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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-37009
PROSPECTUS SUPPLEMENT
RICHMOND COUNTY FINANCIAL CORP.
RICHMOND COUNTY SAVINGS BANK
PARTICIPATION INTERESTS
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the Richmond County Savings Bank 401(k) Savings Plan
in RSI Retirement Trust (the "Plan") of participation interests and shares of
common stock, par value $.01 per share of Richmond County Financial Corp. (the
"Common Stock"), as set forth herein.
In connection with the proposed conversion of Richmond County Savings Bank
(the "Bank") from a mutual savings bank to a stock savings bank (the
"Conversion"), the Plan has been amended to permit the investment of Plan
assets in Common Stock of Richmond County Financial Corp. (the "Holding
Company"). The amended Plan permits Participants to direct the trustee of the
Plan (the "Trustee") to invest in Common Stock with amounts in the Plan
attributable to such Participants. Such investments in Common Stock would be
made by means of the Richmond County Financial Corp. Stock Fund (the "Employer
Stock Fund"). The transactions contemplated in the Plan of Conversion are
hereinafter referred to as the "Conversion." Based upon the value of the Plan
assets at June 30, 1997, 286,347 shares of Common Stock could be purchased
with Plan assets (assuming a purchase price of $10.00 per share). This
Prospectus Supplement relates to the initial election of Participants to
direct that all or a portion of their accounts be invested in the Employer
Stock Fund in connection with the Conversion and also to elections by
Participants to direct that all or a portion of their accounts be invested in
the Employer Stock Fund after the Conversion.
THE PROSPECTUS DATED DECEMBER 16, 1997 OF THE HOLDING COMPANY (THE
"PROSPECTUS"), WHICH IS ATTACHED TO THIS PROSPECTUS SUPPLEMENT, INCLUDES
DETAILED INFORMATION WITH RESPECT TO THE CONVERSION, THE COMMON STOCK AND THE
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE BANK. THIS
PROSPECTUS SUPPLEMENT, WHICH PROVIDES DETAILED INFORMATION WITH RESPECT TO THE
PLAN, SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUS AND SHOULD BE
RETAINED FOR FUTURE REFERENCE.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THE PROSPECTUS.
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 DEPARTMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, OR ANY OTHER STATE OR FEDERAL AGENCY OR
ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION OR
OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED, NOR ARE THE SHARES OF
COMMON STOCK GUARANTEED BY THE COMPANY OR THE BANK. THE ENTIRE AMOUNT OF A
PURCHASER'S PRINCIPAL IS SUBJECT TO LOSS.
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The date of this Prospectus Supplement is December 16, 1997.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS
PROSPECTUS SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE BANK
OR THE PLAN. THIS PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL
OR SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE BANK OR
THE PLAN SINCE THE DATE HEREOF, OR THAT THE INFORMATION HEREIN CONTAINED OR
INCORPORATED BY REFERENCE IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS SUPPLEMENT SHOULD BE READ ONLY IN CONJUNCTION WITH THE
PROSPECTUS THAT IS ATTACHED HERETO AND SHOULD BE RETAINED FOR FUTURE
REFERENCE.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING................................................................ 1
Securities Offered........................................................ 1
Election to Purchase Common Stock in the Conversion....................... 1
Value of Participation Interests.......................................... 1
Method of Directing Transfer.............................................. 1
Time for Directing Transfer............................................... 1
Irrevocability of Transfer Direction...................................... 2
Direction to Purchase Common Stock After the Conversion................... 2
Purchase Price of Common Stock............................................ 2
Nature of a Participant's Interest in the Common Stock.................... 2
Voting and Tender Rights of Common Stock.................................. 2
DESCRIPTION OF THE PLAN..................................................... 3
Introduction.............................................................. 3
Eligibility and Participation............................................. 3
Contributions Under the Plan.............................................. 3
Limitations on Contributions.............................................. 4
Investment of Contributions............................................... 6
Benefits Under the Plan................................................... 8
Withdrawals and Distributions From the Plan............................... 8
Administration of the Plan................................................ 9
Reports to Plan Participants.............................................. 9
Plan Administrator........................................................ 9
Amendment and Termination................................................. 9
Merger, Consolidation or Transfer......................................... 10
Federal Income Tax Consequences........................................... 10
ERISA and Other Qualification............................................. 11
Restrictions on Resale.................................................... 12
SEC Reporting and Short-Swing Profit Liability............................ 12
EXPERTS..................................................................... 13
LEGAL OPINION............................................................... 13
FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES............................. F-1
INVESTMENT FORM
</TABLE>
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan. Up to
286,347 shares (assuming the actual purchase price is $10.00 per share) of
Common Stock may be acquired by the Plan to be held in the Employer Stock
Fund. The Holding Company is the issuer of the Common Stock. Only salaried
employees of the Bank (hereinafter referred to as the "Employer") may
participate in the Plan. The Common Stock to be issued hereby is conditioned
on the consummation of the Conversion. A Participant's investment in units in
the Employer Stock Fund in the Conversion is subject to the priority set forth
in the Plan of Conversion.
Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operations and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 1214 Castleton Avenue, Staten Island, New York 10310. The Bank's telephone
number is (718) 448-2800.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Bank's Conversion, the Plan has been amended to
permit each Participant to direct that all or part of the funds which
represent his or her beneficial interest in the assets of the Plan may be
transferred to the Employer Stock Fund, an investment fund in the Plan that
will invest in Common Stock. If there is not enough Common Stock in the
Conversion to fill all subscriptions, the Common Stock would be apportioned
and the Plan may not be able to purchase all of the Common Stock requested by
the Participants. In such case, the Trustee will purchase shares in the open
market after the Conversion to fulfill Participants' requests. Such purchases
may be at prices higher than the purchase price in the Conversion. The ability
of each Participant to invest in the Employer Stock Fund in the Conversion
pursuant to directions to transfer all or a portion of their beneficial assets
in the Plan will be based on such Participant's status as an Eligible Account
Holder (defined in the Plan of Conversion as holders of deposit accounts of
the Bank totalling $100 or more as of June 30, 1996) or Supplemental Eligible
Account Holder (defined in the Plan of Conversion as holders of deposit
accounts of the Bank totalling $100 or more as of September 30, 1997), the
subscription priorities set forth in the Plan of Conversion and the
availability of Common Stock. The Trustee of the Plan will follow the
Participants' directions. Funds not transferred to the Employer Stock Fund
will remain in the other investment funds of the Plan as directed by the
Participant.
VALUE OF PARTICIPATION INTERESTS
The market value of the assets of the Plan, as of June 30, 1997, was
$2,863,477. This value represents the past contributions to the Plan by the
Employer and the Participants and any earnings or losses thereon, less
previous withdrawals. Each Participant has been informed of the value of his
or her beneficial interest in the Plan.
METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is a form to direct a transfer
to the Employer Stock Fund (the "Investment Form"). If a Participant wishes to
transfer all or part (in multiples of not less than 1%) of his or her
beneficial interest in the assets of the Plan to the Employer Stock Fund being
established in connection with the Conversion, he or she should indicate that
decision in Part 2 of the Investment Form. If a Participant does not wish to
make such an election, he or she does not need to take any action.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund which will purchase Common Stock issued in connection with the
Conversion is January 12, 1998. The Investment Form should be returned to the
Bank's Human Resources Department by 4:00 p.m. on such date.
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IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such Participant's
account in the Plan to the Employer Stock Fund in connection with the
Conversion shall be irrevocable. Participants, however, will be able to direct
the investment of their accounts ("Accounts") after the Conversion under the
Plan as explained below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant shall be able to direct that a certain
percentage (in multiples of not less than 1%) of the net value of such
Participant's interests in the trust fund established for the Plan (the "Trust
Fund") be transferred to the Employer Stock Fund and invested in Common Stock,
or to the other investment funds available under the Plan. Alternatively, a
Participant may direct that a certain percentage of such Participant's
interest in the Employer Stock Fund be transferred to the Trust Fund to be
invested in accordance with the terms of the Plan. Participants will be
permitted to direct that future contributions made to the Plan by or on their
behalf will be invested in Common Stock. Following the initial election, the
allocation of a Participant's interest in the Employer Stock Fund may be
changed once each calendar quarter in any plan year by filing a written notice
with the plan administrator at least ten days before the effective date of the
change. Special restrictions apply to transfers directed by those Participants
who are officers, directors and principal shareholders of the Holding Company
who are subject to the provisions of Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "1934 Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price to be paid by the Trust Fund for
such shares of Common Stock will be the same price as is paid by all persons
who purchase shares of Common Stock in the Conversion.
Common Stock purchased by the Trustee after the Conversion will be acquired
in open market transactions. The prices paid by the Trustee for shares of
Common Stock will not exceed "adequate consideration" as defined in Section
3(18) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant has an allocable interest in the investment funds of
the Plan but not in any particular assets of the Plan. Accordingly, a specific
number of shares of Common Stock will not be directly attributable to the
account of any Participant. Earnings, e.g., gains and losses, are allocated to
the Account of a Participant based on units in the Employer Stock Fund held by
the Participants. Therefore, earnings with respect to a Participant's Account
should not be affected by the investment designations (including investments
in Common Stock) of other Participants.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee generally will exercise voting and tender rights attributable to
all Common Stock held by the Trust Fund as directed by Participants with
interests in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have a right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The number of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
and negative on each matter shall be proportionate to the number of voting
instruction rights exercised in the affirmative and negative, respectively. In
the event of a tender offer for Common Stock, the Plan provides that each
Participant will be allotted a number of tender instruction rights reflecting
such Participant's proportionate interest in the Employer Stock Fund. The
percentage of shares of Common Stock held in the Employer Stock Fund that will
be tendered will be the same as the percentage of the total number of tender
instruction rights that are exercised in favor of tendering. The remaining
shares of Common Stock held in the Employer Stock Fund will not be tendered.
The Plan makes provision for Participants to exercise their voting instruction
rights and tender instruction rights on a confidential basis.
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DESCRIPTION OF THE PLAN
I. INTRODUCTION
The Plan was established effective January 1, 1992, as the Richmond County
Savings Bank 401(k) Savings Plan in the Retirement System for Savings
Institutions. The Plan is a cash or deferred arrangement established in
accordance with the requirements under Section 401(a) and Section 401(k) of
the Internal Revenue Code of 1986, as amended (the "Code"). The Plan will be
submitted to the Internal Revenue Service (the "IRS") in a timely manner for a
determination that the Plan, as amended and restated, is qualified under
Section 401(a) of the Code, and that its related trust(s) are qualified under
Section 501(a) of the Code.
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank
will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable Treasury
Regulations.
Employee Retirement Income Security Act. The Plan is an "individual account
plan" other than a "money purchase pension plan" within the meaning of ERISA.
As such, the Plan is subject to all of the provisions of Title I (Protection
of Employee Benefit Rights) and Title II (Amendments to the Internal Revenue
Code Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA which by their terms do not apply to
an individual account plan (other than a money purchase pension plan). The
Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. Neither
the funding requirements contained in Part 3 of Title I of ERISA nor the plan
termination insurance provisions contained in Title IV of ERISA will be
extended to Participants (as defined below) or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT
UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH THE
BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS
MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, REGARDLESS OF
WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK OR AFTER
TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan. Copies of the Plan are available
to all employees by filing a request with the Plan Administrator, Dorothy
Episcopia, Richmond County Savings Bank, 207 Taylor Street, Staten Island, New
York 10310. The Plan Administrator's telephone number is (718) 448-2800. Each
employee is urged to read carefully the full text of the Plan.
II. ELIGIBILITY AND PARTICIPATION
Any salaried employee of the Employer is eligible to participate in the Plan
as soon as the employee reaches age 21 and completes one year of service with
the Employer. In order to commence participation, an employee must submit an
enrollment form at least 10 days in advance of the date he desires to enter
the Plan. Employees compensated on an hourly, daily, commission, fee or
retainer basis, leased employees (within the meaning of Section 414(n) of the
Code) and employees covered by a collective bargaining agreement which does
not expressly provide for their coverage under the Plan, are not eligible to
participate in the Plan.
As of June 30, 1997, there were approximately 201 employees eligible to
participate in the Plan, and 192 employees had elected to participate in the
Plan.
III. CONTRIBUTIONS UNDER THE PLAN
401(k) Plan Contributions. Subject to certain limitations on contributions,
each Participant in the Plan is permitted to elect to reduce such
Participant's Compensation (as defined below) pursuant to a "Compensation
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Reduction Agreement" by an amount not less than 2% and not more than 9% and
have that amount contributed to the Plan on such Participant's behalf. Such
amounts are credited to the Participant's "Basic Contribution Account." See
"Section IV Limitations on Contributions" below. For purposes of the Plan,
"Compensation" means the base compensation receivable by an Employee from the
Employer for the calendar year prior to any reductions pursuant to the
Compensation Reduction Agreement. Compensation includes salary, Basic
Contributions, wages, overtime and wage continuation payments to an employee
who is absent due to an illness or disability of a short-term nature.
"Compensation" does not include commissions, expense allowances, severance
pay, fees, bonuses, incentive payments, contributions other than Basic
Contributions made to the Plan and contributions made by the Employer to any
other pension, insurance welfare or other employee benefit plan. As of January
1, 1997, the annual compensation of each Participant taken into account under
the Plan is limited to $160,000 (adjusted for increases in the cost of living
as permitted by the Code). Generally, a Participant may elect to modify the
amount contributed to the Plan under such participant's Compensation Reduction
Agreement not more often than once in any calendar quarter by providing notice
to the Plan Administrator at least 10 days before commencement of the first
day of the payroll period for which the modification is to become effective.
However, special restrictions apply to persons subject to Section 16 of the
1934 Act. Basic Contributions are transferred by the Employer to the Trustee
of the Plan.
Notwithstanding the preceding, a Participant who receives a hardship
distribution under the terms of the Plan may not be eligible to make
additional contributions under a Compensation Reduction Agreement or have
matching contributions made on his behalf for a period of twelve (12) months
after the receipt of the hardship distribution.
Employer Contributions. The Employer contributes to the Plan for each Plan
Year 50% of the Participant's Basic Contributions, up to 6% of the
Participant's Compensation for the Plan Year. Such amounts are credited to the
Participant's "Matching Contribution Account." After the Conversion, at the
discretion of the Bank, the Employer contributions may be credited to the
Participant's Account in Richmond County Savings Bank Employee Stock Ownership
Plan. At its discretion, the Employer may make an additional contribution to
the Plan as of the end of the Plan Year. Such amounts are credited to
Participants' "Special Contribution Accounts" based on each Participant's
Compensation. Special Contributions may be made only to the accounts of non-
highly compensated employees.
IV. LIMITATIONS ON CONTRIBUTIONS
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Basic Contribution Account and Matching Contribution
Account during any Plan Year may not exceed the lesser of 25% of the
Participant's Section 415 Compensation for the Plan Year or $30,000 (adjusted
for increases in the cost of living as permitted by the Code). A Participant's
Section 415 Compensation is a Participant's Compensation, excluding any
Employer contribution to the Plan or to any other plan of deferred
compensation or any distributions from a plan of deferred compensation. In
addition, annual additions shall be limited to the extent necessary to prevent
the limitations set forth in the Code for all of the qualified defined benefit
plans and defined contribution plans maintained by the Bank from being
exceeded. To the extent that these limitations would be exceeded by reason of
excess annual additions with respect to a Participant, such excess will be
disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to reduce
the Employer's contributions for such Participant in the next Limitation
Year, and each succeeding Limitation Year if necessary;
(ii) If, an excess amount still exists, and the Participant is not
covered by the Plan at the end of the Limitation Year, the excess amount
will be held unallocated in a suspense account which will then be applied
to reduce future Employer contributions for all remaining Participants in
the next Limitation Year, and each succeeding Limitation Year if necessary;
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(iii) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of investment
gains and losses.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
Compensation under a Compensation Reduction Agreement of a Participant (when
aggregated with any elective deferrals of the Participant under a simplified
employee pension plan or a tax-deferred annuity) may not exceed $7,000
adjusted for increases in the cost of living as permitted by the Code (the
limitation for 1997 is $9,500). Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross income for
federal income tax purposes in the year they are made. In addition, any such
excess deferral will again be subject to federal income tax when distributed
by the Plan to the Participant, unless the excess deferral (together with any
income allocable thereto) is distributed to the Participant not later than the
first April 15th following the close of the taxable year in which the excess
deferral is made. Any income on the excess deferral that is distributed not
later than such date shall be treated, for federal income tax purposes, as
earned and received by the Participant in the taxable year in which the excess
deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees. Sections
401(k) and 401(m) of the Code limit the amount of deferred compensation that
may be made to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
made by or on behalf of all other employees eligible to participate in the
Plan. Specifically, the actual deferral percentage (i.e., the average of the
ratios, calculated separately for each eligible employee in each group, by
dividing the amount of deferred compensation credited to the Basic
Contribution Account of such eligible employee by such eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (i) 125% of the actual deferral percentage of all other
eligible employees, or (ii) the lesser of (x) 200% of the actual deferral
percentage of all other eligible employees, or (y) the actual deferral
percentage of all other eligible employees plus two percentage points. In
addition, the actual contribution percentage for such Plan Years (i.e., the
average of the ratios calculated separately for each eligible employee in each
group, by dividing the amount of voluntary employee and employer matching
contributions credited to the Matching Contribution Account and Special
Contribution Account of such eligible employee by such eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (i) 125% of the actual contribution percentage of all
other eligible employees, or (ii) the lesser of (x) 200% of the actual
contribution percentage of all other eligible employees, or (y) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, a Highly Compensated Employee includes any employee who, (1) was
a five percent owner of the Employer at any time during the year or preceding
year; or (2) had compensation for the preceding year in excess of $80,000 and,
if the Employer so elects, was in the top 20% of employees by compensation for
such year. The dollar amounts in the foregoing sentence are for 1997. Such
amounts are adjusted annually to reflect increases in the cost of living.
In addition, the compensation of an employee who is a family member of a 5%
owner, or one of the ten most highly compensated employees during the relevant
period is aggregated with that of the Highly Compensated Employee. All such
family members are treated as a single employee with respect to the
application of the limitations on Highly Compensated Employees.
In order to prevent the disqualification of the Plan, any amount contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Employer will be subject to a
10% excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate.
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Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to
the combination of annual additions to the Plan and projected annual benefits
under any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance
of the Accounts of Participants who are Key Employees (as defined below)
exceeds 60% of the aggregate balance of the Accounts of all Participants. Key
Employees generally include any employee who, at any time during the Plan Year
or any of the four preceding Plan Years, is (1) an officer of the Bank having
annual compensation in excess of $60,000 who is in an administrative or
policy-making capacity, (2) one of the ten employees having annual
compensation in excess of $30,000 and owning, directly or indirectly, the
largest interests in the Bank, (3) a 5% owner of the Bank, (i.e., owns
directly or indirectly more than 5% of the stock of the Bank, or stock
possessing more than 5% of the total combined voting power of all stock of the
Bank) or (4) a 1% owner of the Bank having annual compensation in excess of
$150,000. The dollar amounts in the foregoing sentence are for 1997.
V. INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held in
the Trust Fund which is administered by the Trustee appointed by the Bank's
Board of Trustees.
Prior to December 16, 1997, Participants' Accounts held in the Trust have
been invested by the Trustee at the direction of the Participants in the
following funds:
a. Core Equity Fund;
b. Emerging Growth Equity Fund;
c. Value Equity Fund;
d. Actively Managed Bond Fund;
e. Intermediate-Term Bond Fund;
f. Short-Term Investment Fund; and
g. International Equity Fund.
The Plan, as amended effective November 20, 1997, now provides that in
addition to the Funds specified above, a Participant who is employed by the
Bank may direct the Trustee to invest all or a portion of his accounts under
the Plan in the Employer Stock Fund.
Once in any calendar quarter a Participant may elect (in increments of 1%),
to have both past and future contributions and additions to the Participant's
Basic Contribution Account and Rollover Account invested either in the
Employer Stock Fund or among such other Funds. Participants may also elect to
have past contributions to their Matching Contribution Accounts invested in
either the Employer Stock Fund or among such other Funds. Participants
Matching Contribution Accounts may be invested in Common Stock under the
proposed terms of the Richmond County Savings Bank Employee Stock Ownership
Plan being implemented by the Bank. These elections will be effective on the
effective date of the Participant's written notice to the plan administrator,
provided such notice is filed with the administrator at least ten days before
it is to become effective. Any amounts credited to a Participant's Account for
which investment directions are not given will be invested in the Short-Term
Investment Fund in accordance with the terms of the Plan. Because investment
allocations only are required to be made in increments of 1%, Participants can
invest their Accounts in each of the eight available
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investment funds. Diversification with respect to the investment of a
Participant's Account may be achieved through the eight investment options
available to Participants and the opportunity for Participants to make
investment designations up to four times each year.
A Participant who receives a loan from the Plan has a separate account
established under the Plan. The amount of the loan is obtained from the
Investment Accounts in which the Borrower's accounts are invested on a pro-
rata basis according to the terms of the Plan. The balance of a Participant's
loan account represents the unpaid principal and interest (if any) of such
participant's loan from the Plan. Repayments of principal and payments of
interest on loans are invested by the Trustee in the same manner as if the
repayment were a contribution.
The Participants interest in the Employer Stock Fund consists of units whose
value is related to a pro rata portion of the net asset value ("NAV") of the
Employer Stock Fund. The NAV is determined daily and all realized and
unrealized gains, dividends, and expenses are used to calculate the NAV. For
purposes of such valuation, all assets of the Trust are valued at their fair
market value.
A. Previous Funds.
Prior to the effective date of the Conversion, contributions under the Plan
were invested in the seven Funds specified above. The annual percentage return
on these funds for the prior three years was:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
a.Core Equity Fund...................................... 21.53% 40.17% 1.31%
b.Emerging Growth Equity Fund........................... 27.09 42.83 3.53
c.Value Equity Fund..................................... 25.90 33.96 (1.14)
d.Actively Managed Bond Fund............................ 3.15 17.70 (4.21)
e.Intermediate-Term Bond Fund........................... 4.02 13.99 (2.54)
f.Short-Term Investment Fund............................ 4.70 5.39 3.40
g.International Equity Fund............................. 10.86 12.46 0.77
</TABLE>
B. The Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion. Each Participant's
proportionate undivided beneficial interest in the Employer Stock Fund is
measured by units. Each day a unit value will be calculated by determining the
market value of the Common Stock actually held and adding to that any cash
held by the Trustee. This total will be divided by the number of units
outstanding to determine the unit value of the Employer Stock Fund.
On the occasion of the payment of a cash dividend, the unit value will be
determined before the dividend is distributed. The Trustee may use the
dividend to purchase additional shares of Common Stock, thereby increasing the
total value of the Employer Stock Fund, and the value of each unit. The Board
of Directors of the Holding Company may consider a policy of paying cash
dividends on the Common Stock in the future; however, no decision as to the
amount or timing of cash dividends, if any, has been made. The Trustee will,
to the extent practicable, use all amounts held by it in the Employer Stock
Fund to purchase shares of Common Stock of the Bank. It is expected that all
purchases will be made at prevailing market prices. Under certain
circumstances, the Trustee may be required to limit the daily volume of shares
purchased. Pending investment in Common Stock, assets held in the Employer
Stock Fund will be placed in bank deposits and other short-term investments.
Any brokerage commissions, transfer fees and other expenses incurred in the
sale and purchase of Common Stock for the Employer Stock Fund will be paid out
of a cash account managed by the trustee. Therefore, although Participants'
accounts will not be directly adjusted for such fees, the market value of
their accounts will be reduced.
7
<PAGE>
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market
for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of the
Holding Company and the Bank and market conditions for the Common Stock
generally. See "Market for the Common Stock" in the Prospectus.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL RISKS IN
INVESTMENTS IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE RISK
FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS.
VI. BENEFITS UNDER THE PLAN
Vesting. A Participant, at all times, has a fully vested, nonforfeitable
interest in his Basic Contribution Account and the earnings thereon under the
Plan. A Participant vests in his Matching Contribution Account under the Plan
according to the following schedule:
<TABLE>
<CAPTION>
PERIOD OF SERVICE VESTED PERCENTAGE
----------------- -----------------
<S> <C>
less than 2 years........................................ 0%
2 years.................................................. 20
3 years.................................................. 40
4 years.................................................. 60
5 years.................................................. 80
6 years or more.......................................... 100
</TABLE>
For purposes of vesting, years of service from age 18 are counted.
VII. WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
Withdrawals Prior to Termination of Employment. Subject to the hardship
distribution rules under the Plan, a Participant may withdraw all or a portion
of his (i) Basic Contribution Account, (ii) Rollover Contribution Account and
(iii) the vested interest in his Matching Contribution Account. The hardship
distribution requirements ensure that Participants have a true financial need
before a withdrawal may be made.
A Participant may make a withdrawal from his Basic Contribution Account,
Rollover Contribution Account, and Matching Contribution Account after he
turns 59 1/2. A Participant after attaining age 59 1/2 may withdraw
contributions to his Basic Contribution Account, contributions to his Rollover
Contribution Account or the vested portion of his Matching Contribution
Account at any time. However, such withdrawals may not be made more often than
two times during any Plan Year.
Distribution Upon Retirement, Disability or Termination of
Employment. Payment of benefits to a Participant who retires, incurs a
disability, or otherwise terminates employment generally shall be made in a
lump sum cash payment as soon as administratively feasible after such
termination of employment if the vested value of the Participant's Account is
$3,500 or less. If the vested portion of the Participant's Account balance is
greater than $3,500, the Participant may request a distribution (subject to
the minimum distribution rules) in a lump sum payment: (a) as soon as
administratively possible after termination, (b) as of any valuation date up
to 13 months after termination or (c) as of the date the Participant attains
normal retirement age. At the request of the Participant, the distribution may
include an in kind distribution of Common Stock of the Holding Company equal
to the number of shares that can be purchased with the Participant's balance
in the Employer Stock Fund. Benefit payments ordinarily shall be made not
later than 60 days following the end of the Plan Year in which occurs the
latest of the Participant's: (i) termination of employment; (ii) the
attainment of age 65 or (iii) 10th anniversary of commencement of
participation in the Plan; but in no event later than the April 1 following
the calendar year in which the Participant attains age 70 1/2. However, if the
vested portion of the Participant's Account balances exceeds or has ever
exceeded $3,500, no distribution shall be made from the Plan prior to the
Participant's attaining age 65 unless the Participant elects to receive an
earlier distribution.
8
<PAGE>
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have his benefits paid to the surviving
spouse in a lump sum as soon as administratively possible following the date
of his death, unless the Participant elected prior to his death or the
beneficiary so elects within 90 days of the Participant's death, to receive
such distribution in a lump sum payment as of any Valuation Date which occurs
within one year of the Participant's death. With respect to an unmarried
Participant, and in the case of a married Participant with spousal consent to
the designation of another beneficiary, payment of benefits to the beneficiary
of a deceased Participant shall be made in the form of a lump-sum payment in
cash or in Common Stock in the same manner described above as to a Participant
with a surviving spouse.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order (as defined in the Code), benefits payable under the Plan shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution, or levy of any kind,
either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
The Trustee with respect to the Plan is the named fiduciary of the Plan for
purposes of Section 402 of ERISA.
The Trustee is appointed by the Board of Trustees of the Bank to serve at
its pleasure. The current Trustee of the Plan is the RSI Retirement Trust.
However, an additional Trustee is being appointed to hold funds invested in
the Employer Stock Fund.
The Trustee receives, holds and invests the contributions to the Plan in
trust and distributes them to Participants and beneficiaries in accordance
with the terms of the Plan and the directions of the Plan Administrator. The
Trustee is responsible for investment of the assets of the Trust.
REPORTS TO PLAN PARTICIPANTS
The Plan Administrator will furnish to each Participant a statement at least
quarterly showing (i) the balance in the Participant's Account as of the end
of that period, (ii) the amount of contributions allocated to such
participant's Account for that period, and (iii) the adjustments to such
participant's Account to reflect earnings or losses (if any).
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan is administered by one or more
persons who are appointed by and who serve at the pleasure of the Bank.
Currently, the Plan Administrator is Dorothy Episcopia, Vice President and
Human Resources Officer of the Bank. The address and telephone number of the
Plan Administrator is c/o 207 Taylor Street, Staten Island, New York 10310;
(718) 448-2800. The Plan Administrator is responsible for the administration
of the Plan, interpretation of the provisions of the Plan, prescribing
procedures for filing applications for benefits, preparation and distribution
of information explaining the Plan, maintenance of Plan records, books of
account and all other data necessary for the proper administration of the
Plan, and preparation and filing of all returns and reports relating to the
Plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to Participants,
Beneficiaries and others under Sections 104 and 105 of ERISA.
AMENDMENT AND TERMINATION
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the
Plan,
9
<PAGE>
each employee affected by such termination shall have a fully vested interest
in his Accounts. The Bank reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust
to be used for, or diverted to, any purpose other than the exclusive benefit
of Participants or their beneficiaries; provided, however, that the Bank may
make any amendment it determines necessary or desirable, with or without
retroactive effect, to comply with ERISA.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that
each Participant would (if either the Plan or the other plan then terminated)
receive a benefit immediately after the merger, consolidation or transfer
which is equal to or greater than the benefit he would have been entitled to
receive immediately before the merger, consolidation or transfer (if the Plan
had then terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan will be submitted to the IRS in a timely manner for a determination
that it is qualified under Section 401(a) and 401(k) of the Code, and that the
related Trust is exempt from tax under Section 501(a) of the Code. A plan that
is "qualified" under these sections of the Code is afforded special tax
treatment which include the following: (1) The sponsoring employer is allowed
an immediate tax deduction for the amount contributed to the Plan each year;
(2) Participants pay no current income tax on amounts contributed by the
employer on their behalf; and (3) earnings of the plan are tax-deferred
thereby permitting the tax-free accumulation of income and gains on
investments. The Plan will be administered to comply in operation with the
requirements of the Code as of the applicable effective date of any change in
the law. The Bank expects to timely adopt any amendments to the Plan that may
be necessary to maintain the qualified status of the Plan under the Code.
Following such an amendment, the Bank will submit the Plan to the IRS for a
determination that the Plan, as amended, continues to qualify under Sections
401(a) and 501(a) of the Code and that it continues to satisfy the
requirements for a qualified cash or deferred arrangement under Section 401(k)
of the Code. Should the Plan receive from the IRS an adverse determination
letter regarding its tax exempt status, all participants would generally
recognize income equal to their vested interest in the Plan, the participants
would not be permitted to transfer amounts distributed from the Plan to an IRA
or to another qualified retirement plan, and the Bank may be denied certain
deductions taken with respect to the Plan.
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a Lump Sum Distribution if it is
made: (i) within one taxable year of the Participant or beneficiary; (ii) on
account of the Participant's death, disability or separation from service, or
after the Participant attains age 59 1/2; and (iii) consists of the balance to
the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum
Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes (the "total
taxable amount") consists of the entire amount of such Lump Sum Distribution
less the amount of after-tax contributions, if any, made by the Participant to
any other profit sharing plans maintained by the Bank which is included in
such distribution.
10
<PAGE>
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation after 1973 in this Plan or
in any other profit-sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in this Plan before the taxable year in which the distribution
is made, or a beneficiary who receives a Lump Sum Distribution on account of
the Participant's death (regardless of the period of the Participant's
participation in this Plan or any other profit-sharing plan maintained by the
Employers), may elect to have the ordinary income portion of such Lump Sum
Distribution taxed according to a special averaging rule ("five-year
averaging"). The election of the special averaging rules may apply only to one
Lump Sum Distribution received by the Participant or beneficiary, provided
such amount is received on or after the Participant turns 59 1/2 and the
recipient elects to have any other Lump Sum Distribution from a qualified plan
received in the same taxable year taxed under the special averaging rule.
Under a special grandfather rule, individuals who turned 50 by 1986 may elect
to have their Lump Sum Distribution taxed under either the five-year averaging
rule or under the prior law ten-year averaging rule. Such individuals also may
elect to have that portion of the Lump Sum Distribution attributable to the
participant's pre-1974 participation in the Plan taxed at a flat 20% rate as
gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost or other basis of the securities to the Trust. The
tax basis of such Common Stock to the Participant or beneficiary for purposes
of computing gain or loss on its subsequent sale will be the value of the
Common Stock at the time of distribution less the amount of net unrealized
appreciation. Any gain on a subsequent sale or other taxable disposition of
such Common Stock, to the extent of the amount of net unrealized appreciation
at the time of distribution, will be considered long-term capital gain
regardless of the holding period of such Common Stock. Any gain on a
subsequent sale or other taxable disposition of the Common Stock in excess of
the amount of net unrealized appreciation at the time of distribution will be
considered either short-term capital gain or long-term capital gain depending
upon the length of the holding period of the Common Stock. The recipient of a
distribution may elect to include the amount of any net unrealized
appreciation in the total taxable amount of such distribution to the extent
allowed by the regulations to be issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard
to whether the distribution is a Lump Sum Distribution or a Partial
Distribution. Effective January 1, 1993, Participants have the right to elect
to have the Trustee transfer all or any portion of an "eligible rollover
distribution" directly to another plan qualified under Section 401(a) of the
Code or to an IRA. If the Participant does not elect to have an "eligible
rollover distribution" transferred directly to another qualified plan or to an
IRA, the distribution will be subject to an mandatory federal withholding tax
equal to 20% of the taxable distribution. An "eligible rollover distribution"
means any amount distributed from the Plan except: (1) a distribution that is
(a) one of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
Participant or the joint lines of the Participant and his or her designated
beneficiary, or (b) for a specified period of ten years or more; (2) any
amount that is required to be distributed under the minimum distribution
rules; and (3) any other distributions excepted under applicable federal law.
The tax law change described above did not modify the special tax treatment of
Lump Sum Distributions, that are not rolled over or transferred i.e., forward
averaging, capital gains tax treatment and the nonrecognition of net
unrealized appreciation, discussed earlier.
ERISA AND OTHER QUALIFICATION
As noted above, the Plan is subject to certain provisions of ERISA and will
be submitted to the IRS for a determination that it is qualified under Section
401(a) of the Code.
11
<PAGE>
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT
INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
RESTRICTIONS ON RESALE
Any person receiving a distribution of shares of Common Stock under the Plan
who is an "affiliate" of the Holding Company as the term "affiliate" is used
in Rules 144 and 405 under the Securities Act of 1933, as amended (the
"Securities Act") (e.g., directors, officers and substantial shareholders of
the Holding Company) may reoffer or resell such shares only pursuant to a
registration statement filed under the Securities Act assuming the
availability thereof, pursuant to Rule 144 or some other exemption of the
registration requirements of the Securities Act. Any person who may be an
"affiliate" of the Holding Company may wish to consult with counsel before
transferring any Common Stock owned by him. In addition, Participants are
advised to consult with counsel as to the applicability of Section 16 of the
1934 Act which may restrict the sale of Common Stock where acquired under the
Plan, or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Holding Company at the
time of resale will be free to resell any shares of Common Stock to them under
the Plan, either publicly or privately, without regard to the Registration and
Prospectus delivery requirements of the Securities Act or compliance with the
restrictions and conditions contained in the exemptive rules thereunder. An
"affiliate" of the Holding Company is someone who directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control, with the Holding Company. Normally, a director, principal
officer or major shareholder of a corporation may be deemed to be an
"affiliate" of that corporation. A person who may be deemed an "affiliate" of
the Holding Company at the time of a proposed resale will be permitted to make
public resales of the Holding Company's Common Stock only pursuant to a
"reoffer" Prospectus or in accordance with the restrictions and conditions
contained in Rule 144 under the Securities Act or some other exemption from
registration, and will not be permitted to use this Prospectus in connection
with any such resale. In general, the amount of the Holding Company's Common
Stock which any such affiliate may publicly resell pursuant to Rule 144 in any
three-month period may not exceed the greater of one percent of the Holding
Company's Common Stock then outstanding or the average weekly trading volume
reported on the National Association of Securities Dealers Automated Quotation
System during the four calendar weeks prior to the sale. Such sales may be
made only through brokers without solicitation and only at a time when the
Holding Company is current in filing the reports required of it under the 1934
Act.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the 1934 Act imposes reporting and liability requirements on
officers, directors and persons beneficially owning more than ten percent of
public companies such as the Holding Company. Section 16(a) of the 1934 Act
requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a
Form 3 reporting initial beneficial ownership must be filed with the
Securities and Exchange Commission. Certain changes in beneficial ownership,
such as purchases, sales, gifts and participation in savings and retirement
plans must be reported periodically, either on a Form 4 within ten days after
the end of the month in which a change occurs, or annually on a Form 5 within
45 days after the close of the Holding Company's fiscal year. Participation in
the Employer Stock Fund of the Plan by officers, directors and persons
beneficially owning more than ten percent of Common Stock of the Holding
Company must be reported to the SEC annually on a Form 5 by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the 1934 Act provides for the recovery by the Holding Company of profits
realized by any officer, director or any person beneficially owning more than
ten percent of the Holding Company's Common Stock ("Section 16(b) Persons")
resulting from the purchase and sale or sale and purchase of the Holding
Company's Common Stock within any six-month period.
12
<PAGE>
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided
certain requirements are met. These requirements generally involve
restrictions upon the timing of elections to acquire or dispose of employer
securities for the accounts of Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution.
EXPERTS
The financial statements and supplemental schedules of the Plan as of
December 31, 1996 and 1995 and for the years then ended have been included
herein in reliance upon the report of Ernst & Young LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
LEGAL OPINION
The validity of the issuance of the Common Stock will be passed upon by
Muldoon, Murphy & Faucette, Washington, D.C., which firm acted as special
counsel for the Holding Company and the Bank in connection with the Bank's
Conversion from a mutual savings bank to a stock based organization.
13
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
INVESTMENT FORM
Name of Plan Participant: ___________
Social Security Number: _____________
1. INSTRUCTIONS. In connection with the proposed Conversion of Richmond
County Savings Bank from a mutual savings bank to a stock based organization
(the "Conversion"), Richmond County Savings Bank 401(k) Savings Plan in RSI
Retirement Trust ("Plan") has been amended to permit participants to direct
their current account balances for their Basic Contribution Account, Matching
Contribution Account and Rollover Account into a new fund: the Employer Stock
Fund. The percentage of a participant's account transferred at the direction
of the participant into the Employer Stock Fund will be used to purchase
shares of common stock of Richmond County Financial Corp. (the "Common
Stock").
To direct a transfer of all or a part of the funds credited to your accounts
to the Employer Stock Fund, you should complete and file this form with the
Human Resources Department, no later than 4:00 p.m. on January 12, 1998. A
representative for the Plan Administrator will retain a copy of this form and
return a copy to you. If you need any assistance in completing this form,
please contact Dorothy Episcopia at (718) 448-2800, extension 291. If you do
not complete and return this form to the Plan Administrator by January 12,
1998, the funds credited to your accounts under the Plan will continue to be
invested in accordance with your prior investment direction, or in accordance
with the terms of the Plan if no investment direction has been provided.
2. INVESTMENT DIRECTIONS. I hereby authorize the Plan Administrator to
direct the Trustee to sell the units currently credited to my Basic
Contribution Account, Matching Contribution Account and Rollover Account and
to purchase units (in multiples of not less than 1%) in the Employer Stock
Fund:
<TABLE>
<CAPTION>
PURCHASE UNITS IN EMPLOYER
SELL UNITS FROM STOCK FUND
- -------------------------------------------------------------------------
<S> <C>
Sell % of A--Core Equity Fund %
- -------------------------------------------------------------------------
Sell % of B--Emerging Growth Equity Fund %
- -------------------------------------------------------------------------
Sell % of C--Value Equity Fund %
- -------------------------------------------------------------------------
Sell % of D--Actively Managed Bond Fund %
- -------------------------------------------------------------------------
Sell % of E--Intermediate-Term Bond Fund %
- -------------------------------------------------------------------------
Sell % of F--Short-Term Investment Fund %
- -------------------------------------------------------------------------
Sell % of G--International Equity Fund %
</TABLE>
NOTE: The total percentage of directed investments, above, may not exceed
100%.
3. PURCHASER INFORMATION. The ability of participants in the Plan to
purchase Common Stock in the Conversion and to direct their current account
balances into the Employer Stock Fund is based upon the participant's status
as an Eligible Account Holder and/or Supplemental Eligible Account Holder.
Please indicate your status.
a.[_] Eligible Account Holder--Check here if you were a depositor with
$100.00 or more on deposit with Richmond County Savings Bank as of
June 30, 1996.
b.[_] Supplemental Eligible Account Holder--Check here if you were a
depositor with $100.00 or more on deposit with Richmond County
Savings Bank as of September 30, 1997, but are not an Eligible
Account Holder.
<PAGE>
4. ACKNOWLEDGMENT OF PARTICIPANT. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan. I acknowledge
that I have received a copy of the Prospectus and the Prospectus Supplement.
_________________________________ ________________
Signature of Participant Date
ACKNOWLEDGMENT OF RECEIPT BY ADMINISTRATOR. This Investment Form was
received by the Plan Administrator and will become effective on the date noted
below.
_________________________________ ________________
Date
By: _____________________________
THE PARTICIPATION INTERESTS REPRESENTED BY COMMON STOCK OFFERED HEREBY ARE
NOT DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE BANK INSURANCE FUND OR THE
SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE
COMPANY OR BANK. THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL INVESTED.
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
RICHMOND COUNTY SAVINGS BANK 401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
Years ended December 31, 1996 and 1995 with Report of Independent Auditors
F-1
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
YEARS ENDED DECEMBER 31, 1996 AND 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................ F-3
Financial Statements
Statements of Net Assets Available for Plan Benefits with Fund In-
formation.......................................................... F-4
Statements of Changes in Net Assets Available for Plan Benefits with
Fund Information................................................... F-5, F-6
Notes to Financial Statements....................................... F-7
Supplemental Schedules
Assets Held for Investment.......................................... F-12
Reportable Transactions............................................. F-13
</TABLE>
A schedule of party-in-interest transactions has not been presented because
there were no party-in-interest transactions which are prohibited by ERISA
Section 406 and for which there are no statutory or administrative exemptions.
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees
Richmond County Savings Bank
We have audited the accompanying statements of net assets available for Plan
benefits with fund information of the Richmond County Savings Bank 401(k)
Savings Plan in RSI Retirement Trust (the "Plan") as of December 31, 1996 and
1995, and the related statements of changes in net assets available for Plan
benefits with fund information for the years then ended. These financial
statements are the responsibility of the Plan's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets available for Plan benefits at
December 31, 1996 and 1995, and the changes in its net assets available for
Plan benefits for the years then ended in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedules of assets
held for investment as of December 31, 1996 and reportable transactions for
the year then ended are presented for purposes of complying with the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974, and are not a required
part of the financial statements. The Fund Information in the statement of net
assets available for Plan benefits with fund information and the statement of
changes in net assets available for Plan benefits with fund information is
presented for purposes of additional analysis rather than to present the net
assets available for Plan benefits with fund information and changes in net
assets available for Plan benefits of each fund. The supplemental schedules
and Fund Information have been subjected to the auditing procedures applied in
our audits of the financial statements and, in our opinion, are fairly stated
in all material respects in relation to the financial statements taken as a
whole.
/s/ Ernst & Young LLP
July 14, 1997
New York, New York
F-3
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND INFORMATION
<TABLE>
<CAPTION>
EMERGING ACTIVELY
CORE GROWTH VALUE SHORT-TERM INTERMEDIATE- MANAGED
EQUITY EQUITY EQUITY INVESTMENT TERM BOND BOND INTERNATIONAL
FUND FUND FUND FUND FUND FUND EQUITY FUND LOANS TOTAL
---------- -------- -------- ---------- ------------- -------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996:
Investments, at fair
value
(Note 4)............. $1,018,580 $453,008 $366,136 $312,458 $146,299 $149,890 $13,282 $ -- $2,459,653
Loans receivable from
participants......... -- -- -- -- -- -- -- 79,839 79,839
---------- -------- -------- -------- -------- -------- ------- ------- ----------
Net assets available
for Plan benefits..... $1,018,580 $453,008 $366,136 $312,458 $146,299 $149,890 $13,282 $79,839 $2,539,492
========== ======== ======== ======== ======== ======== ======= ======= ==========
December 31, 1995:
Investments, at fair
value
(Note 4)............. $ 651,533 $284,997 $238,678 $304,269 $ 67,040 $139,201 $ -- $ -- $1,685,718
Loans receivable from
participants......... -- -- -- -- -- -- -- 47,360 47,360
---------- -------- -------- -------- -------- -------- ------- ------- ----------
Net assets available
for Plan benefits..... $ 651,533 $284,997 $238,678 $304,269 $ 67,040 $139,201 $ -- $47,360 $1,733,078
========== ======== ======== ======== ======== ======== ======= ======= ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND
INFORMATION
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
EMERGING
CORE GROWTH VALUE SHORT-TERM INTERMEDIATE- ACTIVELY
EQUITY EQUITY EQUITY INVESTMENT TERM BOND MANAGED INTERNATIONAL
FUND FUND FUND FUND FUND BOND FUND EQUITY FUND LOANS TOTAL
---------- -------- -------- ---------- ------------- --------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ADDITIONS
Employee
contributions........ $ 154,864 $ 80,434 $ 63,749 $ 38,066 $ 15,517 $ 29,269 $ 1,751 $ -- $ 383,650
Employee rollover
contributions........ -- -- -- 17,718 -- -- -- -- 17,718
Employer
contributions........ 56,449 29,255 22,704 14,597 5,792 10,720 598 -- 140,115
Interest on loans..... -- -- -- -- -- -- -- 5,501 5,501
Net realized and
unrealized
appreciation in fair
value of
investments.......... 168,055 85,663 72,808 12,804 3,557 4,523 446 -- 347,856
---------- -------- -------- -------- -------- -------- ------- ------- ----------
Total additions....... 379,368 195,352 159,261 83,185 24,866 44,512 2,795 5,501 894,840
Benefits distributed.. (24,658) (13,881) (11,640) (7,512) (10,117) (20,618) -- -- (88,426)
Transfers between
funds................ 12,337 (13,460) (20,163) (67,484) 64,510 (13,205) 10,487 26,978 --
---------- -------- -------- -------- -------- -------- ------- ------- ----------
Increase in net assets
available for Plan
benefits............. 367,047 168,011 127,458 8,189 79,259 10,689 13,282 32,479 806,414
Net assets available
for Plan benefits,
beginning of year.... 651,533 284,997 238,678 304,269 67,040 139,201 -- 47,360 1,733,078
---------- -------- -------- -------- -------- -------- ------- ------- ----------
Net assets available
for Plan benefits,
end of year.......... $1,018,580 $453,008 $366,136 $312,458 $146,299 $149,890 $13,282 $79,839 $2,539,492
========== ======== ======== ======== ======== ======== ======= ======= ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRSUT
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND
INFORMATION
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
EMERGING
CORE GROWTH VALUE SHORT-TERM INTERMEDIATE- ACTIVELY
EQUITY EQUITY EQUITY INVESTMENT TERM BOND MANAGED INTERNATIONAL
FUND FUND FUND FUND FUND BOND FUND EQUITY FUND LOANS TOTAL
-------- -------- -------- ---------- ------------- --------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ADDITIONS
Employee contributions.. $105,639 $ 49,404 $ 46,108 $ 39,893 $14,204 $ 28,210 $-- $ -- $ 283,458
Employee rollover
contributions.......... -- 531 531 3,185 -- -- -- -- 4,247
Employer contributions.. 47,951 22,299 20,855 18,351 6,540 13,001 -- -- 128,997
Interest on loans....... -- -- -- -- -- -- -- 3,237 3,237
Net realized and
unrealized appreciation
in fair value of
investments............ 167,454 76,917 55,294 12,540 7,146 18,268 -- -- 337,619
-------- -------- -------- -------- ------- -------- ---- ------- ----------
Total additions......... 321,044 149,151 122,788 73,969 27,890 59,479 -- 3,237 757,558
Benefits distributed.... (23,106) (11,770) (10,481) (11,497) (2,118) (4,296) -- (1,335) (64,603)
Transfers between
funds.................. 4,346 (28,258) (26,448) 58,075 (5,398) (9,744) -- 7,427 --
-------- -------- -------- -------- ------- -------- ---- ------- ----------
Increase in net assets
available for Plan
benefits............... 302,284 109,123 85,859 120,547 20,374 45,439 -- 9,329 692,955
Net assets available for
Plan benefits,
beginning of year...... 349,249 175,874 152,819 183,722 46,666 93,762 -- 38,031 1,040,123
-------- -------- -------- -------- ------- -------- ---- ------- ----------
Net assets available for
Plan benefits, end of
year................... $651,533 $284,997 $238,678 $304,269 $67,040 $139,201 $-- $47,360 $1,733,078
======== ======== ======== ======== ======= ======== ==== ======= ==========
</TABLE>
See accompanying notes.
F-6
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE PLAN
The following brief description of the Richmond County Savings Bank 401(k)
Savings Plan in RSI Retirement Trust (the "Plan") provides only general
information. Participants should refer to the Plan document for more complete
information.
General
The Plan is a defined contribution plan covering all eligible employees of
Richmond County Savings Bank (the "Bank"). The Plan was created on January 1,
1992, as subsequently amended through August 30, 1995, and is administered by
RSI Retirement Trust (the "Trust"). The Trust is a multiple employer trust,
subject to the requirements of the Employee Retirement Income Security Act of
1974 ("ERISA"), that provides retirement benefits for the employees of savings
banks and their allied organizations. The assets of all participating member
organizations are held in this common trust and are collectively invested and
reinvested by the Trust in its capacity as Trustee.
Eligibility
Any full time, salaried employee who reaches the age of 21 who is not
covered by a collective bargaining agreement shall be eligible to participate
as of the first day of any payroll period of any calendar month following one
year of employment.
Contributions
Employee contributions are made in accordance with salary deduction
agreements pursuant to Internal Revenue Code Section 401(k). Subject to
certain limitations set forth in the Plan document, the amount of
contributions authorized by eligible employees prior to August 30, 1995 shall
not be less than 2% nor greater than 6% of an employee's base salary (limited
to $9,240). Effective August 30, 1995, eligible employees may contribute up to
9% of their base salary (limited to $9,500). The Bank makes matching
contributions in an amount equal to 50% of an employee's contributions up to
6%.
New employees joining the Bank may be eligible to deposit any distributions
from a previous employer's tax-qualified defined contribution plan as set
forth in the Plan document and continue to defer income taxes on that
distribution. These rollover contributions can be made even if the employee is
not yet eligible to join the Plan.
Prior to May 24, 1995, participants in the Plan could invest their voluntary
contributions, rollover contributions and the Bank's matching contributions in
multiples of 25% in accordance with any one of the available investment
options. Those who first elect to participate or, if applicable, make a
rollover contribution on or after May 24, 1995 may direct that their
contributions be made to specific investment accounts in multiples of 1%.
Investment direction changes and transfers among the various Plan investment
options are limited to once each calendar quarter, but any participant in the
Plan on May 24, 1995 may redirect his investment one additional time if it is
done within 60 days of May 24, 1995. The Plan utilizes the following RSI
Retirement Trust investment funds:
Core Equity Fund--The Core Equity Fund is an equity based securities
fund. Investments are made primarily in common stocks of a broadly
diversified group of large, high quality, competitively strong companies
that in the view of the investment manager exhibit sustainable growth and
dividend earnings. It offers investors the potential for long-term capital
appreciation, with income as a secondary goal. The Core Equity Fund is
managed by Retirement System Investors, Inc.
F-7
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Emerging Growth Equity Fund--The Emerging Growth Equity Fund is an
aggressive growth equity fund that seeks capital appreciation by investing
in rapidly growing emerging companies that, in the view of the investment
manager, have higher than average potential for earnings growth. The
Emerging Growth Equity Fund is managed by The Putnam Advisory Company, Inc.
and Friess Associates, Inc.
Value Equity Fund--The Value Equity Fund is a growth and income equity
based securities fund that seeks capital appreciation over the longer term.
It invests in financially strong companies with medium to large market
capitalizations. (In the view of the investment manager, these companies
are currently out of favor with investors but have had good earnings growth
records in the past and offer prospects for significant earnings and
dividend growth. In the view of the investment manager, these stocks are
currently undervalued and selling below their potential value.) The Value
Equity Fund is managed by Retirement System Investors, Inc.
Intermediate-Term Bond Fund--The Intermediate-Term Bond Fund invests in a
high quality, diversified portfolio of debt securities that mature within
ten years, or have expected average lives of ten years or less. At least
65% of the investments in this fund are in U.S. Government or U.S.
Government Agency issues which have the highest credit rating. At the time
of purchase, at least 75% of the holdings must have a quality rating of
"AA" or better, with a minimum quality rating of "A" for other holdings.
This investment fund's goal is to achieve income and price appreciation.
The Intermediate-Term Bond Fund is managed by Retirement System Investors,
Inc.
Actively Managed Bond Fund--The Actively Managed Bond Fund invests in
high quality fixed-income securities (bonds and other debt securities),
with maturities that could range from three months to 30 years. The fund's
investment managers frequently adjust the maturity structure of the
portfolio to respond to perceived changes in the relative attractiveness of
the fixed-income market. At the time of purchase, at least 75% of the
investments in this fund must have a rating of "AA" or better, with a
minimum rating of "A" for other holdings, and at least 65% of the
investments must be in U.S. Government or U.S. Government Agency issues.
The fund seeks to achieve both income and price appreciation. The Actively
Managed Bond Fund is managed by Retirement System Investors, Inc.
Short-Term Investment Fund--The Short-Term Investment Fund invests in
high quality cash equivalent types of securities normally maturing in one
year or less. While the fund may invest in U.S. Government instruments with
maturities up to two years, the maximum average maturity of the fund's
holdings will not exceed one year. This investment fund offers substantial
liquidity and capital preservation. The Short-Term Investment Fund is
managed by Retirement System Investors, Inc.
International Equity Fund--The International Equity Fund seeks capital
appreciation and income by investing in stocks of companies headquartered
in foreign countries. Each selection is based on companies whose current
prices, in the view of the investment manager, do not reflect the true
earnings potential and, therefore, are selling at "undervalued" prices.
Investments in foreign markets with unacceptable political or economic
risks are avoided. Holdings are concentrated in the larger markets of
Europe, Australia and the Far East. In addition, the portfolio manager will
invest in emerging markets, as opportunities arise. The International
Equity Fund is managed by Morgan Grenfell Investment Services Limited.
Loans/Hardship Withdrawals
Upon application of any participant, the Bank may direct the Trustee of the
Plan to make a loan from the participant's employee contribution account,
vested matching contribution account and rollover contribution account. All
loans are limited to the lesser of 50% of the participant's accounts or
$50,000 and bear interest at a fixed rate of prime plus 1% (rounded to the
nearest 1/4% of 1%) determined at the time of borrowing and fixed for the life
of the loan. Further restrictions on the principal amount and term of loans do
exist and are discussed in the Plan document.
F-8
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In addition, participants may obtain withdrawals based on immediate
financial needs as outlined in the Plan document.
Participant's Accounts
Separate accounts are maintained for each participant to accumulate values
resulting from Bank, employee and rollover contributions. Participant's
accounts are credited with contributions made on their behalf in accordance
with employee salary deduction arrangements, the Bank's matching contributions
and Plan earnings. Plan earnings and losses are allocated based on account
balances and investment options which the participant chooses.
Vesting
Participants are fully vested in their accrued benefits in all accounts
other than their employer matching accounts at all times and such accrued
benefits are nonforfeitable at all times. Employer matching contributions
become vested and nonforfeitable as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS OF SERVICE AS % VESTED AND
DEFINED IN THE PLAN DOCUMENT NONFORFEITABLE
----------------------------- --------------
<S> <C>
Less than 2 years........................................... 0%
2 years but less than 3 years............................... 20
3 years but less than 4 years............................... 40
4 years but less than 5 years............................... 60
5 years but less than 6 years............................... 80
6 or more years............................................. 100
</TABLE>
For participants hired prior to January 1, 1994, their vesting period
commences on date of enrollment in the Plan, regardless of prior periods of
service at the Bank. For employees hired on or subsequent to January 1, 1994,
their vesting period begins upon date of hire, provided the employee has
attained the age of 18.
A participant, upon leaving the Bank prior to achieving two years of
employment, forfeits the value of all matching contributions and earnings on
those contributions made by the employer. The forfeited amount is deducted
from the amount due from the Bank for the employer contribution in the
following quarter.
Payment of Benefits
Upon retirement, a participant may elect to receive their vested account
balance either in a lump-sum amount or in monthly, quarterly, semi-annual or
annual installments.
Administrative Expenses
All administrative expenses of the Plan are paid by the Bank, except
expenses directly related to the managing of each fund (such as investment
management fees, commissions and other transaction costs) which are charged
against the assets of the total applicable fund to which such expenses
directly relate.
2. SUMMARY OF ACCOUNTING POLICIES
Basis of Accounting and Presentation
The financial statements have been prepared on the accrual basis of
accounting.
F-9
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Valuation
Investments consist of unit shares of funds offered by RSI Retirement Trust,
a registered investment company. Valuation of these shares by the Trust is
based on the underlying value of the net assets of each fund.
Except for debt securities with remaining maturities of 60 days or less
which are valued at book value, investments within each fund for which markets
are available are valued at their last available quote.
Investment transactions within each fund are recorded on a trade date basis.
Dividend income is recognized on the ex-dividend date or when the dividend
information is known; interest income, including, where applicable,
amortization of discount and premium on investments and zero coupon bonds, is
recognized on the accrual basis.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The Plan sponsor believes that the estimates utilized in
preparing its financial statements are reasonable and prudent. Actual results
could differ from these estimates.
3. PLAN TERMINATION
Although it has not expressed any intent to do so, the Bank has the right
under the Plan to discontinue its contributions at any time and to terminate
the Plan subject to the provisions of ERISA. In the event of a Plan
termination, participants become 100% vested in all matching contributions.
4. INVESTMENTS
Investments in the Plan as of December 31, 1996 and 1995 are:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
UNITS FAIR VALUE UNITS FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Core Equity Fund...................... 16,866 $1,018,580 13,111 $ 651,533
Emerging Growth Equity Fund........... 6,701 453,008 5,358 284,997
Value Equity Fund..................... 8,349 366,136 6,852 238,678
Short-Term Investment Fund............ 15,256 312,458 15,555 304,269
Intermediate-Term Bond Fund........... 4,876 146,299 2,324 67,040
Actively Managed Bond Fund............ 4,719 149,890 4,520 139,201
International Equity Fund............. 289 13,282 -- --
---------- ----------
Total............................... $2,459,653 $1,685,718
========== ==========
</TABLE>
Net realized and unrealized appreciation on the above investment funds was
$347,856 and $337,619 for the years ended December 31, 1996 and 1995,
respectively.
5. INCOME TAX STATUS
The Plan obtained its latest determination letter on December 13, 1995, in
which the Internal Revenue Service stated that the Plan, as amended through
March 10, 1994, was in compliance with the applicable requirements of the
Internal Revenue Code. Management is not aware of any cause of action, series
of events or amendments that might adversely affect the qualified status of
the Plan.
F-10
<PAGE>
SUPPLEMENTAL SCHEDULES
F-11
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
ASSETS HELD FOR INVESTMENT
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF FAIR
UNITS HELD VALUE COST
---------- ---------- ----------
<S> <C> <C> <C>
Units in RSI Retirement Trust Series Pooled
Investment Funds:
Core Equity Fund........................... 16,866 $1,018,580 $ 689,045
Emerging Growth Equity Fund................ 6,701 453,008 284,354
Value Equity Fund.......................... 8,349 366,136 250,047
Short-Term Investment Fund................. 15,256 312,458 285,966
Intermediate-Term Bond Fund................ 4,876 146,299 136,599
Actively Managed Bond Fund................. 4,719 149,890 130,182
International Equity Fund.................. 289 13,282 12,836
---------- ----------
2,459,653 1,789,029
Loans to participants........................ 79,839 79,839
---------- ----------
Total.................................... $2,539,492 $1,868,868
========== ==========
</TABLE>
F-12
<PAGE>
RICHMOND COUNTY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
REPORTABLE TRANSACTIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PURCHASES SALES
--------------------- ---------------------
NUMBER OF PURCHASE NUMBER OF
TRANSACTIONS PRICE TRANSACTIONS PROCEEDS
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Core Equity Fund................... 89 $289,050 41 $ 82,037
Emerging Growth Equity Fund........ 85 139,906 40 57,816
Value Equity Fund.................. 83 102,283 38 47,940
Short-Term Investment Fund......... 82 101,068 33 103,563
Intermediate-Term Bond Fund........ 83 95,022 33 19,427
</TABLE>
F-13
<PAGE>
PROSPECTUS
LOGO
RICHMOND COUNTY FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR RICHMOND COUNTY SAVINGS BANK)
21,275,000 SHARES OF COMMON STOCK
Richmond County Financial Corp. (the "Company"), a Delaware corporation, is
offering up to 21,275,000 shares of its common stock, par value $.01 per share
(the "Common Stock"), in connection with the conversion of Richmond County
Savings Bank (the "Bank") from a New York State chartered mutual savings bank
to a New York State chartered stock savings bank and the issuance of the
Bank's capital stock to the Company pursuant to the Bank's plan of conversion,
as amended (the "Plan" or "Plan of Conversion"). The simultaneous conversion
of the Bank to stock form, the issuance of the Bank's capital stock to the
Company and the offer and sale of the Common Stock by the Company are herein
referred to as the "Conversion." In certain circumstances, the Company may
increase the amount of Common Stock offered hereby up to 24,466,250 shares.
See Footnote 4 to the table below.
(continued on following page)
---------------
THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS
OF THE PRINCIPAL INVESTED. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" ON PAGES 14
THROUGH 22.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK,
THE NEW YORK STATE BANKING BOARD, THE NEW YORK STATE BANKING DEPARTMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES
COMMISSION, OR ANY OTHER AGENCY, NOR HAS SUCH COMMISSION, BOARD,
DEPARTMENT, CORPORATION OR ANY STATE SECURITIES COMMISSION OR OTHER
AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT DEPOSIT ACCOUNTS AND ARE
NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND OR THE SAVINGS
ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE COMPANY
OR THE BANK.
<TABLE>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<CAPTION>
ESTIMATED UNDERWRITING
COMMISSIONS
AND OTHER FEES ESTIMATED NET
PURCHASE PRICE(1) AND EXPENSES(2) PROCEEDS(3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share......................... $10.00 $0.33 $9.67
- --------------------------------------------------------------------------------------------------
Midpoint Per Share........................ $10.00 $0.31 $9.69
- --------------------------------------------------------------------------------------------------
Maximum Per Share......................... $10.00 $0.29 $9.71
- --------------------------------------------------------------------------------------------------
Total Minimum(1).......................... $157,250,000 $5,216,600 $152,033,400
- --------------------------------------------------------------------------------------------------
Total Midpoint(1)......................... $185,000,000 $5,660,300 $179,339,700
- --------------------------------------------------------------------------------------------------
Total Maximum(1).......................... $212,750,000 $6,103,900 $206,646,100
- --------------------------------------------------------------------------------------------------
Total Maximum as adjusted(4).............. $244,662,500 $6,614,200 $238,048,300
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by Keller
& Company, Inc. ("Keller") dated September 12, 1997, as updated as of
October 31, 1997, which states that the estimated pro forma market value
of the Common Stock being offered for sale in the Conversion ranged from
$157,250,000 to $212,750,000 with a midpoint of $185,000,000 (the
"Valuation Range") taking into account the contribution to the Richmond
County Savings Foundation (the "Foundation") of an amount of Common Stock
equal to 8% of the Common Stock sold in the Conversion. The independent
appraisal of Keller is based upon estimates and projections that are
subject to change and the valuation must not be construed as a
recommendation as to the advisability of purchasing the Common Stock nor
an assurance that a purchaser of Common Stock will thereafter be able to
sell the Common Stock at the Purchase Price ($10.00 per share of Common
Stock). Based on the Valuation Range, the Board of Directors of the
Company and the Board of Trustees of the Bank established an estimated
price range of the Common Stock being offered for sale in the Conversion
of $157.3 million to $212.8 million (the "Estimated Price Range") or
between 15,725,000 and 21,275,000 shares of Common Stock issued at the
Purchase Price to be paid for each share of Common Stock subscribed for or
purchased in the Offering. See "The Conversion --Stock Pricing."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of approximately $2.8
million, and marketing fees to be paid to Sandler O'Neill & Partners, L.P.
("Sandler O'Neill") estimated to be between $2.5 million and $3.3 million
at the minimum and maximum of the Estimated Price Range, respectively. See
"The Conversion--Marketing and Underwriting Arrangements." The actual fees
and expenses may vary from the estimates. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending upon the number of shares sold in the offerings and other
factors. Includes the purchase of shares of Common Stock by the Richmond
County Savings Bank Employee Stock Ownership Plan and related trust (the
"ESOP") which is intended to be funded by a loan to the ESOP from the
Company or from a third party, which will be deducted from the Company's
stockholders' equity. See "Use of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation
of subscribers or any right of cancellation, due to regulatory
considerations or changes in market or general financial and economic
conditions. See "Pro Forma Data" and "The Conversion--Stock Pricing." For
a discussion of the distribution and allocation of the additional shares,
if any, see "The Conversion--Subscription Offering and Subscription
Rights," "--Community Offering" and "--Limitations on Common Stock
Purchases."
---------------
Sandler O'Neill & Partners, L.P.
---------------
The date of this Prospectus is December 16, 1997.
<PAGE>
(continued from previous page)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED IN THE FOLLOWING
ORDER OF PRIORITY TO: 1) THE BANK'S ELIGIBLE ACCOUNT HOLDERS (DEFINED AS
HOLDERS OF DEPOSIT ACCOUNTS TOTALLING $100 OR MORE AS OF JUNE 30, 1996); (2)
THE COMPANY'S AND BANK'S TAX-QUALIFIED EMPLOYEE BENEFIT PLANS (COLLECTIVELY,
THE "EMPLOYEE PLANS"), CONSISTING OF THE ESOP WHICH INTENDS TO SUBSCRIBE FOR
UP TO 8% OF THE COMMON STOCK ISSUED IN CONNECTION WITH THE CONVERSION
(INCLUDING SHARES ISSUED TO THE RICHMOND COUNTY SAVINGS FOUNDATION); AND (3)
THE BANK'S SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (DEFINED AS HOLDERS OF
DEPOSIT ACCOUNTS TOTALLING $100 OR MORE AS OF SEPTEMBER 30, 1997).
SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING
SUBSCRIPTION RIGHTS WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE
FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE NEW YORK STATE BANKING
DEPARTMENT (THE "NYBD"). Upon completion of the Subscription Offering, and
subject to the other limitations described herein, the Company will offer any
shares of Common Stock not subscribed for in the Subscription Offering for
sale in a community offering to certain members of the general public (the
"Community Offering"). See "The Conversion--Community Offering." It is
anticipated that shares not subscribed for in the Subscription Offering and
the Community Offering, if any, will be offered to certain members of the
general public in a syndicated community offering (the "Syndicated Community
Offering") (the Subscription Offering, Community Offering and the Syndicated
Community Offering are referred to collectively as the "Offerings").
Except for the ESOP, no Eligible Account Holder or Supplemental Eligible
Account Holder may, in their respective capacities as such, purchase in the
Subscription Offering more than $250,000 of Common Stock; no person, together
with Associates (as defined herein) of or persons acting in concert with such
person, may purchase in the Community Offering and Syndicated Community
Offering more than $250,000 of Common Stock; and no person, together with
Associates of or persons acting in concert with such person, may purchase in
the aggregate more than the overall maximum purchase limitation of 1.0% of the
total number of shares of Common Stock offered in the Conversion; provided,
however, such purchase limitations may be increased and the amount that may be
subscribed for may be increased or decreased at the sole discretion of the
Bank and Company without further approval of subscribers or the Bank's Voting
Depositors, as defined herein. The minimum purchase is 25 shares. See "The
Conversion--Subscription Offering and Subscription Rights," "--Community
Offering" and "--Limitations on Common Stock Purchases."
Pursuant to the Plan, the Company has established the Foundation, a
charitable foundation, in connection with the Conversion. The Plan provides
that the Bank and the Company will fund the Foundation with shares of Common
Stock contributed by the Company from authorized but unissued shares in an
amount equal to 8% of the number of shares of Common Stock sold in the
Conversion. The Foundation will be dedicated to charitable purposes within the
Bank's community. For a discussion of the Foundation and its effects on the
Conversion, see "Risk Factors--Effects of the Establishment of the
Foundation," "Pro Forma Data" and "The Conversion--Establishment of Charitable
Foundation."
The Bank has engaged Sandler O'Neill to consult with and advise the Company
and the Bank in the Offerings and Sandler O'Neill has agreed to 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 Bank and the Company will pay a fee to Sandler O'Neill which
will be based on the aggregate Purchase Price of the Common Stock sold in the
Offerings. The Company and the Bank have agreed to indemnify Sandler O'Neill
against certain liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act"). See "The Conversion--Marketing and
Underwriting Arrangements."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT 12:00 NOON, NEW YORK TIME, ON
JANUARY 20, 1998 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE BANK AND THE
COMPANY, WITH THE APPROVAL OF THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW
YORK (THE "SUPERINTENDENT") AND THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE
"FDIC"), IF NECESSARY. The Community Offering and/or any Syndicated Community
Offering must be completed within 45 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. Orders submitted are irrevocable
until the completion of the Conversion; provided, that if the Conversion is
not completed within the 45 day period referred to above, unless such period
has been extended with the consent of the Superintendent and FDIC, if
necessary, all subscribers will have their funds returned promptly with
interest, and all withdrawal authorizations will be cancelled. Such extensions
may not go beyond December 16, 1999. See "The Conversion--Procedure for
Purchasing Shares in Subscription Offering."
The Company has received approval, conditioned on consummation of the
Conversion, to have its Common Stock quoted on the National Market System of
the Nasdaq Stock Market (the "Nasdaq National Market") under the symbol
"RCBK." Prior to this offering there has not been a public market for the
Common Stock, and there can be no assurance that an active and liquid trading
market for the Common Stock will develop, or that resales of the Common Stock
can be made at or above the Purchase Price. To the extent an active and liquid
trading market does not develop, the liquidity and market value of the Common
Stock may be adversely affected. See "Risk Factors--Absence of Market for
Common Stock" and "Market for the Common Stock."
EXPLANATORY NOTE: This Prospectus contains certain forward looking
statements consisting 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 which
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.
2
<PAGE>
BRANCH OFFICES OF
RICHMOND COUNTY SAVINGS BANK
[MAP GOES HERE]
3
<PAGE>
SUMMARY OF THE CONVERSION AND THE OFFERINGS
The following summary of the Conversion and the Offerings is qualified in its
entirety by the more detailed information appearing elsewhere in this
Prospectus.
Risk Factors................ A purchase of the Common Stock involves a
substantial degree of risk. Eligible Account
Holders, Supplemental Eligible Account Holders
and other prospective investors should carefully
consider the matters set forth under "Risk
Factors." THE SHARES OF COMMON STOCK OFFERED
HEREBY ARE NOT INSURED OR GUARANTEED BY THE FDIC
OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT
GUARANTEED BY THE COMPANY OR THE BANK.
Richmond County Financial
Corp. ...................... The Company is a Delaware corporation organized
at the direction of the Bank to become a savings
and loan holding company and purchase all of the
Bank's capital stock to be issued upon its
conversion from mutual form to stock form. To
date, the Company has not engaged in any
business. Its executive office is located at 1214
Castleton Avenue, Staten Island, New York 10310
and its telephone number is (718) 448-2800.
Richmond County Savings
Bank........................ The Bank is a New York State chartered mutual
savings bank. At August 31, 1997, the Bank had
total assets of $1.01 billion, total deposits of
$882.9 million and net worth of $102.8 million
and operated thirteen full service offices. The
Bank's executive office is located at 1214
Castleton Avenue, Staten Island, New York 10310
and its telephone number at that location is
(718) 448-2800.
The Bank's current operating strategy consists
primarily of:
. investing primarily in one- to four-family,
and to a lesser extent, commercial real
estate, construction and development,
commercial and other loans and in investment-
grade securities;
. attempting to increase its position as a
lender to businesses operating in its primary
market area, as well as other areas of the New
York City metropolitan area by offering its
commercial loan and deposit products to small
and medium-sized businesses;
. increasing the yield and estimated average
maturities of its securities investments by
emphasizing the purchase of government agency
and privately issued mortgage-backed and
mortgage-related securities with estimated
average lives of three to five years and de-
emphasizing its investment in U.S. Treasury
obligations and corporate and other debt
securities;
. maintaining a low cost of funds by attracting
and retaining core deposits by providing
enhanced customer service;
. attempting to attract new deposit customers by
competitively pricing certificate of deposit
products and offering a greater variety of
maturities of such certificates;
4
<PAGE>
. developing wholesale borrowing sources such as
Federal Home Loan Bank ("FHLB") advances,
repurchase agreements and brokered
certificates of deposit as an additional means
of funding asset growth; and
. managing its interest rate risk by originating
or purchasing adjustable-rate loans and
generally selling fixed-rate loans with
maturities of more than 15 years.
The Conversion and Reasons
for Conversion............. The Board of Trustees of the Bank has adopted and
subsequently amended a Plan of Conversion
pursuant to which the Bank intends to convert to
a New York State chartered stock savings bank and
issue all of its stock to the Company. The
Company is offering shares of its Common Stock in
the Offerings in connection with the Bank's
Conversion. Management believes the Conversion
offers a number of advantages, including: (i)
providing a larger capital base on which to
operate; (ii) providing enhanced future access to
capital markets; (iii) providing enhanced ability
to diversify into other financial services
related activities; and (iv) providing enhanced
ability to increase its presence in the
communities it serves and to geographically
expand its operations and market area through
marketing and business development, the
acquisition or establishment of branch offices or
the acquisition of other financial institutions.
The Conversion and the Offerings are subject to
approval by the Superintendent and non-objection
by the FDIC, and approval of voting depositors of
the Bank as of September 30, 1997, with aggregate
deposit accounts of $100 or more ("Voting
Depositors") at a special meeting to be held on
February 9, 1998 (the "Special Meeting"). The
Superintendent issued an approval letter on
December 16, 1997 and the FDIC issued a notice of
intent not to object to the Conversion on
December 16, 1997. See "The Conversion--General."
The Richmond County Savings
Foundation................. The Bank's Plan of Conversion provides for the
establishment of a charitable foundation in
connection with the Conversion. The Foundation,
which has been incorporated under Delaware law as
a non-stock corporation, will be funded
concurrent with the sale of Common Stock of the
Company with a contribution by the Company equal
to 8% of the Common Stock sold in the Conversion.
The authority for the affairs of the Foundation
are vested in the Board of Directors of the
Foundation, which initially is comprised of the
members of the Company's Board of Directors. See
"The Conversion--Establishment of Charitable
Foundation."
Terms of the Offering....... The shares of Common Stock to be sold in
connection with the Conversion are being offered
at a fixed price of $10.00 per share in the
Subscription Offering pursuant to subscription
rights in the following order of priority: (i)
Eligible Account Holders; (ii) the ESOP; and
(iii) Supplemental Eligible Account Holders. Upon
completion of the Subscription Offering, any
shares of Common
5
<PAGE>
Stock not subscribed for in the Subscription
Offering will be offered in the Community
Offering at $10.00 per share to certain members
of the general public. Subscription rights will
expire if not exercised by 12:00 noon, New York
time, on January 20, 1998, unless extended by the
Bank and the Company, with the approval of the
Superintendent and the FDIC, if necessary. See
"The Conversion--Subscription Offering and
Subscription Rights" and "--Community Offering."
Procedure for Ordering
Shares and Prospectus
Delivery................... Forms to order Common Stock offered in the
Subscription Offering and the Community Offering
will only be distributed with or preceded by a
Prospectus. Any person receiving a stock order
form and certification form who desires to
subscribe for shares must do so prior to the
Expiration Date by delivering to the Bank a
properly executed stock order form and
certification form together with full payment.
ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE
REVOKED OR MODIFIED WITHOUT THE CONSENT OF THE
COMPANY AND BANK. To ensure that each purchaser
receives a prospectus at least 48 hours prior to
the Expiration Date in accordance with Rule 15c2-
8 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), no prospectus will
be mailed any later than five days prior to the
Expiration Date or hand delivered any later than
two days prior to such date. Additional materials
may only be obtained from the Conversion Center.
The Company and Bank are not obligated to accept
subscriptions not submitted on an original stock
order form. See "The Conversion--Procedure for
Purchasing Shares in Subscription Offering."
Form of Payment for
Shares...................... Payment for subscriptions may be made: (i) in
cash (if delivered in person); (ii) by check,
bank draft or money order; or (iii) by
authorization of withdrawal from deposit accounts
maintained at the Bank. Orders for Common Stock
submitted by subscribers in the Subscription
Offering which aggregate $50,000 or more must be
paid by official bank or certified check or by
withdrawal authorization from a deposit account
at the Bank. No wire transfers will be accepted.
See "The Conversion--Procedure for Purchasing
Shares in Subscription Offering."
Nontransferability of
Subscription Rights........ The subscription rights of Eligible Account
Holders, Supplemental Eligible Account Holders
and the ESOP are nontransferable. Certificates
representing shares of Common Stock purchased in
the Subscription Offering must be registered in
the name of the Eligible Account Holder or
Supplemental Eligible Account Holder, as the case
may be. Joint stock registration will be allowed
only if the qualifying deposit account is so
registered. See "The Conversion--Restrictions on
Transfer of Subscription Rights and Shares."
Purchase Limitations........ No Eligible Account Holder or Supplemental
Eligible Account Holder may purchase in the
Subscription Offering more than $250,000 of
Common Stock. No person, together with Associates
of or persons acting in concert with such person,
may purchase in the
6
<PAGE>
Community Offering and the Syndicated Community
Offering more than $250,000 of Common Stock. No
person, together with Associates of or persons
acting in concert with such person, may purchase
in the aggregate more than 1% of the Common Stock
offered (the "overall maximum purchase
limitation"). However, the ESOP may purchase up
to 10% of the Common Stock issued, including
shares issued to the Foundation. It is
anticipated that the ESOP will subscribe to
purchase 8% of the Common Stock issued, including
shares issued to the Foundation. The minimum
purchase is 25 shares of Common Stock. At any
time during the Conversion and without approval
of Voting Depositors or a resolicitation of
subscribers, the Bank and the Company may, in
their sole discretion, decrease the maximum
purchase limitation below $250,000 of Common
Stock; however, such amount may not be reduced to
less than 0.10% of the Common Stock offered.
Additionally, at any time during the Conversion,
the Bank and the Company may, in their sole
discretion, increase the maximum purchase
limitation in the Subscription and Community
Offerings to an amount in excess of $250,000 up
to a maximum of 5% of the shares to be issued in
the Conversion. Similarly, the 1.0% overall
maximum purchase limitation may be increased up
to 5% of the total shares of Common Stock offered
in the Conversion.
Securities Offered and
Purchase Price.............. The Company is offering between 15,725,000 and
21,275,000 shares of Common Stock at a Purchase
Price of $10.00 per share. The maximum of the
Estimated Price Range may be increased by up to
15% and the maximum number of shares of Common
Stock to be offered may be increased up to
24,466,250 shares due to regulatory
considerations and changes in market or general
financial or economic conditions. See "The
Conversion--Stock Pricing" and "--Number of
Shares to be Issued."
Appraisal................... The Purchase Price per share has been fixed at
$10.00. The total number of shares to be issued
in the Conversion is based upon an independent
appraisal prepared by Keller, dated as of
September 12, 1997, and updated as of October 31,
1997, which states that the estimated pro forma
market value of the Common Stock offered ranged
from $157,250,000 to $212,750,000. The final
aggregate value will be determined at the time of
closing of the Offerings and is subject to change
due to changing market conditions and other
factors. See "The Conversion--Stock Pricing."
Use of Proceeds............. The Company will use 50% of the net proceeds of
the Offerings to purchase all of the outstanding
common stock of the Bank to be issued in the
Conversion. A portion of net proceeds retained by
the Company will be used for general business
purposes, including a loan by the Company
directly to the ESOP to enable the ESOP to
purchase up to 8% of the Common Stock issued in
the Conversion, including shares issued to the
Foundation. In the event that the ESOP is unable
to purchase 8% of the Common Stock in the
Subscription Offering, it is anticipated that the
ESOP will purchase an amount of shares in open
market transactions sufficient to fund
7
<PAGE>
the ESOP with 8% of the Common Stock issued in
the Conversion. The Company intends to initially
invest the remaining net proceeds primarily in
mortgage-backed and mortgage-related securities
and investment grade debt and equity securities.
The Bank intends to utilize net proceeds for
general business purposes, including investments
in loans and securities as well as for the
possible expansion of its facilities and
operations through marketing, business
development, or acquisitions of other financial
institutions, branch offices or other financial
services companies, although the Company and the
Bank have no current arrangements, understandings
or agreements regarding any such transactions,
other than a lease on a public accommodation
office to be opened on Staten Island in 1998 and
plans to open three branch offices on Staten
Island. See "Use of Proceeds."
Dividend Policy............. Upon Conversion, the Board of Directors of the
Company will have the authority to declare
dividends on the Common Stock, subject to
statutory and regulatory requirements. In the
future, the Board of Directors of the Company may
consider a policy of paying cash dividends on the
Common Stock. However, no decision has been made
with respect to the payment of such dividends, if
any. See "Dividend Policy."
Benefits of the Conversion
to Management.............. Among the benefits to the Bank and the Company
anticipated from the Conversion is the ability to
attract and retain personnel through the use of
stock options and other stock related benefit
programs. Subsequent to the Conversion, the
Company intends to adopt a Stock Program (as
defined herein) and a Stock Option Plan (as
defined herein) for the benefit of directors,
officers and employees. If such benefit plans are
adopted within one year after the Conversion,
such plans will be subject to stockholder
approval at a meeting of stockholders which may
not be held earlier than six months after the
Conversion. The Company intends to adopt a stock
benefit plan which would provide for the granting
of Common Stock to officers, directors and
employees of the Bank and Company, at no cost to
the recipient, in an amount equal to 4% of the
Common Stock issued in the Conversion, including
shares issued to the Foundation (the "Stock
Program"). The Company also intends to adopt a
stock option plan which would provide the Company
with the ability to grant options to officers,
directors and employees of the Bank and Company
to purchase Common Stock equal to 10% of the
number of shares of Common Stock issued in the
Conversion, including shares issued to the
Foundation (the "Stock Option Plan"). Further,
qualified personnel may be able to participate in
other employee benefit plans adopted in
connection with the Conversion, including the
Supplemental Executive Retirement Plan and the
Management Supplemental Executive Retirement
Plan. Additionally, certain officers of the
Company and the Bank will be provided with
employment agreements or change in control
agreements which provide such officers with
employment rights
8
<PAGE>
and/or payments upon their termination of service
following a change in control of the Company or
the Bank. For a further description of the Stock
Program and Stock Option Plan, see "Risk
Factors--Increased Costs Associated with Stock-
Based Benefits to Management, Employment
Contracts and Change in Control Payments" and
"Management of the Bank--Benefit Plans." See also
"Management of the Bank--Subscriptions by
Executive Officers, Directors and Trustees," "The
Conversion--Establishment of Charitable
Foundation" and "Restrictions on Acquisition of
the Company and the Bank--Restrictions in the
Company's Certificate of Incorporation and
Bylaws."
Voting Control of Officers
and Directors.............. Trustees, Directors and executive officers of the
Bank and the Company expect to purchase
approximately 1.6% or 1.2% of shares of Common
Stock outstanding, based upon the minimum and the
maximum of the Estimated Price Range, including
shares issued to the Foundation, respectively.
Additionally, assuming the implementation of the
ESOP, Stock Program and Stock Option Plan,
directors, executive officers and employees have
the potential to control the voting of
approximately 21.5% or 21.1% of the Common Stock
at the minimum and the maximum of the Estimated
Price Range, respectively, including shares
issued to the Foundation. Additionally, the
Foundation will hold Common Stock in an amount
equal to 8% of the Common Stock sold in the
Conversion, which shares of Common Stock will be
voted in the same ratio as all other outstanding
shares are voted. See "The Conversion--
Establishment of Charitable Foundation,"
"Management of the Bank--Subscriptions by
Executive Officers, Directors and Trustees," and
"Restrictions on Acquisition of the Company and
the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws."
Expiration Date for the
Subscription Offering...... The Expiration Date for the Subscription Offering
is 12:00 noon New York time on January 20, 1998
unless extended by the Bank and the Company, with
the approval of the Superintendent and the FDIC,
if necessary. See "The Conversion--Subscription
Offering and Subscription Rights."
Market for the Common
Stock....................... As a mutual institution, the Bank has never
issued capital stock and, consequently, there is
no existing market for the Common Stock. The
Company has received conditional approval to have
its Common Stock quoted on the Nasdaq National
Market under the symbol "RCBK," subject to the
completion of the Conversion and compliance with
certain conditions, including the presence of at
least three registered and active market makers.
See "Market for the Common Stock."
No Board Recommendations.... The Bank's Board of Trustees and the Company's
Board of Directors are not making any
recommendations to depositors or other potential
investors regarding whether such persons should
9
<PAGE>
purchase the Common Stock. An investment in the
Common Stock must be made pursuant to each
investor's evaluation of his or her best
interests.
Conversion Center........... If you have any questions regarding Conversion,
call the Conversion Center at (718) 983-4440.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
Set forth below are selected consolidated financial and other data of the
Bank. These financial data are derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Bank and Notes
thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT AT JUNE 30,
AUGUST 31, --------------------------------------------
1997(1) 1997 1996 1995 1994 1993
---------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
CONDITION DATA:
Total assets............ $1,006,064 $993,370 $914,483 $851,751 $825,663 $779,728
Loans receivable,
net(2)................. 513,403 496,258 419,270 392,409 355,850 355,281
Debt and equity
securities(3):
Available-for-sale.... 21,546 19,706 21,659 607 -- --
Held-to-maturity...... 195,345 205,201 307,700 287,879 328,779 331,840
Mortgage-backed and
mortgage related
securities, net(3):
Available-for-sale.... 57,024 27,398 1,394 1,683 -- --
Held-to-maturity...... 163,116 185,122 80,284 92,404 74,961 44,422
Intangible assets(4).... 1,474 1,527 1,802 2,115 2,428 2,715
Deposits................ 882,886 884,531 817,928 764,062 748,638 713,906
Net worth............... 102,832 100,865 89,901 81,166 73,550 63,407
</TABLE>
<TABLE>
<CAPTION>
FOR THE
TWO MONTHS
ENDED
AUGUST 31, FOR THE YEAR ENDED JUNE 30,
--------------- ----------------------------------------
1997(1) 1996(1) 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......... $11,785 $10,566 $65,781 $59,063 $54,321 $51,608 $53,003
Interest expense........ 5,120 4,358 27,707 26,254 22,456 20,207 22,280
------- ------- ------- ------- ------- ------- -------
Net interest income
before provision for
loan losses.......... 6,665 6,208 38,074 32,809 31,865 31,401 30,723
Provision for loan
losses................. 300 266 1,080 1,600 600 859 2,331
------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses.......... 6,365 5,942 36,994 31,209 31,265 30,542 28,392
------- ------- ------- ------- ------- ------- -------
Non-interest income..... 560 517 2,861 2,827 2,659 2,961 3,153
Non-interest expense.... 3,470 3,296 19,667 18,503 18,139 17,287 16,555
------- ------- ------- ------- ------- ------- -------
Income before income
taxes and cumulative
effect of changes in
accounting principles.. 3,455 3,163 20,188 15,533 15,785 16,216 14,990
Provision for income
taxes.................. 1,662 1,474 9,463 6,803 6,919 7,305 7,300
------- ------- ------- ------- ------- ------- -------
Cumulative effect of
changes in accounting
principles(5).......... -- -- -- -- (1,316) 1,232 --
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 1,793 $ 1,689 $10,725 $ 8,730 $ 7,550 $10,143 $ 7,690
======= ======= ======= ======= ======= ======= =======
</TABLE>
(continued on next page)
11
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
TWO MONTHS ENDED AT OR FOR THE YEAR ENDED
AUGUST 31, JUNE 30,
------------------- --------------------------------------
1997(1) 1996(1) 1997 1996 1995 1994 1993
-------- -------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
RATIOS AND
OTHER DATA(6):
PERFORMANCE RATIOS:
Return on average
assets............... 1.08% 1.11% 1.13% 0.99% 0.91% 1.27% 1.11%
Return on average net
worth................ 10.54 11.16 11.25 10.25 9.80 14.97 13.00
Average net worth to
average assets....... 10.22 9.92 10.07 9.70 9.29 8.50 8.52
Net worth to total
assets at end of
period............... 10.22 9.99 10.15 9.83 9.53 8.91 8.13
Net interest rate
spread(7)............ 3.59 3.82 3.68 3.53 3.66 3.85 3.99
Net interest
margin(8)............ 4.21 4.32 4.24 4.01 4.06 4.16 4.31
Average interest-
earning assets to
average interest-
bearing liabilities.. 119.18 116.59 118.32 115.19 113.96 111.64 110.32
Total non-interest
expense to average
assets(9)............ 1.90 1.96 1.99 2.07 2.15 2.13 2.34
Efficiency ratio(10).. 43.70 44.36 46.08 51.04 51.63 49.40 47.95
Net interest income to
operating expenses... 192.07 188.35 193.59 177.32 175.67 181.65 185.58
REGULATORY CAPITAL
RATIOS(11):
Leverage capital...... 10.10% 9.83% 10.02% 9.70% 9.25% 8.60% 7.77%
Total risk-based
capital.............. 19.70 19.53 19.71 19.22 18.33 16.23 15.28
Tier I capital........ 18.77 18.69 18.79 18.33 17.92 15.71 14.52
ASSET QUALITY RATIOS AND
DATA:
Total non-performing
loans(12)............ $ 5,572 $ 3,343 $3,877 $3,820 $2,995 $5,389 $5,375
Real estate owned,
net.................. 885 518 662 612 335 441 2,336
Total non-performing
assets(13)........... 6,457 3,861 4,539 4,432 3,330 5,830 7,711
Non-performing loans
as a percent of
loans, net(12)....... 1.09% 0.75% 0.78% 0.91% 0.76% 1.51% 1.51%
Non-performing assets
as a percent of total
assets(13)........... 0.64 0.42 0.46 0.48 0.39 0.71 0.99
Allowance for loan
losses as a percent
of loans receivable,
net(2)............... 1.11 1.12 1.10 1.14 0.83 0.87 0.77
Allowance for loan
losses as a percent
of total non-
performing
loans(2)(12)......... 101.99 149.42 141.00 125.55 109.35 57.64 50.88
OTHER DATA:
Number of full service
customer facilities.. 13 13 13 13 13 13 13
</TABLE>
(footnotes on next page)
12
<PAGE>
- --------
(1) The data presented at August 31, 1997 and for the two months ended August
31, 1997 and 1996 were derived from unaudited consolidated financial
statements and reflect, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) which are necessary to
present fairly the results for such interim periods. Interim results at and
for the two months ended August 31, 1997 are not necessarily indicative of
the results that may be expected for the year ended June 30, 1998. All
operating results presented for selected financial ratios and other data
for the two month periods ended August 31, 1997 and 1996 are presented on
an annualized basis.
(2) Loans receivable, net, consist of gross loans receivable less unamortized
discounts, deferred loan fees and the allowance for loan losses. The
allowance for loan losses at August 31, 1997 and June 30, 1997, 1996, 1995,
1994 and 1993 was $5.7 million, $5.5 million, $4.8 million, $3.3 million,
$3.1 million and $2.7 million, respectively. Loans receivable, net, at June
30, 1996, includes $1.2 million of loans held for sale.
(3) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities," as of July 1, 1994, and reclassified securities having
a market value of $26.0 million from its held-to-maturity portfolio to its
available-for-sale portfolio in November 1995 pursuant to a Financial
Accounting Standards Board ("FASB") interpretation of SFAS No. 115.
(4) Represents a premium on core deposits acquired which amounted to $3.2
million and which is being amortized on a straight line basis over a ten
year period.
(5) Cumulative effect of changes in accounting principles reflects a charge,
net of tax, of $1.3 million for the year ended June 30, 1995, resulting
from the adoption of SFAS No. 106 ("SFAS No. 106"), "Employer's Accounting
For Post-Retirement Benefits Other than Pensions," and a credit to earnings
of $1.2 million for the year ended June 30, 1994, resulting from the
adoption of SFAS No. 109 ("SFAS No. 109"), "Accounting for Income Taxes."
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Cumulative Effect of Changes in Accounting
Principles."
(6) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(7) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(8) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(9) Total non-interest expense excludes the effect of amortization of goodwill
and the one-time special assessment of $493,000 to recapitalize the Savings
Association Insurance Fund (the "SAIF"). See "Regulation and Supervision--
Insurance of Deposit Accounts." Including the effects of the amortization
of goodwill and the SAIF special assessment, total non-interest expense to
average assets for the two months ended August 31, 1997 and for the year
ended June 30, 1997 would have been 2.08% and 2.08%, respectively.
(10) The efficiency ratio represents the ratio of non-interest expense,
excluding the effect of amortization of goodwill and the SAIF special
assessment, divided by the sum of net interest income and non-interest
income. Including the effects of the amortization of goodwill and the SAIF
special assessment, the efficiency ratio for the two months ended August
31, 1997 and the year ended June 30, 1997 would have been 48.03% and
48.04%, respectively.
(11) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation and Supervision--FDIC Regulations--
Capital Requirements." See "Regulatory Capital Compliance" for the Bank's
pro forma capital levels as a result of the Offerings.
(12) It was the Bank's policy generally to cease accruing interest on all
commercial real estate, construction and commercial loans 90 days or more
past due, on all consumer loans which were 120 days or more past due, and
on all one- to four-family residential mortgage loans which were 180 days
or more past due. Effective July 1, 1997, the Bank revised this policy
such that it does not accrue interest on any loans, including one- to
four-family loans secured by real estate, which are more than ninety days
delinquent as to principal and interest unless, in the opinion of
management, collection is probable. See "Business of the Bank--Delinquent
Loans, Real Estate Owned and Classified Assets." Assuming the revised
policy had been in effect, the Bank's total non-accrual loans would have
been $3.9 million, $3.8 million, $3.0 million, $5.4 million and $5.4
million at June 30, 1997, 1996, 1995, 1994 and 1993, respectively.
(13) Non-performing assets consist of non-performing loans and real estate
owned, net ("REO"). The Bank had no troubled debt restructurings at any of
the dates presented.
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RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors in deciding whether to purchase
the Common Stock offered hereby.
SENSITIVITY TO CHANGES IN INTEREST RATES
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and securities, and its interest
expense on interest-bearing liabilities, such as its deposits and borrowed
funds. Accordingly, the Bank's results of operations and financial condition
are largely dependent on movements in market interest rates and its ability to
manage its assets and liabilities in response to such movements.
While the Bank emphasizes investment in adjustable-rate or shorter-term
loans, the Bank currently originates and sells fixed-rate one- to four-family
mortgage loans with terms in excess of fifteen years. However, from time to
time, the Bank may retain such loans in its portfolio depending on its
interest rate risk position. At August 31, 1997, 73.8% of the Bank's gross
loans had adjustable interest rates and its fixed-rate mortgage loan portfolio
had an average weighted maturity of 16.75 years. At such date, $37.5 million,
or 8.6%, of the Bank's securities had adjustable interest rates and its
securities portfolio had a weighted average life of 2.9 years. At August 31,
1997, the Bank had $213.6 million of certificates of deposit with maturities
of less than one year and $29.4 million of certificates of deposit over
$100,000 ("jumbo certificates of deposit"). Such jumbo certificates of deposit
tend to be less stable sources of funding as compared to money market,
savings, retail checking/negotiable order of withdrawal ("NOW") accounts and
commercial checking accounts (collectively, "core deposits") and, at August
31, 1997, represented 3.7% of the Bank's interest-bearing liabilities. As a
result, the Bank's total interest-earning assets repricing or maturing within
one year or less exceeded its interest-bearing liabilities maturing or
repricing in one year or less by $12.6 million, representing a one-year
interest sensitivity gap as a percentage of total assets of 1.26%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management of Interest Rate Risk--Gap Analysis." Therefore, the
yield on interest-earning assets of the Bank may adjust to changes in interest
rates faster than the cost of the Bank's interest-bearing liabilities and the
Bank's net income may be adversely affected during periods of declining
interest rates.
Significant increases in the level of market interest rates also may
adversely affect the fair value of the Bank's securities and other interest-
earning assets. At August 31, 1997, $399.5 million, or 91.4%, of the Bank's
securities had fixed interest rates. Generally, the value of fixed-rate
interest-earning assets fluctuates inversely with changes in interest rates.
As a result, increases in interest rates could result in decreases in the
market value of fixed-rate interest-earning assets which could adversely
affect the Bank's results of operations if sold. In the case of interest-
earning assets classified as available-for-sale, such increases in interest
rates could adversely affect the Bank's net worth.
Increases in market interest rates also can affect the type (fixed-rate or
adjustable-rate) and amount of loans originated by the Bank and the average
life of loans and securities, which can adversely impact the yields earned on
the Bank's loan and securities portfolio. In periods of decreasing interest
rates, the average life of loans held by the Bank may be shortened to the
extent increased prepayment activity occurs during such periods which, in
turn, may result in the Bank investing funds from such prepayments in lower
yielding assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Management of Interest Rate Risk." In
addition, increases in interest rates would result in interest rates on the
Bank's adjustable-rate loans increasing, thereby resulting in increased loan
payment amounts by the borrowers which, in turn, may result in higher
delinquencies on such loans.
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION
At August 31, 1997, the Bank's ratio of net worth to assets was 10.2%. The
Company's equity position will be significantly increased as a result of the
Conversion. On a pro forma basis as of August 31, 1997, assuming the sale of
Common Stock at the midpoint of the Estimated Price Range, the Company's ratio
of equity to assets would exceed 22.0%. The Company's ability to deploy this
new capital through investments in interest-earning assets, such as loans and
securities, which bear rates of return comparable to its current investments,
will be
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significantly affected by industry competition for such investments. The
Company currently anticipates that it will take time to prudently deploy such
capital. As a result, the Company's return on equity initially is expected to
be below its historical return on equity and may be below peer group
institutions after the Conversion. Additionally, due to the implementation of
stock-based benefit plans such as the ESOP, Stock Program and Stock Option
Plan, the Company's compensation expense will be increased, thereby adversely
affecting its net income and return on equity.
INCREASED LENDING RISKS ASSOCIATED WITH COMMERCIAL REAL ESTATE, MULTI-FAMILY,
CONSTRUCTION AND DEVELOPMENT AND COMMERCIAL LENDING
At August 31, 1997, the Bank's commercial real estate, multi-family,
construction and development and commercial loan portfolios totaled $74.7
million, or 14.3% of gross loans and 7.8% of total interest-earning assets. At
that date, commercial real estate loans totaled $42.9 million, or 8.2% of
gross loans, construction and development loans totalled $19.7 million, or
3.8% of gross loans, commercial loans totaled $9.3 million, or 1.8% of gross
loans, and multi-family loans totaled $2.7 million, or 0.5% of gross loans.
Additionally at such date, the Bank had $27.0 million of outstanding
commitments to fund such loans.
Although the Bank's level of commercial real estate, multi-family,
construction and development and commercial lending historically has been
relatively modest in comparison to its one- to four-family residential
lending, the Bank is attempting to increase its emphasis on such types of
loans. Commercial real estate and multi-family loans are generally viewed as
exposing the lender to a greater risk of loss than one- to four-family
residential loans, as their repayment is dependent, in large part, on
sufficient income from the property to cover operating expenses and debt
service and such loans generally involve larger loan balances. Economic events
and government regulations, which are outside the control of the borrower or
lender, could impact the value of the security for the loan or the future cash
flow of the affected properties. Additionally, although commercial real estate
and multi-family property values have stabilized in recent periods, the
decline in property values experienced in the Bank's primary market area in
the late 1980s and early 1990s was more pronounced with respect to commercial
real estate and multi-family properties than one- to four-family residential
properties. Construction and development financing is also generally
considered to involve a higher degree of credit risk than long-term financing
on improved, owner-occupied real estate as the risk of loss on such loans is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction compared to the estimated cost (including
interest) of construction. If the estimate of value proves to be inaccurate,
the property securing the loan, when completed, may have a value which is
insufficient to assure full repayment of the loan.
The Bank also makes secured and unsecured commercial loans. Unsecured
commercial loans are generally considered to involve a higher degree of risk
than secured commercial loans and real estate lending, due to the absence of
collateral securing the loan. Secured commercial loans are generally secured
by real estate, equipment, leases, inventory and accounts receivable. As of
August 31, 1997, approximately 65.0% of the Bank's commercial loans were
secured by real estate and 5.0% were secured by other forms of collateral.
With respect to commercial loans secured by collateral other than real estate,
the value of the collateral securing the loans may not be as easy to ascertain
as compared to real property, and such collateral may depreciate over time and
may not be as readily saleable as compared to real property. Both secured and
unsecured commercial loans are often substantially dependent upon the success
of the borrower's business. Accordingly, commercial loans involve a greater
degree of risk than a one- to four-family mortgage loan and other types of
mortgage loans. See "Business of the Bank--Lending Activities."
In the event the Bank were to further increase its investments in commercial
real estate, multi-family, construction and development and commercial
lending, management may determine to make additional or increased provisions
for loan losses which would adversely affect the Bank's net income.
EFFECTS OF THE ESTABLISHMENT OF THE FOUNDATION
Pursuant to the Plan, the Bank and the Company voluntarily have established
the Foundation in connection with the Conversion. The Foundation has been
incorporated under Delaware law as a non-stock corporation and
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will be funded with shares of Common Stock contributed by the Company. The
contribution of Common Stock to the Foundation will be dilutive to the
ownership and voting interests of stockholders and will have an adverse impact
on the reported earnings of the Company in fiscal 1998, the fiscal year in
which the Foundation will be funded.
Dilution of Stockholders' Interests. The Company proposes to fund the
Foundation with Common Stock of the Company in an amount equal to 8% of the
Common Stock to be sold in the Conversion. At the minimum, midpoint and
maximum of the Estimated Price Range, the contribution to the Foundation would
equal 1,258,000, 1,480,000 and 1,702,000 shares, with a value of $12.6
million, $14.8 million and $17.0 million, respectively, based on the Purchase
Price of $10.00 per share. Assuming the sale of Common Stock at the maximum of
the Estimated Price Range, upon completion of the Conversion and establishment
of the Foundation, the Company will have 22,977,000 shares issued and
outstanding, of which the Foundation will own 1,702,000 shares, or 7.4%. AS A
RESULT, PERSONS PURCHASING SHARES OF COMMON STOCK IN THE CONVERSION WILL HAVE
THEIR OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.4%, AS
COMPARED TO COMPLETING THE CONVERSION WITHOUT THE FOUNDATION. SEE "PRO FORMA
DATA."
Impact on Earnings. The contribution of Common Stock to the Foundation will
have an adverse impact on the Company's earnings in the year in which the
contribution is made. The Company will recognize the full expense in the
amount of the contribution of Common Stock to the Foundation in the quarter in
which it occurs, which is expected to be the third quarter of fiscal 1998. The
amount of the contribution will range from $12.6 million to $17.0 million,
based on the minimum and maximum of the Estimated Price Range. The
contribution expense will be partially offset by the tax benefit related to
the expense. The Company and the Bank have been advised by their independent
tax advisors that the contribution to the Foundation will be tax deductible,
subject to an annual limitation based on 10% of the Company's annual taxable
income. Assuming a contribution of $17.0 million in Common Stock (based on the
maximum of the Estimated Price Range), the Company estimates a net tax
effected expense of $9.4 million (based upon a 45% tax rate). If the
Foundation had been established at June 30, 1997, the Bank would have reported
net income of $1.7 million for the year ended June 30, 1997 rather than
reporting net income of $10.7 million for the year ended June 30, 1997, based
on an assumed tax rate of 47%. Management cannot predict earnings for fiscal
1998, but expects that the funding of the Foundation will have an adverse
impact on the Company's earnings for the quarter in which the Foundation is
funded. In addition to the contribution to the Foundation, the Bank expects in
the future to continue making ordinary charitable contributions within its
community but the Company and the Bank do not currently anticipate making
additional contributions to the Foundation within the first five years
following the initial contribution.
Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
will qualify as a Section 501(c)(3) exempt organization under the Internal
Revenue Code of 1986, as amended (the "Code"), and will be classified as a
private foundation. The Foundation will submit a request to the Internal
Revenue Service (the "IRS") to be recognized as an exempt organization. The
Company and the Bank have received an opinion of their independent tax
advisors that the Foundation would qualify as a Section 501(c)(3) exempt
organization under the Code, except that such opinion does not consider the
impact of the regulatory condition agreed to by the Foundation that Common
Stock issued to the Foundation be voted in the same ratio as all shares of the
Company's Common Stock voted on all proposals considered by stockholders of
the Company. See "The Conversion--Establishment of Charitable Foundation--
Regulatory Conditions Imposed on the Foundation." The independent tax
advisors' opinion further provides that the Company's contribution of its own
stock to the Foundation should not constitute an act of self-dealing, and that
the Company would be entitled to a deduction in the amount of the fair market
value of the stock at the time of the contribution less the nominal par value
that the Foundation is required to pay to the Company for such stock, subject
to an annual limitation based on 10% of the Company's annual taxable income.
The Company, however, would be able to carry forward any unused portion of the
deduction for five years following the contribution. Thus, while the Company
would have received a charitable contribution deduction of approximately $2.1
million in 1997 (based upon the sale of stock at the maximum of the Estimated
Price Range, a contribution of $17.0 million of Common Stock and the Bank's
pre-tax income for 1997), the Company is permitted under the Code to carryover
the excess contribution in the five following years. Assuming the sale of
Common Stock at the midpoint of the Estimated Price Range, the Company
estimates that substantially all of the
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deduction should be deductible over the six-year period. Although the Company
and the Bank have received an opinion of their independent tax advisors that
the Company will be entitled to the deduction for the charitable contribution,
there can be no assurances that the IRS will recognize the Foundation as a
Section 501(c)(3) exempt organization or that the deduction will be permitted.
In such event, the Company's tax benefit related to the Foundation would have
to be fully expensed, resulting in a further reduction in earnings in the year
in which the IRS makes such a determination.
Comparison of Valuation and Other Factors Assuming the Foundation is Not
Established as Part of the Conversion. The establishment of the Foundation was
taken into account by Keller in determining the estimated pro forma market
value of the Common Stock of the Company. The aggregate price of the shares of
Common Stock being offered in the Subscription and Community Offerings is
based upon the independent appraisal conducted by Keller of the estimated pro
forma market value of the Common Stock of the Company. The pro forma aggregate
price of the Common Stock being offered for sale in the Conversion is
currently estimated to be between $157.3 million and $212.8 million, with a
midpoint of $185.0 million. The pro forma price to book ratio and the pro
forma price to earnings ratio, at and for the two months ended August 31,
1997, are 75.44% and 13.08x, respectively, at the midpoint of the Estimated
Price Range. In the event that the Conversion did not include the Foundation,
Keller has estimated that the estimated pro forma market value of the Common
Stock would be $217.2 million at the midpoint based on a pro forma price to
book ratio and the pro forma price to earnings ratio at 75.48% and 13.48x,
respectively. The amount of Common Stock being offered for sale in the
Conversion at the midpoint of the Estimated Price Range is approximately $32.2
million less than the estimated amount of Common Stock that would be offered
in the Conversion without the Foundation based on the estimate provided by
Keller. Accordingly, certain account holders of the Bank who subscribe to
purchase Common Stock in the Subscription Offering may receive fewer shares
depending on the size of a depositor's stock order and the amount of his or
her qualifying deposits in the Bank and the overall level of subscriptions.
See "Comparison of Valuation and Pro Forma Information with No Foundation."
This estimate by Keller was prepared solely for purposes of providing Eligible
Account Holders, Supplemental Eligible Account Holders, Voting Depositors and
subscribers with information with which to make an informed decision on the
Conversion.
The decrease in the amount of Common Stock being offered as a result of the
contribution of Common Stock to the Foundation will not have a significant
effect on the Company or the Bank's capital position. The Bank's regulatory
capital is significantly in excess of its regulatory capital requirements and
will further exceed such requirements following the Conversion. The Bank's
leverage and risk-based capital ratios at August 31, 1997 were 10.10% and
19.70%, respectively. Assuming the sale of shares at the midpoint of the
Estimated Price Range, the Bank's pro forma leverage and risk-based capital
ratios at August 31, 1997 would be 15.65% and 29.96%, respectively. On a
consolidated basis, the Company's pro forma stockholders' equity would be
$264.9 million, or approximately 22.67% of pro forma consolidated assets,
assuming the sale of shares at the midpoint of the Estimated Price Range, and
pro forma stockholders' equity per share and pro forma net earnings per share
would be $13.26 and $0.13, respectively. If the Foundation was not being
established in the Conversion, based on the Keller estimate, the Company's pro
forma stockholders' equity would be approximately $287.8 million, or
approximately 24.16% of pro forma consolidated assets at the midpoint of the
estimate, and pro forma stockholder's equity per share and pro forma net
earnings per share would be $13.25 and $0.12, respectively. See "Comparison of
Valuation and Pro Forma Information with No Foundation."
Potential Anti-Takeover Effect. Upon completion of the Conversion, the
Foundation will own 7.4% of the total outstanding shares of the Company's
Common Stock. Such shares will be owned solely by the Foundation; however,
pursuant to a condition imposed by the NYBD and FDIC, the shares of Common
Stock held by the Foundation must be voted in the same ratio as all other
voted shares of the Company's Common Stock on all proposals considered by the
stockholders of the Company. As such, the Company does not believe the
Foundation will have an anti-takeover effect on the Company. However, in the
event that the NYBD and the FDIC were to waive this voting restriction and did
not impose additional restrictions on the Foundation with regard to the voting
of the Common Stock, the Foundation's Board of Directors would exercise sole
voting power over such shares. See "The Conversion--Establishment of
Charitable Foundation--Regulatory Conditions Imposed on the Foundation." As
the Foundation's Board of Directors will be comprised initially of the members
of the Board of Directors of the Company, in the event the NYBD and the FDIC
waived the voting
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restriction, management of the Company and the Bank may benefit to the extent
that the Board of Directors of the Foundation determines to vote the shares of
Common Stock held by the Foundation in favor of proposals supported by the
Company and the Bank. Furthermore, in such an event, when the Foundation's
shares are combined with shares purchased directly by officers and directors
of the Company, shares held by the Stock Program trust, and shares held by the
ESOP trust, the aggregate of such shares could exceed 20% of the Company's
outstanding Common Stock, which could enable management to defeat stockholder
proposals requiring 80% approval. Consequently, such potential voting control
might preclude takeover attempts that certain stockholders deem to be in their
best interest, and might tend to perpetuate management. However, since the
ESOP shares are allocated to all eligible employees of the Bank, and any
unallocated shares will be voted by an independent trustee, and because the
Stock Program must first be approved by stockholders no sooner than six months
following completion of the Conversion, and awards under such proposed plans
may be granted to employees other than executive officers, directors and
trustees, management of the Company does not expect to have voting control of
all shares covered by the ESOP and other stock-based benefit plans. See "--
Provisions Which May Discourage Takeover Attempts--Voting Control of Officers
and Trustees." Moreover, as the Foundation sells its shares of Common Stock
over time, its ownership interest and voting power in the Company is expected
to decrease.
Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion of a mutual savings institution to stock
form is innovative and has, to the Bank's knowledge, been done in a limited
number of instances. As such, the Foundation is subject to the
Superintendent's approval of the Conversion and the FDIC's nonobjection to the
Conversion and may also be subject to potential challenges notwithstanding
that the Board of Directors of the Company and the Board of Trustees of the
Bank have carefully considered the various factors involved in the
establishment of the Foundation in reaching their determination to establish
the Foundation as part of the Conversion. See "The Conversion--Establishment
of Charitable Foundation--Purpose of the Foundation." If challenges were to be
instituted seeking to require the Bank to eliminate establishment of the
Foundation in connection with the Conversion, no assurances can be made that
the resolution of such challenges would not result in a delay in the
consummation of the Conversion or that any objecting persons would not be
ultimately successful in obtaining such removal or other relief against the
Company or the Bank. Additionally, if the Company and the Bank are forced to
eliminate the Foundation, the Company may be required to resolicit subscribers
in the Offerings.
HIGHLY COMPETITIVE INDUSTRY AND GEOGRAPHIC AREA
The Bank faces significant competition in its primary market area both in
attracting deposits and in originating loans. The Bank had a lending market
share of approximately 7.2% in the Borough of Staten Island for 1996. The
Bank's share of deposits in the Borough of Staten Island amounted to
approximately 14.2% in June of 1996, according to a survey by a nationally-
recognized bank consulting firm. While the Bank's primary market area
generally consists of the Borough of Staten Island and the area surrounding
its branch office in the Borough of Brooklyn, the Bank may, in the future,
expand its market area to include other areas of the New York City
metropolitan area. The New York City metropolitan area is a highly competitive
market for financial services. The Bank faces direct competition from a
significant number of financial institutions operating in its market area,
many with a state-wide or regional presence, and, in some cases, a national
presence. This competition arises from commercial banks, savings banks,
mortgage banking companies, credit unions and other providers of financial
services, many of which are significantly larger than the Bank and, therefore,
have greater financial and marketing resources than those of the Bank. There
are eleven depository institutions with retail operations located in the
Borough of Staten Island. See "Business of the Bank--Market Area."
WEAKNESS IN LOCAL ECONOMY
During the late 1980s to the early 1990s, the New York City metropolitan
area experienced reduced employment as a result of layoffs in the financial
services industry, corporate relocations and the general decline of the local,
regional and national economies. Additionally, during that period the area
experienced a general
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weakening of real estate values and a decline in home sales and construction.
While Staten Island's significant concentration of government employees
somewhat mitigated the impact of the recession, the financial services
industry historically also has been a significant source of employment in the
Bank's primary market area. As a result, loan delinquencies increased and the
underlying values of properties securing non-performing loans made by lending
institutions generally declined resulting in substantial losses to some
institutions. In 1993, however, the economy of the Bank's primary market area
began to stabilize as demonstrated by improved employment and economic
indicators. Since such time, residential real estate values in the Bank's
primary market have stabilized and recently have begun to improve. However,
commercial real estate values, which previously experienced the greatest
declines during the late 1980s and early 1990s, have only recently begun to
stabilize and have not improved as much as residential real estate and
generally remain below the values experienced in the late 1980s. See "Business
of the Bank--Market Area."
Although the current national and local economic conditions have
significantly improved since the early 1990s, there can be no assurances that
conditions in the local economy, national economy, or real estate market in
general will not deteriorate and adversely affect the financial condition and
results of operations of the Bank. Based on information available to
management at this time, management believes the current allowance for loan
losses is adequate; however, many factors may require additions to the
allowance for loan losses in future periods above those reasonably
anticipated. Future adjustments to the allowance also may be necessary if
economic or other conditions differ substantially from those underlying the
assumptions used in making such estimates. See "Business of the Bank--
Allowance for Loan Losses."
PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
Provisions in the Company's and the Bank's Governing Instruments. Certain
provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Restated
Organization Certificate and Bylaws, as well as certain federal and state
regulations, assist the Company in maintaining its status as an independent
publicly owned corporation. These provisions provide for, among other things,
supermajority voting, staggered boards of directors, noncumulative voting for
directors, limits on the calling of special meetings of shareholders, limits
on the ability to vote Common Stock in excess of 10% of outstanding shares,
and certain uniform price provisions for certain business combinations. The
New York State Banking Board ("NYBB") regulations prohibit, for a period of
one year following the date of conversion, offers to acquire or the
acquisition of beneficial ownership of more than 10% of the outstanding stock
of the Bank. The Bank's Restated Organization Certificate also prohibits, for
three years, the acquisition, directly or indirectly, of the beneficial
ownership of more than 10% of the Bank's equity securities. Any person, or
group acting in concert, violating this restriction may not vote the Bank's or
Company's securities in excess of 10%. These provisions in the Bank's and the
Company's governing instruments may discourage potential proxy contests and
other potential takeover attempts, particularly those which have not been
negotiated with the Board of Directors, and thus, generally may serve to
perpetuate current management. See "Restrictions on Acquisitions of the
Company and the Bank."
Voting Control of Officers and Trustees. Trustees, directors and executive
officers of the Bank and the Company expect to purchase approximately 1.6% or
1.2% of the shares of Common Stock to be issued in the Conversion, including
shares issued to the Foundation, based upon the minimum and the maximum of the
Estimated Price Range, respectively, exclusive of shares that may be
attributable to directors and officers through the Stock Program, the Stock
Option Plan and the ESOP, which may give directors, trustees, executive
officers and employees the potential to control the voting of an additional
20.0% of the Company's Common Stock on a fully diluted basis at the maximum of
the Estimated Price Range. In addition, the Foundation will be funded with a
contribution by the Company equal to 8% of the Common Stock sold in the
Conversion. However, pursuant to voting restrictions imposed by the NYBD and
FDIC, such Common Stock must be voted in the same ratio as all other voted
shares of Common Stock. In the event an unconditional waiver of such voting
restriction was granted by the NYBD and FDIC, such shares would be voted as
determined by the Board of Directors of the Foundation which will initially be
comprised of the Directors of the Company. The Board of Directors of the
Foundation will, in the future, consider appointing to the Board members of
the Bank's local community who are not officers, directors or employees of the
Bank or the Company. Management's potential voting control could, together
with additional stockholder support, defeat stockholder proposals requiring
80% approval of
19
<PAGE>
stockholders. As a result, this potential voting control may preclude takeover
attempts that certain stockholders deem to be in their best interest and may
tend to perpetuate existing management. See "Restrictions on Acquisition of
the Company and the Bank--Restrictions in the Company's Certificate of
Incorporation and Bylaws" and "The Conversion--Establishment of Charitable
Foundation."
ABSENCE OF MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital stock,
and consequently, there is no established market for its Common Stock at this
time. The Company has received approval to have its Common Stock quoted on the
Nasdaq National Market under the symbol "RCBK" conditioned on the consummation
of the Conversion. A public trading market having the desirable
characteristics of depth, liquidity and orderliness depends upon the existence
of willing buyers and sellers at any given time, the presence of which is
dependent upon the individual decisions of buyers and sellers over which
neither the Company nor any market maker has control. Accordingly, there can
be no assurance that an active and liquid trading market for the Common Stock
will develop or that, if developed, will continue, nor is there any assurance
that purchasers of the Common Stock will be able to sell their shares at or
above the Purchase Price. In the event a liquid market for the Common Stock
does not develop or market makers for the Common Stock discontinue their
activities, such occurrences may have an adverse impact on the liquidity of
the Common Stock and the market value of the Common Stock.
INCREASED COSTS ASSOCIATED WITH STOCK-BASED BENEFITS TO MANAGEMENT, EMPLOYMENT
CONTRACTS AND CHANGE IN CONTROL PAYMENTS
Stock Program. The Company intends to adopt the Stock Program which would
provide stock grants of Common Stock to trustees and directors and selected
officers and employees of the Company and Bank and intends to seek stockholder
approval of such plan at a meeting of stockholders following the Conversion,
which may be held no earlier than six months after completion of the
Conversion. The shares granted under the Stock Program will be awarded at no
cost to the recipients. The Company expects to fund the Stock Program with
Common Stock in an amount equal to 4% of the Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, or 679,320
shares and 919,080 shares at the minimum and maximum of the Estimated Price
Range, respectively. These shares will be provided to the Stock Program either
through open market purchases by a trust established for the Stock Program or
from authorized but unissued Common Stock. See "--Possible Dilutive Effect of
Stock Program and Stock Option Plan."
Although no specific award determinations have been made, the Company
anticipates that it will provide awards under the Stock Program to the
trustees, directors and selected officers and employees of the Company and
Bank to the extent permitted by applicable regulations. Current NYBB and FDIC
regulations provide that, to the extent any non-tax qualified stock or stock
option plan is implemented within one year after conversion, no individual may
receive more than 25% of the shares of any such stock-based benefit plan and
non-employee directors or trustees may not receive more than 5% individually,
or 30% in the aggregate, of the shares awarded under any such plan. Under the
terms of the Stock Program, an independent trustee will vote unallocated
shares in the same proportion as it receives instructions from recipients with
respect to allocated shares which have not been earned and distributed.
Recipients will vote allocated shares. The plan trustee will not vote
allocated shares which have not been distributed if it does not receive
instructions from the recipient. The specific terms of the Stock Program
intended to be adopted and the amounts of awards thereunder have not yet been
determined by the Board of Directors, and any such determination will include
consideration of various factors, including but not limited to, the financial
condition of the Company, current and past performance of plan participants
and tax and securities laws and regulations. The stock-based benefits provided
under the Stock Program and Stock Option Plan, discussed below, may be
provided under separate plans established for officers and employees and non-
employee trustees and directors or such benefits may be provided for under a
single master stock-based benefit plan adopted by the Company which would
incorporate the benefits and features of the separate plans (the "Master
Stock-Based Benefit Plan"). Additionally, the granting or vesting of awards
under such benefit plans may be conditioned upon the achievement of individual
or company-wide performance goals, including the achievement by the Company or
the Bank of specified levels of net income or returns on equity or assets. The
implementation of the Stock Program will likely result in increased
compensation expenses to the Company and may have a dilutive effect on
existing stockholders. See "--Possible Dilutive Effect of Stock Program and
Stock Option Plan" and "Management of the Bank--Benefit Plans--Stock Program."
20
<PAGE>
Stock Option Plan. The Company also intends to adopt a stock-based benefit
plan which would provide options to purchase Common Stock ("Stock Options") to
officers, employees and trustees and directors of the Company and Bank and
intends to seek stockholder approval of such plan at a meeting of stockholders
following the Conversion, which may be held no earlier than six months after
completion of the Conversion. Although no specific determinations have been
made, the Company expects that directors and selected officers and employees
of the Company and Bank will be granted options to purchase Common Stock in an
amount equal to 10% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation (or 1,698,300 shares and
2,297,700 shares at the minimum and maximum of the Estimated Price Range,
respectively). It is currently intended that the exercise price of all Stock
Options will be at least equal to the fair market value of the underlying
Common Stock on the date of grant. Stock Options will permit such trustees,
directors, officers and employees to benefit from any increase in the market
value of the shares in excess of the exercise price at the time of exercise.
The specific terms of the Stock Option Plan intended to be adopted and amounts
and awards thereunder have not yet been determined by the Board and any such
determination will include consideration of various factors, including but not
limited to, the financial condition of the Company, current and past
performance of award recipients and tax and securities laws and regulations.
The Stock Options discussed above may be provided under a single stock option
plan, may be granted under separate plans for officers and employees and non-
employee directors or may be provided for under the Master Stock-Based Benefit
Plan which would incorporate the features and benefits of the Stock Option
Plan and the Stock Program, and benefits awarded thereunder may be conditioned
upon the achievement of individual or company-wide performance goals,
including the achievement by the Company or the Bank of specified levels of
net income or returns on equity or assets. The implementation of such Stock
Option Plan may have a dilutive effect upon existing stockholders of the
Company to the extent option exercises are satisfied with authorized but
unissued shares and will likely result in increased compensation expenses to
the Company. See "--Possible Dilutive Effect of Stock Program and Stock Option
Plan" and "Management of the Bank--Benefit Plans--Stock Option Plan."
Change In Control Provisions. The Company and the Bank intend to enter into
employment or change in control agreements with certain officers of the Bank
and Company which will provide for benefits and cash payments in the event of
their termination following a change in control of the Company or the Bank.
These provisions may have the effect of increasing the cost of acquiring the
Company or the Bank, thereby discouraging future attempts to take over the
Company or the Bank. Additionally, the Bank intends to adopt the Stock
Program, Stock Option Plan and employee severance compensation plan, which
similarly provides a cash payment and benefits to eligible employees upon such
employees' termination following a change in control of the Company or the
Bank, which also may have the effect of increasing the cost of acquiring the
Company or the Bank. Based on current salaries, cash payments to be paid in
the event of a change in control pursuant to the terms of the employment
agreements, change in control agreements and the employee severance
compensation plan would be approximately $8.4 million. However, the actual
amount to be paid in the event of a change in control of the Company or the
Bank cannot be estimated at this time because the actual amount is based on
the average salary of the employee and other factors existing at the time of
the change in control. See "Restrictions on Acquisition of the Company and the
Bank--Restrictions in the Company's Certificate of Incorporation and Bylaws,"
"Management of the Bank--Employment Agreements," "--Change in Control
Agreements," "--Employee Severance Compensation Plan," "--Benefit Plans--Stock
Option Plan" and "--Benefit Plans--Stock Program."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAM AND STOCK OPTION PLAN
Following the Conversion, the Stock Program will acquire an amount of shares
equal to 4% of the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation, either through open market purchases or the
issuance of authorized but unissued shares of Common Stock from the Company.
If the Stock Program is funded by the issuance of authorized but unissued
shares, the voting interests of existing shareholders at that time will be
diluted by 3.8%. Also following the Conversion, the Company intends to
implement the Stock Option Plan which will provide trustees, directors and
selected officers and employees of the Company and the Bank with Stock Options
to purchase authorized but unissued shares in an amount equal to 10% of the
Common Stock issued in the Conversion, including shares issued to the
Foundation. If all of the Stock Options intended to
21
<PAGE>
be granted were to be exercised using authorized but unissued Common Stock and
if the Stock Program were funded with authorized but unissued shares, the
voting interests of existing stockholders at that time would be diluted by
12.3%.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion of Keller that subscription rights granted
to Eligible Account Holders and Supplemental Eligible Account Holders have no
value. However, this opinion is not binding on the IRS. If the subscription
rights granted to Eligible Account Holders or Supplemental Eligible Account
Holders are deemed to have an ascertainable value, such recipients could be
taxed upon receipt or exercise of such subscription rights. Additionally, the
Bank could recognize a gain for tax purposes on such distribution. Whether
subscription rights are considered to have ascertainable value is an
inherently factual determination. See "The Conversion--Effects of Conversion"
and "--Tax Aspects."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription Offering. In the event that the Estimated Price Range is so
increased, it is expected that the Company will sell up to 24,466,250 shares
of Common Stock at the Purchase Price for an aggregate purchase price of up to
$244,662,500 which, when aggregated with the shares contributed to the
Foundation will result in the issuance of up to 26,423,550 shares. An increase
in the number of shares issued will decrease a subscriber's pro forma net
earnings per share and stockholders' equity per share and will increase the
Company's pro forma consolidated stockholders' equity and net earnings. Such
an increase will also increase the Purchase Price as a percentage of pro forma
stockholders' equity per share and net earnings per share.
POTENTIAL DELAYS OF CONSUMMATION OF THE CONVERSION
Orders submitted in the Offerings are irrevocable. The Company and the Bank
intend to complete the Conversion within the time periods indicated in this
Prospectus. The Conversion can not be completed prior to approval by the
Voting Depositors at the Special Meeting which is scheduled to be held on
February 9, 1998. Furthermore, it is possible that several factors, including,
but not limited to, a delay in receiving regulatory approval of the final
updated appraisal prepared by Keller, a delay in processing orders in the
event the Offerings are oversubscribed or a delay caused by regulatory or
legal challenges to the establishment and funding of the Foundation or other
actions taken in connection with the Conversion could significantly delay the
completion of the Conversion. Both the Expiration Date and the 45 day period
thereafter may be extended with the approval of the Superintendent and the
FDIC, if necessary. Subscribers will have no access to subscription funds
and/or shares of Common Stock until the Conversion is completed or terminated.
Funds received in cash or by check, bank draft or money order will earn
interest at the Bank's passbook rate of interest from the date payment is
received until the completion of the Conversion. In the event the Conversion
is terminated, subscribers will be refunded their subscription funds, with
interest, or will have their withdrawal authorization terminated. See "The
Conversion."
RICHMOND COUNTY FINANCIAL CORP.
Richmond County Financial Corp. is a Delaware corporation recently organized
at the direction of the Board of Trustees of the Bank for the purpose of
acquiring all of the capital stock of the Bank to be issued in the Conversion.
The Company has received approval from the Office of Thrift Supervision
("OTS") to become a savings and loan holding company and, upon completion of
the Conversion, will be subject to regulation by the OTS. See "The
Conversion--General" and "Regulation and Supervision--Holding Company
Regulation." Upon consummation of the Conversion, the Company will have no
significant assets other than all of the shares of the Bank's capital stock
acquired in the Conversion and an amount equal to 50% of the net proceeds of
the Conversion, including the loan to the ESOP, and will have no significant
liabilities. The Company intends to use a portion of the net proceeds it
retains to loan to the ESOP funds to enable the ESOP to purchase up to 8% of
the stock issued in connection with the Conversion, including shares issued to
the Foundation. The remaining net proceeds will be used for general business
activities, including the funding of the Stock Program and Stock
22
<PAGE>
Option Plan. Initially, net proceeds are expected to be invested by the
Company in primarily mortgage-backed and mortgage-related securities and
investment-grade debt and equity securities. See "Use of Proceeds."
In October 1997, the Company hired a President and Chief Operating Officer
and a Senior Vice President, Chief Financial Officer and Secretary, both of
whom were not previously employed by the Bank but who have significant
experience in the financial services industry. The management of the Company
is set forth under "Management of the Company." Initially, the Company will
neither own nor lease any property, but will instead use the premises,
equipment and furniture of the Bank. At the present time, the Company does not
intend to employ any persons other than the current officers of the Company
but will utilize the support staff of the Bank from time to time. Additional
employees will be hired as appropriate to the extent the Company expands its
business in the future.
Management believes that the holding company structure will provide the
Company additional flexibility to diversify its business activities and to
expand its geographical presence through existing or newly formed subsidiaries
(which subsidiaries could be financial institutions), or through acquisitions
of or mergers with other financial institutions and financial services related
companies. Other than the Bank's plans to open a public accommodation office
in 1998 and to open three branch offices on Staten Island, there are no
current arrangements, understandings or agreements regarding any such
opportunities. The Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Company are anticipated to be funded by the net
proceeds to be retained by the Company, income thereon and through dividends
from the Bank.
The Company's executive office is located at the administrative offices of
the Bank, 1214 Castleton Avenue, Staten Island, New York 10310. Its telephone
number is (718) 448-2800.
RICHMOND COUNTY SAVINGS BANK
The Bank was organized in 1886 as a New York State chartered mutual savings
bank. The Bank has long-standing ties to Staten Island with over 111 years of
continuous service to the residents and businesses of Staten Island and has
served the area around its office in Brooklyn for over 20 years. The Bank's
deposit accounts are insured to the maximum allowable amount by the Bank
Insurance Fund ("BIF") and SAIF as administered by the FDIC. Including the
Bank's principal office, which is located in the Borough of Staten Island, the
Bank services its customers from twelve full service banking facilities
located in the Borough of Staten Island, and one full service banking facility
located in the Borough of Brooklyn. The Bank intends to open one public
accommodation office in Staten Island during 1998 and also is considering
opening three full-service branches. With the exception of plans to open a
public accommodation office and three branch offices on Staten Island, there
are no current arrangements, understandings or agreements, written or oral,
regarding such new offices, and no assurances can be made that such offices
will be opened. At August 31, 1997, the Bank had total assets of $1.01
billion, total deposits of $882.9 million, net worth of $102.8 million and had
a leverage capital ratio of 10.10% and a total risk-based capital ratio of
19.70%. See "Regulation and Supervision--FDIC Regulations--Capital
Requirements."
The Bank is a community-oriented savings institution whose businesses
primarily consist of accepting deposits from customers in its primary market
area consisting of the Borough of Staten Island and the area around its branch
office in the Borough of Brooklyn and investing those funds in mortgage loans
secured by one- to four-family residences and commercial properties and
construction and development and commercial loans, home equity, student and
consumer loans and in mortgage-backed and mortgage-related securities and debt
and equity securities. See "Business of the Bank--Lending Activities."
As of June, 1996, based on a survey by a nationally-recognized bank
consulting firm, the Bank had 14.2% of total deposits in Staten Island, and
for 1996, the Bank had a lending market share of approximately 7.2% on Staten
Island, placing the Bank among the leaders in both loans originated and
deposits in Staten Island. The Bank's operating strategy emphasizes customer
service, security and convenience, and the Bank attributes the
23
<PAGE>
loyalty of its customer base to its commitment to maintaining customer
satisfaction. The Bank attempts to set itself apart from its larger
competitors by providing the type of personalized service not generally
available from larger banks while offering a greater variety of products and
services than is typically available from smaller, local depository
institutions.
At August 31, 1997, the Bank's gross loan portfolio totaled $520.6 million,
or 51.7% of total assets, of which $411.7 million were one- to four-family
loans, $2.7 million were multi-family loans, $42.9 million were commercial
real estate loans, $19.7 million were construction and development loans, $9.3
million were commercial loans, $11.1 million were home equity loans and $23.2
million were student and consumer loans. The Bank originates mortgage loans
generally secured by properties located in the Bank's primary market area. See
"Business of the Bank--Lending Activities."
The Bank's securities investment activities primarily consist of investments
in mortgage-backed and mortgage-related securities and various investment-
grade debt and equity securities. At August 31, 1997, the Bank's securities
portfolio totalled $437.0 million, or 43.4% of total assets, of which $78.6
million was categorized as available-for-sale and $358.5 million was
classified as held-to-maturity. At August 31, 1997, the Bank's mortgage-backed
and mortgage-related securities portfolio totaled $220.1 million, or 21.9% of
total assets, of which $57.0 million was classified as available-for-sale and
$163.1 million was classified as held-to- maturity, and consisted of mortgage-
backed securities guaranteed or issued by Governmental-sponsored and federal
agencies such as the Government National Mortgage Association ("GNMA"), Fannie
Mae ("FNMA") and Freddie Mac ("FHLMC") and collateralized mortgaged
obligations ("CMOs") issued by FNMA, FHLMC and private issuers. At August 31,
1997, the Bank's debt securities portfolio totaled $195.3 million, or 19.4% of
total assets, all of which were classified as held to maturity. The Bank's
debt securities generally consist of United States Government securities,
obligations of FNMA, FHLMC and the FHLB, obligations of corporate issuers,
public utility bonds and bonds issued by New York State. At August 31, 1997,
the Bank's equity securities portfolio totaled $21.5 million, or 2.1% of total
assets, all of which was classified as available-for- sale. See "Business of
the Bank--Securities Investment Activities."
At August 31, 1997, the Bank's deposit accounts totaled $882.9 million, or
97.7% of total liabilities, of which $577.5 million, or 65.4%, were comprised
of core deposits. In addition to core deposits, the Bank had $305.4 million of
certificate accounts, or 33.8% of total liabilities, of which $213.6 million
were certificates of deposit with maturities of one year or less and $29.4
million were jumbo certificates of deposit.
The Bank's executive office is located at 1214 Castleton Avenue, Staten
Island, New York 10310. Its telephone number at that location is (718) 448-
2800.
RICHMOND COUNTY SAVINGS FOUNDATION
In furtherance of the Bank's commitment to the communities it serves, the
Bank's Plan of Conversion provides for the establishment of a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company create the Richmond County Savings Foundation, which has been
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 purpose of the Foundation is to provide funding
to support charitable causes and community development activities. The Company
and the Bank believe that the funding of the Foundation with Common Stock of
the Company is a means of establishing a common bond between the Bank and its
community and thereby enables the Bank's community to share in the potential
growth and success of the Company over the long term. While the Bank has made
charitable contributions in the past, the Bank has not previously formed a
charitable foundation nor has it made contributions to charitable
organizations of the magnitude of the contribution that will be made to the
Foundation in the Conversion. By further enhancing the Bank's visibility and
reputation in its local community, the Bank believes that the Foundation will
enhance the long-term value of the Bank's community banking franchise. See
"The Conversion--Establishment of Charitable Foundation--Structure of the
Foundation."
The members of the Foundation are the Board of Directors of the Foundation.
The authority for the affairs of the Foundation are vested in the Board of
Directors of the Foundation, which initially is comprised of the Board of
Directors of the Company, who will receive no fees for serving on the
Foundation's Board of Directors.
24
<PAGE>
The Board of Directors of the Foundation may be expanded in the future to
include certain members of the community. 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 funding of the Foundation. The Directors of the Foundation
will be responsible for directing the activities of the Foundation, including
the management of the Common Stock held by the Foundation. However,
establishment of the Foundation is subject to certain regulatory 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 each and every proposal considered by stockholders of the
Company. See "The Conversion--Establishment of Charitable Foundation--
Regulatory Conditions Imposed on the Foundation."
The Company proposes to fund the Foundation by contributing to the
Foundation immediately following the Conversion a number of shares of
authorized but unissued Common Stock equal to 8% of the Common Stock sold in
the Offerings, or 1,258,000, 1,480,000 and 1,702,000 shares at the minimum,
midpoint and maximum, respectively, of the Estimated Price Range. Such
contribution, once made, will not be recoverable by the Company or the Bank.
Assuming the sale of shares at the maximum of the Estimated Price Range and
the issuance of shares to the Foundation, the Company will have 22,977,000
shares issued and outstanding, of which the Foundation will own 1,702,000
shares, or 7.4%. 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 7.4%. SEE "PRO FORMA
DATA." The funding of the Foundation was taken into account in determining the
estimated pro forma market value of the Common Stock. In the event the
Conversion did not include the Foundation, Keller has estimated that the pro
forma market value of the Common Stock would be $217.2 million at the midpoint
of the Estimated Price Range rather than $199.8 million. See "Risk Factors--
Effects of the Establishment of the Foundation--Comparison of Valuation and
Other Factors Assuming the Foundation is Not Established as Part of the
Conversion" and "Pro Forma Data."
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
state and federal laws, loans from unaffiliated third parties collateralized
by shares of Common Stock and from the proceeds from sales of shares of Common
Stock held by the Foundation.
As a result of the funding 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 fiscal 1998. Such expense
will reduce earnings and have a material impact on the Company's earnings for
the fiscal year in which it is made. While management cannot predict earnings
for fiscal 1998, it expects that the funding of the Foundation will have an
adverse impact on the Company's earnings for the year in which it is made.
Assuming a contribution of $17.0 million in Common Stock in fiscal 1998, based
on the maximum of the Estimated Price Range and assuming a tax rate of 45%,
the Company estimates a net tax effected expense of $9.4 million. If the
Foundation had been established at June 30, 1997, the Bank would have recorded
net income of $1.7 million, rather than recording net income of $10.7 million
for the year ended June 30, 1997, based on an assumed tax rate of 47%. In
addition to the contribution of Common Stock by the Company to the Foundation,
the Bank expects in the future to continue making ordinary charitable
contributions within its community. The Bank does not anticipate making future
charitable contributions to the Foundation during the first five years
following the initial contribution to the Foundation. For further discussion
of the Foundation and its impact on purchasers in the Conversion, see "Risk
Factors--Effects of the Establishment of the Foundation," "Pro Forma Data" and
"The Conversion--Establishment of Charitable Foundation."
The establishment and funding of a charitable foundation as part of a
conversion of a mutual savings institution to stock form is innovative and has
only been done in a limited number of instances. As such, the establishment of
the Foundation in connection with the Conversion and the Superintendent's
approval and FDIC's non-objection to the Plan of Conversion may be subject to
potential challenges which could result in delays in the Conversion. See "Risk
Factors--Effects of the Establishment of the Foundation--Potential
Challenges."
25
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At August 31, 1997, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the
FDIC capital standards as of August 31, 1997, on an historical and pro forma
basis assuming that the indicated number of shares were sold as of such date
and receipt by the Bank of 50% of the net proceeds. For purposes of the table
below, the amount expected to be borrowed by the ESOP and the cost of the
Company's Common Stock expected to be acquired by the Stock Program are
deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT AUGUST 31, 1997 BASED UPON THE SALE AT $10.00 PER SHARE
---------------------------------------------------------------------------
15,725,000 SHARES 18,500,000 SHARES 21,275,000 SHARES 24,466,250 SHARES
(MINIMUM OF THE (MIDPOINT OF THE (MAXIMUM OF THE (15% ABOVE MAXIMUM
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED OF THE ESTIMATED
AUGUST 31, 1997 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital(3)......... $102,832 10.22% $158,470 14.93% $168,526 15.72% $178,585 16.51% $190,148 17.39%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Leverage Capital:
Capital Level(4)....... $100,911 10.10% $156,549 14.85% $166,605 15.65% $176,664 16.44% $188,227 17.33%
Requirement(5)......... 39,954 4.00 42,180 4.00 42,582 4.00 42,984 4.00 43,447 4.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess................. $ 60,957 6.10% $114,369 10.85% $124,023 11.65% $133,680 12.44% $144,780 13.33%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Tier I Capital:
Capital Level(4)....... $100,911 18.77% $156,549 27.60% $166,605 29.10% $176,664 30.57% $188,227 32.22%
Requirement............ 21,500 4.00 22,689 4.00 22,904 4.00 23,118 4.00 23,366 4.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess................. $ 79,411 14.77% $133,860 23.60% $143,701 25.10% $153,546 26.57% $164,861 28.22%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Risk-Based Capital:
Capital Level(4)(6).... $105,881 19.70% $161,519 28.48% $171,575 29.96% $181,634 31.43% $193,197 33.07%
Requirement............ 42,999 8.00 45,377 8.00 45,807 8.00 46,237 8.00 46,731 8.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess................. $ 62,882 11.70% $116,142 20.48% $125,768 21.96% $135,397 23.43% $146,466 25.07%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- ----
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial or economic conditions following the commencement of the
Subscription Offering.
(2) Leverage capital levels are shown as a percentage of average assets. Risk-
based capital levels are calculated on the basis of a percentage of risk-
weighted assets.
(3) GAAP defined as Generally Accepted Accounting Principles.
(4) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the shares of Common Stock sold at the minimum, midpoint and
maximum of the Estimated Price Range. These levels also assume funding by
the Bank of the Stock Program equal to 4% of the Common Stock issued and
repayment of the Company's loan to the ESOP to enable the ESOP to purchase
8% of the Common Stock issued, including shares issued to the Foundation,
valued at the minimum, midpoint and maximum of the Estimated Price Range.
See "Management of the Bank--Benefit Plans" for a discussion of the Stock
Program and ESOP. With respect to the Stock Program, such amounts are
assumed to be $6.8 million, $8.0 million, $9.2 million and $10.6 million
at the minimum, midpoint, maximum and maximum, as adjusted, of the
Estimated Price Range, respectively. With respect to the ESOP loan, such
amounts are assumed to be $13.6 million, $16.0 million, $18.4 million and
$21.1 million, at the minimum, midpoint, maximum, and maximum, as
adjusted, of the Estimated Price Range respectively.
(5) The current leverage capital requirement for savings banks is 3% of total
adjusted assets for savings banks that receive the highest supervisory
rating for safety and soundness and that are not experiencing or
anticipating significant growth. The current leverage capital ratio
applicable to all other savings banks is 4% to 5%. See "Regulation and
Supervision--FDIC Regulations--Capital Requirements." The Company will not
be subject to regulatory capital requirements.
(6) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the actual risk weighting of the Bank's assets as of August 31,
1997.
26
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed, it is presently anticipated that
the net proceeds from the sale of the Common Stock will be between $152.0
million and $206.6 million (or $238.0 million if the Estimated Price Range is
increased by 15%). See "Pro Forma Data" and "The Conversion--Stock Pricing" as
to the assumptions used to arrive at such amounts. The Company will be unable
to utilize any of the net proceeds of the Offerings until the consummation of
the Conversion.
The Company will purchase all of the outstanding capital stock of the Bank
to be issued upon Conversion in exchange for 50% of the net proceeds of the
Offerings. Based on net proceeds of $152.0 million to $206.6 million, the
Company expects to utilize between $76.0 million and $103.3 million of net
proceeds to purchase the common stock of the Bank. Such portion of net
proceeds received by the Bank from the Company will be added to the Bank's
general funds which the Bank currently intends to utilize for general
corporate purposes, including investment in loans and securities. The Bank may
also use such funds for the expansion of its facilities, and to expand its
operations in its primary market area and other areas within the New York City
metropolitan area through marketing and business development, acquisitions of
other financial institutions, branch offices or other financial services
companies. To the extent that the Stock Program or Stock Option Plan, which
the Company or the Bank intend to adopt subsequent to the Conversion, are not
funded with authorized but unissued common stock of the Company, the Company
or the Bank may use net proceeds from the Conversion to fund the purchase of
stock to be awarded under such plans. See "Risk Factors--Increased Costs
Associated with Stock-Based Benefits to Management, Employment Contracts and
Change in Control Payments" and "Management of the Bank--Benefit Plans--Stock
Option Plan" and "--Stock Program."
The Company intends to use a portion of the net proceeds it retains (i.e.,
50% of the net proceeds, which based on net proceeds of $152.0 million to
$206.6 million will be between $76.0 million and $103.3 million) to make a
loan directly to the ESOP to enable the ESOP to purchase in the Conversion, or
in the open market to the extent Common Stock is not available to fill the
ESOP's subscription in the Conversion, 8% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation.
Based upon the sale of 15,725,000 shares or 21,275,000 shares at the minimum
and maximum of the Estimated Price Range, and the issuance of shares to the
Foundation, the amount of the loan to the ESOP would be $13.6 million or $18.4
million, respectively (or $21.1 million if the Estimated Price Range is
increased by 15%), with a term of 20 years at the prevailing prime rate of
interest, which currently is 8.50%. The Company and the Bank may alternatively
choose to fund the ESOP's stock purchases through a loan by a third party
financial institution. See "Management of the Bank--Benefit Plans--ESOP." The
remaining net proceeds retained by the Company will initially be invested in
mortgage-backed and mortgage-related securities and investment-grade debt and
equity securities.
The net proceeds retained by the Company may also be used to support future
geographic and operational expansion through increased marketing and business
development efforts, branch acquisitions, the establishment of branch offices
and the acquisition of savings associations and commercial banks or their
assets, including those located within the Bank's market area or
diversification into other banking related businesses. The Company and the
Bank have no current arrangements, understandings or agreements regarding any
such transactions with the exception of the Bank's plans to open a public
accommodation office in 1998 and to open three new branch offices on Staten
Island. The Company, upon consummation of the Conversion, will be a unitary
savings and loan holding company, which under existing laws would not be
restricted as to the types of business activities in which it may engage. See
"Regulation and Supervision--Holding Company Regulation" for a description of
certain regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless approved by the Superintendent or NYBB,
the Company, pursuant to NYBB regulations, may not repurchase any Common Stock
in the first year after conversion and, during the next two following years,
may only repurchase up to 5% of its outstanding capital stock during each
twelve-month period. Further, the Company may not repurchase any of its Common
Stock if the repurchases would cause the Bank to become "undercapitalized"
within the meaning of the FDIC
27
<PAGE>
prompt corrective action regulation. See "Regulation and Supervision--Prompt
Corrective Regulatory Action." In addition, the FDIC prohibits an insured
mutual state savings bank which has converted to the stock form of ownership
from repurchasing its capital stock within one year following the date of its
conversion to stock form, except that stock repurchases of no greater than 5%
of a bank's outstanding capital stock may be repurchased during this one-year
period where compelling and valid business reasons are established to the
satisfaction of the FDIC.
Based upon facts and circumstances following the Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
not be limited to: (i) market and economic factors such as the price at which
the stock is trading in the market, the volume of trading, the attractiveness
of other investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase the book value and/or
earnings per share of the remaining outstanding shares, and the opportunity to
improve the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the
Company and its shareholders. In the event the Company determines to
repurchase stock, such repurchases may be made at market prices which may be
in excess of the Purchase Price in the Conversion and in excess of the per
share book value. To the extent that the Company repurchases stock at market
prices in excess of the per share book value, such repurchases may have a
dilutive effect upon the interests of existing stockholders. Any stock
repurchases will be subject to the determination of the Board of Directors
that both the Company and the Bank will be capitalized in excess of all
applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level
of non-performing and other risk assets, the Company's and the Bank's current
and projected results of operations and asset/liability structure, the
economic environment, tax and other considerations. See "The Conversion--
Certain Restrictions on Purchase or Transfer of Shares After Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. Following the Conversion, the Board of Directors
intends to consider a policy of paying cash dividends on the Common Stock.
However, no decision has been made as to the amount or timing of such
dividends, if any.
The Bank will not be permitted to pay dividends on its common stock or
repurchase shares of its common stock if its stockholders' equity would be
reduced below the amount required for the liquidation account. Assuming the
Conversion was consummated on August 31, 1997, the liquidation account would
have totalled $102.8 million. See "The Conversion--Liquidation Rights" for a
discussion of the liquidation account to be established in connection with the
Conversion. Under New York State Banking Law, dividends may be declared and
paid only out of the net profits of the Bank. The approval of the
Superintendent is required if the total of all dividends declared in any
calendar year will exceed net profits for that year plus the retained net
profits of the preceding two years, less any required transfer to surplus or a
fund for the retirement of any preferred stock. In addition, no dividends may
be declared, credited or paid if the effect thereof would cause the Bank's
capital to be reduced below the amount required by the Superintendent or the
FDIC. See "Regulation and Supervision." As of August 31, 1997, the Bank had
$61.0 million available for the payment of dividends without prior approval of
the Superintendent. Subsequent to the Conversion, the availability of the
Bank's funds for the payment of dividends may also be limited by the
liquidation account. See "The Conversion--Liquidation Rights." Dividends or
any repurchase by the Bank of its stock in excess of the Bank's current and
accumulated earnings could result in the realization by the Bank of taxable
income. See "Federal and State Taxation--Federal Taxation."
Unlike the Bank, the Company is not subject to the restrictions imposed by
the New York State Banking Law on the payment of dividends to its
stockholders, although the source of such dividends will be, in part,
dependent upon dividends from the Bank in addition to the net proceeds
retained by the Company and earnings thereon. The Company is subject, however,
to the requirements of Delaware law, which generally limit dividends to an
amount equal to the excess of the net assets of the Company (the amount by
which total assets exceed total liabilities) over its statutory capital, or if
there is no such excess, to its net profits for the current and/or immediately
preceding fiscal year.
28
<PAGE>
MARKET FOR THE COMMON STOCK
The Company was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. The Company has
received conditional approval to have its Common Stock quoted on the Nasdaq
National Market under the symbol "RCBK" subject to the completion of the
Conversion and compliance with certain conditions, including the presence of
at least three registered and active market makers. The Company will seek to
encourage and assist at least three market makers to make a market in its
Common Stock. Making a market involves maintaining bid and ask quotations and
being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. Sandler O'Neill has advised the Company that it intends to make
a market in the Common Stock following the completion of the Conversion, but
it is under no obligation to do so. There can be no assurance that the Common
Stock will be able to meet the applicable listing criteria in order to
maintain its quotation on the Nasdaq National Market or that an active and
liquid trading market will develop or, if developed, will be maintained. A
public market having the desirable characteristics of depth, liquidity and
orderliness, however, depends upon the presence in the marketplace of both
willing buyers and sellers of Common Stock at any given time, which is not
within the control of the Company. No assurance can be given that an investor
will be able to resell the Common Stock at or above the Purchase Price of the
Common Stock after the Conversion. See "Risk Factors--Absence of Market for
Common Stock."
29
<PAGE>
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, including the issuance of shares to the
Foundation, based upon the sale of the number of shares indicated in the table
and the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
------------------------------------------------------
24,466,250
15,725,000 18,500,000 21,275,000 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
BANK ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
---------- ------------ ------------ ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total deposits(2)....... $882,886 $882,886 $882,886 $882,886 $882,886
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $.01
par value, 5,000,000
shares authorized;
none to be issued..... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, 75,000,000
shares authorized;
shares to be issued as
reflected............. -- 170 200 230 264
Additional paid-in
capital(3)............ -- 164,443 193,940 223,436 257,357
Net worth(4)........... 102,348 102,348 102,348 102,348 102,348
Less:
Expense of
contributions to
Foundation............ -- 12,580 14,800 17,020 19,573
Plus:
Tax effect of
contribution to
Foundation(5)......... -- 5,661 6,660 7,659 8,808
Net unrealized gain on
securities available-
for-sale, net of
taxes................. 484 484 484 484 484
Less:
Common Stock acquired
by the ESOP(6)........ -- 13,586 15,984 18,382 21,139
Common Stock acquired
by the Stock
Program(7)............ -- 6,793 7,992 9,191 10,569
-------- -------- -------- -------- --------
Total stockholders'
equity................. $102,832 $240,147 $264,856 $289,564 $317,980
======== ======== ======== ======== ========
</TABLE>
- --------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) 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 Stock Option Plan intended to be
adopted by the Company and presented for approval of stockholders at a
meeting of stockholders following the Conversion. The Stock Option Plan
would provide the grant of Stock Options to purchase an amount of Common
Stock equal to 10% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation. See "Management of the Bank--
Benefit Plans--Stock Option Plan." Additional paid-in capital has been
adjusted to reflect the issuance of additional shares of Common Stock to
the Foundation at the Purchase Price.
(4) The net worth of the Bank will be substantially restricted after the
Conversion. See "The Conversion--Liquidation Rights."
(5) Represents the tax effect of the contribution of Common Stock to the
Foundation based on a 45% tax rate. The realization of the deferred tax
benefit is limited annually to 10% of the Company's annual taxable income,
subject to the ability of the Company to carry forward any unused portion
of the deduction for five years following the year in which the
contribution is made.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP
and the funds used to acquire the ESOP shares will be borrowed from the
Company. The Common Stock acquired by the ESOP is reflected as a reduction
of stockholders' equity. See "Management of the Bank--Benefit Plans--ESOP"
and "--Benefit Plans--Stock Program."
(7) Assumes that, subsequent to the Conversion, an amount equal to 4% of the
shares of Common Stock sold in the Conversion, including shares issued to
the Foundation, is purchased by the Stock Program through open market
purchases. The Common Stock purchased by the Stock Program is reflected as
a reduction of stockholders' equity. See "Risk Factors--Possible Dilutive
Effect of Stock Program and Stock Option Plan," Footnote 2 to the tables
under "Pro Forma Data" and "Management of the Bank--Benefit Plans--Stock
Program."
30
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $152.0 million and $206.6 million based upon
the following assumptions: (i) $3.0 million will be sold to executive
officers, Trustees, Directors and employees of the Bank and Company, the ESOP
will purchase 8% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation, and the remaining shares will be
sold in the Subscription Offering; (ii) Sandler O'Neill will receive a fee
equal to 1.75% of the aggregate Purchase Price of the shares sold in the
Subscription Offering, except that no fee will be paid with respect to shares
purchased by the ESOP, officers, employees, Trustees and Directors of the Bank
and Company and members of their immediate families; (iii) the Company will
issue to the Foundation an amount of Common Stock equal to 8% of the Common
Stock sold in the Conversion from authorized but unissued shares; and (iv)
Conversion expenses, excluding the marketing fees paid to Sandler O'Neill,
will be approximately $2.8 million. Actual Conversion expenses may vary from
those estimated.
Pro forma consolidated net income of the Company for the two months ended
August 31, 1997 and for the year ended June 30, 1997 has been calculated as if
the Common Stock had been sold at the beginning of the respective periods and
the net proceeds had been invested at 5.45% (the one year U.S. Treasury bill
rate as of June 30, 1997). The tables do not reflect the effect of withdrawals
from deposit accounts for the purchase of Common Stock. The pro forma after-
tax yield for the Company and the Bank is assumed to be 3.0% for the two
months ended August 31, 1997 (based on an assumed tax rate of 45.0%) and 3.0%
for the year ended June 30, 1997 (based on an assumed tax rate of 45.0%).
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock, as adjusted to give effect to the purchase of shares by the ESOP and
the effect of the issuance of shares to the Foundation. No effect has been
given in the pro forma stockholders' equity calculations for the assumed
earnings on the net proceeds. As discussed under "Use of Proceeds," the
Company will retain 50% of the net Conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that
would be available for distribution to stockholders in the event of
liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the two months ended August 31, 1997 and at or
for the year ended June 30, 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 Stock Program, which is expected to be adopted by the Company
following the Conversion and presented to stockholders for approval at a
meeting of stockholders. See Footnote 2 to the tables and "Management of the
Bank--Benefit Plans--Stock Program." 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 and presented to stockholders for approval at a meeting of
stockholders, nor does book value as presented give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders or, in the event of
liquidation of the Bank, to the tax effect of the bad debt reserve and other
factors. See Footnote 3 to the tables below, "The Conversion--Liquidation
Rights" and "Management of the Bank--Benefit Plans--Stock Option Plan." THE
FOLLOWING TABLES GIVE EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES
OF THE COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY WITH THE
COMPLETION OF THE CONVERSION. THE VALUATION RANGE, AS SET FORTH HEREIN AND IN
THE TABLES BELOW, TAKES INTO ACCOUNT THE DILUTIVE IMPACT OF THE ISSUANCE OF
SHARES TO THE FOUNDATION.
31
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE TWO MONTHS ENDED AUGUST 31, 1997
-------------------------------------------------------------------------
15,725,000 18,500,000 21,275,000 24,466,250
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE
(MINIMUM (MIDPOINT (MAXIMUM OF (15% ABOVE MAXIMUM
OF ESTIMATED PRICE OF ESTIMATED PRICE ESTIMATED PRICE OF ESTIMATED PRICE
RANGE) RANGE) RANGE) RANGE)(7)
------------------ ------------------ ---------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.......... $157,250 $185,000 $212,750 $244,663
Plus: Shares acquired by
Richmond County
Savings Foundation
(equal to 8% of
stock sold in
Conversion)....... 12,580 14,800 17,020 19,573
-------- -------- -------- --------
Pro forma market
capitalization......... $169,830 $199,800 $229,770 $264,236
======== ======== ======== ========
Gross proceeds.......... $157,250 $185,000 $212,750 $244,663
Less:Offering expenses
and commissions........ (5,217) (5,660) (6,104) (6,614)
-------- -------- -------- --------
Estimated net proceeds.. 152,033 179,340 206,646 238,049
Less: Common Stock
purchased by
ESOP.............. (13,586) (15,984) (18,382) (21,139)
Common Stock
purchased by Stock
Program........... (6,793) (7,992) (9,191) (10,569)
-------- -------- -------- --------
Estimated net proceeds,
as adjusted........... $131,654 $155,364 $179,073 $206,341
======== ======== ======== ========
Net income(1):
Historical............. $ 1,793 $ 1,793 $ 1,793 $ 1,793
Pro forma income on net
proceeds, as
adjusted.............. 653 771 890 1,026
Pro forma ESOP
adjustment(2)......... (62) (73) (84) (97)
Pro forma Stock Program
adjustment(3)......... (124) (147) (169) (194)
-------- -------- -------- --------
Pro forma net
income............... $ 2,260 $ 2,344 $ 2,430 $ 2,528
======== ======== ======== ========
Per share net income(1):
Historical............. $ 0.12 $ 0.10 $ 0.09 $ 0.07
Pro forma income on net
proceeds, as
adjusted.............. 0.04 0.04 0.04 0.04
Pro forma ESOP
adjustment(2)......... (0.01) (0.01) (0.01) (0.01)
Pro forma Stock Program
adjustment(3)......... (0.01) (0.01) (0.01) (0.01)
-------- -------- -------- --------
Pro forma net income
per share............ $ 0.14 $ 0.13 $ 0.11 $ 0.10
======== ======== ======== ========
Stockholders' equity:
Historical............. $102,832 $102,832 $102,832 $102,832
Estimated net
proceeds.............. 152,033 179,340 206,646 238,048
Plus:Tax benefit of
Foundation............ 5,661 6,660 7,659 8,808
Less: Common Stock
acquired by
ESOP(2)......... (13,586) (15,984) (18,382) (21,139)
Common Stock acquired
by Stock
Program(3).......... (6,793) (7,992) (9,191) (10,569)
-------- -------- -------- --------
Pro forma stockholders'
equity(3)(4)(5)....... $240,147 $264,856 $289,564 $317,980
======== ======== ======== ========
Stockholders' equity per
share(6):
Historical............. $ 6.06 $ 5.15 $ 4.48 $ 3.89
Estimated net
proceeds.............. 8.95 8.98 8.99 9.01
Plus: Tax benefit of
Foundation....... 0.33 0.33 0.33 0.33
Less: Common Stock
acquired by
ESOP(2)......... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired
by Stock
Program(3)....... (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders'
equity per
share(3)(4)(5)........ $ 14.14 $ 13.26 $ 12.60 $ 12.03
======== ======== ======== ========
Offering price as a
percentage of pro forma
stockholders' equity
per share.............. 70.72% 75.44% 79.35% 83.10%
Offering price to pro
forma net earnings per
share.................. 11.54x 13.08x 14.51x 16.04x
</TABLE>
(footnotes on next page)
32
<PAGE>
- --------
(1) Does not give effect to the non-recurring expense that will be recognized
in fiscal 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 $6.9 million, $8.1
million, $9.4 million and $10.8 million at the minimum, midpoint, maximum
and maximum as adjusted, of the Estimated Price Range, respectively.
Assuming the contribution to the Foundation was expensed during the two
months ended August 31, 1997, pro forma net income/(loss) per share would
be $(.30), $(.32), $(.33) and $(.34), at the minimum, midpoint, maximum
and maximum as adjusted, respectively. Per share net income data is based
on 15,635,682, 18,394,920, 21,154,158 and 24,327,282 shares outstanding
which represents shares sold in the Conversion, shares contributed to the
Foundation and shares to be allocated or distributed under the ESOP and
Stock Program for the period presented. Does give effect to capital
expenditures relating to the opening of a public accommodation office and
branch renovations.
(2) It is assumed that 8% of the shares of Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
Company. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon twenty equal annual installments of principal, with an assumed
interest rate at 8.5%. The pro forma net income assumes: (i) that the
Bank's contribution to the ESOP is equivalent to the debt service
requirement for the two months ended August 31, 1997, and was made at the
end of the period; (ii) that 11,322, 13,320, 15,318 and 17,616 shares at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, were committed to be released during the two months ended
August 31, 1997 at an average fair value of $10.00 per share in accordance
with Statement of Position ("SOP") 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the
net income per share calculations. See "Management of the Bank--Benefit
Plans--ESOP."
(3) Gives effect to the Stock Program expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. If the Stock Program is approved by stockholders, the Stock
Program 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 679,320, 799,200, 919,080 and
1,056,942 shares of Common Stock at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively, either
through open market purchases, if permissible, or from authorized but
unissued shares of Common Stock or treasury stock of the Company, if any.
In calculating the pro forma effect of the Stock Program, it is assumed
that the shares were acquired by the Stock Program at the beginning of the
period presented in open market purchases at the Purchase Price and that
20% of the amount contributed was an amortized expense during such period.
The issuance of authorized but unissued shares of the Company's Common
Stock to the Stock Program instead of open market purchases would dilute
the voting interests of existing stockholders by approximately 3.8% and
pro forma net income per share would be $0.14, $0.12, $0.11 and $0.10 at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be
$13.98, $13.13, $12.50 and $11.96 at the minimum, midpoint, maximum and
15% above the maximum of the range, respectively. There can be no
assurance that the actual purchase price of the shares granted under the
Stock Program will be equal to the Purchase Price. See "Management of the
Bank--Benefit Plans--Stock Program."
(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 stockholders. If the Stock Option
Plan is approved by stockholders, an amount equal to 10% of the Common
Stock issued in connection with the Conversion, including shares issued to
the Foundation, or 1,698,300, 1,998,000, 2,297,700 and 2,642,355 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 Stock Options under
the Stock Option Plan will result in the dilution of existing
stockholders' interests. Assuming all options were exercised at the end of
the period at an exercise price of $10.00 per share, the pro forma net
income per share would be $0.14, $0.12, $0.11 and $0.10, respectively, and
the pro forma stockholders' equity per share would be $13.76, $12.96,
$12.37 and $11.85, respectively. See "Management of the Bank--Benefit
Plans--Stock Option Plan."
(5) The net worth of the Bank will continue to be substantially restricted
after the Conversion. See "Dividend Policy," "The Conversion--Liquidation
Rights" and "Regulation and Supervision--New York State Law."
(6) Stockholders' equity per share data is based upon 16,983,000, 19,980,000,
22,977,000 and 26,423,500 shares outstanding representing shares sold in
the Conversion, shares contributed to the Foundation and shares purchased
by the ESOP and Stock Program.
(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 or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
33
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30, 1997
-------------------------------------------------------------------------
15,725,000 18,500,000 21,275,000 24,466,250
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE
NB(MINIMUM (MIDPOINT (MAXIMUM OF (15% ABOVE MAXIMUM
OF ESTIMATED PRICE OF ESTIMATED PRICE ESTIMATED OF ESTIMATED PRICE
RANGE) RANGE) PRICE RANGE) RANGE)(7)
------------------ ------------------ ---------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.......... $157,250 $185,000 $212,750 $244,663
Plus: Shares acquired by
Richmond County
Savings Foundation
(equal to 8% of
stock sold in
Conversion)....... 12,580 14,800 17,020 19,573
-------- -------- -------- --------
Pro forma market
capitalization......... $169,830 $199,800 $229,770 $264,236
======== ======== ======== ========
Gross proceeds.......... $157,250 $185,000 $212,750 $244,663
Less: Offering expenses
and commissions... (5,217) (5,660) (6,104) (6,614)
-------- -------- -------- --------
Estimated net proceeds.. 152,033 179,340 206,646 238,049
Less: Common Stock
purchased by
ESOP.............. (13,586) (15,984) (18,382) (21,139)
Common Stock
purchased by Stock
Program............ (6,793) (7,992) (9,191) (10,569)
-------- -------- -------- --------
Estimated net proceeds,
as adjusted........... $131,654 $155,364 $179,073 $206,341
======== ======== ======== ========
Net income(1):
Historical............. $ 10,725 $ 10,725 $ 10,725 $ 10,725
Pro forma income on net
proceeds, as
adjusted.............. 3,916 4,627 5,337 6,155
Pro forma ESOP
adjustment(2)......... (373) (439) (505) (581)
Pro forma Stock Program
adjustment(3)......... (747) (879) (1,011) (1,162)
-------- -------- -------- --------
Pro forma net
income............... $ 13,521 $ 14,034 $ 14,546 $ 15,137
======== ======== ======== ========
Per share net income(1):
Historical............. $ 0.68 $ 0.58 $ 0.51 $ 0.44
Pro forma income on net
proceeds, as
adjusted.............. 0.25 0.25 0.25 0.25
Pro forma ESOP
adjustment(2)......... (0.02) (0.02) (0.02) (0.02)
Pro forma Stock Program
adjustment(3)......... (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- --------
Pro forma net income
per share............ $ 0.86 $ 0.76 $ 0.69 $ 0.62
======== ======== ======== ========
Stockholders' equity:
Historical............. $100,865 $100,865 $100,865 $100,865
Estimated net
proceeds.............. 152,033 179,340 206,646 238,049
Plus: Tax benefit of
Foundation............ 5,661 6,660 7,659 8,808
Less: Common Stock
acquired by
ESOP(2).......... (13,586) (15,984) (18,382) (21,139)
Common Stock
acquired by Stock
Program(3)....... (6,793) (7,992) (9,191) (10,569)
-------- -------- -------- --------
Pro forma
stockholders'
equity(3)(4)(5)...... $238,180 $262,889 $287,597 $316,014
======== ======== ======== ========
Stockholders' equity per
share(6):
Historical............. $ 5.94 $ 5.05 $ 4.39 $ 3.82
Estimated net
proceeds.............. 8.95 8.98 8.99 9.01
Plus: Tax benefit of
Foundation............ 0.33 0.33 0.33 0.33
Less: Common Stock
acquired by
ESOP(2).......... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired
by Stock
Program(3)....... (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma
stockholders' equity
per share(3)(4)(5)... $ 14.02 $ 13.16 $ 12.51 $ 11.96
======== ======== ======== ========
Offering price as a
percentage of pro forma
stockholders' equity
per share.............. 71.30% 76.00% 79.89% 83.62%
Offering price to pro
forma net earnings per
share.................. 11.61x 13.16x 14.60x 16.13x
</TABLE>
(footnotes on next page)
34
<PAGE>
- --------
(1) Does not give effect to the non-recurring expense that will be recognized
in fiscal 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 $6.9 million, $8.1
million, $9.4 million and $10.8 million at the minimum, midpoint, maximum
and maximum as adjusted, of the Estimated Price Range, respectively.
Assuming the contribution to the Foundation was expensed during the year
ended June 30, 1997, pro forma net income per share would be $0.42, $0.32,
$0.24 and $0.18, at the minimum, midpoint, maximum and maximum as
adjusted, respectively. Per share net income data is based on 15,692,292,
18,461,520, 21,230,748 and 24,415,360 shares outstanding which represents
shares sold in the Conversion, shares contributed to the Foundation and
shares to be allocated or distributed under the ESOP and Stock Program for
the period presented. Does give effect to capital expenditures relating to
the opening of a public accommodation office and branch renovations.
(2) It is assumed that 8% of the shares of Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
Company. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon twenty equal annual installments of principal, with an assumed
interest rate at 8.5%. The pro forma net income assumes: (i) that the
Bank's contribution to the ESOP is equivalent to the debt service
requirement for the year ended June 30, 1997, and was made at the end of
the period; (ii) that 67,932, 79,920, 91,908 and 105,694 shares at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, were committed to be released during the year ended June 30,
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--Benefit Plans--ESOP."
(3) Gives effect to the Stock Program expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. If the Stock Program is approved by stockholders, the Stock
Program 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 679,320, 799,200, 919,080 and
1,056,942 shares of Common Stock at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively, either
through open market purchases, if permissible, or from authorized but
unissued shares of Common Stock or treasury stock of the Company, if any.
In calculating the pro forma effect of the Stock Program, it is assumed
that the shares were acquired by the Stock Program at the beginning of the
period presented in open market purchases at the Purchase Price and that
20% of the amount contributed was an amortized expense during such period.
The issuance of authorized but unissued shares of the Company's Common
Stock to the Stock Program instead of open market purchases would dilute
the voting interests of existing stockholders by approximately 3.8% and
pro forma net income per share would be $0.84, $0.74, $0.67 and $0.61 at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be
$13.87, $13.04, $12.42 and $11.88 at the minimum, midpoint, maximum and
15% above the maximum of the range, respectively. There can be no
assurance that the actual purchase price of the shares granted under the
Stock Program will be equal to the Purchase Price. See "Management of the
Bank--Benefit Plans--Stock Program."
(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 stockholders. If the Stock Option
Plan is approved by stockholders, an amount equal to 10% of the Common
Stock issued in connection with the Conversion, including shares issued to
the Foundation, or 1,698,300, 1,998,000, 2,297,700 and 2,642,355 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 Stock Options under
the Stock Option Plan will result in the dilution of existing
stockholders' interests. Assuming all options were exercised at the end of
the period at an exercise price of $10.00 per share, the pro forma net
income per share would be $0.81, $0.72, $0.65 and $0.59, respectively, and
the pro forma stockholders' equity per share would be $13.66, $12.87,
$12.29 and $11.78, respectively. See "Management of the Bank--Benefit
Plans--Stock Option Plan."
(5) The net worth of the Bank will continue to be substantially restricted
after the Conversion. See "Dividend Policy," "The Conversion--Liquidation
Rights" and "Regulation and Supervision--New York State Law."
(6) Stockholders' equity per share data is based upon 16,983,000, 19,980,000,
22,977,000 and 26,423,500 shares outstanding representing shares sold in
the Conversion, shares contributed to the Foundation and shares purchased
by the ESOP and Stock Program.
(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 or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
35
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of the
Conversion, Keller has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $217.2 million, at the
midpoint, which is approximately $17.4 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is included.
The pro forma price to book ratio and pro forma price to earnings ratio would
be 75.44% and 13.08%, respectively, with the Foundation and 75.48% and 13.48%,
respectively, without the Foundation, assuming the midpoint of the Estimated
Price Range. Further, assuming the midpoint of the Estimated Price Range, pro
forma consolidated net earnings for the two months ended August 31, 1997 would
be $2.3 million with the Foundation and $2.5 million without the Foundation,
assuming the midpoint of the Estimated Price Range. In this regard, pro forma
stockholders' equity per share and pro forma net income per share for the two
months ended August 31, 1997 would be $13.25 and $0.12, respectively, at the
midpoint of the estimate, assuming no Foundation, and $13.26 and $0.13,
respectively, with the Foundation. There is no assurance that in the event the
Foundation was not formed that the appraisal prepared at that time would
conclude 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.................. $ 157,250 $ 184,620 $ 185,000 $ 217,200 $ 212,750 $ 249,780 $ 244,663 $ 287,247
Pro forma market
capitalization.......... 169,830 184,620 199,800 217,200 229,770 249,780 264,236 287,247
Total assets............ 1,143,379 1,162,855 1,168,088 1,191,001 1,192,796 1,219,146 1,221,212 1,251,514
Total liabilities....... 903,232 903,232 903,232 903,232 903,232 903,232 903,232 903,232
Pro forma stockholders'
equity.................. 240,147 2,368 264,856 287,769 289,564 315,914 317,980 348,282
Pro forma consolidated
net income.............. 2,260 2,368 2,344 2,473 2,430 2,578 2,528 2,698
Pro forma stockholders'
equity per share........ 14.14 14.06 13.26 13.25 12.60 12.65 12.03 12.12
Pro forma consolidated
net income per share.... 0.14 0.14 0.13 0.12 0.11 0.11 0.10 0.10
Pro Forma Pricing
Ratios:
Offering price as a
percentage of pro
forma stockholders'
equity per share...... 70.72% 71.11% 75.44% 75.48% 79.35% 79.07% 83.10% 82.48%
Offering price to pro
forma net income per
share................. 11.54x 11.96x 13.08x 13.48x 14.51x 14.87x 16.04x 16.34x
Offering price to
assets................ 14.85% 15.88% 17.10% 18.24% 19.26% 20.49% 21.64% 22.95%
Pro Forma Financial
Ratios:
Return on assets
(annualized).......... 1.19% 1.22% 1.20% 1.25% 1.22% 1.27% 1.24% 1.29%
Return on
stockholders' equity
(annualized).......... 5.65 5.47 5.31 5.16 5.04 4.90 4.77 4.65
Stockholders' equity
to assets............. 21.00 22.33 22.67 24.16 24.28 25.91 26.04 27.83
</TABLE>
36
<PAGE>
RICHMOND COUNTY 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 June 30, 1997 have been audited by Ernst
& Young LLP, independent certified public accountants, whose report thereon
appears elsewhere in this Prospectus. Such report includes an explanatory
paragraph relating to a change in accounting principles. With respect to
information for the two months ended August 31, 1997 and 1996, which is
unaudited, in the opinion of management, all adjustments necessary for a fair
presentation of such interim periods have been included and are of a normal
recurring nature. Results for the two months ended August 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 1998. These statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE
TWO MONTHS ENDED FOR THE YEAR
AUGUST 31, ENDED JUNE 30,
----------------- ------------------------
1997 1996 1997 1996 1995
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans.......................... $ 6,822 $ 6,025 $38,068 $33,807 $31,492
Debt and equity securities..... 2,125 3,312 16,754 17,873 16,673
Mortgage-backed and mortgage
related securities............ 2,563 929 9,588 5,402 5,076
Federal funds sold............. 66 214 961 1,570 879
Other.......................... 209 86 410 411 201
-------- -------- ------- ------- -------
Total interest income........ 11,785 10,566 65,781 59,063 54,321
-------- -------- ------- ------- -------
Interest expense:
Deposits....................... 5,088 4,358 27,707 26,254 22,456
Securities sold under
repurchase agreements......... 32 -- -- -- --
-------- -------- ------- ------- -------
Total interest expense....... 5,120 4,358 27,707 26,254 22,456
-------- -------- ------- ------- -------
Net interest income.............. 6,665 6,208 38,074 32,809 31,865
Provision for loan losses........ 300 266 1,080 1,600 600
-------- -------- ------- ------- -------
Net interest income after
provision for loan losses....... 6,365 5,942 36,994 31,209 31,265
-------- -------- ------- ------- -------
Non-interest income:
Fee income..................... 560 520 2,962 2,717 2,550
Net (loss) gain on sales of
securities and loans.......... -- (3) (107) 42 (12)
Other.......................... -- -- 6 68 121
-------- -------- ------- ------- -------
Total non-interest income.... 560 517 2,861 2,827 2,659
-------- -------- ------- ------- -------
Non-interest expense:
Salaries and employee
benefits...................... 1,683 1,730 9,850 9,261 8,753
Occupancy costs................ 537 514 3,063 3,029 2,660
Computer service fees.......... 497 352 2,166 1,873 1,190
Advertising.................... 146 84 817 634 487
Amortization of deposit
premium....................... 52 52 313 313 313
FDIC insurance premiums........ 25 38 624 251 1,679
Other.......................... 530 526 2,834 3,142 3,057
-------- -------- ------- ------- -------
Total non-interest expense... 3,470 3,296 19,667 18,503 18,139
Income before income taxes....... 3,455 3,163 20,188 15,533 15,785
Provision for income taxes....... 1,662 1,474 9,463 6,803 6,919
-------- -------- ------- ------- -------
Income before cumulative effect
of change in accounting
principle....................... 1,793 1,689 10,725 8,730 8,866
-------- -------- ------- ------- -------
Cumulative effect of change in
accounting principle............ -- -- -- -- (1,316)
-------- -------- ------- ------- -------
Net income....................... $ 1,793 $ 1,689 $10,725 $ 8,730 $ 7,550
======== ======== ======= ======= =======
</TABLE>
(See notes to the consolidated financial statements appearing elsewhere
herein)
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan
and securities portfolios and its cost of funds, consisting of the interest
paid on deposits. The Bank's non-interest expense principally consists of
compensation and benefits, occupancy costs, federal deposit insurance premiums
and other expenses. Results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in interest
rates, government policies and actions of regulatory authorities. See
"Regulation and Supervision" for a discussion of the regulatory changes
resulting from the recapitalization of the SAIF and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") and the impact of
such changes on the Bank. Future changes in applicable law, regulations or
government policies may materially impact the Bank.
MANAGEMENT STRATEGY
The Bank's operating strategy emphasizes customer service and convenience,
and the Bank attributes the loyalty of its customer base to its commitment to
maintaining customer satisfaction. The Bank attempts to set itself apart from
its larger competitors by providing the type of personalized service not
generally available from larger banks while offering a greater variety of
products and services than is typically available from smaller, local
depository institutions.
The Bank's historical operating strategy has concentrated on maintaining
profitability and asset quality by primarily investing in one- to four-family
mortgage loans and in U.S. Government and agency debt securities, as well as
debt and equity securities of corporate issuers. In the last few years, the
Bank began to pursue a strategy, in conjunction with its traditional thrift
lending and securities investment strategy, of focusing on small and medium-
sized retail businesses as both lending and deposit customers by emphasizing
the origination of commercial real estate, construction and commercial loans,
as well as increasing the marketing of its business checking accounts and
other business-related services. In this regard, during 1996 and 1997, the
Bank hired additional lending personnel who have commercial real estate and
commercial lending experience in the Bank's primary market area. In addition,
the Bank is increasing the merchant services it provides, such as merchant
credit card processing, letters of credit, sweep accounts and increased night
depository services. The Bank intends to continue this strategy, maintaining
its traditional focus of investing in residential mortgage loans and
soliciting deposits from individuals in its primary market area, while
strengthening the Bank's position as a provider of loans and financial
services to the local business community.
The Bank's current operating strategy consists primarily of: (i) investing
primarily in one- to four-family loans, and to a lesser extent, commercial
real estate, construction and development, commercial and other loans and in
investment-grade securities; (ii) attempting to increase its position as a
lender to businesses operating in its primary market area, as well as other
areas within the New York City metropolitan area by offering its commercial
loan and deposit products to small and medium-sized businesses; (iii)
increasing the yield and estimated average life of its securities investments
by emphasizing the purchase of government agency and privately issued
mortgage-backed and mortgage-related securities with estimated average lives
of three to five years and de-emphasizing its investment in U.S. Treasury
obligations and corporate and other debt securities; (iv) maintaining a low
cost of funds by attracting and retaining core deposits by providing enhanced
customer service; (v) attempting to attract new deposit customers by
competitively pricing certificate of deposit products and offering a greater
variety of maturities of such certificates; (vi) developing wholesale
borrowing sources such as FHLB advances, repurchase agreements and brokered
certificates of deposit as an additional means of funding asset growth; and
(vii) managing its interest rate risk by originating or purchasing adjustable
rate loans and generally selling fixed-rate loans with maturities of more than
15 years. The Bank has recently begun to place a greater level of emphasis on
the utilization of borrowed funds to fund asset growth. In this regard, at
October 31, 1997, the Bank had total borrowings of $60.4 million, as compared
to $8.4 million at August 31, 1997, all of which were in the form of
repurchase agreements. The Bank may continue to increase such emphasis which
may result in an increase in the Bank's average cost of funds. The Bank's
current strategy is to invest such borrowed funds primarily in mortgage-backed
and mortgage-related securities. This strategy is intended to incrementally
increase net interest income, although it may also have the effect of
incrementally decreasing interest rate spread.
38
<PAGE>
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Trustees'
approved guidelines. Through such management, the Bank seeks to reduce the
vulnerability of its operations to changes in interest rates. The Bank's Board
of Trustees reviews the Bank's interest rate risk position at least quarterly.
The Bank's Asset/Liability Committee is comprised of the Bank's senior
management under the direction of the Board of Trustees, with senior
management responsible for reviewing with the Board of Trustees its activities
and strategies, the effect of those strategies on the Bank's net interest
margin, the market value of the portfolio, the effect that changes in the
interest rates will have on the Bank's portfolio and the Bank's exposure
limits. In addition, the Bank has established an Interest Rate Risk Management
Committee, a subcommittee of the Asset/Liability Committee, which is charged
with developing an interest rate forecast for the Bank, establishing and
maintaining a measurement system and providing management reports, and
formulating and recommending strategies to the Asset/Liability Committee. The
Interest Rate Risk Management Committee meets at least monthly, and reports
monthly to the Asset/Liability Committee and the Board of Trustees. See "Risk
Factors--Sensitivity to Changes in Interest Rates."
In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of fixed-
rate mortgage loans having terms to maturity of not more than fifteen years,
adjustable-rate loans and consumer loans consisting primarily of home equity
loans and lines of credit; (2) selling substantially all fixed-rate mortgage
loans with terms of more than fifteen years without recourse and on a
servicing retained basis; and (3) investing in short term and, to a lesser
extent, adjustable-rate securities which may generally bear lower yields as
compared to longer term investments, but which better position the Bank for
increases in market interest rates. The Bank currently does not participate in
hedging programs, interest rate swaps or other activities involving the use of
off-balance sheet derivative financial instruments.
Over the past year, the Bank has begun to emphasize investment in mortgage-
backed and mortgage-related securities with estimated average lives of three
to five years and to de-emphasize investment in U.S. Treasury securities,
corporate and other debt securities. As a result, at August 31, 1997,
mortgage-backed and mortgage-related securities and debt securities totaled
50.4% and 44.7%, of total securities, respectively, as compared to 19.9% and
79.7%, respectively, at June 30, 1996. The estimated weighted average life of
the Bank's securities portfolio increased to 2.9 years at August 31, 1997 from
2.4 years at June 30, 1996. This strategy has been accomplished primarily by
reinvesting maturing U.S. Treasury obligations and other debt securities in
mortgage-backed and mortgage-related securities, primarily government agency
and privately issued CMOs. This strategy has, in part, resulted in the
increase in the weighted average yield of the Bank's securities portfolio. It
has also resulted in a slight increase in the estimated weighted average life
of such portfolio which could increase the Bank's exposure to interest rate
risk in a period of rising interest rates. In pursuing this strategy, the Bank
considered the relative stability of its core deposits.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An
asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within
that same time period. 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. At
August 31, 1997, the Bank's one-year gap position, the difference between the
amount of interest-earning assets maturing or repricing within one year and
interest-bearing liabilities maturing or repricing within one year, was $12.6
million, representing a one-year interest sensitivity gap as a percentage of
total assets of 1.26%. Accordingly, during a period of rising interest rates,
the Bank, having a positive gap position, would be in a better position to
invest in higher yielding assets which, consequently, may result in the yield
on its assets increasing at a pace more closely matching the increase in the
cost of its interest-bearing liabilities than if it had a negative gap. During
a period of falling interest rates, an institution with a positive gap would
tend to have its assets repricing at a faster rate than one with a negative
gap which, consequently, may tend to restrain the growth of its net interest
income or result in a decrease in interest income.
39
<PAGE>
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 (the "Gap Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. The
table sets forth an approximation of the projected repricing of assets and
liabilities at 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. For loans on residential
properties, adjustable-rate loans, and fixed-rate loans, prepayment rates were
assumed to range from 6% to 18% annually. Mortgage-backed and mortgage-related
securities were assumed to prepay at rates between 8% and 30% annually.
Savings and NOW accounts were assumed to decay at 10%, 5%, 5%, 40%, 20%, 20%
and 0%, and money market savings accounts were assumed to decay at 25%, 15%,
10%, 50%, 0%, 0% and 0%, for the periods of three months or less, three to six
months, six to 12 months, one to three years, three to five years, five to ten
years and more than ten years, respectively. These assumptions are generally
based on the FDIC's deposit decay guidelines and the Bank's historical
experience. Prepayment and deposit decay rates can have a significant impact
on the Bank's estimated gap. While the Bank believes such assumptions to be
reasonable, there can be no assurance that assumed prepayment rates and decay
rates will approximate actual future loan prepayment and deposit withdrawal
activity. See "Business of the Bank--Lending Activities," "--Securities
Investment Activities" and "--Sources of Funds."
40
<PAGE>
<TABLE>
<CAPTION>
AT AUGUST 31, 1997
-----------------------------------------------------------------------------------------
3 MORE THAN MORE THAN MORE THAN 1 MORE THAN MORE THAN
MONTHS 3 MONTHS TO 6 MONTHS TO YEAR TO 3 YEARS TO 5 YEARS TO MORE THAN
OR LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS TOTAL
-------- ----------- ----------- ----------- ---------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets(1):
Debt and equity
securities(2)......... $ 34,154 $ 18,011 $ 39,361 $ 84,888 $ 26,141 $ 7,590 $ 6,746 $216,891
Mortgage-backed and
mortgage-related
securities(2)......... 28,351 19,927 39,788 61,082 39,341 22,537 9,114 220,140
Real estate loans,
net(3)(4)(5).......... 43,387 33,319 52,968 177,494 78,276 87,729 14,973 488,146
Commercial
loans(3)(5)........... 9,282 -- -- -- -- -- -- 9,282
Consumer and student
loans(5).............. 18,557 201 406 1,668 666 1,653 -- 23,151
Other interest-earning
assets................ 5,994 -- -- -- -- -- -- 5,994
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets............... $139,725 $ 71,458 $132,523 $325,132 $144,424 $119,509 $ 30,833 $963,604
======== ======== ======== ======== ======== ======== ======== ========
Interest-bearing
liabilities:
Money market savings
accounts.............. 9,772 5,863 3,909 19,543 -- -- -- 39,087
NOW accounts........... 1,720 860 860 6,879 3,439 3,439 -- 17,197
Savings accounts....... 43,040 21,520 21,520 172,158 86,079 86,079 -- 430,396
Certificates of
deposit............... 86,599 43,652 83,328 69,646 19,425 2,763 -- 305,413
Securities sold under
repurchase
agreements............ 8,434 -- -- -- -- -- -- 8,434
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities........... 149,565 71,895 109,617 268,227 108,943 92,281 -- 800,527
-------- -------- -------- -------- -------- -------- -------- --------
Interest sensitivity
gap(6)................ $ (9,840) $ (437) $ 22,906 $ 56,906 $ 35,481 $ 27,228 $ 30,833
======== ======== ======== ======== ======== ======== ========
Cumulative interest
sensitivity gap....... $ (9,840) $(10,277) $ 12,629 $ 69,534 $105,015 $132,243 $163,076
======== ======== ======== ======== ======== ======== ========
Cumulative interest
sensitivity gap as a
percentage of total
assets................ (0.98)% (1.02)% 1.26% 6.91% 10.44% 13.14% 16.21%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning
assets................ (1.02) (1.07) 1.31 7.22 10.90 13.72 16.92
Cumulative net
interest-earning
assets as a percentage
of cumulative
interest-bearing
liabilities........... 93.42 95.36 103.81 110.60 114.83 116.52 120.37
</TABLE>
- --------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Debt and equity and mortgage-backed and mortgage-related securities are
shown excluding the market value adjustment of $194,096 before tax, from
the implementation of SFAS No. 115. Equity securities primarily consist of
callable preferred stock, the maturities of which have been assumed to be
the date on which they are initially callable.
(3) For purposes of the gap analysis, real estate loans, commercial loans, and
consumer and student loans are shown excluding adjustments for allowance
for loan losses and unearned fees of $6,474,000, $227,000 and $475,000,
respectively.
(4) Loans held for sale are included in the three months or less category.
(5) For purposes of the gap analysis, non-performing loans are not included.
(6) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
41
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
Gap Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates both on a short-
term basis and over the life of the asset. Further, in the event of changes in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their adjustable-rate loans may decrease
in the event of an interest rate increase.
Net Portfolio Value. The Bank's interest rate sensitivity is also monitored
by management through the use of a Net Portfolio Value Model which generates
estimates of the change in the Bank's net portfolio value ("NPV") over a range
of interest rate scenarios. NPV is the present value of expected cash flows
from assets, liabilities, and off-balance sheet contracts. The NPV ratio,
under any interest rate scenario, is defined as the NPV in that scenario
divided by the market value of assets in the same scenario. The model assumes
estimated loan prepayment rates, reinvestment rates and deposit decay rates
similar to the assumptions utilized for the Gap Table. The Sensitivity Measure
is the decline in the NPV ratio, in basis points, caused by a 2% increase or
decrease in rates, whichever produces a larger decline. The higher an
institution's Sensitivity Ratio, the greater its exposure to interest rate
risk is considered to be. The following NPV Table sets forth the Bank's NPV as
of August 31, 1997.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ------------------------- -----------------------
IN BASIS POINTS % NPV %
(RATE SHOCK) AMOUNT $ CHANGE CHANGE RATIO CHANGE
- --------------- -------- -------- ------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400................... $ 92,856 $(56,635) (37.89)% 10.11% (31.77)%
300................... 106,875 (42,616) (28.51) 11.36 (23.32)
200................... 121,652 (27,839) (18.62) 12.62 (14.81)
100................... 136,022 (13,469) (9.01) 13.79 (6.96)
Static................ 149,491 -- -- 14.82 --
(100)................. 158,705 9,214 6.16 15.46 4.29
(200)................. 165,992 16,501 11.04 15.91 7.36
(300)................. 173,807 24,316 16.27 16.39 10.60
(400)................. 183,289 33,798 22.61 16.98 14.59
</TABLE>
As of August 31, 1997, the Bank's NPV was $149.5 million, or 14.82% of the
market value of assets. Following a 200 basis point increase in interest
rates, the Bank's "post shock" NPV was $121.7 million, or 12.62% of the market
value of assets. The change in the NPV ratio or the Bank's Sensitivity Measure
was negative 2.20%.
As is the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in
market interest rates. In this regard, the NPV Table presented assumes that
the composition of the Bank's interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration,
maturity or repricing of specific assets and liabilities. Also, the model does
not take into account the Bank's business or strategic plans. Accordingly,
although the NPV Table provides an indication of the Bank's interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income depends on the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
42
<PAGE>
Average Balance Sheet. The following tables set forth certain information
relating to the Bank at August 31, 1997 and for the two months ended August
31, 1997 and 1996, and for the years ended June 30, 1997, 1996 and 1995. The
average yields and costs are derived by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown and reflect annualized yields and costs.
Average balances are derived from average monthly balances. The yields and
costs include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE TWO MONTHS ENDED
AUGUST 31,
----------------------------------------------------
AT AUGUST 31, 1997 1997 1996
------------------ ------------------------- -------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets(1):
Debt and equity
securities............ $ 216,891 6.37% $220,705 $2,299 6.25% $325,556 $3,324 6.13%
Mortgage-backed and
mortgage-related
securities, net....... 220,140 6.99 216,613 2,563 7.10 83,080 929 6.71
Real estate loans,
net(2)(3)............. 481,672 7.80 474,831 6,330 8.00 402,186 5,576 8.32
Commercial loans,
net(2)................ 9,055 8.08 7,706 122 9.50 5,558 92 9.93
Consumer and student
loans................. 22,676 9.79 22,754 370 9.76 22,663 357 9.45
Other interest-earning
assets................ 5,994 9.71 8,326 101 7.28 23,395 288 7.39
---------- -------- ------ -------- ------
Total interest-
earning assets...... 956,428 7.39 950,935 11,785 7.44 862,438 10,566 7.35
------ ------ ------ ------ ------
Non-interest-earning
assets................ 49,636 47,923 52,849
---------- -------- --------
Total assets......... $1,006,064 $998,858 $915,287
========== ======== ========
LIABILITIES AND NET
WORTH:
Interest-bearing
liabilities:
Money market savings
accounts.............. $ 39,087 3.43 $ 38,438 225 3.51 $ 35,269 203 3.45
Savings accounts....... 430,396 2.78 434,100 2,053 2.84 433,190 1,868 2.59
NOW accounts........... 17,197 2.35 17,471 73 2.51 14,699 65 2.65
Certificates of
deposit............... 305,413 5.40 302,239 2,737 5.43 256,533 2,222 5.20
---------- -------- ------ -------- ------
Total deposits....... 792,093 3.82 792,248 5,088 3.85 739,691 4,358 3.53
Securities sold under
repurchase
agreements............ 8,434 5.51 5,633 32 3.41 -- -- --
---------- -------- ------ -------- ------ ------
Total interest-
bearing
liabilities......... 800,527 3.83 797,881 5,120 3.85 739,691 4,358 3.53
------ ------ ------ ------ ------
Non-interest-bearing
liabilities........... 102,705 98,933 84,766
---------- -------- --------
Total liabilities.... 903,232 896,814 824,457
Total net worth........ 102,832 102,044 90,830
---------- -------- --------
Total liabilities and
net worth........... $1,006,064 $998,858 $915,287
========== ======== ========
Net interest
income/interest rate
spread(4)............. 3.56% $6,665 3.59% $6,208 3.82%
====== ====== ====== ====== ======
Net interest margin as
a percentage of
interest-earning
assets(5)............. 4.21% 4.32%
====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 119.47% 119.18% 116.59%
====== ====== ======
</TABLE>
- --------
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan fees, deferred mortgage interest,
unamortized discounts net and allowance for loan losses and includes loans
held for sale and non-performing loans.
(3) Real estate loans, net includes one- to four-family, multi-family,
commercial real estate, construction and development and home equity
loans.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
43
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets: (DOLLARS IN THOUSANDS)
Interest-earning
assets(1):
Debt and equity
securities.......... $271,721 $16,754 6.17% $304,133 $17,873 5.88% $301,204 $16,673 5.54%
Mortgage-backed and
mortgage-related
securities, net..... 142,330 9,588 6.74 84,270 5,402 6.41 89,535 5,076 5.67
Real estate loans,
net(2)(3)........... 436,887 35,165 8.05 374,055 30,902 8.26 352,417 28,843 8.18
Commercial loans,
net(2).............. 6,358 617 9.70 5,915 620 10.48 5,114 486 9.50
Consumer and student
loans............... 23,145 2,286 9.88 22,396 2,285 10.20 20,670 2,163 10.46
Other interest-
earning assets...... 17,505 1,371 7.83 33,667 1,981 5.88 17,059 1,080 6.33
-------- ------- -------- ------- -------- -------
Total interest-
earning assets.... 897,946 65,781 7.33 824,436 59,063 7.16 785,999 54,321 6.91
------- ------ ------- ------ ------- ------
Non-interest-earning
assets................ 48,554 53,852 42,826
-------- -------- --------
Total assets....... $946,500 $878,288 $828,825
======== ======== ========
Liabilities and Net
Worth:
Interest-bearing
liabilities:
Money market savings
accounts............ $ 37,552 $ 1,308 3.48% $ 28,430 $ 987 3.47% $ 25,058 $ 735 2.93%
Savings accounts..... 432,162 11,813 2.73 430,500 11,841 2.75 462,720 12,647 2.73
NOW accounts......... 15,652 370 2.36 14,602 354 2.42 13,724 365 2.66
Certificates of
deposit............. 273,546 14,206 5.19 242,197 12,826 5.30 188,212 8,656 4.60
-------- ------- -------- ------- -------- -------
Total interest-
bearing
liabilities....... 758,912 27,697 3.65 715,729 26,008 3.63 689,714 22,403 3.25
------- ------ ------- ------ ------- ------
Non-interest-bearing
liabilities........... 92,254 77,372 62,109
-------- -------- --------
Total liabilities.. 851,166 793,101 751,823
Total net worth........ 95,334 85,187 77,002
-------- -------- --------
Total liabilities
and net worth..... $946,500 $878,288 $828,825
======== ======== ========
Net interest
income/interest rate
spread(4)............. $38,084 3.68% $33,055 3.53% $31,918 3.66%
======= ====== ======= ====== ======= ======
Net interest margin as
a percentage of
interest-earning
assets(5)............ 4.24% 4.01% 4.06%
====== ====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 118.32% 115.19% 113.96%
====== ====== ======
</TABLE>
- --------
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan fees, deferred mortgage interest,
unamortized discounts net and allowance for loan losses and includes loans
held for sale and non-performing loans.
(3) Real estate loans, net includes one- to four-family, multi-family,
commercial real estate, construction and development and home equity loans.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
44
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated proportionately to the changes due to volume and the
changes due to rate.
<TABLE>
<CAPTION>
TWO MONTHS ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1997 JUNE 30, 1997 JUNE 30, 1996
COMPARED TO COMPARED TO COMPARED TO
TWO MONTHS ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1996 JUNE 30, 1996 JUNE 30, 1995
----------------------- ------------------------ ----------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
-------------- --------------- --------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------- ----- ------- ------- ------ ------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets(1):
Debt and equity
securities............ $(1,089) $ 64 $(1,025) $(1,971) $ 852 $(1,119) $ 164 $1,036 $1,200
Mortgage-backed and
mortgage-related
securities, net....... 1,581 53 1,634 3,895 291 4,186 (311) 637 326
Real estate loans,
net................... 998 (244) 754 5,068 (805) 4,263 1,776 283 2,059
Commercial loans....... 34 (4) 30 43 (46) (3) 81 53 134
Consumer and student
loans................. 1 12 13 74 (73) 1 177 (55) 122
Other interest-earning
assets................ (182) (5) (187) (1,137) 527 (610) 983 (82) 901
------- ----- ------- ------- ------ ------- ----- ------ ------
Total interest-earning
assets.............. 1,343 (124) 1,219 5,972 746 6,718 2,870 1,872 4,742
------- ----- ------- ------- ------ ------- ----- ------ ------
Interest-bearing
liabilities:
Money market savings
accounts.............. 18 4 22 318 3 321 107 145 252
Savings accounts....... 4 181 185 50 (78) (28) (897) 91 (806)
NOW accounts........... 11 (3) 8 25 (9) 16 23 (34) (11)
Certificates of
deposit............... 409 106 515 1,648 (268) 1,380 2,725 1,445 4,170
Securities sold under
repurchase
agreements............ 32 -- 32 -- -- -- -- -- --
------- ----- ------- ------- ------ ------- ----- ------ ------
Total interest-bearing
liabilities......... 474 288 762 2,041 (352) 1,689 1,958 1,647 3,605
------- ----- ------- ------- ------ ------- ----- ------ ------
Net change in net
interest income........ $ 869 $(412) $ 457 $ 3,931 $1,098 $ 5,029 $ 912 $ 225 $1,137
======= ===== ======= ======= ====== ======= ===== ====== ======
</TABLE>
- --------
(1) Includes assets available-for-sale.
45
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT AUGUST 31, 1997 AND JUNE 30, 1997
Total assets increased by $12.7 million, or 1.3%, from $993.3 million at
June 30, 1997 to $1.01 billion at August 31, 1997. The growth in assets is
primarily attributable to a $17.1 million, or 3.5%, increase in loans
receivable, net, partially offset by a $4.0 million decrease in federal funds
sold. The increase in loans receivable, net, from $496.3 million at June 30,
1997 to $513.4 million at August 31, 1997, was primarily due to originations
of one- to four-family loans. The increase in total assets was funded
primarily through borrowings in the form of short-term repurchase agreements,
which increased to $8.4 million at August 31, 1997 as compared to no
borrowings at June 30, 1997, and, to a lesser degree, increases in accrued and
other liabilities and escrow accounts.
During the two month period ended August 31, 1997, the Bank designated all
purchases of investment securities, mortgage-backed and mortgage-related
securities as available for sale. As a result, the Bank's portfolio of
securities held to maturity decreased $31.9 million, or 8.2%, to $358.5
million at August 31, 1997 from $390.3 million at June 30, 1997, reflecting
the impact of maturities, redemptions, and principal collected. In addition,
the Bank's portfolio of securities available for sale increased $31.5 million,
or 66.8%, from $47.1 million at June 30, 1997 to $78.6 million at August 31,
1997. The percentage of securities designated as available-for-sale, as a
percentage of the total securities portfolio, increased from 10.8% at June 30,
1997 to 18.0% at August 31, 1997. Management expects the proportion of
securities available-for-sale as a percentage of total securities to continue
to increase in future periods.
During 1996, the Bank began to restructure its securities portfolio in an
attempt to increase the yield and the expected average maturity of such
portfolio while continuing to monitor its interest rate risk position. The
Bank began to reinvest funds from its maturing U.S. Treasury obligations and
corporate debt into private and government agency mortgage-backed and
mortgage-related securities with estimated average lives of three to five
years. This pattern continued during the two month period ended August 31,
1997, as debt and equity securities decreased by $8.0 million, or 3.6%, from
$224.9 million at June 30, 1997 to $216.9 million at August 31, 1997, while
mortgage-backed and mortgage-related securities increased by $7.6 million, or
3.6%, from $212.5 million at June 30, 1997 to $220.1 million at August 31,
1997. Substantially all of the increase in mortgage-backed and mortgage-
related securities was due to the purchase of CMOs.
Total deposits at August 31, 1997 were relatively unchanged, aggregating
$882.9 million, compared to $884.5 million at June 30, 1997. An increase of
$7.3 million, or 2.5%, in certificates of deposit from $298.1 million at June
30, 1997 to $305.4 million at August 31, 1997, was offset by a $9.0 million
decrease in the Bank's core deposits, which totalled $577.5 million at August
31, 1997, as compared with $586.5 million at June 30, 1997. The increase in
certificates of deposit was primarily attributable to competitive pricing and
increased marketing of such deposit products.
Net worth increased by $1.9 million, or 1.9%, from $100.9 million at June
30, 1997 to $102.8 million at August 31, 1997. The Bank's ratio of net worth
to total assets remained constant at 10.2%.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND JUNE 30, 1996
Total assets increased by $78.9 million, or 8.6%, from $914.5 million at
June 30, 1996 to $993.4 million at June 30, 1997. The growth in assets is
primarily attributable to a $77.0 million, or 18.4%, increase in loans
receivable, net, and a $26.4 million, or 6.4%, increase in the securities
portfolio. The increase in loans receivable, net, from $419.3 million at June
30, 1996 to $496.3 million at June 30, 1997, was primarily due to increased
originations of one- to four-family loans. Originations of one- to four-family
loans increased from $53.9 million in fiscal 1996 to $100.5 million in fiscal
1997 due to the introduction of the Bank's use of mortgage brokers, increased
marketing of its loan products and the expansion of its loan products. The
increase in loans was funded primarily through deposit inflows, primarily in
certificate of deposit accounts which increased by $44.1 million, or 17.4%,
and a $14.8 million, or 19.0%, increase in non-interest-bearing checking
accounts.
In connection with the restructuring of its securities portfolio, the Bank
began to reinvest funds from its maturing U.S. Treasury obligations and
corporate debt securities into private and government agency mortgage-backed
and mortgage-related securities with estimated average lives of three to five
years. As a result, at June 30,
46
<PAGE>
1997, debt and equity securities totaled $224.9 million, a decrease of $104.5
million, or 31.7%, compared to $329.4 million at June 30, 1996, while
mortgage-backed and mortgage-related securities increased by $130.8 million,
or 160.2%, from $81.7 million at June 30, 1996 to $212.5 million at June 30,
1997. Substantially all of the increase in mortgage-backed and mortgage-
related securities was due to the purchase of CMOs.
Total deposits at June 30, 1997 were $884.5 million, an increase of $66.6
million, or 8.1%, compared to $817.9 million at June 30, 1996. The increase
was primarily due to an increase of $44.1 million, or 17.4%, in certificates
of deposit from $253.9 million at June 30, 1996 to $298.1 million at June 30,
1997. The increase in certificates of deposit was primarily attributable to
competitive pricing and increased marketing of such deposit products. The
growth in deposits was also attributable to an increase in non-interest
bearing checking accounts and money market accounts which increased by $18.7
million, or 16.7%, due to the Bank's increased marketing efforts on business
deposit accounts. The Bank's core deposit accounts, which totalled $564.0
million at June 30, 1996, increased by $22.5 million during fiscal 1997.
Net worth increased by $11.0 million, or 12.2%, from $89.9 million at June
30, 1996 to $100.9 million at June 30, 1997, resulting in the Bank's ratio of
net worth to total assets increasing from 9.8% at June 30, 1996 to 10.2% at
June 30, 1997.
COMPARISON OF OPERATING RESULTS FOR THE TWO MONTHS ENDED AUGUST 31, 1997 AND
AUGUST 31, 1996
General. Net income for the two month period ended August 31, 1997, as
compared to the two month period ended August 31, 1996, increased by $104,000,
or 6.2%, from $1.7 million to $1.8 million, respectively. The increase was
primarily due to an increase in net interest income, reflecting increases in
both the average balance of interest-earning assets and improvements in net
interest margin, offset by increases in non-interest expenses, including
computer service fees and advertising.
Interest Income. The Bank reported interest income of $11.8 million for the
two month period ended August 31, 1997, representing an increase of $1.2
million as compared to the same period in 1996. The increase in interest
income was primarily attributable to an overall increase of $88.5 million in
the average balance of interest-earning assets and a 9 basis point increase in
the average yield on interest-earning assets. The increase in the average
balance of interest-earning assets was mainly attributable to a $72.6 million
increase in the average balance of real estate loans, principally in the one-
to four-family loan category. The increase in the average yield on interest-
earning assets, which increased from 7.35% to 7.44%, was primarily due to the
reallocation of interest-earning assets from lower-yielding U.S. Government
securities to higher-yielding mortgage-backed and mortgage-related securities.
This increase in the average yield was partially offset by a 32 basis point
decline in the average yield on real estate loans, net due primarily to the
prepayments of higher yielding loans. Interest income on mortgage-backed and
mortgage-related securities increased $1.6 million, or 175.9%, from $929,000
for the two month period ended August 31, 1996, to $2.6 million for the two
months ended August 31, 1997. This increase was primarily due to an increase
in the average balance of mortgage-backed and mortgage-related securities of
$133.5 million, resulting from the restructuring of the securities portfolio
and the investment of excess funds not utilized for loan demand in mortgage-
backed and mortgage-related securities. The average yield on the mortgage-
backed and mortgage-related securities increased by 39 basis points due
primarily to the higher rate environment for new purchases and the repricing
of adjustable-rate securities purchased in prior periods. Interest income on
debt and equity securities decreased $1.0 million, or 30.8%, due to
management's restructuring of its securities portfolio resulting in a $104.9
million decrease in the average balance of such securities offset in part by
the increased yield on such securities.
Interest income on real estate loans increased by $754,000, from $5.6
million for the two month period ended August 31, 1996 to $6.3 million for the
two month period ended August 31, 1997. The increase in interest income on
real estate loans was a result of growth in average balance of one- to four-
family loans outstanding partially offset by a 32 basis point decrease in the
average yield on loans. The increase in the average balance of loans was
primarily due to an increase in one- to four-family loans, resulting primarily
from the Bank's continued emphasis on such loans.
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Interest Expense. Interest expense increased $762,000, or 17.5%, from $4.4
million for the two month period ended August 31, 1996, to $5.1 million for
the two month period ended August 31, 1997. The increase reflects a $58.2
million increase in the average balance of interest-bearing liabilities,
primarily attributable to an increase in the average balance of certificates
of deposits and money market savings accounts resulting from the Bank's
strategy of attracting more certificates of deposits through additional
certificate of deposit products, competitive pricing of such products, and
related marketing of commercial deposit accounts. As a result, the average
cost of the Bank's interest-bearing liabilities increased from 3.53% for the
two month period ended August 31, 1996 to 3.85% for the two month period ended
August 31, 1997.
Provision for Loan Losses. The Bank's provision for loan losses was $300,000
for the two month period ended August 31, 1997, compared to $266,000 for the
two month period ended August 31, 1996. The August 1997 provision was based on
management's evaluation of its loan portfolio and real estate market
conditions. In particular, management considered the continued growth in the
portfolio, as well as the increase in its non-performing loans from $3.9
million at June 30, 1997 to $5.6 million at August 31, 1997. The growth in
non-performing loans is due primarily to the addition of a $1.1 million
commercial mortgage on a mixed-use property on Staten Island, New York. As of
August 31, 1997, the loan was four months in arrears, totaling $105,000 in
payments. The loan is secured by the property which was last appraised in
December 1996 for $1.4 million. The Bank's non-performing loans as a
percentage of total loans increased to 1.09% as of August 31, 1997 as compared
to 0.75% at August 31, 1996 primarily as a result of the property described
above. At August 31, 1997, the Bank's allowance for loan losses as a
percentage of loans receivable, net, was 1.11%, as compared to 1.12% at August
31, 1996. To the extent the Bank increases its investment in commercial real
estate, commercial and other loans, which entail higher risk than one- to
four-family loans, the Bank may decide to increase its allowance for loan
losses through additional loan loss provisions which may adversely affect net
income. See "Risk Factors--Increased Lending Risks Associated with Commercial
Real Estate, Multi-Family, Construction and Development and Commercial
Lending" and "Business of the Bank--Delinquent Loans, Real Estate Owned and
Classified Assets" and "--Allowance for Loan Losses."
Non-Interest Income. Non-interest income is comprised of fee income and
profits from the sale of securities and loans. Total non-interest income for
the two month period ended August 31, 1997, increased $43,000, or 8.3%, to
$560,000. Fee income increased $40,000, or 7.7%, from $520,000 for the two
month period ended August 31, 1996, to $560,000 for the two month period ended
August 31, 1997, due to an increase in the Bank's non-interest bearing demand
accounts.
Non-Interest Expense. Non-interest expense increased by $174,000, or 5.3%,
from $3.3 million for the two month period ended August 31, 1996, to $3.5
million for the two month period ended August 31, 1997, primarily due to an
increase in computer-related services, check processing charges and
advertising expenses. The computer service and check processing charges
increased by $145,000, primarily as a result of increased check processing
fees paid to the Bank's third party vendors. Advertising expenses increased
$62,000 primarily as a result of the Bank's additional marketing of its loan
and deposit products. The Bank expects that compensation and employee benefits
expense will increase after the Conversion, primarily as a result of the
adoption of various employee benefit plans and compensation adjustments
contemplated in connection with the Conversion. See "Management of the Bank--
Benefit Plans." In addition, the Bank expects non-interest expense to increase
in future periods as a result of the Bank's intention to open a public
accommodation office during 1998. The Bank is also considering opening three
new full-service branches, although no assurance can be made in this regard.
If the Bank were to open new branches, non-interest expenses would be expected
to increase further in future periods. See "Business of the Bank--Properties."
Income Taxes. Total income tax expense was $1.7 million for the two month
period ended August 31, 1997, compared to $1.5 million for the two month
period ended August 31, 1996. The increase was due primarily to an increase in
pre-tax income for August 1997. The effective tax rate was 48.1% for August
1997, as compared to 46.6% for August 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND JUNE 30,
1996
General. Net income for fiscal 1997 increased by $2.0 million, or 22.8%,
from $8.7 million for fiscal 1996 to $10.7 million for fiscal 1997. The
increase was due primarily to an increase in net interest income which
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resulted from an increase in the average balance of interest-earning assets
and a higher weighted average yield on its securities portfolio, offset, in
part, by increases in non-interest expenses, including the one-time SAIF
special assessment and increased compensation and advertising costs.
Interest Income. Interest income amounted to $65.8 million for fiscal 1997,
representing an increase of $6.7 million from fiscal 1996. The increase was
the result of a $73.5 million increase in average interest-earning assets and
a 17 basis point increase in the average yield on interest-earning assets. The
increase in average interest-earning assets was primarily due to an increase
in one- to four-family loans due to the introduction of the Bank's use of
mortgage brokers and increased marketing efforts. The increase in the average
interest rate on interest-earning assets, which increased from 7.16% to 7.33%,
was primarily due to the reallocation of interest-earning assets from lower-
yielding U.S. Government securities to higher-yielding mortgage-backed and
mortgage-related securities. This was partially offset by a 21 basis point
decline in the average yield on real estate loans, net, due primarily to the
repricing of adjustable-rate loans in a lower interest rate environment.
Interest income on mortgage-backed and mortgage-related securities increased
$4.2 million, or 77.0%, from $5.4 million for fiscal 1996 to $9.6 million for
fiscal 1997. This increase was primarily due to an increase in the average
balance of mortgage-backed and mortgage-related securities of $58.1 million,
which resulted from the restructuring of the securities portfolio and the
investment of excess funds not utilized for loan demand in mortgage-backed and
mortgage-related securities. The average yield on the mortgage-backed and
mortgage-related securities portfolio increased by 33 basis points due to the
higher rate environment for new purchases and the repricing of adjustable-rate
securities purchased in prior periods. Interest income on debt and equity
securities decreased $1.1 million, or 6.3%, due to management's restructuring
of its securities portfolio resulting in a $32.4 million decrease in the
average balance of such securities offset in part by the increased average
yield on such securities. See "--Management of Interest Rate Risk."
Interest income on loans increased $4.3 million, from $33.8 million for
fiscal 1996 to $38.1 million for fiscal 1997. The increase in interest income
on loans was a result of growth in the average balance of one- to four- family
loans outstanding partially offset by a 24 basis point decrease in the average
yield on loans, which occurred due to a repricing of adjustable rate loans in
a lower interest rate environment. The increase in the average balance of
loans was primarily due to an increase in residential one- to four-family
loans, resulting primarily from the investment of funds resulting from the
growth in deposits.
Interest Expense. Interest expense increased $1.4 million, or 5.3%, from
$26.3 million for fiscal 1996 to $27.7 million for fiscal 1997. This increase
reflects a $43.2 million increase in the average balance of interest-bearing
liabilities. The increase in average interest-bearing liabilities was
primarily attributable to an increase in the average balance of certificates
of deposits and money market savings accounts, which increased as a result of
the Bank's strategy of attracting more certificates of deposits through
additional certificate of deposit products, competitive pricing of such
products and related marketing of deposit accounts to commercial customers.
The average cost of the Bank's interest-bearing liabilities remained
relatively stable at 3.65% for fiscal 1997 as compared to 3.63% for fiscal
1996.
Provision for Loan Losses. The Bank's provision for loan losses was $1.1
million for fiscal 1997 compared to $1.6 million for fiscal 1996. The 1997
provision was based on management's evaluation of its loan portfolio and real
estate market conditions. In particular, management considered the continued
growth in the portfolio, as well as the decrease in its non-performing loans.
The Bank's non-performing loans as a percentage of total loans improved from
0.91% at June 30, 1996 to 0.78% at June 30, 1997. At June 30, 1997, the Bank's
allowance for loan losses as a percentage of total non-performing loans was
141.1%, compared to 125.5% at June 30, 1996. At June 30, 1997, the Bank's
allowance for loan losses as a percentage of loans receivable, net, was 1.10%,
as compared to 1.14% at June 30, 1996. To the extent the Bank increases its
investment in commercial real estate, commercial and other loans which entail
higher risk than one- to four-family loans, the Bank may determine to increase
its allowance for loan losses through additional loan loss provisions which
may adversely affect net income. See "Risk Factors--Increased Lending Risks
Associated with Commercial Real Estate, Multi-Family, Construction and
Development and Commercial Lending" and "Business of the Bank--Delinquent
Loans, Real Estate Owned and Classified Assets" and "--Allowance for Loan
Losses."
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Non-Interest Income. Non-interest income is composed of fee income and
profits from the sale of securities and loans. Total non-interest income for
fiscal 1997 increased $34,000, or 1.2%, to $2.9 million. Fee income increased
$245,000, or 9.0%, from $2.7 million for fiscal 1996 to $3.0 million for
fiscal 1997 due to an increase in the Bank's deposit accounts. Net
gains/losses on sales of securities and loans changed from a net gain of
$42,000 for fiscal 1996 to a net loss of $107,000 for fiscal 1997, primarily
as a result of the Bank's sale of lower-yielding U.S. Treasury and corporate
obligations.
Non-Interest Expense. Non-interest expense increased by $1.2 million, or
6.5%, from $18.5 million for fiscal 1996 to $19.7 million for fiscal 1997,
primarily due to the one-time SAIF special assessment and an increase in
compensation and employee benefits. Compensation and employee benefits
increased by $589,000, or 6.4%, from $9.3 million for fiscal 1996 to $9.9
million for fiscal 1997, primarily as a result of the retention of new
personnel in various areas of the Bank's operations and normal salary
increases. Deposit insurance premiums increased $373,000, or 148.6%, from
$251,000 for fiscal 1996 to $624,000 for fiscal 1997, due to the increase in
average deposits from $715.7 million for fiscal 1996 to $758.9 million for
fiscal 1997. In addition, the Bank paid a one-time special assessment to the
SAIF of $493,000 in October 1996 based on the amount of SAIF-insured deposits
the Bank maintains. Advertising and promotion expense increased $183,000, or
28.9%, from $634,000 for fiscal 1996 to $817,000 for fiscal 1997, primarily as
a result of the Bank's special anniversary promotion throughout October 1996
and additional marketing of the Bank's loan and deposit products. The Bank
expects that compensation and employee benefits expense may increase after the
Conversion, primarily as a result of the adoption of various employee benefit
plans and compensation adjustments contemplated in connection with the
Conversion. See "Management of the Bank--Benefit Plans." In addition, the Bank
expects non-interest expense to increase in future periods as a result of the
Bank's intention to open a public accommodation office during 1998. The Bank
is also considering opening new full-service branches in 1998, although no
assurances can be made in this regard. If the Bank were to open new branches,
non-interest expenses would be expected to increase further in future periods.
See "Business of the Bank--Properties."
Income Taxes. Total income tax expense was $9.5 million for fiscal 1997
compared to $6.8 million for fiscal 1996. The increase was due primarily to an
increase in pre-tax income for 1997. The effective tax rate was 47.0% for
fiscal 1997 as compared to 43.8% for fiscal 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND JUNE 30,
1995
General. Net income for fiscal 1996 was $8.7 million, compared to $7.6
million for fiscal 1995. The increase was the result of a $1.3 million charge
in fiscal 1995, due to a change in accounting principles from the Bank's
adoption of SFAS No. 106. Excluding the effect of SFAS No. 106, net income
decreased from $8.9 million for fiscal 1995 to $8.7 million for fiscal 1996,
due in part to higher non-interest expenses and a higher provision for loan
losses, partially offset by a decrease in FDIC insurance premiums and an
increase in net interest income.
Interest Income. Total income from interest-earning assets increased from
$54.3 million for fiscal 1995 to $59.1 million for fiscal 1996, primarily due
to an increase of $38.4 million in the average balance of interest-earning
assets and a 25 basis point increase in the yield on interest-earning assets.
The average balance of interest-earning assets increased due in part to a
$21.6 million, or 6.1%, increase in the average balance of real estate loans.
As a result, interest income on the Bank's real estate loan portfolio
increased $2.1 million, or 7.3%, from $28.8 million for fiscal 1995 to $30.9
million for fiscal 1996 due to the increase in the average balance of such
loans and an increase in the average yield from 8.18% for fiscal 1995 to 8.26%
for fiscal 1996. Interest income on consumer and student loans also increased
from $2.2 million for fiscal 1995 to $2.3 million for fiscal 1996, as a result
of an increase of $1.7 million in the average balance of such loans which was
offset, in part, by a decrease in the average yield of such loans from 10.50%
for fiscal 1995 to 10.21% for fiscal 1996.
Interest income from debt and equity securities increased $1.2 million, or
7.2%, from $16.7 million for fiscal 1995 to $17.9 million for fiscal 1996, as
a result of the increase in the average balance of such securities as well as
a 29 basis point increase in the average yield on such securities. Interest
income on mortgage-backed and mortgage-related securities also increased by
$326,000, or 6.4%, from $5.1 million for fiscal 1995 to $5.4 million for
fiscal 1996, due to a 74 basis point increase in the average yield on such
securities, which was partially offset by a $5.3 million decrease in the
average balance of such securities.
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Interest Expense. Interest expense for fiscal 1996 was $26.3 million, as
compared to $22.5 million for fiscal 1995, an increase of $3.8 million, or
17.0%. The increase was primarily due to a $26.0 million increase in average
interest-bearing deposits and a 38 basis point increase in the average cost of
interest-bearing deposits. The increase in average interest-bearing deposits
was primarily attributable to an increase in the average balance of
certificates of deposits due to competitive pricing and increased marketing of
such deposit products. As a result, the average rate paid on certificate
accounts increased from 4.58% for fiscal 1995 to 5.29% for fiscal 1996.
Provision for Loan Losses. The Bank's provision for loan losses was $1.6
million for fiscal 1996 as compared with $600,000 for fiscal 1995. The
increase in the provision was due primarily to management's assessment of its
loan portfolio, the growth in the portfolio and the level of non-performing
loans. In particular, non-performing loans increased from $2.8 million at June
30, 1995 to $3.6 million at June 30, 1996. The increase in non-performing
loans was attributable to a $447,000 increase in non-performing commercial
real estate loans. At June 30, 1995, the Bank's allowance for loan losses to
total non-performing loans and total loans was 109.3% and 0.83%, respectively,
as compared to 125.5% and 1.14%, respectively, at June 30, 1996. See "Risk
Factors--Increased Lending Risks Associated with Commercial Real Estate,
Multi-Family, Construction and Development and Commercial Lending" and
"Business of the Bank--Delinquent Loans, Real Estate Owned and Classified
Assets" and "--Allowance for Loan Losses."
Non-Interest Income. Non-interest income increased by $168,000, or 6.3%,
from $2.7 million for fiscal 1995 to $2.8 million for fiscal 1996. The
increase was primarily due to the increase in fee income of $167,000, or 6.5%,
from $2.6 million for fiscal 1995 to $2.7 million for fiscal 1996, which
increase is primarily attributable to the increase in deposits.
Non-Interest Expense. Non-interest expense increased slightly by $364,000,
or 2.0%, from $18.1 million for fiscal 1995 to $18.5 million for fiscal 1996.
This increase is primarily a result of an increase in non-interest expenses of
$768,000, or 20.8%, from $4.8 million for fiscal 1995 to $5.7 million for
fiscal 1996, as a result of an increase in compensation and employee benefits
of $508,000, from $8.8 million for 1995 to $9.3 million for 1996, as a result
of normal salary increases. Non-interest expense was also impacted by a
$369,000, or 13.9%, increase in occupancy costs from $2.7 million for fiscal
1995 to $3.0 million for fiscal 1996, due to the Bank instituting a repair and
renovation program for the branch offices, as well as a $683,000, or 57.4%,
increase in computer service fees from $1.2 million for fiscal 1995 to $1.9
million for fiscal 1996, as a result of the installation of a new computer
network and equipment at all branch locations and the change in payment method
for check processing charges. These items were offset by a reduction in FDIC
deposit insurance premiums, from $1.7 million for fiscal 1995 to $251,000 for
fiscal 1996 due to a reduction in the assessment rate imposed by the FDIC. See
"Regulation and Supervision--Insurance of Deposit Accounts."
Income Taxes. The provision for income taxes decreased by $116,000, or 1.7%,
from $6.9 million for fiscal 1995 to $6.8 million for fiscal 1996, primarily
as a result of the decrease in income before income taxes. The effective tax
rate was 43.8% for fiscal 1996 and fiscal 1995.
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
In December 1990, the FASB issued SFAS No. 106. SFAS No. 106 focuses
principally on post-retirement health care benefits and significantly changed
the previous practice of accounting for post-retirement benefits on a cash
basis to requiring accrual during the years that the employee renders the
necessary service, of the expected cost of providing those benefits to an
employee and the employee's beneficiaries and covered dependents. SFAS No. 106
became effective for fiscal years beginning after December 15, 1992, and
adoption was required on a prospective basis. The Bank adopted SFAS No. 106
effective July 1, 1994, which resulted in a charge, net of tax, of $1.3
million.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, proceeds from the
principal and interest payments on loans, mortgage-backed and mortgage-related
and debt and equity securities, and to a significantly lesser extent, proceeds
from the sale of fixed-rate mortgage loans to the secondary market. While
maturities and scheduled
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amortization of loans and securities are predictable sources of funds, deposit
outflows, mortgage prepayments and mortgage loan sales are greatly influenced
by general interest rates, economic conditions and competition.
The primary investing activities of the Bank are the origination of
primarily residential one-to four- family and, to a lesser extent, commercial
real estate, construction and development, multi-family and other loans and
the purchase of mortgage-backed and mortgage-related and debt and equity
securities. During the two month period ended August 31, 1997 and the years
ended June 30, 1997, 1996, and 1995, the Bank's loan originations totaled
$26.3 million, $137.2 million, $94.3 million and $78.9 million, respectively.
Purchases of mortgage-backed, mortgage-related and debt and equity securities
totaled $31.6 million, $195.4 million, $166.5 million, and $121.9 million for
the two month period ended August 31, 1997 and the years ended June 30, 1997,
1996, and 1995, respectively. These activities were funded primarily by
deposit growth and principal repayments and prepayments on loans, mortgage-
backed and mortgage-related securities and debt and equity securities. Loan
sales provided additional liquidity to the Bank, totaling $2.0 million, $10.0
million and $1.6 million for the years ended June 30, 1997, 1996 and 1995,
respectively. There were no loan sales for the two months ended August 31,
1997. The Bank experienced a net decrease in total deposits of $1.6 million
for the two month period ended August 31, 1997 and a net increase in total
deposits of $66.6 million, $53.9 million and $15.4 million for the years ended
June 30, 1997, 1996, and 1995, respectively. Deposit flows are affected by the
level of interest rates, the interest rates and products offered by local
competitors and the Bank and other factors.
The Bank closely monitors its liquidity position on a daily basis. Excess
short-term liquidity is invested in overnight federal funds sold. On a longer-
term basis, the Bank maintains a strategy of investing in various lending
products as described in greater detail under "Business of the Bank--Lending
Activities." In the event the Bank should require funds beyond its ability to
generate them internally, additional sources of funds are available through
the Bank's $10.0 million line of credit and through repurchase agreements. In
addition, the Bank's application to become a member of the FHLB system was
approved on October 24, 1997. FHLB membership will provide the Bank with
access to FHLB advances. See "Business of the Bank--Sources of Funds--Borrowed
Funds." At August 31, 1997, the Bank had $8.4 million of outstanding
repurchase agreements. The Bank has recently begun to place a greater level of
emphasis on the utilization of borrowed funds to fund asset growth. In this
regard, at October 31, 1997, the Bank had total borrowings of $60.4 million,
all of which were in the form of repurchase agreements. The Bank may continue
to increase such emphasis which may result in an increase in the Bank's
average cost of funds.
Loan commitments totaled $39.8 million at August 31, 1997, comprised of $9.8
million in one- to four-family loan commitments, $2.5 million in commercial
real estate loan commitments, $10.3 million in construction loan commitments,
$7.2 million in commercial loan commitments and $7.0 million in home equity
loan commitments. Management of the Bank anticipates that it will have
sufficient funds available to meet its current loan commitments. Certificates
of deposit which are scheduled to mature in less than one year from August 31,
1997 totaled $213.6 million. Based upon past experience and the Bank's current
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 leverage capital level of $100.9 million, or 10.10% of
adjusted assets, which is above the required level of $40.0 million, or 4.0%
of adjusted assets and risk-based capital of $105.9 million, or 19.70% of
adjusted assets, which is above the required level of $43.0 million, or 8.0%.
See "Regulatory Capital Compliance."
The Bank's most liquid assets are cash and interest-bearing demand accounts.
The levels of these assets are dependent on the Bank's operating, financing,
lending and investing activities during any given period. At August 31, 1997,
cash and interest-bearing demand accounts totaled $25.9 million, or 2.6% of
total assets.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike
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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
In November 1993, the AICPA issued SOP 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," which is effective for years beginning after
December 15, 1993. SOP 93-6 requires the application of its guidance for
shares acquired by ESOPs after December 31, 1992 but not yet committed to be
released as of the beginning of the year SOP 93-6 is adopted. SOP 93-6 changes
the measure of compensation expense recorded by employers for leveraged ESOPs
from the cost of ESOP shares to the fair value of ESOP shares. The Company has
adopted an ESOP in connection with the Conversion, which is expected to
purchase 8% of the Common Stock issued in the Conversion, including shares
issued to the Foundation. Under SOP 93-6, the Company will recognize
compensation cost equal to the fair value of the ESOP shares during the
periods in which they become committed to be released. To the extent that the
fair value of the Company's ESOP shares differ from the cost of such shares,
this differential will be charged or credited to equity. Employers with
internally leveraged ESOPs such as the Company will not report the loan
receivable from the ESOP as an asset and will not report the ESOP debt from
the employer as a liability. However, the effects of SOP 93-6 on future
operating results cannot be determined at this time.
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"). This statement establishes financial
accounting standards for stock-based employee compensation plans. SFAS No. 123
permits the Bank to choose either a new fair value based method or the current
Accounting Principles Board ("APB") Opinion 25 intrinsic value based method of
accounting for its stock-based compensation arrangements. SFAS No. 123
requires pro forma disclosures of net earnings and earnings per share computed
as if the fair value based method had been applied in financial statements of
companies that continue to follow current practice in accounting for such
arrangements under APB Opinion 25. SFAS No. 123 applies to all stock-based
employee compensation plans in which an employer grants shares of its stock or
other equity instruments to employees except for employee stock ownership
plans. SFAS No. 123 also applies to plans in which the employer incurs
liabilities to employees in amounts based on the price of the employer's
stock, (e.g., stock option plans, stock purchase plans, restricted stock
plans, and stock appreciation rights). The statement also specifies the
accounting for transactions in which a company issues stock options or other
equity instruments for services provided by nonemployees or to acquire goods
or services from outside suppliers or vendors. The recognition provisions of
SFAS No. 123 for companies choosing to adopt the new fair value based method
of accounting for stock-based compensation arrangements may be adopted
immediately and will apply to all transactions entered into in fiscal years
that begin after December 15, 1995, however disclosure of the pro forma net
earnings and earnings per share, as if the fair value method of accounting for
stock-based compensation had been elected, is required for all awards granted
in fiscal years beginning after December 31, 1994. Any effect that this
statement will have on the Bank will be applicable upon the consummation of
the Conversion.
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Under the financial-
components approach, after a transfer of financial assets, an entity
recognizes all financial and servicing assets it controls and liabilities it
has incurred and derecognizes financial assets it no longer controls and
liabilities that have been extinguished. The financial-components approach
focuses on the assets and liabilities that exist after the transfer. Many of
these assets and liabilities are components of financial assets that existed
prior to the transfer. If a transfer does not meet the criteria for a sale,
the transfer is accounted for as a secured borrowing with pledge of
collateral. The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and should be applied prospectively. Earlier or retroactive
application of this Statement
53
<PAGE>
is not permitted. Management has determined that this Statement will not have
a material impact on the Company's consolidated financial statements.
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly
held common stock or potential common stock. SFAS No. 128 simplifies the
standards for computing earnings per share previously found in APB Opinion No.
15, "Earnings Per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the numerator and denominator of the diluted EPS computation. Basic
EPS excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly
to fully diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure" ("SFAS No. 129"). SFAS No. 129 continues the existing
requirements to disclose the pertinent rights and privileges of all securities
other than ordinary common stock but expands the number of companies subject
to portions of its requirements. Specifically, the Statement requires all
entities to provide the capital structure disclosures previously required by
APB Opinion No. 15. Companies that were exempt from the provisions of APB
Opinion No. 15 will now need to make those disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
net worth and additional paid-in capital in the equity section of a statement
of financial position. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Management is in the
process of determining the impact, if any, this statement will have on the
Bank.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. SFAS No. 131
is effective for fiscal year beginning after December 15, 1997 with earlier
application permitted.
54
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company was incorporated in September 1997 at the direction of the Board
of Trustees of the Bank for the purpose of becoming a holding company to
acquire all of the outstanding capital stock of the Bank issued in the
Conversion. Upon consummation of the Conversion, it is anticipated that the
Bank will become a wholly-owned subsidiary of the Company. Upon the
consummation of the Conversion, the Company will be a savings and loan holding
company regulated by the OTS. See "Regulation and Supervision--Holding Company
Regulation."
The Company is currently not an operating company. Following the Conversion,
in addition to directing, planning and coordinating the business activities of
the Bank, the Company will initially invest net proceeds it retains primarily
in mortgage-backed and mortgage-related securities and investment-grade debt
and equity securities. In addition, the Company intends to fund the loan to
the ESOP to enable the ESOP to subscribe for 8% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation;
however, a third party lender may be utilized to lend funds to the ESOP. See
"Use of Proceeds." In the future, the Company may expand its operations in the
Bank's primary market area or other areas surrounding the New York City
metropolitan area by marketing and business development, acquiring or
organizing other operating subsidiaries, including other financial
institutions and financial services companies. Other than a lease on a public
accommodation office to be opened on Staten Island in 1998 and plans to open
three new branch offices on Staten Island, there are no current agreements or
understandings for an expansion of the Company's operations. Initially, the
Company will neither own nor lease any property from any third party, but will
instead use the premises, equipment and furniture of the Bank.
In October 1997, the Company hired a President and Chief Operating Officer
and a Senior Vice President, Chief Financial Officer and Secretary, both of
whom were not previously employed by the Bank but who have significant
experience in the financial services industry. See "Management of the
Company." At the present time, the Company does not intend to employ any
persons other than its current officers, as well as certain officers of the
Bank, who will not be separately provided cash compensation by the Company.
The Company may utilize the support staff of the Bank from time to time, if
needed. Additional employees will be hired as appropriate to the extent the
Company expands its business in the future.
BUSINESS OF THE BANK
GENERAL
The Bank is a community-oriented mutual savings bank which was originally
chartered by the State of New York in 1886. The Bank's principal business
consists of the acceptance of retail deposits from the general public in the
areas surrounding its branch offices and the investment of those deposits,
together with funds generated from operations and borrowings, primarily in
one- to four-family residential mortgage loans and, to a lesser extent,
commercial real estate, construction and development, commercial, home equity,
consumer and student loans and in mortgage-backed and mortgage-related
securities and various debt and equity securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management Strategy." The Bank's revenues are derived principally from the
interest on its mortgage, commercial and consumer loans and securities. The
Bank's primary sources of funds are deposits, principal and interest payments
on loans and securities, and proceeds from the sale of loans and securities.
To a lesser extent, the Bank utilizes borrowed funds to fund its operations.
The Bank's application for membership in the FHLB system was approved on
October 24, 1997. FHLB membership will provide another source of borrowed
funds.
MARKET AREA
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the
needs of the communities it serves. The Bank currently operates twelve full
service banking offices in the Borough of Staten Island, and one full service
banking office in the Borough of Brooklyn. Additionally, the Bank intends to
open a public accommodation office in 1998 and is considering
55
<PAGE>
opening three full-service branches. With the exception of such plans, there
are no current arrangements, understandings or agreements, written or oral,
regarding such offices, and no assurances can be made that such offices will
be opened.
The Bank's primary deposit gathering area is currently concentrated around
the areas where its full service banking offices are located in Staten Island
and Brooklyn which the Bank generally considers to be its primary market area.
The Bank's primary lending area has also historically been concentrated in
Staten Island and, to a lesser extent, in the area around its office in
Brooklyn. As of June 1996, based on a survey by a nationally-recognized bank
consulting firm, the Bank had 14.2% of total deposits in Staten Island, and
for 1996, the Bank had a lending market share of approximately 7.2% in Staten
Island, placing the Bank among the leaders in both loans originated and
deposits in Staten Island. The Bank and Company may, in the future, consider
expanding the market area served by the Bank and Company to other areas in the
New York City metropolitan area including northern New Jersey, Connecticut and
upstate New York.
The economy of the New York City metropolitan area has historically
benefitted from having a large number of corporate headquarters and a
diversity of financial service entities. Additionally, Staten Island has
historically benefitted from steady residential growth and an expanding base
of industrial, service and high technology businesses. During the late 1980s
and early 1990s, however, due in part to the effects of a prolonged period of
weakness in the national economy, the decline in the regional economy, layoffs
in the financial services industry and corporate relocations, the New York
City metropolitan area experienced reduced levels of employment. These
conditions, in conjunction with a surplus of available commercial and
residential property, resulted in an overall decline in the underlying values
of properties located in the area during the late 1980s and early 1990s.
Staten Island, due to its location and its relatively large population of
government employees, was somewhat insulated from the economic decline of the
late 1980s and early 1990s. Since 1993, the prices and values of real estate
have stabilized and, in certain areas, the prices and values of real estate
have increased. In the last several years, the New York City metropolitan area
has benefitted from the resurgence and growth in employment and profitability
experienced by national securities and investment banking firms, many of which
are domiciled in the Borough of Manhattan, as well as the growth and
profitability of other financial services companies, such as money center
banks. See "Risk Factors--Weakness in Local Economy."
COMPETITION
The Bank faces significant competition both in making loans and in
attracting deposits. The New York City metropolitan area has a high density of
financial institutions, many of which are branches of significantly larger
institutions which have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. The Bank's competition
for loans comes principally from savings banks, commercial banks, savings and
loan associations, mortgage banking companies, credit unions and insurance
companies and other financial service companies. Its most direct competition
for deposits has historically come from savings and loan associations, savings
banks, commercial banks and credit unions. The Bank faces additional
competition for deposits from non-depository competitors such as the mutual
fund industry, securities and brokerage firms and insurance companies. There
are eleven depository institutions with operations in the Borough of Staten
Island. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
LENDING ACTIVITIES
Loan Portfolio Composition. The types of loans that the Bank may originate
are subject to federal and state law and regulations. Interest rates charged
by the Bank on loans are affected principally by the demand for such loans,
the supply of money available for lending purposes and the rates offered by
its competitors. These factors are, in turn, affected by general and economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters.
56
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio,
including loans held for sale, in dollar amounts and in percentages of the
respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
AT AUGUST 31, ---------------------------------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------ -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-
family.......... $411,714 79.1% $394,588 78.4% $325,139 76.3% $303,734 76.2% $273,063 75.5% $274,136 76.0%
Multi-family..... 2,708 0.5 2,705 0.5 1,238 0.3 811 0.2 920 0.3 936 0.2
Commercial real
estate.......... 42,937 8.2 40,713 8.1 39,892 9.3 40,037 10.1 39,220 10.8 35,949 10.0
Construction and
development..... 19,731 3.8 18,343 3.7 12,812 3.0 10,487 2.6 6,677 1.9 6,011 1.7
Home equity...... 11,056 2.1 16,729 3.3 18,054 4.2 16,518 4.1 16,775 4.6 20,430 5.7
Commercial........ 9,282 1.8 6,662 1.3 6,300 1.5 5,039 1.3 5,426 1.5 4,282 1.2
Consumer and
student.......... 23,151 4.4 23,589 4.7 22,932 5.4 21,795 5.5 19,663 5.4 18,957 5.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross loans..... 520,579 100.0% 503,329 100.0% 426,367 100.0% 398,421 100.0% 361,744 100.0% 360,701 100.0%
===== ===== ===== ===== ===== =====
Less:
Unamortized
discounts, net.. (763) (788) (947) (1,105) (1,263) (1,420)
Deferred loan
fees............ (730) (813) (1,354) (1,632) (1,525) (1,265)
Allowance for
loan losses..... (5,683) (5,470) (4,796) (3,275) (3,106) (2,735)
-------- -------- -------- -------- -------- --------
Total loans,
net............ 513,403 496,258 419,270 392,409 355,850 355,281
Less:
Loans held for sale,
net: One- to four-
family.......... -- -- 1,155 -- -- --
-------- -------- -------- -------- -------- --------
Loans receivable
held for
investment,
net............. $513,403 $496,258 $418,115 $392,409 $355,850 $355,281
======== ======== ======== ======== ======== ========
Fair value........ $520,634 $502,957 $430,652 $392,678 $358,956 $343,983
======== ======== ======== ======== ======== ========
</TABLE>
57
<PAGE>
Loan Originations. The Bank originates both adjustable-rate and fixed-rate
one- to four-family mortgage loans, commercial real estate loans, construction
and development loans, home equity loans, commercial loans and consumer loans
and student loans. The Bank's one- to four-family mortgage lending activities
are conducted primarily through the utilization of mortgage brokers and by the
Bank's loan personnel generally operating in the Bank's loan center. Although
the Bank has authorized the use of approximately 100 mortgage brokers in
connection with one- to four-family loan originations, the Bank primarily
utilizes the services of seven mortgage brokers operating primarily on Staten
Island and in Brooklyn. During the two month period ended August 31, 1997 and
the year ended June 30, 1997, the Bank originated $12.8 million and $73.9
million, respectively, of one- to four-family loans through mortgage brokers
and $4.9 million and $26.6 million, respectively, of such loans through Bank
personnel. Recently, the Bank began offering through brokers its fully
processed loan program, which is a zero point loan that is originated and
processed by the broker. The Bank pays mortgage brokers a processing fee for a
fully processed loan. All loans are underwritten by the Bank pursuant to the
Bank's loan underwriting policies and procedures.
Recently, the Bank has placed increased emphasis on the origination of
commercial real estate, construction and development and commercial loans as
part of its efforts to broaden the services it provides to the Staten Island
business community. In this regard, the Bank has recently hired commercial
lending personnel with experience in the Bank's primary market area and may
add additional personnel as needed. In addition, the Bank has increased its
marketing efforts with respect to commercial real estate, construction and
development and commercial lending by making its existing business customers
aware of the expanded products and services available to businesses. See "Risk
Factors--Increased Lending Risks Associated With Commercial Real Estate,
Multi-Family, Construction and Development and Commercial Lending." The Bank's
ability to originate loans is dependent upon customer demand, demand for
fixed-rate or adjustable-rate loans and expected future levels of interest
rates.
Generally, all loans are originated for investment with the exception of
longer-term fixed-rate one- to four-family mortgage loans. It is currently the
general policy of the Bank to sell substantially all of the one- to four-
family fixed-rate mortgage loans with maturities over fifteen years that it
originates and to retain all adjustable-rate one- to four-family mortgage
loans which it originates. However, from time to time, the Bank may retain
fixed-rate mortgage loans with terms over fifteen years depending on the asset
quality and the interest rate risk position of the Bank. The one- to four-
family loan products currently originated for sale by the Bank include a
variety of mortgage loans which conform to the underwriting standards
specified by FNMA and FHLMC ("conforming loans"). Loans which do not conform
to FNMA or FHLMC standards due to loan amounts ("jumbo loans") are originated
for the portfolio. With the exception of customary provisions relating to
breaches of representations and warranties, sales of loans are made without
recourse to the Bank in the event of default by the borrower. The Bank
generally retains the servicing rights on the mortgage loans sold to FHLMC.
At August 31, 1997, the Bank was servicing its portfolio of $520.6 million
of loans receivable and $49.4 million of loans for others, primarily
consisting of conforming fixed-rate loans sold by the Bank. Loan servicing
includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults, making certain
insurance and tax payments on behalf of the borrowers, and generally
administering the loans.
During the two month period ended August 31, 1997 and 1996, the Bank
originated $17.7 million and $29.6 million of fixed-rate and adjustable-rate
one- to four-family loans, respectively, the majority of which were retained
by the Bank. During the years ended June 30, 1997 and June 30, 1996, the Bank
originated $100.5 million and $54.0 million of fixed-rate and adjustable-rate
one- to four-family loans, respectively, of which $98.5 million and $43.9
million, respectively, were retained by the Bank. The fixed-rate loans
retained by the Bank consisted primarily of loans with terms of 15 years or
less and non-conforming loans. The Bank recognizes, at the time of sale, the
cash gain or loss on the sale of the loans based on the difference between the
net cash proceeds received and the carrying value of the loans sold. At August
31, 1997, the Bank had no mortgage loans held for sale. The Bank has, in the
past, from time to time, purchased participations in loans, primarily one- to
four-family mortgage loans, and had $1.3 million of participations in loans at
August 31, 1997.
58
<PAGE>
The following tables set forth the Bank's loan originations, purchases, sales
and principal repayments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE TWO MONTHS
ENDED AUGUST 31, FOR THE YEAR ENDED JUNE 30,
------------------- -----------------------------
1997 1996 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross loans(1):
Balance outstanding at
beginning of period......... $ 503,329 $ 426,367 $ 426,367 $ 398,421 $ 361,744
--------- --------- --------- --------- ---------
Loans originated:
One- to four-family...... 17,681 29,528 100,487 53,957 53,355
Multi-family............. -- -- 1,616 540 --
Commercial real estate... 1,964 -- 4,454 6,408 5,805
Construction and
development............. 3,312 2,383 13,444 9,080 7,520
Home equity.............. 765 1,121 5,824 6,049 2,581
Commercial............... 1,119 1,379 3,636 11,280 2,449
Consumer and student..... 1,456 1,581 7,790 7,011 7,143
--------- --------- --------- --------- ---------
Total loans originated... 26,297 35,992 137,251 94,325 78,853
Loans purchased............ -- 944 910 -- --
--------- --------- --------- --------- ---------
Total loans originated
and purchased........... 26,297 36,936 138,161 94,325 78,853
--------- --------- --------- --------- ---------
Less:
Principal repayments....... 8,824 15,025 58,485 55,799 39,803
Sales of loans............. -- 761 2,004 9,972 1,609
Transfers to real estate
owned..................... 223 55 673 608 764
Principal charged off...... -- -- 37 -- --
--------- --------- --------- --------- ---------
Total loans.............. 520,579 447,462 503,329 426,367 398,421
Less:
Loans held for sale, net... -- -- -- 1,155 --
--------- --------- --------- --------- ---------
Loans receivable held for
investment at end of
period.................... $ 520,579 $ 447,462 $ 503,329 $ 425,212 $ 398,421
========= ========= ========= ========= =========
</TABLE>
- --------
(1) Gross loans includes loans receivable held for investment and loans held
for sale.
59
<PAGE>
Loan Maturity. The following table shows the contractual maturity of the
Bank's loan portfolio at August 31, 1997. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on mortgage loans totalled $8.8 million, $58.5 million,
$55.8 million and $39.8 million for the two months ended August 31, 1997 and
for the years ended June 30, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
AT AUGUST 31, 1997
----------------------------------------------------------------------------------
REAL ESTATE LOANS
------------------------------------------------
ONE- TO CONSTRUCTION TOTAL
FOUR- MULTI- COMMERCIAL AND HOME CONSUMER LOANS
FAMILY FAMILY REAL ESTATE DEVELOPMENT EQUITY COMMERCIAL AND STUDENT RECEIVABLE
-------- ------ ----------- ------------ ------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year........ $ 355 $ -- $ 277 $18,300 $ -- $5,502 $ 876 $ 25,310
-------- ------ ------- ------- ------- ------ ------- --------
After one year:
More than one year to
three years......... 1,658 77 298 1,431 -- 2,691 6,389 12,544
More than three years
to five years....... 6,201 -- 1,172 -- 30 747 2,079 10,229
More than five years
to 10 years......... 26,764 535 14,665 -- -- 75 6,681 48,720
More than 10 years to
20 years............ 73,560 2,096 24,418 -- 8,251 267 7,036 115,628
More than 20 years... 303,176 -- 2,107 -- 2,775 -- 90 308,148
-------- ------ ------- ------- ------- ------ ------- --------
Total due after
August 31, 1998..... 411,359 2,708 42,660 1,431 11,056 3,780 22,275 495,269
-------- ------ ------- ------- ------- ------ ------- --------
Total amount due..... $411,714 $2,708 $42,937 $19,731 $11,056 $9,282 $23,151 520,579
======== ====== ======= ======= ======= ====== ======= --------
Less:
Unamortized discounts, net.................................................................. 763
Deferred loan fees, net..................................................................... 730
Allowance for possible loan losses.......................................................... 5,683
--------
Loans receivable held for investment, net....................................................... $513,403
========
</TABLE>
The following table sets forth at August 31, 1997, the dollar amount of
gross loans receivable 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>
Real estate loans:
One- to four-family............................. $113,455 $297,904 $411,359
Multi-family.................................... 238 2,470 2,708
Commercial real estate.......................... 3,844 38,816 42,660
Construction and development.................... -- 1,431 1,431
Home equity..................................... 8,019 3,037 11,056
-------- -------- --------
Total real estate loans....................... 125,556 343,658 469,214
Commercial loans.................................. -- 3,780 3,780
Consumer and student loans........................ 9,540 12,735 22,275
-------- -------- --------
Total loans receivable........................ $135,096 $360,173 $495,269
======== ======== ========
</TABLE>
One- to Four-Family Loans. The Bank currently offers both fixed-rate and
adjustable-rate mortgage loans secured by one- to four-family residences
located in the Bank's primary market area, primarily with maturities of up to
thirty years. One- to four-family mortgage loan originations are obtained
through the use of mortgage brokers, the Bank's loan center, existing or past
customers, advertising, and referrals from real estate brokers and attorneys.
At August 31, 1997, the Bank's one- to four-family loans totalled $411.7
million, or 79.1%, of gross loans. Of the one- to four-family loans
outstanding at that date, 29.1% were fixed-rate mortgage loans and 70.9% were
60
<PAGE>
adjustable-rate mortgage loans. The Bank offers fixed-rate mortgage loans with
terms of fifteen and thirty years. The Bank sells substantially all fixed-rate
residential mortgage loans it originates with terms in excess of fifteen
years, except for non-conforming loans, to FHLMC, and retains the servicing on
all loans sold, although the Bank may retain fixed-rate mortgage loans with
terms in excess of fifteen years, depending on the asset quality and the
interest rate risk position of the Bank. The Bank generally retains for its
portfolio shorter-term, fixed rate loans with maturities of fifteen years or
less and all adjustable-rate one- to four-family loans.
The Bank currently offers a number of adjustable-rate mortgage loans with
terms of up to thirty years and interest rates which adjust annually from the
outset of the loan or which adjust annually after a one, three, five or seven
year initial fixed period. Forty-year terms are available on certain
adjustable-rate loans. The interest rates for the Bank's adjustable-rate
mortgage loans are indexed to the one or three year U.S. Treasury Securities
Index. Interest rate adjustments on loans are limited to a 2% periodic
adjustment cap (2.5% on five-year adjustable-rate loans) and a maximum
adjustment of 6% over the life of the loan. Certain of the Bank's adjustable-
rate mortgage loans can be converted to a fixed-rate loan with interest rates
based upon the then-current market rates plus a varying margin.
The volume and type of adjustable-rate mortgage loans originated by the Bank
have been affected by such market factors as the level of interest rates,
competition, consumer preferences and the availability of funds. The
origination of adjustable-rate residential mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing
the potential for default. Periodic and lifetime caps on interest rate
increases help to reduce the risks associated with adjustable-rate loans but
also limit the interest rate sensitivity thereof.
One- to four-family residential mortgage loans are generally underwritten
according to FNMA or FHLMC guidelines. The Bank currently originates one- to
four-family residential mortgage loans in amounts up to 80% of the lower of
the appraised value or the selling price of the property securing the loan and
up to 97% of the appraised value or selling price if private mortgage
insurance is obtained. Mortgage loans originated by the Bank include due-on-
sale clauses which provide the Bank with the contractual right to deem the
loan immediately due and payable in the event the borrower transfers ownership
of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.
In an effort to provide financing for low and moderate income home buyers,
the Bank participates in residential mortgage programs and products sponsored
by the State of New York Mortgage Association ("SONYMA"). The SONYMA mortgage
programs provide low and moderate income households with fixed- rate loans
which are generally below prevailing fixed-rate mortgages and which allow
below market down payments. At August 31, 1997, $9.0 million, or 1.7% of total
loans, were sponsored by SONYMA.
Commercial Real Estate Lending. The Bank originates commercial real estate
loans that are generally secured by properties used for business purposes or a
combination of residential and retail purposes which are located in the Bank's
primary market area. All mixed-use properties are classified as commercial
real estate. At August 31, 1997, the Bank's commercial real estate loan
portfolio totalled approximately $42.9 million or 8.2% of total loans. The
Bank's underwriting procedures provide that commercial real estate loans
generally may be made in amounts up to 75% of the lower of the appraised value
or sales price of the property, subject to the Bank's current regulatory
loans-to-one-borrower limit. These loans may be made with terms up to twenty
years and are generally offered at interest rates which adjust every one,
three or five years, utilizing the corresponding U.S. Treasury Securities
Index as a base. The Bank also offers fixed rate commercial real estate loans
with ten year terms. In reaching its decision on whether to make a commercial
real estate loan, the Bank considers the net operating income of the property
and the borrower's expertise, credit history and profitability. In addition,
the Bank considers the business activities and present and past uses of the
properties in evaluating potential environmental issues and, where such
consideration indicates a need, a more detailed investigation by a qualified
environmental expert is conducted. The Bank has generally required that the
properties securing commercial real estate loans have debt service coverage
ratios (the ratio of earnings before debt service to debt service) of at least
1.2x. Exceptions to this ratio are considered on an individual basis and must
be approved by the appropriate
61
<PAGE>
lending authority. Generally, all commercial real estate loans made to
corporations, partnerships and other business entities require personal
guarantees by the principals; however, exceptions may be made for existing
customers of the Bank, with approval of the Board of Trustees. The largest
commercial real estate loan in the Bank's portfolio at August 31, 1997, was a
$2.8 million loan secured by a nursing home located on Staten Island.
Loans secured by commercial real estate properties generally involve larger
principal amounts and a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial
real estate properties are often dependent on successful operation or
management of the properties, repayment of such loans may be affected by
adverse conditions in the real estate market or the economy. The Bank seeks to
minimize these risks through its underwriting standards, which require such
loans to be qualified on the basis of the property's income and debt service
coverage ratio. See "Risk Factors--Increased Lending Risks Associated With
Commercial Real Estate, Multi-Family, Construction and Development and
Commercial Lending." As part of the operating strategy, the Bank intends to
continue to emphasize its commercial real estate lending activities in its
primary market area depending on the demand for such loans and commercial real
estate market conditions.
Construction and Development Lending. The Bank originates construction and
development loans for the development of commercial and residential property
located in its primary market area, and may originate construction and
development loans outside its primary market area to existing customers. At
August 31, 1997, the Bank had $30.0 million of construction loans, most of
which related to the construction of one- to four-family properties; $19.7
million of these loans were outstanding at that date, with the remainder
representing commitments for future funding. The Bank originates loans for the
acquisition of commercial and residential property located in its primary
market area only if such acquisition loan is part of an overall development
loan. Construction loans are offered primarily to experienced local developers
operating in the Bank's primary market area and, to a lesser extent, to
individuals for the construction of their residence. The majority of the
Bank's construction loans are originated primarily to finance the construction
of one- to four-family, owner-occupied residential real estate, and commercial
real estate properties located in the Bank's primary market area. Construction
loans are generally offered with terms up to two years. Construction loans may
be made in amounts up to 70% of the estimated cost of construction, or up to
80% in the case of loans to individuals for the construction of their
residence. With respect to construction loans, the Bank generally requires
borrowers with whom the Bank does not have experience to secure permanent
financing commitments from generally recognized lenders for an amount equal to
or greater than the amount of the loan. In some cases, the Bank may itself
provide permanent financing. Loan proceeds are disbursed periodically in
increments as construction progresses and as inspections by the Bank's lending
officers warrant.
The Bank originates land loans to local developers for the purpose of
holding or developing the land for sale. At August 31, 1997, the Bank had $3.6
million of land loans. Such loans are secured by a lien on the property, are
limited to 65% of the appraised value of the secured property on raw land and
up to 75% on developed building lots, and have a term of up to two years, with
a floating interest rate based on the prime rate (which is the prime rate as
published in The Wall Street Journal and The New York Times). The principal of
the loan is reduced as lots are sold and released. The Bank's land loans are
generally secured by property in its primary market area; however, the Bank
may originate land loans outside its primary market area to existing
customers. In addition, the Bank generally originates such loans to developers
with whom it has established relationships and obtains personal guarantees.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction and other assumptions, including the
estimated time to sell residential properties. If the estimate of value proves
to be inaccurate, the Bank may be confronted with a project, when completed,
having a value which is insufficient to assure full repayment. See "Risk
Factors--Increased Lending Risks Associated with Commercial Real Estate,
Multi-Family, Construction and Development and Commercial Lending." The
largest construction loan in the Bank's portfolio at August 31, 1997 was a
$845,000 loan for the construction of a one-family residential unit in the
Borough of Staten Island.
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<PAGE>
Home Equity Lending. The Bank offers fixed-rate, fixed-term home equity
loans and lines of credit and adjustable-rate home equity lines of credit in
its primary market area. At August 31, 1997, the Bank's home equity loans and
lines of credit totalled $11.1 million, or 2.1%, of the Bank's gross loans.
Fixed-rate, fixed-term home equity loans and lines of credit are offered in
amounts up to 75% (80% if the Bank holds the first mortgage) of the appraised
value of the property (including the first mortgage) with a maximum loan
amount of $250,000. Fixed-rate, fixed-term home equity loans and lines of
credit are offered with terms up to fifteen years, with interest-only payments
during the first five years and repayment of principal and interest during the
final ten years. Adjustable-rate home equity lines of credit are offered in
amounts up to 75% (80% if the Bank holds the first mortgage) of the appraised
value of the property (including the first mortgage) with terms of up to
twenty-five years with a maximum amount of $250,000. Adjustable-rate loans are
indexed to the prime rate (which is the prime rate as published in The Wall
Street Journal and The New York Times).
Commercial Lending. The Bank also originates commercial loans to small and
medium sized businesses operating in the Bank's primary market area. At August
31, 1997, the Bank had $9.3 million of commercial loans which amounted to 1.8%
of the Bank's total loans receivable. Although such loans are sometimes
secured by equipment, leases, inventory and accounts receivable, in the case
of the Bank, the majority of its commercial loans are secured by real estate.
Term loans are generally offered with adjustable rates of interest and terms
of up to five years. Secured commercial loans will be made in an amount up to
90% of the value of the property securing the loan. All term loans fully
amortize during the term of such loan. Business lines of credit have terms of
up to five years if secured and two years if unsecured. Secured lines of
credit will be made in amounts up to 90% of the value of the property securing
the line. Business lines of credit adjust on a daily basis and are indexed to
the prime rate.
The Bank also issues both secured and unsecured letters of credit to
business customers of the Bank. Secured letters of credit will be issued in
amounts up to 100% of the value of the collateral securing the letter of
credit. Acceptable collateral includes an assigned deposit account with the
Bank, real estate or marketable securities. Letters of credit have a maximum
term of two years.
In making commercial loans, the Bank considers primarily the financial
resources of the borrower, the borrower's ability to repay the loan out of net
operating income, the Bank's lending history with the borrower and the value
of any collateral. Generally, if the borrower is a corporation, partnership or
other business entity, personal guarantees by the principals are required.
However, personal guarantees may not be required on such loans depending on
the creditworthiness of the borrower and other mitigating circumstances. The
Bank's largest commercial loan at August 31, 1997 was $1.6 million. At such
date, the Bank had $2.6 million of unadvanced commercial lines of credit.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for
the repayment of commercial loans may be substantially dependent on the
success of the business itself. Further, any collateral securing such loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business. See "Risk Factors--Increased
Lending Risks Associated with Commercial Real Estate, Multi-Family,
Construction and Development and Commercial Lending."
Consumer and Student Lending. The Bank's portfolio of consumer and student
loans primarily consists of student loans, unsecured personal loans and
overdraft lines of credit. As of August 31, 1997, consumer and student loans
amounted to $23.2 million, or 4.4% of the Bank's total loan portfolio, of
which $15.0 million were student loans. The Bank offers student loans through
the Federal Family Education Loan Program, a federal program governed by the
New York State Higher Education Services Corporation ("NYSHESC"). The Bank
offers both subsidized and unsubsidized Federal Stafford Loans and Federal
Parent Loans. NYSHESC is responsible for the final approval of and guarantees
all student loans made by the Bank. The terms and rates of the loans are set
by NYSHESC. The Bank is permitted to charge an origination fee, currently 3.0%
of the loan amount, which fee is subject to change by the NYSHESC.
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<PAGE>
Consumer loans may entail a greater degree of credit risk than do
residential mortgage loans, particularly in the case of consumer loans that
are unsecured. Consumer loan collections on these loans are dependent on the
borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
Loan Approval Procedures and Authority. The Board of Trustees establishes
the lending policies and loan approval limits of the Bank. The Board of
Trustees has established the Residential/Commercial/Construction Lending
Committee which is comprised of five members of the Board of Trustees. The
Committee discusses and approves all loans and lines of credit in amounts
greater than management has authority to approve, within the Committee's
designated authority as established from time to time by the Board of
Trustees. Loans which exceed the Committee's authority are approved or denied
by the Board of Trustees.
The Board of Trustees has authorized the following persons to approve loans
up to the amounts indicated: residential mortgage loans of up to $500,000 and
home equity loans of up to $250,000 can be approved by two members of the
Residential/Commercial/Construction Lending Committee, plus the senior retail
loan officer and another loan officer; secured or unsecured commercial loans
of up to $25,000 can be approved by either the senior commercial loan officer,
the commercial loan officer or a vice president within the Business division;
secured or unsecured commercial loans up to $100,000 can be approved by any
two of the senior commercial loan officer, the commercial loan officer or a
vice president with the Business division; secured or unsecured commercial
loans up to $500,000 can be approved by two members of the
Residential/Commercial/Construction Lending Committee and any two of the
senior commercial loan officer, the commercial loan officer or a vice
president within the business division; and commercial real estate and
construction and development loans up to $500,000 can be approved by two
members of the Residential/Commercial/Construction Lending Committee and any
two of the senior commercial loan officer, the commercial loan officer, a vice
president or assistant secretary in the Business division. Individual loans to
one borrower may not exceed $4.0 million and aggregate loans to one borrower
may not exceed $5.0 million, without Board approval. Total aggregate loans are
also subject to the Bank's regulatory loans-to-one-borrower limit, which at
August 31, 1997 was $10 million. See "Regulation and Supervision--New York
State Law."
With respect to 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. If necessary, additional financial information may be required. An
appraisal of real estate intended to secure a proposed loan generally is
required to be performed by appraisers approved by the Bank. For proposed
mortgage loans, the Board annually approves independent appraisers used by the
Bank and approves the Bank's appraisal policy. The Bank's policy is to obtain
title and hazard insurance on all mortgage loans and the Bank may require
borrowers to make payments to a mortgage escrow account for the payment of
property taxes. Any exceptions to the Bank's underwriting policies must be
noted on an underwriting analysis sheet and presented to the Senior Loan
Officer for approval.
DELINQUENT LOANS, REAL ESTATE OWNED AND CLASSIFIED ASSETS
Management and the Board of Trustees perform a monthly review of all
delinquent loans. The Bank's procedures with respect to delinquencies may vary
depending on the nature of the loan and period of delinquency. The Bank
generally requires that delinquent mortgage loans be reviewed and that a
delinquency notice be mailed no later than the thirtieth day of delinquency
and a late charge be assessed after fifteen days. The Bank's policies provide
that telephone contact will be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to foreclosure, the Bank will attempt to obtain
full payment or work out a repayment schedule with the borrower to avoid
foreclosure. Mortgage loans which are more than 45 days delinquent are
referred to the Bank's attorneys for collection. If the loan becomes 75 days
delinquent, the Bank's attorneys are instructed to commence foreclosure
proceedings.
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<PAGE>
It was the Bank's policy to discontinue accruing interest on all commercial
real estate, construction and commercial loans which were past due 90 days, on
all consumer loans which were past due 120 days, and on all one- to four-
family residential mortgage loans which were past due 180 days, or when in the
opinion of management such suspension was warranted. Effective July 1, 1997,
the Bank revised this policy such that it does not accrue interest on any
loans, including one- to four-family loans secured by real estate, which are
more than 90 days delinquent unless, in the opinion of management, collection
is probable. Property acquired by the Bank as a result of foreclosure on a
mortgage loan is classified as "real estate owned" and is recorded at the
lower of the unpaid principal balance or fair value less costs to sell at the
date of acquisition and thereafter. For loans in excess of $25,000, fair value
must be substantiated by an appraisal of the property and, thereafter,
appraisal of the property on an as-needed basis. At August 31, 1997, the Bank
had $6.5 million of nonperforming assets (defined as non-accruing loans and
REO). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Operating Results for the Two Months
Ended August 31, 1997 and August 31, 1996--Provision for Loan Losses."
At August 31, 1997, the Bank's real estate owned, net, consisting of
foreclosed assets, totalled $885,000, which at such date was comprised of nine
one- to four-family properties and one vacant commercial lot. A full appraisal
is conducted by an independent third-party appraiser prior to the Bank taking
ownership of such foreclosed properties, and thereafter Bank personnel
generally conduct periodic external inspections of such properties. Bank
personnel conduct monthly reviews of its foreclosed real estate and
periodically adjust its valuation allowance for possible declines in the value
of real estate owned. The Bank had no allowance for possible losses on real
estate owned at August 31, 1997. The Bank is currently offering for sale all
real estate owned as a result of foreclosure through brokers and through its
own personnel. The Bank's policies generally permit the financing of the sale
of its foreclosed real estate on substantially the same terms applicable to
its other real estate mortgage loans.
Federal regulations and the Bank's Classification of Assets Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank currently classifies
problem and potential problem assets as "Substandard," "Doubtful" or "Loss"
assets. An asset is considered Substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the
distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Assets classified as Doubtful have all of
the weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that their continuance as assets,
without the establishment of a specific loss reserve, is not warranted. Assets
which do not currently expose the insured institution to a sufficient degree
of risk to warrant classification in one of the aforementioned categories but
possess weaknesses are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for possible loan losses in an amount deemed prudent by
management unless the loss of principal appears to be remote. General
valuation allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies one or more assets, or portions
thereof, as Loss, it is required either to establish a specific allowance for
losses equal to 100% of the amount of the assets so classified or to charge
off such amount.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the FDIC
and NYBD, which can order the establishment of additional general or specific
loss allowances. The FDIC, in conjunction with the other federal banking
agencies, adopted an interagency policy statement on the allowance for loan
and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that institutions have effective systems and
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<PAGE>
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth
in the policy statement. While the Bank believes that it has established an
adequate allowance for possible loan losses, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank
to materially increase at that time its allowance for possible loan losses,
thereby negatively affecting the Bank's financial condition and earnings at
that time. Although management believes that adequate specific and general
loan loss allowances have been established, actual losses are dependent upon
future events and, as such, further additions to the level of specific and
general loan loss allowances may become necessary.
All residential real estate loans with loan balances in excess of $500,000
are reviewed annually. Commercial real estate and construction loans with a
balance in excess of $400,000 are also reviewed annually. Additionally, loans
with balances of $1.0 million or more will be reviewed semi-annually, if
conditions warrant. Loan reviews are performed by the Loan Reviewer, a person
not directly involved in the lending or loan administration process. Each loan
reviewed is submitted to the Loan Review Committee, composed of the Loan
Reviewer, Senior Real Estate and Commercial Loan Officer, the foreclosure
officer and certain members of the Board of Trustees. Meetings are held on a
quarterly or on an as-needed basis. Upon review, the Committee will classify
the loan and comment as to any corrective action needed. The Senior Real
Estate Loan Officer will report to the Board of Trustees the findings of the
Loan Review Committee on an on-going basis. A report summarizing the results
of loan reviews is submitted to the Board on a quarterly basis, or as meetings
occur.
At August 31, 1997, the Bank had $3.2 million of assets designated by the
Bank as Substandard, consisting of sixteen loans, no assets classified by the
Bank as Doubtful, and no assets classified by the Bank as Loss, respectively.
At August 31, 1997, the Bank had $1.9 million of assets designated by the Bank
as Special Mention, consisting of twenty-five loans which were designated
Special Mention due to past loan delinquencies.
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<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio as
of the dates indicated:
<TABLE>
<CAPTION>
AT AUGUST 31, 1997 AT JUNE 30, 1997
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... -- $ -- 24 $2,300 3 $ 338 20 $2,306
Multi-family............ -- -- -- -- -- -- -- --
Commercial real estate.. -- -- 8 2,342 1 1,102 6 876
Construction and
development............ -- -- 2 219 1 100 3 341
Home equity............. -- -- 1 31 -- -- 1 30
Commercial loans........ 3 117 3 134 1 18 -- --
Consumer and student
loans.................. 67 159 175 546 67 213 89 324
--- ------ --- ------ --- ------ --- ------
Total................. 70 $ 276 213 $5,572 73 $1,771 119 $3,877
=== ====== === ====== === ====== === ======
Delinquent loans to
total loans(1)......... 0.05% 1.07% 0.35% 0.77%
====== ====== ====== ======
<CAPTION>
AT JUNE 30, 1996 AT JUNE 30, 1995
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... 7 $ 901 16 $1,837 2 $ 276 18 $1,736
Multi-family............ -- -- -- -- -- -- -- --
Commercial real estate.. -- -- 4 939 -- -- 4 593
Construction and
development............ 1 385 7 687 2 1,202 3 423
Home equity............. -- -- 4 94 2 87 2 43
Commercial loans........ 1 118 -- -- 1 30 -- --
Consumer and student
loans.................. 25 71 77 263 34 88 64 200
--- ------ --- ------ --- ------ --- ------
Total................. 34 $1,475 108 $3,820 41 $1,683 91 $2,995
=== ====== === ====== === ====== === ======
Delinquent loans to
total loans(1)......... 0.35% 0.91% 0.42% 0.76%
====== ====== ====== ======
</TABLE>
- --------
(1) Total loans includes loans receivable held-for-investment, less deferred
loan fees, deferred mortgage interest and unamortized discounts, net.
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Non-Performing Assets. The following table sets forth information regarding
the Bank's nonperforming assets.
<TABLE>
<CAPTION>
AT AT JUNE 30,
AUGUST 31, --------------------------------------
1997 1997 1996 1995 1994 1993
---------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family....... $2,331 $1,676 $1,695 $1,590 $1,862 $1,554
Multi-family.............. -- -- -- -- -- --
Commercial real estate.... 2,342 876 939 593 1,747 1,702
Construction and
development.............. 219 120 120 108 215 538
Commercial................ 134 -- -- -- -- 100
Consumer and student...... 546 -- -- -- 52 --
------ ------ ------ ------ ------ ------
Total non-accrual
loans.................. 5,572 2,672 2,754 2,291 3,876 3,894
Loans contractually past due
90 days or more and still
accruing interest(1)....... -- 1,205 1,066 704 1,513 1,481
------ ------ ------ ------ ------ ------
Total non-performing
loans.................. 5,572 3,877 3,820 2,995 5,389 5,375
Real estate owned........... 885 662 612 335 441 2,336
------ ------ ------ ------ ------ ------
Total non-performing
assets................. $6,457 $4,539 $4,432 $3,330 $5,830 $7,711
====== ====== ====== ====== ====== ======
Allowance for possible loan
losses as a percent of
loans(2)................... 1.11% 1.10% 1.14% 0.83% 0.87% 0.77%
Allowance for possible loan
losses as a percent of
total non-performing
loans(3)................... 102.00 141.09 125.55 109.35 57.64 50.88
Non-performing loans as a
percent of loans(2)(3)..... 1.09 0.78 0.91 0.76 1.51 1.51
Non-performing assets as a
percent of total
assets(3).................. 0.64 0.46 0.48 0.39 0.71 0.99
</TABLE>
- --------
(1) Includes consumer and student loans.
(2) Loans include loans receivable held for investment, net, excluding the
allowance for possible loan losses.
(3) It was the Bank's policy to generally cease accruing interest on all
commercial real estate, construction and commercial loans 90 days or more
past due, on all consumer loans which were 120 days or more past due, and
on all one- to four-family residential mortgage loans which were 180 days
or more past due. Effective July 1, 1997, the Bank revised this policy
such that it does not accrue interest on any loans, including one- to
four-family loans secured by real estate, which are more than ninety days
delinquent as to principal and interest unless, in the opinion of
management, collection is probable. See "--Delinquent Loans, Real Estate
Owned and Classified Assets."
Non-accrual loans totalled $5.6 million as of August 31, 1997, which
included twenty-four one- to four-family loans, with an aggregate balance of
$2.3 million and ten commercial real estate loans and construction loans with
an aggregate balance of $2.6 million, of which one loan is a $1.1 million
commercial mortgage on a mixed-use property in Staten Island, New York. Non-
accrual loans do not include student loans delinquent 90 days or more as the
Bank does not classify such loans as non-accrual because delinquent principal
and interest on guaranteed student loans is guaranteed by the U.S. government.
ALLOWANCE FOR LOAN LOSSES
The allowance for possible loan losses is maintained through provisions for
possible loan losses based on management's on-going evaluation of the risks
inherent in its loan portfolio in consideration of the trends in its loan
portfolio, the national and regional economies and the real estate market in
the Bank's primary lending area. The allowance for possible loan losses is
maintained at an amount management considers adequate to cover estimated
losses in its loan portfolio which are deemed probable and estimable based on
information currently known to management. The Bank's loan loss allowance
determinations also incorporate factors and analyses which consider the
potential principal loss associated with the loan, costs of acquiring the
property securing the
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loan through foreclosure or deed in lieu thereof, the periods of time involved
with the acquisition and sale of such property, and costs and expenses
associated with maintaining and holding the property until sale and the costs
associated with the Bank's inability to utilize funds for other income
producing activities during the estimated holding period of the property.
As of August 31, 1997, the Bank's allowance for possible loan losses was
$5.7 million, or 1.1%, of total loans and 102.0% of non-performing loans as
compared to $5.5 million, or 1.1% of total loans and 141.1% of non-performing
loans as of June 30, 1997. The Bank had total non-performing loans of $5.6
million and $3.9 million at August 31, 1997 and June 30, 1997, respectively,
and non-performing loans to total loans of 1.09% and 0.78%, respectively. The
Bank will continue to monitor and modify its allowance for possible loan
losses as conditions dictate. The Board of Trustees reviews the adequacy of
the allowance for possible loan losses quarterly. While management believes
that, based on information currently available, the Bank's allowance for
possible loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover future loan losses
incurred by the Bank or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. Management may
in the future increase its level of loan loss allowance as a percentage of
total loans and non-performing loans in the event it increases the level of
multi-family, commercial real estate, construction and development or other
lending as a percentage of its total loan portfolio. In addition, the FDIC and
NYBD as an integral part of their examination process periodically review the
Bank's allowance for loan losses. Such agencies may require the Bank to make
additional provisions for estimated loan losses based upon judgments different
from those of management.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR
THE TWO MONTHS
ENDED AT OR FOR THE YEAR ENDED JUNE 30,
AUGUST 31, ----------------------------------
1997 1997 1996 1995 1994 1993
-------------- ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period..................... $5,470 $4,796 $3,275 $3,106 $2,735 $2,843
------ ------ ------ ------ ------ ------
Provision for loan losses... 300 1,080 1,600 600 859 2,331
Charge-offs:
Real estate loans......... 40 174 166 384 565 2,255
Commercial real estate.... 4 15 -- 6 118 17
Consumer and student
loans.................... 59 286 186 150 133 242
------ ------ ------ ------ ------ ------
Total charge-offs....... 103 475 352 540 816 2,514
Recoveries:
Real estate loans......... -- 45 97 48 241 23
Commercial real estate.... 12 -- 122 -- -- --
Consumer and student
loans.................... 4 24 54 61 87 52
------ ------ ------ ------ ------ ------
Total recoveries........ 16 69 273 109 328 75
Net charge-offs
(recoveries)............... 87 406 79 431 488 2,439
------ ------ ------ ------ ------ ------
Balance at end of period.... $5,683 $5,470 $4,796 $3,275 $3,106 $2,735
====== ====== ====== ====== ====== ======
</TABLE>
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<PAGE>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance and the percent of loans to total loans in each of
the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT AUGUST 31, AT JUNE 30,
----------------------------- -----------------------------------------------------------
1997 1997 1996
----------------------------- ----------------------------- -----------------------------
PERCENT OF PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate(1).......... $2,664 47% 94% $2,619 48% 94% $2,173 45% 93%
Commercial(2)........... 409 7 2 355 6 1 380 8 3
Consumer and student.... 353 6 4 321 6 5 315 7 5
Unallocated............. 2,257 40 -- 2,175 40 -- 1,928 40 --
------ ----- ----- ------ ----- ----- ------ ----- -----
Total allowance for
possible loan losses... $5,683 100.0% 100.0% $5,470 100.0% 100.0% $4,796 100.0% 100.0%
====== ===== ===== ====== ===== ===== ====== ===== =====
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- ----------------------------- -----------------------------
PERCENT OF PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate(1).......... $2,084 64% 93% $1,892 61% 93% $1,814 66% 94%
Commercial(2)........... 472 14 1 427 14 2 542 20 1
Consumer and student.... 295 9 6 255 8 5 238 9 5
Unallocated............. 424 13 -- 532 17 -- 141 5 --
------ ----- ----- ------ ----- ----- ------ ----- -----
Total allowance for
possible loan losses... $3,275 100.0% 100.0% $3,106 100.0% 100.0% $2,735 100.0% 100.0%
====== ===== ===== ====== ===== ===== ====== ===== =====
</TABLE>
- --------
(1) Real estate includes one- to four-family, construction and development and
home equity loans.
(2) Commercial includes commercial real estate and commercial loans.
SECURITIES INVESTMENT ACTIVITIES
The Board of Trustees sets the securities investment policy of the Bank. The
Bank considers the ability of an investment to provide earnings consistent
with factors of quality, maturity, marketability and risk diversification.
While the Board of Trustees has final authority and responsibility for the
securities investment portfolio, the Bank has established a Management
Investment Committee comprised of eight officers including the Investment
Officer to supervise the Bank's securities investment program. The Chief
Executive Officer is an ex-officio member thereof. The Management Investment
Committee reports to the Asset/Liability Committee. The Management Investment
Committee meets monthly and evaluates all investment activities for safety and
soundness, adherence to the Bank's investment policy, and assurance that
authority levels are maintained. The Bank's Investment Officer is responsible
for making securities investment portfolio decisions in accordance with the
Bank's policies. While the Investment Officer has the authority to conduct
trades within specific guidelines established by the Bank's investment policy,
all transactions are reviewed by the Asset/Liability Committee on an ongoing
basis and reported to the Board of Trustees on a monthly basis.
The Bank's current policies generally permit securities investments in
various types of assets, including U.S. Government and agency securities,
investment-grade corporate debt obligations, various types of mortgage-
70
<PAGE>
backed and mortgage-related securities, including CMOs, insured certificates
of deposits and corporate equities. In addition, the Bank's policies permit
investments in short-term commercial paper and various municipal and other
bonds and obligations. The Bank's current securities investment strategy is to
deemphasize its investment in U.S. Government obligations, corporate debt and
municipal bonds and to emphasize the purchase of mortgage-backed and mortgage-
related securities and equities in order to increase its overall investment
securities yield while remaining in short- and medium-term investments for
purposes of interest rate risk management.
The Bank currently does not participate in hedging programs, interest rate
swaps, or other activities involving use of off-balance sheet derivative
financial instruments. Similarly, the Bank does not invest in mortgage-related
securities which are deemed to be "high risk" by the federal banking
regulators or purchase bonds which are not rated investment grade.
At August 31, 1997, the Bank had $437.0 million in securities, consisting
primarily of U.S. Government and agency obligations, mortgage-backed and
mortgage-related securities, municipal, public utility and corporate
obligations and preferred and common stocks. SFAS No. 115 requires the Bank to
designate its securities as held-to-maturity, available for sale or trading
depending on the Bank's intent regarding its investments. The Bank does not
currently maintain a trading portfolio of securities. In accordance with the
Special Report of the FASB regarding SFAS No. 115, in November 1995, the Bank
reclassified $26.0 million of securities from held to maturity to available-
for-sale. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Financial Condition at June 30, 1997 and
June 30, 1996." As of August 31, 1997, $78.6 million of the Bank's securities
portfolio, or 7.8% of total assets was classified as available-for-sale, with
an estimated average life of the portfolio of 6.4 years. At such date, $358.5
million of the Bank's securities portfolio, or 35.6% of total assets, was
classified as held-to-maturity, with a market value of $360.4 million and an
estimated average life of the portfolio of 2.2 years.
Mortgage-Backed and Mortgage-related Securities. The Bank purchases
mortgage-backed and mortgage-related securities in order to: (i) generate
positive interest rate spreads with minimal administrative expense and (ii)
improve its credit risk as a result of the guarantees provided by FHLMC, FNMA,
and GNMA. The Bank has primarily invested in mortgage-backed securities issued
or sponsored by FNMA, FHLMC and GNMA and private issuers. The Bank also
invests in mortgage-related securities, primarily CMOs, issued or sponsored by
FNMA and FHLMC as well as private issuers. At August 31, 1997, mortgage-backed
and mortgage-related securities totalled $220.1 million, or 21.9% of total
assets and 23.0% of total interest earning assets of which $57.0 million was
classified as available-for-sale and $163.1 million was classified as held-to-
maturity as compared to $81.7 million, or 9.9% of total interest earning
assets at June 30, 1996. The increase in such securities reflects management's
recent revision to its securities investment strategy whereby it has decreased
its emphasis on debt securities by investing funds from maturing debt
securities into mortgage-backed and mortgage-related securities. At August 31,
1997, 17.1% of the mortgage-backed and mortgage-related securities were
adjustable-rate and 82.9% were fixed-rate. The mortgage-backed and mortgage-
related securities portfolio had coupon rates ranging from 5% to 11% and had a
weighted average yield of 7.18% at August 31, 1997. The estimated fair value
of the Bank's mortgage-backed securities available-for-sale at August 31,
1997, was $57.0 million, which is $195,000 greater than the amortized cost of
$56.8 million.
Mortgage-backed securities are created by the pooling of mortgages and
issuance of a security with an interest rate which is less than the interest
rate on the underlying mortgage. Mortgage-backed securities typically
represent a participation interest in a pool of single-family or multi-family
mortgages, although the Bank focuses its investments on mortgage-backed
securities backed by single-family mortgages. The issuers of such securities
(generally U.S. Government agencies and government sponsored enterprises,
including FNMA, FHLMC and GNMA) pool and resell the participation interests in
the form of securities to investors such as the Bank and guarantee the payment
of principal and interest to investors. Mortgage-backed securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage-backed
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Bank.
Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments
71
<PAGE>
thereby impacting the net yield on such securities. There is also reinvestment
risk associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. In addition, the market value of such
securities may be adversely affected by changes in interest rates. The Bank
estimates prepayments for its mortgage-backed securities at purchase to ensure
that prepayment assumptions are reasonable considering the underlying
collateral for the mortgage-backed securities at issue and current mortgage
interest rates and to determine the yield and estimated maturity of its
mortgage-backed security portfolio. Of the Bank's $220.1 million mortgage-
backed securities portfolio at August 31, 1997, $36.0 million with a weighted
average yield of 6.02% had contractual maturities within five years and $184.1
million with a weighted average yield of 7.39% had contractual maturities over
five years. However, the average life of a mortgage-backed security is
generally substantially less than its stated maturity due to prepayments of
the underlying mortgage loans. Prepayments that are faster than anticipated
may shorten the estimated life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages depend on many factors, the difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the
rate of prepayments. During periods of declining mortgage interest rates,
refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Bank may be subject to reinvestment risk because, to the extent that the
Bank's mortgage-backed securities prepay faster than anticipated, the Bank may
not be able to reinvest the proceeds of such repayments and prepayments at a
comparable rate.
CMOs are a type of debt security issued by a special purpose entity that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class possessing different
risk characteristics. The cash flows from the underlying collateral is
generally divided into "tranches" or classes whereby tranches have descending
priorities with respect to the distribution of principal and interest
repayment of the underlying mortgages and mortgage-backed securities as
opposed to pass through mortgage-backed securities where cash flows are
distributed pro rata to all security holders. In contrast to mortgage-backed
securities from which cash flow is received (and hence, prepayment risk is
shared) pro rata by all securities holders, the cash flow from the mortgages
or mortgage-backed securities underlying CMOs is paid in accordance with a
predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche of CMOs may therefore carry
prepayment risk that differs from that of both the underlying collateral and
other tranches. Accordingly, CMOs attempt to moderate reinvestment risk
associated with conventional mortgage-backed securities resulting from
unexpected prepayment activity. Investments in CMOs involve a risk that actual
prepayments will differ from those estimated in pricing the security, which
may result in adjustments to the net yield on such securities. Additionally,
the market value of such securities may be adversely affected by changes in
the market interest rates. Management believes these securities may represent
attractive alternatives relative to other investments due to the wide variety
of maturity, repayment and interest rate options available.
At August 31, 1997, the Bank's CMO portfolio totalled $122.2 million, or
12.1%, of total assets and 12.8% of total interest earning assets, consisting
of $83.2 million of CMOs issued by private issuers such as PNC Mortgage
Corporation, Prudential Home Mortgage Securities, Inc., and GE Capital
Mortgage Services, Inc. and $38.9 million issued by government sponsored
agencies such as FNMA and FHLMC. Prior to purchasing CMOs, each CMO is tested
for Federal Financial Institutions Examination Counsel ("FFIEC") qualification
as it is the policy of the Bank to limit its privately issued CMOs to non-high
risk securities rated "AAA" by two rating agencies with an average life of ten
years or less. The Bank also limits the amount of such investments to 15% of
the Bank's assets and 5% of the Bank's assets for any individual issuer of
privately issued CMOs. For government sponsored CMOs, the Bank's policy limits
such investments to non-high risk securities that have an average life of ten
years or less. The Bank also limits the amount of such investments to $10
million per transaction. The Bank monitors the credit rating of its CMOs on a
regular basis. The current securities investment policy of the Bank prohibits
the purchase of higher risk CMOs, which are defined as those securities
exhibiting significantly greater volatility of estimated average life and
price relative to interest rates than do standard 30-year fixed rate
securities. At August 31, 1997, $25.0 million of the Bank's CMO portfolio was
classified as available-for-sale and $97.1 million was classified as held-to-
maturity with a market value of $97.3 million. At such date, the Bank's CMO
portfolio had an estimated average life of 2.9 years and an weighted average
yield of 7.33%.
72
<PAGE>
Debt and Equity Securities. The Bank's investment in debt securities
generally consists of investments in U.S. Treasury securities and debt
securities issued by government sponsored agencies such as FNMA, FHLB and
FHLMC. The Bank also invests in debt securities issued by industrial and
financial companies and obligations of municipalities and public utilities.
During 1997, the Bank revised its investment strategy whereby it has decreased
its emphasis on investment in debt securities and has emphasized its
investment in mortgage-backed and mortgage-related securities. The Bank's
current policy is to allow such securities to mature.
U.S. Government and Agency Obligations. At August 31, 1997, the Bank's U.S.
Government securities portfolio totalled $47.8 million, all of which were
classified as held-to-maturity. Such portfolio primarily consists of short- to
medium-term (maturities of one to five years) securities. At August 31, 1997,
the Bank's agency securities portfolio totalled $39.5 million, all of which
was classified as held-to-maturity and consisted of agency callable
debentures. The Bank's callable agency debentures generally are callable on
either a quarterly or semi-annual basis following a holding period of three to
six months. The current policy of the Bank limits the purchase of agency debt
obligations to a maturity of twenty years or less and limits such purchases to
$10 million per transaction.
Corporate Bonds. The Bank's corporate bond portfolio, which at August 31,
1997 totalled $64.7 million, all of which is classified as held-to-maturity,
was composed primarily of short- and medium-term, fixed-rate investment grade
corporate issues. At August 31, 1997, the portfolio had a weighted average
maturity of approximately 1 year and a weighted average coupon rate of 7.0%.
The Bank's policy limits investments in corporate bonds to bonds rated "A" or
higher and to a total investment of 25% of the Bank's assets, with a 1%
limitation of a single issuer.
Public Utility Bonds. The Bank's public utility bond portfolio, which at
August 31, 1997 totalled $35.5 million, all of which are classified as held-
to-maturity, generally consists of bonds issued by electric and gas utilities
and telephone companies. All of the Bank's public utility bonds are rated "A"
or higher. The Bank's policies limit investments in gas and electric utility
bonds and telephone company bonds to 10% of total assets, each, and limit
investment in obligations of any one issuer to 1% of assets. At August 31,
1997, the weighted average maturity of the portfolio was approximately 1.9
years and the portfolio had a weighted average coupon rate of 6.50%.
Municipal Bonds. The Bank's municipal bond portfolio, which at August 31,
1997 was comprised of bonds issued by New York State agencies which totalled
$1.1 million, had an estimated fair value of $1.2 million. All of such
securities were classified as held-to-maturity and were comprised of revenue
bonds. All of the Bank's municipal bonds are currently rated "A" or better. At
such date the weighted average maturity of the portfolio was approximately
11.1 years and the portfolio had a weighted average coupon rate of 6.10%.
Interest earned on municipal bonds is exempt from federal, state and local
income taxes.
Equity Securities. At August 31, 1997, the Bank's equity securities
portfolio totalled $21.5 million all of which were classified as available-
for-sale. Such portfolio consisted of a $1.8 million investment in mutual
funds, and $14.4 million in preferred stock issued by corporate issuers and
$5.4 million of common stock. The Bank benefits from its investment in common
and preferred stocks due to a tax deduction the Bank receives with regard to
dividends paid by corporate issuers on equity securities held by other
corporate entities such as the Bank. Accordingly, on a tax equivalent basis,
the yield on the Bank's equity portfolio was 6.85%. The Bank's policy limit
for its common and preferred stock investments is 5% of its total assets with
a 0.5% limitation on the purchase of any single issuer, with the exception of
government agency preferred stock, which limit is 5% per issuer. The Bank's
current policies permit the purchase of preferred stock rated "AA" or better.
The substantial majority of the Bank's preferred stock is redeemable by
issuers after five years. The Bank has retained an independent third party to
advise it on its common stock portfolio. The independent third party does not
have discretionary authority to purchase or sell common stock on behalf of the
Bank. See "Regulation and Supervision--FDIC Regulations."
73
<PAGE>
The following table sets forth the composition of the Bank's debt and equity
and mortgage-backed and mortgage-related securities portfolios in dollar
amounts and in percentages at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
AT AUGUST 31, -----------------------------------------------------
1997 1997 1996 1995
----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
Corporate bonds........ $ 64,655 14.79% $ 68,483 15.66% $110,714 26.94% $108,334 28.32%
U.S. Government
obligations........... 47,761 10.93 52,757 12.06 120,045 29.21 152,783 39.94
Agency securities...... 39,460 9.03 39,457 9.02 49,472 12.03 -- --
Public utilities....... 35,494 8.12 36,489 8.34 39,257 9.55 13,237 3.46
Municipal bonds........ 1,149 0.26 1,149 0.26 1,188 0.28 1,199 0.31
Other debt
obligations(1)........ 6,826 1.56 6,866 1.57 6,976 1.70 12,326 3.22
-------- ------ -------- ------ -------- ------ -------- ------
Total debt securities.. 195,345 44.70 205,201 46.91 327,652 79.71 287,879 75.25
-------- ------ -------- ------ -------- ------ -------- ------
Equity securities:
Preferred stock........ 14,439 3.30 14,158 3.24 24 0.01 34 0.01
Common stock........... 5,351 1.22 3,814 0.87 156 0.04 149 0.04
Mutual funds........... 1,756 0.40 1,734 0.40 1,527 0.37 424 0.11
-------- ------ -------- ------ -------- ------ -------- ------
Total equity
securities............ 21,546 4.93 19,706 4.51 1,707 0.42 607 0.16
-------- ------ -------- ------ -------- ------ -------- ------
Mortgage-backed and
mortgage related
securities:
FHLMC.................. 83,033 19.00 82,237 18.80 80,284 19.53 92,404 24.15
GNMA................... 11,815 2.70 11,824 2.70 1,394 0.34 1,683 0.44
Private issuer......... 3,137 0.72 3,276 0.75 -- -- -- --
Agency CMOs............ 38,910 8.90 36,934 8.44 -- -- -- --
Private issuer CMOs.... 83,245 19.05 78,249 17.89 -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
and mortgage-related
securities............ 220,140 50.37 212,520 48.58 81,678 19.87 94,087 24.59
-------- ------ -------- ------ -------- ------ -------- ------
Total securities...... $437,031 100.00% $437,427 100.00% $411,037 100.00% $382,573 100.00%
======== ====== ======== ====== ======== ====== ======== ======
Debt and equity
securities available-
for-sale............... $ 21,546 4.93% $ 19,706 4.51% $ 21,659 5.27% $ 607 0.16%
Debt and equity
securities held-to-
maturity............... 195,345 44.70 205,201 46.91 307,700 74.86 287,879 75.25
-------- ------ -------- ------ -------- ------ -------- ------
Total debt and equity
securities............ 216,891 49.63 224,907 51.42 329,359 80.13 288,486 75.41
-------- ------ -------- ------ -------- ------ -------- ------
Mortgage-backed and
mortgage-related
securities available-
for-sale............... 57,024 13.05 27,398 6.26 1,394 0.34 1,683 0.44
Mortgage-backed and
mortgage-related
securities held-to-
maturity............... 163,116 37.32 185,122 42.32 80,284 19.53 92,404 24.15
-------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
and mortgage related
securities............ 220,140 50.37 212,520 48.58 81,678 19.87 94,087 24.59
-------- ------ -------- ------ -------- ------ -------- ------
Total securities...... $437,031 100.00% $437,427 100.00% $411,037 100.00% $382,573 100.00%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
- --------
(1) Consists of railroad, foreign and other bonds.
74
<PAGE>
The following table sets forth the Bank's securities activities for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE TWO MONTHS FOR THE YEAR
ENDED AUGUST 31, ENDED JUNE 30,
-------------------- ----------------------------
1997 1996 1997 1996 1995
--------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BEGINNING BALANCE........... $ 437,427 $ 411,037 $411,037 $382,573 $403,740
--------- --------- -------- -------- --------
Debt and equity securities
purchased--held-to-
maturity................... -- 13,024 17,611 150,256 90,365
Debt and equity securities
purchased--available-for-
sale....................... 1,592 -- 17,678 1,064 2,273
Mortgage-backed and
mortgage-related securities
purchased--held-to-
maturity................... -- 4,941 133,668 15,197 29,218
Mortgage-backed and
mortgage-related securities
purchased--available-for-
sale....................... 29,962 -- 26,478 -- --
Less:
Sale of debt and equity
securities--available-for-
sale....................... -- 4,000 11,938 10 2,132
Sale of mortgage-backed and
mortgage-related
securities--available-for-
sale....................... -- -- -- 5,940 --
Principal repayments on
mortgage-backed and
mortgage-related
securities--held-to-
maturity................... 5,220 3,689 25,315 21,305 9,757
Principal repayments on
mortgage-backed and
mortgage-related
securities--available for
sale....................... 453 -- 479 410 505
Maturities of debt
securities................. 9,776 15,125 127,005 107,658 125,877
Maturities of mortgage-
backed and mortgage-related
securities................. 16,800 -- 3,609 -- --
Realized (gains) losses
received on sales of
mortgage-backed and
mortgage related
securities................. -- -- -- (19) --
Realized and unrealized
(gains) losses on debt and
equity securities.......... -- -- 110 (9) 125
Accretion of
discount/Amortization of
(premium).................. 28 280 1,039 2,769 4,753
Change in net unrealized
(gains) losses on
available-for-sale
securities................. (327) 17 (450) (11) (126)
--------- --------- -------- -------- --------
ENDING BALANCE.............. $ 437,031 $ 405,891 $437,427 $411,037 $382,573
========= ========= ======== ======== ========
</TABLE>
75
<PAGE>
The following table sets forth certain information regarding the amortized
cost and market values of the Bank's debt and equity and mortgage-backed and
mortgage-related securities, at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
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........... $ 47,761 $ 47,881 $ 52,757 $ 52,815 $100,093 $ 99,897 $152,783 $152,590
Agency securities...... 39,460 39,574 39,457 39,522 49,472 49,076 -- --
Municipal bonds........ 1,149 1,205 1,149 1,198 1,188 1,212 1,199 1,226
Corporate bonds........ 100,149 100,220 104,972 104,930 149,970 149,431 121,571 121,709
Other debt
obligations(1)........ 6,826 6,864 6,866 6,897 6,977 6,993 12,326 12,229
-------- -------- -------- -------- -------- -------- -------- --------
Total debt securities
held-to-maturity.... 195,345 195,744 205,201 205,362 307,700 306,609 287,879 287,754
-------- -------- -------- -------- -------- -------- -------- --------
Debt securities
available-for-sale:
U.S. Government
obligations........... -- -- -- -- 19,967 19,952 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total debt securities
available-for-sale.. -- -- -- -- 19,967 19,952 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Equity securities
available-for-sale:
Mutual funds........... 1,641 1,756 1,629 1,734 1,521 1,527 457 424
Preferred stock........ 14,026 14,439 14,027 14,158 27 24 36 34
Common stock........... 5,159 5,351 3,578 3,814 109 156 109 149
-------- -------- -------- -------- -------- -------- -------- --------
Total equity securities
available-for-sale.. 20,826 21,546 19,234 19,706 1,657 1,707 602 607
-------- -------- -------- -------- -------- -------- -------- --------
Mortgage-backed and
mortgage-related
securities:
Held-to-maturity:
FHLMC................. 62,868 64,257 82,237 83,584 80,284 80,631 92,404 92,589
Private issuer........ 3,137 3,150 3,276 3,281 -- -- -- --
Agency CMOs........... 31,590 31,675 32,248 32,336 -- -- -- --
Private Issuer CMOs... 65,521 65,596 67,361 67,392 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed
and mortgage-related
securities held-to-
maturity............. 163,116 164,678 185,122 186,593 80,284 80,631 92,404 92,589
-------- -------- -------- -------- -------- -------- -------- --------
Available-for-sale:
GNMA.................. 11,696 11,815 11,710 11,824 1,292 1,394 1,562 1,683
FHLMC................. 20,170 20,165 -- -- -- -- -- --
Agency CMOs........... 7,340 7,320 4,693 4,686 -- -- -- --
Private issuer CMOs... 17,624 17,724 10,881 10,888 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed
and mortgage-related
securities available-
for-sale............. 56,830 57,024 27,284 27,398 1,292 1,394 1,562 1,683
-------- -------- -------- -------- -------- -------- -------- --------
Net unrealized (losses)
gains on available-for-
sale securities........ 914 -- 586 -- 137 -- 126 --
-------- -------- -------- -------- -------- -------- -------- --------
Total securities........ $437,031 $438,992 $437,427 $439,059 $411,037 $410,293 $382,573 $382,633
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1)Consists of railroad, foreign and other bonds.
76
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's securities
portfolio as of August 31, 1997.
<TABLE>
<CAPTION>
AT AUGUST 31, 1997
---------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
----------------- --------------------- --------------------- --------------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- ----------- --------- ---------- --------- ----------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Debt securities:
Municipal bonds...... $ -- -- % $ 100 6.20% $ 490 6.47% $ 559 5.76% $ 1,149 6.10%
U.S. Government
obligations......... 19,380 6.62 28,381 6.05 -- -- -- -- 47,761 6.28
Agency securities.... -- -- 38,462 6.42 998 7.09 -- -- 39,460 6.44
Public utilities..... 15,348 6.35 18,441 6.57 1,205 6.48 500 7.32 35,494 6.48
Industrial bonds..... 41,418 6.44 23,237 6.15 -- -- -- -- 64,655 6.34
Other debt
obligations(1)...... 4,581 5.70 2,245 7.15 -- -- -- -- 6,826 6.17
------- ----------- ---------- ----------- --------
Total debt securities
held-to-maturity.... 80,727 6.42 110,866 6.36 2,693 6.75 1,059 6.56 195,345 6.39
------- ----------- ---------- ----------- --------
Mortgage-backed and
mortgage related
securities:
FHLMC................ 3,962 5.72 32,036 6.06 -- -- 26,870 7.63 62,868 6.76
Private issuer....... -- -- -- -- -- -- 3,137 7.27 3,137 7.27
Agency CMOs.......... -- -- -- -- -- -- 31,590 7.62 31,590 7.62
Private issuer CMOs.. -- -- -- -- -- -- 65,521 7.22 65,521 7.22
------- ----------- ---------- ----------- --------
Total mortgage-backed
and mortgage-related
securities held-to-
maturity............ 3,962 5.72 32,036 6.06 -- -- 127,118 7.41 163,116 7.12
------- ----------- ---------- ----------- --------
Total securities held-
to-maturity.......... 84,689 6.39 142,902 6.30 2,693 6.75 128,177 7.40 358,461 6.72
------- ----------- ---------- ----------- --------
Available-for-sale:
Mortgage-backed and
mortgage-related
securities:
FHLMC................ -- -- -- -- -- -- 20,165 7.45 20,165 7.45
GNMA................. -- -- -- -- 36 8.34 11,779 7.35 11,815 7.35
Agency CMOs.......... -- -- -- -- -- -- 7,320 7.19 7,320 7.19
Private issuer CMOs.. -- -- -- -- -- -- 17,724 7.28 17,724 7.28
------- ----------- ---------- ----------- --------
Total mortgage-backed
and mortgage-related
securities
available-for-sale.. -- -- -- -- 36 8.34 56,988 7.34 57,024 7.34
------- ----------- ---------- ----------- --------
Equity securities:
Mutual funds......... -- -- -- -- -- -- -- -- 1,756 4.04
Preferred stock...... -- -- -- -- -- -- -- -- 14,439 6.20
Common stock......... -- -- -- -- -- -- -- -- 5,351 1.65
------- ----------- ---------- ----------- --------
Total equity
securities.......... -- -- -- -- -- -- -- -- 21,546 4.89
------- ----------- ---------- ----------- --------
Total securities
available-for-sale.. -- -- -- -- 36 8.34 56,988 7.34 78,570 6.67
------- ----------- ---------- ----------- --------
Total securities....... $84,689 6.39 $ 142,902 6.30 $ 2,729 6.77 $ 185,165 7.38 $437,031 6.71
======= =========== ========== =========== ========
</TABLE>
- --------
(1) Consists of railroad, foreign and other bonds.
77
<PAGE>
SOURCES OF FUNDS
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, and proceeds from maturing
securities and cash flows from operations are the primary sources of the
Bank's funds for use in lending, investing and for other general purposes. To
a lesser extent, the Bank utilizes borrowed funds to fund its operations. The
Bank's application for membership in the FHLB system was approved on October
24, 1997. FHLB membership will provide another source of borrowed funds.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings,
retail checking/NOW accounts, commercial checking accounts, money market
accounts, club accounts and certificates of deposit accounts. The Bank offers
jumbo certificate of deposit accounts and also offers Individual Retirement
Accounts ("IRAs") and other qualified plan accounts. While jumbo certificate
accounts are accepted by the Bank, and may be subject to preferential rates,
the Bank does not actively solicit such deposits as such deposits are more
difficult to retain than core deposits.
At August 31, 1997, the Bank's deposits totalled $882.9 million, of which
89.7% were interest-bearing deposits. For the two month period ended August
31, 1997, the average balance of core deposits totalled $574.6 million, or
65.5% of total average deposits. At August 31, 1997, the Bank had a total of
$305.4 million in certificates of deposit, of which $213.6 million had
maturities of less than one year. For the year ended June 30, 1996, the
average balance of core deposits represented approximately 69.0% of total
deposits and certificate accounts represented 31.0%, as compared to core
deposits representing 65.5% of total deposits and certificate accounts
representing 34.5% of deposits for the two month period ended August 31, 1997.
See "Risk Factors--Sensitivity to Increases in Interest Rates." Although the
Bank has a significant portion of its deposits in savings accounts, management
monitors activity on the Bank's savings accounts and, based on historical
experience and the Bank's current pricing strategy, believes it will continue
to retain a large portion of such accounts. The Bank is not limited with
respect to the rates it may offer on deposit products.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its branch offices are located. The Bank relies primarily on 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 affect the Bank's ability to attract and retain
deposits. The Bank uses traditional means of advertising its deposit products,
including television and print media and generally does not solicit deposits
from outside its market area. While the Bank has historically not accepted
brokered deposits, the Bank is currently in the process of establishing
relationships with deposit brokers and may, in the future, utilize brokered
deposits as a funding source, depending on market conditions.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE TWO MONTHS
ENDED AUGUST 31, FOR THE YEAR ENDED JUNE 30,
-------------------- -----------------------------
1997 1996 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net deposits
(withdrawals)........... $ (4,614) $ (3,632) $ 38,896 $ 27,612 $ (7,032)
Interest credited on
deposit accounts........ 2,969 2,425 27,707 26,254 22,456
--------- --------- --------- --------- ---------
Total (decrease) increase
in deposit accounts..... $ (1,645) $ (1,207) $ 66,603 $ 53,866 $ 15,424
========= ========= ========= ========= =========
</TABLE>
At August 31, 1997, the Bank had outstanding $29.4 million in certificate of
deposit accounts in amounts of $100,000 or more, maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less............................ $ 8,198 5.25%
Over three through six months................... 3,579 5.16
Over six through 12 months...................... 7,862 5.40
Over 12 months.................................. 9,751 6.01
------------
Total........................................... $ 29,390 5.53
============
</TABLE>
78
<PAGE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods
presented utilize average month-end balances.
<TABLE>
<CAPTION>
FOR THE TWO MONTHS ENDED FOR THE YEAR ENDED
AUGUST 31, JUNE 30,
----------------------------------------------------- --------------------------
1997 1996 1997
-------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market
accounts......... $ 38,438 4.36% 3.51% $ 35,269 4.32% 3.45% $ 37,552 4.48% 3.48%
Savings
accounts......... 434,147 49.21 2.84 433,185 53.07 2.59 432,162 51.61 2.74
NOW accounts..... 17,471 1.98 2.51 14,699 1.80 2.65 15,652 1.87 2.36
Non-interest-
bearing
accounts......... 89,889 10.19 -- 76,532 9.38 -- 78,483 9.37 --
-------- ------ -------- ------ -------- ------
Total........... 579,945 65.74 2.43 559,685 68.57 2.29 563,849 67.33 2.40
-------- ------ -------- ------ -------- ------
Certificates of
deposit:
Less than six
months.......... 23,410 2.65 4.48 36,359 4.45 4.47 30,437 3.64 4.38
Over six through
12 months....... 60,215 6.83 5.14 40,938 5.02 4.78 46,188 5.52 4.90
Over 12 through
24 months....... 142,147 16.11 5.48 103,564 12.69 5.20 121,109 14.46 5.33
Over 24 months.. 47,822 5.42 5.76 55,318 6.78 5.73 52,787 6.30 5.75
Certificates
over $100,000... 28,645 3.25 5.46 20,354 2.49 5.25 23,025 2.75 5.32
-------- ------ -------- ------ -------- ------
Total
certificates of
deposit......... 302,239 34.26 5.38 256,533 31.43 5.18 273,546 32.67 5.23
-------- ------ -------- ------ -------- ------
Total average
deposits..... $882,184 100.00% 3.44 $816,218 100.00% 3.19 $837,395 100.00% 3.33
======== ====== ======== ====== ======== ======
FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------------
1996 1995
---------------------------------- --------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
----------- ----------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market
accounts......... $ 28,430 3.64% 3.47% $ 25,058 3.37% 2.93%
Savings
accounts......... 430,500 55.09 2.75 462,720 62.15 2.74
NOW accounts..... 14,602 1.87 2.42 13,724 1.84 2.66
Non-interest-
bearing
accounts......... 65,670 8.40 -- 54,864 7.37 --
----------- ----------- -------- --------
Total........... 539,202 69.00 2.44 556,366 74.73 2.48
----------- ----------- -------- --------
Certificates of
deposit:
Less than six
months.......... 30,360 3.89 4.55 33,593 4.51 3.52
Over six through
12 months....... 39,924 5.11 4.91 35,013 4.70 3.94
Over 12 through
24 months....... 100,840 12.91 5.49 56,846 7.63 5.10
Over 24 months.. 54,496 6.97 5.66 52,649 7.07 5.30
Certificates
over $100,000... 16,577 2.12 5.39 10,111 1.36 4.73
----------- ----------- -------- --------
Total
certificates of
deposit......... 242,197 31.00 5.31 188,212 25.27 4.64
----------- ----------- -------- --------
Total average
deposits..... $ 781,399 100.00% 3.33 $744,578 100.00% 3.03
=========== =========== ======== ========
</TABLE>
79
<PAGE>
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM AUGUST 31, 1997 AT JUNE 30,
------------------------------------------------------------------- AT --------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO FIVE YEARS OR AUGUST 31,
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS MORE 1997 1997 1996 1995
--------- --------- ----------- ---------- ---------- ------------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of
deposit:
0 to 4.00%....... $ 3,071 $ 5 $ -- $ 91 $ 18 $ -- $ 3,185 $ 3,369 $ 2,972 $ 2,085
4.01 to 5.00%.... 53,232 6,141 -- -- 10 -- 59,383 75,534 155,120 78,134
5.01 to 6.00%.... 155,521 54,837 6,135 4,207 6,313 2,758 229,771 205,325 63,573 87,760
6.01 to 7.00%.... 1,755 494 1,860 245 4,444 -- 8,798 9,553 28,167 58,495
7.01 to 8.00%.... -- -- 174 393 3,709 -- 4,276 4,285 4,095 --
Over 8.00%....... -- -- -- -- -- -- -- -- -- --
-------- ------- ------ ------ ------- ------ -------- -------- -------- --------
Total........... $213,579 $61,477 $8,169 $4,936 $14,494 $2,758 $305,413 $298,066 $253,927 $226,474
======== ======= ====== ====== ======= ====== ======== ======== ======== ========
Fair value........................................................................... $262,582 $251,893 $206,138 $229,373
======== ======== ======== ========
</TABLE>
Borrowed Funds. The Bank has historically not utilized borrowings as a
source of funding and has primarily depended on retail deposits to provide
funding. At August 31, 1997, the Bank had $8.4 million of borrowings all of
which were in the form of repurchase agreements. The Bank has recently begun
to place a greater level of emphasis on the utilization of borrowed funds to
fund asset growth. In this regard, at October 31, 1997, the Bank had total
borrowings of $60.4 million, all of which were in the form of repurchase
agreements. Also, the Bank currently maintains a $10.0 million line of credit
with a regional financial institution and has the ability to obtain funding
through the use of additional repurchase agreements entered into with a
nationally recognized investment banking firm. The repurchase agreements would
generally be collateralized by U.S. Treasury obligations or other liquid
securities. In order to provide the Bank with an additional source of funding,
the Bank received approval to become a member of the FHLB on October 24, 1997.
The Bank may utilize advances from the FHLB from time-to-time as an
alternative to retail deposits to fund its operations in the future. FHLB
advances may also be used to acquire certain other assets as may be deemed
appropriate for investment purposes. These advances would be collateralized
primarily by certain of the Bank's mortgage loans and mortgage-backed
securities. See "Regulation and Supervision--Federal Home Loan Bank System."
Such advances are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. The maximum amount
that the FHLB will advance to member institutions fluctuates from time-to-time
in accordance with the policies of the OTS and the FHLB.
OTHER ACTIVITIES
In addition to its traditional lending and deposit products, the Bank also
offers certain merchant banking services. These include providing credit card
deposit accounts to local merchants. The Bank receives a processing fee from
the customer for each credit card transaction processed. The Bank also
receives monthly income from terminal and printer sales and rentals. For the
two month period ended August 31, 1997 and for the year ended June 30, 1997,
$11,000 and $65,000, or 1.9% and 2.2%, respectively, of total fee income, was
attributable to credit card processing fees. In addition, the Bank has
endorsed and promotes a credit card through a national affinity credit card
bank. Under the program, the affinity credit card bank receives and
underwrites all credit card applications. The Bank receives royalty payments
based on new accounts and renewal accounts, as well as a portion of finance
charges assessed. For the two month period ended August 31, 1997 and for the
year ended June 30, 1997, the Bank received $10,000 and $42,000, or 1.8% and
1.4%, respectively, of total fee income, through the affinity credit card
program.
SUBSIDIARY ACTIVITIES
RCSB Corp. RCSB Corp. ("RCSB"), a wholly-owned subsidiary of the Bank
incorporated in the State of New York in 1976, was formed to purchase three
branch buildings from the Bank, which are leased back to the Bank and which is
currently the only business activity conducted by RCSB. See "--Properties."
The assets of RCSB totalled $812,000 at August 31, 1997.
80
<PAGE>
Richmond Enterprises, Inc. Richmond Enterprises, Inc., a wholly-owned
subsidiary of the Bank incorporated in the State of New York in 1983,
previously was a partner in a joint-venture real estate development project
with a local developer. The development was completed in 1986, and Richmond
Enterprises, Inc. has been inactive since that date. Its total assets as of
August 31, 1997 were $4,000.
PROPERTIES
The Bank currently conducts its business through thirteen full service
banking offices. The following table sets forth the Bank's offices as of
August 31, 1997. The table does not include the three full service branch
office facilities the Bank is considering establishing. No assurances can be
given that such offices will be opened.
<TABLE>
<CAPTION>
NET BOOK VALUE TOTAL
ORIGINAL OF PROPERTY OR DEPOSITS AT
YEAR LEASEHOLD BRANCH
LEASED LEASED DATE OF IMPROVEMENTS OFFICE AT
OR OR LEASE AT AUGUST 31,
LOCATION OWNED ACQUIRED EXPIRATION AUGUST 31, 1997 1997
-------- ------ -------- ---------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ADMINISTRATIVE/HOME
OFFICE:
West New Brighton Office
(1):................... Owned 1916 -- $577 $57,485
1214 Castleton Avenue
Staten Island, NY 10310
BRANCH OFFICES:
Port Richmond Office
(2):................... Leased 1976 2001 117 61,515
282 Port Richmond
Avenue
Staten Island, NY 10302
Great Kills Office:..... Owned 1975 -- 671 88,730
3879 Amboy Road
Staten Island, NY 10308
Annadale Office (2):.... Leased 1976 2001 364 64,511
820 Annadale Road
Staten Island, NY 10312
Bull's Head Office
(2):................... Leased 1976 2001 324 63,530
1460 Richmond Avenue
Staten Island, NY 10314
Dongan Hills Office:.... Owned 1974 -- 531 71,596
1833 Hylan Boulevard
Staten Island, NY 10305
New Springville
Office:................ Leased 1976 2005 330 115,339
2555 Richmond Avenue
Staten Island, NY 10314
Woodrow Plaza Office:... Leased 1983 2013 189 55,597
645-100 Rossville
Avenue
Staten Island, NY 10309
Tottenville Office:..... Owned 1988 -- 272 25,222
179 Main Street
Staten Island, NY 10307
Westerleigh Office:..... Owned 1992 -- 400 56,272
832 Jewett Avenue
Staten Island, NY 10314
</TABLE>
(continued on next page)
81
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE TOTAL
ORIGINAL OF PROPERTY OR DEPOSITS AT
YEAR LEASEHOLD BRANCH
LEASED LEASED DATE OF IMPROVEMENTS OFFICE AT
OR OR LEASE AT AUGUST 31,
LOCATION OWNED ACQUIRED EXPIRATION AUGUST 31, 1997 1997
-------- ------ -------- ---------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Eltingville Office
(3):................... Owned 1992 -- $ 1,333 $ 77,958
4523 Amboy Road
Staten Island, NY 10312
Grasmere Office:........ Leased 1992 2005 120 51,993
1100 Hylan Boulevard
Staten Island, NY 10305
Brooklyn Office:........ Leased 1977 1997(4) 340(5) 93,138
132 Avenue U
Brooklyn, NY 11223
PUBLIC ACCOMMODATION
OFFICES:
Brooklyn Public
Accommodation Office ... Leased 1980 1999 -- --
81 Avenue U
Brooklyn, NY 11223
Staten Island Public
Accommodation Office.... Leased 1997 2012 -- --
1445 Richmond Avenue
Staten Island, NY 10314
</TABLE>
- --------
(1) Certain portions of the Bank's administrative operations are located at
properties not included in the table.
(2) Property is owned by RCSB Corp.
(3) Eltingville office includes the Bank's lending center.
(4) The Bank has the option to extend the lease on the Brooklyn office for two
five-year periods.
(5) Together with Brooklyn Public Accommodation Office.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business which, in the
aggregate, involve amounts which are believed by management to be immaterial
to the financial condition and results of operations of the Bank.
PERSONNEL
As of August 31, 1997, the Bank had 244 full-time employees and 117 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employees to be good.
See "Management of the Bank--Benefit Plans" for a description of certain
compensation and benefit programs offered to the Bank's employees.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed without considering the impact of
the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000.
The Company primarily utilizes a third party vendor and such vendor's
proprietary software to process its electronic data. The third party data
processor vendor is in the process of modifying, upgrading or replacing its
computer software applications and systems as necessary to accommodate the
"year 2000" dating changes necessary to permit correct recording of year dates
for 2000 and later years. The vendor also has engaged a consultant to review
its year 2000 issues and has begun to implement a year 2000 compliance
program. The Company does not expect that the cost of its year 2000 compliance
program will be material to its financial condition or results of operations
and believes that it will be able to satisfy such compliance program by the
end of 1998 without any material disruption in its operations. The Company
does not currently have any information concerning the compliance status of
its suppliers and customers, other than the Bank's third party data processing
vendor. In the event that any of the Company's significant suppliers do not
successfully and timely achieve year 2000 compliance, the Company's business
or operations could be adversely affected.
82
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a consolidated
basis, using a calendar year and the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Bank's treatment of its
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Company. The Bank
had been audited by the IRS for the year ended December 31, 1992 resulting in
a refund of $27,000. The Bank was also audited by the State of New York for
the three-year period ended December 31, 1993, resulting in an assessment of
tax plus interest in the amount of $4,000.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the "1996
Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Code relating to a savings institution's use of bad debt
reserves for federal income tax purposes and requires such institutions to
recapture (i.e. take into income) certain portions of their accumulated bad
debt reserves. The effect of the 1996 Act on the Bank is discussed below.
Prior to the enactment of the 1996 Act, the Bank was permitted to establish
tax reserves for bad debts and to make annual additions thereto, which
additions, within specified formula limits, were deducted in arriving at the
Bank's taxable income. The Bank's deduction with respect to "qualifying
loans," which are generally loans secured by certain interests in real
property, could be computed using an amount based on a six-year moving average
of the Bank's actual loss experience (the "Experience Method"), or a
percentage equal to 8% of the Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications
and reduced by the amount of any permitted addition to the non-qualifying
reserve. The Bank's deduction with respect to non-qualifying loans was
required to be computed under the Experience Method.
The 1996 Act. Under the 1996 Act, for its current and future taxable years,
the Bank is not permitted to make additions to its tax bad debt reserves. In
addition, the Bank is required to recapture (i.e. take into income) over a six
year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987.
As of December 31, 1995, $2.5 million of the Bank's bad debt reserve was
subject to recapture for which deferred taxes have been provided.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of
such reserves) will be included in the Bank's income. The term "Non-dividend
distributions" is defined as distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax
purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Bank's current or
accumulated earnings and profits will not cause this pre-1988 reserve to be
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 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 includable in income for
federal income tax purposes, assuming a 35% federal corporate income tax rate.
See "Regulation and Supervision" and "Dividend Policy" for limits on the
payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be
offset by net operating loss carryforwards. The adjustment to AMTI based on
book income will be an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and prior to reduction for net operating losses).
Certain payments of AMTI may be used as credits against regular tax
83
<PAGE>
liabilities in future years. For tax years prior to the 1996 tax year, the
excess of the bad debt reserve deduction using the percentage of taxable
income method over the deduction that would have been allowable under the
experience method is treated as a preference item for purposes of computing
the AMTI. In addition, for taxable years beginning after December 31, 1986 and
before January 1, 1996, an environmental tax of .12% of the excess of AMTI
(with certain modifications) over $2 million, is imposed on corporations,
including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid.
The Bank has not been subject to the AMT, and no such amounts have been
accrued for carryover.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company and the Bank own more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be excluded.
STATE AND LOCAL TAXATION
New York State and New York City Taxation. The Bank is subject to the New
York State Franchise Tax on Banking Corporations in an annual amount equal to
the greater of (i) 9% of the Bank's "entire net income" allocable to New York
State during the taxable year, or (ii) the applicable alternative minimum tax.
The alternative minimum tax is generally the greatest of (a) .01% of the
average value of the taxable assets allocable to New York State with certain
modifications, (b) 3% of the Bank's "alternative entire net income" allocable
to New York State or (c) $250. Entire net income is similar to federal taxable
income, subject to certain modifications (including that net operating losses
cannot be carried back or carried forward) and alternative entire net income
is equal to entire net income without certain adjustments. The Bank is also
subject to New York City Corporation Tax which is imposed using SMTI or
alternative taxable income method. 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 and City
purposes, the applicable percentage to calculate bad debt deduction under the
percentage of taxable income method is 32%. The New York State and New York
City tax laws were recently amended to prevent the recapture of tax bad debt
reserves that would otherwise occur as a result of the enactment of the 1996
Act for both New York State and City tax purposes. See "--Federal Taxation--
Bad Debt Reserves." However, the New York bad debt reserve is subject to
recapture for "non-dividend distributions" in a manner similar to the
recapture of the federal bad debt reserves for such distributions. See "--
Federal Taxation--Distributions". Also, the New York bad debt reserve is
subject to recapture in the event that the Bank fails to satisfy certain
definitional tests relating to its assets and the nature of its business. The
Bank's deduction with respect to non-qualifying loans must be computed under
the experience method which is based on the Bank's actual charge-offs.
A Temporary Metropolitan Transportation Business Tax Surcharge on banking
corporations doing business in the metropolitan district has been applied
since 1982. The Bank does all of its business within this District and is
subject to this surcharge. For the tax year ended December 31, 1997, the
surcharge rate is 17% of the New York State Franchise Tax liability.
Delaware State Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION AND SUPERVISION
GENERAL
The Bank is a New York State chartered mutual savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the BIF. The
Bank is subject to extensive regulation by the Superintendent, the NYBB, the
NYBD, as its chartering agency, and by the FDIC, as the deposit insurer. The
Bank must file reports with the NYBD and the FDIC concerning its activities
and financial condition, in addition to obtaining
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regulatory approvals prior to entering into certain transactions such as
establishing branches and mergers with, or acquisitions of, other depository
institutions. There are periodic examinations by the NYBD and the FDIC to
assess the Bank's compliance with various regulatory requirements and
financial condition. This regulation and supervision establishes a framework
of activities in which a savings bank can engage and is intended primarily for
the protection of the insurance fund and depositors. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the NYBD, the FDIC or through
legislation, could have a material adverse impact on the Company and the Bank
and their operations and stockholders. The Company will also be required to
file certain reports with, and otherwise comply with the rules and
regulations, of the OTS, the NYBD and of the Securities and Exchange
Commission ("SEC") under the federal securities laws. Certain of the
regulatory requirements applicable to the Bank and to the Holding Company are
referred to below or elsewhere herein.
NEW YORK STATE LAW
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the NYBB, as limited by FDIC regulations. See "--Investment Activities." Under
these laws and regulations, savings banks, including the Bank, may invest in
real estate mortgages, consumer and commercial loans, certain types of debt
securities, including certain corporate debt securities and obligations of
federal, state and local governments and agencies, certain types of corporate
equity securities and certain other assets. Under the statutory authority for
investing in equity securities, a savings bank may directly invest up to 7.5%
of its assets in certain corporate stock and may also invest up to 7.5% of its
assets in certain mutual fund securities. Investment in the stock of a single
corporation is limited to the lesser of 2% of the outstanding stock of such
corporation or 1% of the savings bank's assets, except as set forth below.
Such equity securities must meet certain tests of financial performance. A
savings bank's lending powers are not subject to percentage of asset
limitations, although there are limits applicable to single borrowers. A
savings bank may also, pursuant to the "leeway" authority, make investments
not otherwise authorized under the New York State Banking Law. This authority
permits investments not otherwise authorized of up to 1% of the savings bank's
assets in any single investment, subject to certain restrictions and to an
aggregate limit for all such investments of up to 5% of assets. Additionally,
in lieu of investing in such securities in accordance with and reliance upon
the specific investment authority set forth in the New York State Banking Law,
savings banks are authorized to elect to invest under a "prudent person"
standard in a wider range of debt and equity securities as compared to the
types of investments permissible under such specific investment authority.
However, in the event a savings bank elects to utilize the "prudent person"
standard, it will be unable to avail itself of the other provisions of the New
York State Banking Law and regulations which set forth specific investment
authority. A New York State chartered stock savings bank may also exercise
trust powers upon approval of the New York State Banking Board.
New York State chartered savings banks may also invest in subsidiaries under
their service corporation investment power. A savings bank may use this power
to invest in corporations that engage in various activities authorized for
savings banks, plus any additional activities which may be authorized by the
NYBB. Investment by a savings bank in the stock, capital notes and debentures
of its service corporations is limited to 3% of the bank's assets, and such
investments, together with the bank's loans to its service corporations, may
not exceed 10% of the savings bank's assets.
The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New York State Banking Law is limited by
FDIC regulations and other federal law and regulations. In particular, the
applicable provisions of New York State Banking Law and regulations governing
the investment authority and activities of an FDIC insured state-chartered
savings bank have been effectively limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 and the FDIC regulations issued pursuant
thereto. See "--Investment Activities."
With certain limited exceptions, a New York State chartered savings bank may
not make loans or extend unsecured credit for commercial, corporate or
business purposes (including lease financing) to a single borrower,
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the aggregate amount of which would be in excess of 15% of the bank's net
worth. The Bank currently complies with all applicable loans-to-one-borrower
limitations.
Under New York State Banking Law, a New York State chartered stock savings
bank may declare and pay dividends out of its net profits, unless there is an
impairment of capital, but approval of the Superintendent is required if the
total of all dividends declared in a calendar year would exceed the total of
its net profits for that year combined with its retained net profits of the
preceding two years, subject to certain adjustments.
Under the New York State Banking Law, the Superintendent may issue an order
to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the NYBB that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business
of the banking organization after having been notified by the Superintendent
to discontinue such practices, such director, trustee or officer may be
removed from office by the NYBB after notice and an opportunity to be heard.
The Bank does not know of any past or current practice, condition or violation
that might lead to any proceeding by the Superintendent or the NYBB against
the Bank or any of its Trustees or officers. The Superintendent also may take
possession of a banking organization under specified statutory criteria.
FDIC REGULATIONS
Capital Requirements. The FDIC has adopted risk-based capital guidelines to
which the Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. The Bank is required
to maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. The ratio of such regulatory capital to regulatory risk-
weighted assets is referred to as the Bank's "risk-based capital ratio." Risk-
based capital ratios are determined by allocating assets and specified off-
balance sheet items to four risk-weighted categories ranging from 0% to 100%,
with higher levels of capital being required for the categories perceived as
representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain non-
cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum Tier
I leverage ratio (Tier I capital to adjusted total assets as specified in the
regulations). These regulations provide for a minimum Tier I leverage ratio of
3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
The federal banking agencies, including the FDIC, have proposed a uniform
minimum Tier 1 leverage ratio of 4% for all but the highest rated banks. The
FDIC may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Savings banks
experiencing or anticipating significant growth are expected to maintain
capital ratios, including tangible capital positions, well above the minimum
levels.
The following is a summary of the Bank's regulatory capital at August 31,
1997:
<TABLE>
<S> <C>
GAAP Capital to Total Assets.......................................... 10.22%
Total Capital to Risk-Weighted Assets................................. 19.70%
Tier I Leverage Ratio................................................. 10.10%
</TABLE>
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In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level
of other risks at the bank for which capital is needed. Institutions with
significant interest rate risk may be required to hold additional capital. The
agencies also have issued a joint policy statement providing guidance on
interest rate risk management, including a discussion of the critical factors
affecting the agencies' evaluation of interest rate risk in connection with
capital adequacy. The agencies have determined not to proceed with a
previously issued proposal to develop a supervisory framework for measuring
interest rate risk and an explicit capital component for interest rate risk.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for depository institutions under its jurisdiction
standards relating to, among other things, internal controls; information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; compensation; fees and benefits; and such
other operational and managerial standards as the agency deems appropriate.
The federal banking agencies adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness (the "Guidelines")
to implement these safety and soundness standards. The Guidelines set forth
the safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings and compensation; fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the Federal Deposit Insurance Act, as amended, ("FDI Act"). The
final regulation establishes deadlines for the submission and review of such
safety and soundness compliance plans.
Real Estate Lending Standards. The FDIC and the other federal banking
agencies have adopted regulations that prescribe standards for extensions of
credit that (i) are secured by real estate or (ii) are made for the purpose of
financing the construction or improvements on real estate. The FDIC
regulations require each institution to establish and maintain written
internal real estate lending standards that are consistent with safe and sound
banking practices and appropriate to the size of the institution and the
nature and scope of its real estate lending activities. The standards also
must be consistent with accompanying FDIC guidelines, which include loan-to-
value limitations for the different types of real estate loans. Institutions
are also permitted to make a limited amount of loans that do not conform to
the proposed loan-to-value limitations so long as such exceptions are reviewed
and justified appropriately. The guidelines also list a number of lending
situations in which exceptions to the loan-to-value standard are justified.
Dividend Limitations. The FDIC has authority to use its enforcement powers
to prohibit a savings bank from paying dividends if, in its opinion, the
payment of dividends would constitute an unsafe or unsound practice. Federal
law prohibits the payment of dividends by a bank that will result in the bank
failing to meet applicable capital requirements on a pro forma basis.
Additionally, the Bank, as a subsidiary of a savings and loan holding company,
will be required to provide the OTS with 30 days prior written notice before
declaring any dividend. The Plan of Conversion also restricts the Bank's
payment of dividends in the event the dividend would impair the liquidation
account established in connection with the Conversion. The Bank is also
subject to dividend declaration restrictions imposed by New York law. See "--
New York State Law" and "Dividend Policy."
INVESTMENT ACTIVITIES
Since the enactment of FDICIA, all state-chartered financial institutions,
including savings banks and their subsidiaries, have generally been limited to
activities as principal and equity investments of the type and in the amount
authorized for national banks, notwithstanding state law. FDICIA and the FDIC
regulations thereunder permit certain exceptions to these limitations. For
example, certain state chartered banks, such as the Bank, may,
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with FDIC approval, continue to exercise state authority to invest in common
or preferred stocks listed on a national securities exchange or the Nasdaq
National Market and in the shares of an investment company registered under
the Investment Company Act of 1940, as amended. Such banks may also continue
to sell savings bank life insurance. In addition, the FDIC is authorized to
permit such institutions to engage in state authorized activities or
investments that do not meet this standard (other than non-subsidiary equity
investments) for institutions that meet all applicable capital requirements if
it is determined that such activities or investments do not pose a significant
risk to the BIF. The FDIC has recently proposed revisions to its regulations
governing the procedures for institutions seeking approval to engage in such
activities or investments. These proposed revisions would, among other things,
streamline certain application procedures for healthy banks and impose certain
quantitative and qualitative restrictions on a bank's dealings with its
subsidiaries engaged in activities not permitted for national bank
subsidiaries. All non-subsidiary equity investments, unless otherwise
authorized or approved by the FDIC, must have been divested by December 19,
1996, pursuant to a FDIC-approved divestiture plan unless such investments
were grandfathered by the FDIC. The Bank received grandfathering authority
from the FDIC in February, 1993 to invest in listed stocks and/or registered
shares subject to the maximum permissible investment of 100% of Tier 1
capital, as specified by the FDIC's regulations, or the maximum amount
permitted by New York State Banking Law, whichever is less. Such
grandfathering authority is subject to termination upon the FDIC's
determination that such investments pose a safety and soundness risk to the
Bank or in the event the Bank converts its charter, other than a mutual to
stock conversion, or undergoes a change in control. As of August 31, 1997, the
Bank had $19.8 million of securities which were subject to such grandfathering
authority.
PROMPT CORRECTIVE REGULATORY ACTION
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes
five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action
legislation. Among other things, the regulations define the relevant capital
measures for the five capital categories. An institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5%
or greater, and is not subject to a regulatory order, agreement or directive
to meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total risk-
based capital ratio of 8% or greater, a Tier I risk- based capital ratio of 4%
or greater, and generally a leverage ratio of 4% or greater. An institution is
deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally
a leverage ratio of less than 4%. An institution is deemed to be
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a
capital restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institutions in
an amount equal to the lesser of 5.0% of the bank's total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately
capitalized. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks are subject to one or more of a number of additional
restrictions, including but not limited to an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to
reduce total assets and cease receipt of deposits from correspondent banks or
dismiss directors or officers, and restrictions on interest rates paid on
deposits, compensation of executive officers and capital distributions by the
parent holding company. "Critically undercapitalized" institutions also may
not, beginning 60 days after becoming "critically undercapitalized," make any
payment of principal or interest on certain subordinated debt or extend credit
for a highly leveraged transaction or enter into any material transaction
outside the ordinary course of business. In addition, "critically
undercapitalized" institutions are subject to appointment of a receiver or
conservator. Generally, subject to a
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narrow exception, the appointment of a receiver or conservator is required for
a "critically undercapitalized" institution within 270 days after it obtains
such status.
TRANSACTIONS WITH AFFILIATES
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
nonbanking subsidiary of the bank. In a holding company context, at a minimum,
the parent holding company of a savings bank and any companies which are
controlled by such parent holding company are affiliates of the savings bank.
The Federal Reserve Board ("FRB") has proposed regulations that would treat as
an affiliate any subsidiary of a savings bank that engages in activities not
permissible for the parent savings bank to engage in directly. Generally,
Section 23A limits the extent to which the savings bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such savings bank's capital stock and surplus, and contains an
aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate;
the purchase of assets from an affiliate, the purchase of, or an investment
in, the securities of an affiliate; the acceptance of securities of an
affiliate as collateral for a loan or extension of credit to any person; or
issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances on letters of
credit issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes
all other outstanding loans to such person) as to which such prior board of
director approval is required, is the greater of $25,000 or 5% of capital and
surplus or any loans over $500,000. Further, pursuant to Section 22(h), loans
to directors, executive officers and principal shareholders must be made on
terms substantially the same as offered in comparable transactions to other
persons except for extensions of credit made pursuant to a benefit or
compensation program that is widely available to the institution's employees
and does not give preference to insiders over other employees. Section 22(g)
of the Federal Reserve Act places additional limitations on loans to executive
officers.
ENFORCEMENT
The FDIC has extensive enforcement authority over insured savings banks,
including the Bank. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease and desist orders
and to remove directors and officers. In general, these enforcement actions
may be initiated in response to violations of laws and regulations and to
unsafe or unsound practices.
The FDIC has authority under federal law to appoint a conservator or
receiver for an insured savings bank under certain circumstances. The FDIC is
required, with certain exceptions, to appoint a receiver or conservator for an
insured state savings bank if that savings bank was "critically
undercapitalized" on average during the calendar quarter beginning 270 days
after the date on which the savings bank became "critically undercapitalized."
For this purpose, "critically undercapitalized" means having a ratio of
tangible capital to total assets of less than 2%. See "--Prompt Corrective
Regulatory Action." The FDIC may also appoint a conservator or receiver for a
state savings bank on the basis of the institution's financial condition or
upon the
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occurrence of certain events, including: (i) insolvency (whereby the assets of
the savings bank are less than its liabilities to depositors and others); (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business; (iv) likelihood that the savings bank will be unable to
meet the demands of its depositors or to pay its obligations in the normal
course of business; and (v) insufficient capital, or the incurring or likely
incurring of losses that will deplete substantially all of the institution's
capital with no reasonable prospect of replenishment of capital without
federal assistance.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and additional information
which the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance funds. An institution's
assessment rate depends on the capital category and supervisory category to
which it is assigned. Assessment rates for BIF and SAIF deposits currently
range from 0 basis points to 27 basis points, and the FDIC has determined to
retain such range of assessment rates for the first half of 1998. The FDIC is
authorized to raise the assessment rates in certain circumstances including to
maintain or achieve the designated reserve ratio of 1.25%, which requirement
the BIF and the SAIF currently meet. The FDIC has exercised its authority to
raise rates in the past and may raise insurance premiums in the future. If
such action is taken by the FDIC, it could have an adverse effect on the
earnings of the Bank. In addition, recent legislation requires BIF-insured
institutions like the Bank to assist in the payment of Financing Corporation
bonds.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the Division. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $49.3 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts greater than
$49.3 million, the reserve requirement is $1.5 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that
portion of total transaction accounts in excess of $49.3 million. Effective
December 16, 1997, the Federal Reserve Board has reduced the amount of
transaction accounts subject to the 3% ratio from $49.3 million to $47.8
million and increased from $4.4 million to $4.7 million the amount of reserve
liabilities that is exempted from reserve requirements. The Bank is in
compliance with the foregoing requirements. Because required reserves must be
maintained in the form of either vault cash, a non-interest-bearing account at
a Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve Board, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized to borrow
from the Federal Reserve "discount window," but Federal Reserve Board
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
COMMUNITY REINVESTMENT ACT
Federal Regulation. Under the Community Reinvestment Act, as amended
("CRA"), as implemented by FDIC regulations, a savings bank has a continuing
and affirmative obligation consistent with its safe and sound operation to
help meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions
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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,
consistent with the CRA. The CRA requires the FDIC, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The FIRREA
amended the CRA to require, effective July 1, 1990, public disclosure of an
institution's CRA rating and requires the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system, which replaced the five-tiered numerical rating system. The Bank's
latest CRA rating received from the FDIC was "Satisfactory."
New York State Regulation. The Bank is also subject to provisions of the New
York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit
needs of its local community ("NYCRA"), which are substantially similar to
those imposed by the CRA. Pursuant to the NYCRA, a bank must file copies of
all federal CRA reports with the NYBD. 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 NYBD has adopted, effective December 3,
1997, new regulations to implement the NYCRA. The NYBD replaced its process-
focused regulations with performance-focused regulations that are intended to
parallel current CRA regulations of federal banking agencies and to promote
consistency in CRA evaluations by considering more objective criteria. The new
regulations require a biennial assessment of a bank's compliance with the
NYCRA, utilizing a four-tiered rating system, and require the NYBD to make
available to the public such rating and a written summary of the results. The
Bank's latest NYCRA rating received from the NYBD was "Satisfactory."
FEDERAL HOME LOAN BANK SYSTEM
On October 24, 1997, the Bank became a member of the FHLB System, which
consists of 12 regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. The Bank, as a member of the FHLB, is
required to acquire and hold shares of capital stock in the FHLB in an amount
at least equal to 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater. FHLB advances must be secured by specified types of collateral and
all long-term advances may only be obtained for the purpose of providing funds
for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. If dividends were reduced, the Bank's net
interest income will likely also be reduced. Further, there can be no
assurance that the impact of recent or future legislation on the FHLBs will
not also cause a decrease in the value of the FHLB stock that will be held by
the Bank.
HOLDING COMPANY REGULATION
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" ("QTL"), discussed below, to elect to be treated as a savings
association for purposes of the savings and loan holding company provisions of
the Home Owners' Loan Act, as amended ("HOLA"). Such election would result in
its holding company being regulated as a savings and loan holding company by
the OTS rather than as a bank holding company by the Federal Reserve Board.
The Bank has made such election and has received approval from the OTS to
become a savings and loan holding company. The Company will be regulated as a
non-diversified unitary savings and loan holding company within the meaning of
the HOLA. As such, the Company will be required to register with the OTS and
will be subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS will have enforcement authority over the
Company and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings institution.
Additionally, the Bank will be required to notify the OTS at least 30 days
before declaring any dividend to the Company.
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As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities
in which it may engage. Upon any non-supervisory acquisition by the Company of
another savings association as a separate subsidiary, the Company would become
a multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible
for bank holding companies under Section 4(c)(8) of the Bank Holding Company
Act, as amended ("BHC Act"), subject to the prior approval of the OTS, and to
other activities authorized by OTS regulations. Multiple savings and loan
holding companies are prohibited from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary holding company, or a non-
subsidiary company engaged in activities other than those permitted by the
HOLA. Recently proposed legislation would treat all savings and loan holding
companies as bank holding companies and would limit the activities of such
companies to those permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings institution or holding company thereof
or from acquiring such an institution or company by merger, consolidation or
purchase of its assets, without prior written approval of the OTS. In
evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of
the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by
savings and loan holding companies, and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the
extent to which they permit interstate savings and loan holding company
acquisitions.
In order to elect and continue to be regulated as a savings and loan holding
company by the OTS (rather than as a bank holding company by the Federal
Reserve Board), the Bank must continue to qualify as a QTL. In order to
qualify as a QTL, the Bank must maintain compliance with a Qualified Thrift
Lender Test ("QTL Test"). Under the QTL Test, a savings institution is
required to maintain at least 65% of its "portfolio assets" (total assets
less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business)
in certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
in at least 9 months out of each 12 month period. A holding company of a
savings institution that fails the QTL test must either convert to a bank
holding company and thereby become subject to the regulation and supervision
of the Federal Reserve Board or operate under certain restrictions. As of
August 31, 1997, the Bank maintained in excess of 80.5% its portfolio assets
in qualified thrift investments. The Bank also met the QTL test in each of the
prior 12 months and, therefore, met the QTL test. Recent legislative
amendments have broadened the scope of "qualified thrift investments" that go
toward meeting the QTL test to fully include credit card loans, student loans
and small business loans. A savings association may also satisfy the QTL test
by qualifying as a "domestic building and loan association" as defined in the
Internal Revenue Code of 1986.
New York State Holding Company Regulation. In addition to the federal
holding company regulations, a bank holding company organized or doing
business in New York State may be also subject to regulation under the New
York State Banking Law. The term "bank holding company," for the purposes of
the New York State Banking Law, is defined generally to include any person,
company or trust that directly or indirectly either controls the election of a
majority of the directors or owns, controls or holds with power to vote more
than 10% of the voting stock of a bank holding company or, if the company is a
banking institution, another banking institution, or 10% or more of the voting
stock of each of two or more banking institutions, including commercial banks
and state savings banks and savings and loan associations organized in stock
form. In general, a holding company controlling, directly or indirectly, only
one banking institution will not be deemed to be a bank holding company for
the purposes of the New York State Banking Law. Under New York State Banking
Law, the prior approval of the NYBD is required before: (1) any action is
taken that causes any company to become a bank holding company; (2) any action
is taken that causes any banking institution to become or to be merged or
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consolidated with a subsidiary of a bank holding company; (3) any bank holding
company acquires direct or indirect ownership or control of more than 5% of
the voting stock of a banking institution; (4) any bank holding company or
subsidiary thereof acquires all or substantially all of the assets of a
banking institution; or (5) any action is taken that causes any bank holding
company to merge or consolidate with another bank holding company.
Additionally, certain restrictions apply to New York State bank holding
companies regarding the acquisition of banking institutions which have been
chartered five years or less and are located in smaller communities. Officers,
directors and employees of New York State bank holding companies are subject
to limitations regarding their affiliation with securities underwriting or
brokerage firms and other bank holding companies and limitations regarding
loans obtained from its subsidiaries. Although the Company will not be a bank
holding company for purposes of New York State law upon the Effective Date of
the Conversion, any future acquisition of ownership, control, or the power to
vote 10% or more of the voting stock of another New York banking institution
or bank holding company would cause it to become such. The Company has no
current plan or arrangement to acquire ownership or control, directly or
indirectly, of 10% or more of the voting stock of another banking institution.
INTERSTATE BANKING AND BRANCHING
The Company, as a savings and loan holding company, will be limited under
HOLA with respect to its acquisition of a savings association located in a
state other than New York. In general, a savings and loan holding company may
not acquire an additional savings association subsidiary that is located in a
state other than the home state of its first savings association subsidiary
unless such an interstate acquisition is permitted by the statutes of such
other state. Many states permit such interstate acquisitions if the statutes
of the home state of the acquiring savings and loan holding company satisfy
various reciprocity conditions. New York is one of a number of states that
permit, subject to the reciprocity conditions of the New York Banking Law,
out-of-state bank and savings and loan holding companies to acquire New York
savings associations.
In contrast, bank holding companies are generally authorized to acquire
banking subsidiaries in more than one state irrespective of any state law
restrictions on such acquisitions. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Banking Act"), which was enacted
on September 29, 1994, permits approval under the BHC Act of the acquisition
of a bank located outside of the holding company's home state regardless of
whether the acquisition is permitted under the law of the state of the
acquired bank. The Federal Reserve Board may not approve an acquisition under
the BHC Act that would result in the acquiring holding company controlling
more than 10% of the deposits in the United States or more than 30% of the
deposits in any particular state.
In the past, branching across state lines was not generally available to a
state bank such as the Bank. Out-of-state branches of savings banks are
authorized under the New York Banking Law, but similar authority does not
exist generally under the laws of most other states. The Interstate Banking
Act permitted, beginning June 1, 1997, the responsible federal banking
agencies to approve merger transactions between banks located in different
states, regardless of whether the merger would be prohibited under the law of
the two states. The Interstate Banking Act also permitted a state to "opt in"
to the provisions of the Interstate Banking Act prior to June 1, 1997, and
permitted a state to "opt out" of the provisions of the Interstate Banking Act
by adopting appropriate legislation before that date. Accordingly, the
Interstate Banking Act, beginning June 1, 1997, permitted a bank, such as the
Bank, to acquire branches in a state other than New York unless the other
state had opted out of the Interstate Banking Act. The Interstate Banking Act
also authorizes de novo branching into another state if the host state enacts
a law expressly permitting out of state banks to establish such branches
within its borders.
The Interstate Banking Act may facilitate the further consolidation of the
banking industry. The effect of the Interstate Banking Act on the Bank, if
any, is likely to occur as banking institutions, state legislators, and bank
regulators respond to the new federal regulatory structure. The states will
have to establish appropriate corporate law, tax and regulatory structures to
adjust to the growth of new interstate banks.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant
to the Conversion. Upon completion of the Conversion, the Company's
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Common Stock will be registered with the SEC under the Exchange Act. The
Company will then be subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of the Company or (ii) the average weekly volume
of trading in such shares during the preceding four calendar weeks. Provision
may be made in the future by the Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain
circumstances.
MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each of
which contains one-third of the Board. The directors shall be elected by the
stockholders of the Company for staggered three year terms, or until their
successors are elected and qualified. One class of directors, consisting of
Messrs. James L. Kelley, T. Ronald Quinlan, Jr. and Anthony E. Burke, has a
term of office expiring at the first annual meeting of stockholders, a second
class, consisting of Messrs. William C. Frederick and Maurice K. Shaw, has a
term expiring at the second annual meeting of stockholders and a third class,
consisting of Messrs. Michael F. Manzulli, Godfrey H. Carstens, Jr. and Robert
S. Farrell, has a term of office expiring at the third annual meeting of
stockholders. The biographical information of each Director, except Messrs.
Manzulli and Burke, is set forth under "Management of the Bank--Trustees of
the Bank."
COMPENSATION OF THE DIRECTORS OF THE COMPANY
Outside directors of the Company will receive an annual retainer of $15,000.
No additional fees will be paid for Board or committee meetings attended. See
"Management of the Bank--Compensation of Trustees" and "--Stock Option Plan"
and "--Stock Program" under "Management of the Bank--Benefit Plans."
EXECUTIVE OFFICERS OF THE COMPANY
The following individuals are executive officers of the Company and hold the
offices set forth below opposite their names.
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME AGE(1) WITH THE COMPANY
---- ------ -----------------
<S> <C> <C>
Michael F. Manzulli..... 56 Chairman of the Board and Chief Executive Officer
Anthony E. Burke........ 50 President and Chief Operating Officer
Thomas R. Cangemi....... 29 Senior Vice President, Chief Financial Officer and Secretary
Andrew M. Sisock........ 44 Vice President and Accounting Officer
</TABLE>
- --------
(1) As of August 31, 1997.
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation, retirement or removal by the Board of Directors.
BIOGRAPHICAL INFORMATION
Michael F. Manzulli is Chairman of the Board of Directors and Chief
Executive Officer of the Company and Trustee, President and Chief Executive
Officer of the Bank. Mr. Manzulli has served as a Trustee of the Bank since
1990, and was named President and Chief Executive Officer in June of 1992. Mr.
Manzulli is
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currently the managing partner of the law firm of Lahr, Dillon, Manzulli,
Kelley & Penett, P.C. Mr. Manzulli is also the Chairman of the Staten Island
Partnership, Inc., and serves on the Board of Directors of the Staten Island
Economic Development Corp., St. Elizabeth Ann Nursing Home, the Staten Island
Historical Society and Notre Dame Academy. He is also a member of the Advisory
Board of the Salvation Army--Staten Island. Mr. Manzulli holds a B.S. from
Niagara University and a Bachelor of Law degree from St. John's University
School of Law.
Anthony E. Burke joined the Company as President and Chief Operating Officer
effective October 20, 1997. Previously, Mr. Burke was a partner for thirteen
years with the financial services industry group of Ernst & Young LLP, where
he worked for twenty-five years. Mr. Burke has represented community banks
(including the Bank), international banks, mortgage banks and real estate
ventures, and also has extensive experience in the mergers and acquisitions
area. Mr. Burke is a C.P.A., and is a member of the American Institute of
Certified Public Accountants. He has a B.S. in economics from St. John's
University and an M.B.A. in accounting and finance from the Columbia
University Graduate School of Business.
Thomas R. Cangemi joined the Company as Senior Vice President, Chief
Financial Officer and Secretary effective October 27, 1997. From December 1996
until joining the Company, Mr. Cangemi was Senior Vice President, Chief
Financial Officer and Corporate Secretary of a New York-based commercial bank.
From January 1996 until December 1996, he was Director of Corporate SEC
Reporting for an electronics corporation in Boca Raton, Florida. Prior to
January 1996, Mr. Cangemi was Vice President and Chief Financial Officer of a
publicly-held savings and loan holding company and its subsidiary federal
savings bank located in the New York area. Before 1993, Mr. Cangemi was a
member of the SEC Professional Practice Group of KPMG Peat Marwick.
Mr. Cangemi holds a B.B.A. from the School of Professional Accountancy at
Dowling College, and is a C.P.A. and a member of the American Institute of
Certified Public Accountants.
Andrew M. Sisock joined the Bank in 1975, and served as Vice President and
Comptroller until 1993, when he was named Senior Vice President and Financial
Comptroller; he was appointed Senior Vice President and Senior Financial
Officer in 1996. Mr. Sisock is also the Vice President--Accounting Officer of
the Company and a Director and Treasurer of both RCSB Corp. and Richmond
Enterprises, Inc. His primary areas of responsibility are overseeing financial
and regulatory reporting, investment policy, interest rate risk policy and
internal controls. Mr. Sisock has a B.S. in Business Administration from
Pennsylvania State University and an M.B.A. in Finance from St. John's
University. Mr. Sisock is a graduate of the National School of Finance and
Management at Fairfield University.
MANAGEMENT OF THE BANK
TRUSTEES OF THE BANK
The Directors of the Company are also Trustees of the Bank, with the
exception of Mr. Burke. 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>
POSITION(S) HELD TERM
NAME AGE(1) WITH THE BANK EXPIRES
---- ------ ---------------- -------
<S> <C> <C> <C>
Godfrey H. Carstens, Jr. ............. 69 Trustee 2000
Robert S. Farrell..................... 71 Trustee 2000
William C. Frederick, M.D............. 69 Trustee 1999
James L. Kelley....................... 55 Trustee 1998
Michael F. Manzulli................... 56 President, Chief Executive 2000
Officer and Trustee
T. Ronald Quinlan, Jr................. 70 Trustee 1998
Maurice K. Shaw....................... 58 Trustee 1999
</TABLE>
- --------
(1) As of August 31, 1997.
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EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT TRUSTEES
The following table sets forth certain information regarding the executive
officers of the Bank with the exception of Messrs. Manzulli and Sisock whose
background is discussed under "Management of the Company--Biographical
Information."
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH THE BANK
---- ------ -----------------------------------------------------
<S> <C> <C>
John M. McKenna......... 61 Executive Vice President
Stephen G.C. Campbell... 54 Senior Vice President and Senior Auditor
Peter J. Esposito....... 54 Senior Vice President--Commercial Lending
Charles F. Hermann,
III.................... 54 Senior Vice President--Special Services
Andrew M. Sisock........ 44 Senior Vice President and Senior Financial Officer
Nelson C. Sundback...... 55 Senior Vice President--Information Systems/Operations
Robert J. O'Rourke...... 60 Vice President--Lending
John J. Amodio.......... 55 Director of Commercial Banking Services
</TABLE>
- --------
(1) As of August 31, 1997.
The executive officers of the Bank are elected annually and will hold office
in the converted Bank until the annual meeting of the Board of Directors of
the Bank held immediately after the first annual meeting of stockholders of
the Bank subsequent to Conversion, and until their successors are elected and
qualified or until death, resignation, retirement or removal by the Board of
Directors. Officers are re-elected by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
TRUSTEES OF THE BANK
Godfrey H. Carstens, Jr. has served as a Trustee of the Bank since 1973. He
is the owner and president of Carstens Electrical Supply Co., an electrical
supply company located in Staten Island, New York. He is also a member of the
Board of Trustees of Staten Island University Hospital, and of the West
Brighton Civic Association.
Robert S. Farrell has served as a Trustee of the Bank since 1973. He has
been president of H.S. Farrell, Inc., a lumber, millwork and building
materials supply company located in Staten Island, New York, since 1986, and
has held other positions with the firm for over fifty years. He is also a
member of the Board of the Northfield Local Development Corp., and of the Port
Richmond Board of Trade.
William C. Frederick, M.D. has served as a Trustee of the Bank since 1980.
Dr. Frederick is a surgeon in Staten Island and is affiliated with St.
Vincent's Hospital, Staten Island University Hospital and Bayley Seton
Hospital.
James L. Kelley has served as a Trustee of the Bank since January 1997. Mr.
Kelley is a partner of the law firm of Lahr, Dillon, Manzulli, Kelley &
Penett, P.C., which serves as general counsel to the Bank. Mr. Kelley holds a
B.S. from St. Peter's College, New Jersey, and a Bachelor of Law degree from
St. John's University School of Law.
T. Ronald Quinlan, Jr. has served as a Trustee since 1978. Mr. Quinlan
retired in 1993 as owner and President of Quinlan Fuel Service, a fuel oil
company located in Staten Island, New York. He is a member of the West
Brighton and Lighthouse Civic Associations.
Maurice K. Shaw has served as a Trustee since 1979. He is Senior Vice
President in charge of corporate affairs of Brooklyn Union Gas Co., where he
has been employed since 1960. Mr. Shaw is a member of the Board of Directors
of the Staten Island Partnership, Inc., the Staten Island Economic Development
Corp. and the Staten Island Chamber of Commerce.
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EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT TRUSTEES
John M. McKenna joined the Bank in 1992 as Executive Vice President. Mr.
McKenna also serves as a Director and President of RCSB Corp. and Richmond
Enterprises, Inc. Mr. McKenna's primary responsibilities include overseeing
the general operations of the Bank, including finance, information systems,
deposits and facilities. Mr. McKenna has a B.S. from the City University of
New York.
Stephen G.C. Campbell joined the Bank in 1980 as assistant vice president
and branch manager and has served in numerous managerial positions. He served
as Senior Vice President and Senior Loan Officer from December 1991 until May
of 1997, when he was named Senior Vice President and Senior Auditor. He is
responsible for the administration and management of the Auditing Department.
Mr. Campbell attended Pace College and Rutgers University and is a graduate of
the National School of Finance and Management at Fairfield University.
Peter J. Esposito joined the Bank in 1975 as Real Estate Appraiser and
Inspector. From 1975 to 1979, he served as Assistant Secretary and Senior Real
Estate Appraiser. He was named Assistant Vice President of the Mortgage and
Servicing Department in 1985, and was promoted to the position of Vice
President in Charge of Commercial Real Estate and Construction Lending in
1992. In 1996, he was appointed Senior Vice President of the aforementioned
department, and was simultaneously named head of the Business Services
Division. Mr. Esposito holds a professional designation as Senior Residential
Appraiser with the Appraisal Institute, formerly the Society of Real Estate
Appraisers. He is a graduate of the Realtor's Institute, Ithaca College. Mr.
Esposito is also a licensed insurance broker and possesses related experience
in the construction and real estate development fields. He currently serves on
the Boards of Trustees of both the South Shore Rotary and the Staten Island
chapter of the Leukemia Society and is involved with numerous charitable
organizations.
Charles F. Hermann, III joined the Bank in 1968 and has served the Bank in
various positions. He was appointed Senior Vice President in December 1985 and
currently serves as Senior Vice President--Special Services. He is responsible
for the management of the Insurance and Security Departments of the Bank. Mr.
Hermann is also a Vice President and Director of RCSB Corp. and Richmond
Enterprises, Inc. He is a graduate of the American Institute of Banking and
attended St. John's University.
Nelson C. Sundback joined the Bank in 1968 and has served in numerous
managerial positions. He was named Senior Vice President--Information
Systems/Operations in November 1993. His primary areas of responsibility
include the management and supervision of the Bank's Operations, Pension,
Insurance, ATM and Network Computer Departments. Mr. Sundback is also
Secretary of RCSB Corp. and Richmond Enterprises, Inc. Mr. Sundback attended
St. John's University and the College of Staten Island. Mr. Sundback is a
graduate of the National School of Finance and Management at Fairfield
University and the American Institute of Banking.
John J. Amodio joined the Bank in April 1997 as Director of Commercial
Banking Services. From 1973 to 1980 Mr. Amodio was Senior Vice President, and
from 1982 to 1991 was President and Chief Executive Officer of a Staten
Island-based commercial bank. Prior to joining the Bank, he was President of
Amodio & Associates, Ltd., a management consulting organization, from 1991 to
1995, and was President of TAM Restaurant Group, Inc., a restaurant, catering
and concessions management firm, from 1995 until 1997. Mr. Amodio's primary
responsibility is to direct the development of the Bank's commercial banking
services. Mr. Amodio is a former director and president of the NYS Society of
Certified Public Accountants, Staten Island Chapter, Chairman of the Board of
Meals on Wheels of Staten Island, and is the Chairman of the Staten Island
Rotary Foundation. Mr. Amodio has a B.B.A. in Accounting from Iona College and
is a C.P.A. He is also a graduate of the Commercial Bank Management Program at
Columbia University.
Robert J. O'Rourke joined the Bank in 1996 as Vice President--Lending. Prior
to joining the Bank, he was President of Robert O'Rourke Inc. Real Estate, a
firm he formed in 1992 which specialized in analysis, appraisal and
coordinating assignments of metropolitan New York area properties for
financing and certiorari purposes. Mr. O'Rourke has over eighteen years of
financial institution experience, the majority as a Senior and Executive Vice
President in charge of the mortgage and real estate department of a New York-
based savings bank. He is an MAI designated member of the Appraisal Institute
and a Certified General Appraiser in New York and New Jersey. He is a licensed
real estate broker in New York and is a member of the New York and Staten
Island Real Estate Boards. Mr. O'Rourke is a member of the Friendly Sons of
St. Patrick-New York and is a board member
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of the Staten Island Botanical Gardens. Mr. O'Rourke is primarily responsible
for overseeing the residential mortgage and consumer lending departments of
the Bank. Mr. O'Rourke has a B.A. from Fordham University and is a graduate of
the National School of Savings Banking, Fairfield University.
MEETINGS AND COMMITTEES OF THE BOARDS OF THE BANK AND THE COMPANY
The Board of Trustees meets monthly and may have additional special meetings
as may be called by the President or at the written request of three trustees.
During the fiscal year ended June 30, 1997, the Board held twelve meetings.
There are currently eight committees of the Board of Trustees consisting of
the Executive/Finance Committee, the Examining/Audit Committee, the
Residential/Commercial/Construction Committee, the Loan Review Committee, the
Personnel Committee, the Insurance Committee, the By-Laws Committee and the
Buildings & Grounds Committee. Subsequent to the Conversion, the Board of
Trustees may consider and make revisions to the current structure of its
committees.
The Board of Trustees of the Bank has established the following committees:
The Executive/Finance Committee consists of the entire Board of Trustees.
The purpose of this Committee is to exercise the authority of the Board of
Trustees with respect to matters requiring action between meetings of the
Board of Trustees. Any actions by this Committee requires subsequent
ratification by the Board of Trustees at the next regular meeting. The
Committee meets at least four times per year as well as on an as needed basis.
The Examining/Audit Committee consists of Messrs. Farrell, Frederick,
Quinlan, Shaw and DeForest (Emeritus). The Bank's internal auditor and
compliance officer report to this committee. The duty of this committee is to
examine the records and affairs of the Bank in conformity with the Banking
Laws of the State of New York applying to examinations and the Federal laws
and regulations relating to bank independent audit committees, and to
determine the Bank's true financial condition and its safety and soundness. It
inquires into the policies of management for the purpose of determining
whether such policies are sound and consistent with the requirements of the
law and inquires into and reviews management's responsibility for the Bank's
compliance with safety and soundness laws and regulations, and management's
responsibility for the Bank's system of internal controls, and into such other
matters as are necessary to enable the Trustees to determine whether adequate
protection is afforded depositors and reviews management reports and the
reports of the Bank's independent public accountant. The committee generally
meets on a bimonthly basis and met five times in fiscal 1997.
The Residential/Commercial/Construction Lending Committee consists of
Messrs. Carstens, Farrell, Frederick, Quinlan and Shaw. This committee is
responsible for reviewing and approving mortgage loans, home equity loans,
commercial real estate, construction, and commercial loans in amounts within
its designated authority. The committee generally meets bimonthly, depending
on loan volume, and met 21 times in fiscal 1997.
The Loan Review Committee consists of Messrs. Carstens, Farrell, Frederick,
Quinlan and Shaw. This committee reviews the workout solutions of problem
loans, and approves the classification of assets and the establishment of
adequate valuation allowances. This committee meets at least semi-annually and
met three times in fiscal 1997.
The Personnel Committee consists of Messrs. Carstens, Farrell, Frederick and
Shaw. This committee is responsible for all matters regarding compensation and
fringe benefits. The committee meets at least semi-annually and met three
times in fiscal 1997.
The Insurance Committee consists of Messrs. Carstens, Frederick, Kelley and
Shaw. This committee is responsible for ensuring that adequate insurance
coverage is in place for the Bank's assets and trustees, officers and
employees. The committee meets at least semi- annually and met twice in fiscal
1997.
The Bylaws Committee consists of Messrs. Frederick, Kelley and Quinlan, and
is responsible for reviewing and proposing revisions to the Bylaws of the
Bank, as necessary. The committee meets on an as-needed basis and did not meet
in fiscal 1997.
The Buildings and Grounds Committee consists of Messrs. Carstens, Farrell,
Kelley and Quinlan. This committee is responsible for supervising the
maintenance and upkeep of the Bank's physical plant. This committee meets on
an as-needed basis and did not meet in fiscal 1997.
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Additionally, the Bank has a number of other management committees including
the Asset/Liability Committee, the Interest Rate Risk Committee, the Internal
Control Committee, the Risk Management Committee, the Investment Committee and
the Compliance Committee.
The Board of Directors of the Company has established the following
committees: the Audit Committee consisting of Messrs. Farrell, Frederick,
Quinlan and Shaw; the Pricing Committee consisting of the entire Board of
Directors; and the Compensation Committee consisting of Messrs. Carstens,
Farrell, Frederick and Shaw.
COMPENSATION OF TRUSTEES
Outside trustees of the Bank receive fees of $1,200 per Board meeting
attended and $650 per Committee meeting attended. Effective January 1, 1998,
outside trustees of the Bank will receive fees of $1,400 per Board meeting
attended and $850 per Committee meeting attended. See "Management of the
Company--Compensation of the Directors of the Company" and "--Stock Option
Plan" and "--Stock Program" under "--Benefit Plans."
TRUSTEES EMERITUS
The Bank maintains a Board of Trustees Emeritus which currently consists of
three former Trustees of the Bank. Pursuant to the Bank's bylaws, Trustees are
automatically retired on December 31 of the year they reach age 75 and any
Trustee who retires because of such age limitation is eligible to be elected
as a Trustee Emeritus. Trustees Emeritus have no vote and receive the same
meeting fees as Trustees of the Bank.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash
compensation paid by the Bank as well as certain other compensation paid or
accrued for services rendered in all capacities during the fiscal year ended
June 30, 1997, to the Chief Executive Officer and the other executive officer
of the Bank who received salary and bonus in excess of $100,000 ("Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
------------------------------- ------------------------- -------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY BONUS ($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- ----------------------- ---- -------- --------- ------------ ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael F. Manzulli
President and Chief
Executive Officer..... 1997 $324,416 -- -- -- -- -- $26,980
John M. McKenna
Executive Vice
President and Chief
Operating Officer..... 1997 $128,308 $6,500 -- -- -- -- $ 3,102
</TABLE>
- --------
(1) Under Annual Compensation, the column titled "Salary" includes salary
deferred by the Named Executive Officer under the Bank's 401(k) Plan and
the column titled "Bonus" consists of board approved discretionary bonus
as well as attendance bonuses, loan referral bonuses and recruitment
bonuses.
(2) For 1997, there were no (a) perquisites over the lesser of $50,000 or 10%
of the individual's total salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments
of earnings with respect to long-term incentive plans prior to settlement
or maturation; (d) tax payment reimbursements; or (e) preferential
discounts on stock. For 1997, the Bank had no restricted stock or stock
related plans in existence.
(3) Does not include awards pursuant to the Stock Program, which may be
granted in conjunction with a meeting of shareholders of the Company,
subject to regulatory and shareholder approval, as such awards were not
earned, vested or granted in fiscal 1997. For a discussion of the terms of
the Stock Program which is intended to be adopted by the Company, see "--
Benefit Plans--Stock Program." For 1997, the Bank had no stock plans in
existence.
(4) No stock options or SARs were earned or granted in 1997. For a discussion
of the Stock Option Plan which is intended to be adopted by the Company,
see "Benefit Plans--Stock Option Plan."
(5) For 1997, there were no payouts or awards under any long-term incentive
plan.
(6) Other compensation includes other benefits such as the Bank's matching
contribution under the Bank's 401(k) Plan, amounts contributed by the Bank
pursuant to the Bank's Supplemental Executive Retirement Plan, and
automobile allowance.
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REPORT OF INDEPENDENT COMPENSATION CONSULTANT
Pursuant to the NYBB regulations governing the Conversion, the Bank must
obtain the opinion of an independent compensation consultant as to whether or
not the total compensation for the executive officers, directors or trustees
of the Bank, viewed as a whole and on an individual basis, is reasonable and
proper in comparison to the compensation provided to executive officers,
directors or trustees of similar publicly-traded financial institutions. The
Bank has obtained an opinion from William M. Mercer, Incorporated, which
provides that, based upon published professional survey data of similarly
situated publicly-traded financial institutions operating in the relevant
markets as of November 18, 1997, with respect to the total cash compensation
(base salary and annual incentive) for executive officers and total
compensation for trustees of the Bank, such compensation, viewed as a whole
and on an individual basis, is reasonable and proper in comparison to the
compensation provided to similarly situated publicly-traded financial
institutions, and that, with respect to the amount of shares of Common Stock
to be reserved under the ESOP, the Stock Program and Stock Option Plan, as a
whole, such amounts reserved for granting are reasonable in comparison to
similar publicly-traded financial institutions.
EMPLOYMENT AGREEMENTS
Upon the Conversion, the Bank intends to enter into employment agreements
with Mr. Manzulli and four other officers of the Bank (individually, the
"Executive") and the Company intends to enter into employment agreements with
Mr. Manzulli and two other officers of the Company (collectively, the
"Employment Agreements"). The Employment Agreements are intended to ensure
that the Bank and the Company will be able to maintain a stable and competent
management base after the Conversion. The continued success of the Bank and
the Company depends to a significant degree on the skills and competence of
the above referenced officers.
The Employment Agreements provide for either three-year or two-year terms
for each Executive. The terms of the Employment Agreements shall be extended
on a daily basis unless written notice of non-renewal is given by the Board of
Directors. The Employment Agreements provide that the Executive's base salary
will be reviewed annually. The base salary which will be effective for such
Employment Agreement for Mr. Manzulli will be $420,000. In addition to the
base salary, the Employment Agreements provide for, among other things,
participation in stock benefits plans and other fringe benefits applicable to
executive personnel. The agreements provide for termination by the Bank or the
Company for cause, as defined in the Employment Agreements, at any time. In
the event the Bank or the Company chooses to terminate the Executive's
employment for reasons other than for cause, or in the event of the
Executive's resignation from the Bank and the Company upon: (i) failure to re-
elect the Executive to his current offices; (ii) a material change in the
Executive's functions, duties or responsibilities; (iii) a reduction in the
benefits and perquisites being provided to the Executive under the Employment
Agreement; (iv) liquidation or dissolution of the Bank or the Company; or (v)
a breach of the agreement by the Bank or the Company, the Executive or, in the
event of death, his beneficiary would be entitled to receive an amount equal
to the remaining base salary payments due to the Executive for the remaining
term of the Employment Agreement and the contributions that would have been
made on the Executive's behalf to any employee benefit plans of the Bank and
the Company during the remaining term of the agreement. The Bank and the
Company would also continue and pay for the Executive's life, health, dental
and disability coverage for the remaining term of the Agreement. Upon any
termination of the Executive, other than following a change in control, the
Executive is subject to a one year non-competition agreement.
Under the Employment Agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company, the Executive or, in
the event of the Executive's death, his beneficiary, would be entitled to a
severance payment equal to the greater of: (i) the payments due for the
remaining terms of the agreement; or (ii) three times the average of the five
preceding taxable years' annual compensation. The Bank and the Company would
also continue the Executive's life, health, and disability coverage for
thirty-six months. Under the Employment Agreements, a voluntary termination
following a change in control means the executive's voluntary resignation
following any demotion, loss of title, office authority or responsibility, a
reduction in compensation or benefits or relocation. Notwithstanding that both
the Bank and Company Employment Agreements provide for a severance payment in
the event of a change in control, the Executive would only be entitled to
receive a severance payment under one agreement.
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Payments to the Executive under the Bank's Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid
by the Bank. Payment under the Company's Employment Agreement would be made by
the Company. The Company's Employment Agreement also provides that the Company
will compensate the Executive for excise taxes imposed on any "excess
parachute payments," as defined under section 280G of the Code, made
thereunder, and any additional income and excise taxes imposed as a result of
such compensation. All reasonable costs and legal fees paid or incurred by the
Executive pursuant to any dispute or question of interpretation relating to
the Employment Agreements shall be paid by the Bank or Company, respectively,
if the Executive is successful on the merits pursuant to a legal judgment,
arbitration or settlement. The Employment Agreements also provide that the
Bank and Company shall indemnify the Executive to the fullest extent allowable
under New York and Delaware law, respectively. In the event of a change in
control of the Bank or the Company, the total amount of payments due under the
Agreements, based solely on cash compensation paid to the officers who will
receive Employment Agreements over the past five fiscal years and excluding
any benefits under any employee benefit plan which may be payable, would be
approximately $3.0 million.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Bank intends to enter into two-year Change in Control
Agreements (the "CIC Agreements") with Mr. McKenna and four other officers,
none of whom will be covered by employment contracts. Commencing on the first
anniversary date and continuing on each anniversary thereafter, the Bank CIC
Agreements may be renewed by the Board of Directors of the Bank for an
additional year. The Bank's CIC Agreements will provide that in the event
voluntary or involuntary termination follows a change in control of the
Company or the Bank, the officer would be entitled to receive a severance
payment equal to two times the officer's average annual compensation for the
five most recent taxable years. The Bank would also continue and pay for the
officer's life, health and disability coverage for twenty-four months
following termination. Under the CIC Agreements, a voluntary termination
following a change in control means the executive's voluntary resignation
following any demotion, loss of title, office authority or responsibility, a
reduction in compensation or benefits or relocation. In the event of a change
in control of the Company or the Bank, the total payments that would be due
under the CIC Agreements, based solely on the current annual compensation paid
to the officers covered by the CIC Agreements and excluding any benefits under
any employee benefit plan which may be payable, would be approximately
$800,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank's Board of Directors intends to, upon Conversion, establish the
Richmond County Savings Bank Employee Severance Compensation Plan ("Severance
Plan") which will provide eligible employees with severance pay benefits in
the event of a change in control of the Bank or the Company following
Conversion. Management personnel with Employment Agreements or CIC Agreements
are not eligible to participate in the Severance Plan. Generally, employees
are eligible to participate in the Severance Plan if they have completed at
least one year of service with the Bank. The Severance Plan vests in each
participant a contractual right to the benefits such participant is entitled
to thereunder. Under the Severance Plan, in the event of a change in control
of the Bank or the Company, eligible employees who are terminated from or
terminate their employment within one year (for reasons specified under the
Severance Plan), will be entitled to receive a severance payment. If the
participant, whose employment has terminated, has completed at least one year
of service, the participant will be entitled to a cash severance payment equal
to one-twelfth of annual compensation for each year of service up to a maximum
of 199% of annual compensation. Such payments may tend to discourage takeover
attempts by increasing costs to be incurred by the Bank in the event of a
takeover. In the event the provisions of the Severance Plan are triggered, the
total amount of payments that would be due thereunder, based solely upon
current salary levels, would be approximately $4.6 million. However, it is
management's belief that substantially all of the Bank's employees would be
retained in their current positions in the event of a change in control, and
that any amount payable under the Severance Plan would be considerably less
than the total amount that could possibly be paid under the Severance Plan.
BENEFIT PLANS
Retirement Plan. The Bank sponsors a defined benefit pension plan known as
The Retirement Plan of Richmond County Savings Bank in RSI Retirement Trust
("Retirement Plan"). The Retirement Plan is intended to satisfy the tax
qualification requirements of Section 401(a) of the Code.
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Employees generally become eligible to participate in the Retirement Plan
upon their attainment of age 21 and the completion of one year of eligibility
service. The plan defines a year of eligibility service as a 12-month period,
coinciding with the employee's anniversary during which an employee completes
1,000 hours of service. The Retirement Plan excludes from becoming eligible to
participate employees (i) paid on an hourly-rate or contract basis, (ii)
regularly employed outside the Bank's own offices in connection with the
operation and maintenance of building and other property acquired through
foreclosure or deed, or (iii) leased employees.
The Retirement Plan provides for a normal retirement benefit to participants
upon retirement at or after the later of (i) attainment of age 65 or (ii) the
fifth anniversary of initial participation in the plan. The annual normal
retirement benefit for a participant under the Retirement Plan equals the sum
of (i) 1.67% of the "Average Annual Earnings" (as defined in the plan)
multiplied by the participant's "Credited Service" (as defined by the plan)
(up to a maximum of 35 years); plus (ii) 0.23% of the participant's Average
Annual Earnings, which exceed the participant's "Covered Compensation" (as
defined by the plan) multiplied by the participant's credited service (up to
maximum of 35 years); plus (iii) 1% of the participant's Average Annual
Earnings, multiplied by the participant's Credited Service which exceeds 35
years.
A participant may also become eligible to receive an early retirement
benefit upon the completion of at least ten consecutive years of "Vested
Service" (as defined in the plan) with the Bank and (i) attainment of age 60,
or (ii) completion of 30 years of vested service, or (iii) at the time the sum
of the participant's age and Vested Service equals or exceeds 85. Early
retirement benefits are generally calculated in the same manner as a
participant's normal retirement benefits but may be actuarially reduced if
paid prior to the participant's "Normal Retirement Date" (as defined by the
plan). Participants generally become vested in their benefits under the
Retirement Plan upon completing at least five years of Vested Service.
The plan generally pays benefits in the form of a straight life annuity with
respect to unmarried participants and in the form of a 50% qualified joint and
survivor annuity (with the spouse as designated beneficiary) for married
participants. Other forms of benefit payments, including a lump sum, are
available under the Retirement Plan.
The following table sets forth the estimated annual benefits payable under
the Retirement Plan upon a participant's retirement at age 65 for the year
ended June 30, 1997, expressed in the form of a straight life annuity, and any
related amounts payable under the Supplemental Executive Retirement Plan (see
description below). Covered compensation under the Retirement Plan basically
includes the base salary for participants, and does not consider any cash
bonus amounts. The benefits listed in the table below for the Retirement Plan
and Supplemental Executive Retirement Plan are not subject to a deduction for
social security benefits or any other offset amount.
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE -----------------------------------------------------
COMPENSATION 15 20 25 30 35 40
---------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$50,000............... $ 13,215 $ 17,820 $ 22,025 $ 26,430 $ 30,835 $ 33,335
100,000............... 27,485 36,820 45,775 54,930 64,085 69,085
150,000............... 41,715 55,620 69,525 83,430 97,335 104,835
200,000............... 55,965 74,620 93,275 111,930 130,585 140,585
250,000............... 70,215 93,820 117,025 140,430 163,835 176,335
300,000............... 84,486 112,620 140,775 188,930 197,085 212,085
350,000............... 98,716 131,620 184,525 197,430 230,335 247,835
400,000............... 112,985 150,830 188,275 225,930 263,335 283,585
450,000............... 127,215 169,620 212,025 254,430 296,835 319,335
500,000............... 141,485 188,620 236,775 282,930 330,085 355,085
550,000............... 155,715 207,820 259,525 311,430 363,335 390,835
</TABLE>
The approximate years of service, as of June 30, 1997, for the named
executive officers are as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------
<S> <C>
Michael F. Manzulli..................................... 5
John M. McKenna......................................... 5
</TABLE>
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401(k) Plan. The Bank also sponsors the Richmond County Savings Bank 401(k)
Savings Plan ("401(k) Plan"), a tax-qualified profit sharing and salary
reduction plan under Sections 401(a) and 401(k) of the Code. Generally,
employees other than (i) employees compensated on an hourly, daily,
commission, fee or retainer basis or (ii) leased employees become eligible to
participate in the 401(k) Plan upon the attainment of age 21 and the
completion of one year of service (i.e., 12 months of service). Under the
401(k) Plan, participants may make salary reduction contributions equal to 2%
to 9% of their compensation or the legally permissible limit (currently
$9,500). The Bank matches 50% of the first 6% of compensation deferred by a
participant.
Participants are always 100% vested in their salary reduction contributions.
Participants become 20% vested in Bank matching contributions after the
completion of two years of service with the Bank. Participants' vested
interest in Bank matching contribution increase by 20% for each additional
year of service completed, so that after the completion of 6 years of service,
participants are 100% vested in Bank matching contributions. A participant who
terminates employment due to death, disability, or retirement immediately
becomes fully vested in the Bank's matching contributions credited to his or
her account regardless of the participant's years of service. A participant's
vested portion of his or her 401(k) Plan account is distributable from the
401(k) Plan upon the termination of the participant's employment, death,
disability or retirement. In addition, a participant may be eligible for
hardship withdrawals and loans under the 401(k) Plan. Any distribution made to
a participant prior to the participant's attainment of age 59 1/2 is subject
to a 10% excise tax in addition to federal income taxes. The Board of
Directors may at any time discontinue the Bank's contributions to employee
accounts. For the years ended June 30, 1997, 1996 and 1995, the Bank's
matching contributions to the 401(k) Plan were $136,000, $133,000 and
$118,000, respectively.
The 401(k) Plan permits participants to direct the investment of their
401(k) plan account into various investment alternatives. The investment
accounts are valued daily and participants are provided with information
regarding the market value of the participant's investments and all
contributions made on his or her behalf on at least a quarterly basis. In
connection with the Conversion, the Bank intends to amend the 401(k) Plan to
permit participants to invest in an "Employer Stock Fund" as one of the
investment alternatives. The Employer Stock Fund will be invested primarily in
shares of Common Stock. The trustee may follow the voting directions of 401(k)
Plan participants investing in the Employer Stock Fund; provided that the
trustee determines such voting is consistent with its fiduciary duties.
However, the trustee is not required to follow the voting directions of the
401(k) Plan participants with respect to Common Stock held in the Employer
Stock Fund.
ESOP. In connection with the Conversion, the Bank also intends to implement
an employee stock ownership plan. An ESOP is a tax-qualified retirement plan
designed to invest primarily in employer securities. The Bank will make
contributions to the ESOP on behalf of all ESOP participants. The ESOP will
provide eligible employees with the opportunity to receive a Bank-funded
retirement benefit based primarily on the value of the Common Stock. All
eligible employees of the Bank and its affiliates, including the Company, as
of the effective date of the Conversion, may participate in the ESOP.
Subsequently, all eligible employees of the Bank and its affiliates, including
the Company, may participate in the ESOP upon the attainment of age 21 and the
completion of one year of service with the Bank.
The Bank expects the ESOP to purchase 8.0% of the Common Stock issued in
connection with the Conversion, including the issuance of shares to the
Foundation. As part of the Conversion and in order to fund the ESOP's purchase
of the Common Stock issued in the Conversion, the ESOP intends to borrow funds
from the Company equal to 100% of the aggregate purchase price of the Common
Stock. Alternatively, the Company and Bank may choose to fund the ESOP's
purchase of stock through a loan from a third-party financial institution. The
Common Stock purchased by the ESOP with the loan proceeds will serve as
collateral for the loan, as described below. The term of the ESOP loan will be
20 years and the trustee will repay the loan principally from the Company's or
the Bank's contributions to the ESOP. Additionally, any dividends that may be
paid on unallocated stock held by the ESOP will also be used to repay the ESOP
loan. Subject to receipt of any necessary regulatory approvals or opinions,
the Bank may make additional contributions to the ESOP for repayment of the
loan or to reimburse the Company for contributions made by it. The interest
rate for the loan is expected to be at or near the prime rate.
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Shares of Common Stock purchased by the ESOP with the loan proceeds will
initially be pledged as collateral for the loan and will be held in a suspense
account until released for allocation among participants as the loan is
repaid. The trustee will release the pledged shares annually from the suspense
account in an amount proportional to the repayment of the ESOP loan for each
plan year. The released shares will then be allocated to the accounts of ESOP
participants based on each participant's compensation relative to all
participants' compensation. Participants will vest in their ESOP account at a
rate of 20% annually commencing after the completion of 2 years of service,
with 100% vesting upon the completion of 6 years of service. Participants will
also become fully vested in their accounts if their service terminates due to
death, retirement, disability, or upon the occurrence of a change in control.
The ESOP may reallocate forfeitures among remaining participants, in the same
proportion as contributions. Benefits under the ESOP will become payable upon
death, retirement, or separation from service. The annual contributions to the
ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.
In connection with the establishment of the ESOP, the Board of Directors
will appoint a Committee of the Board of Directors and officers of the Bank to
administer the ESOP (the "ESOP Committee"). The Bank anticipates that this
Committee will appoint an unrelated trustee for the ESOP and the 401(k) Plan
Employer Stock Fund prior to the Conversion. The ESOP Committee may instruct
the trustee regarding investment of funds contributed to the ESOP and the
401(k) Plan Employee Stock Fund. The ESOP trustee, subject to its fiduciary
duties, must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. Subject to its fiduciary duties
under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the trustee will vote unallocated shares and allocated shares for
which participants provide no instructions in a manner calculated to most
accurately reflect the instructions it has received from participants
regarding the allocated stock for which it has received instructions.
Supplemental Executive Retirement Plan. The Bank also maintains a non-
qualified deferral compensation plan, known as the Richmond County Savings
Bank Supplemental Executive Retirement Plan (the "SERP"). The SERP provides
certain employees with supplemental retirement income from the Bank when such
amounts cannot be paid from the tax-qualified Retirement Plan or 401(k) Plan.
Participants in the SERP receive a benefit equal to the amount they would have
received under the Retirement Plan and the 401(k) Plan, but for reductions in
such benefits imposed by operation of Sections 401(a)(17), 401(m), 401(k)(3),
402(g) and 415 of the Code. The Bank will amend the SERP to provide
participants with supplemental benefits intended to make up for reductions
imposed on the ESOP by operation of Sections 401(a), 401(m) and/or 415 of the
Code. The SERP is an unfunded plan, providing participants only with a
contractual right to obtain the benefits provided thereunder from the general
assets of the Bank. Currently, only Mr. Manzulli is eligible to participate in
the SERP.
Management Supplemental Executive Retirement Plan. The Bank intends to
implement a non-qualified Management Supplemental Executive Retirement Plan
("MSERP") to provide certain officers and highly compensated employees of the
Bank and its affiliates, including the Company, with additional retirement
benefits. The MSERP benefit is intended to make up benefits lost under the
ESOP allocation procedures to participants who retire prior to the complete
repayment of the ESOP loan. At the retirement of a participant, the benefits
under the MSERP are determined by first: (i) projecting the number of shares
that would have been allocated to the participant under the ESOP if they had
been employed throughout the period of the ESOP loan (measured from the
participant's first date of ESOP participation); and (ii) first reducing the
number determined by (i) above by the number of shares actually allocated to
the Participant's account under the ESOP; and second, by multiplying the
number of shares that represent the difference between such figures by the
average fair market value of the Common Stock over the preceding five years.
Benefits under the MSERP vest in 20% annual increments over a five year period
commencing as of the date of a Participant's participation in the MSERP. The
vested portion of the MSERP Participant's benefits are payable upon the
retirement of the Participant upon or after the attainment of age 65 or in
accordance with the requirements of early retirement under the Retirement
Plan.
The Bank will amend the existing irrevocable grantor's trust ("grantor's
trust") established in connection with the SERP to hold the assets of the
MSERP. This trust will be funded with contributions from the Bank for the
purpose of providing the benefits promised under the terms of the MSERP. The
grantor's trust may hold a
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<PAGE>
variety of assets including the Common Stock, other securities, insurance
contracts and cash. The MSERP participants have only the rights of unsecured
creditors with respect to the trust's assets, and will not recognize income
with respect to benefits provided by the MSERP until such benefits are
received by the participants. The assets of the grantor's trust are considered
part of the general assets of the Bank and are subject to the claims of the
Bank's creditors in the event of the Bank's insolvency. Earnings on the
trust's assets are taxable to the Bank.
Stock Option Plan. Following the Conversion, the Board of Directors of the
Company intends to adopt a stock-based benefit plan which would provide for
the granting of options to purchase Common Stock to certain individuals.
Currently, the Company anticipates granting stock options under the Master
Stock-based Benefit Plan which will combine the features of the Stock Program
and the Stock Option Plan covering full-time employees and outside directors
of the Company and its affiliates. However, it is possible that the Company
may establish separate option plans solely for outside directors. At a meeting
of stockholders of the Company following the Conversion, which under
applicable NYBB regulations may not be held earlier than six months after the
completion of the Conversion, the Board of Directors intends to present the
Stock Option Plan, or the Master Stock-based Benefit Plan of which it is a
part, to stockholders for approval. The Company anticipates reserving an
amount equal to 10% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation (or 2,297,700 shares based upon the
issuance of 22,977,000 shares), for issuance under the Stock Option Plan, or
the Master Stock-based Benefit Plan of which it is a part. If the Company
implements an option plan within one year following completion of the
Conversion, NYBB regulations provide that no individual officer or employee of
the Bank may receive more than 25% of the options granted under the plan and
non-employee directors may not receive more than 5% individually, or 30% in
the aggregate, of the options granted under the plan. NYBB and FDIC
regulations also provide that the exercise price of any options granted under
any such plan must equal or exceed the market price of the Common Stock as of
the date of grant. Additionally, OTS regulations, as applied by the FDIC,
provide that with respect to any stock option plan adopted within one year
after conversion, the vesting or the exercisability of any options granted
under such a plan may not be accelerated except upon death or disability.
The Company intends to design the stock option benefits provided under the
Stock Option Plan to attract and retain qualified personnel in key positions,
provide officers and key employees with a proprietary interest in the Company
as an incentive to contribute to the success of the Company and reward key
employees for outstanding performance. The Company may condition the granting
or vesting of stock options on the achievement of individual or Company-wide
performance goals, including the achievement by the Company or the Bank of
specified levels of net income, asset growth, return on equity or other
specific financial performance goals. The Company anticipates that the Stock
Option Plan will provide for the grant of: (i) options for employees to
purchase the Company's Common Stock intended to qualify as incentive stock
options under Section 422 of the Code ("Incentive Stock Options"); (ii)
options for all participants that do not qualify as incentive stock options
("Non-Statutory Stock Options"); and (iii) Limited Option Rights (discussed
below) which participants may exercise only upon a change in control of the
Bank or the Company. Unless sooner terminated, the Stock Option Plan will be
in effect for a period of ten years from the earlier of adoption by the Board
of Directors or approval by the Company's stockholders. Subject to shareholder
approval, the Company intends to grant options with Limited Option Rights at
an exercise price equal to the fair market value of the underlying Common
Stock on the date of grant. Subject to any applicable NYBB and FDIC
regulations, upon exercise of "Limited Option Rights" in the event of a change
in control, the employee will be entitled to receive a lump sum cash payment
equal to the difference between the exercise price of any unexercised option,
whether exercisable or unexercisable at such time, 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. The Company
anticipates that all options granted contemporaneously with stockholder
approval of the Stock Option Plan will qualify as Incentive Stock Options to
the extent permitted under Section 422 of the Code. A change in control would
be defined in the plan document and would generally occur when a person or
group of persons acting in concert acquires beneficial ownership of 20% or
more of any class of equity security of the Company or the Bank or in the
event of a tender or exchange offer, merger or other form of business
combination, sale of all or substantially all of the assets of the Company or
the Bank or contested election of directors which resulted in the replacement
of a majority of the Board of Directors by persons not nominated by the
directors in office prior to the contested election.
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<PAGE>
A committee of the Board of Directors will administer the Stock Option Plan
and will determine which officers and employees may receive options and
Limited Rights, whether such options will qualify as Incentive Stock Options,
the number of shares subject to each option, the exercise price of each
option, the manner of exercise of the options and the time when such options
become exercisable.
If the Company adopts the Stock Option Plan in the form described above, an
employee will not realize taxable income upon grant or exercise of any
Incentive Stock Option, provided that the employee does not dispose of the
shares received through the exercise of such option for at least one year
after the date the employee receives the stock in connection with the option
exercise and two years after the date of grant of the option (a "disqualifying
disposition"). The Company may not take a compensation expense deduction with
respect to the grant or exercise of Incentive Stock Options, unless the
employee disposes of the shares in 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 fair market value of the Common Stock on the date of exercise
exceeds the exercise price of the option. The amount of taxable income
realized by an optionee upon the exercise of a Non-Statutory Stock Option or
due to a disqualifying disposition of shares acquired through the exercise of
an Incentive Stock Option are a deductible expense for tax purposes by the
Company. Upon the exercise of a Limited Option Right, the option holder
realizes taxable income equal to the amount paid to him or her upon exercise
of the right and the Company receives a deduction equal to that same amount.
Stock options under an option plan adopted by the Company would become
vested and exercisable in the manner specified by the committee responsible
for administering the plan, subject to applicable NYBB and FDIC regulations.
The Company anticipates options granted in connection with the Stock Option
Plan will remain exercisable for at least three months following the date on
which the employee ceases to perform services for the Bank or the Company,
except that in the event of death or disability, in which cases options
accelerate and become fully vested and remain exercisable for up to one year
thereafter, or such longer period as determined by the Company. However, any
Incentive Stock Options exercised more than three months following the date
the employee ceases to perform services as an employee, other than termination
due to death or disability, would be treated for tax purposes as a Non-
Statutory Stock Option. The Company also anticipates that in the event of
retirement, if the optionee continues to perform services as a Director,
Director Emeritus or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a Director,
Director Emeritus or consultant. If the Stock Option Plan is adopted in the
form described above, the Company, if requested by the optionee, could elect,
in exchange for vested options, to pay the optionee, or beneficiary in the
event of death, the amount by which the fair market value of the Common Stock
exceeds the exercise price of the options on the date of the employee's
termination of employment.
All options granted to outside directors under an option plan must, by law,
be Non-Statutory Stock Options and would vest and become exercisable in a
manner specified by the committee, subject to applicable NYBB and FDIC
regulations, and would expire upon the earlier of ten years following the date
of grant or one year following the date the optionee ceases to be a Director,
Director Emeritus or consultant. In the event of the death or disability of a
participant, all previously granted options would immediately vest and become
fully exercisable.
Stock Program. Following the Conversion, the Company intends to establish
the Stock Program which would provide for the grant of awards of Common Stock
and Limited Stock Rights to officers, directors and employees of the Company
and its affiliates including the Bank, at no cost to the recipient, as a
method of providing officers, employees and non-employee directors of the Bank
and Company with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Bank. The benefits under the Stock
Program may be provided for under either a separate plan for officers and
employees and a separate plan for outside directors or under the Master Stock-
based Benefit Plan which would combine the features of the Stock Program with
the Stock Option Plan. The Company intends to present the Stock Program or the
plan of which they are a part, for stockholder approval at a meeting of
stockholders, which pursuant to applicable NYBB regulations, may be held no
earlier than six months after the completion of the Conversion.
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The Bank or Company expects to contribute funds to the Stock Program to
enable such plan or a trust established for such plan, to acquire, in the
aggregate, an amount equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation (or 919,080 shares based
upon the issuance of 22,977,000 shares). The Company will acquire these shares
through open market purchases, if permitted, or from authorized but unissued
shares. Although no specific award determinations have been made, the Company
anticipates that it will provide stock awards to the directors and employees
of the Company or Bank or their affiliates to the extent permitted by
applicable regulations. Shares of Common Stock granted pursuant to the Stock
Program will be awarded at no cost to the recipients. NYBB regulations provide
that, to the extent the Company implements the Stock Program within one year
after the Conversion, no individual employee may receive more than 25% of the
shares of any plan and non-employee directors may not receive more than 5% of
any plan individually or 30% in the aggregate for all directors. Additionally,
OTS regulations, as applied by the FDIC, provide that with respect to any
stock option plan adopted within one year after conversion, the vesting or the
exercisability of any options granted under such a plan may not be accelerated
except upon death or disability.
A committee of the Board of Directors will administer the Stock Program or
the plan of which they are a part. Stock awards will not be transferable or
assignable. The Board intends to appoint an independent fiduciary to serve as
trustee of a trust established pursuant to the Stock Program. The Company may
make allocations and grants to officers and employees under the Stock Program
in the form of non performance-based grants and/or performance-based grants.
The Company may make the granting or vesting of stock awards under the Stock
Program conditioned upon the achievement of individual or Company-wide
performance goals, including the Company's or Bank's achievement of specified
levels of net income, return on assets, return on equity or other specified
financial performance goals and will be subject to applicable NYBB and FDIC
regulations, if any.
In the event of death, awards of Common Stock will become 100% vested. In
the event of disability, grants would be 100% vested upon termination of
employment of an officer or employee, or upon termination of service as a
director. In the event of retirement, if the participant continues to perform
services as a Director, Director Emeritus or consultant on behalf of the Bank,
the Company or an affiliate or, in the case of a retiring Director, Director
Emeritus, or as a consulting director, unvested grants will continue to vest
in accordance with their original vesting schedule until the recipient ceases
to perform such services at which time any unvested grants would lapse.
Limited Stock Rights would be exercisable by participants only upon a change
in control of the Company or Bank as described in the Plan. Subject to any
applicable NYBB or FDIC regulations, upon the exercise of a Limited Stock
Right, the recipient will be entitled to receive a cash payment equal to the
fair market value of all unvested stock awards in exchange for any rights to
such unvested stock awards.
A change in control is expected to be defined in the plan document to
generally occur when a person or group of persons acting in concert acquires
beneficial ownership of 20% or more of a class of equity securities of the
Company or the Bank or in the event of a tender or exchange offer, merger or
other form of business combination, sale of all or substantially all of the
assets of the Company or the Bank or contested election of directors which
results in the replacement of a majority of the Board of Directors by persons
not nominated by the directors in office prior to the contested election.
When shares become vested in accordance with the stock programs described
above, the participants will recognize taxable income equal to the fair market
value of the Common Stock at that time. The Company may take a deduction equal
to that amount for the year in which it becomes taxable to the individual.
When shares become vested and are actually distributed in accordance with the
Stock Program, the participants 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
and shares allocated subject to the achievement of performance goals will be
voted by the trustee of the Stock Program, or the plan of which they are a
part, in accordance to the directions provided by individuals 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.
In the event that additional authorized but unissued shares are acquired by
the Stock Program after the Conversion, the interests of existing shareholders
would be diluted. See "Pro Forma Data."
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TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Bank's policies do not permit the Bank to make loans to any of its
Trustees. Two of the Bank's Trustees have loans with the Bank that predate
their becoming Trustees. Federal regulations 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. In addition, loans made to a director or executive
officer in excess of the greater of $25,000 or 5% of the Bank's capital and
surplus (up to a maximum of $500,000) must be approved in advance by a
majority of the disinterested members of the Board of Trustees.
The Bank currently makes loans to its executive officers on the same terms
and conditions offered to the general public. The Bank's policy provides that
all loans made by the Bank to its executive officers be made in the ordinary
course of business, on substantially the same terms, including collateral, as
those prevailing at the time for comparable transactions, with other persons
and may not involve more than the normal risk of collectability or present
other unfavorable features. In addition, the law firm of Lahr, Dillon,
Manzulli, Kelley & Penett, P.C. has a mortgage loan with the Bank. Such loan
was made by the Bank in the ordinary course of business, with no favorable
terms and did not involve more than the normal risk of collectability or
present unfavorable features. During fiscal 1997, the law firm of Lahr,
Dillon, Manzulli, Kelley & Penett, P.C. provided legal representation to the
Bank for which it was paid approximately $139,000 for legal fees and related
services. Mr. Manzulli and Mr. Kelley are partners with the firm.
The Company intends that all transactions 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 arms-length
negotiations with unaffiliated persons and will be approved by a majority of
independent outside directors of the Company not having any interest in the
transaction.
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SUBSCRIPTIONS BY EXECUTIVE OFFICERS, DIRECTORS AND TRUSTEES
The following table sets forth the number of shares of Common Stock that the
executive officers, Trustees and Directors, and their Associates, propose to
purchase, assuming shares of Common Stock are issued at the minimum and
maximum of the Estimated Price Range (including shares issued to the
Foundation) and that sufficient shares will be available to satisfy their
subscriptions. The table also sets forth the total expected beneficial
ownership of Common Stock as to all Trustees, Directors and executive officers
as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED OF THE ESTIMATED PRICE
PRICE RANGE(1) RANGE(1)
------------------- -------------------------
AS A AS A
PERCENT PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES ISSUED(2) OF SHARES ISSUED(2)
---- ---------- --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Anthony E. Burke........ $ 250,000 25,000 0.15% 25,000 0.11%
Godfrey H. Carstens,
Jr..................... 250,000 25,000 0.15 25,000 0.11
Robert S. Farrell....... 300,000 30,000 0.18 30,000 0.13
William C. Frederick,
M.D.................... 250,000 25,000 0.15 25,000 0.11
James L. Kelley (3)..... 250,000 25,000 0.15 25,000 0.11
Michael F. Manzulli
(3).................... 250,000 25,000 0.15 25,000 0.11
T. Ronald Quinlan, Jr... 100,000 10,000 0.06 10,000 0.04
Maurice K. Shaw......... 200,000 20,000 0.12 20,000 0.09
John M. McKenna......... 100,000 10,000 0.06 10,000 0.04
Thomas R. Cangemi....... 250,000 25,000 0.15 25,000 0.11
Stephen G.C. Campbell... 75,000 7,500 0.04 7,500 0.03
Peter J. Esposito....... 75,000 7,500 0.04 7,500 0.03
Charles F. Hermann,
III.................... 125,000 12,500 0.07 12,500 0.05
Andrew M. Sisock........ 100,000 10,000 0.06 10,000 0.04
Nelson C. Sundback...... 100,000 10,000 0.06 10,000 0.04
Robert J. O'Rourke...... 75,000 7,500 0.04 7,500 0.03
---------- ------- ---- ------------ ---------
All Directors and
Executive Officers as a
group (17 persons)..... $2,750,000 275,000 1.62% 275,000 1.20%
========== ======= ==== ============ =========
</TABLE>
- --------
(1) Includes proposed subscriptions, if any, by Associates. Does not include
orders by the ESOP. Intended purchases by the ESOP are expected to be 8.0%
of the shares issued in the Conversion, including shares issued to the
Foundation. Also does not include Common Stock which may be awarded under
the Stock Program to be adopted equal to 4% of the Common Stock issued in
the Conversion, including shares issued to the Foundation, and Common
Stock which may be purchased pursuant to options which may be granted
under the Stock Option Plan equal to 10% of the number of shares of Common
Stock issued in the Conversion, including shares issued to the Foundation.
(2) Includes shares issued to the Foundation.
(3) Does not include proposed subscriptions of $250,000 for a retirement plan
trust, the trustees of which include Messrs. Kelley and Manzulli.
Including such subscriptions, the total amount of subscriptions of
trustees, directors, executive officers and their Associates would be $3.0
million.
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THE CONVERSION
THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK HAS APPROVED THE PLAN
OF CONVERSION SUBJECT TO THE APPROVAL OF THE BANK'S VOTING DEPOSITORS AND THE
SATISFACTION OF CERTAIN OTHER CONDITIONS. HOWEVER, SUCH APPROVAL DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY THE
SUPERINTENDENT.
GENERAL
On July 31, 1997, the Bank's Board of Trustees adopted the Plan of
Conversion, as amended by the Board on November 20, 1997, pursuant to which
the Bank will be converted from a New York State chartered mutual savings bank
to a New York State chartered stock savings bank. It is currently intended
that all of the capital stock of the Bank will be held by the Company, which
is incorporated under Delaware law. The Plan has been approved by the
Superintendent and the Bank has received a notice of intent not to object to
the Plan from the FDIC, subject to, among other things, approval of the Plan
by the Bank's Voting Depositors (defined in the Plan as a depositor holding
one or more deposit accounts with the Bank with an aggregate balance of $100
or more as of the close of business on the Voting Record Date, which has been
fixed by the Bank's Board of Trustees as September 30, 1997). A special
meeting of Voting Depositors has been called for this purpose to be held on
February 9, 1998.
The Company has received approval from the OTS to become a savings and loan
holding company and to acquire all of the common stock of the Bank to be
issued in the Conversion. The Company plans to retain 50% of the net proceeds
from the sale of the Common Stock and to use the remaining 50% to purchase all
of the common stock of the Bank to be issued in the Conversion. The Conversion
will be effected only upon completion of the sale of all of the shares of
Common Stock of the Company or all of the common stock of the Bank, if the
holding company form of organization is not utilized, to be issued in the
Conversion.
The Plan provides that the Board of Trustees of the Bank, at any time prior
to the issuance of the Common Stock and for any reason, may decide not to use
the holding company form of organization in implementing the Conversion. Such
reasons may include possible delays resulting from overlapping regulatory
processing, or policies or conditions, which could adversely affect the Bank's
or the Company's ability to consummate the Conversion and transact its
business after the Conversion as contemplated herein and in accordance with
the Bank's operating policies. In the event that such a decision is made, the
Bank will withdraw the Company's registration statement from the SEC and will
take all steps necessary to complete the Conversion without the Company,
including filing any necessary documents with the Superintendent, FDIC, and
any other appropriate regulatory authority. In such event, and provided there
is no regulatory action, directive or other consideration upon which basis the
Bank determines not to complete the Conversion, if permitted by the
Superintendent, the Bank will issue and sell the common stock of the Bank and
subscribers will be notified of the elimination of the Company and resolicited
(i.e., be permitted to affirm their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their funds will be promptly refunded with
interest, or be permitted to modify or rescind their subscriptions) and
notified of the time period within which the subscriber must affirmatively
notify the Bank of his intention to affirm, modify or rescind his
subscription. The following description of the Plan assumes that a holding
company form of organization will be used in the Conversion. In the event that
a holding company form of organization is not used, all other pertinent terms
of the Plan as described below will apply to the conversion of the Bank from
the mutual to stock form of organization and the sale of the Bank's common
stock.
The Plan provides generally that (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank and (ii) the Company will offer
Common Stock for sale in the Subscription Offering to Eligible Account
Holders, the ESOP and Supplemental Eligible Account Holders. Upon completion
of the Subscription Offering, the Company will offer any shares of Common
Stock not subscribed for in the Subscription Offering to certain members of
the general public in the Community Offering, subject to the other limitations
described herein. It is anticipated that all shares not subscribed for in the
Subscription and Community Offerings will be offered for sale by the Company
to the general public in a Syndicated Community Offering. The Bank and
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Company have the right to accept or reject, in whole or in part, any orders to
purchase shares of the Common Stock received in the Community Offering or
Syndicated Community Offering, provided that such rejection is not in
contravention of any law or regulation.
The aggregate price of the shares of Common Stock to be sold in the
Conversion will be determined based upon an independent appraisal prepared by
Keller & Company, Inc. of the estimated pro forma market value of the Common
Stock giving effect to the Conversion. All shares of Common Stock to be issued
and sold in the Conversion will be sold at the same price. Keller's
independent appraisal will be updated and the final price of the shares will
be determined at the completion of the Subscription Offering, if all shares
are subscribed for, or at the completion of the Community and/or the
Syndicated Community Offering. The independent appraisal has been performed by
Keller, a consulting firm experienced in the valuation and appraisal of
savings institutions. See "--Stock Pricing" for a determination of the
estimated pro forma market value of the Common Stock.
The following is a brief summary of material aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available upon written request from the Bank and
is available for inspection at each branch office of the Bank and at the
office of the Superintendent. The Plan is also filed as an Exhibit to the
Registration Statement of which this Prospectus is a part, copies of which may
be obtained from the SEC. See "Additional Information."
ESTABLISHMENT OF CHARITABLE FOUNDATION
General. In furtherance of the Bank's commitment to its community, the Plan
of Conversion provides for the establishment and funding of a charitable
foundation in connection with the Conversion. The Bank and the Company have
established the Foundation, which is incorporated under Delaware law as a non-
stock corporation, and will fund the Foundation with Common Stock of the
Company, as further described below. The Company and the Bank believe that the
funding of the Foundation with Common Stock of the Company is a means of
establishing a common bond between the Bank and its community and thereby
enables the Bank's community to share in the potential growth and success of
the Company over the long term. By further enhancing the Bank's visibility and
reputation in its 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
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 community. The Bank received a
satisfactory CRA rating in its last CRA examination. The Foundation is being
formed as a complement to the Bank's existing community activities, not as a
replacement for such activities. The Bank intends to continue to emphasize
community lending and community development activities following the
Conversion. However, such activities are not the Bank's sole corporate
purpose. The Foundation, conversely, will be completely dedicated to community
activities and the promotion of charitable causes, and may be able to support
such activities in ways that are not presently available to the Bank. Since
the Bank has a Satisfactory record of serving its community under the CRA and
already engages in community development activities, the Bank believes that
the Foundation will enable the Company and the Bank to assist the communities
the Bank serves in areas beyond community development and lending. The Bank
believes the establishment of the Foundation will enhance its current
activities under the CRA. In this regard, the Board of Trustees believes the
establishment of a charitable foundation is consistent with the Bank's
commitment to community service. The Board further believes that the funding
of the Foundation with Common Stock of the Company is a means of enabling the
Bank's community to share in the potential growth and success of the Company
long after completion of the Conversion. The Foundation will accomplish that
goal by providing for continued ties between the Foundation and 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.
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Structure of the Foundation. The Foundation has been incorporated under
Delaware law as a non-stock corporation. The Foundation's Board of Directors
initially is comprised of eight members, all of whom are existing Directors of
the Company; provided, however, that in the future, the Board of Directors of
the Foundation will consider expanding the Foundation Board to include one or
more members of the community who are not officers, directors or employees of
the Company or the Bank. A Nominating Committee 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. Directors are divided into three classes with each class
appointed for three-year terms. The certificate of incorporation of the
Foundation provides that the corporation is organized exclusively for
charitable purposes, including community development, as set forth in Section
501(c)(3) of the Code. The Foundation's certificate of incorporation further
provides that no part of the net earnings of the Foundation will inure to the
benefit of, or be distributable to, its directors, officers or members.
The authority for the affairs of the Foundation are 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 organization of the Foundation. As directors of a nonprofit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established. The Directors of the
Foundation are also responsible for directing the activities of the
Foundation, including the management of the Common Stock of the Company held
by the Foundation. However, see "--Regulatory Conditions Imposed on the
Foundation."
The Foundation's place of business is located at the Company's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Company or the
Bank. The Board of Directors of the Foundation will appoint such officers as
may be necessary to manage the operations of the Foundation.
The Company intends to capitalize the Foundation with Common Stock of the
Company in an amount equal to 8.0% of the total amount of Common Stock to be
sold in connection with the Conversion concurrent with the sale of Common
Stock in the Offerings. At the minimum, midpoint and maximum of the Estimated
Price Range, the contribution to the Foundation would equal 1,258,000,
1,480,000 and 1,702,000 shares, which would have a market value of $12.6
million, $14.8 million, and $17.0 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
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Stock greater than such amount would result in a long-term reduction of the
value of the Foundation's assets or would otherwise jeopardize the
Foundation's capacity to carry out its charitable purposes. Upon completion of
the Conversion and the contribution of shares to the Foundation immediately
following the Conversion, the Company would have 16,983,000, 19,980,000 and
22,977,000 shares issued and outstanding at the minimum, midpoint and maximum
of the Estimated Price Range. Because the Company will have an increased
number of shares outstanding, the voting and ownership interests of
shareholders in the Company's Common Stock would be diluted by 7.4%, as
compared to their interests in the Company if the Foundation was not
established. For additional discussion of the dilutive effect, see "Pro Forma
Data."
Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
will qualify as a Section 501(c)(3) exempt organization under the Code, and
will be classified as a private foundation. The Foundation will submit a
request to the IRS to be recognized as an exempt organization. As long as the
Foundation files its application for tax-exempt status within 15 months from
the date of its organization, and provided the IRS approves the application,
the effective date of the Foundation's status as a Section 501(c)(3)
organization will be the date of its organization. The Company's independent
accountants, however, have not rendered any advice on the regulatory condition
to the contribution 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 shares voted of Common Stock of the Company on all
proposals considered by stockholders of the Company. See "--Regulatory
Conditions Imposed on the Foundation."
Under Delaware law, the Company is authorized by statute to make charitable
contributions and case law has recognized the benefits of such contributions
to a Delaware corporation. In this regard, Delaware case law provides that a
charitable gift must be within reasonable limits as to amount and purpose to
be valid. Under the Code, the Company may deduct up to 10% of its taxable
income in any one year and any contributions made by the Company in excess of
the deductible amount 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 midpoint of the Estimated Price Range, the Company
would have pro forma consolidated capital of $289.6 million or 24.28% of pro
forma consolidated assets and the Bank's pro forma leverage and risk-based
capital ratios would be 15.65% and 29.96%, respectively. See "Regulatory
Capital Compliance," "Capitalization," and "Comparison of Valuation and Pro
Forma Information with No Foundation." Thus, the amount of the contribution
will not adversely impact the financial condition of the Company and the Bank
and the Company and the Bank therefore believe that the amount of the
charitable contribution is reasonable given the Company's and the Bank's pro
forma capital positions. As such, the Company and the Bank believe that the
contribution does not raise safety and soundness concerns.
The Company and the Bank have received an opinion of their independent tax
advisors that the Company's contribution of its own stock to the Foundation
should 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 less the nominal par value that the Foundation is
required to pay the Company for such stock, subject to a limitation based on
10% of the Company's annual taxable income. As discussed above, the Company,
however, would be able to carry forward any unused portion of the deduction
for five years following the contribution. If the Foundation would have been
established in fiscal 1997, the Company would have received a charitable
contribution deduction of approximately $2.1 million (based on the Bank's pre-
tax income for fiscal 1997, an assumed tax rate of 47% and a contribution of
Common Stock equal to $17.0 million). The Company
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is permitted under the Code to carry over the excess contribution over the
five year period following the contribution to the Foundation. Assuming the
close of the Offerings at the midpoint of the Estimated Price Range, the
Company estimates that substantially all of the deduction should be deductible
over the six-year period. Neither the Company nor the Bank expect to make any
further contributions to the Foundation within the first five years following
the initial contribution. After that time, the Company and the Bank may
consider future contributions to the Foundation. Any such decisions would be
based on an assessment of, among other factors, the financial condition of the
Company and the Bank at that time, the interests of shareholders and
depositors of the Company and the Bank, and the financial condition and
operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent tax advisors that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that
the deduction will be permitted. In such event, the Company's tax benefit
related to the contribution to the Foundation would be expensed without tax
benefit, resulting in a reduction in earnings in the year in which the IRS
makes such a determination. See "Risk Factors--Effects of the Establishment of
the Foundation."
As a private foundation, earnings and gains, if any, from the sale of Common
Stock or other assets are exempt from federal and state corporate taxation.
However, investment income, such as interest, dividends and capital gains,
will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a
private foundation must include, among other things, an itemized list of all
grants made or approved, showing the amount of each grant, the recipient, any
relationship between a grant recipient and the Foundation's managers and a
concise statement of the purpose of each grant. The Foundation will also be
required to file an annual report with the Charities Bureau of the Office of
the Attorney General of the State of New York.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions to be agreed to by the
Foundation in writing as a condition to receiving the approval of the
Superintendent and the FDIC's non-objection to the Bank's Conversion: (i) the
Foundation will be subject to examination by the NYBD and the FDIC; (ii) the
Foundation must comply with supervisory directives imposed by the NYBD and the
FDIC; (iii) the Foundation will operate in accordance with written policies
adopted by the Foundation's board of directors, including a conflict of
interest policy acceptable to the NYBD and the FDIC; (iv) the Foundation shall
not engage in self-dealing and shall comply with all laws necessary to
maintain its tax-exempt status under the Code; (v) no part of the net earnings
of the Foundation shall inure to the benefit of, or be distributable to, the
Foundation's directors, officers or other private persons except for the
payment of reasonable compensation for services rendered and certain
distributions and payments in furtherance of the corporate purposes of the
Foundation; (vi) the Foundation may not participate in any political
campaigns; (vii) the Foundation is prohibited from engaging in any activity
which would cause it to be subject to excise taxes or which would jeopardize
its status as a private foundation under Section 501(c)(3) of the Code; and
(viii) any shares of Common Stock of the Company held by the Foundation must
be voted in the same ratio as all other shares of Common Stock of the Company
voted on all proposals considered by stockholders of the Company; provided,
however, that the NYBD and the FDIC may waive this voting restriction under
certain circumstances, such as the loss of the tax-exempt status of the
Foundation. If the voting restriction is waived or becomes unenforceable, the
NYBD and the FDIC may either impose a condition that provides 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 Company, the Bank or any
affiliate or impose such other conditions relating to control of the
Foundation's Common Stock as is determined by the NYBD and the FDIC to be
appropriate at the time. There can be no assurances that the NYBD or the FDIC
would grant a waiver, unconditional or otherwise, of the voting restriction.
PURPOSES OF CONVERSION
The Bank, as a New York State chartered mutual savings bank, does not have
stockholders and has no authority to issue capital stock. By converting to the
capital stock form of organization, the Bank will be
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structured in the form used by commercial banks, most business entities and a
growing number of savings institutions. The Conversion will be important to
the future growth and performance of the Bank by providing a larger capital
base on which the Bank may operate, enhanced future access to capital markets,
enhanced ability to diversify into other financial services related activities
and enhanced ability to render services to the public.
The holding company form of organization would provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock financial institutions, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to
take advantage of any such opportunities that may arise. While there are
benefits associated with the holding company form of organization, such form
of organization may involve additional costs associated with its maintenance
and regulation as a savings and loan company, such as additional
administrative expenses, taxes and regulatory filings or examination fees.
The potential impact of the Conversion upon the Bank's capital base is
significant. At August 31, 1997, the Bank had Tier I Leverage capital of
$100.9 million, or 10.10% of total assets. Assuming that $155.4 million of net
proceeds are realized from the sale of Common Stock (see "Pro Forma Data" for
the basis of this assumption) and assuming that 50% of the net proceeds are
used by the Company to purchase the capital stock of the Bank, the Bank's Tier
I Leverage capital would increase to $166.6 million, resulting in a pro forma
leverage capital ratio of 15.65% giving effect to the Conversion. In the event
that the holding company form of organization is not utilized and all the net
proceeds, at the midpoint of the Estimated Price Range, are retained by the
Bank, the Bank's core capital would increase to $256.3 million, resulting in a
pro forma leverage capital ratio of 22.2% at August 31, 1997. The investment
of the net proceeds from the sale of the Common Stock will provide the Bank
with additional income to further increase its capital position.
After completion of the Conversion, the unissued Common Stock and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and applicable regulatory approvals, to
raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present
time, the Company has no plans with respect to additional offerings of
securities, other than the issuance of additional shares upon exercise of
stock options under the Stock Option Plan or the possible issuance of
authorized but unissued shares to the Stock Program. Following the Conversion,
the Company will also be able to use stock-based benefit plans to attract and
retain executive and other personnel for itself and its subsidiaries. See
"Management of the Bank--Executive Compensation."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings bank has both a deposit account
in the institution and a pro rata ownership interest in the net worth of the
institution based upon the balance in his or her account, which interest may
only be realized in the event of a liquidation of the institution. However,
this ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. Any depositor who opens a
deposit account obtains a pro rata ownership interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the institution, which is lost to the extent that the balance in the
account is reduced.
Consequently, mutual savings bank depositors normally have no way to realize
the value of their ownership interest, which may have realizable value only in
the unlikely event that the mutual savings bank is liquidated. In such event,
the depositors of record at that time, as owners, would have a claim to share
pro rata in any residual surplus and reserves after other claims, including
claims of depositors to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, depositors lose all
rights to the net worth of the mutual savings bank, except to the extent
depositors have rights to claim a pro rata share of funds representing the
liquidation account established in connection with the Conversion.
Additionally, permanent nonwithdrawable
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capital stock is created and offered to depositors which represents the
ownership of the institution's net worth, subject to certain claims of
Eligible Account Holders and Supplemental Eligible Account Holders with
respect to amounts representing the liquidation account. THE COMMON STOCK IS
SEPARATE AND APART FROM DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY
THE FDIC OR ANY OTHER GOVERNMENT AGENCY. Certificates are issued to evidence
ownership of the permanent stock. The stock certificates are transferable, and
therefore the stock may be sold or traded if a purchaser is available with no
effect on any deposit account the seller may hold in the institution.
No assets of the Company or the Bank will be distributed in connection with
the Conversion other than pursuant to the payment of expenses incurred in
connection therewith.
Continuity. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the
Superintendent and the FDIC. After Conversion, the Bank will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The Trustees of the Bank at the time of Conversion will serve as Directors
of the Bank after the Conversion. With the exception of Mr. Burke, Directors
of the Company will consist of the same individuals who will serve on the
Board of Directors of the Bank. All officers of the Bank at the time of
Conversion will retain their positions after the Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion, and each deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion. Depositors
will continue to hold their existing passbooks and other evidences of their
accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as it was contractually fixed prior to the Conversion.
Effect on Voting Rights of Depositors. In its current mutual form, voting
rights and control of the Bank are vested exclusively in the Board of
Trustees. After the Conversion, direction of the Bank will be under the
control of the Board of Directors of the Bank. The Company, as the holder of
all of the outstanding common stock of the Bank, will have exclusive voting
rights with respect to any matters concerning the Bank requiring stockholder
approval, including the election of Directors of the Bank.
After the Conversion, subject to the rights of the holders of preferred
stock that may be issued in the future, the holders of the Common Stock will
have exclusive voting rights with respect to any matters concerning the
Company. Each holder of Common Stock will, subject to the restrictions and
limitations set forth in the Company's Certificate of Incorporation discussed
below, be entitled to vote on any matters to be considered by the Company's
stockholders, including the election of directors of the Company.
Tax Effects. The Bank has received an opinion of counsel with regard to
federal income taxation which indicates that the adoption and implementation
of the Plan of Conversion set forth herein will not be taxable for federal
income tax purposes to the Bank or its Eligible Account Holders, Supplemental
Eligible Account Holders or the Company, subject to the limitations and
qualifications in such opinion. The Bank has also received an opinion from
Ernst & Young LLP that, with respect to New York State banking and franchise
taxes, sales and use taxes and stock transfer taxes, the Conversion will not
result in a tax liability, and, with respect to New York State real estate
transfer taxes and New York City real property transfer taxes, a position may
be taken that the Conversion is tax free. The opinion of Ernst & Young LLP
does provide that the Company will be required to pay a New York State license
fee as a foreign corporation equal to 1/20% of the apportioned par value of
the Common Stock issued by the Company, subject to the limitations and
qualifications contained in such opinions. See "--Tax Aspects."
Effect on Liquidation Rights. If a mutual savings bank were to liquidate,
all claims of creditors (including those of depositors, to the extent of
deposit balances) would be paid first. Thereafter, if there were any assets
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remaining, depositors would have a claim to receive such remaining assets, pro
rata, based upon the deposit balances in their deposit accounts immediately
prior to liquidation. In the unlikely event that the Bank were to liquidate
after Conversion, all claims of creditors (including those of depositors, to
the extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account," if any, to certain depositors (as
described in "--Liquidation Rights," below), with any assets remaining
thereafter distributed to the Company as the holder of the Bank's capital
stock.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common Stock
must be based on the appraised pro forma market value of the Common Stock, as
determined on the basis of an independent appraisal. The Bank and the Company
have retained Keller to make such appraisal. For its services in making such
appraisal, Keller will receive a fee of $31,000, including fees related to the
preparation of a business plan for the Company and Bank, and will be
reimbursed for certain of its expenses in an amount not to exceed $1,000. The
Bank and the Company have agreed to indemnify Keller and its employees and
affiliates against certain losses (including any losses in connection with
claims under the federal securities laws) arising out of its services as the
independent appraiser, except where Keller's liability results from its
negligence or willful misconduct.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
Keller also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the
Bank, including liquidity, capitalization, asset composition, funding mix,
amount of intangible assets owned, and level of interest rate risk; the
economic, demographic and competitive aspects of the Bank's existing marketing
area; the quality and depth of the Bank's management; certain historical,
financial and other information relating to the Bank; a comparative evaluation
of the operating and financial statistics of the Bank with those of other
savings institutions; the aggregate size of the offering of the Common Stock;
the impact of Conversion on the Bank's net worth and earnings potential; the
proposed dividend policy of the Company and the Bank; the trading market for
securities of comparable institutions and general conditions in the market for
such securities; and recent regulatory matters. In particular, the appraisal
considered the Bank's financial condition and projected and historical
operating results, including income and expense trends, asset size, loan
portfolio composition, non-performing loans and assets, interest rate
sensitivity position, capital position, and yields on assets and costs of
liabilities in comparison to other publicly-traded thrifts with assets greater
than or equal to $200 million and less than or equal to $2.0 billion located
in the State of New York, the states contiguous to New York plus the States of
Delaware and Maryland. The Board of Trustees of the Bank and Board of
Directors of the Company have reviewed the appraisal of Keller in determining
the reasonableness and adequacy of such appraisal consistent with NYBB and
FDIC regulations and have reviewed the methodology and reasonableness of
assumptions utilized by Keller in the preparation of such appraisal and
established the Estimated Price Range in a manner consistent with this
appraisal.
On the basis of the foregoing, Keller has advised the Company and the Bank
that, in its opinion dated as of September 12, 1997, as updated as of October
31, 1997, the estimated pro forma market value of the Common Stock being sold
in connection with the Conversion ranged from a minimum of $157.3 million to a
maximum of $212.8 million with a midpoint of $185.0 million. Based on the
Valuation Range, the Board of Trustees established the Estimated Price Range
of $157.3 million to $212.8 million based on the issuance of 15,725,000 to
21,275,000 shares at the Purchase Price of $10.00 per share. The Estimated
Price Range may be amended with the approval of the Superintendent and FDIC,
if required, if necessitated by subsequent developments in the financial
condition of the Company or the Bank or market conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES OF
COMMON STOCK. KELLER DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID KELLER VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL CONSIDERS
THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF
THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH APPRAISAL IS
NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL
OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN
THAT PERSONS PURCHASING SUCH
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SHARES IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES
AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF
THE PRO FORMA MARKET VALUE THEREOF. The appraisal of Keller may be inspected
by any Eligible Account Holder or Supplemental Eligible Account Holder at the
Bank's main office located at 1214 Castleton Avenue, Staten Island, New York,
during regular business hours of the Bank and at the other locations specified
under "Additional Information." Copies of the appraisal may also be requested
by Eligible Account Holders or Supplemental Eligible Account Holders;
provided, however, that such Eligible Account Holders or Supplemental Eligible
Account Holders shall be responsible for all costs associated with the copying
and transmittal of such appraisal.
Following commencement of the Subscription Offering, the maximum of the
Estimated Price Range may be increased up to 15% and the number of shares of
Common Stock being sold in the Conversion may be increased to 24,466,250
shares due to regulatory considerations, or changes in market or 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 Offering.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, Keller 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 Keller 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.
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the
Superintendent and FDIC, may terminate the Plan and return all funds promptly
with interest at the Bank's passbook rate of interest on payments made by
check, bank draft or money order, extend or hold a new Subscription and/or
Community Offering, establish a new Estimated Price Range, commence a
resolicitation of subscribers or take such other actions as permitted by the
Superintendent and FDIC in order to complete the Conversion. In the event that
a resolicitation is commenced, unless an affirmative response is received
within a reasonable period of time, all funds will be promptly returned to
investors as described above. A resolicitation following the conclusion of the
Subscription Offering would not exceed 45 days unless such resolicitation
period is further extended by the Superintendent and FDIC, if necessary.
If all shares of Common Stock are not sold through the Subscription Offering
or Community Offering, 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 Community Offering. 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, Keller confirms to the Bank, Company, Superintendent and FDIC
that, to the best of its knowledge, nothing of a material nature has occurred
which, taking into account all relevant factors, including those which would
be involved in a cancellation of the Syndicated Community Offering, would
cause Keller 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, reopen or commence new Subscription Offering, Community
Offering or Syndicated Community Offering, establish a new Estimated Price
Range and commence a resolicitation of all subscribers with the approval of
the Superintendent and FDIC or take such other actions as permitted by the
Superintendent and FDIC in order to complete the Conversion, or terminate the
Plan and cancel the Subscription and Community Offerings and/or the Syndicated
Community Offering. In the event market or financial conditions change so as
to cause the aggregate purchase price of the shares to be below the minimum of
the Estimated Price Range or more than 15% above the maximum of such range,
and the Company and the Bank determine to continue the Conversion, subscribers
will be resolicited (i.e., be permitted to continue their orders, in which
case they will
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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
would not exceed 45 days unless such resolicitation period is further extended
by the Superintendent and FDIC, if necessary. If such resolicitation is not
effected, the Bank will return all funds promptly with interest at the Bank's
passbook rate of interest on payments made by check, bank draft or money
order.
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and/or Community Offerings, the total number of shares to be
sold in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the Estimated Price Range or
more than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and Keller's estimate of the pro forma
market value of the Common Stock ranging from a minimum of $157.3 million to a
maximum, as adjusted by 15%, of $244.7 million, the number of shares of Common
Stock expected to be sold is between a minimum of 15,725,000 shares and a
maximum, as adjusted by 15%, of 24,466,250 shares. The actual number of shares
sold between this range will depend on a number of factors and shall be
determined by the Bank and Company subject to Superintendent and FDIC
approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated
Price Range, if the Plan is not terminated by the Company and the Bank after
consultation with the Superintendent and FDIC, purchasers will be resolicited
(i.e., permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded,
or be permitted to modify or rescind their subscriptions). Any change in the
Estimated Price Range must be approved by the Superintendent and FDIC. If the
number of shares issued in the Conversion is increased due to an increase of
up to 15% in the Estimated Price Range to reflect changes in market or
financial conditions, persons who subscribed for the maximum number of shares
will not be given the opportunity to subscribe for an adjusted maximum number
of shares. See "--Limitations on Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
The number of shares to be issued and outstanding as a result of the sale of
Common Stock in the Conversion will be increased by a number of shares equal
to 8.0% of the Common Stock issued in the Conversion to fund the Foundation.
Assuming the sale of shares in the Offerings at the maximum of the Estimated
Price Range, the Company will issue 1,702,000 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 22,977,000 shares. Of that amount, the
Foundation will own 7.4%. 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 7.4% 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."
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SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders
of deposit accounts with the Bank who had a balance of $100 or more as of June
30, 1996; (2) the ESOP; (3) holders of deposit accounts with a balance of $100
or more as of September 30, 1997. All subscriptions received will be subject
to the availability of Common Stock after satisfaction of all subscriptions of
all persons having prior rights in the Subscription Offering and to the
maximum and minimum purchase limitations set forth in the Plan of Conversion
and as described below under "--Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of: 1) the amount permitted to be purchased in the Community Offering,
currently $250,000 of Common Stock; 2) one-tenth of one percent (.10%) of the
total offering of shares of Common Stock; or 3) 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 Eligible Account Holder's Qualifying Deposit
(defined by the Plan as any deposit account in the Bank with a balance of $100
or more as of June 30, 1996) and the denominator is the total amount of
Qualifying Deposits of all Eligible Account Holders, in each case on the
Eligibility Record Date (June 30, 1996). All of such subscription rights
amounts are subject to the overall maximum purchase limitation. See "--
Limitations on Common Stock Purchases." Subscription rights received by
officers and trustees of the Bank and their associates based on increased
deposits in the Bank in the one-year period preceding June 30, 1996 will be
subordinated to all other subscription rights of Eligible Account Holders.
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Common Stock in excess of the total number of such
shares eligible for subscription, the shares of Common Stock will be allocated
so as to permit each subscribing Eligible Account Holder to purchase a number
of shares sufficient to make his total allocation equal to the lesser of 100
shares or the number of shares subscribed for. Thereafter, unallocated shares
will be allocated among the remaining subscribing Eligible Account Holders
whose subscriptions remain unfilled in the proportion that the amounts of
their respective eligible deposits bear to the total amount of eligible
deposits of all remaining Eligible Account Holders whose subscriptions remain
unfilled, provided however, that no fractional shares shall be issued. If the
amount so allocated exceeds the amount subscribed for by any one or more
Eligible Account Holders, the excess shall be reallocated (one or more times
as necessary) among those Eligible Account Holders whose subscriptions are
still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must list
on his or her stock order form all accounts in which such Eligible Account
Holder has an ownership interest. Failure to list an account could result in
less shares being allocated than if all accounts had been disclosed.
Priority 2: ESOP. To the extent that there are sufficient shares remaining
after satisfaction of the subscriptions by Eligible Account Holders, the ESOP,
will receive, without payment therefor, second priority, nontransferable
subscription rights to purchase, in the aggregate, up to 10% of Common Stock
issued in the Conversion, including shares issued to the Foundation and any
increase in the number of shares of Common Stock to be issued in the
Conversion after the date hereof as a result of an increase of up to 15% in
the maximum of the Estimated Price Range. The ESOP intends to purchase 8.0% of
the shares to be issued in connection with the Conversion, including shares
issued to the Foundation, or 1,358,640 shares and 1,838,160 shares, based on
the issuance of 16,983,000 shares and 22,977,000 shares, respectively.
Subscriptions by the ESOP will not be aggregated with shares of Common Stock
purchased directly by or which are otherwise attributable to any other
participants in the Subscription and Community Offerings, including
subscriptions of any of the Bank's trustees, officers, employees or associates
thereof. See "Management of the Bank--Benefit Plans--ESOP." In the event that
the ESOP is unable to purchase 8.0% of the Common Stock in the Subscription
Offering, it is anticipated
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that the ESOP will be funded with an amount of shares purchased in open market
transactions sufficient to increase its ownership to 8.0% of the Common Stock
issued in the Conversion, including shares issued to the Foundation.
Priority 3: Supplemental Eligible Account Holders. To the extent there are
sufficient shares remaining after the satisfaction of subscriptions by
Eligible Account Holders and the ESOP, each Supplemental Eligible Account
Holder will receive, without payment therefor, as third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of: 1) the amount permitted to be purchased in the
Community Offering, currently $250,000 of Common Stock; 2) one tenth of one
percent (.10%) of the total offering of shares of Common Stock; or 3) 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 (September 30, 1997). All of such
subscription rights amounts are subject to the overall maximum purchase
limitation. See "--Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of shares eligible for subscription after the satisfaction of
subscriptions by Eligible Account Holders and the Employee Plans, the shares
of Common Stock will be allocated so as to permit each subscribing
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his total allocation equal to the lesser
of 100 shares or the number of shares subscribed for. Thereafter, unallocated
shares will be allocated among the remaining subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled in the proportion that the
amounts of their respective eligible deposits bear to the total amount of
eligible deposits of all remaining Supplemental Eligible Account Holders whose
subscriptions remain unfilled, provided that no fractional shares shall be
issued. If the amount so allocated exceeds the amount subscribed for by any
one or more Supplemental Eligible Account Holders, the excess shall be
reallocated (one or more times as necessary) among those Supplemental Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his or her stock order form all accounts in which such
Supplemental Eligible Account Holder has an ownership interest. Failure to
list an account could result in less shares being allocated than if all
accounts had been disclosed. The subscription rights received by Eligible
Account Holders will be applied in partial satisfaction of the subscription
rights to be received as a Supplemental Eligible Account Holder.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on the Expiration Date (January 20, 1998) at 12:00 noon, New York
time, unless extended for up to 45 days by the Bank and Company or such
additional periods with the approval of the Superintendent and FDIC, if
required. Subscription rights which have not been exercised prior to the
Expiration Date will become void. The Bank will not execute orders until all
shares of Common Stock have been subscribed for or otherwise sold. If all
shares have not been subscribed for or sold within 45 days after the
Expiration Date, unless such period is extended with the approval of the
Superintendent and FDIC, all funds delivered to the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be canceled. If an extension
beyond the 45 day period following the Expiration Date is granted, the Bank
will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions and have their funds
returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Bank of their intention to confirm,
modify, or rescind their subscription. If an affirmative response to any
resolicitation is not received by the Company from a subscriber, such order
will be rescinded and all subscription funds will be promptly returned with
interest. Such extensions may not go beyond December 16, 1999.
The Plan of Conversion provides that the Company complete the sale of the
Common Stock within 45 days after the close of the Subscription Offering. In
the event that the Company is unable to complete the sale of Common Stock and
effect the Conversion within the 45-day time period, one or more extensions,
with each such extension up to 60 days, may be granted but such extensions may
not go beyond December 16, 1999 unless
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waived by the Superintendent and FDIC, if necessary. If an extension is
granted, each subscriber will have the right to affirm, increase, decrease or
rescind the subscription at any time prior to 20 days before the end of the
extension period. No assurance can be given that an extension would be granted
if requested. If an extension is granted, the Company will notify subscribers
of such extension and of any rights of subscribers to modify or rescind their
subscriptions.
COMMUNITY OFFERING
Upon completion of the Subscription Offering, to the extent that shares
remain available for purchase after satisfaction of all subscriptions of
Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders,
the Company and the Bank have determined to offer shares pursuant to the Plan
to certain members of the general public. The Plan provides that with regard
to shares offered in the Community Offering, the Bank and Company may
establish relative preferences, priorities and allocations of shares among
persons, including institutional investors, subscribing for shares. The Bank
and the Company have made no decisions on such preferences at this time and
would make such determination upon a review of subscriptions received in
connection with the Community Offering, if held. Such persons, together with
associates of and persons acting in concert with such persons, may purchase up
to $250,000 of Common Stock, subject to the maximum overall purchase
limitation and exclusive of shares issued pursuant to an increase in the
Estimated Price Range by up to 15%. See "--Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% of the
Common Stock issued or decreased to less than $250,000 at the sole discretion
of the Company and the Bank. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON
STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK
AND THE COMPANY, IN ITS SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS,
IN WHOLE OR IN PART, EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS
PRACTICABLE FOLLOWING THE EXPIRATION DATE OF THE COMMUNITY OFFERING, PROVIDED
THAT SUCH REJECTION IS NOT IN CONTRAVENTION OF ANY LAW OR REGULATION.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of preferred subscribers after completion of the
Subscription Offering and and Community Offering and the filling of
institutional investor orders, such stock will be allocated first to each
preferred subscriber whose order is accepted by the Bank, in an amount equal
to the lesser of 100 shares or the number of shares subscribed for by each
such preferred subscriber, if possible. Thereafter, unallocated shares will be
allocated among the preferred subscribers whose order remains unsatisfied on a
100 shares per order basis until all such orders have been filled or the
remaining shares have been allocated. If there are any shares remaining,
shares will be allocated to other persons of the general public who purchase
in the Community Offering applying the same allocation described above for
preferred subscribers.
RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The Company and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled
to subscribe for stock pursuant to the Plan reside. The Plan provides that the
Bank and the Company are not required to offer stock in the Subscription
Offering to any person who resides in a foreign country.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a consultant and
financial advisor in connection with the offering of the Common Stock, and
Sandler O'Neill has agreed to assist the Bank and the Company in its
solicitation of subscriptions and purchase orders for shares of Common Stock
in the Offerings. Sandler O'Neill will receive a fee equal to 1.75% of the
aggregate Purchase Price of all shares sold in the Subscription Offering or
Community Offering, excluding in each case shares purchased by trustees,
directors, officers and employees of the Bank or Company and any immediate
family member thereof and the ESOP, for which Sandler O'Neill will not receive
a fee. In the event that a selected dealers agreement is entered into in
connection with a Syndicated Community Offering, the Company and Bank will pay
a fee (to be negotiated at such time under such agreement) to such selected
dealers, any sponsoring dealers fees, and a management fee to Sandler O'Neill
of 1.5% for shares sold by a NASD member firm pursuant to a selected dealers
agreement; provided, however, that the aggregate fees payable to Sandler
O'Neill for Common Stock sold by them pursuant
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to such a selected dealers agreement shall not exceed 1.75% of the aggregate
Purchase Price and provided, further, however, that the aggregate fees payable
to Sandler O'Neill and the selected dealers will not exceed 7% of the
aggregate purchase price of the Common Stock sold by selected dealers. Fees to
Sandler O'Neill and to any other broker-dealer may be deemed to be
underwriting fees, and Sandler O'Neill and such broker-dealers may be deemed
to be underwriters. Sandler O'Neill will also be reimbursed for its reasonable
out-of-pocket expenses, including legal fees, in an amount not to exceed
$200,000. 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 reimbursed for its reasonable out-of-
pocket expenses as described above. The Company and the Bank have agreed to
indemnify Sandler O'Neill for reasonable costs and expenses in connection with
certain claims or liabilities, including certain liabilities under the
Securities Act. Sandler O'Neill has received advances towards its marketing
and financial advisory service fees totaling $50,000. Total marketing fees to
Sandler O'Neill are expected to be $2.5 million and $3.3 million 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 $65,000, plus reimbursement of
reasonable out-of-pocket expenses.
Directors, Trustees and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Questions
of prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offering
in ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers
to purchase Common Stock or provide advice regarding the purchase of Common
Stock. The Company will rely on Rule 3a4-1 under the Exchange Act, and sales
of Common Stock will be conducted within the requirements of Rule 3a4-1, so as
to permit officers, Trustees, Directors and employees to participate in the
sale of Common Stock. No officer, Trustee, Director or employee of the Company
or the Bank will be compensated in connection with his participation by the
payment of commissions or other remuneration based either directly or
indirectly on the transactions in the Common Stock.
Sandler O'Neill has not prepared any report or opinion constituting
recommendations or advice to the Bank or the Company. In addition, Sandler
O'Neill has expressed no opinion as to the prices at which the Common Stock to
be issued in the Offerings may trade. Furthermore, Sandler O'Neill has not
verified the accuracy or completeness of the information contained in the
Prospectus.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours before
the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act, no
prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order and certification forms will only be
distributed with a prospectus.
To purchase shares in the Offering, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the Bank's deposit account
(which may be given by completing the appropriate blanks in the stock order
form), must be physically received by the Bank at any of its branch offices by
12:00 noon, New York time, on the Expiration Date, with respect to the
Subscription Offering, or by the date set for the termination of the Community
Offering, which date shall be within 45 days after the close of the
Subscription Offering, or March 6, 1998, unless extended by the Bank and the
Company with the approval of the Superintendent and the FDIC, if necessary.
Stock order forms which are not physically received by such time or are
executed defectively or are received without full payment (or appropriate
withdrawal instructions) are not required to be accepted. Certificates
representing shares of Common Stock purchased in the Subscription Offering
must be ordered and registered in the name of the Eligible Account Holder or
Supplemental Eligible Account Holder, as the case may be. Joint stock
registration will be allowed only
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if the qualifying deposit account is so registered. In addition, the Bank and
Company are not obligated to accept orders submitted on photocopied or
facsimiled stock order forms and will not accept stock order forms
unaccompanied by an executed certification form. Notwithstanding the
foregoing, the Company and Bank shall have the right, each in their sole
discretion, to permit institutional investors to submit irrevocable orders
together with a legally binding commitment for payment and to thereafter pay
for the shares of Common Stock for which they subscribe in the Community
Offering at any time prior to 48 hours before the completion of the
Conversion. The Company and the Bank have the right to waive or permit the
correction of incomplete or improperly executed forms, but do not represent
that they will do so. Once received, an executed stock order form may not be
modified, amended or rescinded without the consent of the Bank unless the
Conversion has not been completed within 45 days after the end of the
Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders and Supplemental Eligible
Account Holders are properly identified as to their stock purchase priorities,
depositors as of the Eligibility Record Date (June 30, 1996) and/or the
Supplemental Eligibility Record Date (September 30, 1997) must list all
accounts on the stock order form giving all names in each account and the
account number.
Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. Orders for Common Stock submitted by subscribers in the Subscription
Offering which aggregate $50,000 or more must be paid by official bank or
certified check or by withdrawal authorization from a deposit account at the
Bank. No wire transfers will be accepted. Interest will be paid on payments
made by cash, check, bank draft or money order at the Bank's passbook rate of
interest from the date payment is received until the completion or termination
of the Conversion. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date
of the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a
certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the Bank's
passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the ESOP
will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or the
Syndicated Community Offering, if shares remain to be sold in such offerings;
provided, that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Company
to lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
Owners of self-directed IRAs and other Qualified Plan accounts, such as
Keogh accounts, may use the assets of such IRAs and other Qualified Plan
accounts, to purchase shares of Common Stock in the Offerings, provided that
such IRAs or other Qualified Plan accounts are not maintained at the Bank.
Persons with self-directed IRAs or Qualified Plan accounts maintained at the
Bank must have their accounts transferred to an unaffiliated institution or
broker to purchase shares of Common Stock in the Offerings. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and
ten percent shareholders who use self-directed IRA or Qualified Plan account
funds to purchase shares of Common Stock in the Offerings, make such purchases
for the exclusive benefit of the IRAs or Qualified Plan accounts.
Certificates representing shares of Common Stock purchased will be mailed to
purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
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RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the NYBB regulations prohibit any
person with subscription rights, including the Eligible Account Holders, the
ESOP and Supplemental Eligible Account Holders, from transferring or entering
into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Such rights may be exercised
only by the person to whom they are granted and only for his or her account.
Each person exercising such subscription rights will be required to certify
that he or she is purchasing shares solely for his or her own account and that
he or she has no agreement or understanding regarding the sale or transfer of
such shares. The regulations also prohibit any person from offering or making
an announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of the
Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription Offering and 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 to assist the Company and the Bank in the sale of the Common Stock.
THE COMPANY AND THE BANK HAVE THE RIGHT TO REJECT ORDERS IN WHOLE OR IN PART
IN THEIR SOLE DISCRETION IN THE SYNDICATED COMMUNITY OFFERING, PROVIDED THAT
SUCH REJECTION IS NOT IN CONTRAVENTION OF ANY LAW OR REGULATION. Neither
Sandler O'Neill nor any registered broker-dealer shall have any obligation to
take or purchase any shares of the Common Stock in the Syndicated Community
Offering, however, Sandler O'Neill has agreed to use its best efforts in the
sale of shares in the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community Offering
will be determined as described above under "--Stock Pricing." Subject to the
overall maximum purchase limitation, no person, together with any associate or
group of persons acting in concert, will be permitted to subscribe in the
Syndicated Community Offering for more than $250,000 of Common Stock;
provided, however, that shares of Common Stock purchased in the Community
Offering by any persons, together with associates of or persons acting in
concert with such persons, will be aggregated with purchases in the Syndicated
Community Offering and be subject to an overall maximum purchase limitation of
1.0% of the shares offered, exclusive of an increase in shares issued pursuant
to an increase in the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a
selected dealer. If an order form is executed and forwarded to the selected
dealer or if the selected dealer is authorized to execute the order form on
behalf of a purchaser, the selected dealer is required to forward the order
form and funds to the Bank for deposit in a segregated account on or before
noon of the business day following receipt of the order form or execution of
the order form by the selected dealer. Alternatively, selected dealers may
solicit indications of interest from their customers to place orders for
shares. Such selected dealers shall subsequently contact their customers who
indicated an interest and seek their confirmation as to their intent to
purchase. Those indicating an intent to purchase shall execute order forms and
forward them to their selected dealer or authorize the selected dealer to
execute such forms. The selected dealer will acknowledge receipt of the order
to its customer in writing on the following business day and will debit such
customer's account on the third business day after the customer has confirmed
his intent to purchase (the "debit date") and on or before 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
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until the debit date in the event that such alternative procedure is employed
once a confirmation of an intent to purchase has been received by the selected
dealer, the purchaser has no right to rescind his order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Company with the
approval of the Superintendent and FDIC, if necessary. Such extensions may not
be beyond December 16, 1999. See "--Stock Pricing" above for a discussion of
rights of subscribers, if any, in the event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of: 1) the amount permitted to be
purchased in the Community Offering, currently $250,000 of Common Stock; 2)
one-tenth of one percent (.10%) of the total offering of shares of Common
Stock; or 3) 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
Eligible Account Holder's Qualifying Deposit (defined by the Plan as any
deposit account in the Bank with a balance of $100 or more as of June 30,
1996) and the denominator 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 purchase limitation described in (7) below;
(3) The Employee Plans, consisting of the ESOP, are permitted to
purchase, in the aggregate, up to 10% of the shares of Common Stock issued
in the Conversion, including shares issued in the event of an increase in
the Estimated Price Range of 15%, and the ESOP intends to purchase 8.0% of
the shares of Common Stock issued in connection with the Conversion,
including shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently $250,000 of
Common Stock; 2) one tenth of one percent (.10%) of the total offering of
shares of Common Stock; or 3) 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 purchase limitation
described in (7) below;
(5) Persons purchasing shares of Common Stock in the Community Offering,
together with Associates of or persons acting in concert with such persons,
may purchase in the Community Offering up to $250,000 of Common Stock,
subject to the overall maximum purchase limitation described in (7) below;
(6) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with Associates of or persons acting in concert with
such persons, may purchase in the Syndicated Community Offering up to
$250,000 of Common Stock subject to the overall maximum purchase limitation
described in (7) below and, provided further, that shares of Common Stock
purchased in the Community Offering by any persons, together with
Associates of or persons acting in concert with such persons, will be
aggregated with purchases in the Syndicated Community Offering in applying
the $250,000 purchase limitation;
(7) Eligible Account Holders and Supplemental Eligible Account Holders
may purchase stock in the Community Offering and Syndicated Community
Offering, subject to the purchase limitations described in (5) and (6)
above, provided that, except for the ESOP, the overall maximum number of
shares of Common Stock subscribed for or purchased in all categories of the
Conversion by any person, together with
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Associates of or persons acting in concert with such persons, shall not
exceed 1.0% of the shares of Common Stock offered in the Conversion 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%; and
(8) No more than 25% of the total number of shares issued in the
Conversion may be purchased by Trustees, Directors and officers of the Bank
or Company and their Associates in the aggregate, excluding purchases by
the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of Voting
Depositors of the Bank or subscribers for Common Stock, both the individual
amount permitted to be subscribed for and the overall maximum purchase
limitation may be increased to up to a maximum of 5% of the Common Stock to be
issued at the sole discretion of the Company and the Bank. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Bank may be, given the opportunity
to increase their subscriptions up to the then applicable limit.
The overall maximum purchase limitation may not be reduced to less than
1.0%, and the individual amount permitted to be subscribed for may not be
reduced by the Bank to less than .10% without the further approval of Voting
Depositors or resolicitation of subscribers. An Eligible Account Holder or
Supplemental Eligible Account Holder may not purchase individually in the
Subscription Offering the overall maximum purchase limit of 1.0% of the shares
offered, but may make such purchase, together with Associates of or 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 limit for purchases in the Conversion.
The term "Associate" of a person is defined to mean: (i) any corporation
(other than the Bank or a majority-owned subsidiary of the Bank) of which such
person is an officer, partner or 10% stockholder; (ii) any trust or other
estate in which such person has a substantial beneficial interest or serves as
a trustee or in a similar fiduciary capacity; provided, however, such term
shall not include any employee stock benefit plan of the Bank in which such
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity; and (iii) any relative or spouse of such person,
or any relative of such spouse, who either has the same home as such person or
who is a trustee or officer of the Bank. Trustees are not treated as
Associates of each other solely because of their Board membership. For a
further discussion of limitations on purchases of a converting institution's
stock at the time of Conversion and subsequent to Conversion, see "Management
of the Bank--Subscriptions by Executive Officers, Directors and Trustees,"
"The Conversion--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would have a claim to receive their pro rata share
of any assets of the Bank remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). To the extent there are remaining assets, a depositor would have a
claim to receive a pro rata share of any such remaining assets in the same
proportion as the value of such depositor's deposit accounts to the total
value of all deposit accounts in the Bank at the time of liquidation. After
the Conversion, each depositor, in the event of a complete liquidation, would
have a claim as a creditor of the same general priority as the claims of all
other general creditors of the Bank. However, except as described below, their
claim would be solely in the amount of the balance in their deposit account
plus accrued interest. Such depositor would not have an interest in the value
or assets of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders 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. Such liquidation account will not be reflected as an asset or
liability on the Company's or the Bank's financial statements subsequent to
the Conversion. Each Eligible
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Account Holder and Supplemental Eligible Account Holder, if he was to continue
to maintain his deposit account at the Bank, would, on a complete liquidation
of the Bank, have a claim to an interest in the liquidation account after
payment of all creditors prior to any payment to the stockholders of the Bank
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, demand account, NOW
account, money market deposit account, and certificate of deposit account,
with a balance of $100 or more held in the Bank on June 30, 1996 and September
30, 1997, respectively. Each Eligible Account Holder and Supplemental Eligible
Account Holder will have a claim to a pro rata interest in the total
liquidation account based on the proportion that the balance of his Qualifying
Deposits on the Eligibility Record Date or Supplemental Eligibility Record
Date, respectively, bore to the balance of all Qualifying Deposits of all
Eligible Account Holders and Supplemental Eligible Account Holders in the
Bank.
If, however, at the close of business on the last day of any period for
which the Bank or Company has prepared audited financial statements subsequent
to the effective date of the Conversion ("annual closing date"), the amount of
the Qualifying Deposit of an Eligible Account Holder and Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then such person's interest in the liquidation account relating
to such Deposit Account would be reduced from time to time by the proportion
of any such reduction, and such interest will cease to exist if such
Qualifying Deposit is withdrawn or closed. For purposes of the liquidation
account, time deposit accounts shall be deemed to be closed upon maturity
regardless of any renewal thereof. In addition, no interest in the liquidation
account would ever be increased despite any subsequent increase in the related
Qualifying Deposit. Any assets remaining after the above liquidation rights of
Eligible Account Holders are satisfied would be distributed to the Company as
the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel
with respect to federal income taxation, and an opinion of its independent
auditors with respect to certain New York state taxation, to the effect that
the Conversion will not be a taxable transaction to the Company, the Bank,
Eligible Account Holders or Supplemental Eligible Account Holders, except as
noted below. The federal and New York tax consequences will remain unchanged
in the event that a holding company form of organization is not utilized.
No private ruling has been requested from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, which has been filed with the SEC as an exhibit to
the Company's Registration Statement to the effect that for federal income tax
purposes, among other matters: (i) the Bank's change in form from mutual to
stock ownership will constitute a reorganization under section 368(a)(1)(F) of
the Code and neither the Bank nor the Company will recognize any gain or loss
as a result of the Conversion; (ii) no gain or loss will be recognized to the
Bank or the Company upon the purchase of the Bank's capital stock by the
Company or to the Company upon the purchase of its Common Stock in the
Conversion; (iii) no gain or loss will be recognized by Eligible Account
Holders or Supplemental Eligible Account Holders upon the issuance to them of
deposit accounts in the Bank in its stock form plus their interests in the
liquidation account in exchange for their deposit accounts in the Bank; (iv)
the tax basis of the depositors' deposit accounts in the Bank immediately
after the Conversion will be the same as the basis of their deposit accounts
immediately prior to the Conversion; (v) the tax basis of each Eligible
Account Holder's and Supplemental Eligible Account Holder's interest in the
liquidation account will be zero; (vi) no gain or loss will be recognized by
Eligible Account Holders or Supplemental Eligible Account Holders upon the
distribution to them of nontransferable subscription rights to purchase shares
of the Common Stock, provided that the amount to be paid for the Common Stock
is equal to the fair market value of such stock; and (vii) the tax basis to
the stockholders of the Common Stock of the Company purchased in the
Conversion will be the amount paid therefor and the holding period for the
shares of Common Stock purchased by such persons will begin on the date on
which their subscription rights are exercised. Ernst & Young LLP has opined,
subject to the limitations and
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qualifications in its opinion, that: the Conversion will not be a taxable
transaction for the purposes of the New York State banking franchise taxes,
sales and use taxes and stock transfer taxes; a position may be taken that the
Conversion will likely not be a taxable transaction for purposes of the New
York State real estate transfer taxes and the New York City real property
transfer taxes; and the Company, as a foreign corporation, will be subject to
a license fee at a rate of 1/20% of the apportioned par value of the Common
Stock issued. Certain portions of both the federal and the state and local tax
opinions are based upon the opinion of Keller that subscription rights issued
in connection with the Conversion will have no value.
In the opinion of Keller, which opinion is not binding on the IRS, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the Common
Stock at a price equal to its estimated fair market value, which will be the
same price as the Purchase Price for the unsubscribed shares of Common Stock.
If the subscription rights granted to Eligible Account Holders or Supplemental
Eligible Account Holders are deemed to have an ascertainable value, such
recipients could be taxed either on the receipt or exercise of such
subscription rights.
Unlike private rulings, an opinion of counsel is not binding on the IRS and
the IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
Director, Trustee or an executive officer of the Bank or Company will be
subject to a restriction that the shares not be sold for a period of one year
following the Conversion, except in the event of the death of such Director,
Trustee or executive officer. Each certificate for such restricted shares will
bear a legend giving notice of this restriction on transfer, and instructions
will be issued to the effect that any transfer within such time period of any
certificate or record ownership of such shares other than as provided above is
a violation of such restriction. Any shares of Common Stock issued at a later
date as a stock dividend, stock split, or otherwise, with respect to such
restricted stock will be subject to the restriction that they may not be sold
for a period of one year following the Conversion. The Directors, Trustees and
executive officers of the Bank or Company will also be subject to the insider
trading rules promulgated pursuant to the Exchange Act.
Purchases of outstanding shares of Common Stock of the Company by Trustees,
Directors, executive officers (or any person who was an executive officer or
Trustee of the Bank after adoption of the Plan of Conversion) and their
Associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the Superintendent. This restriction does not apply,
however, to the purchase of Common Stock pursuant to the Stock Program or
Stock Option Plan.
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 Voting 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 Bylaws to be adopted by Voting
Depositors of the Bank. The Plan also provides for the concurrent formation of
a holding company. See "The Conversion--General." Certain provisions in the
Company's Certificate of Incorporation and Bylaws and in its management
remuneration provided for in the Conversion, together with provisions of
Delaware corporate law, may have anti-takeover effects. In addition, the
Bank's Restated Organization Certificate and Bylaws and management
remuneration provided for in the Conversion may have anti-takeover effects as
described below. Finally, regulatory restrictions may make it difficult for
persons or companies to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and
certain other statutory and regulatory provisions relating to stock ownership
and transfers, the Board of Directors and business combinations, which might
be deemed to have a potential "anti-takeover" effect. These provisions may
have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors but which individual Company stockholders
may deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of the Company more difficult.
The following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the Company
provides that in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations promulgated
pursuant to the Exchange Act, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options or
otherwise and shares as to which such person and his affiliates have sole or
shared voting or investment power, but shall not include shares that are
subject to a publicly solicited revocable proxy and that are not otherwise
deemed to be beneficially owned by such person and his affiliates. No Director
or officer (or any affiliate thereof) of the Company shall, solely by reason
of any or all of such Directors or officers acting in their capacities as
such, be deemed to beneficially own any shares beneficially owned by any other
Director or officer (or affiliate thereof) nor will the ESOP or any similar
plan of the Company or the Bank or any trustee with respect thereto (solely by
reason of such trustee's capacity) be deemed to beneficially own any shares
held under any such plan. The Certificate of Incorporation of the Company
further provides that the provisions limiting voting rights may only be
amended upon the vote of the holders of at least 80% of the voting power of
all then outstanding shares of capital stock entitled to vote thereon (after
giving effect to the provision limiting voting rights).
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the
whole number of the members of the Board. Each class shall serve a staggered
term, with approximately one-third of the total number of Directors being
elected each year. The Company's Certificate of Incorporation and Bylaws
provide that the size of the Board shall be determined by a majority of the
Whole Board of Directors. The Certificate of Incorporation and the Bylaws
provide that any
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vacancy occurring in the Board, including a vacancy created by an increase in
the number of Directors or resulting from death, resignation, retirement,
disqualification, removal from office or other cause, shall be filled for the
remainder of the unexpired term exclusively by a majority vote of the
Directors then in office. The classified Board is intended to provide for
continuity of the Board of Directors and to make it more difficult and time
consuming for a stockholder group to fully use its voting power to gain
control of the Board of Directors without the consent of the incumbent Board
of Directors of the Company. Directors may be removed by the shareholders only
for cause by the affirmative vote of the holders of at least 80% of the voting
power of all then outstanding shares of capital stock entitled to vote
thereon.
In the absence of these provisions, the vote of the holders of a majority of
the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by a resolution adopted by a majority of the Whole Board of
Directors of the Company. The Certificate of Incorporation also provides that
any action required or permitted to be taken by the stockholders of the
Company may be taken only at an annual or special meeting and prohibits
stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 75 million shares of Common Stock and 5 million shares of preferred stock.
The shares of Common Stock and preferred stock were authorized in an amount
greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also
be used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also
has sole authority to determine the terms of any one or more series of
preferred stock, including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a series of
preferred stock, the Board has the power to the extent consistent with its
fiduciary duty to issue a series of preferred stock to persons friendly to
management in order to attempt to block a post-tender offer merger or other
transaction by which a third party seeks control, and thereby assist
management to retain its position. The Company's Board currently has no plans
for the issuance of additional shares, other than the issuance of shares in
the Conversion, including shares contributed to the Foundation, and the
issuance of additional shares upon exercise of stock options.
Stockholder Vote Required to Approve Business Combinations with Interested
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock
entitled to vote thereon to approve certain "Business Combinations" with an
"Interested Stockholder," each as defined therein, and related transactions.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of all or substantially all of the assets of
a corporation must, subject to certain exceptions, be approved by the vote of
the holders of only a majority of the outstanding shares of Common Stock of
the Company and any other affected class of stock. Under the Certificate of
Incorporation, the approval of the holders of at least 80% of the shares of
capital stock entitled to vote thereon is required for any business
combination involving an Interested Stockholder (as defined below) except (i)
in cases where the proposed transaction has been approved by a majority of
those members of the Company's Board of Directors who are unaffiliated with
the Interested Stockholder and were Directors prior to the time when the
Interested Stockholder became an Interested Stockholder or (ii) if the
proposed transaction meets certain conditions set forth therein which are
designed to afford the stockholders a fair price in consideration for their
shares. In each such case, where stockholder approval is required, the
approval of only a majority of the outstanding shares of voting stock is
sufficient. The term "Interested Stockholder" is defined to include, among
others, any individual, a group acting in concert, corporation, partnership,
association or other entity (other than the Company or its subsidiary) who or
which is the beneficial owner, directly or indirectly, of 10% or more of the
outstanding shares of voting stock of the Company. This provision of the
Certificate of Incorporation applies to any "Business Combination," which is
defined to include: (i) any merger or consolidation of the Company or any of
its subsidiaries with any Interested Stockholder or Affiliate (as defined in
the Certificate of Incorporation) of an Interested Stockholder or any
corporation which is, or after such merger or consolidation would be, an
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Affiliate of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of 25% or more of the assets of the Company or
combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company (or any subsidiary) in exchange
for any cash, securities or other property the value of which equals or
exceeds 25% of the fair market value of the Common Stock of the Company; (iv)
the adoption of any plan for the liquidation or dissolution of the Company
proposed by or on behalf of any Interested Stockholder or Affiliate thereof;
and (v) any reclassification of securities, recapitalization, merger or
consolidation of the Company with any of its subsidiaries which has the effect
of increasing the proportionate share of Common Stock or any class of equity
or convertible securities of the Company or subsidiary owned directly or
indirectly, by an Interested Stockholder or Affiliate thereof. The Trustees
and executive officers of the Bank are purchasing in the aggregate
approximately 1.2% of the shares of the Common Stock based on the maximum of
the Estimated Price Range, including shares issued to the Foundation. In
addition, the ESOP intends to purchase 8.0% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation.
Additionally, the Company expects to acquire 4% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation, on
behalf of the Stock Program and expects to grant options to issue an amount
equal to 10% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation, under the Stock Option Plan to
directors and executive officers. As a result, Directors, executive officers
and employees have the potential to control the voting of approximately 21.1%
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 herein above.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating
any offer of another "Person" (as defined therein), to (i) make a tender or
exchange offer for any equity security of the Company, (ii) merge or
consolidate the Company with another corporation or entity or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Company and the stockholders
of the Company, give due consideration to all relevant factors, including,
without limitation, those factors that directors of any subsidiary (including
the Bank) may consider in evaluating any action that may result in a change or
potential change of control of such subsidiary, and the social and economic
effects of acceptance of such offer on: the Company's present and future
customers and employees and those of its subsidiaries (including the Bank);
the communities in which the Company and the Bank operate or are located; the
ability of the Company to fulfill its corporate objectives as a bank holding
company; and the ability of the Bank to fulfill the objectives of a stock
savings bank under applicable statutes and regulations. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of the holders of at
least 80% of the outstanding voting stock entitled to vote (after giving
effect to the provision limiting voting rights) is required to amend or repeal
certain provisions of the Certificate of Incorporation, including the
provision limiting voting rights, the provisions relating to approval of
certain business combinations, calling special meetings, the number and
classification of Directors, Director and officer indemnification by the
Company and amendment of the Company's Bylaws and Certificate of
Incorporation. The Company's Bylaws may be amended by a majority of the Whole
Board of Directors, or by a vote of the holders of at least 80% (after giving
effect to the provision limiting voting rights) of the total votes eligible to
be voted at a duly constituted meeting of stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual stockholder meeting to give
at least 90 days' advance notice to the Secretary of the Company. The notice
provision requires
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a stockholder who desires to raise new business to provide certain information
to the Company concerning the nature of the new business, the stockholder and
the stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a Director must provide the
Company with certain information concerning the nominee and the proposing
stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have
not been negotiated with and approved by members of its Board of Directors.
Certain provisions of the Stock Option Plan and Stock Program provide for
accelerated benefits to participants in the event of a change in control of
the Company or the Bank or a tender or exchange offer for their stock. See
"Management of the Bank--Benefit Plans--Stock Option Plan," and "--Benefit
Plans--Stock Program." The Company and the Bank have also entered into
agreements with key officers and intends to establish the Severance
Compensation Plan which will provide such officers and eligible employees with
additional payments and benefits on the officer's termination in connection
with a change in control of the Company or the Bank. See "Management of the
Bank--Employment Agreements," "--Change in Control Agreements" and "--Employee
Severance Compensation Plan." The foregoing provisions and limitations may
make it more difficult for companies or persons to acquire control of the
Bank. Additionally, the provisions could deter offers to acquire the
outstanding shares of the Company which might be viewed by stockholders to be
in their best interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws are in the best interest of the
Company and its stockholders. An unsolicited non-negotiated takeover proposal
can seriously disrupt the business and management of a corporation and cause
it great expense. Accordingly, the Board of Directors believes it is in the
best interests of the Company and its stockholders to encourage potential
acquirors to negotiate directly with management and that these provisions will
encourage such negotiations and discourage non-negotiated takeover attempts.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The
takeover statute, which is codified in Section 203 of the Delaware General
Corporate Law ("Section 203"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquiror to engage in certain
transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-
year period following the date such "Person" became an Interested Stockholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person
became an Interested Stockholder, the board of directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, excluding, for
purposes of determining the number of shares outstanding, shares owned by the
corporation's directors who are also officers and certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the board of directors and by a two-thirds vote of the outstanding
voting stock not owned by the Interested Stockholder; and (iv) certain
business combinations that are proposed after the corporation had received
other acquisition proposals and which are approved or not opposed by a
majority of certain continuing members of the board of directors. A
corporation may exempt itself from the requirements of the statute by adopting
an amendment to its certificate of incorporation or bylaws electing not to be
governed by Section 203. At the present time, the Board of Directors does not
intend to propose any such amendment.
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RESTRICTIONS IN THE BANK'S RESTATED ORGANIZATION CERTIFICATE AND NEW BYLAWS
Although the Board of Trustees of the Bank is not aware of any effort that
might be made to obtain control of the Bank after Conversion, the Board of
Trustees believes that it is appropriate to adopt certain provisions permitted
by General Regulations of the NYBB to protect the interests of the converted
Bank and its stockholders from any hostile takeover. Such provisions may,
indirectly, inhibit a change in control of the Company, as the Bank's sole
stockholder. See "Risk Factors--Provisions Which May Discourage Takeover
Attempts."
The Bank's Restated Organization Certificate will contain a provision
whereby the acquisition of beneficial ownership of more than 10% of the issued
and outstanding shares of any class of equity securities of the Bank by any
person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate thereof, will be prohibited for a period of three years
following the date of completion of the Conversion. Any stock in excess of 10%
acquired in violation of the charter provision will not be counted as
outstanding for voting purposes. This limitation shall not apply to any
transaction in which the Bank forms a holding company without a change in the
respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter or appraisal rights. In the event
that holders of revocable proxies for more than 10% of the shares of the
Common Stock of the Company seek, among other things, to elect one-third or
more of the Company's Board of Directors, to cause the Company's stockholders
to approve the acquisition or corporate reorganization of the Company or to
exert a continuing influence on a material aspect of the business operations
of the Company, which actions could indirectly result in a change in control
of the Bank, the Board of Directors of the Bank will be able to assert this
provision of the Bank's Restated Organization Certificate against such
holders. Although the Board of Directors of the Bank is not currently able to
determine when and if it would assert this provision of the Bank's Restated
Organization Certificate, the Board of Directors, in exercising its fiduciary
duty, may assert this provision if it were deemed to be in the best interests
of the Bank, the Company and its stockholders. It is unclear, however, whether
this provision, if asserted, would be successful against such persons in a
proxy contest which could result in a change in control of the Bank indirectly
through a change in control of the Company.
In addition, stockholders will not be permitted to call a special meeting of
stockholders or to cumulate their votes in the election of Directors.
Furthermore, the Bank's Restated Organization Certificate and Bylaws provide
for the election of three classes of directors to staggered terms. The
staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and
continuity of management of the Bank in the years immediately following the
Conversion.
Finally, the Restated Organization Certificate provides for the issuance of
shares of preferred stock on such terms, including conversion and voting
rights, as may be determined by the Bank's Board of Directors without
stockholder approval. Although the Bank has no arrangements, understandings or
plans at the present time for the issuance or use of the shares of
undesignated preferred stock (the "Preferred Stock") proposed to be
authorized, the Board of Trustees believes that the availability of such
shares will provide the Bank with increased flexibility in structuring
possible future financings and acquisitions and in meeting other corporate
needs which may arise. In the event of a proposed merger, tender offer or
other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of Preferred Stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such Preferred Stock, therefore, may be to deter a future
takeover attempt. The Board of Trustees does not intend to issue any Preferred
Stock except on terms which the Board deems to be in the best interest of the
Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
New York State Banking Board Conversion Regulations. NYBB regulations
prohibit any person, prior to the completion of the Conversion, from
transferring, or from entering into any agreement or understanding to
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transfer, to the account of another, legal or beneficial ownership of the
subscription rights issued under the Plan or the Common Stock to be issued
upon their exercise. NYBB regulations also prohibit any person, prior to the
completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or
Common Stock. See "The Conversion--Restrictions on Transfer of Subscription
Rights and Shares."
For one year following the Conversion, NYBB regulations prohibit any person
from acquiring or making an offer to acquire more than 10% of the stock of any
converted savings institution, except with the prior approval of the
Superintendent.
OTS Regulations. In addition, any proposal to acquire 10% of any class of
equity security of the Company generally would be subject to approval by the
OTS under the Change in Bank Control Act (the "CBCA") and the HOLA. The OTS
requires all persons seeking control of a savings institution, either directly
or indirectly through its holding company, to obtain regulatory approval prior
to offering to obtain control. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire directly or indirectly "control," as that term
is defined in OTS regulations, of an OTS-regulated savings and loan holding
company without giving at least 60 days' written notice to the OTS and
providing the OTS an opportunity to disapprove the proposed acquisition. Such
acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. Such change in control restrictions on the acquisition
of holding company stock are not limited to a set time period but will apply
for as long as the CBCA is in effect. Persons holding revocable or irrevocable
proxies may be deemed to be beneficial owners of such securities under OTS
regulations and therefore prohibited from voting all or the portion of such
proxies in excess of the 10% aggregate beneficial ownership limit. Such
regulatory restrictions may prevent or inhibit proxy contests for control of
the Company or the Bank which have not received prior regulatory approval.
Acquisitions of control of a savings bank are subject to the approval of the
FDIC under the CBCA. However, transactions involving the Company for which OTS
approval must be sought under HOLA are exempted from this requirement.
New York State Bank Holding Company Regulation. Under New York Banking Law,
the prior approval of the NYBD is required before: (1) any action is taken
that causes any company to become a bank holding company; (2) any action is
taken that causes any banking institution to become or to be merged or
consolidated with a subsidiary of a bank holding company; (3) any bank holding
company acquires direct or indirect ownership or control of more than 5% of
the voting stock of a banking institution; (4) any bank holding company or
subsidiary thereof acquires all or substantially all of the assets of a
banking institution; or (5) any action is taken that causes any bank holding
company to merge or consolidate with another bank holding company. See
"Regulation and Supervision--Holding Company Regulation--New York State
Holding Company Regulation." Accordingly, the prior approval of the NYBB would
be required before any bank holding company, as defined in the banking law,
could acquire 5% of more of the common stock of the Company.
New York State Change in Control Regulation. Prior approval of the NYBB is
also required before any action is taken that causes any company to acquire
direct or indirect control of a banking institution. Control is presumed to
exist if any company directly or indirectly owns, controls or holds with power
to vote 10% or more of the voting stock of a banking institution or of any
company that owns, controls or holds with power to vote 10% or more of the
voting stock of a banking institution. Accordingly, prior approval of the NYBB
would be required before any company could acquire 10% or more of the Common
Stock of the Company.
Federal Reserve Board Regulations. In the event the Bank does not qualify to
be a QTL and does not elect to be treated as a "savings association" under
Section 10 of HOLA, attempts to acquire control of the Bank become subject to
regulations of the Federal Reserve Board under the CBCA.
135
<PAGE>
DESCRIPTION OF CAPITAL STOCK
OF THE COMPANY
GENERAL
The Company is authorized to issue 75 million shares of Common Stock having
a par value of $.01 per share and 5 million shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). Based on the sale of
Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock in an amount equal to 8% of the Common Stock sold in the
Conversion to the Foundation, the Company currently expects to issue up to
26,423,550 shares of Common Stock (based on the maximum of the Estimated Price
Range, as adjusted by 15%) and no shares of Preferred Stock in the Conversion.
Except for shares issued in connection with the Conversion, the Company
presently does not have plans to issue Common Stock. Each share of the
Company's Common Stock will have the same relative rights as, and will be
identical in all respects with, each other share of Common Stock. Upon payment
of the Actual Purchase Price for the Common Stock, in accordance with the Plan
of Conversion, all such stock will be duly authorized, fully paid and
nonassessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL, WILL
NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are
imposed by law and applicable regulation. See "Dividend Policy" and
"Regulation and Supervision." The holders of Common Stock of the Company will
be entitled to receive and share equally in such dividends as may be declared
by the Board of Directors of the Company out of funds legally available
therefor. If the Company issues Preferred Stock, the holders thereof may have
a priority over the holders of the Common Stock with respect to dividends.
Voting Rights. Upon the Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect
the Company's Board of Directors and act on such other matters as are required
to be presented to them under Delaware law or as are otherwise presented to
them by the Board of Directors. Except as discussed in "Restrictions on
Acquisition of the Company and the Bank," each holder of Common Stock will be
entitled to one vote per share. Stockholders will not have any right to
cumulate votes in the election of Directors. If the Company issues Preferred
Stock, holders of the Preferred Stock may also possess voting rights. Certain
matters require an 80% stockholder vote (after giving effect to the provision
limiting voting rights). See "Restrictions on Acquisition of the Company and
the Bank."
As a New York State mutual savings bank, corporate powers and control of the
Bank are vested in its Board of Trustees, who elect the officers of the Bank
and who fill any vacancies on the Board of Trustees as it exists upon
Conversion. Subsequent to Conversion, voting rights will be vested exclusively
in the owners of the shares of capital stock of the Bank, which will be the
Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock would be entitled
to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion--Liquidation Rights"), all assets of the Bank available
for distribution. In the event of liquidation, dissolution or winding up of
the Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all of its debts and liabilities,
all of the assets of the Company available for distribution. If Preferred
Stock is issued, the holders thereof may have a priority over the holders of
the Common Stock in the event of liquidation or dissolution.
136
<PAGE>
Preemptive Rights; Redemption. Holders of the Common Stock of the Company
will not be entitled to preemptive rights with respect to any shares which may
be issued. The Common Stock is not subject to redemption.
Indemnification and Limit on Liability. The Company's Certificate of
Incorporation contains provisions which limit the liability of directors,
officers and employees of the Company and indemnify such individuals. Such
provisions provide that each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director or officer of the
Company shall be indemnified and held harmless by the Company to the fullest
extent authorized by the Delaware General Corporation Law against all expense,
liability and loss reasonably incurred. Under certain circumstances, the right
to indemnification shall include the right to be paid by the Company the
expenses incurred in defending any such proceeding in advance of its final
disposition. In addition, a Director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages except for
liability for any breach of the duty of loyalty, for acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of the
law, under Section 174 of the Delaware General Corporation, or for any
transaction from which the Director derived an improper personal benefit.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. The Company presently does not have plans to issue Preferred Stock.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
In the event the holding company form of organization is not utilized in
connection with the Conversion, the Bank may offer shares of its common stock
in connection with the Conversion. The following is a discussion of the
capital stock of the Bank.
The Restated Organization Certificate of the Bank, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 75 million
shares of common stock, par value $0.01 per share, and 5 million shares of
preferred stock, par value $0.01 per share, which preferred stock may be
issued in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. 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 stockholders. Assuming that the
holding company form of organization is utilized, all of the issued and
outstanding common stock of the Bank will be held by the Company as the Bank's
sole stockholder. THE CAPITAL STOCK OF THE BANK WILL REPRESENT NON-
WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL
NOT BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation--Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
137
<PAGE>
Voting Rights. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held.
Shareholders shall not be entitled to cumulate their votes for the election of
directors. See "Restrictions on Acquisition of the Company and the Bank--Anti-
Takeover Effects of the Company's Certificate of Incorporation and Bylaws and
Management Remuneration Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit
accounts and accrued interest thereon), and distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Bank available for distribution in
cash or in kind. If additional preferred stock is issued subsequent to the
Conversion, the holders thereof may also have priority over the holders of
common stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank will
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. Upon receipt by the Bank of the full specified purchase
price therefor, the common stock will be fully paid and non-assessable and not
subject to redemption.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries as of
June 30, 1997 and 1996, and for each of the years in the three-year period
ended June 30, 1997, have been included herein in reliance upon the report of
Ernst & Young LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing. Such report includes an explanatory paragraph relating to a
change in accounting principles.
William M. Mercer, Incorporated has consented to the publication herein of
the summary of its opinion relating to compensation matters.
Keller & Company, Inc. has consented to the publication herein of the
summary of its report to the Bank and Company setting forth its opinion as to
the estimated pro forma market value of the Common Stock upon Conversion and
its opinion with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and Company by Muldoon, Murphy
& Faucette, Washington, D.C., special counsel to the Bank and Company. The
federal income tax consequences of Richmond County Savings Foundation will be
passed upon for the Bank and the Company by Ernst & Young LLP, independent
certified public accountants. Muldoon, Murphy & Faucette will rely as to
certain matters of Delaware law on the opinion of Morris, Nichols, Arsht &
Tunnell and as to certain matters of New York law on the opinion of Lahr,
Dillon, Manzulli, Kelley & Penett, P.C., of which Messrs. Manzulli and Kelley
are partners. New York State and New York City income tax consequences will be
passed upon by Ernst & Young LLP. Certain legal matters will be passed upon
for Sandler O'Neill by Thacher Proffitt & Wood, New York, N.Y.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information,
including the Conversion
138
<PAGE>
Valuation Appraisal Report, which is an exhibit to the Registration Statement,
can be examined without charge at the public reference facilities of the SEC
located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such
material can be obtained from the SEC at prescribed rates. In addition, the
SEC maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC, including the Company. The Conversion Valuation
Appraisal Report may also be inspected by Eligible Account Holders and
Supplemental Eligible Account Holders at the offices of the Bank during normal
business hours. Copies of the appraisal may also be requested by Eligible
Account Holders or Supplemental Eligible Account Holders; provided, however,
that such Eligible Account Holders or Supplemental Eligible Account Holders
shall be responsible for all costs associated with the copying and transmittal
of such appraisal. This Prospectus contains a description of the material
terms and features of all material contracts, reports or exhibits to the
registration statement required to be described; however, the statements
contained in this Prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions thereof and are not necessarily complete; each such
statement is qualified by reference to such contract or document.
The Bank has filed an application for approval of conversion with the
Superintendent and the FDIC. Pursuant to the rules and regulations of the
Superintendent, this Prospectus omits certain information contained in that
application. The application may be examined at the principal office of the
Superintendent, Two Rector Street, New York, New York 10006.
The Company has filed with the Office of Thrift Supervision an Application
to Form a Holding Company. This Prospectus omits certain information contained
in such Application. Such Application may be inspected at the offices of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by Directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the
Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion. In the event that the Bank amends the Plan to eliminate the
concurrent formation of the Company as part of the Conversion, the Bank will
register its stock with the Federal Deposit Insurance Corporation under
Section 12(g) of the Exchange Act and, upon such registration, the Bank and
the holders of its stock will become subject to the same obligations and
restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the Company and
the Restated Organization Certificate and Bylaws of the Bank are available
without charge from the Bank. See "Restrictions on Acquisition of the Company
and the Bank," "Description of Capital Stock of the Company" and "Description
of Capital Stock of the Bank." The Bank's principal office is located at 1214
Castleton Avenue, Staten Island, New York and its telephone number is (718)
448-2800.
139
<PAGE>
RICHMOND COUNTY SAVINGS BANK
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Auditors..................................... F-2
Consolidated Statements of Financial Condition as of August 31,
1997 (unaudited) and June 30, 1997 and 1996....................... F-3
Consolidated Statements of Income for the Two Months Ended August
31, 1997 and 1996 (unaudited) and for the Years Ended June 30,
1997, 1996 and 1995............................................... 37
Consolidated Statements of Changes in Net Worth for the Two Months
Ended August 31, 1997 and 1996 (unaudited) and for the Years Ended
June 30, 1997, 1996 and 1995...................................... F-4
Consolidated Statements of Cash Flows for the Two Months Ended
August 31, 1997 and 1996 (unaudited) and for the Years Ended June
30, 1997, 1996 and 1995........................................... F-5
Notes to Consolidated Financial Statements......................... F-6 to F-20
</TABLE>
All schedules are omitted because they are not required or applicable, or
the required information is shown in the financial statements or notes
thereto.
The financial statements of Richmond County Financial Corp. have been
omitted because Richmond County Financial Corp. 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>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees
Richmond County Savings Bank
We have audited the accompanying consolidated statements of financial
condition of Richmond County Savings Bank (the "Bank") as of June 30, 1997 and
1996, and the related consolidated statements of income, changes in net worth
and cash flows for each of the three years in the period ended June 30, 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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Bank at
June 30, 1997 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1997 in
conformity with generally accepted accounting principles.
As discussed in Note 9 to the financial statements, the Bank adopted, as of
July 1, 1994, Statement of Financial Accounting Standards ("SFAS") No. 106,
"Employer's Accounting for Postretirement Benefits Other Than Pensions."
Ernst & Young LLP
August 22, 1997 New York, New York
F-2
<PAGE>
RICHMOND COUNTY SAVINGS BANK
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30
AUGUST 31 ------------------
1997 1997 1996
----------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and due from banks........................ $ 25,897 $ 26,543 $ 29,272
Federal funds sold............................. 2,000 6,000 20,000
Receivable from broker......................... -- -- 7,531
Securities held to maturity:
Investment securities........................ 195,345 205,201 307,700
Mortgage-backed and mortgage related
securities.................................. 163,116 185,122 80,284
Securities available for sale:
Investment securities........................ 21,546 19,706 21,659
Mortgage-backed and mortgage related
securities.................................. 57,024 27,398 1,394
Loans receivable:
Real estate mortgage loans................... 486,834 471,601 394,957
Other loans.................................. 32,252 30,127 29,109
Less allowance for loan losses............... (5,683) (5,470) (4,796)
---------- -------- --------
Total loans receivable, net.................... 513,403 496,258 419,270
Banking premises and equipment, net............ 11,970 12,058 11,568
Accrued interest receivable.................... 8,696 8,268 9,212
Other real estate owned........................ 885 662 612
Net deferred tax assets........................ 3,036 2,942 2,978
Other assets................................... 3,146 3,212 3,003
---------- -------- --------
Total assets................................... $1,006,064 $993,370 $914,483
========== ======== ========
LIABILITIES AND NET WORTH
Liabilities:
Deposits..................................... $ 882,886 $884,531 $817,928
Escrow accounts.............................. 2,567 1,287 1,288
Accrued and other liabilities................ 9,345 6,687 5,366
Securities sold under repurchase agreements.... 8,434 -- --
---------- -------- --------
Total liabilities.............................. 903,232 892,505 824,582
Net worth...................................... 102,832 100,865 89,901
---------- -------- --------
Total liabilities and net worth................ $1,006,064 $993,370 $914,483
========== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
RICHMOND COUNTY SAVINGS BANK
CONSOLIDATED STATEMENTS OF CHANGES IN NET WORTH
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN ON
SECURITIES
SURPLUS UNDIVIDED AVAILABLE
FUND PROFITS FOR SALE TOTAL
------- --------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance--June 30, 1994.............. $15,538 $58,012 $-- $ 73,550
Unrealized net gain, net of
applicable income taxes, upon
adoption of SFAS 115............... -- -- 64 64
Change in unrealized holding gains
and losses, net of applicable
income taxes....................... -- -- 3 3
Net income for the year ended June
30, 1995........................... 755 6,795 -- 7,550
------- ------- ---- --------
Balance--June 30, 1995.............. 16,293 64,807 67 81,167
Change in unrealized holding gains
and losses, net of applicable
income taxes....................... -- -- 4 4
Net income for the year ended June
30, 1996........................... -- 8,730 -- 8,730
------- ------- ---- --------
Balance--June 30, 1996.............. 16,293 73,537 71 89,901
Change in unrealized holding gains
and losses, net of applicable
income taxes....................... -- -- 239 239
Net income for the year ended June
30, 1997........................... -- 10,725 -- 10,725
------- ------- ---- --------
Balance--June 30, 1997.............. 16,293 84,262 310 100,865
Change in unrealized holding gains
and losses, net of applicable
income taxes (unaudited)........... -- -- 174 174
Net income for the two months ended
August 31, 1997 (unaudited)........ -- 1,793 -- 1,793
------- ------- ---- --------
Balance--August 31, 1997
(unaudited)........................ $16,293 $86,055 $484 $102,832
======= ======= ==== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
RICHMOND COUNTY SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWO MONTHS ENDED
AUGUST 31 YEAR ENDED JUNE 30
------------------ ---------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income................... $ 1,793 $ 1,689 $ 10,725 $ 8,730 $ 7,550
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation of bank
premises and equipment..... 165 145 928 750 549
Amortization of deposit
premium.................... 52 52 313 313 313
Amortization of deferred
fees....................... (110) (95) (479) (580) (570)
Amortization of investment
premiums/discounts......... 28 280 1,039 2,769 4,753
Provision for loan losses... 300 266 1,080 1,600 600
Earned discounts on loans
purchased.................. -- 26 (158) (158) (158)
Net realized losses (gains)
on sales of securities and
loans...................... -- 4 107 (42) 12
Decrease (increase) in
receivable from broker..... -- -- 7,531 (7,531) --
Decrease (increase) in net
deferred tax assets........ (94) 127 36 (450) (1,251)
(Increase) decrease in
accrued interest
receivable................. (428) 298 944 (575) 455
Increase in accrued and
other liabilities.......... 2,658 2,481 1,321 1,013 2,396
(Increase) decrease in other
assets..................... (362) (991) (782) 8,387 (8,238)
-------- -------- -------- -------- -------
Net cash provided by
operating activities........ 4,002 4,282 22,605 14,226 6,411
Cash flows from investing
activities
Increase in loans receivable,
net......................... (17,335) (20,265) (76,519) (27,948) (36,210)
Loan purchases............... -- (944) (910) -- --
Investment securities held to
maturity:
Maturities and redemptions.. 9,776 15,125 127,005 107,658 125,877
Purchases................... -- (13,024) (17,611) (150,256) (90,365)
Investment securities
available for sale:
Sales and redemptions....... -- 4,000 11,938 10 2,132
Purchases................... (1,592) -- (17,678) (1,064) (2,273)
Mortgage-backed and mortgage
related securities held to
maturity:
Maturities.................. 16,800 -- 3,609 -- --
Principal collected......... 5,220 3,689 25,315 21,305 9,757
Purchases................... -- (4,941) (133,668) (15,197) (29,218)
Mortgage-backed and mortgage
related securities available
for sale:
Sales and redemptions....... -- -- -- 5,940 --
Principal collected......... 453 28 479 410 505
Purchases................... (29,962) -- (26,478) -- --
Net additions to banking
premises and equipment...... (77) (152) (1,418) (1,897) (2,095)
-------- -------- -------- -------- -------
Net cash used in investing
activities.................. (16,717) (16,484) (105,936) (61,039) (21,890)
Cash flows from financing
activities
Increase (decrease) in escrow
accounts.................... 1,280 (1,212) (1) (881) 591
Net (decrease) increase in
deposits.................... (1,645) 1,258 66,603 53,866 15,425
Increase in securities sold
under repurchase
agreements.................. 8,434 -- -- -- --
-------- -------- -------- -------- -------
Net cash provided by
financing activities........ 8,069 46 66,602 52,985 16,016
-------- -------- -------- -------- -------
Net (decrease) increase in
cash and cash equivalents... (4,646) (12,156) (16,729) 6,172 537
Cash and cash equivalents at
beginning of period......... 32,543 49,272 49,272 43,100 42,563
-------- -------- -------- -------- -------
Cash and cash equivalents at
end of period............... $ 27,897 $ 37,116 $ 32,543 $ 49,272 $43,100
======== ======== ======== ======== =======
Income taxes paid............ $ -- $ -- $ 8,733 $ 7,080 $ 6,423
======== ======== ======== ======== =======
Interest paid on deposits.... $ 5,120 $ 4,362 $ 27,707 $ 26,254 $22,426
======== ======== ======== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
JUNE 30, 1997, 1996, AND 1995
1. GENERAL
Richmond County Savings Bank (the "Bank") is a New York State chartered
mutual savings bank. The Bank operates twelve branches in the borough of
Staten Island and one branch in the borough of Brooklyn, in the City of New
York. The Bank originates secured residential and commercial real estate loans
(primarily residential) and provides other financial services to customers
primarily within this region. The Bank's primary revenues are derived from
these banking activities and its portfolios of investment and mortgage-backed
and mortgage related securities. The Bank is subject to regulation by the
Federal Deposit Insurance Corporation and the New York State Banking
Department.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies
followed by the Bank and its wholly-owned subsidiaries. The policies conform
to generally accepted accounting principles and to general practice within the
banking industry:
Basis of Presentation: The consolidated financial statements of the Bank
include the accounts of the Bank and its wholly-owned subsidiaries, RCSB
Corporation and Richmond Enterprises, Inc. All significant intercompany
balances and transactions between the Bank and its subsidiaries have been
eliminated. Certain prior year balances have been reclassified to conform with
current year presentation.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from the estimates.
Securities Held to Maturity: Investment securities and mortgage-backed and
mortgage related securities for which the Bank has the positive intent and
ability to hold to maturity are stated at cost, adjusted for amortization of
premiums and discounts which are recognized as adjustments to interest income
over the life of the security so as to provide a level yield.
Securities Available for Sale: Investment securities and mortgage-backed and
mortgage related securities not classified as trading nor as held to maturity
are classified as available for sale and are carried at fair value. Unrealized
gains or losses on securities available for sale are included as a separate
component of net worth, net of applicable income taxes. Gains and losses on
the disposition of securities available for sale are recognized using the
specific identification method.
Loans Receivable: Loans receivable are stated at unpaid principal balances,
less unearned discounts and net deferred origination and commitment fees. Loan
origination and commitment fees and certain direct costs incurred in
connection with loan originations are deferred and amortized to income over
the life of the related loans as an adjustment to yield. Loans held for sale
are stated at the lower of cost or market value.
The Bank does not accrue interest on loans which are more than ninety days
delinquent as to principal or interest unless, in the opinion of management,
collection is probable, with the exception of single-family-home loans secured
by real estate, where accrual is discontinued after six months. Any accrued
but unpaid interest previously recorded on these loans is reversed against
current period interest income. Effective July 1, 1997, the Bank revised this
policy such that it does not accrue interest on any loans, including single-
family loans secured by real estate, which are more than ninety days
delinquent as to principal or interest unless, in the opinion of management,
collection is probable. The effect of this change in policy was immaterial.
F-6
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective July 1, 1995, the Bank adopted 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." SFAS
No. 114 does not apply to large groups of smaller balance homogeneous loans,
including in the case of the Bank, one-to-four family mortgage loans, home
equity loans, consumer and student loans. The impact of adoption on the Bank's
financial position and results of operations was immaterial.
Allowance for Loan Losses: The allowance for loan losses is based on
management's periodic review and evaluation of the loan portfolio and the
potential for loss in light of the current composition of the loan portfolio,
current and prospective economic conditions, and other relevant factors.
Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that
may be susceptible to significant change. In the opinion of management, the
allowance, when taken as a whole, is adequate to absorb estimated loan losses
inherent in the Bank's entire portfolio.
Other Real Estate Owned: Other real estate owned, consisting of properties
acquired through foreclosure, is carried at the lower of carrying amount or
fair value less cost to sell.
Banking Premises and Equipment: Banking premises and equipment are recorded
at cost. Depreciation and amortization are provided for in amounts sufficient
to relate the cost of depreciable assets to operations over their estimated
service lives (3 to 20 years) on a straight-line basis. Leasehold improvements
are amortized over the lives of the respective leases or the service lives of
the improvements, whichever is shorter.
Expenditures for improvements and major renewals are capitalized, while the
cost of ordinary maintenance, repairs and minor improvements is charged to
operations.
Income Taxes: The Bank uses the liability method to account for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured at currently enacted income tax rates applicable
to the period in which they are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
Statutory Transfers to Surplus: In accordance with the provisions of New
York State Banking Law and Banking Board regulations, 10% of net income
(excluding that of subsidiaries) is credited to surplus until such time as
total net worth is at least equal to 10% of the amount due to depositors.
Consolidated Statement of Cash Flows: For purposes of the consolidated
statement of cash flows, the Bank defines cash and cash equivalents as cash
and due from banks, federal funds sold and time deposits with original
maturities of three months or less.
F-7
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SECURITIES HELD TO MATURITY
The amortized cost of investment securities, net of premiums and discounts,
and mortgage-backed and mortgage related securities held to maturity and their
related estimated fair values at August 31, 1997 and June 30, 1997 and 1996
are summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agencies... $ 87,221 $ 234 $ -- $ 87,455
Corporate and other debt
obligations................... 108,124 194 (29) 108,289
-------- ------ ----- --------
$195,345 $ 428 $ (29) $195,744
======== ====== ===== ========
Mortgage-backed and mortgage
related securities:
Federal Home Loan Mortgage
Corporation Pass-Through
Certificates.................. $ 62,868 $1,419 $ (30) $ 64,257
Private Issuer Pass-Through
Certificates.................. 3,137 13 -- 3,150
Federal Home Loan Mortgage
Corporation Real Estate
Mortgage Investment Conduits.. 31,590 85 -- 31,675
Private Issuer Real Estate
Mortgage Investment Conduits.. 65,521 75 -- 65,596
-------- ------ ----- --------
$163,116 $1,592 $ (30) $164,678
======== ====== ===== ========
<CAPTION>
JUNE 30, 1997
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agencies... $ 92,215 $ 394 $(272) $ 92,337
Corporate and other debt
obligations................... 112,986 443 (404) 113,025
-------- ------ ----- --------
$205,201 $ 837 $(676) $205,362
======== ====== ===== ========
Mortgage-backed and mortgage
related securities:
Federal Home Loan Mortgage
Corporation Pass-Through
Certificates.................. $ 82,237 $1,534 $(187) $ 83,584
Private Issuer Pass-Through
Certificates.................. 3,276 5 -- 3,281
Federal Home Loan Mortgage
Corporation Real Estate
Mortgage Investment Conduits.. 32,248 130 (42) 32,336
Private Issuer Real Estate
Mortgage Investment Conduits.. 67,361 179 (148) 67,392
-------- ------ ----- --------
$185,122 $1,848 $(377) $186,593
======== ====== ===== ========
</TABLE>
F-8
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agencies.. $149,565 $385 $ (977) $148,973
Corporate and other debt
obligations.................. 158,135 570 (1,069) 157,636
-------- ---- ------- --------
$307,700 $955 $(2,046) $306,609
======== ==== ======= ========
Mortgage-backed and mortgage
related securities:
Federal Home Loan Mortgage
Corporation Pass-Through
Certificates................. $ 80,284 $993 $ (646) $ 80,631
======== ==== ======= ========
</TABLE>
The amortized cost and estimated fair value of investment and mortgage-backed
and mortgage related securities held-to-maturity by contractual maturity are as
follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997
-----------------------------------------------------
MORTGAGE-BACKED AND
INVESTMENT SECURITIES MORTGAGE RELATED SECURITIES
----------------------- -----------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ----------- ------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended August 31:
1998.................. $ 80,727 $ 80,961 $ 3,962 $ 3,955
1999-2002............. 110,866 111,016 32,036 32,013
2003-2008............. 2,693 2,693 -- --
2009 and thereafter... 1,059 1,074 127,118 128,710
---------- ---------- ------------- -------------
$ 195,345 $ 195,744 $ 163,116 $ 164,678
========== ========== ============= =============
<CAPTION>
JUNE 30, 1997
-----------------------------------------------------
MORTGAGE-BACKED AND
INVESTMENT SECURITIES MORTGAGE RELATED SECURITIES
----------------------- -----------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ----------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended June 30:
1998.................. $ 85,115 $ 85,365 $ 2,197 $ 2,198
1999-2002............. 116,333 116,255 32,871 32,792
2003-2008............. 2,693 2,679 -- --
2009 and thereafter... 1,060 1,063 150,054 151,603
---------- ---------- ------------- -------------
$ 205,201 $ 205,362 $ 185,122 $ 186,593
========== ========== ============= =============
</TABLE>
Proceeds from maturities and redemptions of securities held to maturity are
summarized as follows:
<TABLE>
<CAPTION>
TWO MONTHS ENDED YEAR ENDED
AUGUST 31 JUNE 30
----------------- --------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proceeds........................ $ 26,576 $ 15,125 $130,614 $107,658 $125,877
Gross gains..................... -- -- 5 9 1
Gross losses.................... -- 4 129 1 1
</TABLE>
F-9
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 15, 1995, the Financial Accounting Standards Board issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." In accordance with
provisions in that Special Report, the Bank chose to reclassify securities
from held-to-maturity to available for sale. At the date of the transfer, the
amortized cost of those securities was $25,981,369 and the unrealized gain on
those securities was $94,287, net of tax, which was included in net worth.
4. SECURITIES AVAILABLE FOR SALE
The amortized cost of investment securities, net of premiums and discounts,
and mortgage-backed and mortgage related securities available for sale and
their related estimated fair values at August 31, 1997 and June 30, 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Marketable equity securities:
Preferred..................... $14,026 $414 $ (1) $14,439
Common........................ 5,159 192 -- 5,351
Mutual Funds.................. 1,641 115 -- 1,756
------- ---- ---- -------
$20,826 $721 $ (1) $21,546
======= ==== ==== =======
Mortgage-backed and mortgage re-
lated securities:
Government National Mortgage
Association Pass-through
Certificate.................. $11,696 $119 $-- $11,815
Federal Home Loan Mortgage
Corporation Pass-Through Cer-
tificate..................... 20,170 -- (5) 20,165
Federal Home Loan Mortgage
Corporation Real Estate Mort-
gage Investment Conduits..... 7,340 -- (20) 7,320
Private Issuer Real Estate
Mortgage Investment Con-
duits........................ 17,624 100 -- 17,724
------- ---- ---- -------
$56,830 $219 $(25) $57,024
======= ==== ==== =======
<CAPTION>
JUNE 30, 1997
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Marketable equity securities:
Preferred..................... $14,027 $132 $ (1) $14,158
Common........................ 3,578 305 (69) 3,814
Mutual Funds.................. 1,629 105 -- 1,734
------- ---- ---- -------
$19,234 $542 $(70) $19,706
======= ==== ==== =======
Mortgage-backed and mortgage
related securities:
Government National Mortgage
Association Pass-Through
Certificates................. $11,710 $151 $(37) $11,824
Federal Home Loan Mortgage
Corporation Real Estate
Mortgage Investment
Conduits..................... 4,693 -- (7) 4,686
Private Issuer Real Estate
Mortgage Investment
Conduits..................... 10,881 19 (12) 10,888
------- ---- ---- -------
$27,284 $170 $(56) $27,398
======= ==== ==== =======
</TABLE>
F-10
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Marketable equity securities:
Preferred..................... $ 27 $ -- $ (2) $ 25
Common........................ 109 81 (34) 156
Mutual funds.................. 1,521 7 (2) 1,526
------- ----- ---- -------
1,657 88 (38) 1,707
======= ===== ==== =======
Debt securities:
U.S. Government and agencies.. 19,967 44 (59) 19,952
------- ----- ---- -------
$21,624 $ 132 $(97) $21,659
======= ===== ==== =======
Mortgage-backed and mortgage
related securities:
Government National Mortgage
Association Pass-Through Cer-
tificates.................... $ 1,292 $ 102 $-- $ 1,394
======= ===== ==== =======
</TABLE>
The amortized cost and estimated fair value of mortgage-backed and mortgage
related securities by contractual maturity at August 31, 1997 and June 30, 1997
are as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997
--------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Years ended August 31:
1998.................................................. $ -- $ --
1999-2002............................................. -- --
2003-2008............................................. 34 36
2009 and thereafter................................... 56,796 56,988
------- -------
$56,830 $57,024
======= =======
<CAPTION>
JUNE 30, 1997
--------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Years ended June 30:
1998.................................................. $ -- $ --
1999-2002............................................. 1 1
2003-2008............................................. 34 35
2009 and thereafter................................... 27,249 27,362
------- -------
$27,284 $27,398
======= =======
</TABLE>
Proceeds from sales and redemptions of securities available for sale are
summarized as follows:
<TABLE>
<CAPTION>
TWO MONTHS ENDED YEAR ENDED
AUGUST 31 JUNE 30
----------------- ---------------------
1997 1996 1997 1996 1995
----------------- ------- ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proceeds............................... $ -- $ 4,000 $11,938 $5,950 $2,132
Gross gains............................ -- -- 40 19 --
Gross losses........................... -- -- 24 -- 20
</TABLE>
F-11
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30
AUGUST 31 ------------------
1997 1997 1996
----------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
One-to-four family mortgage loans.......... $411,714 $394,588 $325,139
Multi-family mortgage loans................ 2,708 2,705 1,238
Commercial real estate mortgage loans...... 42,937 40,713 39,892
Construction and development loans,
principally residential................... 19,731 18,343 12,812
Home equity loans.......................... 11,056 16,729 18,054
-------- -------- --------
488,146 473,078 397,135
Less unearned discounts and net deferred
origination and commitment fees........... (1,312) (1,477) (2,178)
-------- -------- --------
Total real estate mortgage loans........... 486,834 471,601 394,957
Consumer and student loans................. 23,151 23,589 22,932
Commercial loans........................... 9,282 6,662 6,300
-------- -------- --------
32,433 30,251 29,232
Less unearned discounts and net deferred
origination and commitment fees........... (181) (124) (123)
-------- -------- --------
Total other loans.......................... 32,252 30,127 29,109
Less allowance for loan losses............. (5,683) (5,470) (4,796)
-------- -------- --------
Total loans receivable, net................ $513,403 $496,258 $419,270
-------- -------- --------
</TABLE>
Included in real estate mortgage loans are $1,269,814, $1,345,843 and
$1,851,300 of mortgages serviced by third parties as of August 31, 1997 and
June 30, 1997 and 1996, respectively, and $0, $0 and $1,155,282 of loans held
for sale as of August 31, 1997 and June 30, 1997 and 1996, respectively.
The Bank sells real estate mortgage loans to the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and
the State of New York Mortgage Association ("SONYMA"). These loans are then
serviced by the Bank under agreements which specify a servicing fee based on a
percentage of the outstanding principal balances. The FHLMC, FNMA and SONYMA
loan servicing portfolios totaled $39,835,693, $568,973 and $8,974,397 at
August 31, 1997, and $40,672,907, $570,309 and $8,875,350 at June 30, 1997 and
$41,801,765, $576,210 and $7,157,689 at June 30, 1996, respectively, and are
not included in the consolidated financial statements.
Real estate mortgage loans on nonaccrual status totaled $4,891,855,
$2,673,574, $2,756,510 and $2,291,417 at August 31, 1997 and June 30, 1997,
1996 and 1995, respectively. If interest on the nonaccrual loans had been
accrued, such income would have been $71,673, $276,092, $225,506 and $113,664,
respectively.
A summary of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
TWO MONTHS ENDED YEAR ENDED
AUGUST 31 JUNE 30
------------------ ----------------------
1997 1996 1997 1996 1995
-------- -------- ------ ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year... $5,470 $4,796 $4,796 $3,275 $3,106
Provision charged to opera-
tions....................... 300 266 1,080 1,600 600
Charge offs, net of recov-
eries....................... (87) (67) (406) (79) (431)
-------- -------- ------ ------ ------
Balance at end of year......... $ 5,683 $ 4,995 $5,470 $4,796 $3,275
======== ======== ====== ====== ======
</TABLE>
F-12
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. BANKING PREMISES AND EQUIPMENT
Banking premises and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30
AUGUST 31 ----------------
1997 1997 1996
----------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Land......................................... $ 2,850 $ 2,850 $ 2,850
Banking houses and improvements.............. 6,742 6,742 6,140
Leasehold improvements....................... 2,821 2,847 2,635
Furniture, fixtures and equipment............ 3,906 3,835 3,517
Automobiles.................................. 40 40 51
------- ------- -------
16,359 16,314 15,193
Less accumulated depreciation and amortiza-
tion........................................ (4,389) (4,256) (3,625)
------- ------- -------
$11,970 $12,058 $11,568
======= ======= =======
</TABLE>
7. DEPOSITS
At August 31, 1997, June 30, 1997 and 1996, deposits consist of the
following:
<TABLE>
<CAPTION>
AUGUST 31, 1997 JUNE 30, 1997 JUNE 30, 1996
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ------- -------- ------- -------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificates of
deposit................ $305,413 5.40% $298,066 5.37% $253,927 5.16%
Savings................. 430,396 2.78 437,694 2.78 436,669 2.78
Money market savings
accounts............... 39,087 3.48 37,782 3.45 33,988 3.45
Noninterest-bearing
demand deposits........ 90,793 -- 92,959 -- 78,113 --
NOW accounts............ 17,197 2.35 18,030 2.26 15,231 2.24
-------- -------- --------
$882,886 $884,531 $817,928
======== ======== ========
</TABLE>
Contractual maturities of certificates of deposit accounts are as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997
--------------------------------------
CERTIFICATES
OF $100,000 ALL OTHER TOTAL
OR MORE CERTIFICATES CERTIFICATES
------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Year ending August 31:
1998................................ $19,862 $193,717 $213,579
1999................................ 5,662 55,815 61,477
2000................................ 351 7,818 8,169
2001................................ 734 4,202 4,936
2002 and thereafter................. 2,781 14,471 17,252
------- -------- --------
$29,390 $276,023 $305,413
======= ======== ========
</TABLE>
F-13
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------
CERTIFICATES
OF $100,000 ALL OTHER TOTAL
OR MORE CERTIFICATES CERTIFICATES
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ending June 30:
1998................................ $17,551 $191,526 $209,077
1999................................ 5,837 53,741 59,578
2000................................ 200 6,529 6,729
2001................................ 792 4,237 5,029
2002 and thereafter................. 3,061 14,592 17,653
------- -------- --------
$27,441 $270,625 $298,066
======= ======== ========
</TABLE>
8. INCOME TAXES
Significant components of the Bank's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
JUNE 30
AUGUST 31 -------------
1997 1997 1996
----------- ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses....................... $2,676 $2,576 $2,259
Deferred loan fees.............................. 292 338 604
Book over tax amortization...................... 270 262 213
Non-accrual interest income..................... 403 370 257
Postretirement benefits......................... 1,677 1,660 1,547
Capital loss carryforward....................... -- -- 14
------ ------ ------
Gross deferred tax assets......................... 5,318 5,206 4,894
Deferred tax liabilities:
Tax bad debt reserves........................... 1,159 1,159 1,159
Tax over book depreciation...................... 428 426 369
Prepaid pension expense......................... 265 402 277
Discount accretion.............................. -- 1 47
Securities available for sale................... 430 276 64
------ ------ ------
Gross deferred tax liabilities.................... 2,282 2,264 1,916
------ ------ ------
Net deferred tax assets........................... $3,036 $2,942 $2,978
====== ====== ======
</TABLE>
In view of the Bank's current and projected future earnings trend, management
believes that it is more likely than not that the entire net deferred tax
assets will be utilized. Accordingly, no valuation allowance was deemed
necessary for the net deferred tax assets at August 31, 1997 and June 30, 1997
and 1996.
F-14
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the provision (benefit) for income taxes
attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
TWO MONTHS ENDED
AUGUST 31 YEAR ENDED JUNE 30
------------------ ----------------------
1997 1996 1997 1996 1995
-------- -------- ------ ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current:
Federal........................ $ 1,079 $ 955 $6,278 $4,526 $4,815
State and local................ 604 550 3,361 2,732 2,191
-------- -------- ------ ------ ------
1,683 1,505 9,639 7,258 7,006
Deferred:
Federal........................ (16) (23) (106) (275) (54)
State and local................ (5) (8) (70) (180) (33)
-------- -------- ------ ------ ------
(21) (31) (176) (455) (87)
-------- -------- ------ ------ ------
$ 1,662 $ 1,474 $9,463 $6,803 $6,919
======== ======== ====== ====== ======
</TABLE>
The table below presents a reconciliation between the reported tax provision
and the tax provision computed by applying the statutory federal income tax
rate (35% for the two months ended August 31, 1997 and 1996 and for the years
ended June 30, 1997, 1996 and 1995) to income before provision for income
taxes:
<TABLE>
<CAPTION>
TWO MONTHS ENDED
AUGUST 31 YEAR ENDED JUNE 30
----------------- ---------------------
1997 1996 1997 1996 1995
-------- -------- ------ ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal income tax provision at
statutory rates................. $ 1,209 $ 1,154 $7,066 $5,437 $5,525
Increase (reduction) in tax
resulting from:
State and local income taxes,
net of federal income tax
effect........................ 368 351 2,139 1,659 1,402
Other.......................... 85 (31) 258 (293) (8)
-------- -------- ------ ------ ------
$ 1,662 $ 1,474 $9,463 $6,803 $6,919
======== ======== ====== ====== ======
</TABLE>
For federal income tax purposes, prior to 1996, if certain definitional
tests and other conditions were met, the Bank was allowed a special bad debt
deduction in determining its taxable income. The deduction was based on either
specified experience formulas or a percentage of taxable income. Federal tax
legislation enacted during 1996 repealed the special bad debt deduction
provisions. As a result, a large thrift institution such as the Bank is
required to use the specific charge-off method in computing its federal bad
debt deduction for tax years beginning after December 31, 1995. However, New
York State enacted legislation which, among other things, would permit a large
thrift institution such as the Bank to continue to use the bad debt reserve
method for both New York State and New York City tax purposes.
The 1996 federal tax legislation also provided that a large thrift
institution such as the Bank is required to recapture the excess of its tax
bad debt reserves at December 31, 1995 over the balance of such reserves as of
December 31, 1987 (the "base year"), whether the additions were made under the
percentage of the taxable income method or the experience method. The Bank
will be required to recapture its excess bad debt reserves, for which deferred
taxes have been recognized, over a six-year period on a straight-line basis
beginning in calendar year 1998. The base year reserve will remain subject to
recapture in the case of certain excess distributions to and redemptions of
shareholders or if the Bank ceases to be a bank. The New York State
legislation provides that the recapture of excess bad debt reserves is not
required for either New York State or New York City tax purposes.
F-15
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At August 31, 1997 and June 30, 1997, the base year bad debt reserve for
federal income tax purposes was approximately $9.6 million, for which deferred
taxes are not required to be recognized. Bad debt reserves maintained for New
York State and New York City tax purposes as of August 31, 1997 and June 30,
1997, for which deferred taxes are not required to be recognized, amounted to
approximately $34 million. Accordingly, deferred tax liabilities of
approximately $7.2 million have not been recognized as of August 31, 1997 and
June 30, 1997.
9. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLAN
The Bank, through its participation in the RSI Retirement Trust, contributes
to a pension plan covering substantially all of its employees. The pension
plan benefit formula is based upon years of service and average compensation
over the final years of service. The Bank's policy is to make quarterly
contributions to the plan equal to the amount necessary to satisfy the funding
requirements of ERISA. Plan assets are principally invested in pooled
investment funds in the RSI Retirement Trust, which is a registered investment
company.
The following table sets forth the funded status of the Bank's defined
benefit plan for the years ended June 30, 1997 and 1996 in accordance with
Statement of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions":
<TABLE>
<CAPTION>
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation................................. $ 6,640 $6,120
Nonvested benefits........................................ 266 735
------- ------
Accumulated benefit obligation.............................. $ 6,906 $6,855
======= ======
Plan assets at fair value................................... $10,852 $9,766
Projected benefit obligation................................ (8,569) (8,379)
------- ------
Plan assets in excess of projected benefit obligation....... 2,283 1,387
Unrecognized (gain)......................................... (1,619) (687)
Unrecognized transition (asset)............................. (76) (111)
Unrecognized past service liability......................... (25) (27)
------- ------
Prepaid pension asset included in other assets.............. $ 563 $ 562
======= ======
</TABLE>
The expected long-term rate of return on plan assets for plan years 1997 and
1996 was 8.00%. The rate of increase in future compensation levels was 6.00%
and 5.50% for plan years 1997 and 1996, respectively. The weighted-average
discount rate was 8.00% and 7.50% for plan years 1997 and 1996, respectively.
Pension expense for the years ended June 30, 1997, 1996 and 1995 includes
the following components:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............................................ $ 478 $ 453 $ 362
Interest cost........................................... 671 614 584
Actual return on plan assets............................ (854) (773) (616)
Net amortization and deferrals.......................... (94) (38) (38)
----- ----- -----
Net pension expense..................................... $ 201 $ 256 $ 292
===== ===== =====
</TABLE>
F-16
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEFINED CONTRIBUTION PLAN
The Bank also provides a 401(k) Savings Plan open to salaried employees
meeting certain eligibility requirements. Participants contribute 2% to 9% of
pre-tax compensation. The Bank makes matching contributions in an amount equal
to 50% of an employee's contributions, up to 6%. Participants may invest in
any or all of six investment funds, which are managed by the 401(k) Plan's
trustee, RSI Retirement Trust.
POSTRETIREMENT BENEFIT PLAN
The Bank provides postretirement medical and life insurance benefits for
eligible retired employees.
Effective July 1, 1994, the Bank adopted SFAS No. 106, "Employer's
Accounting for Postretirement Benefits Other Than Pensions." The Bank uses
actuarial-basis accrual accounting for all employer provided postretirement
benefits other than pensions. This requires the recognition of a transition
obligation for the difference between the accumulated postretirement benefit
obligation and the liability currently recognized on the statement of
financial condition. Upon adoption of SFAS No. 106, the Bank immediately
recognized its entire net transition obligation by recording a charge of
$2,489,000 ($1,315,950 on an after-tax basis) as the cumulative effect of this
change in accounting principle.
The following table sets forth the funded status and amounts recognized in
the Bank's consolidated statements of financial condition at June 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................... $(1,025) $ (894)
Fully eligible active plan participants................ (300) (207)
Other active plan participants......................... (1,471) (1,545)
Unrecognized net actuarial gain........................ (498) (434)
------- -------
Accrued postretirement benefit cost included in accrued
and other liabilities................................... $(3,294) $(3,080)
------- -------
</TABLE>
The Bank's postretirement benefits expense for the years ended June 30,
1997, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost............................................... $201 $190 $205
Service cost................................................ 120 120 140
Amortization................................................ (20) (16) --
---- ---- ----
$301 $294 $345
==== ==== ====
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) is 12.5% for the
initial year and is assumed to decrease gradually to 6% in 2003 with 1.0%
annual decreases thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation at June 30,
1997 by $327,000 (11.7%). The increase in the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for 1997
would be $44,000 (12.1%).
The weighted-average discount rate at June 30, 1997 and 1996 was 8%. The
rate of increase in future compensation levels at June 30, 1997 and 1996 was
5.5%.
F-17
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Bank conducts a portion of its banking operations in leased facilities
under noncancellable operating leases expiring at various periods through
2002. These leases contain renewal options and certain of the leases provide
for increases based upon various escalation clauses. Rent expense was $29,683,
$28,638, $353,642, $339,656 and $324,152 for the two months ended August 31,
1997 and 1996 and the years ended June 30, 1997, 1996 and 1995, respectively.
The future minimum lease payments under such operating leases are as
follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Years ended August 31:
1998........................................................ $ 362
1999........................................................ 366
2000........................................................ 362
2001........................................................ 358
2002 and thereafter......................................... 2,604
------
$4,052
======
</TABLE>
LITIGATION
The Bank is a defendant in legal actions arising in the ordinary course of
business. Management believes that these actions are without merit or that the
ultimate liability, if any, resulting from such actions will not materially
affect the Bank's consolidated financial position.
LOAN COMMITMENTS
There were outstanding commitments to make loans (primarily fixed rate
residential) at August 31, 1997 and June 30, 1997 and 1996 of $39,829,659,
$49,373,635 and $54,522,128, respectively. Loan commitments have credit risk
essentially the same as that involved in extending loans to customers and are
subject to the Bank's normal credit policy. These commitments are not
reflected in the accompanying consolidated statements of financial condition.
Management expects that all loan originations will be funded from existing
liquidity and normal monthly cash flow.
LINES OF CREDIT
At August 31, 1997 and June 30, 1997 and 1996, the Bank had available lines
of credits with other financial institutions aggregating $10,000,000,
$10,000,000 and $20,000,000, respectively. As of August 31, 1997 and June 30,
1997 and 1996, no amounts were outstanding under these lines of credit.
11. REGULATORY 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 as 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.
F-18
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
total and Tier I capital to risk-weighted assets, and Tier I capital to
average assets (all as defined in the regulations). Management believes, as of
August 31, 1997 and June 30, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
Based on its regulatory capital ratios at August 31, 1997 and June 30, 1997,
the Bank is categorized 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 I risk-based, and Tier I leverage
ratios as set forth in the table. The Bank's actual capital amounts and ratios
are also presented in the table.
<TABLE>
<CAPTION>
MINIMUM FOR MINIMUM
CAPITAL TO BE WELL CAPITALIZED
ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------- --------------- -------------------------
MINIMUM MINIMUM
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of August 31, 1997:
(Unaudited)
Total Capital
(to Risk Weighed
Assets).............. $105,881 19.70% $42,999 8.00% $ 53,749 10.00%
Tier I Capital
(to Risk Weighed
Assets).............. 100,911 18.77 21,500 4.00 32,249 6.00
Tier I Capital (to
Average Assets)...... 100,911 10.10 39,954 4.00 49,943 5.00
As of June 30, 1997:
Total Capital
(to Risk Weighed
Assets).............. 103,910 19.71 42,181 8.00 52,726 10.00
Tier I Capital
(to Risk Weighed
Assets).............. 99,063 18.79 21,090 4.00 31,635 6.00
Tier I Capital
(to Average Assets).. 99,063 10.02 39,562 4.00 49,452 5.00
As of June 30, 1996:
Total Capital
(to Risk Weighed
Assets).............. 92,194 19.20 38,414 8.00 48,017 10.00
Tier I Capital
(to Risk Weighed
Assets).............. 88,029 18.33 19,207 4.00 28,810 6.00
Tier I Capital
(to Average Assets).. 88,029 9.65 36,483 4.00 45,604 5.00
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. Quoted market prices, when available, are used as the
measure of fair value. In cases where quoted market prices are not available,
fair values are based on present value estimates or other valuation
techniques. These derived fair values are significantly affected by
assumptions used, principally the timing of future cash flows and the discount
rate.
Because assumptions are inherently subjective in nature, the estimated fair
values cannot be substantiated by comparison to independent market quotes and
in many cases, the estimated fair values would not necessarily be realized in
an immediate sale or settlement of the instrument. The disclosure requirements
of SFAS No. 107 exclude certain financial instruments and all nonfinancial
instruments. Accordingly, the aggregate fair value amounts presented do not
represent management's estimation of the underlying value of the Bank.
F-19
<PAGE>
RICHMOND COUNTY SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying values and estimated fair values of the Bank's material
financial instruments as of the dates below are summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997 JUNE 30, 1997 JUNE 30, 1996
----------------- ----------------- -----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from
banks.................. $ 25,897 $ 25,897 $ 26,543 $ 26,543 $ 29,272 $ 29,272
Federal funds sold...... 2,000 2,000 6,000 6,000 20,000 20,000
Receivable from broker.. -- -- -- -- 7,531 7,531
Securities held to
maturity:
Investment
securities........... 195,345 195,743 205,201 205,362 307,700 306,609
Mortgage-backed and
mortgage related
securities........... 163,116 164,677 185,122 186,593 80,284 80,631
Securities available for
sale:
Investment
securities........... 21,546 21,546 19,706 19,706 21,659 21,659
Mortgage-backed and
mortgage related
securities........... 57,024 57,024 27,398 27,398 1,394 1,394
Real estate mortgage
loans receivable....... 486,834 488,416 471,601 472,868 394,957 401,330
Other loans receivable.. 32,252 32,218 30,127 30,089 29,109 29,322
FINANCIAL LIABILITIES
Deposits................ 882,886 840,055 884,531 838,358 817,928 770,139
</TABLE>
The following methods and assumptions were used by the Bank in estimating
the fair values of financial instruments:
Cash and Due from Banks, Federal Funds Sold and Receivable from
Broker: Carrying amounts approximate fair value since these instruments are
either payable on demand or have short-term maturities.
Securities Held to Maturity and Securities Available for Sale: The estimated
fair values of securities held to maturity and securities available for sale
are based on independent dealer quotations and quoted market prices.
Real Estate Mortgage Loans and Other Loans Receivable: The estimated fair
values of real estate mortgage loans and other loans receivable are based on
discounted cash flow calculations that apply interest rates currently being
offered by the Bank for loans with similar remaining maturities to a schedule
of aggregated expected monthly maturities.
Deposits: The estimated fair values of deposits are based on discounted cash
flow calculations that apply interest rates currently being offered by the
Bank for deposits with similar remaining maturities to a schedule of
aggregated expected monthly maturities.
13. SUBSEQUENT EVENTS
On July 31, 1997, the Board of Trustees of the Bank unanimously adopted a
Plan of Conversion (the "Plan of Conversion") whereby the Bank would convert
from a New York State chartered mutual bank to a New York State chartered
stock institution and offer shares of common stock in a subscription and, if
necessary, a community offering. As part of the conversion, newly authorized
shares of a new stock holding company will be offered to the Bank's depositors
and employee benefit plans in accordance with applicable state and federal
regulations. The amount and pricing of the proposed stock offering will be
based upon an independent appraisal of the Bank.
The Plan of Conversion must be approved by Voting Depositors as of September
30, 1997 as well as the Superintendent of Banks of New York State. In
addition, the FDIC must issue a Letter of Non-objection with respect to the
Plan of Conversion.
F-20
<PAGE>
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- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY RICHMOND COUNTY FINANCIAL CORP., RICHMOND COUNTY 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 RICHMOND COUNTY FINANCIAL CORP.
OR RICHMOND COUNTY 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 of the Conversion and the Offerings.............................. 4
Selected Consolidated Financial and Other Data of the Bank............... 11
Risk Factors ............................................................ 14
Richmond County Financial Corp........................................... 22
Richmond County Savings Bank............................................. 23
Richmond County Savings Foundation....................................... 24
Regulatory Capital Compliance............................................ 26
Use of Proceeds.......................................................... 27
Dividend Policy.......................................................... 28
Market for the Common Stock.............................................. 29
Capitalization........................................................... 30
Pro Forma Data........................................................... 31
Comparison of Valuation and Pro Forma Information with No Foundation..... 36
Consolidated Statements of Income ....................................... 37
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 38
Business of the Company.................................................. 55
Business of the Bank..................................................... 55
Federal and State Taxation............................................... 83
Regulation and Supervision............................................... 84
Management of the Company................................................ 94
Management of the Bank................................................... 95
The Conversion........................................................... 110
Restrictions on Acquisition of the Company and the Bank.................. 130
Description of Capital Stock of the Company.............................. 136
Description of Capital Stock of the Bank................................. 137
Transfer Agent and Registrar............................................. 138
Experts.................................................................. 138
Legal and Tax Opinions................................................... 138
Additional Information................................................... 138
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL JANUARY 21, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
21,275,000 SHARES
LOGO
RICHMOND COUNTY
FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR RICHMOND COUNTY SAVINGS BANK)
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
-------------------
PROSPECTUS
-------------------
DECEMBER 16, 1997
Sandler O'Neill & Partners, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
