDIC
concerning its activities and financial condition, and it must obtain regulatory
approval prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions and opening or acquiring branch
offices. The NYSBD and the FDIC conduct periodic examinations to assess the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings bank can engage and is intended primarily for the protection of the
deposit insurance funds and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the NYSBD or the FDIC or through legislation, could have a material adverse
impact on the Company and the Bank and their operations and stockholders. The
Company is also required to file certain reports with, and otherwise comply
with, the rules and regulations of the FRB and the NYSBD and with the rules and
regulations of the SEC under the federal securities laws.
Certain of the laws and regulations applicable to the Bank and to the
Company are summarized below or elsewhere herein. These summaries do not purport
to be complete and are qualified in their entirety by reference to such laws and
regulations.
NEW YORK BANKING REGULATION
Activity Powers. The Bank derives its lending, investment and other
activity powers primarily from the applicable provisions of the Banking Law and
the regulations adopted thereunder. Under these laws and regulations, savings
banks, including the Bank, may invest in real estate mortgages, consumer and
commercial loans, certain types of debt securities, including certain corporate
debt securities and obligations of federal, state and local governments and
agencies, certain types of corporate equity securities and certain other assets.
A savings bank may also exercise trust powers upon approval of the Banking
Department. The exercise of these lending, investment and activity powers are
limited by federal law and the regulations thereunder. See "-- Federal Banking
Regulation -- Activity Restrictions on State-Chartered Banks."
Loans-to-One-Borrower Limitations. With certain limited exceptions, a New
York chartered savings bank may not make loans or extend credit for commercial,
corporate or business purposes (including lease financing) to a single borrower
and to certain entities related to the borrower, the aggregate amount of which
would exceed 15% of the bank's net worth, plus an additional 10% of the bank's
net worth if secured by the requisite collateral. The Bank currently complies
with all applicable loans-to-one-borrower limitations.
Community Reinvestment Act. The Bank is also subject to provisions of the
Banking Law that, like the provisions of the federal Community Reinvestment Act
("CRA"), impose continuing and affirmative obligations upon a banking
institution organized in the State of New York to serve the credit needs of its
local community ("NYCRA"). The obligations of the NYCRA are similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file with the Banking
Department an annual NYCRA report and copies of all federal CRA reports. The
NYCRA requires the Banking Department to make an annual written assessment of a
bank's compliance with the NYCRA, utilizing a four-tiered rating system with
respect to 5 performance categories and 12 other factors, and to make such
assessment available to the public. The Bank's latest NYCRA rating, received by
letter dated March 29, 1996 from the Banking Department, was a rating of
"Satisfactory". The NYCRA also requires the Superintendent to consider a bank's
NYCRA rating when reviewing a bank's application to engage in certain
transactions, including mergers, asset purchases and the establishment of branch
offices or automated teller machines, and provides that such assessment may
serve as a basis for the denial of any such application. The regulations
currently implementing the NYCRA
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require the Superintendent to the utilize a four-tiered rating system with
respect to 5 performance categories and 12 other factors, and the
Superintendent's analysis focuses on a bank's activities in complying with the
NYCRA. The Superintendent has recently proposed replacing the current
process-focused regulations with performance-focused regulations that are
intended to parallel the current CRA regulations of the federal banking agencies
and to promote consistency in CRA evaluations by considering more objective
criteria.
Dividends. Under the Banking Law, the Bank, as a stock savings bank, will
not be able to declare, credit or pay any dividends if such dividends would
result in any impairment of capital stock. In addition, the Banking Law provides
that, without regulatory approval, the Bank cannot declare and pay dividends in
any calendar year in excess of its "net profits" for such year combined with its
"retained net profits" of the two preceding years, less any required transfer to
surplus or a fund for the retirement of preferred stock.
Enforcement. Under the Banking Law, the Superintendent may issue an order
to a New York-chartered banking institution to appear and explain an apparent
violation of law, to discontinue unauthorized or unsafe practices and to keep
prescribed books and accounts. Upon a finding by the Superintendent that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Superintendent to
discontinue such practices, the NYBB may remove such director, trustee or
officer from office after notice and an opportunity to be heard. The Bank does
not know of any past or current practice, condition or violation that might lead
to any proceeding by the Superintendent or the NYBB against the Bank or any of
its trustees or officers.
FEDERAL BANKING REGULATION
Capital Requirements. FDIC regulations require BIF-insured banks, such as
the Bank, to maintain minimum levels of capital. The regulations establish a
minimum leverage capital requirement of not less than 3.0% Tier 1 capital to
total assets for banks in the strongest financial and managerial condition, with
a CAMEL Rating of 1 (the highest examination rating of the FDIC for banks). For
all other banks, the minimum leverage capital requirement is 3% plus an
additional cushion of at least 100 to 200 basis points. Tier 1 capital is
comprised of the sum of common stockholders' equity (excluding the net
unrealized appreciation or depreciation, net of tax, from available-for-sale
securities), non-cumulative perpetual preferred stock (including any related
surplus) and minority interests in consolidated subsidiaries, minus all
intangible assets (other than qualifying servicing rights), and any net
unrealized loss on marketable equity securities.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 capital) to risk-weighted
assets of at least 8% and Tier 1 capital to risk-weighted assets of at least 4%.
In determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
3% leverage requirement. The components of Tier 2 capital currently include
cumulative perpetual preferred stock, certain perpetual preferred stock for
which the dividend rate may be reset periodically, mandatory convertible
securities, subordinated debt, intermediate preferred stock and allowance for
possible loan losses. Allowance for possible loan losses includible in Tier 2
capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the
amount of Tier 2 capital that may be included in total capital cannot exceed
100% of Tier 1 capital.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the overall financial condition of the
bank and the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk
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in connection with capital adequacy. The agencies determined not to proceed with
a previously issued proposal to develop a supervisory framework for measuring
interest rate risk and an explicit capital component for interest rate risk.
The following table shows the Bank's leverage ratio, its Tier 1 risk-based
capital ratio, and its total risk-based capital ratio, at August 31, 1997 on a
historical basis and a pro forma basis assuming the sale of shares at the
maximum of the Estimated Price Range.
<TABLE>
<CAPTION>
AT AUGUST 31, 1997
---------------------------------------------------------------------------
HISTORICAL PERCENT OF PRO FORMA PERCENT OF CAPITAL PERCENT OF
CAPITAL ASSETS(1) CAPITAL ASSETS REQUIREMENT ASSETS(1)
---------- ---------- --------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Regulatory Tier 1 leverage
capital.......................... $ 28,033 9.81% $48,680 15.89% $12,256 4.0%
Tier 1 risk-based capital.......... 28,033 19.19 48,680 29.19 6,671 4.0
Total risk-based capital........... 29,400 20.12 50,047 30.01 13,342 8.0
</TABLE>
- ---------------
(1) For purpose of calculating Regulatory Tier 1 leverage capital, assets
include adjusted total average assets. In calculating Tier 1 risked-based
capital and total risk-based capital, assets include total risk-weighted
assets.
As the preceding table shows, the Bank exceeded the minimum capital adequacy
requirements at the date indicated.
Activity Restrictions on State-Chartered Banks. Section 24 of the Federal
Deposit Insurance Act, as amended ("FDIA"), which was added by FDICIA, generally
limits the activities and investments of state-chartered FDIC insured banks and
their subsidiaries to those permissible for federally chartered national banks
and their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common and
preferred stocks listed on a national securities exchange or the shares of
registered investment companies if (1) the bank held such types of investments
during the 14-month period from September 30, 1990 through November 26, 1991,
(2) the state in which the bank is chartered permitted such investments as of
September 30, 1991, and (3) the bank notifies the FDIC and obtains approval from
the FDIC to make or retain such investments. Upon receiving such FDIC approval,
an institution's investment in such equity securities will be subject to an
aggregate limit up to the amount of its Tier 1 capital. The Bank received
approval from the FDIC to retain and acquire such equity investments subject to
a maximum permissible investment equal to the lesser of 100% of the Bank's Tier
1 capital or the maximum permissible amount specified by the Banking Law.
Section 24 also contains an exception for certain majority owned subsidiaries,
but the activities of such subsidiaries are limited to those permissible for a
national bank, permissible under Section 24 of the FDIA and the FDIC regulations
issued pursuant thereto, or as approved by the FDIC.
Any bank that held an impermissible investment or engaged in an
impermissible activity and that did not receive FDIC approval to retain such
investment or to continue such activity was required to submit to the FDIC a
plan for divesting of such investment or activity as quickly and prudently as
possible. Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24 or the
FDIC regulations thereunder, an insured bank must seek approval from the FDIC to
make such investment or engage in such activity. The FDIC will not approve the
activity unless such bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist orders and to remove directors and officers. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
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The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. See "-- Prompt
Corrective Action." The FDIC may also appoint a conservator or receiver for a
state bank on the basis of the institution's financial condition or upon the
occurrence of certain events, including: (i) insolvency (whereby the assets of
the bank are less than its liabilities to depositors and others); (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business; (iv) likelihood that the bank will be unable to meet the
demands of its depositors or to pay its obligations in the normal course of
business; and (v) insufficient capital, or the incurring or likely incurring of
losses that will deplete substantially all of the institution's capital with no
reasonable prospect of replenishment of capital without federal assistance.
Deposit Insurance. Pursuant to FDICIA, the FDIC established a system for
setting deposit insurance premiums based upon the risks a particular bank or
savings association posed to its deposit insurance funds. Under the risk-based
deposit insurance assessment system, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending six months before the assessment period, consisting
of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and
one of three supervisory subcategories within each capital group. With respect
to the capital ratios, institutions are classified as well capitalized, or
adequately capitalized using ratios that are substantially similar to the prompt
corrective action capital ratios discussed below. Any institution that does not
meet these two definitions is deemed to be undercapitalized for this purpose.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under the
final risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied. Assessments rates for deposit
insurance currently range from 0 basis points to 27 basis points. The capital
and supervisory subgroup to which an institution is assigned by the FDIC is
confidential and may not be disclosed. A bank's rate of deposit insurance
assessments will depend upon the category and subcategory to which the bank is
assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on the earnings of the Bank.
Under the Deposit Insurance Funds Act of 1996 ("Funds Act"), the assessment
base for the payments on the bonds ("FICO bonds") issued in the late 1980's by
the Financing Corporation to recapitalize the now defunct Federal Savings and
Loan Insurance Corporation was expanded to include, beginning January 1, 1997,
the deposits of BIF-insured institutions, such as the Bank. Until December 31,
1999, or such earlier date on which the last savings association ceases to
exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of
the rate imposed on deposits insured by the Savings Association Insurance Fund
("SAIF"). The annual rate of assessments for the payments on the FICO bonds for
the semi-annual period beginning on January 1, 1997 was 0.0130% for
BIF-assessable deposits and 0.0648% for SAIF-assessable deposits and for the
semi-annual period beginning on July 1, 1997 was 0.0126% for BIF-assessable
deposits and 0.0630% for SAIF-assessable deposits.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Transactions with Affiliates of the Bank. Transactions between an insured
bank, such as the Bank, and any of its affiliates is governed by Sections 23A
and 23B of the Federal Reserve Act. An affiliate of a bank is any company or
entity that controls, is controlled by or is under common control with the bank.
Currently, a subsidiary of a bank that is not also a depository institution is
not treated as an affiliate of the bank for purposes of Sections 23A and 23B,
but the FRB has proposed treating any subsidiary of a bank that is engaged
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in activities not permissible for bank holding companies under the Bank Holding
Company Act of 1956, as amended ("BHCA"), as an affiliate for purposes of
Sections 23A and 23B. Generally, Sections 23A and 23B (i) limit the extent to
which the bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms that are consistent with safe and sound banking
practices. The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and other similar types of transactions.
Further, most loans by a bank to any of its affiliates must be secured by
collateral in amounts ranging from 100 to 130 percent of the loan amounts. In
addition, any covered transaction by a bank with an affiliate and any purchase
of assets or services by a bank from an affiliate must be on terms that are
substantially the same, or at least as favorable, to the institution as those
that would be provided to a non-affiliate.
Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. sec. 1972 on certain tying arrangements and extensions
of credit by correspondent banks. In general, a depository institution is
prohibited, subject to certain exceptions, from extending credit to or offering
any other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution.
Uniform Real Estate Lending Standards. Pursuant to FDICIA, the federal
banking agencies adopted uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in real estate or
made for the purpose of financing the construction of a building or other
improvements to real estate. Under the joint regulations adopted by the banking
agencies, all financial institutions must adopt and maintain written policies
that establish appropriate limits and standards for extensions of credit that
are secured by liens or interests in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must establish
loan portfolio diversification standards, prudent underwriting standards
(including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies ("Interagency
Guidelines") that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multi-family or other non-residential property, the supervisory limit is 80%;
(iv) for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non-owner occupied, one- to four-family property), the limit
is 85%. Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
Community Reinvestment Act. Under the CRA, as implemented by FDIC and FRB
regulations, a savings bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community. The CRA requires the FDIC, in connection with its examination of a
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution.
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In April 1995, the FDIC and the other federal banking agencies amended
their CRA regulations. Among other things, the amended CRA regulations
substitute for the prior process-based assessment factors a new evaluation
system that would rate an institution based on its actual performance in meeting
community needs. In particular, the proposed system would focus on three tests:
(a) a lending test, to evaluate the institution's record of making loans in its
service areas; (b) an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and (c) a service
test, to evaluate the institution's delivery of services through its branches,
ATMs, and other offices. Small banks would be assessed pursuant to a streamlined
approach focusing on a lesser range of information and performance standards.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. The Bank's latest
CRA rating, received from the FDIC by letter dated December 4, 1995, was a
rating of "satisfactory."
Safety and Soundness Standards. Pursuant to the requirements of FDICIA, as
amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal shareholder. In addition,
the FDIC adopted regulations to require a bank that is given notice by the FDIC
that it is not satisfying any of such safety and soundness standards to submit a
compliance plan to the FDIC. If, after being so notified, a bank fails to submit
an acceptable compliance plan or fails in any material respect to implement an
accepted compliance plan, the FDIC may issue an order directing corrective and
other actions of the types to which a significantly undercapitalized institution
is subject under the "prompt corrective action" provisions of FDICIA. If a bank
fails to comply with such an order, the FDIC may seek to enforce such an order
in judicial proceedings and to impose civil monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
FDIC, as well as the other federal banking regulators, adopted regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The regulations establish five categories, consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The FDIC's regulations
defines the five capital categories as follows: Generally, an institution will
be treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is
at least 6%, its ratio of Tier 1 capital to total assets is at least 5%, and it
is not subject to any order or directive by the FDIC to meet a specific capital
level. An institution will be treated as "adequately capitalized" if its ratio
of total capital to risk-weighted assets is at least 8%, its ratio of Tier 1
capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital
to total assets is at least 4% (3% if the bank receives the highest rating on
the CAMEL financial institutions rating system) and it is not a well-capitalized
institution. An institution that has total risk-based capital of less than 8%,
Tier 1 risk-based-capital of less than 4% or a leverage ratio that is less than
4% (or less than 3% if the institution is rated a composite "1" under the CAMEL
rating system) would be considered to be "undercapitalized." An institution that
has total risk-based capital of less than 6%, Tier 1 capital of less than 3% or
a leverage ratio that is less than 3% would be considered to be "significantly
undercapitalized," and an institution that has a tangible capital to assets
ratio equal to or less than 2% would be deemed to be "critically
undercapitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital deteriorates
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to
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monitor closely the condition of an undercapitalized bank and to restrict the
growth of its assets. An undercapitalized bank is required to file a capital
restoration plan within 45 days of the date the bank receives notice that it is
within any of the three undercapitalized categories, and the plan must be
guaranteed by any parent holding company. The aggregate liability of a parent
holding company is limited to the lesser of: (i) an amount equal to the five
percent of the bank's total assets at the time it became "undercapitalized," and
(ii) the amount that is necessary (or would have been necessary) to bring the
bank into compliance with all capital standards applicable with respect to such
bank as of the time it fails to comply with the plan. If a bank fails to submit
an acceptable plan, it is treated as if it were "significantly
undercapitalized." Banks that are significantly or critically undercapitalized
are subject to a wider range of regulatory requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a receiver
or conservator for an insured depositary bank. If one or more grounds exist for
appointing a conservator or receiver for a bank, the FDIC may require the bank
to issue additional debt or stock, sell assets, be acquired by a depository bank
holding company or combine with another depository bank. Under FDICIA, the FDIC
is required to appoint a receiver or a conservator for a critically
undercapitalized bank within 90 days after the bank becomes critically
undercapitalized or to take such other action that would better achieve the
purposes of the prompt corrective action provisions. Such alternative action can
be renewed for successive 90-day periods. However, if the bank continues to be
critically undercapitalized on average during the quarter that begins 270 days
after it first became critically undercapitalized, a receiver must be appointed,
unless the FDIC makes certain findings that the bank is viable.
LOANS TO A BANK'S INSIDERS
Federal Regulation. A bank's loans to its executive officers, directors,
any owner of 10% or more of its stock (each, an "insider") and any of certain
entities affiliated with any such person (an "insider's related interest") are
subject to the conditions and limitations imposed by Section 22(h) of the
Federal Reserve Act and the FRB's Regulation O thereunder. Under these
restrictions, the aggregate amount of the loans to any insider and the insider's
related interests may not exceed the loans-to-one-borrower limit applicable to
national banks, which is comparable to the loans-to-one-borrower limit
applicable to the Bank's loans for commercial, corporate or business purposes.
See "-- New York Banking Regulation -- Loans-to-One Borrower Limitations." All
loans by a bank to all such persons and related interests in the aggregate may
not exceed the bank's unimpaired capital and unimpaired surplus. Regulation O
also requires that any proposed loan to an insider or a related interest of that
insider be approved in advance by a majority of the board of directors of the
bank, with any interested director not participating in the voting, if such
loan, when aggregated with any existing loans to that insider and the insider's
related interests, would exceed either (a) $500,000 or (b) the greater of
$25,000 or 5% of the bank's unimpaired capital and surplus. Such loans must be
made on substantially the same terms as, and follow credit underwriting
procedures that are not less stringent than, those that are prevailing at the
time for comparable transactions with other persons.
In addition, provisions of the BHCA prohibit extensions of credit to a
bank's insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
New York Regulation. Applicable New York regulations impose conditions and
limitations on a stock savings bank's loans to its directors and executive
officers that are comparable in most respects to the conditions and limitations
imposed under federal law, as discussed above. However, there are a number of
differences. The New York regulations do not affect loans to shareholders owning
10% or more of the savings bank's stock. Loans to an executive officer, other
than loans for the education of the officer's children and certain loans secured
by the officer's residence, may not exceed the lesser of (a) $100,000 or (b) the
greater of $25,000 or 2.5% of the bank's capital stock, surplus fund and
undivided profits.
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FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLBNY, which is one of the 12 regional Federal
Home Loan Banks that comprise the FHLB system. Each of the Federal Home Loan
Banks are subject to supervision and regulation by the Federal Housing Finance
Board ("FHFB"), and each acts as a central credit facility primarily for its
member institutions. As a member of the FHLBNY, the Bank is required to acquire
and hold shares of capital stock in the FHLBNY in an amount at least equal to
the greater of 1% of the aggregate unpaid principal of its home mortgage loans,
home purchase contracts, and similar obligations at the beginning of each year,
or 1/20 of its advances (borrowings) from the FHLBNY. The Bank was in compliance
with this requirement with an investment in FHLBNY stock at August 31, 1997, of
$1.7 million.
Each FHLB serves as a reserve or central bank for its member institutions
within its assigned region. Each is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It offers advances to
members in accordance with policies and procedures established by the FHFB and
the board of directors of the FHLB. Long-term advances may only be made for the
purpose of providing funds for residential housing finance.
FEDERAL RESERVE SYSTEM
Under FRB regulations, the Bank is required to maintain
non-interest-earning reserves against its transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves of 3% must be maintained against aggregate transaction accounts of
$49.3 million or less (subject to adjustment by the FRB) and an initial reserve
of $1,479,000 plus 10% (subject to adjustment by the FRB between 8% and 14%)
against that portion of total transaction accounts in excess of $49.3 million.
The first $4.4 million of otherwise reservable balances (subject to adjustments
by the FRB) are exempted from the reserve requirements. The Bank is in
compliance with the foregoing requirements. Because required reserves must be
maintained in the form of either vault cash, a non-interest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the FRB, the effect
of this reserve requirement is to reduce the Bank's interest-earning assets.
HOLDING COMPANY REGULATION
Federal Regulation. Following the consummation of the Conversion, the
Company will be subject to examination, regulation and periodic reporting under
the BHCA, as administered by the FRB. The FRB has adopted capital adequacy
guidelines for bank holding companies on a consolidated basis substantially
similar to those of the FDIC for the Bank. See, "Federal Regulation -- Capital
Requirements." On a pro forma basis after the Conversion, the Company's pro
forma total capital and Tier 1 capital ratios will exceed these minimum capital
requirements.
The Company will be required to obtain the prior approval of the FRB to
acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior FRB approval will be required for the Company to acquire direct
or indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.
The Company will be required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, will be equal to 10% or more of the Company's consolidated net worth.
The FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would violate any
law, regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the FRB, that has received a composite "1" or "2" rating at its
most recent bank holding company inspection by the FRB, and that is not the
subject of any unresolved supervisory issues.
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The status of the Company as a registered bank holding company under the
BHCA does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
In addition, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of any company engaged in,
non-banking activities. One of the principal exceptions to this prohibition is
for activities found by the FRB to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking as to be a proper incident thereto are: (i) making or servicing loans;
(ii) performing certain data processing services; (iii) providing discount
brokerage services; (iv) acting as fiduciary, investment or financial advisor,
(v) leasing personal or real property; (vi) making investments in corporations
or projects designed primarily to promote community welfare; and (vii) acquiring
a savings and loan association.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), depository institutions are liable to the FDIC for losses
suffered or anticipated by the FDIC in connection with the default of a commonly
controlled depository institution or any assistance provided by the FDIC to such
an institution in danger of default. This law would have potential applicability
if the Company ever acquired as a separate subsidiary a depository institution
in addition to the Bank. There are no current plans for such an acquisition.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank, the
Company, any subsidiary of the Company and related interests of such persons.
Moreover, banks are prohibited from engaging in certain tie-in arrangements
(with the bank's parent holding company or any of the holding company's
subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
New York Regulation. Under the Banking Law, certain companies owning or
controlling banks are regulated as a bank holding company. For the purposes of
the Banking Law, the term "bank holding company," is defined generally to
include any "company" that, directly or indirectly, either (a) controls the
election of a majority of the directors or (b) owns, controls or holds with
power to vote more than 10% of the voting stock of a bank holding company or, if
the company is a banking institution, another banking institution, or 10% or
more of the voting stock of each of two or more banking institutions. The term
"company" is defined to include corporations, partnerships and other types of
business entities, chartered or doing business in New York, and the term
"banking institution" is defined to include commercial banks, stock savings
banks and stock savings and loan associations. A company controlling, directly
or indirectly, only one banking institution will not be deemed to be a bank
holding company for the purposes of the Banking Law. Under the Banking Law, the
prior approval of the NYBB is required before: (1) any action is taken that
causes any company to become a bank holding company; (2) any action is taken
that causes any banking institution to become or to be merged or consolidated
with a subsidiary of a bank holding company; (3) any bank holding company
acquires direct or indirect ownership or control of more than 5% of the voting
stock of a banking institution; (4) any bank holding company or subsidiary
thereof acquires all or substantially all of the assets of a banking
institution; or (5) any action is taken that causes any bank holding company to
merge or consolidate with another bank holding company. Additionally, certain
restrictions apply to New York State bank holding companies regarding the
acquisition of banking institutions that have been chartered for five years or
less and are located in smaller communities. Directors, officers and employees
of a New York State bank holding company are subject to limitations regarding
their affiliation with securities underwriting or distribution firms and with
other bank holding companies, and directors and executive officers are subject
to limitations regarding loans obtained from certain of the holding company's
banking subsidiaries. Although the Company will not be a bank holding company
for purposes of the Banking Law upon the Effective Date of the
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Conversion, any future acquisition of ownership, control, or the power to vote
10% or more of the voting stock of another banking institution or bank holding
company would cause it to become such.
ACQUISITION OF THE HOLDING COMPANY
Federal Restrictions. Under the federal Change in Bank Control Act
("CBCA"), a notice must be submitted to the FRB if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's shares of Common Stock outstanding, unless the FRB has found that the
acquisition will not result in a change in control of the Company. Under the
CBCA, the FRB has 60 days within which to act on such notices, taking into
consideration certain factors, including the financial and managerial resources
of the acquiror, the convenience and needs of the communities served by the
Company and the Bank, and the anti-trust effects of the acquisition. Under the
BHCA, any company would be required to obtain prior approval from the FRB before
it may obtain "control" of the Company within the meaning of the BHCA. Control
generally is defined to mean the ownership or power to vote 25% more of any
class of voting securities of the Company or the ability to control in any
manner the election of a majority of the Company's directors. See "Holding
Company Regulation."
New York Change in Bank Control Restrictions. In addition to the CBCA, the
Banking Law generally requires prior approval of the NYBB before any action is
taken that causes any company to acquire direct or indirect control of a banking
institution that is organized in the State of New York. For this purpose, the
term "company" is defined to include corporations, partnerships and other types
of business entities, chartered or doing-business in New York, and an individual
or combination of individuals acting in concert and residing or doing business
in New York, and the term "control" is defined generally to mean the power to
direct or cause the direction of the management and policies of the banking
institution and is presumed to exist if the company owns, controls or holds with
power to vote 10% or more of the voting stock of the banking institution.
INTERSTATE BANKING AND BRANCHING
In the past, interstate banking has been limited under the BHCA to those
states that permitted interstate banking by statute. New York was one of a
number of states that permitted, subject to the reciprocity conditions of the
Banking Law, out-of-state bank holding companies to acquire New York banks. By
1995, most states had adopted statutes permitting multistate bank holding
companies.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Banking Act") was enacted on September 29, 1994. As of September
29, 1995, the Interstate Banking Act permitted approval under the BHCA of the
acquisition by a bank holding company that is well-capitalized and managed of a
bank outside of the holding company's home state regardless of whether the
acquisition was permitted under the law of the state of the bank to be acquired.
The FRB may not approve an acquisition under the BHCA that would result in the
acquiring holding company controlling more than 10% of the deposits in the
United States or more than 30% of the deposits in any particular state.
In the past, branching across state lines was not generally available to a
state bank, such as the Bank. While out-of-state branches were authorized under
the Banking Law, similar authority was not generally available under the laws of
most other states. Beginning June 1, 1997, the Interstate Banking Act, permitted
the responsible federal banking agencies to approve merger transactions between
banks located in different states, regardless of whether the merger would be
prohibited under state law. Accordingly, the Interstate Banking Act permits a
bank to have branches in more than one state.
Before any bank acquisition can be completed, prior approval thereof may
also be required to be obtained from other agencies having supervisory
jurisdiction over the bank to be acquired, including the Banking Department. See
"Acquisition of the Holding Company." The Interstate Banking Act will facilitate
the consolidation of the banking industry that has taken place over recent years
and will allow the creation of larger, presumably more efficient, banking
networks.
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FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
Shares of the Common Stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (a) 1% of the outstanding
shares of the Company or (b) the average weekly volume of trading in such shares
during the preceding four calendar weeks. Provision may be made in the future by
the Company to permit affiliates to have their shares registered for sale under
the Securities Act under certain circumstances.
In the event that the holding company form of organization is not utilized,
the shares of the Bank's common stock to be issued and sold in the Conversion
would be exempt from registration under Section 3(a)(5) of the Securities Act.
Prior to the sale of all shares of its common stock in such a case, the Bank
would register its capital stock under Section 12(g) of the Exchange Act. Upon
such registration, the proxy rules, tender offer rules, insider trading
restrictions, annual and periodic reporting and other requirements of the
Exchange Act would also be applicable to the Bank but under the jurisdiction of
the FDIC. The Bank would be required by the FDIC to maintain said registration
for a period of at least three years following Conversion and to register with
and report to the FDIC, not to the SEC.
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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 shareholders of the Company for staggered three-year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Timothy A. Dempsey, Fred M. Knipp, and Henry L. Nielsen, Jr., has
a term of office expiring at the first annual meeting of shareholders; a second
class, consisting of Ronald J. Gentile, Emil R. Krahulik and Thomas F. Lawrence,
Jr. has a term of office expiring at the second annual meeting of shareholders;
and a third class, consisting of Frances M. Gorish, R. Michael Kennedy, John W.
Sanford III and Robert N. Smith has a term of office expiring at the third
annual meeting of shareholders. Biographical information with respect to each
individual is set forth under "Management of the Bank -- Biographical
Information."
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITIONS HELD WITH THE COMPANY
------------------------------ -------------------------------------------------------------
<S> <C>
Timothy A. Dempsey............ President and Chief Executive Officer
Ronald J. Gentile............. Executive Vice President and Chief Operating Officer
Arthur W. Budich.............. Senior Vice President, Treasurer and Chief Financial Officer
Laurence D. Haggerty.......... Senior Vice President
Donna M. Lyons................ Senior Vice President/Auditor
Barbara A. Rudy............... Senior Vice President
Nancy L. Sobotor-Littell...... Corporate Secretary and Director of Human Resources
</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.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company. It is
currently expected that, unless and until the Company becomes actively involved
in business activities separate from those conducted by the Bank, no separate
compensation will be paid to the directors and employees of the Company.
However, directors of the Company or the Bank who are not employees of the
Company or the Bank or any of their subsidiaries ("Outside Directors") may be
entitled to participate in stock incentive plans established by the Company. See
"Management of the Bank -- Benefits -- Stock Option Plan" and "-- Recognition
and Retention Plan." The Company will also guarantee certain obligations of the
Bank to the Bank's executive officers, employees and directors, as described
below. Information concerning the principal occupations, employment and
compensation of the directors and officers of the Company during the past five
years is set forth under "Management of the Bank -- Biographical Information."
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MANAGEMENT OF THE BANK
TRUSTEES
The directors of the Company are also the trustees of the Bank. Upon
consummation of the Conversion, the current trustees of the Bank will become
directors of the stock chartered Bank. The following table sets forth certain
information regarding the Board of Trustees of the Bank.
<TABLE>
<CAPTION>
TRUSTEE TERM
NAME AGE(1) POSITIONS HELD WITH THE BANK SINCE EXPIRES(2)
- -------------------------- ------ ----------------------------------------- ------- ----------
<S> <C> <C> <C> <C>
Timothy A. Dempsey........ 63 President, Chief Executive Officer and 1974 1998
Trustee
Ronald J. Gentile......... 48 Executive Vice President, Chief Operating 1990 1999
Officer and Trustee
Frances M. Gorish......... 70 Trustee 1979 2000
R. Michael Kennedy........ 46 Trustee 1997 2000
Fred M. Knipp............. 66 Trustee 1992 1998
Emil R. Krahulik.......... 64 Trustee 1984 1999
Thomas F. Lawrence, 69 Trustee 1965 1999
Jr. ....................
Henry L. Nielsen, Jr. .... 71 Trustee 1962 1998
John W. Sanford III....... 60 Trustee 1986 2000
Robert N. Smith........... 48 Trustee 1994 2000
</TABLE>
- ---------------
(1) At December 1, 1997.
(2) The year in which the term of the individual as a director of the Company
would expire.
EXECUTIVE OFFICERS
The executive officers of the Bank are Mr. Dempsey and Mr. Gentile who are
trustees of the Bank, and Mr. Budich, Mr. Haggerty, Ms. Lyons, Ms. Rudy and Ms.
Sobotor-Littell, who are not trustees of the Bank. See "Management of the
Company." Each of the executive officers of the Bank will retain his or her
office in the converted Bank until the annual meeting of the Board of Trustees
of the Bank held immediately after the first annual meeting of shareholders of
the Company subsequent to Conversion and until their successors are elected and
qualified or until they are removed or replaced. Officers are re-elected by the
Board of Directors annually.
BIOGRAPHICAL INFORMATION
Positions held by trustees or executive officers of the Bank have been held
for at least the past five years unless stated otherwise.
Trustees
Timothy A. Dempsey serves as the President, Chief Executive Officer and a
trustee of the Bank. Mr. Dempsey has been involved in the financial institutions
industry for more than 45 years and has served as President and Chief Executive
Officer of the Bank since 1985 and as a trustee since 1974. He also serves as
President and Chief Executive Officer of the Bank's wholly owned subsidiaries,
including Warsave, WSB Financial and WSB Mortgage. In addition, he serves as the
Executive Vice President and a director of the Institutional Investors Capital
Appreciation Fund, Inc., a director of the M.S.B. Fund Inc. and Chairman of the
Orange County Water Authority.
Ronald J. Gentile serves as the Executive Vice President, Chief Operating
Officer and a trustee of the Bank. Mr. Gentile joined the Bank and has been a
trustee since 1990. In addition, he serves as Vice President of the Bank's
wholly owned subsidiaries, including Warsave, WSB Financial and WSB Mortgage.
Prior to joining the Bank, Mr. Gentile served as a senior bank examiner for the
FDIC. He is also a member of the board of directors of the TriState Health
System, Inc. and Winslow Therapeutic Riding Unlimited, and a former President
and member of the board of directors of the Warwick Valley Rotary Club.
Frances M. Gorish joined the Bank in 1944 and has served as a trustee since
1979. Now retired, she served in various capacities for the Bank, most recently
as Vice President and Corporate Secretary. In
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addition, she serves as treasurer of the Salvation Army, Lorena Abbott Service
Unit, and the treasurer of the Florida Historical Society.
R. Michael Kennedy became a trustee of the Bank in 1997. Mr. Kennedy is a
general partner and manager of various real estate companies, all managed
through Kennedy Companies. He is also the general managing partner of The
Fireplace Restaurant.
Fred M. Knipp has served as a trustee of the Bank since 1992. He is the
President, Chief Executive Officer and director of the Warwick Valley Telephone
Company and a director of Centrex Communications Corporation.
Emil R. Krahulik has served as a trustee of the Bank since 1984. He is a
partner in the law firm of Beattie & Krahulik and serves as the Bank's general
counsel.
Thomas F. Lawrence, Jr. has been a trustee of the Bank since 1965. Mr.
Lawrence, now retired, formerly served as President of Warwick Auto Company Inc.
He is also President of the Warwick Cemetery Association. Mr. Lawrence is Nancy
L. Sobotor-Littell's father.
Henry L. Nielsen, Jr. has served as a trustee of the Bank since 1962. He is
the President of Nielsen Construction Co., Inc. and is a director of the Warwick
Valley Telephone Company. He is also a trustee of the Warwick Historical Society
and the Warwick Cemetery Association.
John W. Sanford III has been a trustee since 1986. Mr. Sanford also serves
as President of John W. Sanford & Son, Inc., an insurance agency, and is a
partner in Maple Terrace Farms, a dairy beef business.
Robert N. Smith has served as a trustee since 1994. He is currently the
President of Lazear-Smith and Vander-Plaat Memorial Home and Lazear-Smith
Funeral Home. Mr. Smith is also sole proprietor of Smith and Gesell Associates,
a bookkeeping and tax preparation service.
Executive Officers who are not Trustees
Arthur W. Budich, age 47, has been the Senior Vice President, Treasurer and
Chief Financial Officer of the Bank since 1992 and has been employed by the Bank
in various capacities since 1986. He also serves as Treasurer of the Bank's
wholly owned subsidiaries, which include Warsave Development, Inc., WSB
Financial Services, Inc. and WSB Mortgage Company of New Jersey, Inc.
Laurence D. Haggerty, age 54, is the Senior Vice President, Commercial Loan
Department of the Bank. He has served in such capacity since 1991.
Donna M. Lyons, age 42, has served as the Senior Vice President of the Bank
since 1992 and Auditor of the Bank since 1989.
Barbara A. Rudy, age 44, has served as Senior Vice President, Loan
Servicing since 1991. She has been employed by the Bank in various capacities
since 1972.
Nancy L. Sobotor-Littell, age 40, is the Corporate Secretary and Director
of Human Resources of the Bank, positions she has held since 1988. She has been
employed by the Bank in various capacities since 1975. In addition, she serves
as Corporate Secretary of the Bank's wholly-owned subsidiaries, including
Warsave, WSB Financial and WSB Mortgage. Ms. Sobotor-Littell is Thomas F.
Lawrence, Jr.'s daughter.
Significant Employee
Arthur S. Anderson, age 39, has served as the Executive Director of the
Bank's Mortgage Department since 1995. Mr. Anderson is also the Vice President
of WSB Mortgage. Prior to joining the Bank, Mr. Anderson served as Vice
President of The Bank of New York Mortgage Company from March, 1989 until
February, 1995.
COMMITTEES AND MEETINGS OF THE BOARDS OF THE COMPANY AND THE BANK
The Board of Trustees of the Bank meets on a monthly basis and may have
additional special meetings from time to time. During the fiscal year ended May
31, 1997, the Board of Trustees of the Bank met 12 times. No current trustee
attended fewer than 75% of the total number of Board meetings and committee
meetings of which such trustee was a member.
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Effective as of the Conversion, the Company and/or the Bank will maintain
the following committees of each of their respective Boards of Directors:
The Executive Committee of both the Company and the Bank consists of
Messrs. Dempsey, Nielsen, Lawrence, Krahulik and Sanford and Ms. Gorish. Each
such committee generally oversees the affairs of the Bank and Company, considers
proposals from management in relation to the election of officers and makes
recommendations to the Board regarding those individuals nominated to officer
positions.
The Audit Committee of both the Company and the Bank consists of Messrs.
Nielsen, Knipp, Sanford and Kennedy. Each Audit Committee meets periodically
with its independent certified public accountants to arrange the Bank's annual
financial statement audit and to review and evaluate recommendations made during
the annual audit. The Audit Committee also reviews and evaluates the procedures
and performance of the Bank's internal auditing staff.
The Compensation Committee of both the Company and the Bank consists of
Messrs. Lawrence, Nielsen and Kennedy and Ms. Gorish. The Compensation Committee
is responsible for overseeing the development, implementation and conduct of the
Company's and the Bank's employment and personnel policies, notices and
procedures, including the administration of the Company's and the Bank's
compensation and benefit programs.
The Bank also maintains the following committees: the Building Committee,
the CRA Committee, the Public Relations Committee and the Re-Inspection
Committee.
TRUSTEES' COMPENSATION
Fee Arrangements. Currently, each trustee of the Bank who is not an
employee of the Bank receives a fee of $400 for each Board meeting attended and
$250 for each committee meeting attended. In addition, the members of the
Re-Inspection Committee each receive an annual $250 fee. The aggregate amount of
fees paid to such trustees by the Bank for the year ended May 31, 1997 was
approximately $115,475. Directors of the Company will not be separately
compensated for their services as such. It is anticipated that directors will
also be covered by the Stock Option Plan and RRP expected to be implemented by
the Company. See "-- Benefits -- Stock Option Plan" and "-- Recognition and
Retention Plan."
TRUSTEES EMERITUS
The Bank maintains a Board of Trustees Emeritus which currently consists of
four former trustees of the Bank. The four trustees emeriti are Harry C. Sayre,
Jr., M.D., John W. Sanford, Jr., Robert A. Schoonover and Wilbur L. Smith.
Pursuant to the Bank's By-Laws, trustees must retire in the year they reach age
75, and any trustee who retires because of such age limitation is eligible to be
elected as trustee emeritus. Trustees emeritus have no vote and receive the same
meeting fees as trustees of the Bank. Recognizing the importance of past
experience in present operations and future planning, the Bank has found the
trustee emeritus program extremely beneficial.
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EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash
compensation paid by the Bank for services rendered in all capacities during the
fiscal year ended May 31, 1997 to the Chief Executive Officer and all executive
officers of the Bank who received compensation in excess of $100,000 ("Named
Executive Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION AWARDS(2)
ANNUAL ------------------------------------------
COMPENSATION(1) RESTRICTED
----------------- STOCK ALL OTHER
SALARY BONUS AWARDS(3) OPTIONS(3) COMPENSATION(4)
NAME AND PRINCIPAL POSITIONS YEAR ($) ($) ($) (#) ($)
- -------------------------------- ---- -------- ----- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Timothy A. Dempsey
President and Chief Executive
Officer....................... 1997 $189,750 -- -- -- $ 5,052
Ronald J. Gentile
Executive Vice President and
Chief Operating Officer....... 1997 $123,862 -- -- -- $ 3,618
</TABLE>
- ---------------
(1) Under Annual Compensation, the column titled "Salary" includes base salary
and payroll deductions for health insurance under the Bank's health
insurance plan and for each individual's contributions under The Warwick
Savings Bank 401(k) Savings Plan ("401(k) Plan"). In addition, Mr. Gentile's
salary amount includes $108.28 per week, which the Bank has added to his
compensation in lieu of providing him with the use of an automobile.
(2) For the fiscal year ended May 31, 1997, there were no: (a) perquisites with
an aggregate value for any named individual in excess of the lesser of
$50,000 or 10% of the total of the individual's salary and bonus for the
year; (b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term incentive
plans prior to settlement or maturation; or (d) preferential discounts on
stock. For 1997 the fiscal year ended May 31, the Bank had no restricted
stock or stock related plans in existence.
(3) During the fiscal year ended May 31, 1997, the Bank did not maintain any
restricted stock, stock options or other long-term incentive plans.
(4) Reflects matching contributions made by the Bank under the 401(k) Plan.
REPORT OF INDEPENDENT COMPENSATION EXPERT
Pursuant to the NYBB regulations governing the Conversion, the Bank must
obtain the opinion of an independent compensation consultant as to whether or
not the total compensation for the executive officers and trustees of the Bank,
viewed as a whole and on an individual basis, is reasonable and proper in
comparison to the compensation provided to executive officers, directors or
trustees of similar publicly-traded financial institutions. The Bank has
obtained an opinion from William M. Mercer, Incorporated, which provides that,
based upon published professional survey data of similarly situated
publicly-traded financial institutions operating in the relevant markets, with
respect to the total cash compensation for executive officers and total
remuneration for trustees of the Bank, such compensation, viewed as a whole and
on an individual basis, is reasonable and proper in comparison to the
compensation provided to similarly situated publicly-traded financial
institutions, and that, with respect to the amount of shares of Common Stock to
be reserved under the ESOP, and expected to be reserved under the RRP and the
Stock Option Plan, as a whole, such amounts reserved for granting are reasonable
in comparison to similar publicly-traded financial institutions.
EMPLOYMENT AGREEMENTS
Effective upon the Conversion, the Company intends to enter into Employment
Agreements with each of Mr. Dempsey, Mr. Gentile, Mr. Budich and Ms.
Sobotor-Littell ("Senior Executives"). These Employment Agreements establish the
respective duties and compensation of the Senior Executives and are intended to
ensure that the Company will be able to maintain a stable and competent
management base after the
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<PAGE> 92
Conversion. The continued success of the Company depends to a significant degree
on the skills and competence of the Senior Executives.
The Employment Agreements provide for three-year terms, with automatic
daily extensions such that the remaining terms of the Employment Agreements
shall be three years unless written notice of non-renewal is given by the
Company or the Senior Executive. The Employment Agreements provide that the
Senior Executive's base salary will be reviewed annually. It is anticipated that
this review will be performed by the Company's Compensation Committee and
approved by non-employee members of the Board, and the Senior Executive's base
salary may be increased on the basis of such officer's job performance and the
overall performance of the Company. The base salaries for Mr. Dempsey, Mr.
Gentile, Mr. Budich and Ms. Sobotor-Littell for 1997 are $200,000, $125,000,
$85,000 and $63,000, respectively. The Employment Agreements also provide for,
among other things, entitlement to participation in stock, retirement and
welfare benefit plans and reimbursement for ordinary and necessary business
expenses. Senior Executives would also be entitled to reimbursement of certain
costs incurred in interpreting or enforcing the Employment Agreements. The
Employment Agreements provide for termination by the Company at any time for
"cause" as defined in the Employment Agreements.
In the event the Company chooses to terminate a Senior Executive's
employment for reasons other than for cause, in the event of a Senior
Executive's resignation from the Company for certain reasons specified in the
Employment Agreements or in the event of a "change of control" as defined in the
Employment Agreements, the Senior Executive (or, in the event of the Senior
Executive's death, such Senior Executive's estate) would be entitled to a lump
sum cash payment in an amount generally equal to (a) the Senior Executive's
earned but unpaid salary, (b) the present value of the amount the Senior
Executive would have earned in salary had he or she continued working through
the unexpired term of the Employment Agreement and (c) the present value of the
additional contributions or benefits that such Senior Executive would have
earned under the specified employee benefit plans or programs of the Bank or the
Company during the remaining term of the Employment Agreement and payments that
would have been made under any incentive compensation plan during the remaining
term of the Employment Agreement. The Employment Agreements also provide for the
cash out of any stock options, appreciation rights or restricted stock as if the
Senior Executive was fully vested. The Bank and the Company would also continue
the Senior Executive's life, health and any disability insurance or other
benefit plan coverage for the remaining terms of the Employment Agreements.
Reasons specified as grounds for resignation for purposes of the Employment
Agreements are: failure to elect or re-elect the Senior Executive to such
officer's position; failure to vest in the Senior Executive the functions,
duties or authority associated with such position; if the Senior Executive is a
member of the Board of Directors of the Bank or Company, failure to renominate
or re-elect such Senior Executive to such Board; any material breach of contract
by the Bank or the Company which is not cured within 30 days after written
notice thereof; a change in the Senior Executive's principal place of employment
for a distance in excess of 50 miles from the Bank's principal office in
Warwick, New York. In general, for purposes of the Employment Agreements and the
plans maintained by the Company or the Bank, a "Change of Control" will
generally be deemed to occur when a person or group of persons acting in concert
acquires beneficial ownership of 25% or more of any class of equity security of
the Company or the Bank, upon a merger, consolidation or reorganization of the
Company or the Bank, upon liquidation or sale of substantially all the assets of
the Company or the Bank or upon a contested election of directors which results
in a change in the majority of the Board of Directors. Based on current
compensation and benefit costs, cash payments to be made in the event of a
Change of Control of the Bank or the Company pursuant to the terms of the
Employment Agreements would be approximately $3,474,000, of which approximately
$1,677,000 would be payable to Mr. Dempsey, $795,000 would be payable to Mr.
Gentile, $572,000 would be payable to Mr. Budich and $430,000 would be payable
to Ms. Sobotor-Littell. However, the actual amount to be paid under the
Employment Agreements in the event of a Change of Control of the Bank or the
Company cannot be estimated at this time, because the actual amount is based on
the compensation and benefit costs applicable to these individuals and other
factors existing at the time of the Change of Control which cannot be determined
at this time. Such figures do not include any estimate as to amounts that may be
payable on account of the Stock Option Plan or RRP because no options or shares
have been allocated under such plans.
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Cash and benefits paid to a Senior Executive under the Employment Agreement
together with payments under other benefit plans following a Change of Control
of the Bank or the Company may constitute an "excess parachute payment" under
Section 280G of the Code, resulting in the imposition of a 20% excise tax on the
recipient and the denial of the deduction for such excess amounts to the Company
and the Bank. In the event that any amounts paid to a Senior Executive following
a Change of Control would constitute excess parachute payments, the Employment
Agreements provide that such Senior Executives will be indemnified for any
excise taxes imposed due to such excess parachute payments, and any additional
excise, income and employment taxes imposed as a result of such tax
indemnification.
EMPLOYEE RETENTION AGREEMENTS
Effective upon the Conversion, the Bank intends to enter into Retention
Agreements with the following four employees: Laurence D. Haggerty, Donna M.
Lyons, Barbara A. Rudy and Arthur S. Anderson ("Contract Employees"). The
purpose of the Retention Agreements is to secure the Contract Employees'
continued availability and attention to the Bank's affairs, relieved of
distractions arising from the possibility of a corporate change of control. The
Retention Agreements do not impose an immediate obligation on the Bank to
continue the Contract Employees' employment, but provide for a period of assured
employment ("Assurance Period") in the event of a "Change of Control" as defined
in the Retention Agreements, which definition is similar to the definition of
change of control contained in the Employment Agreement. The Retention
Agreements provide for an initial Assurance Period of one year commencing on the
date of a Change of Control. In general, the applicable Assurance Periods will
be automatically extended on a daily basis under the Retention Agreements until
written notice of non-extension is given by the Bank or the Contract Employee,
in which case an Assurance Period would end on the first anniversary of the date
such notice is given.
If a Contract Employee is discharged without "cause" as defined in the
Retention Agreements during the Assurance Period, or prior to the commencement
of the Assurance Period but within 3 months of, and in connection with a Change
of Control, or the Contract Employee voluntarily resigns during the Assurance
Period following a failure to elect or re-elect the Contract Employee to such
officer's position; failure to vest in the Contract Employee the functions,
duties or authority associated with such position; if the Contract Employee is a
member of the Board of Directors of the Bank or Company, failure to renominate
or reelect such Contract Employee such Board; any material breach of contract by
the Bank or the Company which is not cured within 30 days after written notice
thereof; a change in the Contract Employee's principal place of employment for a
distance in excess of 50 miles from the Bank's principal office in Warwick, New
York, the Contract Employee (or, in the event of such employee's death, such
employee's estate) would be entitled to a lump sum cash payment in an amount
generally equal to (a) the Contract Employee's earned but unpaid salary, (b) the
present value of the amount the Contract Employee would have earned in salary
had he or she continued working during the remaining term of the Assurance
Period and (c) the present value of the additional contributions or benefits
that such that Contract Employee would have earned under the specified employee
benefit plans or programs of the Bank or Company during the remaining term of
the Assurance Period. The Retention Agreements also provide for the cashout of
stock options, appreciation rights or restricted stock as if the Contract
employee was fully vested. Each Contract Employee's life, health and disability
coverage would also be continued during the Assurance Period. The total amount
of termination benefits payable to each Contract Employee under the Retention
Agreements is limited to three times the Contract Employee's average total
compensation for the prior five calendar years. Payments to the Contract
Employees under their respective Retention Agreements will be guaranteed by the
Company to the extent that the required payments are not made by the Bank. Based
on current compensation and benefit costs applicable to the Contract Employees
expected to be covered by the Retention Agreements, cash payments to be made in
the event of a Change of Control would be approximately $580,000. However, the
actual amount to be paid under the Retention Agreements in the event of a change
of control of the Bank or the Company cannot be estimated at this time because
it will be based on the compensation and benefit costs applicable to the
Contract Employees and other factors existing at the time of the change of
control which cannot be determined at this time. Such figures do not include any
estimate as to amounts that may be payable on account of the Stock Option Plan
or RRP because no options or shares have been allocated under such plans.
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<PAGE> 94
BENEFITS
Pension Plan. The Bank maintains The Warwick Savings Bank Defined Benefit
Pension Plan, a non-contributory, tax-qualified defined benefit pension plan
("Pension Plan") for eligible employees. All employees, except (i) those paid on
an hourly basis or contract basis, (ii) leased employees or (iii) employees
regularly employed by outside employers for maintenance of properties, are
eligible to participate in the Pension Plan upon the later of (i) the end of the
12-month period in which he or she completes 1,000 hours of service or (ii) the
date he or she attains age 21. The Pension Plan provides an annual benefit for
each participant, including the executive officers named in the Summary
Compensation Table above, equal to 2% of the participant's average annual
compensation, multiplied by the participant's years of credited service, up to a
maximum of 30 years.
Average annual compensation is the average of a Participant's compensation
over the three years of employment out of the Participant's last 10-year period
of employment during which the participant's compensation is the highest. A
participant is fully vested in his or her pension benefit after five years of
service. The Pension Plan is funded by the Bank on an actuarial basis, and all
assets are held in trust by the Pension Plan trustee.
Benefit Restoration Plan. The Bank has adopted the Benefit Restoration
Plan of The Warwick Savings Bank ("BRP") to provide eligible employees with the
benefits that would be due to such employees under the Pension Plan, the 401(k)
Plan and the ESOP if such benefits were not limited under the Code. The BRP is
also intended to make up allocations lost by participants of the ESOP who retire
prior to the complete repayment of the ESOP loan. BRP benefits to be provided
with respect to the Pension Plan are reflected in the pension table.
The Bank intends to establish an irrevocable grantor's trust to hold the
assets of the BRP. This trust would be funded with contributions of the Bank for
the purpose of providing the benefits under the BRP. The assets of the trust are
considered to be part of the general assets of the Bank and are subject to
claims of the Bank's creditors. Earnings on the trust's assets are taxable to
the Bank.
Pension Plan Table. The following table sets forth the estimated annual
benefits payable under the Pension Plan upon a participant's normal retirement
at age 65, expressed in the form of a single life annuity, and any related
amounts payable under the BRP, for the average annual compensation and years of
credited service specified.
PENSION PLAN TABLE(1)
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE AT RETIREMENT
AVERAGE ANNUAL -----------------------------------------------------------
COMPENSATION 15 20 25 30 35(2)
- -------------- ------- -------- -------- -------- --------
<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(3) 52,500 70,000 87,500 105,000 105,000
200,000(3) 60,000 80,000 100,000 120,000 120,000
225,000(3) 67,500 90,000 112,500 135,000(4) 135,000(4)
250,000(3) 75,000 100,000 125,000 150,000(4) 150,000(4)
</TABLE>
- ---------------
(1) The annual benefits shown in the table above assume the participant would
receive his retirement benefits under the Pension Plan and the BRP in the
form of a straight life annuity at normal retirement age.
(2) Normal retirement benefits are limited to 60% of average annual earnings.
(3) For the Pension Plan year ending September 30, 1997, the annual compensation
for calculating benefits may not exceed $150,000 (as adjusted for subsequent
years pursuant to Code provisions). The limitation is $160,000 for the plan
year beginning October 1, 1997, and will be adjusted to reflect cost of
living increases after 1997 in accordance with Section 401(a)(17) of the
Code. The table reflects amounts payable in conjunction with the BRP.
(4) These are hypothetical benefits based upon the Pension Plan's normal
retirement benefit formula. The maximum annual benefit permitted under
Section 415 of the Code in 1997 is $125,000 in 1997, or, if higher, a
member's current accrued benefit as of December 31, 1982 (but not more than
$136,425). The
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$125,000 ceiling will be adjusted to reflect cost of living increases after
1997 in accordance with Section 415 of the Code. The BRP will provide the
difference between the amounts appearing in this table and the maximum
amount allowed by the Code.
The following table sets forth the years of credited service and the
average monthly compensation (as defined above) determined as of May 31, 1997,
for each of the individuals named in the Summary Compensation Table. The Average
Annual Earnings includes the base salary component of the figures shown in the
salary column of the Summary Compensation Table.
<TABLE>
<CAPTION>
YEARS OF
CREDITED SERVICE
---------------- AVERAGE ANNUAL
YEARS MONTHS COMPENSATION
----- ------ --------------
<S> <C> <C> <C>
Mr. Dempsey........................................... 24 3 $178,349
Mr. Gentile........................................... 7 0 $112,168
</TABLE>
401(k) Plan. The Bank maintains The Warwick Savings Bank 401(k) Savings
Plan ("401(k) Plan"), a tax-qualified profit-sharing plan under Sections 401(a)
and 401(k) of the Code. Employees who satisfy prescribed eligibility
requirements may make pre-tax salary deferrals under section 401(k) of the Code.
Salary deferrals are made by election and are limited to 15% of compensation up
to $160,000 (for 1997), or to a limit imposed under the Code ($9,500 for 1997).
The Bank makes matching contributions equal to a percentage of salary
contributions determined annually by the Bank, up to 3% of salary. Employees are
fully vested in their salary deferrals, and become incrementally vested in the
Bank's contribution after one year and fully vested in the Bank's contributions
after seven years.
The Bank has amended the 401(k) Plan in connection with the Conversion to
provide that the Bank's matching contributions will be invested in an investment
fund consisting primarily of Common Stock of the Company. In addition,
participating employees may elect to invest all or a portion of their remaining
account balances in such investment fund or the other investment funds provided
under the 401(k) Plan. Common Stock held by the 401(k) Plan may be newly issued
or treasury shares acquired from the Company or outstanding shares purchased in
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.
Employee Stock Ownership Plan and Trust. The Company has established, and
the Bank has adopted, for the benefit of eligible employees, an ESOP and related
trust to become effective upon completion of the Conversion. Substantially all
employees of the Bank or the Company who have completed 1,000 hours of service
during a consecutive 12-month period will be eligible to become participants in
the ESOP. The ESOP intends to purchase 8% of the Common Stock to be issued in
the Conversion, including shares to be issued to the Foundation. As part of the
Conversion and in order to fund the ESOP's purchase of the Common Stock to be
issued in the Conversion, the Bank or the Company expects to contribute to the
ESOP sufficient funds to pay the par value of the Common Stock to be purchased,
and the ESOP intends to borrow funds from the Company equal to the balance of
the aggregate purchase price of the Common Stock. Although contributions to the
ESOP will be discretionary, the Company and the Bank intend to make annual
contributions to the ESOP in an aggregate amount at least equal to the principal
and interest requirement on the debt. It is expected that this loan will be for
a term of up to 10 years, will bear interest at the rate of 8% per annum and
will call for annual payments of principal and all accrued but unpaid interest
on the outstanding balance of the loan; provided, however, that payments in any
year may be deferred if the Company determines that either its consolidated
return on average assets or return on average equity do not meet certain
prescribed levels or it will not be able to deduct such payments for federal
income tax purposes for such year, so long as all payments have been made by the
end of the ten-year term of the loan. It is anticipated that the loan will also
permit optional pre-payment. The Company and the Bank may make additional annual
contributions to the ESOP to the maximum extent deductible for federal income
tax purposes.
Shares purchased by the ESOP will initially be pledged as collateral for
the loan and will be held in a suspense account until released for allocation
among participants in the ESOP as the loan is repaid. The pledged shares will be
released annually from the suspense account in an amount proportional to the
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repayment of the ESOP loan for each plan year. The released shares will be
allocated among the accounts of participants who are employees of the Bank or
the Company on the last day of the plan year on the basis of the participants'
total taxable compensation for the year of allocation. Benefits generally become
vested at the rate of 20% per year beginning on a participant's third year of
service with 100% vesting after seven years of service (including past service).
Participants also become immediately vested upon termination of employment due
to death, retirement at age 65 or older, permanent disability or upon the
occurrence of a change of control. Forfeitures will be reallocated among
remaining participating employees, in the same proportion as contributions.
Vested benefits may be paid in a single sum or installment payments and are
payable upon death, retirement at age 65 or older, disability or separation from
service.
In connection with the establishment of the ESOP, a Plan Administrator was
appointed to administer the ESOP ("Plan Administrator"). An unrelated corporate
trustee for the ESOP will be appointed prior to the Conversion and will continue
thereafter. The Plan Administrator may instruct the trustee regarding investment
of funds contributed to the ESOP. The ESOP trustee, subject to its fiduciary
duty, must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. Under the ESOP, unallocated shares
will be voted in a manner calculated to most accurately reflect the instructions
received from participants regarding the allocated stock as long as such vote is
in accordance with the provisions of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA").
The ESOP may purchase additional shares of Common Stock in the future, in
the open market or otherwise, and may do so either on a leveraged basis with
borrowed funds or with cash dividends, periodic employer contributions or other
cash flow. Whether such purchases will be made and the terms and conditions of
any such purchases will be determined by the ESOP's fiduciaries taking into
account such factors as they consider relevant at the time, including their
judgment as to the attractiveness of the Common Stock as an investment, the
price at which Common Stock may be purchased and, in the case of leveraged
purchases, the terms and conditions on which borrowed funds are available and
the willingness of the Company or the Bank to offer purchase money financing or
guarantee purchase money financing offered by third parties.
Stock Option Plan. Following the Conversion, the Board of Directors of the
Company intends to adopt a stock option plan ("Stock Option Plan") which would
provide for the granting of options to purchase Common Stock to eligible
officers, employees and Outside Directors of the Company and Bank. If
implemented within one year following the Conversion, the adoption of the Stock
Option Plan will be subject to shareholder approval to be obtained at a meeting
of shareholders to be held no earlier than six months after the completion of
the Conversion. Assuming such implementation, an amount of shares of Common
Stock equal to 10% of the shares of Common Stock to be issued in the Conversion,
including shares to be issued to the Foundation, is expected to be reserved for
issuance under the Stock Option Plan. No determinations have been made by the
Board of Directors as to the specific terms of the Stock Option Plan or the
amount of awards thereunder. However, applicable regulations provide that, in
the event that such plans are implemented within one year following the
Conversion, no individual officer or employee may receive more than 25% of the
options granted and that Outside Directors may not receive more than 5%
individually or more than 30% in the aggregate of the options granted. Such
regulations also provide that the exercise price of any option granted must be
the market price of Common Stock as of the date of grant, and options granted
may not vest any earlier than one year from the date the Stock Option Plan is
approved by shareholders. Accordingly, it is not anticipated that any options
granted pursuant to the Stock Option Plan will be exercisable within one year
following the Conversion. In determining the estimated pro forma market value of
the Common Stock, no effect was given to the issuance of additional shares of
Common Stock pursuant to the Stock Option Plan. See footnote 4 to the tables
contained in "Pro Forma Data" for information regarding the effect on pro forma
net earnings per share and pro forma shareholders' equity per share assuming all
options granted pursuant to the Stock Option Plan were exercised.
The purpose of the Stock Option Plan will be to attract and retain
qualified personnel in key positions, provide directors, officers and key
employees with a proprietary interest in the Company as an incentive to
contribute to the success of the Company and its subsidiaries and reward
officers and key employees for outstanding performance. Although the terms of
the Stock Option Plan have not yet been determined, it is expected that the
Stock Option Plan will provide for the grant of: (i) options to purchase the
Company's
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Common Stock intended to qualify as incentive stock options under Section 422 of
the Code ("Incentive Stock Options"); (ii) options that do not so qualify
("Non-Statutory Stock Options"); and (iii) Limited Rights (discussed below)
which will be exercisable only upon a change of control of the Bank or the
Company. Outside Directors of the Company are not eligible to be granted
Incentive Stock Options. Unless sooner terminated, any Stock Option Plan adopted
will be in effect for a period of 10 years.
The Stock Option Plan will be administered by a Committee of the Board of
Directors ("Stock Option Committee"), and such committee will determine which
officers and employees will be granted options and Limited Rights, whether such
options will be Incentive Stock Options or Non-Statutory Stock Options, the
number of shares subject to each option, the exercise price of each
Non-Statutory Stock Option, whether such options may be exercised by delivering
other shares of Common Stock and when such options become exercisable. It is
expected that any Stock Option Plan will permit options to be granted for terms
of up to 10 years (5 years in the case of Incentive Stock Options granted to
employees who are 10% shareholders) and at exercise prices no less than the fair
market value at date of grant (110% of fair market value in the case of
Incentive Stock Options granted to employees who are 10% shareholders). It is
expected that in the event of death or disability, upon termination of
employment as an officer or employee or upon termination of service as an
Outside Director, grants would become 100% vested.
It is anticipated that the Stock Option Plan will also provide for Limited
Rights which, upon a change of control, will allow the holder to exercise such
Limited Rights and thereby be entitled to receive a lump sum cash payment equal
to the difference between the exercise price of the related option and the fair
market value of the shares of Common Stock subject to the option on the date of
exercise of the right in lieu of purchasing the stock underlying the option. It
is also anticipated that these Limited Rights could be canceled by an acquiror
in the contract for an acquisition if such acquiror commits to substitute other
consideration (including substitute options on the acquiror's stock) having
equivalent value to the options being canceled.
An employee will not be deemed to have received taxable income upon grant
or exercise of any Incentive Stock Option; provided, however, that shares
received through the exercise of such option are not disposed of for at least
one year after the date the stock is received in connection with the option
exercise and two years after the date of grant of the option. No compensation
deduction may be taken by the Company as a result of the grant or exercise of
Incentive Stock Options, provided such shares are not disposed of before the
expiration of the period described above (a "disqualifying disposition"). In the
case of a Non-Statutory Stock Option and in the case of a disqualifying
disposition of an Incentive Stock Option, an employee will be deemed to receive
ordinary income upon exercise of the stock option in an amount equal to the
amount by which the exercise price is exceeded by the fair market value of the
Common Stock purchased on the date of exercise. The amount of any ordinary
income deemed to be received by an optionee upon the exercise of a Non-Statutory
Stock Option or due to a disqualifying disposition of an Incentive Stock Option
may be a deductible expense for tax purposes for the Company. In the case of
Limited Rights, upon exercise, the option holder would have to include the
amount paid to him or her upon exercise in his or her gross income for federal
income tax purposes in the year in which the payment is made and the Company may
be entitled to a deduction for federal income tax purposes of the amount paid.
Grants to Outside Directors under the Stock Option Plan are expected to be
self-executing. It is anticipated that the exercise price per share of each
option granted to Outside Directors will be equal to the fair market value of
the shares of Common Stock on the date the option is granted.
Recognition and Retention Plan. Following the Conversion, the Company also
intends to establish the RRP as a method of providing officers, employees and
Outside Directors of the Bank and Company with a proprietary interest in the
Company in a manner designed to encourage such persons to remain with the Bank
and the Company. If implemented within one year following the Conversion, the
adoption of the RRP will be subject to shareholder approval obtained at a
meeting of shareholders to be held no earlier than six months after the
completion of the Conversion.
If the RRP is implemented, the Company expects to contribute funds to the
RRP to enable the RRP trust to acquire, in the aggregate, an amount up to 4% of
the shares of Common Stock to be issued in the Conversion, including shares to
be issued to the Foundation. Shares used to fund the RRP may be acquired through
open market purchases, if permitted, or from authorized but unissued shares. No
determinations have
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<PAGE> 98
been made as to the specific terms of the RRP or the amount of awards
thereunder. Although no specific award determinations have been made, the
Company anticipates that, if the RRP is implemented, the Company will provide
awards to eligible officers, employees and directors to the extent permitted by
applicable regulations. Applicable regulations provide that no individual
employee may receive more than 25% of the shares of any plan and that
non-employee directors may not receive more than 5% of the shares individually
or 30% in the aggregate in the case of plans implemented within one year
following the Conversion. Applicable regulations also provide that awards under
the RRP may not vest any earlier than one year from the date the RRP is approved
by shareholders. Accordingly, it is not anticipated that any shares will be
issued to participants in the RRP within one year following the Conversion. The
estimated pro forma market value of the Common Stock was determined after giving
effect to the adoption of the RRP. This effect is illustrated in the tables
contained in "Pro Forma Data."
Any RRP adopted shall be administered by a Committee of the Board of
Directors ("RRP Committee"). Any grants or allocations under the RRP for the
benefit of Outside Directors are expected to be self-executing. All awards are
expected to be granted in the form of shares of Common Stock held by the RRP at
no cost to the recipients of such awards. The Board intends to appoint an
independent fiduciary to serve as trustee of the trust to be established
pursuant to any RRP. The RRP is expected to provide for the vesting of awards
granted thereunder in the manner specified by the RRP Committee. It is also
expected that, in the event of death or disability, grants would be 100% vested
upon termination of employment of an officer or employee, or upon termination of
service as a director.
When shares become vested in accordance with the RRP, the participants will
recognize income equal to the fair market value of the Common Stock at that
time. The amount of income recognized by the participants may be a deductible
expense for tax purposes for the Company. When shares become vested and are
actually distributed in accordance with the RRP, the participants will also
receive amounts equal to any accrued dividends with respect thereto. Prior to
vesting, recipients of grants may direct the voting of the shares awarded to
them. Shares not subject to grants will be voted by the trustee of the RRP in
proportion to the directions provided with respect to shares subject to grants.
Vested shares will be distributed to recipients as soon as practicable following
the day on which they are vested. Any awards to Outside Directors under the RRP
implemented prior to the first anniversary of the Conversion and the material
terms and conditions thereof, will be specified in a plan document approved by
shareholders.
In the event that additional authorized but unissued shares are acquired by
the RRP after the Conversion, the interests of existing shareholders will be
diluted. See "Pro Forma Data."
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Section 22(h) of the Federal Reserve Act and the FRB's Regulation O
thereunder require that all loans or extensions of credit to executive officers
and directors must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. The Bank has made loans
or extended credit to executive officers and also to certain persons related to
executive officers and trustees. All such loans were made by the Bank in the
ordinary course of business and were not made with more favorable terms nor did
they involve more than the normal risk of collectibility or present unfavorable
features. The outstanding principal balance of such loans to executive officers
and their associates totaled $54,700 or 0.1% of the Bank's retained earnings at
August 31, 1997 and 0.01% of the Bank's pro forma stockholders' equity at August
31, 1997, after giving effect to the Conversion, and assuming the sale of Common
Stock at the maximum of the Estimated Price Range. In addition, the Bank has
committed a line of credit of $2.5 million to the Warwick Valley Telephone
Company, none of which was outstanding at August 31, 1997. Mr. Knipp is the
Chief Executive Officer and Mr. Nielsen is a director of Warwick Valley
Telephone Company.
Mr. Krahulik is a partner in the law firm of Beattie & Krahulik, which the
Bank retains to provide certain legal services. In the fiscal year ended May 31,
1997, the Bank paid $112,875 for legal services provided during such period. In
addition, the firm received fees in the amount of approximately $395,017 from
third parties pursuant to its representation of the Bank in loan closings and
other legal matters for the fiscal year ended
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<PAGE> 99
May 31, 1997. WSB Mortgage and Beattie & Krahulik are co-tenants on the lease
for WSB Mortgage's office in West Milford, New Jersey. See "Business of the
Bank -- Properties."
The Company intends that all transactions in the future between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no less
favorable to the Company than could have been obtained by it in arm's-length
negotiations with unaffiliated persons and will be approved by a majority of
independent Outside Directors of the Company not having any interest in the
transaction.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND TRUSTEES
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and trustees propose to purchase in the Offerings,
assuming shares of Common Stock are issued at the minimum and maximum of the
Estimated Price Range and that sufficient shares will be available to satisfy
their subscriptions. The table also sets forth the total expected beneficial
ownership of Common Stock as to all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED OF THE ESTIMATED
PRICE RANGE(1)(2) PRICE RANGE(1)(2)
-------------------------- --------------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF SHARES OFFERED
- ---------------------------------- ---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Timothy A. Dempsey................ $ 300,000 30,000 0.73% 30,000 0.54%
Ronald J. Gentile................. 300,000 30,000 0.73 30,000 0.54
Frances M. Gorish................. 50,000 5,000 0.12 5,000 0.09
R. Michael Kennedy................ 500,000 50,000 1.21 50,000 0.90
Fred M. Knipp..................... 150,000 15,000 0.36 15,000 0.27
Emil R. Krahulik.................. 50,000 5,000 0.12 5,000 0.09
Thomas F. Lawrence, Jr............ 20,000 2,000 0.05 2,000 0.04
Henry L. Nielsen, Jr.............. 150,000 15,000 0.36 15,000 0.27
John W. Sanford III............... 35,000 3,500 0.08 3,500 0.06
Robert N. Smith................... 150,000 15,000 0.36 15,000 0.27
Arthur W. Budich.................. 150,000 15,000 0.36 15,000 0.27
Laurence D. Haggerty.............. 150,000 15,000 0.36 15,000 0.27
Donna M. Lyons.................... 100,000 10,000 0.24 10,000 0.18
Barbara A. Rudy................... 140,000 14,000 0.34 14,000 0.25
Nancy L. Sobotor-Littell.......... 35,000 3,500 0.08 3,500 0.06
---------- ------- ---- ------- ----
All trustees and executive
officers as a group............. $2,280,000 228,000 5.53% 228,000 4.09%
========== ======= ==== ======= ====
</TABLE>
- ---------------
(1) The individual maximum purchase limitation is equal to $150,000. The above
table, however, includes proposed subscriptions by Associates (See "The
Conversion -- Limitations on Common Stock Purchases"). Does not include
subscription orders by the ESOP. The ESOP is expected to purchase 8% of the
shares to be issued in the Conversion, including shares to be issued to the
Foundation. See "-- Benefits -- Employee Stock Ownership Plan and Trust."
(2) The table does not reflect additional shares that the following persons, who
serve as trustees emeritus of the Bank, propose to purchase in the Offerings
in the amounts indicated: Harry C. Sayre, Jr., M.D. -- $20,000, John W.
Sanford, Jr. -- $30,000, Wilbur L. Smith -- $50,000. Such purchases, when
aggregated with the purchases set forth in the table, amount to $2,380,000
or 238,000 shares (5.77% of the shares offered at the minimum of the
Estimated Price Range and 4.27% of the shares offered at the maximum of the
Estimated Price Range).
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<PAGE> 100
THE CONVERSION
THE BOARD OF TRUSTEES OF THE BANK AND THE SUPERINTENDENT OF BANKS OF THE
STATE OF NEW YORK HAVE APPROVED THE PLAN OF CONVERSION, SUBJECT TO APPROVAL BY
THE BANK'S DEPOSITORS ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF
CERTAIN OTHER CONDITIONS. SUCH APPROVAL, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE SUPERINTENDENT.
GENERAL
On July 10, 1997, the Bank's Board of Trustees unanimously adopted the Plan
of Conversion pursuant to which the Bank will be converted from a New York
mutual savings bank to a New York stock savings bank. The Plan was amended by
the Board of Trustees as of August 19, 1997 and October 21, 1997. It is
currently intended that all of the outstanding capital stock issued by the Bank
pursuant to the Plan will be held by the Company, which is incorporated under
Delaware law. The Plan was approved by the Superintendent, and the Bank has
received a notice of intent not to object to the Plan from the FDIC, subject to,
among other things, approval of the Plan by the Bank's depositors. A special
meeting of depositors has been called for this purpose to be held on December
22, 1997.
The Company has received approval from the FRB to become a bank holding
company and to acquire all of the capital stock of the Bank to be issued in the
Conversion. The Company plans to retain 50% of the net proceeds from the sale of
the Common Stock and to use the remaining net proceeds to purchase all of the
then to be issued and outstanding capital stock of the Bank. The Conversion will
be effected only upon completion of the sale of all of the shares of Common
Stock of the Company (or of the Bank, if the holding company form of
organization is not utilized) to be issued pursuant to the Plan.
The Plan provides that the Board of Trustees of the Bank may, at any time
prior to the issuance of the Common Stock and for any reason, decide not to use
the holding company form of organization. Such reasons may include possible
delays resulting from overlapping regulatory processing or policies which could
adversely affect the Bank's or the Company's ability to consummate the
Conversion and transact its business as contemplated herein and in accordance
with the Bank's operating policies. In the event such a decision is made, the
Bank will withdraw the Company's registration statement from the SEC and take
steps necessary to complete the Conversion without the Company, including filing
any necessary documents with the Superintendent and the FDIC. In such event, and
provided there is no regulatory action, directive or other consideration upon
which basis the Bank determines not to complete the Conversion, if permitted by
the Superintendent, the Bank will issue and sell the common stock of the Bank
and subscribers will be notified of the elimination of a holding company and
will be solicited (i.e., be permitted to affirm their orders, in which case they
will need to affirmatively reconfirm their subscriptions prior to the expiration
of the resolicitation offering or their funds will be promptly refunded with
interest at the Bank's passbook rate of interest; or be permitted to modify or
rescind their subscriptions), and notified of the time period within which the
subscriber must affirmatively notify the Bank of such subscriber's intention to
affirm, modify or rescind such subscriber's subscription. The following
description of the Plan assumes that a holding company form of organization will
be used in the Conversion. In the event that a holding company form of
organization is not used, all other pertinent terms of the Plan as described
below will apply to the conversion of the Bank from the mutual to stock form of
organization and the sale of the Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank and (ii) the Company will offer
shares of Common Stock for sale in the Subscription Offering to the Bank's
Eligible Account Holders, Employee Plans, including the ESOP, Supplemental
Eligible Account Holders and Other Depositors. The Plan also provides that
shares not subscribed for in the Subscription Offering may be offered in a
Community Offering to certain members of the general public. It is anticipated
that all shares not subscribed for in the Subscription and Community Offerings
will be offered for sale by the Company to the general public in a Syndicated
Community Offering. The Company and the Bank have reserved the right to accept
or reject, in whole or in part, any orders to purchase shares of the Common
Stock
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<PAGE> 101
received in the Community Offering or in the Syndicated Community Offering. See
"-- Community Offering" and "-- Syndicated Community Offering."
The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be between
$41,225,000 and $55,775,000, is based upon an independent appraisal prepared by
FinPro, a consulting firm experienced in the valuation and appraisal of savings
institutions, of the estimated pro forma market value of the Common Stock of the
Company. 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 Offerings. See "-- Stock Pricing"
for additional information as to the determination of the estimated pro forma
market value of the Common Stock.
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 from the Bank upon written request and is
available for inspection at the offices of the Bank and at the office of the
Superintendent. The Plan is also filed as an Exhibit to the Registration
Statement of which this Prospectus is a part, copies of which may be obtained
from the SEC. See "Additional Information."
PURPOSES OF CONVERSION
The Bank, as a New York mutual savings bank, does not have shareholders 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 many commercial
banks, other business entities and a growing number of savings institutions. The
Conversion will be important to the future growth and performance of the Bank by
providing a larger capital base on which the Bank may operate, enhanced future
access to capital markets, enhanced ability to diversify into other financial
services related activities and enhanced ability to render services to the
public.
The holding company form of organization, if used, would provide additional
flexibility to diversify the Bank's business activities through newly-formed
subsidiaries, or through acquisitions of or mergers with both mutual and stock
institutions, as well as other companies. Although there are no current
arrangements, understandings or agreements, written or oral, regarding any such
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. While there are benefits
associated with the holding company form of organization, such form of
organization may involve additional costs associated with its maintenance and
regulation as a savings and loan company, such as additional administrative
expenses, taxes and regulatory filings or examination fees.
The potential impact of the Conversion upon the Bank's capital base is
significant. The Bank had Tier 1 Leverage Capital of $28.0 million, or 9.81% of
assets, at August 31, 1997. Assuming that $53.7 million of net proceeds are
realized from the sale of Common Stock (being the maximum of the Estimated Price
Range established by the Board of Directors based on the Valuation Range which
has been estimated by FinPro to be from a minimum of $41,225,000 to a maximum of
$55,775,000 (see "Pro Forma Data" for the basis of this assumption)) and
assuming that $26.9 million of the net proceeds are used by the Company to
purchase the capital stock of the Bank, the Bank's Tier 1 Leverage capital
ratio, on a pro forma basis, will increase to 15.89% after the Conversion. In
the event that the holding company form of organization is not utilized and all
of the net proceeds from the Offerings, at the maximum of the Estimated Price
Range, are retained by the Bank, the Bank's Tier 1 Leverage capital ratio on a
pro forma basis, will increase to 24.66% after Conversion. The investment of the
net proceeds from the sale of the Common Stock will provide the Bank with
additional income to further enhance its capital position. The additional
capital may also assist the Bank in offering new programs and expanded services
to its customers.
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 regulatory approval of an offering, to
raise additional equity capital through further sales of securities and to issue
securities in connection with possible acquisitions. At the present time, the
Company has no plans with respect to additional offerings of securities, other
than the issuance of additional shares to the Foundation or upon
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<PAGE> 102
exercise of stock options granted pursuant to the Stock Option Plan or the
possible issuance of authorized but unissued shares to the RRP. 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 of the Bank -- Executive Compensation."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the equity of
the institution based upon the balance in such depositor's account, which
interest may only be realized in the event of a liquidation of the institution.
However, this ownership interest is tied to the depositor's account and has no
tangible market value separate from such deposit account. Any depositor who
opens a deposit account obtains a pro rata ownership interest in the equity of
the institution without any additional payment beyond the amount of the deposit.
A depositor who reduces or closes such depositor's account receives the balance
in the account but receives nothing for such depositor's ownership interest in
the equity of the institution, which is lost to the extent that the balance in
the account is reduced.
Consequently, depositors of a mutual savings bank have no way to realize
the value of their ownership interest, which has realizable value only in the
unlikely event that the mutual savings bank is liquidated. In such event, the
depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves after other claims, including claims of depositors
to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of depositors is
thereafter represented exclusively by their liquidation rights. See "--
Liquidation Rights." Such common stock is separate and apart from deposit
accounts and cannot be and is not insured by the FDIC or any other governmental
agency. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable, and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.
Continuity. While the Conversion is being accomplished, and after the
consummation of the Conversion, the normal business of the Bank of accepting
deposits and making loans will continue without interruption. The Bank will
continue to be subject to regulation by the Superintendent and the FDIC. After
Conversion, the Bank will continue to provide services for depositors and
borrowers under current policies by its present management and staff.
The trustees serving the Bank immediately before the Conversion will serve
as directors of the Bank after the Conversion. The directors of the Company will
consist of all of the individuals currently serving on the Board of Trustees of
the Bank. It is anticipated that all officers of the Bank serving immediately
before the Conversion will retain their positions after the Conversion. See
"Management of the Company" and "Management of the Bank."
Deposit Accounts and Loans. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms, except to the extent affected by
withdrawals made to purchase Common Stock in the Conversion. See "-- Procedure
for Purchasing Shares in Subscription and Community Offerings." Each such
account will be insured by the FDIC to the same extent as before the Conversion
(i.e., up to $100,000 per depositor). Depositors will continue to hold their
existing certificates of deposit, passbooks and other evidences of their
accounts.
Furthermore, 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.
Voting Rights. In its current mutual form, voting rights and control of
the Bank are vested exclusively in the Board of Trustees. After the Conversion,
direction of the Bank will be under the control of the Board of Directors of the
Bank. The Company, as the holder of all of the outstanding common stock of the
Bank, will
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have exclusive voting rights with respect to any matters concerning the Bank
requiring shareholder approval, including the election of directors of the Bank.
After the Conversion, subject to the rights of the holders of preferred
stock that may be issued in the future, the holders of the Common Stock will
have exclusive voting rights with respect to any matters concerning the Company.
Each holder of Common Stock will, subject to the restrictions and limitations
set forth in the Company's Certificate of Incorporation discussed below, be
entitled to vote on any matters to be considered by the Company's shareholders,
including the election of directors of the Company.
Liquidation Rights. In the unlikely event of a complete liquidation of the
Bank in its present mutual form, each depositor would receive such depositor's
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 such depositor's 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, 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, such depositor's claim would be solely in the amount of the
balance in such depositor's deposit account plus accrued interest. Such
depositor would not have an interest in the value or assets of the Bank above
that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" (which is a memorandum account
only) for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders in an amount equal to the surplus and reserves of the Bank as of
the date of its latest balance sheet contained in the final Prospectus used in
connection with the Conversion. Each Eligible Account Holder and Supplemental
Eligible Account Holder, if such account holder were to continue to maintain
such account holder's deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the shareholders of the Bank,
whether or not such Eligible Account Holder or Supplemental Eligible Account
Holder purchased Common Stock in the Conversion. 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,
demand deposits transaction accounts such as NOW/Super NOW accounts, money
market deposit accounts and certificates of deposit, with an aggregate balance
of $100 or more held in the Bank on June 30, 1996 (with respect to an Eligible
Account Holder) and September 30, 1997 (with respect to a Supplemental Eligible
Account Holder) (each a "Qualifying Deposit"). Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the total
liquidation account for such account holder's deposit accounts based on the
proportion that the aggregate balance of such person's Qualifying Deposits on
the Eligibility Record Date or Supplemental Eligibility Record Date, as
applicable, bore to the total amount of all Qualifying Deposits of all Eligible
Account Holders and Supplemental Eligible Account Holders.
If, however, on any annual closing date (i.e., the anniversary of the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable) of the Bank, commencing on or after the effective date of the
Conversion, the amount in any deposit account is less than the amount in such
deposit account on June 30, 1996 (with respect to an Eligible Account Holder),
or September 30, 1997 (with respect to a Supplemental Eligible Account Holder),
or any other annual closing date, then the interest in the liquidation account
relating to such deposit account would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. For purposes of the liquidation account, time deposit
accounts shall be deemed to be closed upon maturity regardless of renewal. In
addition, no interest in the liquidation account would ever be increased despite
any subsequent increase in the related deposit account. Any assets remaining
after the above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to the Company as
the sole shareholder of the Bank.
Tax Aspects. Consummation of the Conversion is expressly conditioned upon
the receipt by the Bank of either a favorable ruling from the IRS and New York
taxing authorities or opinions of counsel with respect to federal and New York
income taxation, to the effect that the Conversion will not be a taxable
transaction to
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the Company, the Bank, Eligible Account Holders or Supplemental Eligible Account
Holders, except as noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Thacher Proffitt & Wood, based on customary certificates delivered by management
of the Company and the Bank, that for federal income tax purposes, among other
matters: (i) the Bank's change in form from mutual to stock ownership will
constitute a reorganization under section 368(a)(1)(F) of the Code, (ii) neither
the Bank nor the Company will recognize any gain or loss as a result of the
Conversion; (iii) 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 or by the Company
upon the purchase of its Common Stock in the Conversion; (iv) no gain or loss
will be recognized by Eligible Account Holders or Supplemental Eligible Accounts
Holders upon the issuance to them of deposit accounts in the Bank in its stock
form plus their interests in the liquidation account in exchange for their
deposit accounts in the Bank; (v) 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; (vi) the
tax basis of each Eligible Account Holder's and each Supplemental Eligible
Account Holders interest in the liquidation account will be zero; (vii) no gain
or loss will be recognized by Eligible Account Holders or Supplemental Eligible
Account Holders upon the distribution to them of non-transferable subscription
rights to purchase shares of the Common Stock, provided, that the amount to be
paid for the Common Stock is equal to the fair market value of such stock; and
(viii) the tax basis to the shareholders of the Common Stock of the Company
purchased in the Conversion pursuant to the subscription rights will be the
amount paid therefore and the holding period for the shares of Common Stock
purchased by such persons will begin on the date on which their subscription
rights are exercised.
Thacher Proffitt & Wood has also opined, subject to the limitations and
qualifications in its opinion, that the Conversion will not be a taxable
transaction to the Company or to the Bank for New York income and franchise tax
purposes or to Eligible Account Holders or to Supplemental Eligible Account
Holders for New York income tax purposes. The opinions of Thacher Proffitt &
Wood have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
Unlike private rulings, opinions of counsel are not binding on the IRS or
the New York taxing authorities and the IRS or the New York taxing authorities
could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS or the New York taxing
authorities would not prevail in a judicial or administrative proceeding.
Certain portions of both the federal and the state tax opinions are based
upon the opinion of FinPro that subscription rights issued in connection with
the Conversion will have no value. In the opinion of FinPro, which opinion is
not binding on the IRS or the New York taxing authorities, the subscription
rights do not have any value based on the fact that such rights are acquired by
the recipients without cost, are non-transferable and of short duration, and
afford the recipients the right only to purchase the Common Stock at a price
equal to its estimated fair market value, which will be the same price as the
Purchase Price for the unsubscribed shares of Common Stock. If the subscription
rights granted to Eligible Account Holders, Supplemental Eligible Account
Holders and Other Depositors are deemed to have an ascertainable value, such
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Depositors could be taxed upon the receipt or exercise of the subscription
rights in an amount equal to such value, and the Bank could recognize gain on
such distribution. Eligible Account Holders, Supplemental Eligible Account
Holders and Other Depositors are encouraged to consult with their own tax
advisors as to the tax consequences in the event that such subscription rights
are deemed to have an ascertainable value.
ESTABLISHMENT OF THE WARWICK SAVINGS FOUNDATION
General. In furtherance of the Bank's commitment to its local community,
the Plan of Conversion provides for the establishment of a charitable foundation
in connection with the Conversion. The Plan provides that the Bank and the
Company will incorporate the Foundation under Delaware law as a non-stock
corporation, and will fund the Foundation with Common Stock of the Company, as
further described below.
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The Company and the Bank believe that the funding of the Foundation with Common
Stock of the Company is a means to establish a common bond between the Bank and
its community, enabling the Bank's community to share in the potential growth
and success of the Company over the long term. By further enhancing the Bank's
visibility and reputation in its local community, the Bank believes that the
Foundation will enhance the long-term value of the Bank's community banking
franchise. The Foundation will be dedicated to charitable purposes within the
Bank's local community, including community development activities.
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and community
development activities within the Bank's local community. The Bank received a
satisfactory CRA rating in its last CRA examination. The Foundation is being
formed to complement the Bank's existing community activities, not as a
replacement for such activities. The Bank intends to continue to emphasize
community lending and community development activities following the Conversion.
However, such activities are not the Bank's sole corporate purpose. The
Foundation will be completely dedicated to community activities and the
promotion of charitable causes, and may be able to support such activities in
ways that are not presently available to the Bank. In this regard, the Board of
Trustees believes the establishment of a charitable foundation is consistent
with the Bank's commitment to community service. The Board further believes that
the funding of the Foundation with Common Stock of the Company is a means of
enabling the Bank's community to share in the potential growth and success of
the Company long after completion of the Conversion. The Foundation will
accomplish that goal by providing for continued ties between the Foundation and
the Bank, thereby forming a partnership with the Bank's community. The
establishment of the Foundation will also enable the Company and the Bank to
develop a unified charitable donation strategy and will centralize the
responsibility for administration and allocation of corporate charitable funds.
Charitable foundations have been formed by other financial institutions for this
purpose, among others. The Bank, however, does not expect the contribution to
the Foundation to take the place of the Bank's traditional community lending and
charitable activities.
Although the Board of Trustees of the Bank and the Board of Directors of
the Company have carefully considered each of the above factors, the
establishment of a charitable foundation in connection with a conversion is a
relatively new concept that has been implemented by only a few other converting
banks. Accordingly, certain persons may raise challenges as to the validity of
the establishment of the Foundation that, if not resolved promptly, could delay
the consummation of the Conversion or result in the elimination of the
Foundation.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. The Foundation's Certificate of
Incorporation provides that it 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. A majority of the Board of
Directors of the Foundation will consist of individuals who are officers or
trustees of the Bank, and the remaining members of the Board will consist of
civic and community leaders within the Bank's local community. A Nominating
Committee of such Board, which is to be comprised of a minimum of three members
of the Board, will nominate individuals eligible for election to the Board of
Directors. The members of the Foundation, who are comprised of its Board
members, will elect the directors at the annual meeting of the Foundation from
those nominated by the Nominating Committee. Only persons serving as directors
of the Foundation qualify as members of the Foundation, with voting authority.
Directors will be divided into three classes with each class appointed for
three-year terms.
The authority for the affairs of the Foundation will be vested in the Board
of Directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt such
a policy upon establishment of the Foundation. As directors of a non-profit
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
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the charitable purpose for which the Foundation is established. The directors of
the Foundation will also be responsible for directing the activities of the
Foundation, including the management of the Common Stock of the Company held by
the Foundation. However, as a condition to receiving the non-objection of the
FDIC to the Bank's Conversion and the approval of the Conversion by the
Superintendent, the Foundation will commit in writing to the FDIC and the
Superintendent 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 shareholders of the Company; provided, however, that,
consistent with the condition, the FDIC and the Superintendent shall waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (i) cause a violation of the law of the State of Delaware;
(ii) cause the Foundation to lose its tax-exempt status, or cause the IRS 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) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the FDIC and the Superintendent to waive
such voting restriction, the Company's or the Foundation's legal counsel must
render an opinion satisfactory to the FDIC and the Superintendent that
compliance with the voting restriction would have an effect described in clauses
(i), (ii) or (iii) above. Under those circumstances, the FDIC and the
Superintendent shall grant a waiver of the voting requirement upon submission of
such legal opinion(s) by the Company or the Foundation that are satisfactory to
the FDIC and the Superintendent. In the event that the FDIC and the
Superintendent were to waive such 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 staff of the Company and the Bank. The Board of
Directors of the Foundation will appoint such officers as may be necessary to
manage the operations of the Foundation. In this regard, the Bank has provided
the FDIC with a commitment that, to the extent applicable, the Bank will comply
with the affiliate restrictions set forth in Sections 23A and 23B of the Federal
Reserve Act with respect to any transactions between the Bank and the
Foundation.
The Company intends to capitalize the Foundation with Common Stock of the
Company in an amount equal to 3% of the total amount of Common Stock to be sold
in connection with the Conversion. At the minimum, midpoint and maximum of the
Estimated Price Range, the contribution to the Foundation would equal 123,675,
145,500 and 167,325 shares, which would have a market value of $1.2 million,
$1.5 million and $1.7 million, respectively, assuming the Purchase Price of
$10.00 per share. The Company and the Bank determined to fund the Foundation
with Common Stock rather than cash because it desired to form a bond with its
community in a manner that would allow the community to share in the potential
growth and success of the Company and the Bank over the long term. The funding
of the Foundation with stock also provides the Foundation with a potentially
larger endowment than if the Company contributed cash to the Foundation since,
as a shareholder, the Foundation will share in the potential growth and success
of the Company. As such, the contribution of stock to the Foundation has the
potential to provide a self-sustaining funding mechanism which reduces the
amount of cash that the Company, if it were not making the stock donation, would
have to contribute to the Foundation in future years in order to maintain a
level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that may be
paid on the Company's Common Stock in the future, and subject to applicable
federal and state laws, loans collateralized by the Common Stock or from the
proceeds of the sale of any of the Common Stock in the open market from time to
time as may be permitted to provide the Foundation with additional liquidity. As
a private foundation under Section 501(c)(3) of the Code, the Foundation will be
required to distribute annually in grants or donations, a minimum of 5% of the
average fair market value of its net investment assets. One of the conditions
imposed on the gift of Common Stock by the Company is that the amount of Common
Stock that may be sold by the Foundation in any one year shall not exceed 5% of
the average market value of the assets held by the Foundation, except where the
Board of Directors of the Foundation determines that the failure to sell an
amount of common stock greater than such amount would result in a long-term
reduction of the value of the Foundation's assets and as such would jeopardize
the Foundation's capacity to carry out its charitable purposes. Upon completion
of the Conversion and the contribution of shares to the Foundation immediately
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following the Conversion, the Company would have 4,246,175, 4,995,500 and
5,744,825 shares issued and outstanding at the minimum, midpoint and maximum of
the Estimated Price Range. Because the Company will have an increased number of
shares outstanding, the voting and ownership interests of shareholders in the
Company's common stock would be diluted by 2.9%, as compared to their interests
in the Company if the Foundation was not established. For additional discussion
of the dilutive effect, see "Pro Forma Data."
Tax Considerations. The Company and the Bank have received an opinion of
Thacher Proffitt & Wood that an organization created for the above purposes
would qualify as an organization exempt from taxation under Section 501(c)(3) of
the Code, and would likely be classified as a private foundation. The Foundation
will submit an application to the IRS to be recognized as an exempt
organization. If the Foundation files such an application within 15 months from
the date of its organization, and if the IRS approves the application, the
effective date of the Foundation's status as a Section 501(c)(3) organization
will be retroactive to the date of its organization. Thacher Proffitt & Wood,
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
shareholders of the Company. Consistent with this 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 for "self-dealing" under Section 4941 of the Code, the FDIC and the
Superintendent will waive such voting restriction upon submission by the Company
or the Foundation of a legal opinion(s) to that effect satisfactory to the FDIC
and the Superintendent. See "-- Regulatory Conditions Imposed on the
Foundation."
Under the Code, the Company is entitled to a deduction for charitable
contributions in an amount not exceeding 10% of its taxable income (computed
without regard to the contributions) for the year of the contribution, and any
contributions in excess of the deductible amount may be carried forward and
deducted in the Company's five succeeding taxable years, subject, in each such
year, to the 10% of taxable income limitation. The Company and the Bank believe
that the Conversion presents a unique opportunity to establish and fund a
charitable foundation given the substantial amount of additional capital being
raised in the Conversion. In making such a determination, the Company and the
Bank considered the dilutive impact of the contribution of Common Stock to the
Foundation on the amount of Common Stock available to be offered for sale in the
Conversion. Based on such consideration, the Company and Bank believe that the
contribution to the Foundation in excess of the 10% annual limitation is
justified given the Bank's capital position and its earnings, the substantial
additional capital being raised in the Conversion and the potential benefits of
the Foundation to the Bank's community. In this regard, assuming the sale of the
Common Stock at the maximum of the Estimated Price Range, the Company would have
pro forma consolidated capital of $76.7 million or 22.68% of pro forma
consolidated assets and the Bank's pro forma leverage and risk-based capital
ratios would be 15.89% and 30.01%, 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 and will not raise safety and soundness concerns.
The Company and the Bank have received the opinion of Thacher Proffitt &
Wood that the Company's contribution of its own stock to the Foundation would
not constitute an act of self-dealing, and that the Company will be entitled to
a deduction in the amount of the fair market value of the stock at the time of
the contribution, subject to the 10% of taxable income limitation. As discussed
above, the Company will be able to carry forward and deduct any portion of the
contribution in excess of such 10% limitation for five years following the year
of the contribution. If the Company and the Foundation had been established in
the fiscal year ended May 31, 1997, the Company would have been entitled to a
charitable contribution deduction in its taxable year ended December 31, 1996 of
approximately $447,000 and would have been able to carry forward and deduct
approximately $1.2 million over its next succeeding five taxable years (based on
the Bank's pre-tax income for 1996 and a contribution in 1996 of Common Stock
equal to $1.7 million). Assuming the close of
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the Offerings at the midpoint of the Estimated Price Range, the Company
estimates that the entire amount of the contribution should be deductible over a
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 the opinion of Thacher
Proffitt & Wood 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 an organization exempt from taxation under section 501(c)(3) of
the Code or that the deduction will be permitted. If the IRS successfully
maintains that the Foundation is not so exempt or that the deduction is not
permitted, 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 Charitable Foundation."
In general, the income of a private foundation is exempt from federal and
state taxation. However, investment income, such as interest, dividends and
capital gains, will be subject to a federal excise tax of 2.0%. The Foundation
will be required to make an annual filing with the IRS within four and one-half
months after the close of the Foundation's taxable year to maintain its
tax-exempt status. The Foundation will also be required to publish a notice that
the annual information return will be available for public inspection for a
period of 180 days after the date of such public notice. The information return
for a private foundation must include, among other things, an itemized list of
all grants made or approved, showing the amount of each grant, the recipient,
any relationship between a grant recipient and the Foundation's managers, and a
concise statement of the purpose of each grant. The Foundation will also be
required to file an annual report with the Charities Bureau of the Office of the
Attorney General of the State of New York.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions to be agreed to by the
Foundation in writing as a condition to receiving the FDIC's non-objection of
the Bank's Conversion and the approval of the Conversion by the Superintendent:
(i) the Foundation will be subject to examination by the FDIC and the
Superintendent; (ii) the Foundation must comply with supervisory directives
imposed by the FDIC and the Superintendent; (iii) the Foundation will operate in
accordance with written policies adopted by its Board of Directors, including a
conflict of interest policy; and (iv) any shares of Common Stock of the Company
held by the Foundation must be voted in the same ratio as all other outstanding
shares of Common Stock of the Company on all proposals considered by
shareholders of the Company; provided, however, that, consistent with the
condition, the FDIC and the Superintendent shall waive this voting restriction
under certain circumstances if compliance with the voting restriction would: (a)
cause a violation of the law of the State of Delaware; (b) would cause the
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation; or (c) would cause the Foundation to
be subject to an excise tax under Section 4941 of the Code. In order for the
FDIC and the Superintendent to waive such voting restriction, the Company's or
the Foundation's legal counsel must render an opinion satisfactory to FDIC and
the Superintendent that compliance with the voting restriction would have the
effect described in clauses (a), (b) or (c) above. Under those circumstances,
the FDIC and the Superintendent shall grant a waiver of the voting restriction
upon submission of such opinion(s) by the Company or the Foundation which are
satisfactory to the FDIC and the Superintendent. There can be no assurances that
a legal opinion addressing these issues will be rendered, or if rendered, that
the FDIC and the Superintendent will grant an unconditional waiver of the voting
restriction. If the Superintendent waives the voting restriction, the NYSBD may
(1) impose a condition that a certain portion of the members of the Foundation's
Board of Directors shall be persons who are not directors, officers or employees
of the Bank or the Company or any affiliate thereof or (2) impose such other
condition relating to control of the Common Stock held by the Foundation as
determined by the NYSBD to be appropriate. In no event will the voting
restriction survive the sale of shares of the Common Stock held by the
Foundation.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common Stock
must be based on the appraised pro forma market value of the Common Stock, as
determined on the basis of an independent
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valuation. The Bank and the Company have retained FinPro to make such valuation.
For its services in making such appraisal, FinPro will receive a fee of $14,000,
plus out-of-pocket expenses. The Bank and the Company have agreed to indemnify
FinPro and its employees and affiliates against certain losses (including any
losses in connection with claims under the federal securities laws) arising out
of its services as appraiser, except where FinPro's liability results from its
negligence or bad faith.
An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the financial statements. FinPro also
considered the following factors, among others: the present and projected
operating results and financial condition of the Company and the Bank, and the
economic and demographic conditions in the Bank's existing market 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 associations and savings
institutions located in the Bank's market area and the State of New York; the
aggregate size of the offering of the Common Stock; the impact of the Conversion
on the Bank's equity 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.
On the basis of the foregoing, FinPro has advised the Company and the Bank
that, in its opinion, dated as of September 18, 1997 and updated as of October
17, 1997, the estimated pro forma market value of the Common Stock ranged from a
minimum of $41,225,000 to a maximum of $55,775,000 with a midpoint of
$48,500,000. The Board of Trustees of the Bank held a meeting to review and
discuss the appraisal report prepared by FinPro. A representative of FinPro
participated in the meeting to explain the contents of the appraisal report. In
connection with its review of the reasonableness and adequacy of such appraisal
consistent with NYBB and FDIC regulations and policies, the Board of Trustees
reviewed the methodology that FinPro employed to determine the pro forma market
value of the Common Stock and the appropriateness of the assumptions that FinPro
used in determining this value.
Based upon the Valuation Range and the Purchase Price of $10.00 per share
for the Common Stock established by the Board of Trustees, the Board of Trustees
has established the Estimated Price Range of $41,225,000 to $55,775,000, with a
midpoint of $48,500,000 million, and the Company expects to issue between
4,122,500 and 5,577,500 shares of Common Stock. The Estimated Price Range may be
amended with the approval of the Superintendent and FDIC (if required), if
necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally.
THE VALUATION PREPARED BY FINPRO IS NOT INTENDED, AND MUST NOT BE
CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING
SUCH SHARES. FINPRO DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE BANK, NOR DID FINPRO 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 SUCH
SHARES IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES
AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE
PRO FORMA MARKET VALUE THEREOF.
Following commencement of the Subscription Offering or Community Offering,
if any, the maximum of the Estimated Price Range may be increased up to 15% and
the number of shares of Common Stock to be issued in the Conversion may be
increased to 6,414,125 shares due to regulatory considerations, changes in the
market and general financial and economic conditions, without the resolicitation
of subscribers. See "-- Limitations on Common Stock Purchases" as to the method
of distribution and allocation of additional shares that may be issued in the
event of an increase in the Estimated Price Range to fill unfilled orders in the
Subscription and Community Offerings.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank, Company, Superintendent and FDIC
that, to the best of its knowledge, nothing of a material nature has occurred
which, taking into account all relevant factors, would cause FinPro to conclude
that the value of the Common Stock at the price so determined is incompatible
with its estimate of the pro forma market value of the Common Stock at the
conclusion of the Subscription Offering and Community Offering, if any.
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If, based on FinPro's estimate, the pro forma market value of the Common
Stock, as of the date that FinPro so confirms, is not more than 15% above the
maximum and not less than the minimum of the Estimated Price Range then, (1)
with the approval of the Superintendent, if required, and the FDIC, the number
of shares of Common Stock to be issued in the Conversion may be increased or
decreased, pro rata to the increase or decrease in value, without resolicitation
of subscriptions, to no more than 6,414,125 shares or no less than 4,122,500
shares, and (2) all shares purchased in the Subscription and Community Offerings
will be purchased for the Purchase Price of $10.00 per share. If the number of
shares issued in the Conversion is increased due to an increase of up to 15% in
the Estimated Price Range to reflect changes in market or financial conditions,
persons who subscribed for the maximum number of shares will not be given the
opportunity to subscribe for an adjusted maximum number of shares, except for
the Employee Plans which will be able to subscribe for such adjusted amount up
to their 10% subscription. See "-- Limitations on Common Stock Purchases."
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the
Superintendent and the FDIC, may terminate the Plan and return all funds
promptly with interest at the Bank's passbook rate of interest on payments made
by check, draft or money order, extend or hold new Subscription and Community
Offerings, establish a new Estimated Price Range, commence a resolicitation of
subscribers or take such other actions as permitted by the Superintendent and
the FDIC in order to complete the Conversion. In the event that a resolicitation
is commenced, unless an affirmative response is received within a reasonable
period of time, all funds will be promptly returned to investors as described
above. A resolicitation, if any, following the conclusion of the Subscription
and Community Offerings would not exceed 45 days unless such resolicitation is
further extended by the Superintendent and the FDIC for periods of up to 60 days
not to extend beyond November 18, 1999.
If all shares of Common Stock are not sold through the Subscription and
Community Offerings, then the Bank and the Company expect to offer the remaining
shares in a Syndicated Community Offering, which would occur as soon as
practicable following the close of the Subscription Offering or Community
Offering, if any, but may commence during the Subscription Offering and
Community Offering, if any, subject to the prior rights of subscribers. All
shares of Common Stock will be sold at the same price per share in the
Syndicated Community Offering as in the Subscription and Community Offerings.
See "-- Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank, the Company, Superintendent and the
FDIC that, to the best of its knowledge, nothing of a material nature has
occurred which, taking into account all relevant factors, including those which
would be involved in a cancellation of the Syndicated Community Offering, would
cause FinPro to conclude that the aggregate value of the Common Stock at the
Purchase Price is incompatible with its estimate of the pro forma market value
of the Common Stock of the Company at the time of the Syndicated Community
Offering. Any change which would result in an aggregate purchase price which is
below, or more than 15% above, the Estimated Price Range would be subject to
Superintendent and FDIC approval. If such confirmation is not received, the Bank
may extend the Conversion, extend, reopen or commence new Subscription and
Community Offerings or a Syndicated Community Offering, establish a new
Estimated Price Range and commence a resolicitation of all subscribers with the
approval of the Superintendent and FDIC or take such other actions as permitted
by the Superintendent and FDIC in order to complete the Conversion, or terminate
the Plan and cancel the Subscription and Community Offerings and/or the
Syndicated Community Offering. In the event market or financial conditions
change so as to cause the aggregate purchase price of the shares to be below the
minimum of the Estimated Price Range or more than 15% above the maximum of such
range, and the Company and the Bank determine to continue the Conversion,
subscribers will be resolicited (i.e., be permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Bank's passbook rate of interest,
or be permitted to decrease or cancel their subscriptions). Any change in the
Estimated Price Range must be approved by the Superintendent and FDIC. A
resolicitation, if any, following the conclusion of the Subscription Offering or
the Community Offering would not exceed
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45 days, or if following the Syndicated Community Offering, 60 days, unless
further extended by the Superintendent for periods up to 60 days not to extend
beyond November 18, 1999. If such resolicitation is not effected, the Bank will
return with interest all funds promptly at the Bank's passbook rate of interest
on payments made by check, savings bank draft or money order.
Copies of the appraisal report of FinPro, including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the offices of
the Bank and the other locations specified under "Additional Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription Offering and Community Offering, if any, the total number of
shares to be issued in the Conversion may be increased or decreased without a
resolicitation of subscribers; provided, that the product of the total number of
shares times the price per share is not below the minimum or more than 15% above
the maximum of the Estimated Price Range, and the total number of shares to be
issued in the Conversion is not less than 4,122,500 or greater than 5,577,500
(or 6,414,125 if the Estimated Price Range is increased by 15%).
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of such range, if the Plan is not
terminated by the Company and the Bank after consultation with the
Superintendent and FDIC, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the Superintendent and FDIC. If the number of shares issued in the
Conversion is increased due to an increase of up to 15% in the Estimated Price
Range to reflect changes in market or financial condition, persons who
subscribed for the maximum number of shares will not be given the opportunity to
subscribe for an adjusted maximum number of shares, except for the Employee
Plans, which will be able to subscribe for such adjusted amount up to its 10%
subscription. See "-- Limitations on Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and shareholders' equity on a per share basis while increasing pro forma net
earnings and shareholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
shareholders' equity on a per share basis while decreasing pro forma net
earnings and shareholder's equity on an aggregate basis. For a presentation of
the effects of such changes see "Pro Forma Data."
To fund the Foundation, the number of shares to be issued and outstanding
as a result of the sale of Common Stock in the Conversion will be increased by a
number of shares equal to 3% of the Common Stock sold in the Conversion.
Assuming the sale of shares in the Offerings at the maximum of the Estimated
Price Range, the Company will contribute 167,325 shares of its Common Stock from
authorized but unissued shares to the Foundation immediately following the
completion of the Conversion. In that event, the Company will have total shares
of Common Stock outstanding of 5,744,825 shares. Funding the Foundation with
authorized but unissued shares will have the effect of diluting the ownership
and voting interests of persons purchasing shares in the Conversion by 2.9%
since a greater number of shares will be outstanding upon completion of the
Conversion than would be if the Foundation were not established. See "Pro Forma
Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) depositors
whose deposits in qualifying accounts in the Bank totaled $100 or more on June
30, 1996 ("Eligible Account Holders"); (2) the Employee Plans, including the
ESOP; (3) depositors whose deposits in qualifying accounts in the Bank totaled
$100 or more on September 30, 1997, other than (i) those
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depositors who would otherwise qualify as Eligible Account Holders or (ii)
trustees or executive officers of the Bank or their Associates, (as defined
herein) ("Supplemental Eligible Account Holders"); and (4) depositors whose
deposits in qualifying accounts in the Bank totaled $100 or more on October 31,
1997, the Voting Record Date, other than those depositors who would otherwise
qualify as Eligible Account Holders or Supplemental Eligible Account Holders
("Other Depositors"). All subscriptions received will be subject to the
availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering and to the maximum and
minimum purchase limitations set forth in the Plan of Conversion and as
described below under "-- Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, non-transferable subscription
rights to subscribe for Common Stock in the Subscription Offering up to the
greatest of (i) the amount permitted to be purchased in the Community Offering,
which amount is currently $150,000 of the Common Stock offered, (ii) one-tenth
of one percent (0.10%) of the total offering of shares of Common Stock or (iii)
fifteen 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 the numerator of which 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 on the
Eligibility Record Date, subject to the overall maximum and minimum purchase
limitations and exclusive of an increase in the shares issued pursuant to an
increase in the Estimated Price Range of up to 15%. See "-- Limitations on
Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares in excess of the total number of shares eligible for
subscription, the shares will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make such
Eligible Account Holder's total allocation equal to the lesser of 100 shares or
the number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all remaining Eligible Account Holders whose subscriptions remain unfilled.
To ensure a proper allocation of stock, each Eligible Account Holder must
list on his or her stock order form all accounts in which such Eligible Account
Holder has an ownership interest. Failure to list an account could result in
fewer shares being allocated than if all accounts had been disclosed. The
subscription rights of Eligible Account Holders who are also trustees or
executive 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 one-year period preceding the Eligibility Record
Date.
Priority 2: The Employee Plans. To the extent that there are sufficient
shares remaining after satisfaction of the subscriptions by Eligible Account
Holders, the Employee Plans, including the ESOP, will receive, without payment
therefor, second priority, non-transferable subscription rights to purchase up
to 10% of the Common Stock to be issued in the Conversion, including shares to
be issued to the Foundation, subject to the purchase limitations set forth in
the Plan of Conversion and as described below under "-- Limitations on Common
Stock Purchases." As an Employee Plan, the ESOP intends to purchase 8% of the
shares to be issued in the Conversion, or 339,694 shares and 459,586 shares,
based on the issuance of 4,246,175 shares and 5,744,825 shares, respectively, at
the minimum and the maximum of the Estimated Price Range, including the shares
of Common Stock to be issued to the Foundation. Subscriptions by the ESOP will
not be aggregated with shares of Common Stock purchased directly by or which are
otherwise attributable to any other participants in the Subscription and
Community Offerings, including subscriptions of any of the Bank's trustees,
officers, employees or associates thereof. See "Management of the
Bank -- Benefits -- Employee Stock Ownership Plan and Trust."
Priority 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of the subscriptions by
the Eligible Account Holders and Employee Plans, Supplemental Eligible Account
Holders will receive, without payment therefor, third priority, non-transferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greatest of (i) the amount permitted to be subscribed for in the
Community Offering, which amount is currently $150,000 of the Common Stock
offered, (ii) one-tenth of one percent (0.10%) of the total offering of shares
of Common
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Stock or (iii) fifteen 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 is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders, in each case
on the Supplemental Eligibility Record Date, subject to the overall maximum and
minimum purchase limitations and exclusive of an increase in the shares issued
pursuant to an increase in the Estimated Price Range of up to 15%. See
"-- Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares in excess of the total number of
shares eligible for subscription, the shares will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make such Supplemental Eligible
Account Holder's total allocation equal to the lesser of 100 shares or the
number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing Supplemental Eligible Account Holders
whose subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all remaining Supplemental Eligible Account Holders whose subscriptions
remain unfilled.
To ensure a proper allocation of stock, each Supplemental Eligible Account
Holder must list on his or her stock order form all accounts in which such
Supplemental Eligible Account Holder has an ownership interest. Failure to list
an account could result in fewer shares being allocated than if all accounts had
been disclosed.
Priority 4: Other Depositors. To the extent that there are sufficient
shares remaining after satisfaction of the subscriptions by the Eligible Account
Holders, the Employee Plans and the Supplemental Eligible Account Holders, each
Other Depositor will receive, without payment therefor, fourth priority, non-
transferable subscription rights to subscribe for Common Stock in the
Subscription Offering up to the greater of (i) the amount permitted to be
subscribed for in the Community Offering, which amount is currently $150,000 of
the Common Stock offered, or (ii) one-tenth of one percent (0.10%) of the total
offering of shares of Common Stock, subject to the overall maximum and minimum
purchase limitations and exclusive of an increase in the shares issued pursuant
to an increase in the Estimated Price Range of up to 15%. See "-- Limitations on
Common Stock Purchases."
In the event that Other Depositors exercise subscription rights for a
number of shares in excess of the total number of shares eligible for
subscription, the shares will be allocated so as to permit each subscribing
Other Depositor, to the extent possible, to purchase a number of shares
sufficient to make such Other Depositor's total allocation equal to the lesser
of 100 shares or the number of shares subscribed for. Thereafter, unallocated
shares will be allocated among the remaining Other Depositors whose
subscriptions remain unfilled on a 100 share per order basis until all such
orders have been filled or the remaining shares have been allocated.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire at 12:00 noon, Eastern time, on December 15, 1997, unless extended
for an initial period of up to 45 days by the Bank or additional 60 day periods
with the approval of the Superintendent and if necessary, the FDIC. Subscription
rights which have not been exercised prior to the Expiration Date will become
void.
The Bank will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the Subscription Expiration Date, unless such period
is extended with the consent of the Superintendent, all funds delivered to the
Bank pursuant to the Subscription Offering will be returned with interest
promptly to the subscribers and all withdrawal authorizations will be canceled.
If an extension beyond the 45-day period following the Subscription Expiration
Date is granted, the Bank will notify subscribers of the extension of time and
of any rights of subscribers to modify or rescind their subscriptions. Each such
extension may not exceed 60 days, and such extensions, in the aggregate, may not
last beyond November 18, 1999.
Persons in Non-qualified 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
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subscribe for stock pursuant to the Plan reside. However, the Bank and the
Company are not required to offer stock in the Subscription Offering to any
person who resides in a foreign country.
COMMUNITY OFFERING
Upon completion of the Subscription Offering, to the extent that shares
remain available for purchase after satisfaction of all subscriptions of the
Eligible Account Holders, the Employee Plans, the Supplemental Eligible Account
Holders and Other Depositors, the Bank will offer shares pursuant to the Plan in
the Community Offering to certain members of the general public to whom a copy
of this prospectus has been delivered, subject to the right of the Company and
the Bank to accept or reject any such orders, in whole or in part, in its sole
discretion. The Community Offering, if any, shall commence upon the completion
of the Subscription Offering and shall terminate 7 days after the close of the
Subscription Offering unless extended by the Bank and the Company, with the
approval of the Superintendent and the FDIC, if necessary. Such persons,
together with associates of and persons acting in concert with such persons, may
purchase up to $150,000 of Common Stock subject to the maximum purchase
limitation. See "-- Limitations on Common Stock Purchases." This amount may be
increased to up to a maximum of 5% or decreased to less than $150,000 of Common
Stock at the discretion of the Company and the Bank. THE OPPORTUNITY TO
SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS
SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN 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.
HOWEVER, NO SUCH REJECTION WILL BE IN CONTRAVENTION OF ANY APPLICABLE LAW OR
REGULATION. IF THE COMPANY OR THE BANK REJECTS A SUBSCRIPTION IN PART, THE
SUBSCRIBER WILL NOT HAVE THE RIGHT TO CANCEL THE REMAINDER OF HIS OR HER
SUBSCRIPTION.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of subscribers in the Community Offering after completion of
the Subscription and Community Offerings, such stock will be allocated first to
each subscriber whose order is accepted by the Bank, in an amount equal to the
lesser of 100 shares or the number of shares subscribed for by each such
subscriber, if possible. Thereafter, unallocated shares will be allocated among
such subscribers whose order remains unsatisfied on a 100 shares per order basis
until all such orders have been filled or the remaining shares have been
allocated.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a financial and
marketing advisor in connection with the offering of the Common Stock and
Sandler O'Neill has agreed to use its best efforts to assist the Company with
the solicitation of subscriptions and purchase orders for shares of Common Stock
in the Offerings. Based upon negotiations between the Bank and the Company,
Sandler O'Neill will receive a fee for services provided in connection with the
Offerings equal to 1.875% of the aggregate Purchase Price of Common Stock sold
in the Offerings. No fees will be paid to Sandler O'Neill with respect to any
shares of Common Stock purchased by any trustee, trustee emeritus, director,
executive officer or employee of the Bank or the Company or members of their
immediate families or the ESOP. In the event of a Syndicated Community Offering,
Sandler O'Neill will negotiate with the Company for the receipt of an additional
fee to be remitted to selected dealers under one or more selected dealer
agreements to be entered into by Sandler O'Neill with certain dealers; provided,
however, that the aggregate fees payable to Sandler O'Neill and any selected
dealers in connection with any Syndicated Community Offering will not exceed 7%
of the aggregate Purchase Price of the Common Stock sold in the Syndicated
Community Offering. Fees to Sandler O'Neill and to any other broker-dealer may
be deemed to be underwriting fees and Sandler O'Neill and such broker-dealers
may be deemed to be underwriters. Sandler O'Neill will also be reimbursed for
its reasonable out-of-pocket expenses, including legal fees and expenses up to a
maximum of $85,000. Notwithstanding the foregoing, in the event the Offerings
are not consummated or Sandler O'Neill ceases, under certain circumstances after
the subscription solicitation activities are commenced, to provide assistance to
the Company, Sandler O'Neill will be entitled to reimbursement for its
reasonable out-of-pocket expenses as described above. The Company and the Bank
have agreed to indemnify Sandler O'Neill for costs and expenses in connection
with certain claims or liabilities related to or arising out of the services to
be provided by Sandler O'Neill pursuant to its engagement by the Bank and the
Company as financial advisor in connection with the
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Conversion, including certain liabilities under the Securities Act. Total
marketing fees to Sandler O'Neill are estimated to be $681,000 and $951,000 at
the minimum and the maximum of the Estimated Price Range, respectively. See "Pro
Forma Data" for the assumptions used to arrive at these estimates.
Sandler O'Neill will also perform proxy solicitation services, conversion
agent services and records management services for the Bank in the Conversion
and will receive a fee for these services of $12,500, plus reimbursement of
reasonable out-of-pocket expenses.
Directors, trustees and executive officers of the Company and the Bank may
participate in the solicitation of offers to purchase Common Stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offerings in
ministerial capacities or provide clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers to
purchase Common Stock or provide advice regarding the purchase of Common Stock.
The Company will rely on Rule 3a4-1 under the Exchange Act, and sales of Common
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, trustees, directors and employees to participate in the sale of Common
Stock. No officer, director or employee of the Company or the Bank will be
compensated in connection with his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the respective expiration dates for the Offerings, in accordance with Rule
15c2-8 of the Exchange Act, no Prospectus will be mailed later than five days
prior to such date or hand delivered any later than two days prior to such date.
Execution of the stock order form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order forms will only be distributed with a Prospectus
and a certification form requiring each prospective investor to acknowledge,
among other things, that the shares of Common Stock are not insured by the Bank,
the FDIC or any other governmental agency and that such prospective investor has
received a copy of this Prospectus, which, among other things, describes the
risks involved in the investment in the Common Stock.
To purchase shares in the Subscription Offering and, if a Community
Offering is held, the Community Offering, an executed order form with the
required payment for each share subscribed for, or with appropriate
authorization for withdrawal from the Bank's deposit account (which may be given
by completing the appropriate blanks in the stock order form), must be received
by the Bank at its office by 12:00 noon, Eastern time, on the Expiration Date,
in the case of the Subscription Offering, or 7 days after the close of the
Subscription Offering, in the case of the Community Offering. 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 Company and Bank are not obligated to accept
orders submitted on photocopied or facsimiled order forms and will not accept
order forms unaccompanied by an executed certification form. The Company and the
Bank have the power to waive or permit the correction of incomplete or
improperly executed forms, but do not represent that they will do so. Once
received, an executed order form may not be modified, amended or rescinded
without the consent of the Bank unless the Conversion has not been completed
within 45 days after the end of the Subscription and Community Offerings, unless
such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Depositors are properly identified as to their stock
purchase priorities, depositors 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 to
the office of the Bank, (ii) by check, bank draft or money order, or (iii) by
authorization of withdrawal from deposit accounts maintained with the Bank. No
wire transfers will be accepted. Interest will be paid on payments made by cash,
check, cashier's check or money order at the Bank's passbook rate of interest
from the date payment is received until the completion or termination of the
Conversion. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion.
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Notwithstanding the foregoing, the Company shall have the right, in its sole
discretion, to permit institutional investors to submit irrevocable orders
together with a legally binding commitment for payment and to thereafter pay for
the shares of Common Stock for which they subscribe in the Community Offering at
any time prior to 48 hours before the completion of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from such subscriber's 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 canceled at the time of the withdrawal, without penalty, and
the remaining balance will be converted into a passbook account and will earn
interest at the passbook rate. Upon completion of the Conversion, funds
withdrawn from depositors' accounts for stock purchases will no longer be
insured by the FDIC.
The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes but, rather, may pay for such shares of Common Stock
subscribed for at the Purchase Price upon consummation of the Offerings;
provided, that there is in force from the time of its subscription until such
time, a loan commitment acceptable to the Company 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. The Company intends to
provide such a loan to the ESOP.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use the
assets of such IRAs to purchase shares of Common Stock in the Subscription and
Community Offerings, provided that such IRAs are not maintained at the Bank.
Persons with IRAs maintained at the Bank must have their accounts transferred to
an unaffiliated institution or broker to purchase shares of Common Stock in the
Subscription and Community Offerings. In addition, the provisions of ERISA and
IRS regulations require that officers, trustees and ten percent shareholders who
use self-directed IRA funds to purchase shares of Common Stock in the
Subscription and Community Offerings make such purchases for the exclusive
benefit of the IRAs.
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 specified in properly completed order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES OF COMMON STOCK
Prior to the completion of the Conversion, the NYBB conversion regulations
prohibit any person with subscription rights (i.e., the Eligible Account
Holders, the Employee Plans, the Supplemental Eligible Account Holders and the
Other Depositors) from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Certificates representing shares of Common Stock purchased in
the Subscription Offering must be registered in the name of the Eligible Account
Holder, Supplemental Eligible Account Holder or Other Depositor, as the case may
be. Joint registrations will be allowed only if the qualifying deposit account
is so registered. Such rights may be exercised only by the person to whom they
are granted and only for such person's account. Each person exercising such
subscription rights will be required to certify that such person is purchasing
shares solely for such person's own account and that such person has no
agreement or understanding regarding the sale or transfer of such shares. The
regulations also prohibit any person from offering or making an announcement of
an offer or an intent to make an offer to purchase such subscription rights or
shares of Common Stock prior to the completion of the Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
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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 Offering or the
Community Offering, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company.
There are no known agreements between Sandler O'Neill and any broker-dealer in
connection with a possible Syndicated Community Offering. As an alternative to a
Syndicated Community Offering, the Company and the Bank may instead elect to
offer for sale such remaining shares to or through underwriters in a public
offering, as described under "-- Public Offering Alternative." The Company and
the Bank have reserved the right to reject orders in whole or in part in their
sole discretion in the Syndicated Community Offering. However, no such rejection
will be in contravention of any applicable law or regulation. If the Company or
the Bank rejects an order in part, the subscriber will not have the right to
cancel the remainder of his or her subscription. Neither Sandler O'Neill nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering; however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "-- Stock Pricing." Subject
to overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $150,000 of the Common Stock offered in the
Conversion; provided, however, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons acting
in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to a maximum purchase limitation of
$150,000 of the Common Stock offered.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his or her shares with funds held by or deposited with a selected
dealer. If an order form is executed and forwarded to the selected dealer or if
the selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his or her intent to purchase
("debit date") and on or before noon of the next business day following the
debit date, will send order forms and funds to the Bank for deposit in a
segregated account. Although purchasers' funds are not required to be in their
accounts with selected dealers until the debit date, in the event that such
alternative procedure is employed once a confirmation of an intent to purchase
has been received by the selected dealer, the purchaser has no right to rescind
his or her order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company with
the approval of the Superintendent and FDIC. Such
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extensions may not be beyond November 18, 1999. See "-- Stock Pricing" above for
a discussion of rights of subscribers, if any, in the event an extension is
granted.
PUBLIC OFFERING ALTERNATIVE
The Company anticipates that the shares of Common Stock will be sold in the
Subscription Offering and, if necessary, in the Community Offering. However,
shares of Common Stock not sold in the Subscription Offering or the Community
Offering may, as an alternative to a Syndicated Community Offering as described
above, be offered for sale by the Company to or through underwriters ("Public
Offering"). Certain provisions restricting the purchase and transfer of Common
Stock shall not be applicable to sales to underwriters for purposes of such
Public Offering. Any such underwriter shall agree to purchase such shares from
the Company with a view to reoffering them to the general public, use their best
efforts to sell, for the account of the Company, such shares to the general
public or a combination of the preceding two provisions, subject to certain
terms and conditions described in the Plan. If the Public Offering is utilized,
then the Company will amend the Registration Statement, of which this Prospectus
is a part, to reflect the specific terms of such Public Offering alternative,
including, without limitation, the terms of any underwriting agreements,
commission structure and plan of distribution.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No subscription for fewer than 25 shares will be accepted;
(2) Each Eligible Account Holder may subscribe for and purchase Common
Stock in the Subscription Offering in an amount up to the greatest of (a)
the amount permitted to be purchased in the Community Offering, currently
$150,000 of the Common Stock offered, (b) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock or (c) fifteen times the
product (rounded down to the net whole number) obtained by multiplying the
total number of shares of Common Stock to be issued in the Conversion by a
fraction the numerator of which is the amount of the qualifying deposit of
the Eligible Account Holder and the denominator of which is the total
amount of qualifying deposits of all Eligible Account Holders in each case
on the Eligibility Record Date, subject to the overall limitation in (8)
below and exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15%;
(3) The Employee Plans are permitted to purchase up to 10% of the
shares of Common Stock issued in the Conversion and as an Employee Plan,
the ESOP intends to purchase 8% of the shares of Common Stock issued in the
Conversion, in each case, including shares to be issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase Common Stock in the Subscription Offering in an amount up to the
greatest of (a) the amount permitted to be purchased in the Community
Offering, currently $150,000 of the Common Stock offered, (b) one-tenth of
one percent (0.10%) of the total offering of shares of Common Stock or (c)
fifteen times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of Common Stock to be issued in
the Conversion by a fraction the numerator of which is the amount of the
qualifying deposit of the Supplemental Eligible Account Holder and the
denominator of which is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders in each case on the Supplemental
Eligibility Record Date, subject to the overall limitation in (8) below and
exclusive of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
(5) Each Other Depositor may subscribe for and purchase Common Stock
in the Subscription Offering in an amount up to the greater of (a) the
amount permitted to be purchased in the Community Offering, currently
$150,000 of the Common Stock offered, or (b) one-tenth of one percent
(0.10%) of the total offering of shares of Common Stock, subject to the
overall limitation in (8) below and exclusive
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of an increase in the total number of shares issued due to an increase in
the Estimated Price Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons acting in
concert with such persons, may purchase Common Stock in the Community
Offering in an amount up to $150,000 of the Common Stock offered in the
Conversion subject to the overall limitation in (8) below;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, or the Public Offering alternative (exclusive of
underwriters), together with associates of and persons acting in concert
with such persons, may purchase Common Stock in the Syndicated Offering in
an amount up to $150,000 of the shares of Common Stock offered in the
Conversion subject to the overall limitation in (8) below; provided, that
shares of Common Stock purchased in the Community Offering by any persons,
together with associates of and persons acting in concert with such
persons, will be aggregated with purchases by such persons in the
Syndicated Community Offering in applying the $150,000 purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders,
Other Depositors and certain members of the general public may purchase
stock in the Community Offering and Syndicated Community Offering or Public
Offering alternative subject to the purchase limitations described in (6)
and (7) above; provided, that, except for the Employee Plans, 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 shares of Common Stock offered for sale in the Conversion; and
(9) The directors and officers of the Bank and their associates in the
aggregate, excluding purchases by the Employee Plans, may purchase up to
25% of shares offered for sale in the Conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the depositors
of the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% of
the shares offered for sale in the Offering at the sole discretion of the
Company and the Bank. It is currently anticipated that the overall maximum
purchase limitation may be increased if, after a Community Offering, the Company
has not received subscriptions for an aggregate amount equal to at least the
minimum of the Estimated Price Range. 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. Requests to purchase
additional shares of Common Stock under this provision will be determined by the
Board of Directors of the Company and the Board of Trustees of the Bank and, if
approved, allocated on a pro rata basis giving priority in accordance with the
priority rights set forth in the Plan and described herein.
The overall maximum purchase limitation may not be reduced to less than
1.0%; the individual amount permitted to be subscribed for in the Offerings,
however, may be reduced by the Bank to less than $150,000 of the Common Stock
offered. An individual Eligible Account Holder, Supplemental Eligible Account
Holder or Other Depositor may not purchase individually in the Subscription
Offering the overall maximum purchase limitation of 1.0% of the shares offered
for sale, but may make such purchase, together with associates of and persons
acting in concert with such person, by also purchasing in other available
categories of the Conversion, subject to availability of shares and the maximum
overall purchase limitation for purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15%
("Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) in the event that there is an
oversubscription by Eligible Account Holders, to fill unfilled subscriptions of
Eligible Account Holders, exclusive of the Adjusted Maximum; (ii) to fill the
Employee Plans' subscription of up to 10% of the Adjusted Maximum number of
shares; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unfilled subscriptions of Supplemental
Eligible Account Holders, exclusive of the Adjusted Maximum; (iv) in
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the event that there is an oversubscription by Other Depositors, to fill
unfulfilled subscriptions of Other Depositors, exclusive of the Adjusted
Maximum; and (v) to fill unfilled subscriptions in the Community Offering,
exclusive of the Adjusted Maximum, each to the extent possible.
The term "Associate" of a person is defined to mean: (i) any corporation or
organization (other than the Company, the Bank or a majority-owned subsidiary of
the Bank) of which such person is an officer, partner or is directly or
indirectly, either alone or with one or more members of his or her immediate
family, 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, except that the term "Associate" does not include any employee stock
benefit plan maintained by the Company or the Bank in which a person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity, and except that, for purposes of aggregating total shares that may be
acquired or held by officers and directors and their Associates, the term
"Associate" does not include any tax-qualified employee stock benefit plan; and
(iii) any relative or spouse of such person, or any relative of such spouse, who
has the same home as such person or who is a director or officer of the Company
or the Bank. Trustees, directors and officers are not treated as associates of
each other solely by virtue of holding such positions. For a further discussion
of limitations on purchases of a converting institution's stock at the time of
Conversion and subsequent to Conversion, see "-- Certain Restrictions on
Purchase or Transfer of Shares After Conversion," "Management of the
Bank -- Subscriptions by Executive Officers and Directors" and "Restrictions on
Acquisition of the Company and the Bank."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
director or an executive officer of 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 or judicial declaration of incompetence of such
director or executive officer. 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 issued at a later date
as a stock dividend, stock split, or otherwise, with respect to such restricted
stock will be subject to the same restrictions. The directors and executive
officers of the Company and the Bank will also be subject to the insider trading
rules promulgated pursuant to the Exchange Act and any other applicable
requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the Superintendent. This restriction does not apply,
however, to the purchase of stock pursuant to the Stock Option Plan or the RRP
to be established after the Conversion.
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the Plan by the Board of the Bank will be final,
subject to the authority of the Superintendent and FDIC. The Plan provides that,
if deemed necessary or desirable by the Board of Trustees of the Bank, the Plan
may be substantively amended prior to the solicitation of proxies from
depositors by a vote of the Board of Trustees; amendment of the Plan thereafter
requires the approval of the Superintendent and FDIC. The Plan will terminate if
the sale of all shares of stock being offered pursuant to the Plan is not
completed prior to 24 months after the date of the approval of the Plan by the
Superintendent unless a longer time period is permitted by governing laws and
regulations. The Plan may be terminated by a vote of the Board of Trustees of
the Bank at any time prior to the Special Meeting, and thereafter by such a vote
with the approval of the Superintendent and FDIC.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, a
Restated Organization Certificate and By-Laws to be adopted by depositors of the
Bank. The Plan also provides for the concurrent formation of a holding company,
which form of organization may or may not be utilized at the option of the Board
of Trustees of the Bank. See "The Conversion -- General." In the event that the
holding company form of organization is utilized, as described below, certain
provisions in the Company's Certificate of Incorporation and By-Laws and in its
management remuneration plans and agreements entered into in connection with the
Conversion, together with provisions of the Delaware General Corporation Law
("DGCL"), may have anti-takeover effects. In the event that the holding company
form of organization is not utilized, the Bank's Restated Organization
Certificate and By-Laws and management remuneration plans and agreements entered
into in connection with the Conversion may have anti-takeover effects as
described below. In addition, regulatory restrictions may make it difficult for
persons or companies to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
The following discussion is a general summary of certain provisions of the
Company's Certificate of Incorporation and By-Laws and certain other statutory
and regulatory provisions relating to stock ownership and transfers, the Board
of Directors and business combinations, that might have a potential
"anti-takeover" effect. The Certificate of Incorporation and By-Laws of the
Company are filed as exhibits to the Registration Statement, of which this
Prospectus is a part, and the descriptions herein of such documents are
qualified in their entirety by reference to such documents. A number of
provisions of the Company's Certificate of Incorporation and By-Laws deal with
matters of corporate governance and certain rights of shareholders. These
provisions might have the effect of discouraging future takeover attempts which
are not approved by the Board of Directors but which individual Company
shareholders may deem to be in their best interests or in which shareholders may
receive substantial premiums for their shares over then current market prices.
As a result, shareholders who might desire to participate in such transactions
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 By-Laws of the Company is necessarily general
and reference should be made in each case to such Certificate of Incorporation
and By-Laws, which are incorporated herein by reference. See "Additional
Information" as to how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the
Company provides that any record owner of any outstanding Common Stock which is
beneficially owned, directly or indirectly, by a person who beneficially owns in
excess of 10% of the then outstanding shares of Common Stock ("Limit") shall be
entitled or permitted to only one one-hundredth (1/100) of a vote with respect
of each share held in excess of the Limit. Beneficial ownership of shares
includes shares beneficially owned by such person or any of his affiliates,
shares which such person or his affiliates have the right to acquire upon the
exercise of conversion rights or options and shares as to which such person and
his affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or shares that are subject to a revocable
proxy and that are not otherwise beneficially owned or deemed by the Company to
be beneficially owned by such person and his affiliates. The Certificate of
Incorporation further provides that this provision limiting voting rights may
only be amended upon (i) the approval of the Board of Directors, and (ii) the
affirmative vote of the holders of a majority of the total votes eligible to be
cast by the holders of all outstanding shares of capital stock entitled to vote
thereon and (iii) by the affirmative vote of either (1) not less than a majority
of the authorized number of directors and, if one or more Interested
Shareholders exist, by not less than a majority of the Disinterested Directors
(as defined in the Certificate of Incorporation) or (2) the holders of not less
than two-thirds of the total votes eligible to be cast by the holders of all
outstanding shares of the capital stock of the Company entitled to vote thereon
and, if the amendment is proposed by or on behalf of an Interested Shareholder
or a director who is an Affiliate or Associate of an Interested Shareholder, by
the affirmative vote
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of the holders of not less than a majority of the total votes eligible to be
cast by holders of all outstanding shares entitled to vote thereon not
beneficially owned by an Interested Shareholder or an Affiliate or Associate
thereof.
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the total
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and By-Laws provide that the
size of the Board shall be determined by a majority of the directors but shall
not be less than seven nor more than 20. The Certificate of Incorporation and
the By-Laws provide that any vacancy occurring in the Board, including a vacancy
created by an increase in the number of directors or resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the directors then in office. The classified Board is intended
to provide for continuity of the Board of Directors and to make it more
difficult and time consuming for a shareholder 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. The Certificate of Incorporation of
the Company provides that a director may be removed from the Board of Directors
prior to the expiration of his term only for cause, upon the affirmative vote of
at least 80% of the outstanding shares of voting stock. In the absence of these
provisions, the vote of the holders of a majority of the shares could remove the
entire Board, with or without cause, and replace it with persons of such
holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of shareholders of the Company may be called
only by resolution of at least three-fourths of the Board of Directors then in
office or by the Chairman, if one has been elected by the Board, or the Chief
Executive Officer of the Company. The Certificate of Incorporation also provides
that any action required or permitted to be taken by the shareholders of the
Company may be taken only at an annual or special meeting and prohibits
shareholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of twenty million (20,000,000) shares of capital stock, consisting of
fifteen million (15,000,000) shares of Common Stock and five million (5,000,000)
shares of preferred stock ("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 of
Directors currently has no plans for the issuance of additional shares, other
than the issuance of additional shares pursuant to the terms of the RRP and upon
exercise of stock options to be issued pursuant to the terms of the Stock Option
Plan, all of which, if implemented prior to the first anniversary of the
Conversion, will be presented to shareholders for approval at a meeting of
shareholders to be held no earlier than six months after completion of the
Conversion.
Shareholder Vote Required to Approve Business Combinations with Principal
Shareholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock,
together with the affirmative vote of at least 50% of the Company's outstanding
shares of voting stock not beneficially owned by an Interested Shareholder (as
defined below) to approve certain "Business Combinations," as defined therein,
and related transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a
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majority of the outstanding shares of Common Stock of the Company and any other
affected class of stock. Under the Certificate of Incorporation, at least 80%
approval of shareholders is required in connection with any transaction
involving an Interested Shareholder except (i) in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Company's Board of Directors who are unaffiliated with the Interested
Shareholder and were directors prior to the time when the Interested Shareholder
became an Interested Shareholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
shareholders a fair price in consideration for their shares in which case, if a
shareholder vote is required, approval of only a majority of the outstanding
shares of voting stock would be sufficient. The term "Interested Shareholder" is
defined to include any individual, corporation, partnership or other entity
(other than the Company or its subsidiary or any employee benefit plan
maintained by the Company or its subsidiary) which owns beneficially or
controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of the Company. This provision of the Certificate of Incorporation
applies to any "Business Combination," which is defined to include (i) any
merger or consolidation of the Company or any of its subsidiaries with or into
any Interested Shareholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Shareholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Shareholder or Affiliate of 5% or more of the assets of the Company or combined
assets of the Company and its subsidiary; (iii) the issuance or transfer to any
Interested Shareholder or its Affiliate by the Company (or any subsidiary) of
any securities of the Company other than on a pro rata basis to all
shareholders; (iv) the adoption of any plan for the liquidation or dissolution
of the Company proposed by or on behalf of any Interested Shareholder or
Affiliate thereof; (v) any reclassification of securities, recapitalization,
merger or consolidation of the Company which has the effect of increasing the
proportionate share of Common Stock or any class of equity or convertible
securities of the Company owned directly or indirectly by an Interested
Shareholder or Affiliate thereof; and (vi) the acquisition by the Company or its
subsidiary of any securities of an Interested Shareholder or its Affiliates or
Associates.
The trustees and executive officers of the Bank are purchasing in the
aggregate approximately 4.09% of the shares of the Common Stock at the maximum
of the Estimated Price Range. In addition, the ESOP intends to purchase 8% of
the Common Stock to be issued in the Conversion, including shares to be issued
to the Foundation. Additionally, if, the proposed RRP and Stock Options Plan are
implemented, the Company expects to acquire 4% of the Common Stock issued in the
Conversion, including shares to be issued to the Foundation, on behalf of the
RRP and expects to issue an amount equal to 10% of the Common Stock issued in
the Conversion, including shares to be issued to the Foundation, under the Stock
Option Plan to directors, executive officers and employees. As a result,
assuming the RRP and Stock Option Plan are implemented, the directors, executive
officers and employees have the potential to control the voting of approximately
25% of the Company's Common Stock, on a fully diluted basis at the maximum of
the Estimated Price Range, thereby enabling them to prevent the approval of the
transactions requiring the approval of at least 80% of the Company's outstanding
shares of voting stock described hereinabove.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer to the Company from another party to (i) make a tender or exchange offer
for any outstanding 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,
shall, in connection with the exercise of its judgment in determining what is in
the best interest of the Company and the shareholders of the Company, give due
consideration to the extent permitted by law to all 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 interests of the
Company, even if the price offered is significantly greater than the then market
price of any equity security of the Company.
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Amendment of Certificate of Incorporation and By-Laws. The Certificate of
Incorporation provides that certain provisions of the Certificate of
Incorporation may not be altered, amended, repealed or rescinded without the
affirmative vote of either (1) not less than a majority of the authorized number
of directors and, if one or more Interested Shareholders exist, by not less than
a majority of the Disinterested Directors (as defined in the Certificate of
Incorporation) or (2) the holders of not less than two-thirds of the total votes
eligible to be cast by the holders of all outstanding shares of the capital
stock of the Company entitled to vote thereon and, if the alteration, amendment,
repeal, or rescission is proposed by or on behalf of an Interested Shareholder
or a director who is an Affiliate or Associate of an Interested Shareholder, by
the affirmative vote of the holders of not less than a majority of the total
votes eligible to be cast by holders of all outstanding shares entitled to vote
thereon not beneficially owned by an Interested Shareholder or an Affiliate or
Associate thereof. Amendment of the provision relating to business combinations
must also be approved by either (i) a majority of the Disinterested Directors,
or (ii) the affirmative vote of not less than eighty percent (80%) of the total
number of votes eligible to be cast by the holders of all outstanding shares of
the Voting Stock, voting together as a single class, together with the
affirmative vote of not less than fifty percent (50%) of the total number of
votes eligible to be cast by the holders of all outstanding shares of the Voting
Stock not beneficially owned by any Interested Shareholder or Affiliate or
Associate thereof, voting together as a single class. Furthermore, the Company's
Certificate of Incorporation provides that provisions of the By-Laws that
contain supermajority voting requirements may not be altered, amended, repealed
or rescinded without a vote of the Board or holders of capital stock entitled to
vote thereon that is not less than the supermajority specified in such
provision. Absent these provisions, the DGCL provides that a corporation's
certificate of incorporation and by-laws may be amended by the holders of a
majority of the corporation's outstanding capital stock. The Certificate of
Incorporation also provides that the Board of Directors is authorized to make,
alter, amend, rescind or repeal any of the Company's By-Laws in accordance with
the terms thereof, regardless of whether the Bylaw was initially adopted by the
shareholders. However, this authorization neither divests the shareholders of
their right, nor limits their power to adopt, amend, rescind or repeal any Bylaw
under the DGCL. These provisions could have the effect of discouraging a tender
offer or other takeover attempt where the ability to make fundamental changes
through Bylaw amendments is an important element of the takeover strategy of the
acquiror.
Certain By-Law Provisions. The By-Laws of the Company also require a
shareholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual shareholder meeting to give
approximately 60 days notice in advance of the anniversary of the prior year's
annual shareholders' meeting to the Secretary of the Company. The notice
provision requires a shareholder who desires to raise new business to provide
certain information to the Company concerning the nature of the new business,
the shareholder and the shareholder's interest in the business matter.
Similarly, a shareholder wishing to nominate any person for election as a
director must provide the Company with certain information concerning the
nominee and the proposing shareholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
AND MANAGEMENT REMUNERATION PLANS ADOPTED IN THE CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, Retention Agreements, the ESOP, the RRP
and the Stock Option Plan to be established may also discourage takeover
attempts by increasing the costs to be incurred by the Bank and the Company in
the event of a takeover. See "Management of the Bank -- Employment Agreements,"
"-- Employee Retention Agreements" and "-- Benefits -- Employee Stock Ownership
Plan and Trust," "-- Benefits -- Stock Option Plan" and
"-- Benefits -- Recognition and Retention Plan."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, By-Laws and management remuneration plans to be
established are in the best interests of the Company and its shareholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests
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of the Company and its shareholders to encourage potential acquirors to
negotiate directly with management and that these provisions will encourage such
negotiations and discourage non-negotiated takeover attempts. It is also the
Board of Directors' view that these provisions should not discourage persons
from proposing a merger or other transaction at a price that reflects the true
value of the Company and that otherwise is in the best interests of all
shareholders.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the DGCL ("Section 203"), is
intended to discourage certain takeover practices by impeding the ability of a
hostile acquiror to engage in certain transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (a
"DGCL Interested Shareholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became a DGCL Interested Shareholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
a DGCL Interested Shareholder, the Board of Directors approved either the
business combination or the transaction which resulted in the shareholder
becoming a DGCL Interested Shareholder; (ii) any business combination involving
a person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became a DGCL Interested Shareholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Shareholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the DGCL Interested Shareholder; and (iv) certain
business combinations that are proposed after the corporation had received other
acquisition proposals and which are approved or not opposed by a majority of
certain continuing members of the Board of Directors. A corporation may exempt
itself from the requirement of the statute by adopting an amendment to its
Certificate of Incorporation or By-Laws electing not to be governed by Section
203 of the DGCL. At the present time, the Board of Directors does not intend to
propose any such amendment.
RESTRICTIONS IN THE BANK'S RESTATED ORGANIZATION CERTIFICATE AND BY-LAWS
Although the Board of Trustees of the Bank is not aware of any effort that
might be made to obtain control of the Bank after the Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions permitted
by the Banking Law and the conversion regulations of the NYBB to protect the
interests of the converted Bank and its shareholders from any hostile takeover.
Such provisions may, indirectly, inhibit a change in control of the Company, as
the Bank's sole stockholder. See "Risk Factors -- Certain Anti-Takeover
Provisions."
In the event that the Company is not formed and the subscription rights are
deemed to be subscriptions to purchase the common stock of the Bank, the
provisions contained in the Restated Organization Certificate and By-Laws of the
Bank, to be effective on the effective date of the Conversion, will govern
corporate procedure and certain rights of shareholders. The anti-takeover
effects of such provisions are generally similar to those described above for
the Company, except that the issuance of any additional capital stock of the
Bank would require the prior approval of the NYSBD, and the consent of the
holders of two-thirds of the outstanding shares of capital stock of the Bank
would be required prior to effecting a merger of, or certain acquisitions of
assets by, the Bank.
Limitation on Voting Rights. The Bank's Restated Organization Certificate
will contain a provision whereby the acquisition of or offer to acquire
beneficial ownership of more than 10% of the issued and outstanding shares of
any class of equity securities of the Bank by any person (i.e., any individual,
corporation,
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group acting in concert, trust, partnership, joint stock company or similar
organization), either directly or indirectly, will be prohibited for a period of
three years following the date of completion of the Conversion. Any stock in
excess of 10% acquired in violation of this provision will not be counted as
outstanding for voting purposes. This limitation shall not apply to (a) any
offer or sale with a view towards public resale made exclusively by the Bank to
any underwriter acting on behalf of the Bank in connection with a public
offering of the common stock of the Bank; (b) any corporation formed by the Bank
in connection with its conversion from mutual to stock form to acquire all of
the shares of stock of the Bank to be issued in connection with such conversion;
or (c) any reclassification of securities (including any reverse stock split),
or recapitalization of the Bank, or any merger or consolidation of the Bank with
any of its subsidiaries or any other transaction or reorganization (including a
transaction in which the Bank shall form a holding company) that does not have
the effect, directly or indirectly, of changing the beneficial ownership
interests of the Bank's shareholders, other than pursuant to the exercise of any
appraisal rights.
In the event that holders of revocable proxies for more than 10% of the
shares of the Common Stock of the Company seek, among other things, to elect
one-third or more of the Company's Board of Directors, to cause the Company's
shareholders to approve the acquisition or corporate reorganization of the
Company or to exert a continuing influence on a material aspect of the business
operations of the Company, which actions could indirectly result in a change in
control of the Bank, the Board of Directors of the Bank will be able to assert
this provision of the Bank's Restated Organization Certificate against such
holders. Although the Board of Directors of the Bank is not currently able to
determine when and if it would assert this provision of the Bank's Restated
Organization Certificate, the Bank's Board of Directors, in exercising its
fiduciary duty, may assert this provision if it were deemed to be in the best
interests of the Bank, the Company and its shareholders. It is unclear, however,
whether this provision, if asserted, would be successful against such persons in
a proxy contest which could result in a change in control of the Bank indirectly
through a change in control of the Company.
Board of Directors. The Board of Directors of the Bank is divided into
three classes, each of which shall contain approximately one-third of the total
number of members of the Board of Directors. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. The staggered terms of the Bank's Board of Directors could
have an anti-takeover effect by making it more difficult for a majority of
shares to force an immediate change in the Board since only one-third of the
Board is elected each year. The purpose of these provisions is to assure
stability and continuity of management of the Bank in the years immediately
following the Conversion. In addition, shareholders will not be permitted to
cumulate their votes in the election of directors.
The Restated Organization Certificate and By-Laws of the Bank provide that
any director, or the entire Board of Directors, may be removed at any time, but
only for cause and only by the affirmative vote of at least 80% of the
outstanding shares of voting stock. The Restated Organization Certificate and
By-Laws of the Bank also provide that any vacancy occurring in the Board of
Directors, including any vacancy created by an increase in the number of
directors, shall be filled by the shareholders of the Bank, except that
vacancies not exceeding one-third of the entire Board of Directors may be filled
by the affirmative vote of a majority of the directors then holding office.
Preferred Stock. Although the Bank has no arrangements, understandings or
plans at the present time, the Board of Directors believes that the availability
of unissued shares of Preferred Stock will provide the Bank with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other corporate needs which may arise. In the event of a proposed
merger, tender offer or other attempt to gain control of the Bank of which
management does not approve, it might be possible for the Bank's Board of
Directors to authorize the issuance of one or more series of Preferred Stock
with rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Preferred Stock,
therefore, may be to deter a future takeover attempt. The Bank's Board of
Directors does not intend to issue any Preferred Stock except on terms which the
Board deems to be in the best interests of the Bank and its then existing
shareholders.
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<PAGE> 127
Shareholder Vote Required for Certain Business Combinations. The Bank's
Restated Organization Certificate contains provisions requiring a higher
shareholder vote for certain business combinations, which provisions are
substantially identical to those contained in the Company's Certificate of
Incorporation. See "-- Restrictions in the Company's Certificate of
Incorporation and By-Laws -- Shareholder Vote Required to Approve Business
Combinations with Principal Shareholders."
Evaluation of Offers. The Restated Organization Certificate of the Bank
also provides that the Board of Directors of the Bank, when evaluating any offer
to the Bank or to the shareholders of the Bank from another party relating to a
change or potential change in control of the Bank, including, without
limitation, any offer to (a) purchase for cash or exchange any securities or
property for any outstanding equity securities of the Bank, (b) merge or
consolidate the Bank with another corporation or (c) purchase or otherwise
acquire all or substantially all of the properties and assets of the Bank,
shall, in connection with the exercise of its judgment in determining what is in
the best interest of the Bank and its shareholders, give due consideration not
only to the price or other consideration being offered, but also to all other
relevant factors including, without limitation, (1) both the long-term and the
short-term interests of the Bank and its shareholders and (2) the effects that
the Bank's actions may have in the short-term or in the long-term upon any of
the following: (i) the prospects for potential growth, development, productivity
and profitability of the Bank; (ii) the Bank's current employees; (iii) the
Bank's retired employees and other beneficiaries receiving or entitled to
receive retirement, welfare or similar benefits from or pursuant to any plan
sponsored, or agreement entered into, by the Bank; (iv) the Bank's customers and
creditors; and (v) the ability of the Bank to provide, as a going concern,
goods, services, employment opportunities and employment benefits and otherwise
to contribute to the communities in which is does business. By having these
standards in the Restated Organization Certificate, the Board of Directors of
the Bank may be in a stronger position to oppose such a transaction if the Board
concludes that the transaction would not be in the best interests of the Bank,
even if the price offered is significantly greater than the then market price of
any equity security of the Bank.
Amendment of Restated Organization Certificate and By-Laws. The Bank's
Restated Organization Certificate provides that certain provisions of the
Restated Organization Certificate may not be altered, amended, repealed or
rescinded without the affirmative vote of either (i) not less than a majority of
the authorized number of directors and, if one or more Interested Shareholders
exist, by not less than a majority of the Disinterested Directors, or (ii) the
holders of not less than two-thirds of the total votes eligible to be cast by
the holders of all outstanding shares of capital stock entitled to vote thereon
and, if the alteration, amendment, repeal or rescission is proposed by or on
behalf of an Interested Shareholder or a director who is an Affiliate or
Associate of an Interested Shareholder, the holders of not less than a majority
of the total votes eligible to be cast by holders of all outstanding shares of
capital stock entitled to vote thereon not beneficially owned by an Interested
Shareholder or an Affiliate or Associate thereof.
In addition, provisions of the By-Laws of the Bank that contain
supermajority voting requirements may not be altered, amended, repealed or
rescinded without a vote of the Board or holders of capital stock entitled to
vote thereon that is not less than the supermajority specified in such
provision.
REGULATORY RESTRICTIONS
New York State Banking Board Conversion Regulations. NYBB regulations
prohibit any person, prior to the completion of the Conversion, from
transferring, or from entering into any agreement or understanding to transfer,
to the account of another, legal or beneficial ownership of the subscription
rights issued under the Plan of Conversion or the Common Stock to be issued upon
their exercise. The NYBB regulations also prohibit any person, prior to the
completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock. See "The Conversion -- Restrictions on Transfer of Subscription Rights
and Shares." For one year following the Conversion, NYBB regulations prohibit
any person from acquiring or making an offer to acquire more than 10% of the
stock of any converted savings institution, except with the prior approval of
the Superintendent.
New York State Change in Bank Control Regulation. Under the Banking Law,
the prior approval of the NYBB is required before any action is taken that
causes any company to acquire direct or indirect control of a
127
<PAGE> 128
banking institution. For this purpose, the term "company" is defined to include
corporations, partnerships and other types of business entities, chartered or
doing business in New York, and an individual or combination of individuals
acting in concert and residing or doing business in New York. Control is
presumed to exist if any company directly or indirectly owns, controls or holds
with power to vote 10% or more of the voting stock of a banking institution or
of any company that owns, controls or holds with power to vote 10% or more of
the voting stock of a banking institution or of any company that owns, controls
or holds with power to vote 10% or more of the voting stock of a banking
institution. Accordingly, prior approval of the NYBB would be required before
any company could acquire 10% or more of the Common Stock of the Company.
New York State Bank Holding Company Regulation. Under the Banking Law, the
prior approval of the NYBB is required before: (1) any action is taken that
causes any company to become a bank holding company; (2) any action is taken
that causes any banking institution to become or to be merged or consolidated
with a subsidiary of a bank holding company; (3) any bank holding company
acquires direct or indirect ownership or control of more than 5% of the voting
stock of a banking institution; (4) any bank holding company or subsidiary
thereof acquires all or substantially all of the assets of a banking
institution; or (5) any action is taken that causes any bank holding company to
merge or consolidate with another bank holding company. See "Regulation and
Supervision -- Holding Company Regulation -- New York Bank Company Regulation."
Accordingly, the prior approval of the NYBB would be required before any bank
holding company, as defined under the Banking Law, could acquire 5% or more of
the Common Stock of the Company.
Federal Change in Bank Control Act. Under the CBCA and the FRB's
regulations thereunder, a person is required to give 60 days' prior written
notice to the FRB before acquiring control of a bank holding company. For this
purpose, the term "control" means the acquisition of the ownership, control or
holding of the power to vote 25% or more of any class of a bank holding
company's voting stock, and the term "person" includes an individual,
corporation, partnership, and various other entities, acting individually or in
concert. In addition, an acquiring person is presumed to acquire control if the
person acquires the ownership, control or holding of the power to vote of 10% or
more of any class of the holding company's voting stock if (i) the company's
shares are registered pursuant to Section 12 of the Exchange Act or (ii) no
other person will own, control or hold the power to vote a greater percentage of
that class of voting securities. The CBCA and the FRB's regulations authorize
the FRB to disapprove a proposed transaction on certain specified grounds.
Accordingly, the prior approval of the FRB would be required under the CBCA
before any person could acquire 10% or more of the Common Stock of the Company.
Federal Bank Holding Company Act. Under the BHCA and the FRB's regulations
thereunder, any company seeking to acquire control of a bank or bank holding
company, must acquire the prior written approval of the FRB. For this purpose,
the term "company" is defined to include banks, corporations, partnerships,
associations, and certain trusts and other entities, and the term "control" is
deemed to exist if a company has voting control of at least 25% of any class of
a bank's voting stock, and may be found to exist if a company controls in any
manner the election of a majority of the directors of the bank or has the power
to exercise a controlling influence over the management or policies of the bank.
In addition, a bank holding company must obtain FRB approval prior to acquiring
voting control of more than 5% of any class of voting stock of a bank or another
bank holding company. An acquisition of control of a bank that requires the
prior approval of the FRB under the BHCA is not subject to the notice
requirements of the Change in Bank Control Act of 1978. Accordingly, the prior
approval of the FRB under the BHCA would be required (a) before any bank holding
company could acquire 5% or more of the Common Stock of the Company and (b)
before any other company could acquire 25% or more of the Common Stock of the
Company.
128
<PAGE> 129
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue fifteen million (15,000,000) shares of
Common Stock having a par value of $.01 per share and five million (5,000,000)
shares of Preferred Stock having a par value of $.01 per share. The Company
currently expects to issue 5,577,500 shares of Common Stock (or 6,414,125 in the
event of an increase of 15% in the Estimated Price Range) and does not expect to
issue any shares of Preferred Stock. Except as discussed above in "Restrictions
on Acquisition of the Company and the Bank," 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, all such stock will be
duly authorized, fully paid and non-assessable. THE COMMON STOCK OF THE COMPANY
WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE
TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation and
Supervision." The holders of Common Stock of the Company will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the Company
issues Preferred Stock, the holders thereof may have a priority over the holders
of the Common Stock with respect to dividends.
Voting Rights. Upon 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.
Except as discussed in "Restrictions on Acquisition of the Company and the
Bank," each holder of Common Stock will be entitled to one vote per share and
will not have any right to cumulate votes in the election of directors. If the
Company issues Preferred Stock, holders of the Preferred Stock may also possess
voting rights. Certain matters require an 80% or two-thirds shareholder vote.
See "Restrictions on Acquisition of the Company and the Bank."
As a New York mutual savings bank, corporate powers and control of the Bank
are vested in its Board of Trustees, who elect the officers of the Bank and who
fill any vacancies on the Board of Trustees as it exists upon Conversion.
Subsequent to Conversion, voting rights will be vested exclusively in the owners
of the shares of capital stock of the Bank, which owner will be the Company, and
voted at the direction of the Company's Board of Directors. Consequently, the
holders of the Common Stock will not have direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account, which is a
memorandum account only, to Eligible Account Holders and Supplemental Eligible
Account Holders (see "The Conversion -- Effects of Conversion -- Liquidation
Rights"), all assets of the Bank available for distribution in cash or in kind.
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
the liquidation or dissolution of the Company.
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.
129
<PAGE> 130
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 shareholder 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 unsolicited takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Restated Organization Certificate of the Bank, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of fifteen
million (15,000,000) shares of common stock, par value $.01 per share, and five
million (5,000,000) shares of preferred stock, par value $.01 per share, which
preferred stock may be issued in series and classes having such rights,
preferences, privileges and restrictions as the Board of Directors may
determine. Except as discussed above in "Restrictions on Acquisition of the
Company and the Bank," each share of common stock of the Bank will have the same
relative rights as, and will be identical in all respects with, each other share
of common stock. After the Conversion, the Board of Directors will be authorized
to approve the issuance of Common Stock up to the amount authorized by the
Restated Organization Certificate without the approval of the Bank's
shareholders, except to the extent that such approval is required by governing
law. All of the issued and outstanding common stock of the Bank (which is
currently expected to be 1,000 shares) will be held by the Company as the Bank's
sole shareholder. THE CAPITAL STOCK OF THE BANK WILL REPRESENT NON-WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY
THE FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock (the Company upon
consummation of the Conversion) will be entitled to receive and to share equally
in such dividends as may be declared by the Board of Directors of the Bank out
of funds legally available therefor. See "Dividend Policy" for certain
restrictions on the payment of dividends and "Federal and State
Taxation -- Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the Bank's
common stock (the Company upon consummation of the Conversion) 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. Cumulation of votes will not be
permitted. See "Restrictions on Acquisition of the Company and the
Bank -- Anti-Takeover Effects of the Company's Articles of Incorporation and
By-Laws and Management Remuneration Plans Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up
of the Bank, the holders of its common stock (the Company upon consummation of
the Conversion) 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,
which is a memorandum account only, to Eligible Account Holders and Supplemental
Eligible Account Holders (see "The Conversion -- Effects of
Conversion -- Liquidation Rights"), all assets of the Bank available for
distribution in cash or in kind. If preferred stock is issued subsequent to the
Conversion, the holders thereof may also have priority over the holders of
common stock in the event of liquidation or dissolution.
Preemptive Rights and Redemption. Holders of the common stock of the Bank
(the Company upon consummation of the Conversion) will not be entitled to
preemptive rights with respect to any shares of the Bank which may be issued.
The common stock will not be subject to redemption. Upon receipt by the Bank of
the full specified purchase price therefor, the common stock will be fully paid
and non-assessable.
130
<PAGE> 131
PREFERRED STOCK
None of the shares of the Bank's authorized preferred stock will be issued
in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without shareholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
Registrar and Transfer Company.
EXPERTS
The financial statements of the Bank as of May 31, 1997 and 1996 and for
each of the years in the three-year period ended May 31, 1997, 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 accounting and
auditing in giving said report.
FinPro has consented to the publication herein of the summary of its report
to the Bank and Company setting forth its opinion as to the estimated pro forma
market value of the Common Stock upon Conversion and its opinion with respect to
subscription rights.
OTHER INFORMATION
In October of 1996, the Bank's Board of Trustees decided to retain Arthur
Andersen LLP as its independent public accountants and dismissed the Bank's
former auditors. The former auditors' report on the Bank's balance sheet as of
May 31, 1996 does not cover the balance sheet of the Bank included in this
Prospectus. Such report did not contain an adverse opinion or disclaimer of
opinion and was not modified as to uncertainty, audit scope or accounting
principles. There were no disagreements with the former auditors on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure at the time of the change or with respect to the
Bank's balance sheet as of May 31, 1996, which, if not resolved to the former
auditors' satisfaction, would have caused them to make reference to the subject
matter of the disagreement in connection with their report. Prior to retaining
Arthur Andersen LLP, the Bank had not consulted with Arthur Andersen LLP
regarding accounting principles.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal and state income tax
consequences of the Conversion will be passed upon for the Bank and the Company
by Thacher Proffitt & Wood, New York, New York, special counsel to the Bank and
the Company. Certain legal matters will be passed upon for Sandler O'Neill by
Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
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<PAGE> 132
ADDITIONAL INFORMATION
The Company has filed with the SEC the 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.
Such information is also available on the SEC's Electronic Data Gathering
Analysis and Retrieval ("EDGAR") System at the SEC's website, www.sec.gov.
The Bank has filed an application for conversion with the Superintendent
and FDIC. Pursuant to the rules and regulations of the Superintendent, this
Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the Superintendent, Two
Rector Street, New York, New York 10006.
The Company has filed with the FRB an application to become a bank holding
company. This Prospectus omits certain information contained in such
application. Such application may be inspected at the offices of the Federal
Reserve Bank of New York, 59 Maiden Lane, New York, New York 10045.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% shareholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan of Conversion, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion. In the event that the Bank amends the Plan to eliminate the
concurrent formation of the Company as part of the Conversion, the Bank will
register its stock with the FDIC under Section 12(g) of the Exchange Act and,
upon such registration, the Bank and the holders of its stock will become
subject to the same obligations and restrictions.
Copies of the Certificate of Incorporation and the By-Laws of the Company
and the Restated Organization Certificate and By-Laws of the Bank are available
without charge from the Bank upon written or oral request.
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<PAGE> 133
INDEX TO FINANCIAL STATEMENTS
THE WARWICK SAVINGS BANK
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Financial Statements:
Consolidated Statements of Financial Condition as of August 31, 1997 (Unaudited) and
May 31, 1997 and 1996............................................................ F-3
Consolidated Statements of Income for the Three Months Ended August 31, 1997 and
1996 (Unaudited) and for Each of the Years in the Three-Year Period Ended May 31,
1997............................................................................. 36
Consolidated Statements of Changes in Net Worth for the Three Months Ended August
31, 1997 (Unaudited) and for Each of the Years in the Three-Year Period Ended May
31, 1997......................................................................... F-4
Consolidated Statements of Cash Flows for the Three Months Ended August 31, 1997 and
1996 (Unaudited) and for Each of the Years in the Three-Year Period Ended May 31,
1997............................................................................. F-5
Notes to Consolidated Financial Statements............................................ F-6
</TABLE>
NOTE: 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 Warwick Community Bancorp, Inc. have been
omitted because Warwick Community Bancorp, Inc. has not yet issued any stock,
has no assets and no liabilities, and has not conducted any business other than
of an organizational nature.
F-1
<PAGE> 134
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Examining Committee of
The Warwick Savings Bank:
We have audited the accompanying consolidated statements of financial
condition of The Warwick Savings Bank and subsidiaries as of May 31, 1997 and
1996, and the related consolidated statements of income, changes in net worth
and cash flows for each of the years in the three-year period ended May 31,
1997. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Warwick Savings Bank and
subsidiaries as of May 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 1997, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 11 to the consolidated financial statements,
the Bank changed its method of accounting for certain postretirement benefit
costs in fiscal 1995 upon adoption of Statement of Financial Accounting
Standards No. 106. Also, as discussed in Notes 1 and 7 to the consolidated
financial statements, in fiscal 1996, the Bank changed its method of accounting
for mortgage servicing rights upon adoption of Statement of Financial Accounting
Standards No. 122.
[Andersen Sig.]
New York, New York
July 30, 1997
F-2
<PAGE> 135
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AUGUST 31, 1997 AND MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
MAY 31
AUGUST 31, ---------------------------
1997 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
ASSETS:
Cash on hand and in banks........................ $ 9,290,746 $ 10,366,711 $ 7,101,510
Federal funds sold............................... -- 1,315,000 --
Securities --
Trading, at fair value........................ -- -- 1,933,694
Available-for-sale, at fair value............. 110,226,282 120,301,288 135,232,414
Held-to-maturity, at amortized cost (fair
value of $6,116,637, $6,116,184 and
$7,087,692, respectively)................... 6,101,776 6,091,684 7,117,468
------------ ------------ ------------
Total securities......................... 116,328,058 126,392,972 144,283,576
------------ ------------ ------------
Mortgage loans, net.............................. 114,986,191 97,440,203 71,941,908
Mortgage loans held-for-sale..................... 2,028,150 4,831,500 5,053,892
Other loans, net................................. 37,650,676 36,051,438 31,901,679
Mortgage servicing rights........................ 860,890 835,079 669,945
Accrued interest receivable...................... 2,143,606 2,096,627 1,942,185
Federal Home Loan Bank stock..................... 1,731,300 1,731,300 1,178,100
Bank premises and equipment, net................. 3,260,847 2,425,831 2,539,141
Other real estate owned, net..................... 167,083 223,782 330,140
Other assets..................................... 2,420,231 2,834,743 7,110,877
------------ ------------ ------------
Total assets............................. $290,867,778 $286,545,186 $274,052,953
============ ============ ============
LIABILITIES AND NET WORTH
LIABILITIES:
Deposits......................................... $221,763,471 $221,211,137 $232,965,276
Mortgage escrow funds............................ 2,255,799 1,397,584 1,252,416
Securities sold under agreements to repurchase... 23,045,000 23,090,000 4,700,000
Federal Home Loan Bank advances.................. 8,270,000 5,250,000 3,600,000
Accrued expenses and other liabilities........... 6,321,371 7,482,034 6,764,788
------------ ------------ ------------
Total liabilities........................ 261,655,641 258,430,755 249,282,480
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 14)
NET WORTH:
Surplus.......................................... 6,025,846 6,025,846 6,025,846
Undivided profits................................ 22,007,142 21,468,663 18,603,160
Net unrealized gain on securities, net of
taxes......................................... 1,179,149 619,922 141,467
------------ ------------ ------------
Total net worth............................... 29,212,137 28,114,431 24,770,473
------------ ------------ ------------
Total liabilities and net worth.......... $290,867,778 $286,545,186 $274,052,953
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 136
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET WORTH
(FOR THE THREE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) AND FOR THE YEARS ENDED
MAY 31, 1997, 1996 AND 1995)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
ON SECURITIES
UNDIVIDED AVAILABLE-
SURPLUS PROFITS FOR-SALE, NET TOTAL
---------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
BALANCE, May 31, 1994................. $6,025,846 $16,633,815 $ (750,013) $21,909,648
Net income.......................... -- 503,765 -- 503,765
Unrealized appreciation
(depreciation) on securities
available-for-sale, net.......... -- -- 662,725 662,725
---------- ----------- --------- -----------
BALANCE, May 31, 1995................. 6,025,846 17,137,580 (87,288) 23,076,138
Net income.......................... -- 1,465,580 -- 1,465,580
Unrealized appreciation
(depreciation) on securities
available-for-sale, net.......... -- -- 228,755 228,755
---------- ----------- --------- -----------
BALANCE, May 31, 1996................. 6,025,846 18,603,160 141,467 24,770,473
Net income.......................... -- 2,865,503 -- 2,865,503
Unrealized appreciation
(depreciation) on securities
available-for-sale, net.......... -- -- 478,455 478,455
---------- ----------- --------- -----------
BALANCE, May 31, 1997................. $6,025,846 $21,468,663 $ 619,922 $28,114,431
Net income.......................... -- 538,479 -- 538,479
Unrealized appreciation
(depreciation) on securities
available-for-sale, net.......... -- -- 559,227 559,227
---------- ----------- --------- -----------
BALANCE, August 31, 1997.............. $6,025,846 $22,007,142 $1,179,149 $29,212,137
========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 137
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED AUGUST 31 FOR THE YEARS ENDED MAY 31
--------------------------- ------------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 538,479 $ 847,410 $ 2,865,503 $ 1,465,580 $ 503,765
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Cumulative effect of change in accounting
principle...................................... -- -- -- -- 645,184
Depreciation..................................... 112,361 109,972 459,171 428,008 381,190
Amortization of premium on investment
securities..................................... 38,365 87,608 264,120 497,342 848,222
Accretion of discount on investment securities... (23,909) (64,310) (189,667) (509,755) (204,763)
Net (increase) decrease in accrued interest
receivable..................................... (36,340) (400,760) (154,589) 140,166 (102,179)
Net (increase) decrease in mortgage servicing
rights and other assets........................ 129,346 3,610,828 4,111,000 (2,165,524) (3,051,086)
Provision for loan losses........................ 304,000 20,000 130,000 140,000 261,000
Net (gain) loss on sales of loans................ (23,428) (17,420) (137,403) (118,807) (14,107)
Net (gain) loss on sale of securities............ (154,231) (696,155) (816,304) (356,266) 428,611
Net increase (decrease) in accrued interest
payable........................................ 110,301 (80,326) 10,496 (174,460) 530,548
Net increase (decrease) in accrued expenses and
other liabilities.............................. (1,320,362) 676,658 706,750 1,539,027 (580,955)
Purchase of trading securities................... (3,956,789) (6,855,762) (21,358,341) (22,733,683) --
Sales of trading securities...................... 3,956,789 3,003,955 17,485,771 22,667,672 --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities................................ (325,418) 241,698 3,376,507 819,300 (354,570)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and calls of securities
held-to-maturity................................. -- 1,000,000 2,222,870 22,999,141 8,067,351
Proceeds from maturities and calls of securities
available- for-sale.............................. 3,000,000 2,000,000 10,202,052 16,577,155 4,000,000
Purchases of securities held-to-maturity........... -- -- (200,000) (525,539) (17,879,756)
Purchases of securities available-for-sale......... (18,617,728) (29,000,331) (49,185,133) (85,139,186) (15,879,228)
Proceeds from sales of securities
available-for-sale............................... 24,145,840 25,442,143 48,890,431 9,059,791 13,855,143
Principal repayments from mortgage-backed
securities....................................... 2,638,308 2,593,000 10,469,393 3,637,431 3,421,464
Purchases of Federal Home Loan Bank Stock.......... -- -- (553,200) (267,600) (910,500)
Net (increase) decrease in loans................... (16,659,857) (10,113,897) (29,187,635) 14,537,389 (14,608,051)
Purchases of banking premises and equipment, net... (949,188) (42,673) (240,610) 60,174 (201,060)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities....... (6,442,625) (8,121,758) (7,581,832) (19,061,244) (20,134,637)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits................ 536,058 (7,961,433) (11,649,533) (882,800) 21,684,849
Net increase (decrease) in mortgage escrow funds... 866,020 477,250 395,059 3,051,380 305,796
Increase in borrowed funds......................... 2,975,000 17,200,000 20,040,000 8,300,000 --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities... 4,377,078 9,715,817 8,785,526 10,468,580 21,990,645
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents............................... (2,390,965) 1,835,757 4,580,201 (7,773,364) 1,501,438
CASH AND CASH EQUIVALENTS, beginning of year......... 11,681,711 7,101,510 7,101,510 14,874,874 13,373,436
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year............... $ 9,290,746 $ 8,937,267 $ 11,681,711 $ 7,101,510 $ 14,874,874
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest on deposits and borrowed funds.......... $ 2,248,000 $ 2,361,000 $ 9,365,666 $ 8,891,558 $ 6,297,235
Income taxes..................................... 477,500 745,000 2,117,500 -- 1,481,740
Reclassification from held-to-maturity to
available-for-sale............................... -- -- -- 26,180,452 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 138
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies
followed by The Warwick Savings Bank and subsidiaries (the "Bank") in the
preparation of its consolidated financial statements:
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Bank and its wholly owned subsidiaries, Warsave Development Co., Inc., WSB
Financial Services, Inc., and WSB Mortgage Company of New Jersey, Inc., and are
prepared on the accrual basis. All significant intercompany balances and
transactions are eliminated in consolidation.
Unaudited Financial Information
All information as of August 31, 1997 and for the three-month periods ended
August 31, 1997 and 1996 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 August 31, 1997 and the results of operations and cash
flows for the three-month periods ended August 31, 1997 and 1996. The results of
the three-month periods are not necessarily indicative of the results of the
Bank, which may be expected for the entire year.
Use of Estimates in the Preparation of Financial Statements
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported assets and
liabilities as of the date of the consolidated statements of financial
condition. The same is true of revenues and expenses reported for the period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Bank generally considers short-term instruments, with original
maturities of three months or less, measured from their acquisition date, and
highly liquid instruments readily convertible to known amounts of cash to be
cash equivalents.
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Generally, federal
funds sold are sold for one-day periods.
Securities
The Bank classifies its securities as trading securities,
available-for-sale securities, or held-to-maturity securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Trading securities are debt
and equity securities that are bought principally for the purpose of selling
them in the near term, and securities classified as held-to-maturity consist of
debt securities for which the Bank has the positive intent and ability to hold
to maturity and are carried at amortized cost. Securities considered neither
trading nor held-to-maturity are classified as available-for-sale securities and
are carried at fair value with unrealized gains and losses excluded from
earnings and reported as a separate component of net worth (net of related
deferred taxes). Trading securities are carried at fair value with unrealized
gains and losses included in earnings.
Federal Home Loan Bank stock is considered restricted stock under SFAS No.
115 and, accordingly, is carried at cost.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
a special report on the implementation of SFAS No. 115. This special report
provided an opportunity for a one-time reassessment of
F-6
<PAGE> 139
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an institution's classification of securities as of a single measurement date
between November 15, 1995 and December 31, 1995. In December 1995, the Bank
transferred $26,180,452 of U.S. Government agency securities and other
securities to available-for-sale from the held-to-maturity portfolio.
Loans
Loans are stated at the principal amount outstanding, net of unearned
income. 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.
Allowance for Loan Losses
The allowance for loan losses is based upon management's periodic
evaluation of the loan portfolio under current economic conditions, considering
factors such as the Bank's past loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
and the estimated value of the underlying collateral. Establishing the allowance
for loan losses involves significant management judgment, utilizing the best
available information at the time of review. Those judgments are subject to
further review by various sources, including the Bank's regulators. While
management estimates loan losses using the best available information, future
adjustments to the allowance may be necessary based on changes in economic and
real estate market conditions, further information obtained regarding known
problem loans, the identification of additional problem loans, and other
factors.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures," was adopted by the Bank in fiscal
1995. Such change in accounting was not material to the consolidated financial
statements. SFAS 114 defines an impaired loan as a loan for which it is
probable, based on current information, that the lender will not collect all
amounts due under the contractual terms of the loan agreement. The Bank applies
the impairment criteria to all loans, except for large groups of smaller balance
homogenous loans that are collectively evaluated for impairment, such as
residential mortgage and consumer installment loans. Income recognition and
charge-off policies were not changed as a result of this statement. At August
31, 1997 and May 31, 1997 and 1996, in addition to the nonaccrual loans
discussed in Notes 4 and 5, there were $503,331, $504,265 and $25,600,
respectively, of loans identified by the Bank as impaired, as defined under SFAS
No. 114 with no related reserves for losses.
Mortgage Loans Held-for-Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate, with net
unrealized losses (if any) reported in earnings. Realized gains and losses on
sales of loans are based on the cost of the specific loans sold.
Loan Origination Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost is recognized in income using the level-yield method over the
contractual life of the loans. Unamortized fees and costs on loans sold or
prepaid prior to contractual maturity are recognized as an adjustment to income
in the year such loans are sold or prepaid.
F-7
<PAGE> 140
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage Servicing Rights
In fiscal 1996, the Bank prospectively adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights." SFAS No. 122 requires that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others; however, those servicing rights are acquired. As a result of adopting
SFAS No. 122, the Bank capitalized $443,739 of originated mortgage servicing
rights during fiscal 1996. In June 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which is effective for transactions occurring after December
31, 1996 (as amended by SFAS No. 127) and which supersedes SFAS No. 122. This
standard requires that, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, and derecognizes financial assets when control has been
surrendered.
The cost of mortgage servicing rights (purchased or originated rights with
related loans sold) is amortized in proportion to, and over the period of,
estimated net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. For purposes of measuring
impairment, the servicing rights are stratified based on the following
predominant risk characteristics of the underlying loans: (a) loan type and (b)
origination or securitization date.
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets. Equipment under
capital leases is amortized on the straight-line method over the shorter of the
lease term or the estimated useful life of the asset. Repairs and maintenance,
as well as renewals and replacements of a routine nature, are expensed while
costs incurred to improve or extend the life of existing assets are capitalized.
Other Real Estate Owned
Other real estate owned ("OREO") represents properties acquired through
legal foreclosure. Prior to transferring a real estate loan to OREO, the loan is
written down to the lower of the recorded investment in the loan or the fair
value of the property. Any resulting write-downs are charged to the allowance
for loan losses. Thereafter, the property is carried at the lower of cost or
fair value less costs to sell, with any adjustments recorded as an increase or
decrease to the allowance for losses on OREO.
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.
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 calendar year quarter so long as the net worth of the Bank is less than 10%
of the amount due depositors.
F-8
<PAGE> 141
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
effects attributable to "temporary differences" (differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases) and tax loss and tax credit carryforwards. Deferred
tax assets are reduced by a valuation allowance if, based on an analysis of
available evidence, management determines that it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which the temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax laws or rates is recognized in income in the
period that includes the enactment date of the change.
Postretirement Benefits Other Than Pensions
The Bank changed its method of accounting for the cost of postretirement
health care and life insurance benefits in fiscal 1995 upon adoption of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The cumulative effect of this accounting change was fully recognized as a
liability in fiscal 1995 equal to the full amount of the Bank's accumulated
benefit obligation. Under SFAS No. 106, the cost of postretirement health care
and life insurance benefits is recognized on an accrual basis as such benefits
are earned by active employees. Prior to fiscal 1995, the Bank recognized the
cost of these benefits on a pay-as-you-go (cash) basis.
New Accounting Pronouncements
In March 1995, the FASB 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 June 1996, the FASB 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 and 125 did not have a material effect on the
Bank's financial statements.
In March 1997, the FASB issued SFAS No. 128 "Earnings per Share." SFAS No.
128 specifies the computations, presentation, and disclosure requirements for
Earnings per Share by all entities with publicly held common stock or potential
stock. SFAS 128 supersedes Accounting Principles Board Opinion No. 15 "Earnings
per Share." SFAS No. 128 is effective for financial statements for interim and
annual periods ending after December 15, 1997.
In March 1997, the FASB also issued SFAS No. 129 "Disclosure of Information
about Capital Structure." SFAS No. 129 is effective for financial statements for
periods ending after December 15, 1997. SFAS No. 129 does not change disclosure
requirements for the Bank.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." These statements are effective for fiscal years beginning after
December 15, 1997 and restatement of financial statements or information for
earlier periods provided for comparative purposes is required. The provisions of
these statements will not affect the Bank's results of operations or financial
condition.
F-9
<PAGE> 142
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUBSEQUENT EVENT -- CONVERSION TO STOCK FORM OF OWNERSHIP
On July 10, 1997, the Board of Trustees adopted a proposed Plan of
Conversion ("Plan") to convert the Bank from a New York mutual savings bank to a
New York stock savings bank and to become a wholly owned subsidiary of a new
Delaware corporation ("Company") to be organized at the direction of the Bank.
Pursuant to the Plan, the Company will issue and offer for sale certain shares
of its common stock and use up to 50% of the net proceeds of such sale to
acquire all of the capital stock of the Bank. The proposed transaction is
subject to the approval of the Superintendent of Banks of New York State and of
the Federal Deposit Insurance Corporation, as well as to a vote of Bank's
Eligible Account Holders (depositors of the Bank having a deposit of at least
$100 as of June 30, 1996). In addition, the Company will file a registration
statement with the Securities and Exchange Commission ("SEC") with respect to
the offering of its common stock and will seek the permission of the Federal
Reserve Board ("FRB") to acquire the stock of the Bank to be issued upon the
Bank's conversion.
At the time of conversion, the Bank will establish a liquidation account in
an amount equal to the retained income 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, the Company intends to establish a Charitable
Foundation, Employee Stock Ownership Plan (ESOP), Stock Option Plan, Recognition
and Retention Plan, and Employment and Retention Agreements as discussed below.
The Company proposes to fund the Charitable Foundation by contributing to
the Charitable Foundation, immediately following the conversion, a number of
shares of authorized but unissued shares of the Common Stock equal to 3% of
Common Stock sold in the Offering. Such contribution, once made, will not be
recoverable by the Company or the Bank. The Company will recognize the full
expense equal to the fair value of the stock, in the amount of the contribution
in the quarter in which it occurs. Such expense will reduce earnings and have a
material impact on the Company's and the Bank's earnings for such quarter and
for the year.
The Company plans to set up an ESOP, a tax-qualified benefit plan for
officers and employees of the Company and the Bank. It is anticipated that 8% 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 Recognition 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.
Upon consummation of the conversion, the Company and the Bank intend to
enter into employment agreements with certain senior management personnel and
retention agreements with other key employees.
F-10
<PAGE> 143
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 August 31, 1997, $284,473 conversion costs had been
incurred.
The conversion will not affect the terms of any loans held by borrowers of
the Bank or the balances, interest rates, federal deposit insurance or
maturities of deposit accounts at the Bank.
A registration statement relating to the securities of the Company has not
yet been filed with the SEC. These securities may not be sold nor may offers to
buy be accepted prior to the time the registration statement becomes effective,
and the offering of these securities will be made only by means of a prospectus
to be included in such registration statement.
3. SECURITIES
A summary of securities at August 31, 1997, May 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
Debt securities --
U.S. Government and agency
obligations........................ $ 30,087,995 $ 338,728 $ (15,753) $ 30,410,970
Industrial and financial............. 5,944,844 46,396 -- 5,991,240
Collateralized mortgage
obligations........................ 106,927 -- (60) 106,867
Mortgage-backed securities........... 67,696,952 1,230,692 (14,908) 68,912,736
------------ ---------- ---------- ------------
Total debt securities........... 103,836,718 1,615,816 (30,721) 105,421,813
Preferred stock......................... 101,654 2,596 -- 104,250
Mutual fund shares...................... 4,230,405 469,814 -- 4,700,219
------------ ---------- ---------- ------------
Total securities
available-for-sale............ 108,168,777 2,088,226 (30,721) 110,226,282
------------ ---------- ---------- ------------
Securities held-to-maturity:
U.S. Government and agency
obligations.......................... 5,695,368 22,750 (10,237) 5,707,881
Obligations of state and political
subdivisions......................... 406,408 2,348 -- 408,756
------------ ---------- ---------- ------------
Total securities held-to-maturity.... 6,101,776 25,098 (10,237) 6,116,637
------------ ---------- ---------- ------------
Total securities................ $114,270,553 $2,113,324 $ (40,958) $116,342,919
============ ========== ========== ============
</TABLE>
F-11
<PAGE> 144
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MAY 31, 1997
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
Debt securities --
U.S. Government and agency
obligations........................ $ 29,901,648 $ 160,787 $ (40,877) $ 30,021,558
Public utilities..................... 999,340 -- (7,710) 991,630
Industrial and financial............. 6,991,615 51,779 (5,700) 7,037,694
Collateralized mortgage
obligations........................ 2,695,832 -- (11,354) 2,684,478
Mortgage-backed securities........... 72,811,663 770,367 (310,970) 73,271,060
------------ ---------- ---------- ------------
Total debt securities........... 113,400,098 982,933 (376,611) 114,006,420
Preferred stock......................... 203,518 1,011 (29) 204,500
Mutual fund shares...................... 5,597,002 493,366 -- 6,090,368
------------ ---------- ---------- ------------
Total securities
available-for-sale............ 119,200,618 1,477,310 (376,640) 120,301,288
------------ ---------- ---------- ------------
Securities held-to-maturity:
U.S. Government and agency
obligations.......................... 5,684,812 38,720 (16,932) 5,706,600
Obligations of state and political
subdivisions......................... 406,872 2,712 -- 409,584
------------ ---------- ---------- ------------
Total securities held-to-maturity.... 6,091,684 41,432 (16,932) 6,116,184
------------ ---------- ---------- ------------
Total securities................ $125,292,302 $1,518,742 $(393,572) $126,417,472
============ ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Trading securities -- mortgage-backed
securities............................. $ 1,991,573 $ -- $ (57,879) $ 1,933,694
------------ ---------- ----------- ------------
Securities available-for-sale:
Debt securities --
U.S. Government and agency
obligations....................... 37,012,296 150,946 (241,698) 36,921,544
Public utilities.................... 2,126,095 -- (31,218) 2,094,877
Industrial and financial............ 11,991,242 106,420 (26,147) 12,071,515
Canadian Government................. 2,085,660 4,320 -- 2,089,980
Collateralized mortgage
obligations....................... 4,973,345 5,372 (28,767) 4,949,950
Mortgage-backed securities.......... 67,663,132 1,081,310 (737,460) 68,006,982
------------ ---------- ----------- ------------
Total debt securities.......... 125,851,770 1,348,368 (1,065,290) 126,134,848
Preferred stock........................ 305,420 -- (28,545) 276,875
Mutual fund shares..................... 8,636,261 239,549 (55,119) 8,820,691
------------ ---------- ----------- ------------
Total securities
available-for-sale........... 134,793,451 1,587,917 (1,148,954) 135,232,414
------------ ---------- ----------- ------------
Securities held-to-maturity:
U.S. Government and agency
obligations......................... 6,603,426 38,434 (73,914) 6,567,946
Obligations of state and political
subdivisions........................ 431,542 5,704 -- 437,246
Public utilities....................... 82,500 -- -- 82,500
------------ ---------- ----------- ------------
Total securities held-to-maturity... 7,117,468 44,138 (73,914) 7,087,692
------------ ---------- ----------- ------------
Total securities............... $143,902,492 $1,632,055 $(1,280,747) $144,253,800
============ ========== =========== ============
</TABLE>
F-12
<PAGE> 145
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the carrying value of debt securities at August 31, 1997 by
contractual maturity is shown below. Actual maturities may differ from
contractual maturities because certain security issuers may have the right to
call or prepay their obligations.
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
ONE YEAR THROUGH THROUGH AFTER TEN
OR LESS FIVE YEARS TEN YEARS YEARS TOTAL
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Available-for-sale --
U.S. Government and
agency obligations................... $ 2,507,660 $ 7,178,590 $20,724,720 $ -- $ 30,410,970
Industrial and financial............... 5,001,130 221,727 768,383 -- 5,991,240
Collateralized mortgage obligations.... -- -- -- 106,867 106,867
Mortgage-backed securities............. 5,115,298 1,245,788 1,527,649 61,024,001 68,912,736
----------- ----------- ----------- ----------- ------------
Total available-for-sale........ $12,624,088 $ 8,646,105 $23,020,752 $61,130,868 $105,421,813
=========== =========== =========== =========== ============
Held-to-maturity --
U.S. Government and
agency obligations................... $ 65,075 $ 5,630,293 $ -- $ -- $ 5,695,368
Obligations of state and political
subdivisions......................... 299,996 106,412 -- -- 406,408
----------- ----------- ----------- ----------- ------------
Total held-to-maturity.......... $ 365,071 $ 5,736,705 $ -- $ -- $ 6,101,776
=========== =========== =========== =========== ============
</TABLE>
A summary of the carrying value of debt securities at May 31, 1997 by
contractual maturity is shown below. Actual maturities may differ from
contractual maturities because certain security issuers may have the right to
call or prepay their obligations.
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
ONE YEAR THROUGH THROUGH AFTER TEN
OR LESS FIVE YEARS TEN YEARS YEARS TOTAL
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Available-for-sale --
U.S. Government and agency
obligations.......................... $ 4,340,688 $ 7,651,440 $18,029,430 $ -- $ 30,021,558
Public utilities....................... -- 991,630 -- 991,630
Industrial and financial............... 4,998,600 1,279,231 759,863 -- 7,037,694
Collateralized mortgage obligations.... 1,982,980 16,635 684,863 -- 2,684,478
Mortgage-backed securities............. 8,743,499 5,841,923 1,555,406 57,130,232 73,271,060
----------- ----------- ----------- ----------- ------------
Total available-for-sale........ $20,065,767 $15,780,859 $21,029,562 $57,130,232 $114,006,420
=========== =========== =========== =========== ============
Held-to-maturity --
U.S. Government and agency............. $ 65,111 $ 5,619,701 $ -- $ -- $ 5,684,812
Obligations of state and political
subdivisions......................... 299,986 106,886 -- -- 406,872
----------- ----------- ----------- ----------- ------------
Total held-to-maturity.......... $ 365,097 $ 5,726,587 $ -- $ -- $ 6,091,684
=========== =========== =========== =========== ============
</TABLE>
Proceeds from sales of securities (trading and available-for-sale) are
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31 YEARS ENDED MAY 31
------------------------- ---------------------------------------
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Proceeds from sales..... $28,102,629 $28,446,098 $66,376,202 $31,727,463 $13,855,143
Gross gains on sales.... $ 310,929 $ 697,195 $ 1,046,199 $ 545,577 $ 2,759
Gross losses on sales... $ 156,698 $ 1,040 $ 229,895 $ 189,311 $ 431,370
</TABLE>
No securities held-to-maturity were sold during the three months ended
August 31, 1997 and 1996 and the three years ended May 31, 1997.
F-13
<PAGE> 146
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. MORTGAGE LOANS
A summary of mortgage loans at August 31, 1997 and May 31, 1997 and 1996
follows:
<TABLE>
<CAPTION>
MAY 31
AUGUST 31, ----------------------------
1997 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Conventional 1 - 4 family residential
loans originated........................ $ 94,227,679 $ 79,096,961 $58,942,371
Conventional 1 - 4 family residential
loans purchased......................... 2,520,149 2,706,457 2,993,821
Loans partially guaranteed by VA or
insured by FHA.......................... 728,396 748,520 375,572
Home equity loans......................... 14,369,382 13,449,077 11,040,096
Construction loans........................ 6,127,116 4,109,840 961,187
----------- ----------- -----------
117,972,722 100,110,855 74,313,047
Undisbursed portion of construction
loans................................... (2,192,690) (2,117,833) (1,838,169)
Net deferred loan fees.................... (395,762) (328,740) (139,923)
Allowance for loan losses................. (398,079) (224,079) (393,047)
----------- ----------- -----------
$114,986,191 $ 97,440,203 $71,941,908
=========== =========== ===========
</TABLE>
The Bank has sold certain conventional mortgage loans without recourse and
has retained the related servicing rights. The remaining principal balances of
mortgage loans serviced for others, which are not included in the accompanying
consolidated financial statements, were approximately $126,197,000, $122,311,000
and $100,016,000 at August 31, 1997 and May 31, 1997 and 1996, respectively.
Mortgage loans in arrears three months or more were approximately
$1,349,000, $1,214,000 and $692,000 at August 31, 1997 and May 31, 1997 and
1996, respectively. Mortgage loans on nonaccrual status at August 31, 1997 and
May 31, 1997 and 1996 were approximately $1,349,000, $1,111,000 and $582,000,
respectively. Interest income that would have been recorded if the loans had
been performing in accordance with their original terms aggregated approximately
$31,000 and $13,000 for the three months ended August 31, 1997 and 1996,
respectively, and $93,000, $54,000 and $88,000 during the years ended May 31,
1997, 1996 and 1995, respectively. During fiscal 1996, the Bank securitized
approximately $70 million of mortgage loans, which were reinvested in Fannie
Mae's mortgage-backed securities program.
5. OTHER LOANS
A summary of other loans at August 31, 1997, May 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
MAY 31
AUGUST 31, ---------------------------
1997 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Commercial.......................... $25,064,754 $23,417,939 $19,384,969
Automobile.......................... 7,632,057 7,738,516 7,495,811
Student............................. 1,345,438 1,331,569 1,532,747
Credit card......................... 1,345,529 1,334,548 1,195,377
Other consumer loans................ 3,019,561 3,053,852 3,102,389
----------- ----------- -----------
38,407,339 36,876,424 32,711,293
Net deferred loan fees.............. 212,203 182,590 102,104
Allowance for loan losses........... (968,866) (1,007,576) (911,718)
----------- ----------- -----------
$37,650,676 $36,051,438 $31,901,679
=========== =========== ===========
</TABLE>
F-14
<PAGE> 147
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commercial loans in arrears three months or more were approximately
$78,000, $121,000 and $58,000 at August 31, 1997 and May 31, 1997 and 1996,
respectively. Commercial loans on nonaccrual status at August 31, 1997 and May
31, 1997 and 1996 were approximately $31,000, $26,000 and $51,000, respectively.
Consumer loans in arrears three months or more were approximately $37,000 and
$96,000 and $113,000 at August 31, 1997 and May 31, 1997 and 1996, respectively.
6. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31 YEARS ENDED MAY 31
----------------------- ------------------------------------
1997 1996 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period..................... $1,231,655 $1,304,765 $1,304,765 $1,206,486 $ 908,915
Provision for loan
losses.................. 304,000 20,000 130,000 140,000 261,000
Charge-offs................ (171,451) -- (213,042) (149,877) (108,379)
Recoveries................. 2,741 2,359 9,932 108,156 144,950
---------- ---------- ---------- ---------- ----------
Balance at end of period..... $1,366,945 $1,327,124 $1,231,655 $1,304,765 $1,206,486
========== ========== ========== ========== ==========
</TABLE>
7. MORTGAGE SERVICING RIGHTS
Mortgage servicing rights as of August 31, 1997 and May 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
MAY 31
AUGUST 31, ---------------------
1997 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Mortgage Servicing Rights.................. $944,958 $885,992 $681,004
Less -- Accumulated amortization......... (84,068) (50,913) (11,059)
-------- -------- --------
$860,890 $835,079 $669,945
======== ======== ========
</TABLE>
The Bank capitalized originated mortgage servicing rights of $48,483 and
$73,203 for the three months ended August 31, 1997 and 1996, respectively, and
$216,047 and $443,739 for the years ended May 31, 1997 and 1996, respectively.
8. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at August 31, 1997 and May 31,
1997 and 1996 follows:
<TABLE>
<CAPTION>
MAY 31
AUGUST 31, ---------------------------
1997 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Land........................................ $ 1,169,109 $ 340,587 $ 340,587
Buildings and improvements.................. 2,752,242 2,720,751 2,606,057
Equipment................................... 2,600,456 2,522,432 2,322,898
Furniture and fixtures...................... 595,386 584,896 562,322
----------- ----------- -----------
7,117,193 6,168,666 5,831,864
Less -- Accumulated depreciation............ (3,856,346) (3,742,835) (3,292,723)
----------- ----------- -----------
$ 3,260,847 $ 2,425,831 $ 2,539,141
=========== =========== ===========
</TABLE>
F-15
<PAGE> 148
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DEPOSITOR ACCOUNTS
Deposit account balances and stated interest rates at August 31, 1997 and
May 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1997 1996
STATED AUGUST 31, STATED MAY 31, STATED MAY 31,
RATES 1997 RATES 1997 RATES 1996
----------- ------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Demand checking
accounts............ --% $ 25,385,759 --% $ 23,854,838 --% $ 23,080,009
Negotiable order of
withdrawal accounts
(NOW)............... 1.00 - 2.25 15,747,731 1.00 - 2.25 15,023,912 1.00 - 2.25 14,771,748
Savings accounts...... 3.00 79,072,478 3.00 80,175,311 3.00 80,813,613
Money market
accounts............ 2.35 - 3.50 25,811,305 2.35 - 3.50 27,119,239 2.35 - 3.50 28,750,026
Time certificates..... 4.30 - 5.50 75,746,198 4.30 - 5.50 75,037,837 4.30 - 5.50 85,549,880
------------ ------------ ------------
Total
deposits... $221,763,471 $221,211,137 $232,965,276
============ ============ ============
</TABLE>
Time certificate balances at August 31, 1997 and May 31, 1997 and 1996 are
summarized by remaining period to contractual maturity as follows:
<TABLE>
<CAPTION>
MAY 31
AUGUST 31, ---------------------------
1997 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Under one year...................... $70,286,939 $69,248,768 $78,548,354
One year to under three years....... 3,385,351 3,792,718 5,859,727
Three years and over................ 2,073,908 1,996,351 1,141,799
----------- ----------- -----------
$75,746,198 $75,037,837 $85,549,880
=========== =========== ===========
</TABLE>
The aggregate amount of time certificates in denominations of $100,000 or
more was approximately $5,779,000, $5,174,000 and $5,460,000 at August 31, 1997
and May 31, 1997 and 1996, respectively.
F-16
<PAGE> 149
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The tax effects of temporary differences that give rise to the Bank's
deferred tax assets and deferred tax liabilities, on a combined basis, for
federal and state tax purposes at August 31, 1997 and May 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
MAY 31
AUGUST 31, -----------------
1997 1997 1996
---------- ------ ------
(000'S OMITTED)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses............................ $ 560 $ 504 $ 540
Accrued postretirement benefits...................... 618 618 520
Other deductible temporary differences............... 196 141 157
------ ------ ------
Total gross deferred tax assets.............. 1,374 1,263 1,217
------ ------ ------
Deferred tax liabilities:
Bad debt reserves for income tax purposes in excess
of the base-year reserves......................... 289 289 422
Net unrealized gain on securities
available-for-sale................................ 842 438 59
Other taxable temporary differences.................. 176 479 377
------ ------ ------
Total gross deferred tax liabilities......... 1,307 1,206 858
------ ------ ------
Net deferred tax asset (included in other
assets).................................... $ 67 $ 57 $ 359
====== ====== ======
</TABLE>
Management believes that it is more likely than not that it will realize
the net deferred tax asset.
Provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31 YEARS ENDED MAY 31
------------------- ------------------------------------
1997 1996 1997 1996 1995
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Current:
Federal....................... $330,824 $385,275 $1,302,494 $ 945,021 $ 827,582
State......................... 114,517 133,365 450,864 350,741 307,154
-------- -------- ---------- ---------- ----------
445,341 518,640 1,753,358 1,295,762 1,134,736
-------- -------- ---------- ---------- ----------
Deferred:
Federal....................... (67,414) 32,362 109,410 (198,026) (248,217)
State......................... (18,941) (31,621) (106,902) (73,496) (92,125)
-------- -------- ---------- ---------- ----------
(86,355) 741 2,508 (271,522) (340,342)
-------- -------- ---------- ---------- ----------
$358,986 $519,381 $1,755,866 $1,024,240 $ 794,394
======== ======== ========== ========== ==========
</TABLE>
F-17
<PAGE> 150
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes for the three months ended August 31, 1997
and 1996 and the three years ended May 31, 1997 differs from that computed at
the federal statutory rate as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31 YEARS ENDED MAY 31
------------------- ----------------------------------
1997 1996 1997 1996 1995
-------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Tax at federal statutory rate............ $305,138 $464,709 $1,571,265 $ 846,539 $660,737
State taxes, net of federal income tax
benefit................................ 64,079 97,589 322,566 182,981 141,867
Excess New York State Bad Debt Reserve... -- -- (164,817) -- --
Other.................................... (10,231) (42,917) 26,852 (5,280) (8,210)
-------- -------- ---------- ---------- --------
Total income tax expense....... $358,986 $519,381 $1,755,866 $1,024,240 $794,394
======== ======== ========== ========== ========
Effective rate........................... 40.00% 38.00% 37.99% 41.14% 40.88%
======== ======== ========== ========== ========
</TABLE>
As a thrift institution, the Bank is subject to special provisions in the
federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically have
been determined using methods based on loss experience or a percentage of
taxable income. Tax bad debt reserves are maintained for qualifying real
property loans and for nonqualifying loans in amounts equal to the excess of
allowable deductions over actual bad debt losses and other reserve reductions. A
supplemental reserve is also maintained. The qualifying and nonqualifying loan
reserves consist of a defined base-year amount, plus additional amounts ("excess
reserves") accumulated after the base year. SFAS No. 109 requires recognition of
deferred tax liabilities with respect to such excess reserves, as well as any
portion of the base-year amount or the supplemental reserve which is expected to
become taxable (or "recaptured") in the foreseeable future.
Certain amendments to the federal and New York State tax bad debt
provisions were enacted in July and August 1996. The federal amendments include
elimination of the percentage-of-taxable-income method for tax years beginning
after December 31, 1995 and imposition of a requirement to recapture into
taxable income (over a six-year period) the qualifying and nonqualifying loan
reserves in excess of the base-year amounts. The Bank previously established,
and will continue to maintain a deferred tax liability with respect to such
excess federal reserves. The New York State amendments redesignate the Bank's
State bad debt reserves at May 31, 1997 as the base-year amount and also provide
for future additions to the base-year reserve using the
percentage-of-taxable-income method. This change effectively eliminated the
excess New York State reserves for which a deferred tax liability had been
recognized and, accordingly, the Bank reduced its deferred tax liability by
$164,817 (with a corresponding reduction in income tax expense) during the year
ended May 31, 1997.
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the base-year and supplemental reserves, since the
Bank does not expect that these amounts will become taxable in the foreseeable
future. Under the tax laws as amended, events that would result in taxation of
these reserves include: (i) reductions in the reserves for purposes other than
tax bad debt losses, (ii) failure of the Bank to maintain a specified
qualifying-assets ratio or meet other thrift definition tests for New York State
tax purposes and (iii) certain stock redemptions, partial or complete
liquidation or distribution in excess of post-1951 earnings and profits. The
reserve balance of $4,713,000 at December 31, 1987 has not been subject to
deferred taxes.
11. BENEFIT PLANS
Pension Plan
All eligible employees of the Bank are included in a noncontributory
defined benefit pension plan administered by Actuarial Pension Analysts, Inc.
Under the terms of the Plan, participants vest 100% upon
F-18
<PAGE> 151
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
completion of five years of service as defined in the plan document. The Bank's
policy is to fund the consulting actuary's recommended contribution.
The funded status of the Bank's pension plan was as follows at August 31,
1997 and May 31, 1997 and 1996:
<TABLE>
<CAPTION>
MAY 31
AUGUST 31, -------------------------
1997 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefits of $3,287,749, $3,188,237
and $2,828,423, respectively............. $(3,302,668) $(3,203,156) $(3,139,230)
Effect of projected future compensation
levels................................... (915,896) (915,896) (695,801)
----------- ----------- -----------
Projected benefit obligation............. (4,218,564) (4,119,052) (3,835,031)
Plan assets at fair value, primarily fixed
income and equity funds..................... 5,217,096 4,990,430 4,488,632
----------- ----------- -----------
Excess of plan assets over projected
benefit obligation..................... 998,532 871,378 653,601
Unrecognized net gain from past experience
different from that assumed and effect of
changes in assumptions...................... (670,859) (515,120) (220,562)
Unrecognized past service liability........... (43,838) (45,471) (52,005)
Unrecognized net transition asset............. (14,324) (19,099) (52,410)
----------- ----------- -----------
Net prepaid pension cost (included in
other assets).......................... $ 269,511 $ 291,688 $ 328,624
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
AUGUST 31 YEARS ENDED MAY 31
----------------- ---------------------------------
1997 1996 1997 1996 1995
------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net pension cost includes the
following components:
Service costs -- benefits
earned during the period.... $58,057 $44,121 $ 228,068 $ 176,483 $ 151,059
Interest cost on projected
benefit obligation.......... 74,746 66,685 275,763 266,739 247,131
Actual return on assets........ (99,516) (80,396) (357,442) (321,582) (264,534)
Amortization of transition
assets...................... (8,328) (8,328) (33,311) (33,311) (33,311)
Amortization of prior service
cost........................ (2,782) (1,506) (6,534) (6,024) (6,024)
-------- -------- --------- --------- ---------
Net pension cost............ $22,177 $20,576 $ 106,544 $ 82,305 $ 94,321
======== ======== ========= ========= =========
Major assumptions utilized as
follows:
Discount rate.................. 7.50% 7.50% 7.50% 7.50% 8.25%
Rate of increase in
compensation levels......... 5.50 5.50 5.50 5.50 6.00
Expected long-term rate of
return on Plan assets....... 8.00 8.00 8.00 8.00 8.00
</TABLE>
Postretirement Benefits Other Than Pensions
The Bank also sponsors postretirement defined benefit plans that cover
substantially all employees and provide health care (medical and dental)
benefits and life insurance benefits. Under the current plans,
F-19
<PAGE> 152
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
substantially all employees become eligible for benefits if they meet certain
age and length of service requirements. Beginning on April 25, 1996, the plans
require a partial employee contribution. Prior to that date, the plans were
noncontributory for the Bank's employees.
The Bank adopted SFAS No. 106 in fiscal 1995 and changed its method of
accounting for these postretirement benefits. Under SFAS No. 106, the cost of
postretirement health care and life insurance benefits is recognized on an
accrual basis as such benefits are earned by active employees. Prior to the
adoption of SFAS No. 106, the Bank recognized the cost of these benefits on a
cash basis.
The accumulated obligation for these benefits, upon adoption of SFAS No.
106, may be recognized as an immediate charge to earnings, or it may be
amortized to expense over a number of years. The Bank recognized in fiscal 1995
the full amount of its accumulated benefit obligation at the time of adoption as
a charge to earnings, which amounted to approximately $645,000, after deducting
a tax benefit of approximately $455,000.
At August 31, 1997 and May 31, 1997 and 1996, the actuarial and accrued
liabilities for postretirement health care and life insurance benefits, none of
which have been funded, were as follows:
<TABLE>
<CAPTION>
MAY 31
AUGUST 31, ------------------------
1997 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Accumulated postretirement benefit obligations:
Retirees....................................... $ 664,065 $ 629,490 $ 643,752
Other active participants...................... 747,617 654,434 721,147
---------- ---------- ----------
Accumulated postretirement benefit
obligation................................ 1,411,682 1,283,924 1,364,899
Unrecognized (gain) loss......................... (98,061) (200,486) 114,332
---------- ---------- ----------
Accrued postretirement benefit cost
(including in other liabilities).......... $1,509,743 $1,484,410 $1,250,567
========== ========== ==========
Effect of 1% increase in health care cost trend
rate -- accumulated postretirement benefit
obligation..................................... $ 154,095 $ 154,095 $ 186,040
========== ========== ==========
</TABLE>
Net periodic postretirement benefit cost is included in the following
components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31 YEARS ENDED MAY 31
------------------ --------------------------------
1997 1996 1997 1996 1995
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Service cost -- benefits
attributed to service during
period.......................... $14,835 $18,039 $ 59,341 $ 72,156 $ 46,115
Interest cost on accumulated
postretirement benefit
obligation...................... 25,452 25,519 101,806 102,074 92,640
Amortization of prior service
cost............................ -- -- -- -- (59,693)
Amortization of (gains) losses.... (4,285) 3,461 (17,141) 13,845 (28,689)
------- ------- -------- -------- --------
Net periodic postretirement
benefit cost............... $36,002 $47,019 $144,006 $188,075 $ 50,373
======= ======= ======== ======== ========
</TABLE>
The accumulated postretirement benefit obligation was determined using the
projected unit cost method, as required by SFAS No. 106, and a discount rate of
8.00% in 1997, 7.50% in 1996 and 8.25% in 1995. The assumed rate of increase in
future health care costs was 9.50% in 1997, 10.0% in 1996 and 10.5% in 1995,
gradually decreasing to 5.0% in the year 2006 and remaining at that level
thereafter.
F-20
<PAGE> 153
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Amounts charged to operations for the three
months ended August 31, 1997 and 1996 were approximately $23,000 and $21,000,
respectively. Amounts charged to operations for the years ended May 31, 1997,
1996 and 1995 were approximately $86,000, $65,000 and $61,000, respectively.
12. BORROWED FUNDS AND REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase at August 31, 1997 and May
31, 1997 and 1996 which were transacted with a major securities firm are as
follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997
-------------------------------
AMOUNT RATE MATURITY
----------- ---- --------
<S> <C> <C>
$ 660,000 5.66% 11/17/97
4,685,000 5.66 11/17/97
1,300,000 5.95 06/19/98
1,300,000 6.40 06/19/98
4,700,000 6.65 07/01/98
1,000,000 6.65 06/19/99
4,700,000 6.32 05/24/99
4,700,000 6.53 08/01/99
-----------
$23,045,000
==========
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1997
-------------------------------
AMOUNT RATE MATURITY
----------- ---- --------
<S> <C> <C>
$ 705,000 5.69% 06/18/97
4,685,000 5.69 06/18/97
1,300,000 6.00 06/19/97
1,300,000 6.40 06/19/98
4,700,000 6.65 07/01/98
1,000,000 6.65 06/19/99
4,700,000 6.32 05/24/99
4,700,000 6.53 08/01/99
-----------
$23,090,000
==========
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996
------------------------------
AMOUNT RATE MATURITY
---------- ---- --------
<S> <C> <C>
$4,700,000 6.32% 08/96
=========
</TABLE>
Information relating to borrowings under repurchase agreements are
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31 YEARS ENDED MAY 31
------------------------- -------------------------------------
1997 1996 1997 1996 1995
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Average balance during the
year.................... $23,080,994 $12,798,924 $19,685,315 $ 101,075 $ 875,000
Average interest rates
during the year......... 6.42% 6.42% 6.20% 6.32% 5.82%
Maximum month-end balance
during the year......... 23,090,000 18,450,000 23,300,000 4,700,000 4,500,000
Securities underlying
agreement at year-end:
Amortized cost.......... 25,080,400 21,075,838 25,470,851 5,000,000 --
Estimated market
value................ 25,403,619 20,894,180 25,508,437 4,981,000 --
</TABLE>
F-21
<PAGE> 154
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Federal Home Loan Bank advances are as follows at August 31, 1997 and May
31, 1997 and 1996:
<TABLE>
<CAPTION>
AVAILABLE OUTSTANDING RATE MATURITY
----------- ----------- ----- ----------
<S> <C> <C> <C> <C>
August 31, 1997:
Revolving line of credit.......... $14,417,000 $ 3,020,000 5.69% Daily
Repricing line of credit.......... 14,417,000 -- -- Monthly
Term loans........................ -- 250,000 6.96 06/19/2000
-- 5,000,000 5.79 12/18/2001
----------- ----------
$28,834,000 $ 8,270,000
=========== ==========
May 31, 1997:
Revolving line of credit.......... $14,417,000 $ -- --% Daily
Repricing line of credit.......... 14,417,000 -- -- Monthly
Term loans........................ -- 250,000 6.96 06/19/2000
-- 5,000,000 5.79 12/18/2001
----------- ----------
$28,834,000 $ 5,250,000
=========== ==========
May 31, 1996:
Revolving line of credit.......... $12,922,000 $ 1,600,000 5.563% Daily
Repricing line of credit.......... 12,922,000 -- -- Monthly
Term loan......................... 2,000,000 2,000,000 5.500 May 1997
----------- ----------
$27,844,000 $ 3,600,000
=========== ==========
</TABLE>
In addition, the Bank has a $5 million line of credit from a commercial
bank and a $10 million line of credit from a securities investment company which
expire on November 30, 1997. As of August 31, 1997 and May 31, 1997 and 1996,
the credit lines were unused.
13. REGULATORY CAPITAL REQUIREMENTS
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 August 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
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, Tier 1 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.
F-22
<PAGE> 155
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank's actual capital amounts and ratios are also presented in the
following table (000's omitted):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
---------------- ---------------------------- ------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----------------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
As of August 31, 1997:
Total Capital (to risk weighted
assets).............................. $29,400 20.12% $11,689 (greater than)8.0% $14,611 (greater than)10.0%
Tier 1 Capital (to risk weighted
assets).............................. 28,033 19.19 5,845 (greater than)4.0 8,767 (greater than)6.0
Tier 1 Capital (to average assets)...... 28,033 9.81 11,430 (greater than)4.0 14,287 (greater than)5.0
As of May 31, 1997:
Total Capital (to risk weighted
assets).............................. $28,726 20.33% $11,302 (greater than)8.0% $14,127 (greater than)10.0%
Tier 1 Capital (to risk weighted
assets).............................. 27,495 19.46 5,651 (greater than)4.0 8,476 (greater than)6.0
Tier 1 Capital (to average assets)...... 27,495 9.53 11,535 (greater than)4.0 14,419 (greater than)5.0
As of May 31, 1996:
Total Capital (to risk weighted
assets).............................. $25,934 18.45% $11,246 (greater than)8.0% $14,057 (greater than)10.0%
Tier 1 Capital (to risk weighted
assets).............................. 24,629 17.52 5,623 (greater than)4.0 8,434 (greater than)6.0
Tier 1 Capital (to average assets)...... 24,629 9.51 10,361 (greater than)4.0 12,952 (greater than)5.0
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
Lease Commitments
At August 31, 1997, the Bank was obligated under noncancelable operating
leases for office space. Minimum future obligations under the leases are as
follows:
<TABLE>
<S> <C>
1998............................................ $123,935
1999............................................ 10,328
2000............................................ --
2001............................................ --
2002............................................ --
Thereafter...................................... --
--------
$134,263
========
</TABLE>
Rental expense included in the statements of income was approximately
$67,000 and $63,000 for the three-month periods ended August 31, 1997 and 1996,
respectively.
Rental expense included in the statements of income was approximately
$267,000, $249,000 and $238,000 for the years ended May 31, 1997, 1996 and 1995,
respectively.
In 1993, the Bank entered into an agreement with a company to provide data
processing services. Such agreement expires in July 2000. 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.
F-23
<PAGE> 156
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loan Commitments
Loan commitments and unused lines of credit as of August 31, 1997 and May
31, 1997 are as follows (with comparative totals as of May 31, 1996):
<TABLE>
<CAPTION>
AUGUST 31, 1997
------------------------------------------
COMMITMENTS
TO UNUSED
ORIGINATE LINES OF
LOANS CREDIT TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
Mortgage loans............................... $14,243,611 $ -- $14,243,611
Construction loans........................... 6,620,376 -- 6,620,376
Commercial loans............................. 1,766,000 4,992,429 6,758,429
Other loans.................................. 5,946,410 -- 5,946,410
----------- ---------- -----------
Total as of August 31, 1997........ $28,576,397 $4,992,429 $33,568,826
=========== ========== ===========
Total as of August 31, 1996........ $22,995,659 $6,092,292 $29,087,951
=========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1997
------------------------------------------
COMMITMENTS
TO UNUSED
ORIGINATE LINES OF
LOANS CREDIT TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
Mortgage loans............................... $19,189,757 $ -- $19,189,757
Construction loans........................... 4,599,600 -- 4,599,600
Commercial loans............................. 345,000 4,275,202 4,620,202
Other loans.................................. 5,877,312 -- 5,877,312
----------- ---------- -----------
Total as of May 31, 1997........... $30,011,669 $4,275,202 $34,286,871
=========== ========== ===========
Total as of May 31, 1996........... $20,765,251 $9,344,404 $30,109,655
=========== ========== ===========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since commitments may expire, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the loan commitments is represented by their contractual amount.
The Bank controls the credit risk of loan commitments through credit approvals,
limits and monitoring procedures. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the borrower.
CONCENTRATION OF CREDIT RISK
The Bank grants residential mortgage loans, construction loans, commercial
loans and consumer loans to customers located primarily in Orange County, New
York and the surrounding counties of Rockland and Dutchess in New York. The
borrowers' ability to repay loan principal and accrued interest is dependent
upon, among other things, the economic conditions prevailing in the Bank's
lending area.
HEDGING
In the normal course of business, the Bank uses off-balance sheet financial
instruments primarily as part of mortgage-banking hedging strategies. Such
instruments generally include put options purchased and forward commitments to
sell mortgage loans. As a result of interest rate fluctuations, these
off-balance sheet financial instruments will develop unrealized gains or losses
that mitigate changes in the underlying hedged
F-24
<PAGE> 157
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
portion of the balance sheet. When effectively used, these off-balance sheet
financial instruments are designed to moderate the impact on earnings as
interest rates move up or down.
Nationar
One of the Bank's correspondents was Nationar, a state-chartered trust
company. The Bank had used Nationar for in-clearing of bank checks, money orders
and ACH returns. On February 6, 1995, the New York State Superintendent of
Banking (the "Superintendent") took possession of the business and property of
Nationar. At that time, customer accounts were frozen, including approximately
$3.9 million of the Bank's assets primarily consisting of cash balances. The
Superintendent maintained the continued operations of Nationar, managed the
process of selling Nationar's assets and prepared the initial accounting of
Nationar's assets and liabilities.
On June 27, 1996, the Bank received payment of $3.5 million, and
subsequently received additional payments of $211,595, $3,800 and $75,000 on
July 18, 1996, November 12, 1996 and April 22, 1997, respectively. The Bank
wrote off its investment in Nationar securities of approximately $97,000 in
fiscal 1995.
Litigation
The Bank is involved in legal proceedings incurred in the normal course of
business. In the opinion of management, none of these proceedings are expected
to have a material effect on the consolidated financial position or results of
operations of the Bank.
15. DISCLOSURES ABOUT FAIR VALUES 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 and FHLB Stock
The carrying amount is a reasonable estimate of fair value.
Securities
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, net
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 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.
F-25
<PAGE> 158
THE WARWICK SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depositor Accounts
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.
Mortgage Escrow Funds and Borrowed Funds
The carrying amount is a reasonable estimate of fair value.
The following is a summary of the carrying values and estimated fair values
of the Bank's financial assets and liabilities at August 31, 1997 and May 31,
1997 and 1996 (000's omitted):
<TABLE>
<CAPTION>
MAY 31
-----------------------------------------
AUGUST 31, 1997 1997 1996
------------------- ------------------- -------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash on hand and in banks........ $ 9,291 $ 9,291 $ 10,367 $ 10,367 $ 7,102 $ 7,102
Federal funds sold............... -- -- 1,315 1,315 -- --
Securities....................... 116,328 116,343 126,393 126,417 144,284 144,254
Loans, net....................... 154,665 155,742 138,323 139,126 108,897 109,553
Accrued interest receivable...... 2,144 2,144 2,097 2,097 1,942 1,942
Federal Home Loan Bank stock..... 1,731 1,731 1,731 1,731 1,178 1,178
Financial liabilities:
Demand, NOW, statement savings
and passbook, and money market
accounts...................... $146,017 $146,017 $146,173 $146,173 $147,415 $147,415
Time certificate accounts........ 75,746 75,821 75,038 75,003 85,550 85,886
Mortgage escrow funds............ 2,256 2,256 1,398 1,398 1,252 1,252
Borrowed funds................... 31,315 31,315 28,340 28,340 8,300 8,300
Accrued interest payable......... 1,322 1,322 1,211 1,211 1,201 1,201
</TABLE>
F-26
<PAGE> 159
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY WARWICK COMMUNITY BANCORP, INC., THE WARWICK SAVINGS BANK OR
SANDLER O'NEILL & PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
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 WARWICK COMMUNITY BANCORP, INC. OR
THE WARWICK SAVINGS BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................... 5
Selected Consolidated Financial and Other
Data of the Bank........................ 15
Risk Factors.............................. 17
Warwick Community Bancorp, Inc. .......... 23
The Warwick Savings Bank.................. 23
Use of Proceeds........................... 24
Dividend Policy........................... 26
Market for the Common Stock............... 27
Regulatory Capital Compliance............. 28
Capitalization............................ 29
Pro Forma Data............................ 31
Comparison of Valuation and Pro Forma
Information With and Without
Foundation.............................. 35
The Warwick Savings Bank and Subsidiaries
Consolidated Statements of Income....... 36
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 37
Business of the Company................... 51
Business of the Bank...................... 51
Federal and State Taxation................ 74
Regulation and Supervision................ 76
Management of the Company................. 87
Management of the Bank.................... 88
The Conversion............................ 100
Restrictions on Acquisition of the Company
and the Bank............................ 121
Description of Capital Stock of the
Company................................. 129
Description of Capital Stock of the
Bank.................................... 130
Transfer Agent and Registrar.............. 131
Experts................................... 131
Other Information......................... 131
Legal and Tax Opinions.................... 131
Additional Information.................... 132
Index to Financial Statements............. F-1
</TABLE>
------------------------
UNTIL THE LATER OF DECEMBER 17, 1997, OR 25 DAYS AFTER
THE COMMENCEMENT OF THE COMMUNITY OFFERING, IF ANY, 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.
======================================================
======================================================
5,577,500 SHARES
[DAVID WARWICK SAVINGS BANK LOGO]
(PROPOSED HOLDING COMPANY FOR
THE WARWICK SAVINGS BANK)
COMMON STOCK
------------------------
PROSPECTUS
------------------------
NOVEMBER 18, 1997
Sandler O'Neill & Partners, L.P.
======================================================
