Prospectus
[LOGO]
HUDSON RIVER BANCORP, INC.
(Proposed Holding Company for The Hudson City Savings Institution
to be known as Hudson River Bank & Trust Company)
$10.00 Per Share
15,072,815 Shares of Common Stock
(Anticipated Maximum)
Hudson River Bancorp, Inc. (the "Holding Company") is offering up to
15,072,815 shares of common stock, par value $0.01 per share (the "Common
Stock"), in connection with the conversion of The Hudson City Savings
Institution ("HCSI" or the "Bank") from a New York state chartered mutual
savings bank to a New York state chartered stock savings bank to be renamed
Hudson River Bank & Trust Company and the issuance of all of HCSI's outstanding
capital stock to the Holding Company (the "Conversion"). Pursuant to the Bank's
plan of conversion (the "Plan of Conversion" or the "Plan"), non-transferable
rights to subscribe for the Common Stock ("Subscription Rights") have been given
to (i) HCSI's depositors with account balances of $100 or more as of September
30, 1996 ("Eligible Account Holders"), (ii) tax-qualified employee plans of HCSI
and the Holding Company ("Tax-Qualified Employee Plans") and (iii) HCSI's
depositors with account balances of $100 or more as of March 31, 1998
("Supplemental Eligible Account Holders").
(continued on next page)
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE CONVERSION
CENTER AT (518) 828-4068.
THESE SECURITIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL INVESTED.
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED, SEE
"RISK FACTORS" BEGINNING ON PAGE __.
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, OR THE
FEDERAL DEPOSIT INSURANCE CORPORATION, NOR HAS SUCH COMMISSION, SUPERINTENDENT,
BOARD, DEPARTMENT OR CORPORATION 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 SAVINGS
ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
<TABLE>
<S> <C> <C> <C>
Estimated
Underwriting Fees,
Commissions and Estimated Net
Purchase Price(1) Other Expenses(2) Conversion Proceeds(3)
Minimum Per Share............ $10.00 0.21 9.79
Midpoint Per Share........... $10.00 0.19 9.81
Maximum Per Share............ $10.00 0.18 9.82
Minimum Total................ $111,407,770 2,326,475 109,081,295
Midpoint Total............... $131,067,960 2,542,737 128,525,223
Maximum Total................ $150,728,150 2,759,000 147,969,150
Maximum Total, As Adjusted(4) $173,337,380 3,007,701 170,329,679
</TABLE>
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(1) Determined on the basis of an appraisal prepared by RP Financial, LC.
("RP Financial") dated February 27, 1998, which states that the
estimated aggregate pro forma market value of the Common Stock to be
sold in the Conversion ranged from $111,407,770 to $150,728,150 or
between 11,140,777 shares and 15,072,815 shares of Common Stock at
$10.00 per share. See "The Conversion - Stock Pricing" and "-- Number
of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Holding Company
arising from the Conversion, including the payment to Sandler O'Neill &
Partners, L.P. ("Sandler O'Neill") of estimated sales commissions
ranging from $1,195,917 (at the minimum) to $1,628,442 (at the maximum)
in connection with the sale of shares in the Offering. Such fees may be
deemed to be underwriting fees. See "Use of Proceeds" and "Pro Forma
Data" for the assumptions used to arrive at these estimates. The
Holding Company has agreed to indemnify Sandler O'Neill against certain
liabilities, including liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"). See "The Conversion -
Marketing and Underwriting Arrangements" for a more detailed
description of underwriting fees, commissions and expenses.
(3) Net Conversion proceeds may vary from the estimated amounts, depending
on the Purchase Price, the number of shares issued and the number of
shares sold subject to commissions. The actual number of shares of
Common Stock to be issued in the Conversion will not be determined
until after the close of the Offering.
(4) As adjusted to give effect to the sale of up to an additional 2,260,923
shares (15% above the maximum of the Estimated Valuation Range) which
may be offered in the Conversion without the resolicitation of
subscribers or any right of cancellation, to reflect changes in market
and financial conditions following the commencement of the Offering.
See "Pro Forma Data," and "The Conversion - Stock Pricing" and "--
Number of Shares to be Issued."
Sandler O'Neill & Partners, L.P.
The date of this Prospectus is May 12, 1998
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(continued from prior page)
Subscription Rights are non-transferrable. Persons found to be selling or
otherwise transferring their right to purchase stock in the Subscription
Offering or purchasing Common Stock on behalf of another person will be subject
to forfeiture of such rights. Subject to the prior rights of holders of
Subscription Rights and to market conditions, the Holding Company may also offer
the Common Stock for sale through Sandler O'Neill in a community offering (the
"Community Offering") to selected persons to whom this prospectus is delivered.
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 Syndicated
Community Offering are referred to collectively as the "Offerings").
The total number of shares to be issued in the Conversion will be based
upon an appraised valuation of the estimated aggregate pro forma market value of
the Holding Company and the Bank as converted. The purchase price per share
("Purchase Price") has been fixed at $10.00. Based on the current valuation
range of the shares to be sold of $111,407,770 to $150,728,150 (the "Estimated
Valuation Range"), the Holding Company is offering up to 15,072,815 shares of
Common Stock. Depending upon the market and financial conditions at the time of
the completion of the Syndicated Community Offering, if any, the total number of
shares to be issued in the Conversion may be increased or decreased from the
15,072,815 shares offered hereby, provided that the product of the total number
of shares multiplied by the price per share remains within, or does not exceed
by more than 15% the maximum of the Estimated Valuation Range. If the aggregate
Purchase Price of the Common Stock sold in the Conversion is below $111,407,770
or above $173,337,380, or if the Offering is extended beyond July 30, 1998,
subscribers will be permitted to modify or cancel their subscriptions and to
have their subscription funds returned promptly with interest. Under such
circumstances, if subscribers take no action, their subscription funds will be
promptly returned to them with interest. In all other circumstances,
subscriptions are irrevocable by subscribers. See "The Conversion - Subscription
Offering and Subscription Rights."
Pursuant to the Plan, the Holding Company has established the Hudson River
Bank & Trust Company Foundation, a charitable foundation (the "Foundation"). The
Plan provides that the Bank and the Holding Company will fund the Foundation
with shares of Common Stock contributed by the Holding Company from authorized
but unissued shares in an amount equal to 3% of the number of shares of Common
Stock sold in the Conversion. The purpose of the Foundation is to provide
charitable benefits to persons and organizations residing within the communities
in which the Bank operates. For a discussion of the Foundation and its effects
on the Conversion, see "Risk Factors -- Risks Associated With the Establishment
of the Charitable Foundation," "Pro Forma Data," and "The Conversion -
Establishment of the Hudson River Bank and Trust Company Foundation."
With the exception of the Tax-Qualified Employee Plans, no Eligible Account
Holder or Supplemental Eligible Account Holder may purchase in their capacity as
such in the Subscription Offering more than $250,000 of Common Stock; no person,
together with associates of and persons acting in concert with such person, may
purchase more than $250,000 of Common Stock in the Community Offering and no
person, together with associates of and persons acting in concert with such
person, may purchase more than 1% of Common Stock in the Offerings. Under
certain circumstances, the maximum purchase limitations may be increased or
decreased at the sole discretion of the Bank and the Holding Company up to 9.99%
of the total number of shares of Common Stock sold in the Conversion or down to
one percent of shares of Common Stock offered in the Conversion. The minimum
purchase is 25 shares. See "The Conversion - Limitations on Common Stock
Purchases." The Bank and the Holding Company have engaged Sandler O'Neill as
financial advisor and agent to consult, advise and assist in the distribution of
shares of Common Stock, on a best-efforts basis in the Offering including, if
necessary, managing selected broker-dealers to assist in selling stock in the
Syndicated Community Offering. For such services, Sandler O'Neill will receive a
marketing fee of 1.10% of the total dollar amount of Common Stock sold in the
Conversion, excluding purchases by directors, officers, employees and their
immediate family members, and the employee stock ownership and benefit plans of
the Bank and the Holding Company. If selected dealers are used, the selected
dealers will receive a fee estimated to be up to % of the aggregate Purchase
Price for all shares of Common Stock sold in the Syndicated Community Offering
through such selected dealers. Such fees may be deemed to be underwriting
commissions. Sandler O'Neill and the selected dealers may be deemed to be
underwriters. See "The Conversion - Marketing and Underwriting Arrangements" and
"The Conversion - Subscription Offering and Subscription Rights."
The Subscription Offering will expire at 12:00 noon, Eastern time, on June
15, 1998 ("Expiration Date"), unless extended by the Bank and the Holding
Company with the approval of the Superintendent of Banks of the State of New
York (the "Superintendent") and the Federal Deposit Insurance Corporation
("FDIC"), if necessary. The Community Offering and/or any Syndicated Community
Offering must be completed within 45 days after close of the Subscription
Offering, unless extended by the Bank and the Holding 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 the
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 June 29, 2000.
The Holding Company has applied to have the Common Stock listed on the
Nasdaq Stock Market under the symbol "HRBT." 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. See
"Market for Common Stock" and "The Conversion Stock Pricing" and "-- Number of
Shares to be Issued."
Explanatory Note: This Prospectus contains certain forward looking
statements, which statements consist of estimates with respect to the financial
condition, results of operations and business of the Company and the Bank.
Prospective investors are cautioned that such forward looking statements are not
guarantees of future performance and are subject to various factors that could
cause actual results to differ materially from these estimates. These factors
include changes in general economic and market conditions, and the development
of an interest rate environment that adversely affects the interest rate spread
or other income anticipated from the Company's and the Bank's operations and
investments. See "Risk Factors" for a discussion of other factors that might
cause actual results to differ from such estimates.
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[MAP TO COME]
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SUMMARY
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 Holding Company or the Bank.
Hudson River Bancorp, Inc. .................. The Holding Company is a Delaware
corporation organized at the
direction of the Bank to become a
savings and loan holding company
and own all of the Bank's capital
stock to be issued upon its
conversion from mutual form to
stock form. To date, the Holding
Company has not engaged in any
business. Its executive office is
located at One Hudson City Centre,
Hudson, New York 12534 and its
telephone number is (518) 828-4600
The Hudson City Savings Institution......... The Bank is a New York State
chartered mutual savings bank. At
December 31, 1997, the Bank had
total assets of $665.1 million,
total deposits of $586.2 million
and total equity of $67.4 million
and operated twelve full service
offices. The Bank's main office is
located at One Hudson City Centre,
Hudson, New York 12534 and its
telephone number at that location
is (518) 828-4600. The Bank's
current operating strategy
consists primarily of:
o investing primarily in residential
mortgage loans; including home
equity loans, and to a lesser
extent, manufactured home loans
(loans secured by prefabricated or
mobile homes which serve as the
borrower's dwelling), financed
insurance premiums and other
consumer loans, commercial real
estate, construction and
commercial business loans and in
investment-grade securities;
o managing its interest rate risk by
originating and retaining for
portfolio adjustable-rate loans
and fixed-rate loans with
maturities of 20 years or less;
o emphasizing the purchase of short-
to intermediate-term government
agency and corporate debt
securities;
o maintaining a low cost of funds by
providing enhanced service to
attract and retain core deposits;
and
o attempting to attract new deposit
customers by competitively pricing
time deposit products and offering
a variety of maturities of such
deposits.
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The Conversion and Reasons for Conversion ... The Board of Trustees of the Bank
has adopted a Plan of Conversion
pursuant to which the Bank intends
to convert to a New York
State-chartered stock savings bank
to be known as Hudson River Bank &
Trust Company and issue all of its
stock to the Holding Company. The
Holding Company is offering shares
of its Common Stock in the
Offerings in connection with the
Conversion. Management believes
the Conversion offers a number of
advantages, including: (i)
providing enhanced future access
to capital markets; (ii) providing
enhanced ability to diversify into
other financial services related
activities; and (iii) 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 March 31, 1998, with aggregate
deposit accounts of $100 or more
("Voting Depositors") at a special
meeting to be held on June 29,
1998 (the "Special Meeting"). The
Superintendent issued an approval
letter on May 12, 1998 and the
FDIC issued a notice of intent not
to object to the Conversion on May
12, 1998. See "The Conversion--
General."
Hudson River Bank & Trust Company Foundation The Bank's Plan of Conversion
provides for the establishment of
a charitable foundation in
connection with the Conversion.
The Foundation, which will be
incorporated under Delaware law as
a non-stock corporation, will be
funded with a contribution by the
Holding Company equal to 3% of the
Common Stock sold in the
Conversion. The authority for the
affairs of the Foundation will be
vested in the Board of Directors
of the Foundation, which will
initially be comprised of six
members of which four will be
members of the Bank's Board of
Trustees. See "The Conversion -
Establishment of The Hudson River
Bank & Trust Company 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 orders of priority: (i)
Eligible Account Holders; (ii) the
Holding Company's and the Bank's
tax-qualified employee plans
("Employee Plans"), including the
ESOP; and (iii) Supplemental
Eligible Account Holders. Under
the New York Banking regulations,
Escrow Account holders are not
considered eligible account
holders or subscribers for
purposes of the Offerings. Upon
completion of the Subscription
Offering, any shares of Common
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,
Eastern time, on June 15, 1998,
unless extended by the Bank and
the Holding 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 be preceded by a
Prospectus. Any person receiving a
stock order and certification form
who desires to subscribe for
shares must do so prior
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to the Expiration Date by
delivering to the Bank a properly
executed stock order and
certification form together with
full payment. Once tendered,
subscription orders cannot be
revoked or modified without the
consent of the Holding 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. The Holding Company and
Bank are not obligated to accept
subscriptions not submitted on an
original stock order form. The
only place to obtain an original
stock order form and prospectus
other than through the mail is at
the Conversion Center located at
the Bank's main office. See "The
Conversion - Procedure for
Purchasing Shares in Subscription
and Community Offerings."
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. 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 Employee Benefit Plans
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 of Common Stock."
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
and persons acting in concert with
such person, may purchase in the
Community Offering and the
Syndicated Community Offering more
than $250,000 of Common Stock. No
person, together with associates
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 Employee Plans,
including 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
the Bank's depositors or a
resolicitation of subscribers, the
Bank and the Holding 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
Holding Company may, in their sole
discretion, increase the maximum
purchase limitation in the
Subscription and Community
Offerings to an amount in excess
of
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$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 Holding Company is offering
between 11,140,777 and 15,072,815
shares of Common Stock at a
Purchase Price of $10.00 per
share. The maximum of the
Estimated Valuation 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 17,333,738 shares
due to regulatory considerations
or changes in market or general
financial or economic
considerations. 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
RP Financial, LC. ("RP
Financial"), dated as of February
27, 1998, which states that the
estimated pro forma market value
of the Common Stock offered ranged
from $111,407,770 to $150,728,150.
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 Holding Company will use 50%
of the net proceeds of the
Offerings to purchase all of the
outstanding capital stock of the
Bank to be issued in the
Conversion. A portion of net
proceeds retained by the Holding
Company will be used for general
business activities, including a
loan by the Holding 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. The
Holding Company intends to
initially invest the remaining net
proceeds primarily in government
agency and corporate debt
securities and in deposit accounts
with the Bank. 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 Holding
Company and the Bank have no
current arrangements,
understandings or agreements
regarding any such transactions.
Dividend Policy............................. Upon Conversion, the Board of
Directors of the Holding 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 Holding Company may consider a
policy of paying cash dividends on
the Common Stock. However, no
decision has been made with
respect to such dividends, if any.
See "Dividend Policy."
Benefits of the Conversion to Management ... Among the benefits to the Bank and
the Holding 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 Holding Company
intends to adopt a Recognition and
Retention Plan and a Stock Option
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and Incentive Plan 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 stockholders' approval
at a meeting of stockholders which
may not be held earlier than six
months after the Conversion.
The Holding Company intends to
adopt a Recognition and Retention
Plan (the "RRP") which would
provide for the granting of Common
Stock to officers, directors and
employees of the Bank and Holding
Company in an amount equal to 4%
of the Common Stock issued in the
Conversion, including shares
issued to the Foundation
(representing 621,000 shares in
the aggregate, having a value of
$6,210,000 based on the offering
price per share of $10.00). The
Holding Company also intends to
adopt a stock option and incentive
plan (the "Stock Option Plan")
which would provide the Holding
Company with the ability to grant
options to officers, directors and
employees of the Bank and Holding
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. It is
intended that under the Stock
Option Plan, an optionee would not
be required to make any payment
for an option granted thereunder;
accordingly, until the optionee
exercised the option, he or she
would not be placing any personal
funds at risk.
Certain officers of the Holding
Company and the Bank will be
provided with employment
agreements and/or change in
control agreements which provide
such officers with employment
rights and/or payments upon their
termination of service following a
change in control. For a further
description of the RRP and Stock
Option Plan as well as the
employment contracts and change in
control agreements, see "Risk
Factors" and "Management of the
Bank - Benefit Plans." See also
"Management of the Bank --
Proposed Purchases by Executive
Officers and Trustees," "The
Conversion -- Establishment of The
Hudson River Bank & Trust Company
Foundation" and "Restrictions on
Acquisition of the Holding Company
and the Bank -- Restrictions in
the Holding Company's Certificate
of Incorporation and Bylaws."
Voting Control of Officers and Directors.... Trustees and executive officers of
the Bank and the Holding Company
are expected to purchase
approximately 2.36% and 1.52% of
the shares of Common Stock
outstanding, based upon the
minimum and the maximum of the
Estimated Valuation Range
including shares issued to the
Foundation, respectively.
Additionally, assuming the
implementation of the ESOP, RRP
and Stock Option Plan, trustees,
executive officers and employees
have the potential to control the
voting of approximately 24.36% or
23.52% of the Common Stock at the
minimum and the maximum of the
Estimated Valuation Range,
including shares issued to the
Foundation, respectively.
Additionally, the Foundation will
hold Common Stock in an amount
equal to 3% of the Common Stock
sold in the Conversion, which such
shares of Common Stock may be
voted as directed by the Board of
Directors of the Foundation, which
will initially consist of six
Directors of whom four will be
Directors of the Holding Company
and
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the Bank. However, the FDIC and
the New York State Banking Board
(the "NYBB" or the "Board") has
imposed conditions regarding
voting of the Common Stock by the
Foundation. See "The Conversion
Establishment of The Hudson River
Bank & Trust Company Foundation,"
"Management of the Bank - Proposed
Purchases by Executive Officers
and Trustees," and "Restrictions
on Acquisition of the Holding
Company and the Bank -
Restrictions in the Holding
Company's Certificate of
Incorporation and Bylaws."
Expiration Date for the Subscription Offering The Expiration Date for the
Subscription Offering is 12:00
noon Eastern time on June 15, 1998
unless extended by the Bank for an
initial period of up to 45 days
after the Expiration Date or for
one or more additional 60 day
periods thereafter, upon approval
of the Superintendent, and if
necessary, the FDIC. The
Subscription Offering may not be
extended beyond June 29, 2000. See
"The Conversion -Subscription
Offering and Subscription Rights."
Market for 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 Holding Company has
applied to have its Common Stock
listed on the Nasdaq National
Market under the symbol "HRBT"
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 Common
Stock."
No Board Recommendations.................... The Bank's Board of Trustees and
the Holding Company's Board of
Directors are not making any
recommendations to depositors or
other potential investors
regarding whether such persons
should purchase the Common Stock.
An investment in the Common Stock
must be made pursuant to each
investor's evaluation of his or
her best interests.
Conversion Center........................... If you have any questions
regarding Conversion, call the
Conversion Center at (518)
828-4068.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
Set forth below are selected consolidated financial and other data of
the Bank. The financial data is derived in part from, and should be read in
conjunction with the Consolidated Financial Statements and Notes of the Bank
presented elsewhere in this Prospectus.
In the opinion of management, the unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial condition and results of
operations of HCSI as of December 31, 1997 and for the nine month periods ended
December 31, 1997 and 1996. Interim results for the nine months ended December
31, 1997 are not necessarily indicative of the results that may be expected for
the year ended March 31, 1998.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
At
December At March 31,
31,
1997 1997 1996 1995 1994 1993
</TABLE>
(Dollars in Thousands)
Selected Financial Data:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total assets.................................. $665,051 $651,034 $623,220 $576,111 $553,818 $515,184
Loans receivable, net......................... 505,142 487,147 447,125 435,688 406,072 387,806
Securities available for sale, at fair value:
U.S. Government and Agency securities....... 36,943 37,329 33,452 2,937 --- ---
Corporate debt securities................... 6,339 8,294 17,977 6,926 14,337 ---
Investment securities, at amortized cost:
U.S. Government and Agency securities....... 19,974 17,960 13,957 14,937 13,964 5,961
Corporate debt securities................... 46,743 57,648 63,557 69,238 59,611 76,632
Mortgage-backed securities.................. 4,517 3,050 4,221 2,591 3,147 4,476
State, county and municipal................. 10 410 1,268 2,820 1,955 2,456
Federal Home Loan Bank of New York stock...... 2,812 2,812 2,596 2,569 --- ---
Deposits...................................... 586,231 564,599 555,188 514,451 498,677 465,353
Short-term borrowings......................... 2,000 12,585 --- --- --- ---
Total equity.................................. 67,395 65,129 59,606 52,138 46,350 40,177
Full service offices(1)....................... 12 11 11 9 7 7
<FN>
- ------------------
(1) No branch offices of the Bank were closed during the periods shown.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Nine Months Years Ended
Ended December March 31,
31,
1997 1996 1997 1996 1995 1994 1993
------ ------ ----- ---- ---- ---- ----
(In Thousands)
Summary of Operations:
Interest and dividend income................. $41,453 $39,373 $52,881 $49,082 $43,059 $40,649 $41,152
Interest expense............................. 19,540 19,091 25,426 24,086 19,309 18,157 20,814
-------- -------- ------- ------- ------- ------- ------
Net interest income........................ 21,913 20,282 27,455 24,996 23,750 22,492 20,338
Provision for loan losses.................... 6,408 1,858 3,826 1,090 1,169 1,201 2,543
-------- -------- ------- ------- ------- ------- -------
Net interest income after provision for
loan losses.............................. 15,505 18,424 23,629 23,906 22,581 21,291 17,795
-------- ------- ------- ------- ------- ------- -------
Other operating income:
Service charges on deposit accounts........ 840 815 1,063 1,026 1,033 921 928
Loan servicing income...................... 353 402 480 272 265 281 193
Net securities transactions................ 12 28 28 28 (16) 597 449
Net gain (loss) on sale of loans........... 39 (5) 17 92 14 326 964
Other income............................... 646 121 237 217 236 1,396 546
-------- -------- ------- ------- ------- ------ -------
Total other operating income............. 1,890 1,361 1,825 1,635 1,532 3,521 3,080
-------- ------- ------- ------ ------ ------ -------
Other operating expenses:
Compensation and benefits.................. 6,985 6,436 8,592 7,471 6,840 6,381 5,843
Occupancy.................................. 993 916 1,285 1,184 1,162 1,086 1,047
Equipment.................................. 1,232 860 1,230 1,057 1,194 1,219 1,092
OREO and repossessed property
expenses................................. 274 190 292 348 851 441 365
Other expenses............................. 4,704 3,356 4,788 4,139 5,176 5,325 4,364
------- -------- ------- ------- ------- ------- -------
Total other operating expenses.......... 14,188 11,758 16,187 14,199 15,223 14,452 12,711
------- ------- ------- ------ ------- ------ ------
Income before income tax expense....... 3,207 8,027 9,267 11,342 8,890 10,360 8,164
Income tax expense.......................... 1,321 3,142 3,607 4,298 2,917 4,169 3,571
------- ------- ------- ------- ------- ------- -------
Income before cumulative effect of
accounting changes........................ 1,886 4,885 5,660 7,044 5,973 6,191 4,593
Cumulative effect of change in accounting
for taxes.................................. --- --- --- --- --- --- 815
-------- -------- ------- ------- ------- ------- -------
Net income................................... $1,886 $4,885 $5,660 $7,044 $5,973 $6,191 $5,408
====== ====== ====== ====== ====== ====== ======
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
At or For
the Nine
Months Ended At or For the Year Ended
December 31, March 31,
1997(1) 1996(1) 1997 1996 1995 1994 1993
Performance Ratios:
Return on average assets........................... 0.38% 1.01% 0.88% 1.18% 1.05% 1.15% 1.07%
Return on average equity........................... 3.71 10.36 8.94 12.52 12.06 14.17 14.45
Net interest rate spread(2)........................ 4.05 3.90 3.97 3.89 4.05 4.04 3.95
Net interest margin(3)............................. 4.62 4.41 4.48 4.38 4.40 4.38 4.24
Yield on average earning assets.................... 8.75 8.56 8.64 8.59 7.98 7.92 8.59
Rate on average interest-bearing liabilities....... 4.70 4.66 4.67 4.70 3.93 3.88 4.64
Average earning assets to average interest-bearing
liabilities...................................... 113.97 112.33 112.56 111.48 109.72 109.55 106.91
Efficiency ratio(4)................................ 58.48 53.52 54.34 52.07 56.81 55.13 53.75
Expense ratio(5)................................... 2.80 2.40 2.48 2.32 2.54 2.60 2.44
Asset Quality Ratios:
Non-performing loans to total loans................ 3.20 3.10 4.06 2.42 1.67 2.25 2.41
Allowance for loan losses to non-performing loans.. 41.24 28.19 29.37 32.57 43.36 31.67 21.28
Allowance for loan losses to total loans........... 1.32 0.87 1.19 0.79 0.73 0.71 0.51
Non-performing assets to total assets.............. 2.62 2.85 3.60 2.02 1.50 2.12 2.07
Capital Ratios:
Equity to total assets............................. 10.13 10.00 10.00 9.56 9.05 8.37 7.80
Average equity to average total assets............. 10.21 9.78 9.88 9.42 8.74 8.11 7.41
</TABLE>
(1) Ratios for the nine month periods are stated on an annualized basis. Such
ratios and results are not necessarily indicative of results that may be
expected for the full year.
(2) Net interest rate spread represents the difference between the yield on
average earning assets and the rate on average interest-bearing
liabilities.
(3) Net interest margin represents net interest income as a percentage of
average earning assets.
(4) Total other operating expense, excluding other real estate owned and
repossessed property expense, as a percentage of net interest income and
total other operating income, excluding net securities transactions.
(5) Total other operating expense, excluding other real estate owned and
repossessed property expense, as a percentage of average total assets.
13
<PAGE>
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered in the Offerings.
Interest Rate Risk Exposure
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest and dividend
income on earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and borrowings.
Changes in the level of interest rates affect the amount of loans originated by
the Bank as well as the market value of the Bank's earning assets. Moreover,
increases in interest rates also can result in disintermediation, which is the
flow of funds away from savings institutions into other investments, such as
corporate securities and other investment vehicles, which generally pay higher
rates of return than savings institutions. Finally, a flattening of the "yield
curve" (i.e., a decline in the difference between long and short term interest
rates), could adversely impact net interest income.
In managing its asset/liability mix, the Bank may, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, place more emphasis on managing net interest margin than on
better matching the interest rate sensitivity of its assets and liabilities in
an effort to enhance net interest income. As a result, the Bank will continue to
be significantly vulnerable to changes in interest rates and to decreases in the
difference between long and short term interest rates.
Risks Associated with the Establishment of the Charitable Foundation
Pursuant to the Plan of Conversion, the Holding Company and the Bank
intend to voluntarily establish a charitable foundation in connection with the
Conversion. The Foundation has been incorporated under Delaware law as a
non-stock corporation and will be funded with shares of common stock contributed
by the Holding Company (the "Stock Contribution"). 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 earnings of the Holding
Company on a consolidated basis in the period the Foundation is established.
As a condition to receiving the non-objection of the FDIC to the
Conversion and the approval of the Conversion by the Superintendent, the
Foundation will commit in writing to the FDIC and the Superintendent that all
shares of Common Stock held by the Foundation will be voted in the same ratio as
all other shares of the Holding Company's Common Stock on all proposals
considered by shareholders of the Holding Company; provided, however, that,
consistent with the condition, the FDIC and the Superintendent shall waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (i) cause a violation of the law of the State of Delaware;
(ii) cause the Foundation to lose its tax-exempt status, or cause the IRS to
deny the Foundation's request for a determination that it is an exempt
organization or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) cause the Foundation to be subject
14
<PAGE>
to an excise tax under Section 4941 of the Code. In order for the FDIC and the
Superintendent to waive such voting restriction, the Holding Company's or the
Foundation's legal counsel must render an opinion satisfactory to FDIC and the
Superintendent that compliance with the voting restriction would have the effect
described in clauses (i), (ii) or (iii) above. Under those circumstances, the
FDIC and the Superintendent shall grant a waiver of the voting restriction upon
submission of such opinion(s) by the Holding Company or the Foundation which are
satisfactory to the FDIC and the Superintendent. There can be no assurances that
a legal opinion addressing these issues will be rendered, or if rendered, that
the FDIC and the Superintendent will grant an unconditional waiver of the voting
restriction. As of the date hereof, no event has occurred which would require
the Holding Company to seek a waiver from the FDIC and the Superintendent of the
voting restriction.
Adverse Impact on Earnings. The Stock Contribution will have an adverse
impact on the Holding Company's earnings. The Holding Company will recognize an
expense in the amount of $4.5 million ($2.7 million net of taxes) in the quarter
in which the Conversion is completed based on the issuance of shares at the
maximum of the Estimated Valuation Range, which is expected to be the second
quarter of fiscal 1999. Such expense will reduce earnings and have a material
adverse impact on the Holding Company's earnings in the fiscal quarter and year
recorded. The Holding Company has been advised by its legal counsel that the
Stock Contribution should be tax deductible, subject to a limitation based on
10% of the Holding Company's annual taxable income. If the Stock Contribution
had been made at December 31, 1997, the Bank would have reported a net loss of
$827 thousand for the nine month period rather than net income of $1.9 million.
In the future, the Holding Company may make additional contributions to
the Foundation, although the Holding Company has no current plans regarding the
amount or timing of any such future contributions. The amount of future
contributions, if any, will be determined based upon, among other factors, an
assessment of the Holding Company's then current financial position, operations,
and prospects and on the need for charitable activities in the Bank's market
area. Any such contributions, regardless of form, will result in an increase in
other operating expense and thus a reduction in net earnings. In addition, any
contributions of authorized but unissued shares would dilute the interests of
outstanding stockholders. However, the Holding Company currently anticipates
that any future contributions of shares by it to the Foundation will be funded
through shares repurchased in the open market.
Dilution of Stockholders' Interests. The Stock Contribution will
involve the donation of 452,184 shares of the Common Stock, or the sale of such
shares for their aggregate par value ($4,522), to the Foundation. Upon
completion of the Conversion and the Stock Contribution, the Holding Company
will have 15,525,000 shares issued and outstanding at the maximum of the
Estimated Valuation Range, of which the Foundation will own 452,184 shares, or
2.9%. As a result, persons purchasing shares in the Conversion will have their
share ownership and voting interest in the Holding Company diluted by 2.9%. See
"Pro Forma Data."
Possible Nondeductibility of the Stock Contribution. It is expected
that the Internal Revenue Service ("IRS") will rule that the Foundation is
exempt from federal income tax under Section 501(a) of the Code as an
organization described in Section 501(c)(3) of the Code. As such, the Holding
Company will be entitled to a deduction in the amount of the Stock Contribution,
subject to an
15
<PAGE>
annual limitation based on 10% of the Holding Company's annual taxable income.
The Holding Company, however, would be able to carry forward any unused portion
of the deduction for five years following the Stock Contribution for Federal and
New York income tax purposes. Based on present information, the Holding Company
currently estimates that the Stock Contribution should be fully deductible for
Federal and New York income tax purposes. However, no assurances can be made
that the Holding Company will have sufficient pre-tax income over the five-year
period following the year in which the Stock Contribution is made to utilize
fully the carryover related to the excess contribution.
Potential Change in Valuation and Capital if the Stock Contribution is
Not Made. The Stock Contribution was taken into account by RP Financial in
determining the estimated pro forma market value of the Holding Company. The
aggregate price of the shares of Common Stock being offered in the Offering is
based upon the Appraisal. The pro forma aggregate price of the shares being
offered for sale in the Conversion is currently estimated to be between $111.4
million and $150.7 million, with a midpoint of $131.1 million.
If the Stock Contribution is not part of the Conversion, the Estimated
Valuation Range of the shares being offered is estimated to be between $119.0
million and $161.0 million. This represents an increase of $8.9 million at the
midpoint of the Estimated Valuation Range. In such event the estimated pro forma
stockholders' equity of the Holding Company would be approximately $188.0
million at the midpoint based on a pro forma price to book ratio of 74.5% and a
pro forma price to earnings ratio of 24.15x. See "Comparison of Valuation and
Pro Forma Information with No Stock Contribution."
The decrease in the amount of Common Stock being offered for sale as a
result of the Stock Contribution will not have a significant effect on the
Holding Company's 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. See "Comparison of
Valuation and Pro Forma Information with No Stock Contribution."
Potential Anti-Takeover Effect. Upon completion of the Conversion, the
Foundation would own 2.9% of the Holding Company's outstanding shares. Such
shares will be owned solely by the Foundation; however pursuant to the terms of
the Stock Contribution as mandated by the FDIC and the Superintendent, the
shares of Holding Company Common Stock must be voted in the same proportion as
all other shares of Holding Company Common Stock on all proposals considered by
the Holding Company's stockholders. See "The Conversion - Establishment of The
Hudson River Bank & Trust Company Foundation." In the event that the FDIC and
the Superintendent were to waive this voting restriction, the Foundation's Board
of Directors would exercise sole voting power over such shares and would no
longer be subject to the voting restriction. However, the FDIC and the
Superintendent could impose additional conditions at that time on the
composition of the Board of the Foundation or which otherwise relate to control
of the Common Stock of the Holding Company held by the Foundation. See "The
Conversion - Establishment of The Hudson River Bank & Trust Company Foundation."
If a waiver of the voting restriction were granted by the FDIC and the
Superintendent and no further conditions were imposed on the Foundation at that
time, management of the Holding Company and the Bank could benefit to the extent
that the Board of
16
<PAGE>
Directors of the Foundation determines to vote the shares of Common Stock held
by the Foundation in favor of proposals supported by the Holding Company and the
Bank. Furthermore, when the Foundation's shares are combined with shares
purchased directly by executive officers and directors of the Holding Company,
shares issued pursuant to proposed stock benefit plans, and shares held in the
Bank's ESOP, the aggregate of such shares could exceed 20% of the Holding
Company's outstanding Common Stock, which could enable management to defeat
proposals requiring 80% stockholder approval. Consequently, this potential
voting control might preclude takeover attempts that other stockholders deem to
be in their best interest, and might tend to perpetuate management. Since the
ESOP shares are allocated to eligible employees of the Bank, and any unallocated
shares will be voted by an independent trustee, and because awards under the
proposed stock benefit plans may be granted to employees other than executive
officers and directors, management of the Holding Company does not expect to
have voting control of all shares held or to be allocated by the ESOP or other
stock benefit plans. See "-- Takeover Defensive Provisions."
There are no agreements or understandings, written or tacit, with
respect to the exercise of either direct or indirect control over the management
or policies of the Holding Company by the Foundation, including agreements
related to voting, acquisition or disposition of the Holding Company's Common
Stock. Finally, as the Foundation sells its shares of Common Stock over time,
its ownership interest and voting power in the Holding Company is expected to
decrease.
Potential Challenges. The funding of a charitable foundation as part of
a conversion is innovative and has occurred on only a few other occasions. As
such, the Stock Contribution may be subject to potential challenges
notwithstanding that the Board of Directors of the Holding 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 make
the Stock Contribution as part of the Conversion. See "The
Conversion-Establishment of the Hudson River Bank & Trust Company Foundation."
Source of Manufactured Home Loan Applications
The largest component of the Bank's consumer loan portfolio is
manufactured home loans (loans secured by prefabricated or mobile homes which
serve as the borrower's dwelling). At December 31, 1997 the Bank had $98.3
million in manufactured home loans, representing 19.2% of the Bank's total loan
portfolio. Substantially all of the manufactured home loans originated by the
Bank are referred to it by Tammac Corporation ("Tammac"), an unaffiliated
corporation which is a party to an agreement with the Bank to solicit
manufactured home loans on behalf of the Bank in return for a fixed percentage
of the loan amount. If Tammac were unable to perform its obligations under the
agreement and the Bank were unable to secure a comparable source of manufactured
home loan applications, originations of manufactured home loans could decline
substantially. In addition, because Tammac provides certain collection,
repossession and liquidation services for delinquent manufactured home loans,
termination of the agreement with Tammac could adversely affect the Bank. The
Bank currently has no reason to believe that Tammac will fail to perform its
obligations under the agreement.
17
<PAGE>
Risks Associated with Non-Residential Lending Activity
The Bank has emphasized the origination of non-residential loans. At
December 31, 1997, the Bank's loan portfolio included $98.3 million (19.2%) of
manufactured home loans, $23.4 million (4.6%) of financed insurance premiums,
$12.1 million (2.4%) of other consumer loans, $73.9 million (14.4%) of
commercial real estate loans and $13.9 million (2.7%) of commercial business
loans.
These loans generally are considered to involve a higher degree of risk
than single-family residential loans due to a variety of factors. See "Business
of the Bank -- Commercial Real Estate Lending" and "-- Consumer Lending." At
December 31, 1997, of the $16.4 million of the Bank's non-performing loans, $4.9
million related to residential non-performing real estate loans and $11.5
million related to other non-performing loans. See "Business of the Bank - Asset
Quality - NonPerforming Assets."
Competition
HCSI experiences significant competition in its local market area in
both originating real estate and other loans and attracting deposits. This
competition arises from other savings institutions as well as credit unions,
mortgage banks, commercial banks, mutual funds and national and local securities
firms. Due to their size, many competitors can achieve certain economies of
scale and as a result offer a broader range of products and services than the
Bank. The Bank attempts to mitigate the effect of such factors by emphasizing
customer service and community outreach. Such competition may limit HCSI's
growth in the future. See "Business of the Bank - Competition."
Takeover Defensive Provisions
Holding Company and Bank Governing Instruments. Certain provisions of
the Holding Company's Certificate of Incorporation and Bylaws and the Bank's
Restated Organization Certificate and Bylaws assist the Holding Company and the
Bank in maintaining its status as an independent publicly owned corporation.
However, such provisions may also block stockholders from approving a potential
takeover of the Holding Company which a majority of such stockholders believe to
be in their best interests. These provisions provide for, among other things,
limiting voting rights of beneficial owners of more than 10% of the Common
Stock, staggered terms for directors, noncumulative voting for directors, limits
on the calling of special meetings, a fair price/supermajority vote requirement
for certain business combinations and certain notice requirements. The 10% vote
limitation would not affect the ability of an individual who is not the
beneficial owner of more than 10% of the Common Stock to solicit revocable
proxies in a public solicitation for proxies for a particular meeting of
stockholders and to vote such proxies. Any or all of these provisions may
discourage potential proxy contests and other takeover attempts, particularly
those which have not been negotiated with the Board of Directors. In addition,
the Holding Company's certificate of incorporation also authorizes preferred
stock with terms to be established by the Board of Directors which may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both, may have full or limited voting rights and may have a dilutive effect on
the ownership interests of holders of the Common Stock. See "Restrictions on
Acquisition of the Holding Company and the Bank."
18
<PAGE>
Provisions in Management Contracts and Benefit Plans. Certain provisions
contained in the proposed management contracts and benefit plans that provide
for cash payments or the vesting of benefits upon a change of control of the
Holding Company or the Bank may have an anti-takeover effect and could
discourage an acquisition of the Holding Company. See "Management of the Bank -
Employment Agreements."
Possible Dilutive Effects. The issuance of additional shares pursuant
to the proposed Stock Option Plan and RRP will result in a dilution in the
percentage of ownership of the Holding Company of those persons purchasing
Common Stock in the Conversion, assuming that the shares utilized to fund the
proposed Stock Option Plan and RRP awards come from authorized but unissued
shares. Assuming the exercise of all options available under the Stock Option
Plan and the award of all shares available under the RRP, respectively, and
assuming the use of authorized but unissued shares, the interest of stockholders
will be diluted by up to 9.1% and 3.8%, respectively. See "Pro Forma Data,"
"Management of the Bank - Benefit Plans - Stock Option and Incentive Plan," and
"- Recognition and Retention Plan" and "Restrictions on Acquisition of the
Holding Company and the Bank." For financial accounting purposes, grants under
the proposed RRP will result in the recording of compensation expense over the
vesting period. See "Pro Forma Data."
Voting Control of Directors and Executive Officers. The trustees and
executive officers (12 persons) of the Bank propose to purchase an aggregate of
approximately 270,800 shares, representing approximately 2.36% of the shares
offered in the Conversion at the minimum of the Estimated Valuation Range, and
1.52% of the shares offered in the Conversion at the maximum of the Estimated
Valuation Range, exclusive of shares that may be attributable to directors and
officers through the RRP, the Stock Option Plan and the ESOP, which may give
directors, executive officers and employees the potential to control the voting
of additional Common Stock and including shares issued to the Foundation. A
number of shares equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be available for
issuance under the Recognition and Retention Plan (621,000 shares at the maximum
of the Estimated Valuation Range), and a number of shares equal to 10% of the
shares issued in the Conversion, including shares issued to the Foundation, will
be available for issuance under the Stock Option Plan (1,552,500 shares at the
maximum of the Estimated Valuation Range). It is intended that the ESOP will
purchase 8% of the shares issued in the Conversion, including shares issued to
the Foundation (1,242,000 shares at the maximum of the Estimated Valuation
Range). In connection with the Conversion, the Foundation will receive 452,184
shares of Common Stock at the maximum of the Estimated Valuation Range which, if
a waiver of the voting restriction imposed on such Common Stock is obtained from
the FDIC and the Superintendent, may be voted as determined by the Board of
Directors of the Foundation who will initially consist of four Directors of the
Holding Company and the Bank and two outside directors. Thus, after the
Conversion, the aggregate number of shares which may be controlled by directors
and executive officers of the Holding Company, including those to be issued to
the Foundation and those that may be issued under the Stock Option Plan and the
Recognition and Retention Plan totaled 2,896,484 at the maximum of the Estimated
Valuation Range, or 18.66% of the total number of shares at the maximum of the
Estimated Valuation Range, including shares issued to the Foundation, on a fully
diluted basis (including shares available for issuance under the Stock Option
Plan and Recognition and Retention Plan). Management's voting control could,
together with additional stockholder support, defeat proposals requiring 80%
approval
19
<PAGE>
of stockholders. As a result, this voting control may preclude takeover attempts
that certain stockholders deem to be in their best interest and tend to
perpetuate existing management. See "Restrictions on Acquisition of the Holding
Company and the Bank--Restrictions in the Holding Company's Certificate of
Incorporation and Bylaws."
Post-Conversion Overhead Expense
After completion of the Conversion, the Holding Company's noninterest
expense is likely to increase as a result of the financial accounting, legal and
tax expenses usually associated with operating as a public company. See
"Regulation" and "Taxation" and "Additional Information." In addition, it is
currently anticipated that the Holding Company will record additional expense
based on the proposed RRP. See "Pro Forma Data" and "Management of the Bank -
Benefit Plans" and "-- Recognition and Retention Plan." Finally, the Holding
Company will also record additional expense as a result of the adoption of the
ESOP. See "Management of the Bank - Benefit Plans - Employee Stock Ownership
Plan." In addition, the Bank and the Holding Company intend to initially invest
the additional capital being raised through the offering into shorter-term,
lower-yielding assets (i.e., federal funds sold) and gradually reinvest the
additional capital into longer-term, higher-yielding loans and mortgage backed
securities as opportunities arise. Until the additional capital can be
effectively reinvested, the Holding Company's return on equity is expected to
decrease from the Bank's historic levels.
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" ("SOP 93-6") requires an employer to record compensation
expense in an amount equal to the fair value of shares committed to be released
to employees from an employee stock ownership plan. Assuming shares of Common
Stock appreciate in value over time, SOP 93-6 would increase compensation
expense relating to the ESOP to be established in connection with the
Conversion. It is not possible to determine at this time the extent of such
impact on future net income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of New Accounting
Standards" and "Pro Forma Data."
In addition, the Holding Company will experience additional expense in the
quarter in which the Conversion is completed as a result of the Stock
Contribution. See "The Conversion -- Establishment of The Hudson River Bank &
Trust Company Foundation."
Absence of Active Market for the Common Stock
The Holding Company, as a newly organized company, has never issued
capital stock and, consequently, there is no established market for the Common
Stock at this time. The Holding Company has received approval to have its Common
Stock listed on the Nasdaq National Market under the symbol "HRBT" 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 Holding 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
20
<PAGE>
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. See "Market for Common
Stock."
HUDSON RIVER BANCORP, INC.
The Holding Company was formed at the direction of HCSI in March 1998
for the purpose of becoming a savings and loan holding company and owning all of
the outstanding stock of the Bank issued in the Conversion. The Holding Company
is incorporated under the laws of the State of Delaware. The Holding Company is
authorized to do business in the State of New York, and generally is authorized
to engage in any activity that is permitted by the Delaware General Corporation
Law. The business of the Holding Company initially will consist only of the
business of HCSI. The holding company structure will, however, provide the
Holding Company with greater flexibility than the Bank has to diversify its
business activities, through existing or newly formed subsidiaries, or through
acquisitions or mergers of stock financial institutions, as well as, other
companies. Although there are no current arrangements, understandings or
agreements regarding any such activity or acquisition, the Holding Company will
be in a position after the Conversion, subject to regulatory restrictions, to
take advantage of any favorable acquisition opportunities that may arise.
The assets of the Holding Company will consist initially of the stock
of HCSI, a note evidencing the Holding Company's loan to the ESOP and up to 50%
of the net proceeds from the Conversion (less the amount used to fund the ESOP
loan). See "Use of Proceeds." Initially, any activities of the Holding Company
are anticipated to be funded by such retained proceeds and the income thereon
and dividends from HCSI, if any. See "Dividends" and "Regulation - The Holding
Company." Thereafter, activities of the Holding Company may also be funded
through sales of additional securities, through borrowings and through income
generated by other activities of the Holding Company. At this time, there are no
plans regarding such other activities other than the intended loan to the ESOP
to facilitate its purchase of Common Stock in the Conversion. See "Management of
the Bank - Benefit Plans - Employee Stock Ownership Plan."
The executive office of the Holding Company is located at One Hudson
City Centre, Hudson, New York 12534. Its telephone number at that address is
(518) 828-4600.
THE HUDSON CITY SAVINGS INSTITUTION
HCSI serves the financial needs of communities in its market area
through its main office and 11 other full service branch offices and one loan
production office located throughout HCSI's primary market area. Its deposits
are insured up to applicable limits by the FDIC. At December 31, 1997, HCSI had
total assets of $665.1 million, deposits of $586.2 million and total equity of
$67.4 million (or 10.1% of total assets).
21
<PAGE>
HCSI has been, and intends to continue to be, an independent, community
oriented financial institution. HCSI's business involves attracting deposits
from the general public and using such deposits, together with other funds, to
originate primarily residential mortgage loans including home equity loans, and
to a lesser extent, manufactured home loans, financed insurance premiums and
other consumer loans, commercial real estate, construction and commercial
business loans. HCSI originates its loans in the Bank's primary market area,
with the exception of manufactured home loans, which are primarily originated
outside of the Bank's primary market area including states contiguous with New
York, and financed insurance premiums, which are originated primarily in New
York, New Jersey and Pennsylvania. At December 31, 1997, $250.6 million, or
49.0%, of the Bank's total loan portfolio consisted of residential mortgage
loans. See "Business of the Bank - Lending Activities." The Bank also invests in
government agency and corporate debt securities and other permissible
investments. See "Business of the Bank - Investment Activities."
The executive office of the Bank is located at One Hudson City Centre,
Hudson, New York 12534. Its telephone number at that address is (518) 828-4600.
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 such net proceeds will be between $109.1 million and $148.0
million (or up to $170.3 million in the event of an increase in the aggregate
pro forma market value of the Common Stock of up to 15% above the maximum of the
Estimated Valuation Range). See "Pro Forma Data" and "The Conversion - Stock
Pricing" and "--Number of Shares to be Issued" as to the assumptions used to
arrive at such amounts.
In exchange for all of the common stock of HCSI issued in the
Conversion, the Holding Company will contribute approximately 50% of the net
proceeds from the sale of the Holding Company's Common Stock to HCSI. On an
interim basis, the proceeds will be invested by the Holding Company and HCSI in
short-term investments similar to those currently in the Bank's portfolio. The
specific types and amounts of short-term assets will be determined based on
market conditions at the time of the completion of the Conversion. In addition,
the Holding Company intends to provide the funding for the ESOP loan. Based upon
the initial Purchase Price of $10.00 per share, the dollar amount of the ESOP
loan would range from $9.2 million (based upon the sale of shares at the minimum
of the Estimated Valuation Range) to $12.4 million (based upon the sale of
shares at the maximum of the Estimated Valuation Range). The interest rate to be
charged by the Holding Company on the ESOP loan will be based upon the prime
rate of interest as reported in the Wall Street Journal at the time of
origination. It is anticipated that the ESOP will repay the loan through
periodic tax-deductible contributions from the Bank over a fifteen-year period.
The net proceeds received by HCSI will become part of HCSI's general
funds for use in its business and will be used to support the Bank's existing
operations, subject to applicable regulatory restrictions. Immediately upon the
completion of the Conversion, it is anticipated that the Bank will invest such
proceeds into short-term assets. Subsequently, the Bank intends to redirect the
net proceeds to the origination of loans, subject to market conditions.
22
<PAGE>
After the completion of the Conversion, the Holding Company will
redirect the net proceeds invested by it in short-term assets into a variety of
securities similar to those already held by the Bank, as well as in deposit
accounts with the Bank. Also, the Holding Company may use a portion of the
proceeds to fund the RRP, subject to shareholder approval of such plan.
Compensation expense related to the RRP will be recognized as share awards vest.
See "Pro Forma Data." Following stockholder ratification of the RRP, the RRP
will be funded either with shares purchased in the open market or with
authorized but unissued shares. Based upon the initial Purchase Price of $10.00
per share, the amount required to fund the RRP through open-market purchases
would range from approximately $4.6 million (based upon the sale of shares at
the minimum of the Estimated Valuation Range and including shares issued to the
Foundation) to approximately $6.2 million (based upon the sale of shares at the
maximum of the Estimated Valuation Range). In the event that the per share price
of the Common Stock increases above the $10.00 per share Purchase Price
following completion of the Offering, the amount necessary to fund the RRP would
also increase. The use of authorized but unissued shares to fund the RRP could
dilute the holdings of stockholders who purchase Common Stock in the Conversion.
See "Business of the Bank - Lending Activities" and " - Investment Activities"
and "Management of the Bank - Benefit Plans - Employee Stock Ownership Plan" and
"- Recognition and Retention Plan."
The proceeds may also be utilized by the Holding Company to repurchase
(at prices which may be above or below the initial offering price) shares of the
Common Stock through an open market repurchase program subject to applicable
regulations, although the Holding Company currently has no specific plan to
repurchase any of its stock. In the future, the Board of Directors of the
Holding Company will make decisions on the repurchase of the Common Stock based
on its view of the appropriateness of the price of the Common Stock as well as
the Holding Company's and the Bank's investment opportunities and capital needs.
The Bank may use a portion of the proceeds to fund the creation of one
or more new branch offices within its primary market area, although the Bank has
no specific plans regarding any new branch offices at this time. In addition,
the Holding Company or HCSI might consider expansion through the acquisition of
other financial services providers (or branches, deposits or assets thereof),
although there are no specific plans, negotiations or written or oral agreements
regarding any acquisitions at this time.
DIVIDENDS
The Holding Company currently has no plans to pay dividends. However,
the Holding Company's Board of Directors may consider a policy of paying
dividends in the future. Dividends, when and if paid, will be subject to
determination and declaration by the Board of Directors at its discretion. The
Board will take into account the Holding Company's consolidated financial
condition, the Bank's regulatory capital requirements, tax considerations,
industry standards, economic conditions, regulatory restrictions, general
business practices and other factors. The Holding Company also has no plans to
make a return of capital distribution. In the event the Holding Company intends
to declare a return of capital distribution within three years following
Conversion, it must first obtain the prior written approval of the FDIC.
23
<PAGE>
It is not presently anticipated that the Holding Company will conduct
significant operations independent of those of HCSI for some time following the
Conversion. As such, the Holding Company does not expect to have any significant
source of income other than earnings on the net proceeds from the Conversion
retained by the Holding Company (which proceeds are currently estimated to range
from $54.5 million to $74.0 million based on the minimum and the maximum of the
Estimated Valuation Range, respectively) and dividends from HCSI, if any.
Consequently, the ability of the Holding Company to pay cash dividends to its
stockholders will be dependent upon such retained proceeds and earnings thereon,
and upon the ability of HCSI to pay dividends to the Holding Company. See
"Description of Capital Stock - Holding Company Capital Stock Dividends." HCSI,
like all savings associations regulated by the FDIC, is subject to certain
restrictions on the payment of dividends based on its net income, its capital in
excess of the regulatory capital requirements and the amount of regulatory
capital required for the liquidation account to be established in connection
with the Conversion. In addition, under New York state banking law, a New York
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 New York
State Banking Department (the "NYSBD" or the "Department") 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. See "The Conversion -
Effects of Conversion -- Deposit Accounts and Loans" and "Regulation - The Bank
- -- Capital Requirements" and "- Limitations on Dividends." Earnings allocated to
HCSI's "excess" bad debt reserves and deducted for federal income tax purposes
cannot be used by HCSI to pay cash dividends to the Holding Company without
adverse tax consequences. See "Regulation" and "Taxation."
MARKET FOR COMMON STOCK
HCSI, as a mutual savings bank, and the Holding Company, as a newly
organized company, have never issued capital stock. Consequently, there is not
at this time an existing market for the Common Stock. The Holding Company has
been approved for listing of the Common Stock on the Nasdaq Stock Market under
the symbol "HRBT" upon completion of the Conversion. In order to be quoted on
the Nasdaq Stock Market, among other criteria, there must be at least three
market makers for the Common Stock. Sandler O'Neill has agreed to act as a
market maker for the Holding Company's Common Stock following the Conversion,
and assist in securing additional market makers to do the same. A public trading
market having the desirable characteristics of depth, liquidity and orderliness
depends upon the presence in the marketplace of both willing buyers and sellers
of the Common Stock at any given time. Accordingly, there can be no assurance
that an active and liquid market for the Common Stock will develop or be
maintained or that resales of the Common Stock can be made at or above the
Purchase Price. See "The Conversion - Stock Pricing" and "-- Number of Shares to
be Issued."
24
<PAGE>
PRO FORMA REGULATORY CAPITAL ANALYSIS
At December 31, 1997, the Bank exceeded all regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with
regulatory capital standards as of December 31, 1997 based on historical capital
and also assuming that the indicated number of shares were sold as of such date
using the assumptions contained under the caption "Pro Forma Data."
<TABLE>
<CAPTION>
Pro Forma at December 31, 1997
<S> <C> <C> <C> <C> <C>
17,333,738
11,140,777 13,106,796 15,072,815 Shares Sold
Shares Sold Shares Sold Shares Sold Shares Sold 15% above
Historical at Minimum at Midpoint at Maximum Maximum
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
GAAP Capital(1)....... $67,395 10.13% $108,166 15.32% $115,458 16.19 % $122,750 17.04% $131,135 17.99%
======= ====== ======== ====== ======== ======== ======== ====== ======== =======
Leverage Capital(2):
Capital level(3).... $66,753 10.08% $107,524 15.29% $114,816 16.16% $122,108 17.01% $130,493 17.97%
Requirement(4)...... 26,495 4.00% 28,126 4.00% 28,417 4.00% 28,709 4.00% 29,044 4.00%
-------- ------- ------- ------- -------- ------- -------- ------ --------- -------
Excess.............. $40,258 6.08% $79,398 11.29% $86,399 12.16% $93,399 13.01% $101,449 13.97%
======= ======= ======= ====== ======= ======= ======== ====== ======== ======
Risk-Based Capital(2):
Capital level(3)(5). $72,672 15.38% $113,443 23.01% $120,735 24.31% $128,027 25.59% $136,412 27.04%
Requirement......... 37,812 8.00% 39,443 8.00% 39,735 8.00% 40,027 8.00% 40,362 8.00%
-------- ------- ------- ------- -------- ------- --------- ------ --------- --------
Excess.............. $34,860 7.38% $74,000 15.01% $81,000 16.31% $88,000 17.59% $96,050 19.04%
======= ======= ======= ====== ======= ======= ======== ====== ======== ========
</TABLE>
(1) Total equity as calculated under generally accepted accounting principles
("GAAP") expressed as a percent of total assets under GAAP.
(2) Leverage capital levels are shown as a percentage of "total assets," and
risk-based capital levels are calculated on the basis of a percentage of
"risk-weighted assets," each as defined in the FDIC regulations.
(3) 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,
maximum and 15% above the maximum of the Estimated Valuation Range. These
levels assume funding by the Bank of the RRP equal to 4% of the Common
Stock issued, including shares issued to the Foundation, and repayment of
the Holding 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, maximum and 15% above the maximum of the
Estimated Valuation Range.
(4) The current leverage capital requirement is 3% of total adjusted assets for
savings banks that receive the highest supervisory ratings for safety and
soundness and that are not experiencing or anticipating significant growth.
The current leverage capital ratio applicable to all other savings banks is
4% to 5%. See "Regulation - The Bank - Capital Requirements."
(5) Assumes the net proceeds are invested in assets that carry a risk-weighting
of 50%.
25
<PAGE>
CAPITALIZATION
Set forth below is the capitalization, including deposits and
short-term borrowings, of HCSI as of December 31, 1997, and the pro forma
capitalization of the Holding Company at the minimum, the midpoint, the maximum
and 15% above the maximum of the Estimated Valuation Range, after giving effect
to the Conversion and based on other assumptions set forth in the table and
under the caption "Pro Forma Data."
<TABLE>
<CAPTION>
Holding Company - Pro Forma Based
Upon Sale at $10.00 per share
15% Above
HCSI Minimum Midpoint Maximum Maximum
Existing 11,140,777 13,106,796 15,072,815 17,333,738
Capitalization Shares Shares Shares Shares
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1)................................. $586,231 $586,231 $586,231 $586,231 $586,231
======== ======== ======== ======== ========
Total Deposits and short-term borrowings.... $588,231 $588,231 $588,231 $588,231 $588,231
======== ======== ======== ======== ========
Stockholders' Equity
Preferred stock ($0.01)................ $ --- $ --- $ --- $ --- $ ---
Common stock ($0.01)(2)................ --- 115 135 155 179
Additional paid-in capital (includes expenses
and commissions)................... --- 112,309 132,322 152,336 175,351
Surplus and undivided profits, substantially
restricted(3)..................... 67,363 67,363 67,363 67,363 67,363
Net unrealized gains on securities available
for sale, net of tax............... 32 32 32 32 32
Less:
Expense of contribution to Foundation(6) --- (3,342) (3,932) (4,522) (5,200)
Plus:
Tax effect of contribution to Foundation(4) --- 1,337 1,573 1,809 2,080
Less:
Common stock acquired by ESOP(5)....... --- (9,180) (10,800) (12,420) (14,283)
Common stock acquired by RRP(5)........ --- (4,590) (5,400) (6,210) (7,142)
--------- ---------- --------- ----------- -----------
Total Stockholders' Equity(6)... $67,395 $164,043 $181,293 $198,543 $218,380
</TABLE>
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) Does not reflect the shares of Common Stock that may be reserved for
issuance pursuant to the Stock Option Plan and includes shares issued to
the Foundation.
(3) See "Dividends" and "Regulation -The Bank - Limitations on Dividends"
regarding restrictions on future dividend payments and "The Conversion -
Effects of Conversion - Deposit Accounts and Loans" regarding the
liquidation account to be established upon Conversion.
(4) Represents the tax effect of the contribution of Common Stock to the
Foundation based on a 40% tax rate. The realization of the tax benefit is
limited annually to 10% of the Holding Company's annual taxable income,
subject to the ability of the Holding Company to carry forward any unused
portion of the deduction for five years following the year in which the
contribution is made.
(5) Assumes that 8% of the shares sold in the Conversion, including shares
issued to the Foundation, will be purchased by the ESOP. The funds used to
acquire the ESOP shares will be borrowed from the Holding Company. The Bank
intends to make contributions to the ESOP sufficient to service and
ultimately retire the ESOP's debt over a fifteen-year period. Also assumes
that an amount of shares equal to 4% of the amount of shares sold in the
Conversion, including shares issued to the Foundation will be acquired by
the RRP, following stockholder ratification of such plan after completion
of the Conversion. In the event that the RRP is funded by the issuance of
authorized but unissued shares in an amount equal to 4% of the shares sold
in the Conversion, the interest of existing stockholders would be diluted
by approximately 3.8%. The amount to be borrowed by the ESOP and the Common
Stock acquired by the RRP is reflected as a reduction of stockholders'
equity. See "Management of the Bank - Benefit Plans - Employee Stock
Ownership Plan" and "- Recognition and Retention Plan."
(6) If the Stock Contribution is approved by the Bank's members, the amount of
initial contribution will be accrued as an expense in the fiscal quarter in
which the conversion is completed. See "The Conversion -- Establishment of
The Hudson River Bank & Trust Company Foundation."
26
<PAGE>
PRO FORMA DATA
The following table sets forth the historical net income and equity
data of HCSI at and for the nine months ended December 31, 1997 and the fiscal
year ended March 31, 1997, and after giving effect to the Conversion, the pro
forma net income, capital stock and stockholders' equity and per share data of
the Holding Company at and for the nine months ended December 31, 1997 and the
fiscal year ended March 31, 1997. The pro forma data has been computed on the
assumptions that (i) the specified number of shares of Common Stock were sold at
the beginning of the specified periods and yielded net proceeds to the Holding
Company as indicated, (ii) 3% of the shares were donated to the Foundation upon
the completion of the Conversion, (iii) 50% of such net proceeds were retained
by the Holding Company and the remainder was used to purchase all of the stock
of HCSI, and (iv) such net proceeds, less the amount of the ESOP and RRP
funding, were invested by the Bank and Holding Company at the beginning of the
periods to yield a pre-tax return of 5.476% and 5.997% for the nine months ended
December 31, 1997 and for the fiscal year ended March 31, 1997, respectively.
The after-tax rate of return is 3.286% and 3.598%, respectively, assuming a
combined federal and state income tax rate of 40%. The assumed return is based
upon the market yield rate of one-year U.S. Government Treasury Securities as of
the end of the periods indicated. The use of this rate is viewed to be more
relevant than the use of an arithmetic average of the weighted average yield
earned by the Bank on its earning assets and the weighted average rate paid on
its interest-bearing liabilities during such periods. In calculating the
underwriting fees to be paid as part of the Offering, the table assumes that (i)
no commission was paid on $2.7 million of shares sold to directors, officers and
employees and (ii) the remaining shares were sold at a 1.10% commission. (These
assumptions represent management's estimate as to the distribution of stock
orders in the Conversion. However, there can be no assurance that such estimate
will be accurate and that a greater proportion of shares will not be sold at a
higher commission, thus increasing offering expenses.) Fixed expenses are
estimated to be $1,130,558. Actual Conversion expenses may be more or less than
those estimated because the fees paid to Sandler O'Neill and other brokers will
depend upon the categories of purchasers, the Purchase Price and market
conditions and other factors. The pro forma net income amounts derived from the
assumptions set forth herein should not be considered indicative of the actual
results of operations of the Holding Company that would have been attained for
any period if the Conversion had been actually consummated at the beginning of
such period, and the assumptions regarding investment yields should not be
considered indicative of the actual yields expected to be achieved during any
future period.
The total number of shares to be issued in the Conversion may be
increased or decreased significantly, or the price per share decreased, to
reflect changes in market and financial conditions prior to the close of the
Offering. However, if the aggregate Purchase Price of the Common Stock sold in
the Conversion is below $111,407,770 (the minimum of the Estimated Valuation
Range) or more than $173,337,380 (15% above the maximum of the Estimated
Valuation Range), subscribers will be offered the opportunity to modify or
cancel their subscriptions. See "The Conversion - Stock Pricing" and "-- Number
of Shares to be Issued."
27
<PAGE>
<TABLE>
<CAPTION>
At or For the Nine Months Ended December 31, 1997
15% Above
Minimum Midpoint Maximum Maximum
11,140,777 13,106,796 15,072,815 17,333,738
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
per Share per Share per Share per Share
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds................................................ $111,408 $131,068 $150,728 $173,337
Plus: Shares issued to Foundation(1).......................... 3,342 3,932 4,522 5,200
---------- ---------- ---------- ----------
Pro forma market capitalization............................... $114,750 $135,000 $155,250 $178,537
======== ======== ======== ========
Gross proceeds................................................ $111,408 $131,068 $150,728 $173,337
Less offering expenses and commissions........................ (2,326) (2,543) (2,759) (3,007)
----------- ----------- ----------- -----------
Estimated net conversion proceeds............................ $109,082 $128,525 $147,969 $170,330
Less ESOP shares.............................................. (9,180) (10,800) (12,420) (14,283)
Less RRP shares............................................... (4,590) (5,400) (6,210) (7,142)
----------- ----------- ----------- -----------
Estimated proceeds available for investment(2)............... $ 95,312 $112,325 $129,339 $148,905
========= ======== ======== ========
Net Income:
Historical.................................................. $1,886 $1,886 $1,886 $1,886
Pro Forma Adjustments:
Net earnings from proceeds(3).............................. $2,349 $2,768 $3,187 $3,669
ESOP(4).................................................... ($275) ($324) ($373) ($428)
RRP(5)..................................................... ($413) ($486) ($559) ($643)
----------- ----------- ----------- -----------
Pro forma net income(5).................................. $ 3,547 $ 3,844 $ 4,141 $ 4,484
========== ========== ========== ==========
Net Income Per Share:
Historical(7)............................................. $0.18 $0.15 $0.13 $0.11
Pro forma Adjustments:
Net earnings from proceeds............................... $0.22 $0.22 $0.22 $0.22
ESOP(4).................................................. ($0.03) ($0.03) ($0.03) ($0.03)
RRP(5)................................................... ($0.04) ($0.04) ($0.04) ($0.04)
----------- ----------- ----------- -----------
Pro forma net income per share(5)(6)................. $0.33 $0.30 $0.28 $0.26
=========== ============ =========== ===========
Offering price to pro forma net income per share
(annualized)........................................... 22.47x 24.39x 26.03x 27.65x
Stockholders' Equity (Book Value)(8):
Historical.................................................. $67,395 $67,395 $67,395 $67,395
Pro Forma Adjustments:
Estimated net Conversion proceeds........................... $109,082 $128,525 $147,969 $170,330
Plus: Tax benefit of Stock Contribution..................... $1,337 $1,573 $1,809 $2,080
Less: Common stock acquired by:
ESOP(4).................................................... ($9,180) ($10,800) ($12,420) ($14,283)
RRP(5)..................................................... ($4,590) ($5,400) ($6,210) ($7,142)
---------- ---------- ---------- ----------
Pro forma stockholder's equity(6)...................... $164,044 $181,293 $198,543 $218,380
======== ======== ======== ========
Stockholders' Equity (Book Value)(8):
Per Share(7):
Historical.................................................. $5.87 $4.99 $4.34 $3.77
Pro Forma Adjustments:
Estimated net Conversion proceeds........................... $9.51 $9.52 $9.53 $9.54
Plus: Tax benefit of Stock Contribution..................... $0.12 $0.12 $0.12 $0.12
Less: Common stock acquired by:
ESOP(4).................................................... ($0.80) ($0.80) ($0.80) ($0.80)
RRP(5)..................................................... ($0.40) ($0.40) ($0.40) ($0.40)
----------- ----------- ----------- -----------
Pro forma book value per share(6)...................... $14.30 $13.43 $12.79 $12.23
========== ========== ========== ==========
Pro forma offering price per share to book value per share.... 69.95% 74.46% 78.19% 81.76%
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended March 31, 1997
15% Above
Minimum Midpoint Maximum Maximum
11,140,777 13,106,796 15,072,815 17,333,738
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
per Share per Share per Share per Share
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds................................................ $111,408 $131,068 $150,728 $173,337
Plus: Shares issued to Foundation(1).......................... $3,342 $3,392 $4,522 $5,200
---------- ---------- ----------
Pro forma market capitalization............................... $114,750 $135,000 $155,250 $178,537
======== ======== ======== ========
Gross proceeds................................................ $111,408 $131,068 $150,728 $173,337
Less offering expenses and commissions........................ ($2,326) ($2,543) ($2,759) ($3,007)
----------- ----------- ----------- ----------
Estimated net conversion proceeds............................ $109,082 $128,525 $147,969 $170,330
Less ESOP shares.............................................. ($9,180) ($10,800) ($12,420) ($14,283)
Less RRP shares............................................... ($4,590) ($5,400) ($6,210) ($7,142)
---------- ---------- ---------- ----------
Estimated proceeds available for investment(2)............... $95,312 $112,325 $129,339 $148,905
========= ======== ======== ========
Net Income:
Historical.................................................. $5,660 $5,660 $5,660 $5,660
Pro Forma Adjustments:
Net earnings from proceeds(3).............................. $3,429 $4,042 $4,654 $5,358
ESOP(4).................................................... ($367) ($432) ($497) ($571)
RRP(5)..................................................... ($551) ($648) ($745) ($857)
----------- ----------- ----------- ----------
Pro forma net income(5).................................. $8,171 $8,622 $9,072 $9,590
========== ========== ========== ==========
Net Income Per Share:
Historical(7)............................................. $0.53 $0.45 $0.39 $0.34
Pro forma Adjustments:
Net earnings from proceeds............................... $0.32 $0.32 $0.32 $0.32
ESOP(4).................................................. ($0.03) ($0.03) ($0.03) ($0.03)
RRP(5)................................................... ($0.05) ($0.05) ($0.05) ($0.05)
----------- ----------- ----------- -----------
Pro forma net income per share(5)(6)................. $0.77 $0.69 $0.63 $0.58
=========== =========== =========== ===========
Offering price to pro forma net income per share......... 13.03x 14.53x 15.88x 17.28x
Stockholders' Equity (Book Value)(8):
Historical.................................................. $65,129 $65,129 $65,129 $65,129
Pro Forma Adjustments:
Estimated net Conversion proceeds........................... $109,082 $128,525 $147,969 $170,330
Plus: Tax benefit of Stock Contribution..................... $1,337 $1,573 $1,809 $2,080
Less: Common stock acquired by: ($9,180) ($10,800) ($12,420) ($14,283)
ESOP(4)....................................................
RRP(5)..................................................... ($4,590) ($5,400) ($6,210) ($7,142)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(6)...................... $161,778 $179,027 $196,277 $216,114
======== ======== ======== ========
Stockholders' Equity (Book Value)(8):
Per Share(7):
Historical.................................................. $5.68 $4.82 $4.20 $3.65
Pro Forma Adjustments:
Estimated net Conversion proceeds........................... $9.51 $9.52 $9.53 $9.54
Plus: Tax benefit of Stock Contribution..................... $0.12 $0.12 $0.12 $0.12
Less: Common stock acquired by:
ESOP(4).................................................... ($0.80) ($0.80) ($0.80) ($0.80)
RRP(5)..................................................... ($0.40) ($0.40) ($0.40) ($0.40)
----------- ----------- ----------- -----------
Pro forma book value per share(6)...................... $14.11 $13.26 $12.65 $12.11
=========== =========== =========== ==========
Pro forma offering price per share to pro forma book 70.93% 75.41% 79.10% 82.61%
value per share(6)
</TABLE>
(1) The Holding Company intends to contribute shares equal to 3% of the shares
issued in the Conversion to the Foundation within 12 months following the
completion of the Conversion. See "The Conversion - Establishment of The
Hudson River Bank & Trust Company Foundation." Since the contributed shares
will be donated or sold for nominal consideration, they will not add to
gross proceeds. However, since such shares are issued and outstanding, they
add to the Holding Company's market capitalization. The amount of the Stock
Contribution will be accrued as an expense in the fiscal quarter in which
the Conversion is completed. The pro forma net income data does not reflect
such non-recurring accrual. Both the historical and pro forma per share
data assume that the Stock Contribution is made.
29
<PAGE>
(2) Reflects a reduction to net proceeds for the cost of the ESOP and the RRP
(assuming stockholder ratification of the RRP is received) which it is
assumed will be funded from the net proceeds retained by the Holding
Company.
(3) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by the
ESOP and RRP, which purchases are to be funded by the Holding Company and
the Bank, have been deducted from net proceeds.
(4) It is assumed that 8% of the shares of Common Stock sold in the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP.
The funds used to acquire such shares will be borrowed by the ESOP from the
net proceeds from the Conversion retained by the Holding Company. The Bank
intends to make contributions to the ESOP in amounts at least equal to the
principal and interest requirement of the debt. The Bank's payment of the
ESOP debt is based upon equal installments of principal and interest over a
15-year period. However, assuming the Holding Company makes the ESOP loan,
interest income earned by the Holding Company on the ESOP debt will offset
the interest paid by the Bank. Accordingly, the only expense to the Holding
Company on a consolidated basis will be related to the allocations of
earned ESOP shares which will be based on the number of shares committed to
be released to participants for the year at the average market value of the
shares during the year, net of the related tax effects. The amount of ESOP
debt is reflected as a reduction of stockholders' equity. In the event that
the ESOP were to receive a loan from an independent third party, both ESOP
expense and earnings on the proceeds retained by the Holding Company would
be expected to increase. Pursuant to SOP 93-6, only the ESOP shares
committed to be released are considered outstanding for the purposes of the
net income per share calculations.
(5) Adjustments to both book value and net income have been made to give effect
to the proposed open market purchase (based upon an assumed purchase price
of $10.00 per share) following Conversion by the RRP (assuming stockholder
ratification of such plan is received) of an amount of shares equal to 4%
of the shares of Common Stock sold in the Conversion, including shares
issued to the Foundation, for the benefit of certain directors, officers
and employees. It is assumed that the sale of the shares to the RRP
occurred at the beginning of the period. Funds used by the RRP to purchase
the shares will be contributed to the RRP by the Holding Company if the RRP
is ratified by stockholders following the Conversion. Therefore, this
funding is assumed to reduce the proceeds available for reinvestment. For
financial accounting purposes, the amount of the contribution will be
recorded as a compensation expense over the period of vesting. These grants
are scheduled to vest in equal annual installments over the five years
following stockholder ratification of the RRP. For purposes of calculating
pro forma net income per share, RRP shares are considered to be fully
vested. However, all unvested grants will be forfeited in the case of
recipients who fail to maintain continuous service with the Holding Company
or its subsidiaries. In the event the RRP is unable to purchase a
sufficient number of shares of Common Stock to fund the RRP, the RRP may
issue authorized but unissued shares of Common Stock from the Holding
Company to fund the remaining balance. In the event the RRP is funded by
the issuance of authorized but unissued shares in an amount equal to 4% of
the shares sold in the Conversion, including shares issued to the
Foundation, the interests of existing stockholders would be diluted by
approximately 3.8%. In the event that the RRP is funded through authorized
but unissued shares, for the nine months ended December 31, 1997 and year
ended March 31, 1997, pro forma net income per share (assuming all RRP
shares are treated as being fully vested) would be $0.33, $0.31, $0.29 and
$0.27 and $0.75, $0.68, $0.62 and $0.57, respectively, and pro forma
stockholders' equity per share would be $14.13, $13.30, $12.68 and $12.15
and $13.94, $13.14, $12.54 and $12.02, respectively, in each case at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range.
(6) No effect has been given to the shares to be reserved for issuance under
the proposed Stock Option Plan which is expected to be adopted by the
Holding Company following the Conversion, subject to stockholder approval.
In the event the Stock Option Plan is funded by the issuance of authorized
but unissued shares in an amount equal to 10% of the shares sold in the
Conversion, including shares issued to the Foundation, at $10.00 per share,
the interests of existing stockholders would be diluted as follows: pro
forma net income per share for the nine months ended December 31, 1997 and
the year ended March 31, 1997 would be $0.33, $0.30, $0.28 and $0.27 and
$0.73, $0.66, $0.60 and $0.56, respectively, and pro forma stockholders'
equity per share would be $13.91, $13.12, $12.54 and $12.03 and $13.73,
$12.96, $12.40 and $11.91, respectively, in each case at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range. In the alternative, the Holding Company may purchase shares in the
open market to fund the Stock Option Plan following stockholder approval of
such plan. To the extent the entire 10% of the shares to be reserved for
issuance under the Stock Option Plan are funded through open market
purchases at the Purchase Price of $10.00 per share, proceeds available for
reinvestment would be reduced by $11,475,000, $13,500,000, $15,525,000 and
$17,853,700 at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range. See "Management of the Bank - Benefit Plans
- Employee Stock Ownership Plan."
(7) Historical per share amounts have been computed as if the shares of Common
Stock indicated had been outstanding at the beginning of the periods or on
the dates shown, but without any adjustment of historical net income or
historical equity to reflect the investment of the estimated net proceeds
of the sale of shares in the Conversion as described above. Pursuant to SOP
93-6, only the ESOP shares committed to be released are considered
outstanding for the purposes of the net income per share calculations. All
ESOP shares have been considered outstanding for purposes of computing book
value per share.
(8) "Book value" represents the difference between the stated amounts of the
Bank's assets (generally based on historical cost) and liabilities computed
in accordance with generally accepted accounting principles. The amounts
shown do not reflect the effect of the Liquidation Account which will be
established for the benefit of Eligible and Supplemental Eligible Account
Holders in the Conversion, or the federal income tax consequences of the
restoration to income of the Bank's special bad debt reserves for income
tax purposes which would be required in the unlikely event of liquidation.
See "The Conversion - Effects of Conversion -- Deposit Accounts and Loans"
and "Regulation" and "Taxation." The amounts shown for book value do not
represent fair market values or amounts, if any, distributable to
stockholders in the unlikely event of liquidation.
30
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO
STOCK CONTRIBUTION
In the event that the Stock Contribution to the Foundation is not
made, RP Financial has estimated that the amount of Common Stock offered for
sale in the Conversion would increase by approximately 893,200 shares and that
the overall market capitalization would increase by $5.0 million, both at the
midpoint of the Estimated Valuation Range as of December 31, 1997. Under such
circumstances, pro forma stockholders' equity of the Holding Company would be
approximately $188.0 million, at the midpoint, which is approximately $6.7
million greater than the pro forma stockholders' equity of the Holding Company
would be if the Stock Contribution is made. In preparing this estimate, it has
been assumed that the pro forma price to book value ratio and pro forma price to
earnings ratio would be approximately the same under both the current appraisal
and the estimate of the value of the Holding Company without the Stock
Contribution at the midpoint of the Estimated Valuation Range. Further, assuming
the midpoint of the Estimated Valuation Range, pro forma stockholders' equity
per share and pro forma net income per share would be substantially the same
with the Stock Contribution as without the Stock Contribution. In this regard,
pro forma stockholders' equity and pro forma net income per share at and for the
period ended December 31, 1997 would be $13.43 and $0.31 respectively, at the
midpoint of the Estimated Valuation Range, assuming no Stock Contribution, and
$13.43 and $0.30, respectively, with the Stock Contribution. The pro forma price
to book value ratio and the pro forma price to earnings ratio at and for the
period ended December 31, 1997 are 74.49% and 24.15x, respectively, at the
midpoint of the Estimated Valuation Range, assuming no Stock Contribution and
are 74.46% and 24.39x, respectively, with the Stock Contribution. There is no
assurance that in the event the Stock Contribution is not made that the
appraisal prepared at that time would conclude that the pro forma market value
of the Holding Company would be the same as that estimated herein.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Valuation Range, assuming the Conversion
was completed at December 31, 1997.
31
<PAGE>
<TABLE>
<CAPTION>
At the Maximum
At the Minimum At the Midpoint At the Maximum as Adjusted
With No With No With No With No
Stock Stock Stock Stock Stock Stock Stock Stock
Contri- Contri- Contri- Contri- Contri- Contri- Contri- Contri-
11,140,777 11,900,000 13,106,796 14,000,000 15,072,815 16,100,000 17,333,738 18,515,000
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount............... $111,408 $119,000 $131,068 $140,000 $150,728 $161,000 $173,337 $185,150
Pro forma market capitalization......... $114,750 $119,000 $135,000 $140,000 $155,250 $161,000 $178,537 $185,150
Total assets............................ $761,699 $767,361 $778,949 $785,610 $796,199 $803,859 $816,036 $824,846
Total liabilities....................... $597,656 $597,656 $597,656 $597,656 $597,656 $597,656 $597,656 $597,656
Pro forma stockholders' equity.......... $164,043 $169,705 $181,293 $187,954 $198,543 $206,203 $218,380 $227,190
Pro forma net income(1)................. $3,547 $3,693 $3,844 $4,017 $4,141 $4,341 $4,484 $4,713
Pro forma stockholders' equity per share $14.30 $14.26 $13.43 $13.43 $12.79 $12.81 $12.23 $12.27
Pro forma net income per share(1)...... $0.33 $0.34 $0.30 $0.31 $0.28 $0.29 $0.26 $0.28
Pro Forma Pricing Ratios:
Offering price as a percentage of pro
forma stockholders' equity per share 69.95% 70.12% 74.46% 74.49% 78.19% 78.08% 81.76% 81.50%
Offering price to pro forma net income
per share(1)........................ 22.47x 22.32x 24.39x 24.15x 26.03x 25.70x 27.65x 27.22x
Market capitialization to assets..... 15.07% 15.51% 17.33% 17.82% 19.50% 20.03% 21.88% 22.45%
Pro Forma Financial Ratios:
Return on assets(2).................. 0.62% 0.64% 0.66% 0.68% 0.69% 0.72% 0.73% 0.76%
Return on stockholders' equity(2).... 2.88% 2.90% 2.83% 2.85% 2.78% 2.81% 2.74% 2.77%
Stockholders' equity to assets....... 21.54% 22.12% 23.27% 23.92% 24.94% 25.65% 26.76% 27.54%
<FN>
(1) For the nine month period ended December 31, 1997. (2) Ratios for the nine
month periods have been annualized.
</FN>
</TABLE>
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Holding Company has only recently been formed and accordingly has
no results of operations at this time. As a result, the following discussion
principally reflects the operations of the Bank and its subsidiaries. The Bank's
primary market area, with 12 full-service branches and one loan production
office, consists of Columbia, Albany and Rensselaer counties in New York and
portions of Dutchess and Schenectady counties in New York. The Bank has been,
and intends to continue to be, a community-oriented financial institution
offering a variety of financial services. The Bank's principal business is
attracting deposits from customers within its market area and investing those
funds, together with funds from operations and, to a much lesser extent,
borrowings, in primarily residential mortgage loans, including home equity
loans, and to a lesser extent, in manufactured home loans, financed insurance
premiums and other consumer loans, commercial real estate, construction loans
and commercial business loans and government and corporate debt securities. See
"Business of the Bank - Lending Activities." The financial condition and
operating results of the Bank are dependent on its net interest income which is
the difference between the interest income earned on its assets, primarily loans
and investments, and the interest expense on its liabilities, primarily deposits
and borrowings. Net income is also affected by other operating income, such as
loan servicing income and fees on deposit related services, other operating
expenses, such as compensation and occupancy expenses, provisions for loan
losses, and Federal and state income taxes.
The Bank's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government policies, changes in accounting standards and actions of
regulatory agencies. Future changes in applicable laws, regulations or
government policies may have a material impact on the Bank. Lending activities
are substantially influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates and the availability of
funds. The ability to gather deposits and the cost of funds are influenced by
prevailing market interest rates, fees and terms on deposit products, as well as
the availability of alternative investments, including mutual funds and stocks.
MARKET RISK AND ASSET/LIABILITY MANAGEMENT
Interest rate risk is the most significant market risk affecting the
Bank. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Bank's
business activities.
Interest rate risk is defined as an exposure to a movement in interest
rates that could have an adverse effect on the Bank's net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or reprice more quickly than
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest
33
<PAGE>
income. Similarly, when earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Bank's interest rate risk. Management's asset/liability
committee meets weekly to review the Bank's interest rate risk position and
profitability, and to recommend adjustments for consideration by the Board of
Trustees. Management also reviews loan and deposit pricing, and the Bank's
securities portfolio, formulates investment strategies and oversees the timing
and implementation of transactions. Notwithstanding the Bank's interest rate
risk management activities, the potential for changing interest rates is an
uncertainty that can adversely affect net income.
In adjusting the Bank's asset/liability position, the Board and
management attempt to manage the Bank's interest rate risk while enhancing net
interest margins. At times, depending on the level of general interest rates,
the relationship between long- and short-term interest rates, market conditions
and competitive factors, the Board and management may determine to increase the
Bank's interest rate risk position somewhat in order to increase its net
interest margins. The Bank's results of operations and net portfolio values
remain vulnerable to changes in interest rates and to fluctuations in the
difference between long- and short-term interest rates.
Consistent with the asset/liability management philosophy described
above, the Bank has taken several steps to manage its interest rate risk. First,
the Bank has structured the security portfolio to shorten the maturities of its
earning assets. The Bank's recent purchases of securities have had terms to
maturity of seven years or less. At December 31, 1997, the Bank had securities
with a carrying value of $106.3 million with contractual maturities of five
years or less. Except for approximately $74.5 million of fixed rate products,
the Bank's residential real estate portfolio is composed of either one, three or
five year adjustable rate mortgages or floating-rate home equity loans. The Bank
also manages interest rate risk by emphasizing lower cost, more stable non-time
deposit accounts. In the current low rate environment, longer-term time deposits
are welcomed although not particularly popular with the Bank's customer base.
One approach used to quantify interest rate risk is the net market
value analysis. In essence, this analysis calculates the difference between the
present value of liabilities and the present value of expected cash flows from
assets and off-balance sheet contracts. A second approach is to quantify the
impact on net interest income due to changes in cash flows, interest income and
interest expense resulting from shifts in interest rates. The following tables
set forth, at December 31, 1997, an analysis of the Bank's interest rate risk as
measured by the estimated changes in net market value of its assets and
liabilities and net interest income resulting from instantaneous and sustained
parallel shifts in interest rates (+ or - 200 basis points, measured in 50 basis
point increments).
34
<PAGE>
Net Market Value of Assets and Liabilities
- ---------------------------------------------------------------------
Change in Net
Interest Rates Market
in Basis Points Value
(Rate Shock) $ Change % Change
- --------------------- --------------- --------------- ---------------
(Dollars in thousands)
200 89,641 (2,322) (2.52)%
150 90,468 (1,495) (1.63)%
100 91,142 (821) (0.89)%
50 91,636 (327) (0.36)%
0 91,963 0 ---
(50) 91,551 (412) (0.45)%
(100) 90,698 (1,265) (1.38)%
(150) 89,938 (2,025) (2.20)%
(200) 89,100 (2,863) (3.11)%
Net Interest Income
- ---------------------------------------------------------------------
Change in Net
Interest Rates Interest
in Basis Points Income
(Rate Shock) $ Change % Change
- ---------------------------------------------------------------------
(Dollars in thousands)
200 26,651 1,111 4.35%
150 26,406 866 3.39%
100 26,136 596 2.33%
50 25,855 315 1.23%
0 25,540 0 ---
(50) 25,032 (508) (1.99)%
(100) 24,569 (971) (3.80)%
(150) 24,105 (1,435) (5.62)%
(200) 23,635 (1,905) (7.46)%
Certain assumptions utilized by management in assessing the interest
rate risk of the Bank were employed in preparing data included in the preceding
table. These assumptions were based upon proprietary data selected by management
and are reflective of historical results or current market conditions. These
assumptions relate to interest rates, prepayment rates, deposit decay rates, and
the market values of certain assets under the various interest rate scenarios.
Prepayment assumptions for mortgage backed securities and residential
mortgage loans were based upon industry standards for prepayments. Cash flows of
securities containing call provisions were determined based on what was in the
best interest of the issuer given the respective interest rate scenario. The
Bank's mortgage backed securities, residential mortgages, and callable
securities are the only assets or liabilities which management assumed possess
optionality for purposes of determining market value changes.
35
<PAGE>
Management assumed that the majority of non-maturity deposits had
estimated lives ranging from 0 to 5 years, while only 15.6% of non-maturity
deposits had estimated lives ranging from 5 to 10 years. These assumptions are
based upon management's analysis of its customer base and competitive factors.
The net market value and net interest income tables presented above are
predicated upon a stable balance sheet with no growth or change in asset or
liability mix. In addition, the net market value table is based upon the present
value of discounted cash flows using management's estimates of current
replacement rates to discount the cash flows. The net interest income table is
based upon a cash flow simulation of the Bank's existing assets and liabilities.
It was also assumed that delinquency rates would not change as a result of
changes in interest rates although there can be no assurance that this will be
the case. Even if interest rates change in the designated amounts, there can be
no assurance that the Bank's assets and liabilities would perform as set forth
above. Also, a change in the US Treasury rates in the designated amounts
accompanied by a change in the shape of the Treasury yield curve would cause
changes to the net market value and net interest income other than those
indicated above.
The Bank does not currently engage in trading activities or use
derivative instruments to manage interest rate risk. Instruments such as
interest rate swaps, caps and floors may be utilized under certain interest rate
risk scenarios in order to manage interest rate risk. Such activities may be
permitted with the approval of the Board of Trustees, and management continually
evaluates the usefulness of such instruments in managing interest rate risk.
Analysis of Net Interest Income
The following table sets forth the Bank's average consolidated balance
sheets, interest income and expense, average yields and costs, and certain other
information for the periods noted.
36
<PAGE>
The following table presents, for the periods indicated, the total
dollar amount of interest and dividend income from average earning assets and
the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No tax
equivalent adjustments were made. All average balances are monthly average
balances. Management believes that the use of average monthly balances instead
of average daily balances does not have a material effect on the information
presented. Non-accruing loans have been included in the loan balances.
<TABLE>
<CAPTION>
Nine Months Ended December 31, Year Ended March 31,
1997 1996 1997
----------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate(1) Balance Paid Rate(1) Balance Paid Rate
--------------------------------------------------------------------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Federal funds sold............. $ 4,710 $ 202 5.69% $ 2,121 $ 87 5.44% $ 1,638 $ 89 5.43%
Securities available for sale.. 39,703 1,960 6.55 55,729 2,879 6.86 53,445 3,658 6.84
Investment securities.......... 72,208 3,565 6.55 84,428 4,063 6.39 83,343 5,385 6.46
Federal Home Loan Bank of 3 2,565 2 2,575
NY stock..................... 2,812 151 7.1 124 6.4 164 6.37
Loans receivable............... 509,634 35,575 9.27 465,883 32,220 9.18 471,295 43,585 9.25
------- ------ ---- ------- ------ ---- ------- ------ ----
Total earning assets........ 629,067 41,453 8.75 610,726 39,373 8.56 612,296 52,881 8.64
------ ---- ------ ---- ------ ----
Cash and due from banks........ 11,048 7,602 6,860
Allowance for loan losses...... (6,953) (3,656) (3,886)
Other non-earning assets...... 26,945 25,342 25,597
------- ------- -------
Total assets.............. $660,107 $640,014 $640,867
======== ======== ========
Interest-Bearing Liabilities:
Savings accounts............... 137,841 3,584 3.45 132,886 3,388 3.38 133,209 4,523 3.40
N.O.W. and money market accounts 94,247 2,178 3.07 95,046 2,144 2.99 93,972 2,831 3.01
Time deposit accounts.......... 310,499 13,513 5.78 307,259 13,342 5.76 307,757 17,727 5.76
Escrow accounts................ 5,088 89 2.32 5,198 87 2.22 4,579 106 2.31
Other borrowings............... 4,266 176 5.48 3,303 130 5.22 4,459 239 5.36
---------- --------- ---- ------- ------- ---- ------- -------- -----
Total interest-bearing 551,941 19,540 4.70 543,692 19,091 4.66 543,976 25,426 4.67
liabilities -------- ---- ----- ---- ------ ----
Non-interest-bearing deposits... 35,638 28,270 27,984
Other non-interest bearing 5,106 5,440 5,585
liabilities...............
Equity.......................... 67,422 62,612 63,322
---------- ---------- -----------
Total liabilities and equity. $660,107 $640,014 $640,867
======== ======== ========
Net interest income............. $21,913 $20,282 27,455
======= ======= ======
Net interest rate spread........ 4.05% 3.90% 3.97%
==== ==== ====
Net interest margin............. 4.62% 4.41% 4.48%
<FN>
==== ==== ====
- ------------------------
(1) Annualized
</FN>
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
1996 1995
---------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------------------------------------------ ------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Federal funds sold............. $4,908 $ 271 5.52% $ 7,206 $ 344 4.77%
Securities available for sale.. 26,889 1,782 6.63 12,307 917 7.45
Investment securities.......... 92,243 6,062 6.57 94,001 6,503 6.92
Federal Home Loan Bank of 5 2,064 5
NY stock..................... 2,578 187 7.2 160 7.7
Loans receivable............... 444,645 40,780 9.17 424,187 35,135 8.28
------- ------ ---- ------- ------ ----
Total earning assets........ 571,263 49,082 8.59 539,765 43,059 7.98
------ ---- ------ ----
Cash and due from banks........ 6,386 6,740
Allowance for loan losses...... (3,304) (2,931)
Other non-earning assets...... 23,090 22,869
-------- -------
Total assets.............. $597,435 $566,443
======== ========
Interest-Bearing Liabilities:
Savings accounts............... 129,281 4,275 3.31 167,284 5,501 3.29
N.O.W. and money market accounts 93,813 2,932 3.13 97,131 2,769 2.85
Time deposit accounts.......... 283,149 16,713 5.90 219,008 10,796 4.93
Escrow accounts................ 5,460 124 2.27 6,360 142 2.23
Other borrowings............... 745 42 5.64 2,145 101 4.71
--------- -------- ----- -------- ------- ----
Total interest-bearing 512,448 24,086 4.70 491,928 19,309 3.93
liabilities ------ ---- ------ ----
Non-interest-bearing deposits... 24,096 21,021
Other non-interest bearing 4,630 3,983
liabilities
Equity.......................... 56,261 49,511
-------- ----------
Total liabilities and equity. $597,435 $566,443
======== ========
Net interest income............. $24,996 $23,750
======= =======
Net interest rate spread........ 3.89% 4.05%
==== ====
Net interest margin............. 4.38% 4.40%
<FN>
==== ====
- ------------------------
(1) Annualized
</FN>
</TABLE>
37
<PAGE>
The following schedule presents the dollar amount of changes in
interest and dividend income and interest expense for major components of
earning assets and interest-bearing liabilities. For each category of earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (i.e., changes in volume multiplied by old
rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume).
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Nine Months Ended
December 31, Years Ended March 31, Years Ended March 31,
1997 vs. 1996 1997 vs. 1996 1996 vs. 1995
Increase Increase Increase
(Decrease) Total Decrease) Total (Decrease) Total
Due to Increase Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Federal funds sold................... $ 111 $ 4 $115 $(178) $ (4) $(182) $(121) $ 48 $ (73)
Securities available for sale........ (796) (123) (919) 1,816 60 1,876 977 (112) 865
Investment securities................ (601) 103 (498) (577) (100) (677) (120) (321) (441)
Federal Home Loan Bank of NY stock... 13 14 27 --- (23) (23) 38 (11) 27
Loans receivable..................... 3,051 304 3,355 2,462 343 2,805 1,751 3,894 5,645
----- ----- ----- ----- ----- ----- ----- ------ -------
Total interest and dividend income. 1,778 302 2,080 3,523 276 3,799 2,525 3,498 6,023
----- ----- ----- ----- ----- ----- ----- ------ -------
Interest expense:
Savings accounts...................... 128 68 196 132 116 248 (1,256) 30 (1,226)
N.O.W. and money market accounts...... (18) 52 34 5 (106) (101) (97) 260 163
Time deposit accounts................. 141 30 171 1,425 (411) 1,014 3,535 2,382 5,917
Escrow accounts....................... (2) 4 2 (20) 2 (18) (20) 2 (18)
Other borrowings...................... 39 7 46 199 (2) 197 (76) 17 (59)
------- ------ ------ ------ ------ ------ ------ -------- ---------
Total interest expense............. 288 161 449 1,741 (401) 1,340 2,086 2,691 4,777
------- ----- ------ ----- ----- ------ ----- ------ --------
Net interest income................... $1,490 $ 141 $1,631 $1,782 $ 677 $2,459 $ 439 $ 807 $ 1,246
====== ===== ====== ====== ===== ====== ===== ====== =======
</TABLE>
38
<PAGE>
OPERATING RESULTS
Comparison of Nine Months Ended December 31, 1997 and Nine Months Ended December
31, 1996
Net income for the nine months ended December 31, 1997 was $1.9
million, down $3.0 million from the $4.9 million earned during the nine months
ended December 31, 1996. This decrease was primarily a result of a higher
provision for loan losses (up $4.6 million) and higher other operating expenses
(up $2.4 million). These increased expenses were partially offset by increased
net interest income (up $1.6 million), increased other operating income (up $529
thousand) and lower income tax expense (down $1.8 million). The Bank's return on
average assets (ROA) was .38% for the nine months ended December 31, 1997, down
from 1.01% for the same period in 1996. The Bank's return on average equity
(ROE) was also lower, 3.71% for the nine months ended December 31, 1997 down
from 10.36% for the nine months ended December 31, 1996.
Net Interest Income. Net interest income for the nine months ended
December 31, 1997 was $21.9 million, up $1.6 million versus the nine months
ended December 31, 1996. The increase was primarily the result of an increase in
average earning assets from $610.7 million for the nine months ended December
31, 1996 to $629.1 million for the same period in 1997. Interest-bearing
liabilities also increased during this same period, up $8.2 million to $551.9
million for the nine months ended December 31, 1997. The impact of these volume
increases resulted in an increase in net interest income of $1.5 million. The
remaining $141 thousand increase in net interest income is the result of
slightly higher interest rates. The Bank's net interest margin for the nine
months ended December 31, 1997 was 4.62%, up from 4.41% for the nine months
ended December 31, 1996. The yield on average earning assets increased from
8.56% to 8.75%, while the rate paid on interest-bearing liabilities increased
slightly from 4.66% to 4.70%.
Interest Income. Interest income for the nine months ended December 31,
1997 was $41.5 million, up from $39.4 million for the comparable period in 1996.
The largest component of interest income, as well as the increase from 1996 to
1997, is interest on loans. Interest on loans increased from $32.2 million for
the nine months ended December 31, 1996 to $35.6 million for the nine months
ended December 31, 1997. This increase of $3.4 million is the result of both
volume increases and rate increases. The average balance of loans increased
$43.8 million, while the yield on loans increased from 9.18% to 9.27%. The
increase in interest on loans was offset by decreases in interest on securities
available for sale and investment securities. Interest income on these
categories of earning assets decreased $919 thousand and $498 thousand,
respectively. Substantially all of the decreases in interest income on these
assets are attributed to reductions in volume. The average balance of securities
available for sale decreased from $55.7 million for the nine months ended
December 31, 1996 to $39.7 million for the nine months ended December 31, 1997.
This decrease in volume resulted in a decrease in interest income of $796
thousand. The average balance of investment securities decreased from $84.4
million in 1996 to $72.2 million in 1997, resulting in a $601 thousand decrease
in interest income due to volume. Management expects the average balance of
investment securities to continue to decrease as new purchases of securities are
generally classified as securities available for sale. The changes in rates on
securities available for sale and
39
<PAGE>
investment securities, as well as the changes in volume and rate on other
categories of interest earning assets was not significant.
Interest Expense. Interest expense increased slightly during the nine
months ended December 31, 1997 to $19.5 million up from $19.1 million for the
comparable period in 1996. Substantially all of the Bank's interest expense is
from the Bank's interest-bearing deposits. The largest category of
interest-bearing deposits is time deposits. Interest on time deposits for the
nine months ended December 31, 1997 was $13.5 million, up from $13.3 million in
1996. Most of this increase is attributable to an increase in the average
balance of time deposits, from $307.3 million in 1996 to $310.5 million in 1997.
Interest expense on savings accounts increased $196 thousand, from $3.4 million
for the nine months ended December 31, 1996 to $3.6 million for the nine months
ended December 31, 1997. This increase is attributed to an increase in the
average balance of savings accounts (up $5.0 million) as well as an increase of
7 basis points in the rates paid on these savings accounts, from 3.38% to 3.45%.
Interest expense on NOW/Money Market accounts was relatively flat, increasing
only $34 thousand from 1996 to 1997. Fluctuations in interest expense on other
categories of interest-bearing liabilities were not significant.
Provision for Loan Losses. The provision for loan losses increased from
$1.9 million in the nine months ended December 31, 1996 to $6.4 million in the
nine months ended December 31, 1997. This increase is primarily the result of
increases in net charge-offs from $1.2 million for the nine months ended
December 31, 1996 to $5.5 million for the nine months ended December 31, 1997,
largely due to one large lending relationship. This increase in net charge-offs
combined with continued growth in the higher risk elements of the Bank's loan
portfolio, continued economic weaknesses in the Bank's market area, declining
real estate values securing much of the loan portfolio as well as management's
evaluation of the prospects for its market area resulted in the increase in the
provision charged during the nine months ended December 31, 1997. Although the
Bank anticipates that the provision for loan losses will continue at current
levels through at least fiscal 1999, there can be no assurance that such losses
will not exceed estimated amounts or that the provision for loan losses will not
increase in future periods. See "Business of the Bank - Asset Quality -
Allowance for Loan Losses."
Other Operating Income. Total other operating income increased $529
thousand for the nine months ended December 31, 1997 as compared to the same
period in 1996. Other operating income is composed primarily of service charges
on deposit accounts and loan servicing income. Income from service charges on
deposits accounts increased from $815 thousand for the nine months ended
December 31, 1996 to $840 thousand for the nine months ended December 31, 1997.
This increase is attributed to the overall increase in the Bank's deposit
accounts during this time period. Loan servicing income decreased $49 thousand
from $402 thousand in the nine months ended December 31, 1996 to $353 thousand
in the nine months ended December 31, 1997. This decrease relates to the
termination of an agreement to service financed insurance premiums for an
unaffiliated premium finance company and the runoff of the corresponding
servicing portfolio. The servicing agreement was terminated due to the financial
difficulties and ultimate liquidation of the unaffiliated premium finance
company. Other income was $646 thousand for the nine months ended December 31,
1997, up from $121 thousand for the same period in 1996. A portion of this
increase is the result of a partial recovery of previous writedowns of the
Bank's investment in Nationar, a New York chartered
40
<PAGE>
institution that HCSI utilized for certain correspondent banking services prior
to its takeover and liquidation by the State Banking Department in 1995. A large
portion of the remaining increase resulted from the income generated by the
Bank's mortgage brokerage subsidiary, Hudson River Mortgage Company. This
subsidiary generates fee income on loan applications, which applications are
received and forwarded to independent third parties. Loan applications on
products not currently offered by the Bank or on credits which do not meet the
Bank's minimum credit standards are forwarded to other institutions, resulting
in brokerage fee income. Fluctuations in other categories of other operating
income were not significant.
Other Operating Expenses. Total other operating expenses increased $2.4
million to $14.2 million for the nine months ended December 31, 1997, up from
$11.8 million for the comparable period in 1996. Increases in compensation and
benefits ($549 thousand), equipment ($372 thousand), legal and other
professional fees ($529 thousand), and other expenses ($685 thousand) were the
primary contributors to the overall increase.
The increase in compensation and benefits is the result of establishing
a new branch in May 1997 in Hillsdale, New York, the increase in staff
necessitated by the Bank's acquisition (through its premium finance subsidiary)
of the customer list of an unaffiliated premium finance company and the related
sub-servicing agreement with this company, as well as general merit increases
for the Bank's employees during the nine months ended December 31, 1997.
The increase in equipment expenses is directly attributed to the
acquisition and integration of a new mainframe data processing system in
November 1996, as well as the addition of the new branch as referenced above.
The Bank's new data processing system resulted in increased depreciation and
maintenance expense during the nine months ended December 31, 1997. The Bank
anticipates that improvements in the products and services offered to its
customers as well the increased efficiencies the new system provides will
generally offset the increased expenses associated with this acquisition.
The increase in legal and other professional fees are the result of
several factors. During the nine months ended December 31, 1997, the Bank
considered several acquisition opportunities. Although only the aforementioned
acquisition of the customer list of an unaffiliated premium finance company was
consummated, legal and accounting expenses associated with considering these
opportunities resulted in higher expenses in 1997. In addition, the Bank hired
various consulting firms during the nine months ended December 31, 1997. These
firms assisted management in addressing certain strategic and organizational
issues as well as operational issues of the Bank.
The increase in other expenses is the result of increased goodwill
amortization from the previously mentioned acquisition of a premium finance
customer list, expenses relating to the consideration of various funding
alternatives relating to the Bank's premium finance subsidiary, a one-time
charge relating to a reduction of an asset deemed uncollectible, increases in
advertising, telephone and supplies relating to the Bank's new branch and
general increases in expenses relating to the servicing and collection of
nonperforming and other delinquent loans. The remaining categories of other
expenses and other operating expenses did not experience significant
fluctuations.
41
<PAGE>
Income Tax Expense. Income tax expense decreased from $3.1 million for
the nine months ended December 31, 1996 to $1.3 million for the comparable
period in 1997. The reduction is primarily the result of less income before
income tax expense; $3.2 million in 1997 as compared to $8.0 million in 1996.
The effect of reduced income before income tax expense was partially offset by
an increase in the Bank's effective tax rate due primarily to less tax-exempt
income and the effect of state taxes.
Comparison of Year Ended March 31, 1997 and Year Ended March 31, 1996
Net income for the year ended March 31, 1997 was $5.7 million, down
from $7.0 million for the year ended March 31, 1996. The provision for loan
losses increased $2.7 million and other operating expenses increased $2.0
million for the year ended March 31, 1997 as compared to the year previous.
These increases were offset in part by higher net interest income (up $2.5
million), increased other operating income (up $190 thousand), and lower income
tax expense (down $691 thousand). The Bank's ROA declined from 1.18% for the
year ended March 31, 1996 to .88% for the year ended March 31, 1997. The Bank's
ROE declined from 12.52% for the year ended March 31, 1996 to 8.94% for the year
ended March 31, 1997.
Net Interest Income. Net interest income for the year ended March 31,
1997 was $27.5 million, up $2.5 million versus the year ended March 31, 1996.
The increase was primarily the result of the increase of $41.0 million in
average earning assets from $571.3 million for the year ended March 31, 1996 to
$612.3 million for the same period in 1997. Interest-bearing liabilities also
increased during this same period, up $31.5 million. The net impact of these
volume increases resulted in an increase in net interest income of $1.8 million.
The remaining $677 thousand increase in net interest income is the result of
higher yields earned on interest earning assets and lower rates paid on interest
bearing liabilities. The Bank's net interest margin for the year ended March 31,
1997 was 4.48%, up 10 basis points from 4.38% for the year ended March 31, 1996.
The yield on average earning assets increased from 8.59% to 8.64%, while the
rate paid on average interest-bearing liabilities decreased slightly from 4.70%
to 4.67%.
Interest Income. Interest income for the year ended March 31, 1997 was
$52.9 million, up from $49.1 million for the comparable period in 1996. The
largest component of interest income, as well as the increase from 1996 to 1997,
is interest on loans. Interest on loans increased from $40.8 million for the
year ended March 31, 1996 to $43.6 million for the year ended March 31, 1997.
This increase of $2.8 million is primarily the result of volume increases. The
average balance of loans increased $26.7 million to $471.3 million, while the
yield on loans increased 8 basis points from 9.17% to 9.25%. The increase in
interest on loans was complemented by an increase in interest on securities
available for sale, offset by a decrease in interest on investment securities.
Interest income on securities available for sale increased $1.9 million while
interest income on investment securities fell $677 thousand. Substantially all
of the increases in interest income on securities available for sale are
attributed to higher volume. The average balance of securities available for
sale increased from $26.9 million for the year ended March 31, 1996 to $53.4
million for the year ended March 31, 1997. This increase in volume resulted in
an increase in interest income of $l.8 million. The average balance of
investment securities decreased from $92.2 million in 1996 to $83.3 million in
1997, resulting in a $577 thousand decrease in interest income due to volume.
The changes in
42
<PAGE>
rates on securities available for sale and investment securities account for the
remainder of the fluctuations in interest income on these asset categories. The
changes in volume and rate on other categories of interest earning assets were
not significant.
Interest Expense. Interest expense increased during the year ended
March 31, 1997 to $25.4 million, up from $24.1 million for the comparable period
in 1996. Substantially all of the Bank's interest expense is from the Bank's
interest-bearing deposits. The largest category of interest-bearing deposits is
time deposits. Interest on time deposits for the year ended March 31, 1997 was
$17.7 million, up $1.0 million from the $16.7 million in 1996. This increase is
the result of an increase in the average balance of time deposits, from $283.1
million in 1996 to $307.8 million in 1997, offset by a reduction of 14 basis
points in the rates paid on these deposits from 5.90% in 1996 to 5.76% in 1997.
Interest expense on savings accounts increased $248 thousand, from $4.3 million
for the year ended March 31, 1996 to $4.5 million for the year ended March 31,
1997. This increase is attributable to an increase in the average balance of
savings accounts (up $3.9 million) as well as an increase of nine basis points
in the rates paid on these savings accounts, from 3.31% to 3.40%. Interest
expense on NOW/Money Market accounts was relatively flat, decreasing $101
thousand from 1996 to 1997, almost entirely attributed to lower interest rates.
Fluctuations in interest expense on other categories of interest-bearing
liabilities were not significant.
Provision for Loan Losses. The provision for loan losses increased from
$1.1 million in the year ended March 31, 1996 to $3.8 million in the year ended
March 31, 1997. This increase is primarily the result of increases in net
charge-offs from $774 thousand for the year ended March 31, 1996 to $1.5 million
for the year ended March 31, 1997. In addition, the increase of $9.1 million, or
84%, in nonperforming loans from $10.9 million to $20.0 million, necessitated
the increase in the provision during the year ended March 31, 1997. The increase
in net charge offs combined with the continued growth in the higher risk
elements of the loan portfolio, continued economic weaknesses in the Bank's
market area, declining real estate values securing much of the loan portfolio as
well as management's evaluation of the prospects for its market area resulted in
the increase in the provision. See "Business of the Bank - Asset Quality -
Allowance for Loan Losses".
Other Operating Income. Total other operating income increased $190
thousand for the year ended March 31, 1997 as compared to the same period in
1996. Income from service charges on deposits accounts increased only slightly
to $1.1 million for the year ended March 31, 1997, from $1.0 million for the
year ended March 31, 1996. Loan servicing income increased $208 thousand from
$272 thousand in the year ended March 31, 1996 to $480 thousand in the year
ended March 31, 1997. This increase relates to the existence for a full year of
an agreement to service financed insurance premiums for an unaffiliated premium
finance company. As noted previously, the servicing agreement was terminated.
Fluctuations in other categories of other operating income were not significant.
Other Operating Expenses. Total other operating expenses increased $2.0
million to $16.2 million for the year ended March 31, 1997, up from $14.2
million for the comparable period in 1996. Increases in compensation and
benefits ($1.1 million), occupancy ($101 thousand), equipment ($173 thousand),
and other expenses ($709 thousand) were the primary contributors to the overall
increase, offset by a decrease in the FDIC assessment of $272 thousand.
43
<PAGE>
The increase in compensation and benefits is the result of establishing
two new branches, located in East Greenbush and Rotterdam, New York, in January
1996, the increase in staff associated with the growth of the Bank's premium
finance subsidiary, the establishment of the Bank's mortgage brokerage
subsidiary in July 1996, as well as general merit increases for the Bank's
employees during the year ended March 31, 1997.
The increases in occupancy and equipment expenses are attributed to the
addition of the two new branches and the mortgage brokerage subsidiary as
referenced above. Management believes that adding these new outlets for the
services offered by the Bank is an important investment and a strong commitment
to our customer base.
The increase in other expenses is the result of general increases in
printing and supplies, and telephone expenses related to the two new branches
and the mortgage brokerage subsidiary, expenses relating to the investigation of
financing alternatives at the Bank's premium finance subsidiary, increased
marketing expenses at the Bank's premium finance subsidiary and general
increases in expenses relating to the servicing and collection of nonperforming
and other delinquent loans. The increases in these expense items offset a
decrease in fiscal 1997 expense relating to the write down during fiscal 1996 of
the Bank's investment in Nationar. The remaining categories of other expenses
and other operating expenses did not experience significant fluctuations.
Income Tax Expense. Income tax expense decreased from $4.3 million for
the year ended March 31, 1996 to $3.6 million for the comparable period in 1997.
The reduction is primarily the result of less income before income tax expense,
$9.3 million in 1997 as compared to $11.3 million in 1996.
Comparison of Year Ended March 31, 1996 and Year Ended March 31, 1995
Net income for the year ended March 31, 1996 was up $1.1 million from
the $6.0 million earned for year ended March 31, 1995. This increase was
primarily the result of higher net interest income and lower operating expenses,
offset by higher income tax expense during the year ended March 31, 1996. The
provision for loan losses was relatively flat between the two years as was other
operating income. The increased net income contributed to an increase in the
Bank's ROA, 1.18% for the year ended March 31, 1996, up from 1.05% for the year
previous. The Bank's ROE was also higher for the year ended March 31, 1996 at
12.52%, up from 12.06% for the year ended March 31, 1995.
Net Interest Income. Net interest income for the year ended March 31,
1996 was $25.0 million, up $1.2 million versus the year ended March 31, 1995.
The increase was primarily the result of the increase of $31.5 million in
average earning assets from $539.8 million for the year ended March 31, 1995 to
$571.3 million for the same period in 1996. Interest-bearing liabilities also
increased during this same period, up $20.5 million. The net impact of these
volume increases resulted in an increase in net interest income of $439
thousand. The remaining $807 thousand increase in net interest income is the
result of generally higher interest rates. The effects of the 61 basis point
increase in the rates earned on earning assets from 7.98% in 1995 to 8.59% in
1996 more than offset the effects of the 77 basis point increase in the rates
paid on interest-bearing liabilities,
44
<PAGE>
from 3.93% in 1995 to 4.70% in 1996. The Bank's net interest margin for the year
ended March 31, 1996 was 4.38%, virtually unchanged from 4.40% for the year
ended March 31, 1995.
Interest Income. Interest income for the year ended March 31, 1996, was
$49.1 million, up from $43.1 million for the comparable period in 1995. The
largest component of interest income, as well as the increase from 1995 to 1996,
is interest on loans. Interest on loans increased from $35.1 million for the
year ended March 31, 1995 to $40.8 million for the year ended March 31, 1996. Of
the $5.6 million increase, rate increases accounted for $3.9 million, and volume
increases accounted for the remainder. The average balance of loans increased
$20.5 million to $444.6 million, while the yield on loans increased 89 basis
points from 8.28% to 9.17%. This increase in the yield earned on loans was
driven by increases in the balances of the higher yielding components of the
loan portfolio. See "Business of the Bank - Consumer Lending". The increase in
interest on loans was complemented by an increase in interest on securities
available for sale, offset by a decrease in interest on investment securities.
Interest income on securities available for sale increased $865 thousand while
interest income on investment securities fell $441 thousand. Substantially all
of the increases in interest income on securities available for sale are
attributed to higher volume. The average balance of securities available for
sale increased from $12.3 million for the year ended March 31, 1995 to $26.9
million for the year ended March 31, 1996. This increase in volume resulted in
an increase in interest income of $977 thousand. This increase was offset by a
decrease in the yield on securities available for sale of 82 basis points,
resulting in a reduction of interest income on securities available for sale due
to rate of $112 thousand. The average balance of investment securities decreased
from $94.0 million in 1995 to $92.2 million in 1996, resulting in a $120
thousand decrease in interest income. A decrease in the rate on investment
securities from 6.92% in the year ended March 31, 1995 to 6.57% in the year
ended March 31, 1996 resulted in a reduction of interest income on investment
securities of $321 thousand. The changes in volume and rate on other categories
of interest earning assets were not significant.
Interest Expense. Interest expense increased during the year ended
March 31, 1996 to $24.1 million, up from $19.3 million for the comparable period
in 1995. Substantially all of the Bank's interest expense is from the Bank's
interest-bearing deposits. The largest category of interest-bearing deposits is
time deposits. Interest on time deposits for the year ended March 31, 1996 was
$16.7 million, up $5.9 million from the $10.8 million in 1995. This increase is
the result of an increase in the average balance of time deposits, from $219.0
million in 1995 to $283.1 million in 1996, combined with an increase of 97 basis
points in the rates paid on these deposits from 4.93% in 1995 to 5.90% in 1996.
Interest expense on savings accounts decreased $l.2 million, from $5.5 million
for the year ended March 31, 1995 to $4.3 million for the year ended March 31,
1996. This decrease is attributable to a decrease in the average balance of
savings accounts (down $38.0 million) offset by an increase of 2 basis points in
the rates paid on these savings accounts, from 3.29% to 3.31%. The decrease in
savings accounts is attributable to customers seeking higher yielding investment
alternatives. Interest expense on NOW/Money Market accounts increased $163
thousand from 1995 to 1996, almost entirely attributed to higher interest rates.
Fluctuations in interest expense on other categories of interest-bearing
liabilities were not significant.
Provision for Loan Losses. The provision for loan losses of $1.1
million for the year ended March 31, 1996 remained level with the $1.2 million
provision in the year ended March 31, 1995.
45
<PAGE>
This level of provision is attributed to the slight decline in net charge-offs
from $899 thousand for the year ended March 31, 1995 to $774 thousand for the
year ended March 31, 1996.
Other Operating Income. Total other operating income for the year ended
March 31, 1996 was $1.6 million, an increase of $103 thousand over the $1.5
million for the same period in 1995. Other operating income is composed
primarily of service charges on deposit accounts ($1.0 million for each of the
years ended March 31, 1996 and 1995) and loan servicing income (approximately
$270 thousand for each of the years ended March 31, 1996 and 1995). There were
no significant fluctuations in other categories of other operating income.
Other Operating Expenses. Total other operating expenses decreased $1.0
million to $14.2 million for the year ended March 31, 1996, down from $15.2
million for the comparable period in 1995. An increase in compensation and
benefits ($631 thousand) was offset by decreases in the FDIC assessment ($871
thousand), and OREO and repossessed property expenses ($503 thousand).
The increase in compensation and benefits is the result of adding 2 new
branches (the Bank's Greenport Price Chopper and Millerton, New York locations
in June and August 1994, respectively) the increase in staff associated with the
growth of the Bank's premium finance subsidiary, as well as general merit
increases to the Bank's employees during the year ended March 31, 1996.
The decrease in the FDIC assessment is the result of legislation which
mandated a reduction in insurance rates when the Bank Insurance Fund achieved a
1.25% reserve ratio. That target was reached in May 1995, resulting in reduced
premiums for the September 1995 and December 1995 quarters as well as a refund
of premiums for the June 1995 quarter. The reduced premium level continued
through the remainder of the year ended March 31, 1996.
The decrease in OREO and repossessed property expenses during the year
ended March 31, 1996 as compared to the year ended March 31, 1995 is the result
of increased gains on sale of these properties during 1996, offset by slightly
higher writedowns to fair value of OREO and repossessed property during this
time period.
Income Tax Expense. Income tax expense increased from $2.9 million for
the year ended March 31, 1995 to $4.3 million for the comparable period in 1996.
The increase is the result of more income before income tax expense, $11.3
million in 1996 as compared to $8.9 million in 1995 as well as a reduction in
the Bank's deferred tax asset valuation allowance of $248 thousand and higher
tax-exempt income during the year ended March 31, 1995.
FINANCIAL CONDITION
Comparison of December 31, 1997 and March 31, 1997
Total assets at December 31, 1997 stood at $665.1 million, up $14.0
million, or 2.2% from the $651.0 million at March 31, 1997. Most of the increase
was concentrated in the loan portfolio, which increased $18.9 million, ending
December 31, 1997 at $511.9 million. This growth in loans
46
<PAGE>
was funded by an increase in deposits from $564.6 million on March 31, 1997 to
$586.2 at December 31, 1997.
Loans. The overall increase in total loans is primarily made up of
increases in residential real estate, commercial real estate, manufactured home
loans, and warehouse lines, offset by a decrease in commercial business loans.
Although total residential real estate increased $4.0 million, the level of
total residential real estate, as a percentage of total loans, remained
relatively flat at 54.3%, down slightly from 55.6%. The growth in this portfolio
is primarily a result of the Bank's decision to retain in its portfolio a
limited amount of 15 to 20 year fixed rate residential real estate loans at a
time when adjustable rate loans are less popular. Commercial real estate
increased from $67.7 million at March 31, 1997, or 13.7% of total loans, to
$73.9 million or 14.4% of total loans at December 31, 1997.
Manufactured home loans increased $5.7 million from $92.7 million at
March 31, 1997 to $98.3 million at December 31, 1997. The Bank utilizes a third
party institution to forward mobile home loan applications to the Bank for
underwriting and approval. In exchange for these loan referrals and other
specified activities, the Bank pays the third party institution a premium that
is capitalized and amortized over the estimated life of the loan originated. The
warehouse line of credit represents a relationship with a mortgage broker in the
Capital District area in which loans are funded via draws on the outstanding
line. The line is repaid upon ultimate sale of the loan to unrelated third
parties. The balance at December 31, 1997 was $7.1 million, up from $3.6 million
at March 31, 1997. Commercial loans decreased $2.2 million to a balance of $13.9
million at December 31, 1997 from $16.1 million at March 31, 1997. Most of this
decrease relates to a large lending relationship that was charged off during
December 1997.
Allowance for Loan Losses. The allowance for loan losses increased from
$5.9 million at March 31, 1997 to $6.8 million at December 31, 1997, an increase
of $884 thousand. This increase is the result of the $6.4 million provision for
loan losses taken in the nine months ended December 31, 1997 offset by $5.5
million in net charge offs for the same period. The adequacy of the allowance
for loan losses is evaluated monthly by management based upon a review of
significant loans, with particular emphasis on nonperforming and delinquent
loans that management believes warrant special attention. At December 31, 1997
the allowance for loan losses provided coverage of 41.2% of total nonperforming
loans, up from 29.4% at March 31, 1997. The balance of the allowance is
maintained at a level which is, in management's judgment, representative of the
amount of risk inherent in the loan portfolio. See "Business of the Bank - Asset
Quality - Allowance for Loan Losses."
Securities Available for Sale and Investment Securities. The balances
of securities available for sale and investment securities (collectively
"securities") decreased from $45.6 million and $79.1 million, respectively, at
March 31, 1997 to $43.3 million and $71.2 million, respectively, as of December
31, 1997. These decreases were driven by maturities and calls of these
securities totaling $31.8 million during the nine months ended December 31,
1997, offset by purchases of securities totaling $21.0 million. Management's
intention is to continue allowing investment securities to mature and paydown
with the reinvestment of the proceeds primarily in the securities available for
sale or loan portfolios. During the nine months ended December 31, 1997, loan
demand was higher.
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<PAGE>
The proceeds were reinvested in loans and used to pay down short-term
borrowings, resulting in an overall decrease in securities during this time
period.
Premises and Equipment. The balance of premises and equipment increased
from $15.0 million at March 31, 1997 to $15.8 million at December 31, 1997. This
increase was a result of approximately $1.7 million in expenditures relating to
a new addition to the Bank's main office building to accommodate current and
future growth, as well as the relocation of the Bank's Warren Street, Hudson
branch to the first floor of the Bank's main office building. This relocation
occurred on January 5, 1998. During the month of January 1998, the former branch
building at Warren Street was sold resulting in a gain of approximately $450
thousand.
OREO and Repossessed Property. The balance of OREO and repossessed
property decreased from $3.4 million at March 31, 1997 to $l.1 million at
December 31, 1997, a decrease of approximately $2.4 million. The majority of
this decrease relates to the sale in November 1997 of the Bank's largest OREO
property that had a balance of $2.4 million at March 31, 1997.
Other Assets. The balance of other assets increased $2.6 million from
$2.6 million at March 31, 1997 to $5.1 million at December 31, 1997. This
increase is almost entirely a result of increases in the Bank's net deferred tax
asset and the amount of prepaid taxes resulting from the timing of the Bank's
estimated tax payments for Federal and state income taxes.
Deposits. Total deposits increased $21.6 million, or 3.8%, from $564.6
million at March 31, 1997 to $586.2 million at December 31, 1997. Of this total
increase, time deposits increased $7.9 million (2.6%), savings accounts
increased $4.4 million (3.2%), NOW/money market accounts increased $1.7 million
(1.8%), and non-interest bearing accounts increased $7.7 million (26.7%). During
the nine months ended December 31, 1997, the Bank had a special 18-month CD
campaign centered on the Bank's supermarket branches to celebrate the opening of
its new Hillsdale branch. The addition of this branch, the CD campaign, and
general seasonal fluctuations have resulted in the increases noted above.
Short-term Borrowings. The balance of short-term borrowings decreased
$10.6 million from $12.6 million at March 31, 1997 to $2.0 million at December
31, 1997. This decrease was driven by the proceeds generated by the maturities
and calls of our securities portfolios as detailed above as well as the growth
in the deposit balances.
UDAG Payable. The balance of the Urban Development Action Grant
("UDAG") payable, which stood at $835 thousand at March 31, 1997, was satisfied
in September 1997. The UDAG payable was a loan received from a local economic
development agency during the original construction of the main office building
in the early 1990's. This loan, which was to be repaid at the end of calendar
year 2000, was repaid early in order to provide the economic development agency
with the funds available to spur further economic growth in the City of Hudson,
New York.
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Comparison of March 31, 1997 and March 31, 1996
Total assets at March 31, 1997 stood at $651.0 million, up $27.8
million, or 4.5%, from $623.2 million at March 31, 1996. Most of the increase
was concentrated in the loan portfolio which increased $42.3 million, ending
March 31, 1997 at $493.0 million, partially offset by a reduction in securities
(securities available for sale and investment securities) of $9.7 million. This
growth in loans was funded by an increase of $9.4 million in deposits from
$555.2 million on March 31, 1996 to $564.6 at March 31, 1997, as well as an
increase in short-term borrowings of $12.6 million. These increases as well as
fluctuations in other asset and liability categories are discussed below.
Loans. The overall increase in total loans is primarily made up of
increases in residential real estate, manufactured home loans, and financed
insurance premium loans, offset by decreases in the Bank's warehouse line of
credit, commercial real estate and commercial business loans. Total residential
real estate increased $32.9 million, or 13.7%, which increased the level of
total residential real estate as a percentage of total loans from 53.5% at March
31, 1996 to 55.6% at March 31, 1997. The growth in this portfolio is primarily a
result in the Bank's decision to retain in its portfolio a limited amount of
fixed rate 15 and 20 year residential real estate loans. Manufactured home loans
increased $12.3 million from $80.4 million at March 31, 1996 to $92.7 million at
March 31, 1997. Financed insurance premiums are generated by the Bank's premium
finance subsidiary. This loan category increased from $13.5 million or 3.0% of
total loans at March 31, 1996 to $23.5 million or 4.8% of total loans at March
31, 1997. The increase in this category is a result of management's efforts to
grow the Bank's investment in this area through marketing and new relationships
with insurance agents located primarily in New York, New Jersey and
Pennsylvania.
The Bank's warehouse line of credit represents a relationship with a
mortgage broker in the Capital District area in which loans are funded via draws
on the outstanding line. The line is repaid upon ultimate sale of the loan to
unrelated third parties. The balance outstanding on this line decreased from
$11.8 million at March 31, 1996 to $3.6 million at March 31,1997. Commercial
real estate fell slightly from $70.9 million at March 31, 1996 to $67.7 million
at March 31, 1997. At March 31, 1997, commercial real estate represented 13.7%
of total loans. Commercial business loans decreased $1.2 million to a balance of
$16.1 million at March 31, 1997 from $17.4 million at March 31, 1996. Commercial
business loans are loans to businesses which are either unsecured or are secured
by non-real estate business assets.
Allowance for Loan Losses. The allowance for loan losses increased from
$3.5 million at March 31, 1996 to $5.9 million at March 31, 1997, an increase of
$2.3 million. This increase is the result of the $3.8 million provision for loan
losses taken in the year ended March 31, 1997 offset by $1.5 million in net
charge offs for the same period. At March 31, 1997 the allowance for loan losses
provided coverage of 29.4% of total non-performing loans, down slightly from
32.6% at March 31, 1996. The balance of the allowance is maintained at a level
which is, in management's judgment, representative of the amount of risk
inherent in the Bank's loan portfolio. See "Business of the Bank - Asset Quality
- - Allowance for Loan Losses."
Securities Available for Sale and Investment Securities. The balances of
securities available for sale and investment securities (collectively
"securities") decreased from $51.4 million and $83.0
49
<PAGE>
million, respectively, at March 31, 1996 to $45.6 million and $79.1 million,
respectively, as of March 31, 1997. These decreases during the year ended March
31, 1997 were driven by maturities and calls of these securities totaling $30.4
million and sales totaling $10.0 million, which were offset by purchases of
securities totaling $30.9 million. During the year ended March 31, 1997, loan
demand was higher, therefore more of the proceeds were reinvested in loans,
resulting in an overall decrease in securities during this time period.
Premises and Equipment. The balance of premises and equipment increased
from $14.3 million at March 31, 1996 to $15.0 million at March 31, 1997. This
increase was a result of expenditures relating to a new data processing system
during November 1996.
OREO and Repossessed Property. The balance of OREO and repossessed
property increased from $1.7 million at March 31, 1996 to $3.4 million at March
31, 1997, an increase of approximately $1.7 million. This increase directly
relates to the addition during the year ended March 31, 1997 of an OREO property
that had a balance of $2.4 million at March 31, 1997.
Deposits. Total deposits increased $9.4 million, or 1.7%, from $555.2
million at March 31, 1996 to $564.6 million at March 31, 1997. Of this total
increase, time deposits increased $4.6 million (1.5%), savings accounts
increased $6.1 million (4.7%), while NOW/Money market accounts and non-interest
bearing accounts remained relatively flat.
Short-term Borrowings. Short-term borrowings increased $12.6 during the
year ended March 31, 1997. There were no short-term borrowings at March 31,
1996. This increase was a result of the growth in loan demand that exceeded the
increase in deposit balances.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is defined as the ability to generate sufficient cash flow to
meet all present and future funding commitments, depositor withdrawals and
operating expenses. Management monitors the Bank's liquidity position on a daily
basis and evaluates its ability to meet depositor withdrawals or make new loans
or investments. The Bank's liquid assets include cash and cash equivalents,
investment securities that mature within one year, and its portfolio of
securities available for sale. At December 31, 1997, the Bank's liquid assets as
a percentage of deposits which have no withdrawal restrictions, time deposits
which mature within one year, and short-term borrowings was 18.8%.
The Bank's cash inflows result primarily from loan repayments,
maturities, calls and pay downs of securities, new deposits, and to a lesser
extent, drawing upon the Bank's credit lines with other financial institutions
and the Federal Home Loan Bank of New York. The Bank's cash outflows are
substantially new loan originations, securities purchases, and deposit
withdrawals. The timing of cash inflows and outflows are closely monitored by
management although changes in interest rates, economic conditions, and
competitive forces strongly impact the predictability of these cash flows. The
Bank attempts to provide stable and flexible sources of funding through the
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<PAGE>
management of its liabilities, including core deposit products offered through
its branch network as well as with limited use of borrowings. Management
believes that the level of the Bank's liquid assets combined with daily
monitoring of cash inflows and outflows provide adequate liquidity to fund
outstanding loan commitments, meet daily withdrawal requirements of our
depositors, and meet all other daily obligations of the Bank.
Capital
Consistent with its goals to operate a sound and profitable financial
organization, the Bank actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. Total equity was $67.4
million at December 31, 1997, 10.1% of total assets on that date. As of March
31, 1997 and 1996, total equity was $65.1 million and $59.6 million,
respectively, or 10.0% and 9.6% of total assets at the respective dates. As of
December 31, 1997, the Bank exceeded all of the capital requirements of the
FDIC. The Bank's regulatory capital ratios at December 31, 1997 were as follows:
Tier I (leverage) capital, 10.1%; Tier I risk-based capital, 14.1%; and Total
risk-based capital, 15.4%. The regulatory capital minimum requirements to be
considered well capitalized are 5.0%, 6.0%, and 10.0% respectively.
IMPACT OF THE YEAR 2000
The Bank has conducted a comprehensive review of its computer systems
to identify applications that could be affected by the "Year 2000" issue, and
has developed an implementation plan to address the issue. The Bank's data
processing is performed primarily in-house; however software and hardware
utilized is under maintenance agreements with third party vendors, consequently
the Bank is very dependent on those vendors to conduct its business. The Bank
has already contacted each vendor to request time tables for Year 2000
compliance and expected costs, if any, to be passed along to the Bank. To date,
the Bank has been informed that its primary service providers anticipate that
all reprogramming efforts will be completed by December 31, 1998, allowing the
Bank adequate time for testing. Certain other vendors have not yet responded;
however, and the Bank will pursue other options if it appears that these vendors
will be unable to comply. Management does not expect these costs to have a
significant impact on its financial position or results of operations; however,
there can be no assurance that the vendors' systems will be Year 2000 compliant.
Consequently, the Bank could incur incremental costs to convert to another
vendor.
The risks associated with this issue go beyond the Bank's own ability
to solve Year 2000 problems. Should significant commercial customers fail to
address Year 2000 issues effectively, their ability to meet debt service
requirements could be impaired, resulting in increased credit risk and potential
increases in loan charge offs. In addition, should suppliers of critical
services fail in their efforts to become Year 2000 compliant, or if significant
third party interfaces fail to be compatible with the Bank's or fail to be Year
2000 compliant, it could have significant adverse affects on the operations and
financial results of the Bank.
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<PAGE>
IMPACT ON INFLATION AND CHANGING PRICES
The Bank's consolidated financial statements are prepared in accordance
with generally accepted accounting principles which require the measurement of
financial condition and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increasing cost of the
Bank's operations. Unlike most industrial companies, nearly all assets and
liabilities of the Bank are monetary. As a result, interest rates have a greater
impact on the Bank's performance than do the effects of general levels of
inflation. In addition, interest rates do not necessarily move in the direction,
or to the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In November 1993, the AICPA issued Statement of Position 93-6 ("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
measure of compensation expense recorded by employers for leveraged ESOPs to be
the fair value of ESOP shares. The Holding 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 Holding Company will recognize compensation cost equal to the
average fair value of the ESOP shares during the periods in which they become
committed to be released. Employers with internally leveraged ESOPs such as the
Holding 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. The effects
of SOP 93-6 on future operating results cannot be determined at this time.
In November 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 Holding Company to choose either a new fair value based
method or the 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 income and earnings per share
computed as if the fair value based method had been applied in financial
statements of companies that follow 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 Holding Company
expects to utilize the intrinsic value based method prescribed by APB Opinion
No. 25. Accordingly, the impact of adopting this Statement will not be material
to the Holding Company's consolidated financial statements.
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<PAGE>
In February 1997, the FASB issued SFAS No. 128,"Earnings per Share". SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS). This Statement supersedes APB Opinion No. 15, "Earnings per Share" and
related interpretations. SFAS No. 128 replaces the presentation of primary EPS
with the presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation 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. Unvested restricted stock awards are considered
outstanding common shares and included in the computation of basic EPS as of the
date that they are fully vested. 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. This Statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Holding Company will adopt this Statement
for all financial statements prepared after the Conversion.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure", which establishes standards for disclosure
about an entity's capital structure. In accordance with SFAS No. 129, companies
will be required to provide in the financial statements a complete description
of all aspects of their capital structure, including call and put features,
redemption requirements and conversion options. The disclosures required by SFAS
No. 129 are for financial statements for periods ending after December 15, 1997.
Management anticipates providing the required information in the March 31, 1998
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and displaying
comprehensive income. SFAS No. 130 states that comprehensive income includes the
reported net income of an enterprise adjusted for items that are currently
accounted for as direct entries to equity, such as the mark to market adjustment
on securities available for sale, foreign currency items and minimum pension
liability adjustments. This Statement is effective for both interim and annual
periods after December 15, 1997. Management anticipates developing the required
information in accordance with this new Statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes standards
for reporting by public companies about operating segments of their business.
SFAS No. 131 also establishes standards for related disclosures about products
and services, geographic areas and major customers. This Statement is effective
for periods beginning after December 15, 1997. At this time, management does not
anticipate that the adoption of this Statement will significantly impact the
Holding Company's financial reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which amends the disclosure
requirements of SFAS No. 87,
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"Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Statement No. 132 standardizes the
disclosure requirements of Statements No. 87 and No. 106 to the extent
practicable and recommends a parallel format for presenting information about
pensions and other postretirement benefits. This Statement is applicable to all
entities and addresses disclosure only. The Statement does not change any of the
measurement or recognition provisions provided for in Statements No. 87, No. 88,
or No. 106. The Statement is effective for fiscal years beginning after December
15, 1997. Management anticipates providing the required disclosures in the March
31, 1999 consolidated financial statements.
BUSINESS OF THE HOLDING COMPANY
The Holding Company, a Delaware corporation, was organized on March 5,
1998 at the direction of the Board of Trustees of the Bank for the purpose of
owning all of the outstanding capital stock of the Bank upon consummation of the
Conversion. Upon consummation of the Conversion, the Holding Company, as the
sole stockholder of the Bank, will be a savings and loan holding company
regulated by the OTS. See "Regulation - The Holding Company."
The Holding Company is currently not an operating company. Following
the Conversion, in addition to directing, planning and coordinating the business
activities of the Bank, the Holding Company will initially invest the proceeds
of the Conversion primarily in federal funds, government and federal agency
mortgage-backed securities, other debt securities, equity securities, deposits
of or loans to the Bank or a combination thereof. In addition, the Holding
Company intends to fund the loan to the ESOP to enable the ESOP to purchase up
to 8% of the Common Stock to be issued in the Conversion, including shares
issued to the Foundation. See "Use of Proceeds." In the future, the Holding
Company may acquire or organize other operating subsidiaries, including other
financial institutions, or it may merge with or acquire other financial
institutions and financial services related companies, although there are no
current plans for any such expansion. Initially, the Holding Company will
neither own nor lease any property but will instead use the premises, equipment
and furniture of the Bank. The Holding Company does not currently intend to
employ any persons other than certain officers of the Bank who will not be
separately compensated by the Holding Company. The Holding Company may utilize
the support staff of the Bank from time to time, if needed. Additional employees
will be hired as appropriate to the extent the Holding Company expands its
business in the future.
BUSINESS OF THE BANK
General
The Bank is a community-oriented mutual savings bank which was
chartered by the State of New York in 1850. The principal business of the Bank
consists of attracting retail deposits from the general public and using those
funds, together with funds from operations and, to a much lesser extent,
borrowings, to originate primarily residential mortgage loans, including home
equity loans,
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and, to a lesser extent, manufactured home loans, financed insurance premiums
and other consumer loans, commercial real estate, construction and commercial
business loans. The Bank originates its loans in the Bank's primary market area,
with the exception of manufactured home loans, which are primarily originated
outside the Bank's primary market area including states contiguous with New
York, and financed insurance premiums, which are originated primarily in New
York, New Jersey and Pennsylvania. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Bank also invests in
corporate debt securities and U.S. Government and agency obligations. Revenues
are derived primarily from interest on loans and securities.
HCSI offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank's deposit accounts are insured up to
applicable limits by the FDIC. The Bank only solicits deposits in its primary
market area and does not have brokered deposits. HCSI is a member of the Federal
Home Loan Bank of New York.
Following the Conversion the Bank will have a leverage capital ratio of
17.01% assuming the sale of Common Stock at the maximum of the estimated
valuation range. While the Bank has no specific plans at this time to utilize
the increased capital to expand its lending operations and geographical
presence, the Bank will consider opportunities to increase its market presence
through both lending operations and geographical expansion in an effort to
utilize its excess capital in the future.
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. HCSI's primary market area is comprised of
Columbia, Albany and Rensselaer Counties in New York and portions of Dutchess
and Schenectady Counties in New York, which are serviced through the Bank's main
office and eleven other full service banking offices and one loan production
office. The Bank's main office and six of its branch offices are located in
Columbia County. Based on the most recent information available, the Bank had
approximately 59.5% of total bank and thrift deposits in Columbia County.
HCSI's primary market area consists principally of suburban and rural
communities with service, wholesale/retail trade, government and manufacturing
serving as the basis of the local economy. Service jobs represent the largest
type of employment in the Bank's primary market area, with jobs in
wholesale/retail trade accounting for the second largest employment sector.
Management believes that its market area continues to show economic weakness
with declining real estate values.
Lending Activities
General. The Bank primarily originates fixed- and adjustable-rate,
residential mortgage loans, including home equity loans, secured by the
borrower's primary residence. Currently, the Bank's general practice is to
originate fixed-rate mortgage loans with terms between 15 and 30 years and to
sell substantially all 30-year fixed rate mortgage loans on the secondary
market. The Bank
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<PAGE>
generally retains 15 and 20-year fixed rate mortgage loans in its portfolio. The
Bank also originates to a lesser extent commercial real estate, manufactured
home, financed insurance premiums and other consumer loans, construction and
commercial business loans. In-market loan originations are generated by the
Bank's marketing efforts, which include print, radio and television advertising,
lobby displays and direct contact with local civic and religious organizations,
as well as by the Bank's present customers, walk-in customers and referrals from
real estate agents, brokers and builders. The marketing for manufactured home
loans is conducted through Tammac Corporation with which the Bank has an
agreement relating to such loans. The marketing for financed insurance premiums
is conducted through the Bank's premium finance subsidiary. See "--Consumer
Lending." At December 31, 1997, the Bank's total loan portfolio totaled
approximately $511.9 million.
The Bank originates fixed and adjustable rate consumer loans.
Adjustable rate mortgage ("ARM") and consumer loans are originated in order to
increase the percentage of loans with more frequent terms to repricing or
shorter maturities than long-term fixed-rate, residential mortgage loans. See
"--Loan Portfolio Composition" and "--Residential Real Estate Lending."
Loan applications are initially considered and approved at various
levels of authority, depending on the type and amount of the loan. Bank
employees with lending authority are designated, and their lending limit
authority defined, by the Board of Trustees of the Bank. The approval of the
Bank's Board of Trustees is required for any loans over $250,000. Pursuant to
the Bank's lending policy, senior lending officers may approve loans up to
$250,000. The Bank generally requires personal guarantees for all commercial
loans.
At December 31, 1997, the Bank's largest lending relationship consisted
of a commitment to lend up to $10 million pursuant to a warehouse line of credit
to a mortgage banker for residential mortgages. The line of credit is secured by
assignments of the underlying mortgages. The next largest lending relationship
consisted of five loans aggregating approximately $4.0 million primarily secured
by a nursing home. The third largest lending relationship consisted of two loans
totaling approximately $3.5 million secured by a medical office facility. The
fourth largest lending relationship consisted of three loans totaling
approximately $2.3 million secured by a commercial shopping plaza. The fifth
largest lending relationship was a $2.4 million loan secured by a hotel.
Subsequent to December 31, 1997, the Bank extended additional credit to this
borrower to finance the construction of an adjoining restaurant, which increased
the size of this lending relationship to $4.0 million. As of December 31, 1997,
each of the five relationships discussed above were performing in accordance
with their applicable terms.
The types of loans that the Bank may originate are subject to federal
and state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are in turn
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board ("FRB"), and tax
policies.
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Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loan portfolio in dollar amounts and in percentages as of the
dates indicated.
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997 1996 1995
Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real Estate Loans:
Residential mortgage.............. $250,649 48.96% $246,462 49.99% $214,226 47.53% $225,437 51.37%
Home equity....................... 27,441 5.36 27,630 5.60 26,936 5.98 27,938 6.37
------- -------- ------ -------- -------- ------ -------- ------
Total residential real estate 278,090 54.32 274,092 55.59 241,162 53.51 253,375 57.74
Commercial........................ 73,902 14.44 67,697 13.73 70,854 15.72 70,328 16.02
Construction...................... 3,980 0.78 2,725 0.55 4,317 0.96 6,446 1.47
------- -------- ------ -------- -------- ------ -------- ------ -
Total real estate loans......... 355,972 69.54 344,514 69.87 316,333 70.19 330,149 75.23
Consumer loans:
Manufactured home loans........... 98,307 19.20 92,651 18.79 80,399 17.84 72,184 16.45
Financed insurance premiums(1) 23,395 4.57 23,535 4.78 13,503 3.00 8,674 1.98
Other consumer loans.............. 12,140 2.37 11,577 2.35 10,155 2.25 8,448 1.93
------- -------- ------- -------- -------- ------ -------- ------
Total consumer loans............ 133,842 26.14 127,763 25.92 104,057 23.09 89,306 20.36
Commercial business loans......... 13,907 2.72 16,146 3.27 17,393 3.86 13,821 3.15
Warehouse lines of credit......... 7,062 1.38 3,567 0.72 11,797 2.62 4,599 1.05
Net deferred loan costs and
unearned discount............... 1,115 0.22 1,029 0.22 1,091 0.24 1,000 0.21
--------- -------- ------- -------- -------- ------ -------- --------
Total loans....................... 511,898 100.00% 493,019 100.00% 450,671 100.00% 438,875 100.00%
====== ====== ====== ======
Less:
Allowance for loan losses......... (6,756) (5,872) (3,546) (3,187)
---------- ------- --------- --------
Total loans receivable, net..... $505,142 $487,147 $447,125 $435,688
======== ======== ======== ========
<FN>
- -------------------
(1) Includes personal as well as commercial insurance premiums.
</FN>
</TABLE>
March 31,
1994 1993
Amount Percent Amount Percent
Real Estate Loans:
Residential mortgage.............. 203,819 49.83% 186,874 47.94%
Home equity....................... 26,620 6.51 25,540 6.55
--------- -------- --------- -------
Total residential real estate 230,439 56.34 212,414 54.49
Commercial........................ 65,571 16.03 59,268 15.20
Construction...................... 9,899 2.42 11,159 2.86
--------- -------- -------- -------
Total real estate loans......... 305,909 74.79 282,841 72.55
Consumer loans:
Manufactured home loans........... 65,285 15.96 78,858 20.23
Financed insurance premiums(1) 7,098 1.74 5,248 1.35
Other consumer loans.............. 7,789 1.90 9,727 2.50
-------- -------- --------- -------
Total consumer loans............ 80,172 19.60 93,833 24.08
Commercial business loans......... 12,827 3.14 8,086 2.07
Warehouse lines of credit......... 9,520 2.33 8,901 2.28
Net deferred loan costs and
unearned discount............... 561 0.14 (3,856) (.98)
--------- ------------------- -------
Total loans....................... 408,989 100.00% 389,805 100.00%
====== ======
Less:
Allowance for loan losses......... (2,917) (1,999)
-------- ----------
Total loans receivable, net..... $406,072 $387,806
======== ========
57
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed-and adjustable-rate loans as of December 31, 1997.
December 31,
1997
Amount Percent
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
Residential(1) .................................... $ 74,528 14.56%
Commercial......................................... 28,556 5.58
---------- --------
Total real estate loans.......................... 103,084 20.14
Consumer:
Manufactured home loans............................ 47,175 9.21
Financed insurance premiums........................ 23,395 4.57
Other consumer loans............................... 12,140 2.37
---------- --------
Total consumer loans............................. 82,710 16.15
Commercial business loans ......................... 2,084 0.41
----------- --------
Total fixed-rate loans.......................... 187,878 36.70
Adjustable-Rate Loans
Real estate:
Residential(1)..................................... 203,562 39.76
Construction....................................... 3,980 0.78
Commercial......................................... 45,346 8.86
---------- --------
Total real estate loans.......................... 252,888 49.40
Consumer:
Manufactured home loans............................ 51,132 9.99
Other consumer loans............................... --- ---
----------- ------
Total consumer loans............................. 51,132 9.99
Commercial business loans(2)....................... 18,885 3.69
---------- --------
Total adjustable-rate loans...................... 322,905 63.08
Net deferred loan costs and unearned discount.... 1,115 0.22
---------- --------
Total loans...................................... 511,898 100.00%
======
Less:
Allowance for loan losses.......................... (6,756)
----------
Total loans receivable, net...................... $505,142
========
-----------------
(1) Includes home equity loans.
(2) Includes warehouse lines of credit.
58
<PAGE>
The following table illustrates the contractual maturity of the Bank's
loan portfolio at December 31, 1997. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Consumer Loans
Real Estate Loans
Residential Commercial Commercial Manu- Financed Other
Real Real Business factured Insurance Consumer
Estate(1) Estate Loans(2) Home Loans Premiums Loans Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts Due:
0 months to 1 year........... $ 5,706 $11,843 $12,986 $ 222 $23,395 $ 3,174 $57,326
After 1 year:
1 to 2 years............... 1,165 6,217 707 304 --- 1,227 9,620
2 to 3 years............... 998 7,213 2,524 608 --- 2,425 13,768
3 to 5 years............... 6,649 24,280 2,707 2,096 --- 4,287 40,019
5 to 10 years ............. 17,895 13,219 2,045 15,477 --- 811 49,447
10 to 15 years............. 59,037 4,245 --- 42,422 --- 213 105,917
Over 15 years.............. 190,620 6,885 --- 37,178 --- 3 234,686
--------- -------- ------- ------- ------- ------- -------
Total due after one year..... 276,364 62,059 7,983 98,085 --- 8,966 453,457
--------- -------- --------- -------- ------- ------- -------
Total amount due............. $282,070 $73,902 $ 20,969 $98,307 $23,395 $12,140 510,783
======== ======= ======== ======= ======= =======
Net deferred loan costs
and unearned discount...... 1,115
--------
Total loans............. 511,898
Less:
Allowance for loan losses.... (6,756)
--------
Total loans receivable, net $505,142
========
<FN>
(1) Includes home equity and construction loans.
(2) Includes warehouse lines of credit.
</FN>
</TABLE>
59
<PAGE>
The following table sets forth the dollar amounts in each loan category
at December 31, 1997 that are contractually due after December 31, 1998, and
whether such loans have fixed interest rates or adjustable interest rates.
Due after December 31, 1998
Fixed Adjustable Total
(In Thousands)
Residential real estate(1)....... $ 74,222 $202,142 $276,364
Commercial real estate........... 23,671 38,388 62,059
Commercial business loans(2)..... 1,884 6,099 7,983
Manufactured home loans.......... 47,135 50,950 98,085
Other consumer loans............. 8,966 --- 8,966
----------- ---------- ---------
Total........................ $155,878 $297,579 $453,457
======== ======== ========
(1) Includes home equity loans.
(2) Includes warehouse lines of credit.
Residential Real Estate Lending
HCSI's residential real estate loans consist of primarily one- to
four-family, owner occupied mortgage loans, including home equity loans. At
December 31, 1997, $278.1 million, or 54.3% of HCSI's total loans consisted of
residential first mortgage loans and home equity loans. Of such loans, $27.4
million, or 5.4% of total loans receivable, consisted of home equity loans
secured by the borrower's primary residence. At December 31, 1997, approximately
$74.5 million of HCSI's residential first mortgage loans and home equity loans
provided for fixed rates of interest and for repayment of principal over a fixed
period not to exceed 30 years. HCSI does not originate fixed-rate loans for
terms longer than 30 years. HCSI's fixed-rate residential mortgage loans and
home equity loans are priced competitively with the market. Accordingly, HCSI
attempts to distinguish itself from its competitors based on quality of service.
HCSI generally underwrites its fixed-rate residential first mortgage
loans using accepted secondary market standards. The Bank sells substantially
all fixed-rate residential mortgage loans it originates with terms in excess of
20 years to the secondary market, and continues to service substantially all the
loans it sells. HCSI generally holds for investment all adjustable and 15 and 20
year fixed residential first mortgage loans it originates. In underwriting
residential first mortgage loans, HCSI evaluates, among other things, the
borrower's ability to make monthly payments and the value of the property
securing the loan. Properties securing real estate loans made by HCSI are
appraised by independent fee appraisers approved by the Bank's Board of
Trustees. HCSI requires borrowers to obtain title insurance, and fire and
property insurance (including flood insurance, if necessary) in an amount not
less than the amount of the loan.
The Bank currently offers one- and three-year residential ARM loans
with an interest rate that adjusts annually in the case of one-year ARM loans,
and every three years in the case of a three-year ARM loan, based on the change
in the relevant United States Treasury index. These loans provide for up to a
2.0% periodic cap and a lifetime cap of 6.0% over the initial rate. As a
consequence of using caps, the interest rates on these loans may not be as rate
sensitive as the Bank's cost of funds. Borrowers of one-year residential ARM
loans are generally qualified at a rate of 2.0% above the initial interest rate.
The Bank offers ARM loans that are convertible into fixed-rate loans with
interest rates based upon the then current market rates. ARM loans generally
pose greater credit risks than fixed-rate loans, primarily because as interest
rates rise, the required periodic payment by the borrower rises, increasing the
potential for default. However, as of December 31, 1997, the Bank had not
experienced higher default rates on these loans relative to its other loans. See
"--Asset Quality-Non-Performing Assets."
The Bank's residential mortgage loans do not contain prepayment
penalties and do not permit negative amortization of principal. Real estate
loans originated by the Bank generally contain a "due on sale" clause allowing
the Bank to declare the unpaid principal balance due and payable upon the sale
of the security property. The Bank has waived the due on sale clause on loans
held in its portfolio from time to time to permit assumptions of the loans by
qualified borrowers.
Generally, HCSI does not originate residential mortgage loans where the
ratio of the loan amount to the value of the property securing the loan (i.e.,
the "loan-to-value" ratio) exceeds 95%, although HCSI may lend up to 97% of the
value of the property securing the loan. If the loan-to-value ratio exceeds 80%,
HCSI generally requires that the borrower obtain private mortgage insurance in
amounts intended to reduce the Bank's exposure to 80% or less of the lower of
the appraised value or the purchase price of the property securing the loan. See
"--Loan Originations Sales."
HCSI's home equity loans and lines of credit are secured by a lien on
the borrower's residence and generally do not exceed $250,000. HCSI uses the
same underwriting standards for home equity loans as it uses for residential
mortgage loans. Home equity loans are generally originated in amounts which,
together with all prior liens on such residence, do not exceed 80% of the
appraised value of the property securing the loan. The interest rates for home
equity loans and lines of credit either float at a stated margin over the prime
rate or have fixed interest rates. Home equity lines of credit require interest
and principal payments on the outstanding balance for the term of the loan. The
terms of the Bank's home equity lines of credit are generally five years, with a
15-year payback period. The Bank also has home equity lines of credit with terms
of ten years, with a 20-year payback period; such lines of credit are not
frequently utilized. As of December 31, 1997, HCSI had $27.4 million, or 5.4% of
the Bank's total loan portfolio outstanding, in home equity loans and lines of
credit, with an additional $11.9 million of unused home equity lines of credit.
Commercial Real Estate Lending
The Bank has engaged in commercial real estate lending secured
primarily by apartment buildings, office buildings, motels, nursing homes, strip
shopping centers and mobile home parks located in the Bank's primary market
area. At December 31, 1997, the Bank had $73.9 million of commercial real estate
loans, representing 14.4% of the Bank's total loan portfolio.
60
<PAGE>
Commercial real estate loans generally have adjustable rates and terms
to maturity that do not exceed 25 years. HCSI's current lending guidelines
generally require that the property securing a loan generate net cash flows of
at least 125% of debt service after the payment of all operating expenses,
excluding depreciation, and the loan-to-value ratio not exceed 75% on loans
secured by such properties. As a result of a decline in the value of some
properties in the Bank's primary market area and due to economic conditions, the
current loan-to-value ratio of some commercial real estate loans in the Bank's
portfolio may exceed the initial loan-to-value ratio, and the current debt
service ratio may exceed the initial debt service ratio. Adjustable rate
commercial real estate loans provide for interest at a margin over a designated
index, often a designated prime rate, with periodic adjustments, generally at
frequencies of up to five years. In underwriting commercial real estate loans,
the Bank analyzes the financial condition of the borrower, the borrower's credit
history, the reliability and predictability of the net income generated by the
property securing the loan and the value of the property itself. The Bank
generally requires personal guarantees of the borrowers in addition to the
security property as collateral for such loans. Appraisals on properties
securing commercial real estate loans originated by the Bank are performed by
independent fee appraisers approved by the Board of Trustees.
Commercial real estate loans generally present a higher level of risk
than loans secured by one- to four-family residences. This greater risk is due
to several factors, including the concentration of principal in a limited number
of loans and borrowers, the effect of general economic conditions on income
producing properties and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by commercial
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced (for example,
if leases are not obtained or renewed, or a bankruptcy court modifies a lease
term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired and the value of the
property may be reduced.
Construction Lending
HCSI makes construction loans to individuals for the construction of
their personal residences. The Bank has occasionally made loans to builders for
the construction of homes. The Bank generally requires construction stage
inspections before funds may be released to borrowers pursuant to such loans.
Such inspections are generally performed by Bank personnel or independent fee
appraisers approved by the Bank's Board of Trustees.
At December 31, 1997, the Bank's construction loan portfolio totaled
$4.0 million, or .8% of its total loan portfolio. Substantially all of these
construction loans were to individuals intending to occupy the homes being
constructed and were secured by properties located within the Bank's primary
market area. Although no construction loans were classified as non-performing as
of December 31, 1997, such loans do involve a higher level of risk than
conventional residential mortgage loans. For example, if a project is not
completed and the borrower defaults, HCSI may have to hire another contractor to
complete the project at a higher cost.
61
<PAGE>
Consumer Lending
HCSI offers a variety of secured and unsecured consumer loans,
including manufactured home loans (loans secured by prefabricated or mobile
homes which serve as the borrower's dwelling), financed insurance premiums and,
to a lesser extent, lines of credit and loans secured by automobiles.
Substantially all of the Bank's manufactured home loans and financed insurance
premium loans are originated outside the Bank's primary market area. The balance
of the Bank's consumer loans are originated inside the Bank's market area. At
December 31, 1997, the Bank's consumer loan portfolio totaled $133.8 million, or
26.1% of the Bank's total loan portfolio.
The underwriting standards employed by the Bank for consumer loans
other than financed insurance premiums generally include a determination of the
applicant's payment history on other debts and an assessment of ability to meet
existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is the primary consideration, the underwriting
process also includes a comparison of the value of the property securing the
loan, if any, in relation to the proposed loan amount. For information regarding
underwriting of financed insurance premiums, see "- Financed Insurance
Premiums."
Manufactured Home Loans. In order to expand its origination of
manufactured home lending, the Bank is party to an agreement with Tammac
Corporation ("Tammac"), pursuant to which Tammac solicits manufactured home loan
applications on behalf of the Bank. Under the agreement, the Bank may refuse to
accept for any reason any application referred to it by Tammac. Tammac provides
certain collection services to the Bank, which include, for any loan that is
more than 30 days past due, attempting to cause the borrower to pay delinquent
installments and to bring his or her delinquent loan payments up to date. Tammac
also provides repossession and liquidation services, at the direction of the
Bank, for certain delinquent loans. Tammac is paid a fixed percentage of the
amount financed by the borrower and does not receive additional compensation for
collection, repossession or any other services provided to the Bank.
Substantially all of the manufactured home loans originated by the Bank have
been referred to it by Tammac. See "Risk Factors--Source of Manufactured Home
Loan Applications."
Manufactured home loans represent the largest component of the Bank's
consumer loan portfolio. At December 31, 1997, the Bank's portfolio of
manufactured home loans totaled $98.3 million, or 19.2% of its total loan
portfolio. HCSI's manufactured home loans are typically originated at a higher
rate than residential first mortgage loans, and generally have terms of up to 20
years. Historically, HCSI's manufactured home loans have been made with both
fixed and adjustable rates of interest. Currently, however, the Bank originates
only fixed rate manufactured home loans. The Bank's adjustable-rate manufactured
home loans typically have an interest rate of 4% above the one year United
States Treasury index, adjusted annually, with a 2% maximum annual adjustment
and a 16% interest rate cap. The initial interest rate represents the floor.
Because the loan may be based on the cost of the manufactured home as well as
improvements and because manufactured homes may decline in value due to wear and
tear following their initial sale, the value of the collateral securing a
manufactured home loan may be substantially less than the loan balance. At the
time of origin, inspections are made to substantiate current market values on
all manufactured homes.
62
<PAGE>
Financed Insurance Premiums. The second largest component of the Bank's
consumer loan portfolio is financed insurance premiums. The Bank conducts such
lending through a general partnership known as Premium Payment Plan ("PPP") in
which Hudson City Associates, Inc., a wholly owned subsidiary of the Bank, holds
a 65% ownership interest. The remaining 35% interest is held by F.G.O.
Corporation, which is responsible for the marketing of PPP's business. Hudson
City Associates receives 65% of any profits but absorbs 100% of any losses of
PPP. No profit distributions are made to F.G.O. Corporation until any past
losses have been recouped. PPP is currently licensed to provide insurance
premium financing in nine states, but does business primarily in New York, New
Jersey and Pennsylvania. Management estimates that approximately 75% of premiums
financed are for non-standard and sub-standard (assigned risk) personal
automobile insurance and the remaining 25% are for various commercial lines of
insurance. Interest rates charged on these loans are substantially higher than
those charged on other types of loans. Terms on these loans are primarily eight
months.
The Bank has experienced a relatively high level of delinquencies in
its financed insurance premium portfolio resulting in higher charge-offs. See
"--Asset Quality - Non-Performing Assets." The Bank may continue to experience a
high level of delinquencies and charge-offs in this class of loans due to the
nature of this type of lending. The underwriting of these loans is generally not
based upon the credit risk of the borrower. In the typical case, Bank funds are
advanced to the insurance company for the full amount of the premium upon
receipt of a down payment from the insured. If the insured defaults on the loan,
the Bank sustains a loss to the extent the premium has been earned by (and is
therefore unrecoverable from) the insurance company. The Bank's most significant
exposure to loss occurs when the initial insurance premium quoted by an
insurance broker, and used as the basis for the loan and the related down
payment, is increased by the underwriting insurance company subsequent to making
the loan. In these instances, if the borrower decides not to pay the increased
premium amount, the Bank is left with an insufficient down payment, relative to
the increased premium, and little or no collateral in the way of insurance
premiums refundable by the insurance company. Accordingly, writing financed
insurance premiums through insurance brokers who accurately quote the initial
insurance premium is critical to this type of lending. At December 31, 1997, the
Bank had $23.4 million of financed insurance premiums through PPP, representing
4.6% of the Bank's total loan portfolio.
Consumer loans may entail greater credit risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by assets which may decline in value. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of high initial
loan-to-value ratios, repossession, rehabilitation and carrying costs, and the
greater likelihood of damage, loss or depreciation of the property, and thus are
more likely to be affected by adverse personal circumstances. In the case of
manufactured home loans, which may have loan balances in excess of the resale
value of the collateral, borrowers may abandon the collateral property making
repossession by the Bank and subsequent losses more likely. The application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on consumer loans, including
manufactured home loans.
63
<PAGE>
Commercial Business Lending
At December 31, 1997, commercial business loans comprised $13.9
million, or 2.7% of the Bank's total loan portfolio. Most of the Bank's
commercial business loans have been extended to finance local businesses and
include primarily short term loans to finance machinery and equipment purchases,
inventory and accounts receivable. Commercial business loans also involve the
extension of revolving credit for a combination of equipment acquisitions and
working capital needs.
The terms of loans extended on machinery and equipment are based on the
projected useful life of such machinery and equipment, generally not to exceed
seven years. Lines of credit are available to borrowers provided that the
outstanding balance is paid in full (i.e., the credit line has a zero balance)
for at least 30 days every year. All lines of credit are reviewed on an annual
basis. In the event the borrower does not meet this 30 day requirement, the line
of credit may be terminated and the outstanding balance may be converted into a
fixed term loan. The Bank has a few standby letters of credit outstanding which
are offered at competitive rates and terms and are generally on a secured basis.
Unlike residential mortgage loans, commercial business loans are
typically 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 business loans may be substantially dependent on the
success of the business itself (which, in turn, is often dependent in part upon
general economic conditions). The Bank's commercial business loans are usually,
but not always, secured by business assets. However, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business.
HCSI's commercial business lending policy includes credit file
documentation and analysis of the borrower's background, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of other conditions affecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
HCSI's current credit analysis. The Bank generally obtains personal guarantees
on its commercial business loans. Nonetheless, such loans are believed to carry
higher credit risk than more traditional savings bank loans.
Warehouse Lines of Credit. The Bank maintains a $10.0 million warehouse
line of credit with a mortgage banker located in the Capital District area of
New York. The mortgage banker primarily originates residential real estate loans
in the Bank's market area. The line of credit is secured by assignments of the
underlying mortgages. At December 31, 1997, the Bank had $7.1 million
outstanding under this warehouse line of credit.
Loan Originations and Sales
Mortgage and commercial loan originations are developed from the
continuing business with depositors and borrowers, soliciting realtors and other
brokers and walk-in customers. Residential and commercial loans are originated
by the Bank's staff of salaried and commissioned loan officers. Manufactured
home loans are originated indirectly through Tammac Corporation (see "- Consumer
64
<PAGE>
Lending - Manufactured Home Loans.") and financed insurance premiums are
originated through a partnership of the Bank's wholly owned subsidiary, Hudson
City Associates, Inc. and its relationship with insurance brokers (see "-
Consumer Lending - Financed Insurance Premiums.")
While the bank originates both fixed- and adjustable-rate loans, its
ability to originate loans is dependent upon demand for loans in the markets in
which it serves. Demand is affected by the applicable local economies and the
interest rate environment. The Bank generally retains new 15 and 20 year
fixed-rate and 30 year adjustable-rate real estate loans in its portfolio. To
reduce its vulnerability to changes in interest rates, the Bank's general
practice is to sell in the secondary market all conforming fixed rate
residential loans with maturities of greater than 20 years. The Bank's general
practice is to retain servicing on the loans it sells. At December 31, 1997, the
Bank serviced approximately $56.2 million of loans for others.
For the nine months ended December 31, 1997, the Bank originated $155.8
million of loans. During the year ended March 31, 1997, the Bank originated
$196.8 million of loans, compared to $127.0 million in fiscal 1996.
In periods of economic uncertainty, the Bank's ability to originate
large dollar volumes of loans with acceptable underwriting characteristics may
be substantially reduced or restricted which may result in a decrease in
operating earnings.
65
<PAGE>
The following table shows the loan origination and repayment activities
of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Residential Commercial Commercial Warehouse Financed
Real Estate Real Estate Business Lines of Manufactured Insurance
Loans(1) Loans Loans Credit(2) Home Loans Premiums
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance as of March 31, 1995................ $259,821 $70,328 $13,821 $ 4,599 $72,184 $8,674
Add: loan originations, other advances and
transfers................................. 27,246 9,145 16,997 7,198 23,402 34,417
Less: principal repayments and other (41,477) (8,524) (13,425) --- (14,815) (29,015)
reductions.................................
Less: charge-offs........................... (111) (95) --- --- (372) (573)
--------- --------- ---------- ------------ ---------- ----------
Balance as of March 31, 1996................ 245,479 70,854 17,393 11,797 80,399 13,503
Add: loan originations, other advances and
transfers................................. 68,086 14,030 13,201 --- 26,773 63,932
Less: principal repayments and other (36,586) (16,733) (14,321) (8,230) (14,305) (52,830)
reductions.................................
Less: charge-offs........................... (162) (454) (127) --- (216) (1,070)
--------- -------- --------- ------------ ---------- ------
Balance as of March 31, 1997................ 276,817 67,697 16,146 3,567 92,651 23,535
Add: loan originations, other advances and
transfers................................. 49,879 12,160 11,601 3,495 17,222 54,233
Less: principal repayments and other (44,235) (4,722) (11,531) --- (11,235) (52,765)
reductions.................................
Less: charge-offs........................... (391) (1,233) (2,309) --- (331) (1,608)
---------- --------- --------- ------------ ---------- ----------
Balance as of December 31, 1997............. $282,070 $73,902 $13,907 $ 7,062 $98,307 $23,395
======== ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Net Deferred
Other Loan Costs
Consumer and Unearned Total
Loans Subtotals Discount Loans
<S> <C> <C> <C> <C>
Balance as of March 31, 1995................ $8,448 $437,875 $1,000 $438,875
====== ========
Add: loan originations, other advances and
transfers................................. 8,601 127,006
Less: principal repayments and other (6,848) (114,104)
reductions.................................
Less: charge-offs........................... (46) (1,197)
-------- ----------
Balance as of March 31, 1996................ 10,155 449,580 $1,091 $450,671
====== ========
Add: loan originations, other advances and
transfers................................. 10,749 196,771
Less: principal repayments and other (9,286) (152,291)
reductions.................................
Less: charge-offs........................... (41) (2,070)
-------- ----------
Balance as of March 31, 1997................ 11,577 491,990 $1,029 $493,019
====== ========
Add: loan originations, other advances and
transfers................................. 7,189 155,779
Less: principal repayments and other (6,545) (131,033)
reductions.................................
Less: charge-offs........................... (81) (5,953)
--------- ----------
Balance as of December 31, 1997............. $12,140 $510,783 $1,115 $511,898
======= ======== ====== ========
<FN>
(1) Includes home equity and construction loans.
(2) Activity represents the net drawdowns and repayments.
</FN>
</TABLE>
66
<PAGE>
Asset Quality
Delinquency Procedures. When a borrower fails to make a required
payment on a residential mortgage loan, the Bank attempts to cure the deficiency
by contacting the borrower. Written contacts are made after payment is 15 days
past due and, in most cases, deficiencies are cured promptly. If the delinquency
is not cured by the 30th day, the Bank attempts to contact the borrower by
telephone to arrange payment of the delinquency. If these efforts have not
resolved the delinquency within 45 days after the due date, a second written
notice is sent to the borrower, and on the 60th day a notice is sent to the
borrower warning that foreclosure proceedings will be commenced unless the
delinquent amount is paid. If the delinquency has not been cured within a
reasonable period of time after the foreclosure notice has been sent, the Bank
may obtain a forbearance agreement or may institute appropriate legal action to
foreclose upon the property. If foreclosed, property collateralizing the loan is
sold at a public sale and may be purchased by the Bank. If the Bank is in fact
the successful bidder at the foreclosure sale, upon receipt of a deed to the
property, the Bank generally sells the property at the earliest possible date.
Collection efforts on consumer and commercial real estate loans are
similar to efforts on residential mortgage loans, except that collection efforts
on consumer and commercial real estate loans generally begin within 15 days
after the payment date is missed. In the case of manufactured home loans, the
Holding Company's agreement with Tammac requires Tammac to provide collection
services on any loan that is more than 30 days past due. The Bank also maintains
periodic contact with commercial loan customers and monitors and reviews the
borrowers' financial statements and compliance with debt covenants on a regular
basis.
Real estate and other assets acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure or repossession are classified as
Other Real Estate Owned ("OREO") and Repossessed Property until sold. When
property is classified as OREO and Repossessed Property, it is recorded at the
lower of cost or fair value (net of disposition costs) at that date and any
writedown resulting therefrom is charged to the allowance for loan losses.
Subsequent writedowns are charged to operating expenses. Net expense from OREO
is expensed as incurred.
67
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets. Loans are generally placed on non-accrual
status when the loan is contractually past due 90 days or more or when the
collection of principal and/or interest in full becomes doubtful. When loans are
designated as non-accrual, all accrued but unpaid interest is reversed against
current period income and, as long as the loan remains on non-accrual status,
interest is recognized only when received, if considered appropriate by
management. Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
December
31, March 31,
1997 1997 1996 1995 1994 1993
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate(1)............. $4,485 $4,553 $3,496 $1,900 $2,418 $2,198
Commercial real estate................. 4,279 3,239 1,587 1,884 1,805 2,651
Commercial business.................... --- 2,318 75 27 125 112
Manufactured home loans................ 3,241 2,260 1,597 1,581 1,363 1,125
Financed insurance premiums............ 3,013 2,867 1,527 819 1,114 1,172
Other consumer loans................... 63 45 4 10 39 96
----- ------- ------- ------- -------- --------
Total............................. 15,081 15,282 8,286 6,221 6,864 7,354
------ ------- ------- ------- -------- -------
Accruing loans contractually past due
90 days or more:
Residential real estate(1)............. 435 570 1,262 400 125 617
Commercial real estate................. 867 3,874 1,316 591 1,686 1,131
Commercial business.................... --- 244 --- --- --- ---
Manufactured home loans................ --- --- 22 16 63 54
Financed insurance premiums............ --- --- --- --- --- ---
Other consumer loans................... --- 23 --- 122 473 237
---- ------- ------- ------- -------- -------
Total............................. 1,302 4,711 2,600 1,129 2,347 2,039
------ ------- ------- ------- -------- -------
Total non-performing loans............... $16,383 $19,993 $10,886 $7,350 $9,211 $9,393
======= ======= ======= ======= ======== =======
Foreclosed assets:
Residential real estate................ 59 48 160 49 10 250
Commercial real estate................. 300 2,860 921 726 1,969 569
Repossessed property................... 700 539 635 503 577 468
----- ------- ------- ------- -------- -------
Total............................. $1,059 $3,447 $1,716 $1,278 $2,556 $1,287
====== ======= ======= ======= ======== =======
Total non-performing assets.............. $17,442 $23,440 $12,602 $8,628 $11,767 $10,680
======= ======= ======= ======= ======= =======
Allowance for loan losses................ $6,756 $5,872 $3,546 $3,187 $2,917 $1,999
======= ======= ======= ======= ======== =======
Allowance for loan losses as a
percentage of non-performing loans....... 41.24% 29.37% 32.57% 43.36% 31.67% 21.28%
======= ====== ====== ====== ======= ======
Non-performing loans as a percentage of
total loans.............................. 3.20% 4.06% 2.42% 1.67% 2.25% 2.41%
======= ====== ====== ====== ======= =======
Non-performing assets as a percentage
of total assets.......................... 2.62% 3.60% 2.02% 1.50% 2.12% 2.07%
======= ====== ====== ====== ======= =======
<FN>
- ---------------------
(1) Includes home equity loans.
</FN>
</TABLE>
68
<PAGE>
Non-Accruing Loans. At December 31, 1997, the Bank had approximately
$15.1 million in non-accruing loans, which constituted 2.9% of the Bank's total
loan portfolio. As of such date, there were no non-accruing loans or aggregate
non-accruing loans-to-one-borrower in excess of $1.0 million.
For the year ended March 31, 1997 and for the nine months ended
December 31, 1997, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms amounted
to $1.5 million and $1.1 million, respectively. The amounts that were included
in interest income on such loans were $937 thousand and $586 thousand for the
year ended March 31, 1997, and for the nine months ended December 31, 1997,
respectively, which represented actual receipts. During the periods shown, there
were no troubled debt restructurings.
Accruing Loans Contractually Past Due 90 Days or More. As of December
31, 1997, the Bank had approximately $1.3 million in accruing loans
contractually past due 90 days or more. At December 31, 1997, there were no
accruing loans contractually past due 90 days or more in excess of $1.0 million.
Other Loans of Concern. As of December 31, 1997, there were $6.2
million of other loans not included in the table or discussed above where known
information about the possible credit or other problems of borrowers caused
management to have doubts as to the ability of the borrower to comply with
present loan repayment terms.
The largest of such other loans of concern was a $1.1 million
commercial real estate loan. Although this loan is current and has never been
delinquent, environmental issues related to the property require management to
monitor this loan closely.
There were no other loans in excess of $1.0 million being specially
monitored by the Bank as of December 31, 1997. These loans have been considered
by management in conjunction with the analysis of the adequacy of the allowance
for loan losses.
Allowance for Loan Losses. The allowance for loan losses is replenished
through a provision for loan losses charged to operations. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Recoveries on loans previously
charged-off are credited to the allowance for loan losses. The allowance is an
amount that management believes will be adequate to absorb losses on existing
loans that may become uncollectible. Management's evaluation of the adequacy of
the allowance for loan losses is performed on a periodic basis and takes into
consideration such factors as the historical loan loss experience, changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans and current economic conditions that may affect
borrowers' ability to pay.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in determining the level of the
allowance. Future additions to the Bank's allowance will be the result of
periodic
69
<PAGE>
loan, property and collateral reviews and thus cannot be predicted in advance.
In addition, regulatory agencies, as an integral part of the examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based upon their
judgment of the information available to them at the time of their examination.
At December 31, 1997, the Bank had a total allowance for loan losses of $6.8
million, representing 41.2% of total non-performing loans.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended
December 31, Year Ended March 31,
1997 1997 1996 1995 1994 1993
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total loans outstanding (end of period)...... $511,898 $493,019 $450,671 $438,875 $408,989 $389,805
======== ======== ======== ======== ======== ========
Average total loans outstanding
(period to date)........................... $509,634 $471,295 $444,645 $424,187 $422,752 $376,218
======== ======== ======== ======== ======== ========
Allowance for loan losses at beginning
of period.................................. $5,872 $3,546 $3,187 $2,917 $1,999 $1,994
Loan charge-offs:
Residential real estate(1)................. (391) (162) (111) (88) (9) (360)
Commercial real estate..................... (1,233) (454) (95) (36) (41) (943)
Commercial business(2)..................... (2,309) (127) --- (86) (113) (118)
Manufactured home loans.................... (331) (216) (372) (288) (95) (10)
Financed insurance premiums................ (1,608) (1,070) (573) (711) (97) (939)
Other consumer loans....................... (81) (41) (46) (54) (31) (323)
--------- ------- -------- ------- ------- -------
Total charge-offs....................... (5,953) (2,070) (1,197) (1,263) (386) (2,693)
------- ------- ------- ------- ------- -------
Loan recoveries:
Residential real estate(1)................. 8 3 21 93 --- 8
Commercial real estate..................... 17 11 16 7 --- 45
Commercial business(2)..................... 7 74 6 4 1 1
Manufactured home loans.................... 82 45 70 33 18 15
Financed insurance premiums................ 284 386 261 161 --- ---
Other consumer loans....................... 31 51 49 66 84 86
---------- -------- --------- -------- -------- --------
Total recoveries........................ 429 570 423 364 103 155
--------- -------- --------- -------- -------- --------
Loan charge-offs, net of recoveries.......... (5,524) (1,500) (774) (899) (283) (2,538)
Provision charged to operations.............. 6,408 3,826 1,090 1,169 1,201 2,543
Allowance acquired from acquisition.......... --- --- 43 --- --- ---
----------- -------- --------- -------- -------- --------
Allowance for loan losses at end of period... $6,756 $5,872 $3,546 $3,187 $2,917 $1,999
======= ======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period. 1.08% 0.32% 0.17% 0.21% 0.07% 0.67%
======= ======= ======= ======= ======= =======
Provision as a percentage of average loans... 1.26% 0.81% 0.25% 0.28% 0.28% 0.68%
======= ======= ======= ======= ======= =======
Allowance as a percentage of
non-performing loans........................ 41.24% 29.37% 32.57% 43.36% 31.67% 21.28%
====== ====== ====== ====== ====== ======
Allowance as a percentage of total loans
(end of period)............................. 1.32% 1.19% 0.79% 0.73% 0.71% 0.51%
<FN>
======= ======= ======= ======= ======= ======
- -------------------
(1) Includes home equity and construction loans.
(2) Includes warehouse lines of credit.
</FN>
</TABLE>
70
<PAGE>
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses by category as prepared by the Bank. This allocation is based on
management's assessment as of a given point in time of the risk characteristics
of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The
allocation is not indicative of either the specific amounts or the loan
categories in which future charge-offs may be taken, nor should it be taken as
an indicator of future loss trends. The allocation of the allowance to each
category does not restrict the use of the allowance to absorb losses in any
category.
<TABLE>
<CAPTION>
March 31,
December 31, 1997 1997 1996
Percent Percent Percent
of of of
Loans Loans Loans
Percent in Percent in Percent in
of Al- Each of Al- Each of Al- Each
Allow- lowance Cate- Allow- lowance Cate- Allow- lowance Cate-
ance to Total gory to ance to Total gory to ance to Total gory to
for Loan Allow- Total for Loan Allow- Total for Loan Allow- Total
Losses ance Loans Losses ance Loans Losses ance Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allocation of allowance
for loan losses:
Residential real estate $1,285 19.02% 55.$0% 998 17.00% 56.14$ 846 23.86% 54.4$%
Commercial real estate 1,719 25.44 14.44 758 12.91 13.73 658 18.56 15.72
Commercial business 154 2.28 4.10 1,833 31.21 3.99 213 6.01 6.48
loans(2)...........
Manufactured home loans 1,879 27.81 19.20 1,040 17.71 18.79 1,049 29.58 17.84
Financed insurance 1,479 21.90 4.57 1,127 19.19 4.78 442 12.46 3.00
premiums...........
Other consumer loans 134 1.98 2.37 52 0.89 2.35 25 0.70 2.25
Net deferred loan costs
and unearned discount --- --- 0.22 --- --- 0.22 --- --- 0.24
Unallocated........ 106 1.57 --- 64 1.09 --- 313 8.83 ---
------- ----- ------ ----- ----- ----- ---- ----- ----
Total......... $6,756 100.00% 100.00% $5,872 100.00% 100.00% $3,546 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
March 31,
1995 1994 1993
Percent Percent Percent
of of of
Loans Loans Loans
Percent in Percent in Percent in
of Al- Each of Al- Each of Al- Each
Allow- lowance Cate- Allow- lowance Cate- Allow- lowance Cate-
ance to Total gory to ance to Total gory to ance to Total gory to
for Loan Allow- Total for Loan Allow- Total for Loan Allow- Total
Losses ance Loans Losses ance Loans Losses ance Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allocation of allowance
for loan losses:
Residential real estate 815 25.57% 59.2$% 480 16.46% 58.7$% 826 41.32% 57.35%
Commercial real estate 538 16.88 16.02 356 12.20 16.03 287 14.36 15.20
Commercial business 275 8.63 4.20 157 5.38 5.47 169 8.46 4.35
loans(2)...........
Manufactured home loans 699 21.93 16.45 418 14.33 15.96 334 16.71 20.23
Financed insurance 272 8.54 1.98 355 12.17 1.74 184 9.20 1.35
premiums...........
Other consumer loans 24 0.75 1.93 49 1.68 1.90 91 4.55 2.50
Net deferred loan costs
and unearned discount --- --- 0.21 --- --- 0.14 --- --- (0.98)
Unallocated........ 564 17.70 --- 1,102 37.78 --- 108 5.40 ---
---- ------- --- ------ ------ ----- ----- ------ -----
Total......... $3,187 100.00% 100.00%$2,917 100.00% 100.00% $1,999 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
<FN>
- -------------
(1) Includes home equity and construction loans.
(2) Includes warehouse lines of credit.
</FN>
</TABLE>
71
<PAGE>
Investment Activities
The Bank is authorized to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements and federal
funds. Subject to various restrictions, the Bank may also invest its assets in
investment grade commercial paper and corporate debt securities and mutual funds
whose assets conform to the investments that the Bank is otherwise authorized to
make directly. As of December 31, 1997, the Bank did not hold any securities to
one issuer which exceeded 10% of equity, excluding securities issued by U.S.
Government agencies.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, and, to a much lesser extent, to provide collateral for
borrowings and to fulfill the Bank's asset/liability management policies. To
date, the Bank's investment strategy has been directed toward high-quality
assets (primarily federal agency obligations and high grade corporate debt
securities) with short and intermediate terms (five years or less) to maturity.
At December 31, 1997, the weighted average term to maturity or repricing of the
security portfolio was 2.8 years. This did not take into account securities
which may be called prior to their contractual maturity or repricing. See Notes
3 and 4 of the Notes to Consolidated Financial Statements for information
regarding the maturities of the Bank's securities.
Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are classified
as trading securities and are reported at fair value with unrealized holding
gains and losses reflected in current earnings. All other debt and marketable
equity securities are classified as securities available for sale and are
reported at fair value, with net unrealized gains or losses reported, net of
income taxes, as a separate component of equity. As a member of the FHLB of New
York, the Bank is required to hold FHLB of New York stock which is carried at
cost since there is no readily available market value. Historically, the Bank
has not held any securities considered to be trading securities.
72
<PAGE>
The following table sets forth the composition of the Bank's securities
portfolios at the dates indicated. As of December 31, 1997, the Bank did not
hold securities of any one issuer having an aggregate book value in excess of
10% of the Bank's equity.
<TABLE>
<CAPTION>
March 31,
December 31, 1997 1997 1996 1995
Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Securities available for sale, at fair value:
U.S. Government and Agency securities...... $36,943 85.35% $37,329 81.82% $33,452 65.05% $2,937 29.78%
Corporate debt securities.................. 6,339 14.65 8,294 18.18 17,977 34.95 6,926 70.22
------- ----- ------- ------ -------- ------ ------- ------
Total securities available for sale...... $43,282 100.00% $45,623 100.00% $51,429 100.00% $9,863 100.00%
======= ====== ======= ====== ======= ====== ====== ======
Investment securities, at amortized cost:
U.S. Government and Agency securities...... $19,974 28.04% $17,960 22.71% $13,957 16.81% $14,937 16.67%
Mortgage-backed securities................. 4,517 6.34 3,050 3.86 4,221 5.09 2,591 2.89
Corporate debt securities.................. 46,743 65.61 57,648 72.91 63,557 76.57 69,238 77.29
State, county and municipal................. 10 .01 410 .52 1,268 1.53 2,820 3.15
------- ------ ------- ------ -------- ------ --------- -------
Total investment securities.............. $71,244 100.00% $79,068 100.00% $83,003 100.00% $89,586 100.00%
======= ====== ======= ====== ======= ====== ======= ======
Investment securities, at fair value......... $71,608 100.51% $78,753 99.60% $83,122 100.14% $87,608 97.79%
======= ====== ======= ===== ======= ====== ======= =====
</TABLE>
73
<PAGE>
The following table sets forth information regarding the scheduled
maturities, amortized cost, and weighted average yields for the Bank's
securities portfolios at December 31, 1997 by contractual maturity. The table
does not take into consideration the effects of scheduled repayments or possible
prepayments.
<TABLE>
<CAPTION>
Less than 1 year 1 to 5 years 5 to 10 years Over 10 years Total Securities
Weigh- Weigh- Weigh- Weigh- Weigh-
Amor- ted Amor- ted Amor- ted Amor- ted Amor- ted
tized Average tized Average tized Average tized Average tized Average Fair
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for
sale:
U.S. Government and
Agency securities......... $ --- ---% $33,955 6.38% $3,000 6.94% $ --- ---% $36,955 6.43% $36,943
Corporate debt securities.. 1,000 7.27 5,274 6.88 --- --- --- --- 6,274 6.94 6,339
------ ---- ------- ---- ------ ----- ----- ----- ------- ---- --------
Total securities
available for sale... $1,000 7.27% $39,229 6.45% $3,000 6.94% $ --- ---% $43,229 6.50% $43,282
====== ==== ======= ==== ====== ==== ===== ===== ======= ==== =======
Investment securities:
U.S. Government and
Agency securities........ $ 4,998 5.34% $14,976 6.41% $ --- ---% $ --- ---% $19,974 6.14% $20,034
Mortgage-backed
securities............... --- --- 280 6.00 2,586 7.22 1,651 6.88 4,517 7.02 4,515
Corporate debt securities. 20,894 6.21 24,863 6.72 986 6.64 --- --- 46,743 6.49 47,049
State, county and
municipal................ --- --- --- --- 10 9.32 --- --- 10 9.32 10
------- ---- ------- ---- ------ ---- ----- ----- ------- ----- --------
Total investment
securities........... $25,892 6.04% $40,119 6.60% $3,582 7.07% $1,651 6.88% $71,244 6.43% $71,608
======= ==== ======= ==== ====== ==== ====== ==== ======= ==== =======
</TABLE>
74
<PAGE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and prepayment of loan principal, maturities of securities, short-term
investments, funds provided from operations and borrowings.
Deposits. HCSI offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of passbook and statement
savings accounts, money market accounts, transaction accounts, and time deposits
currently ranging in terms from three months to six years. The Bank only
solicits deposits from its primary market area and does not have brokered
deposits. The Bank relies primarily on competitive pricing policies, advertising
and customer service to attract and retain these deposits. At December 31, 1997,
the Bank's deposits totaled $586.2 million, of which $549.8 million were
interest bearing deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management, liquidity and profitability objectives. Based on its
experience, the Bank believes that its passbook and statement savings, money
market accounts and transaction accounts are relatively stable sources of
deposits. However, the ability of the Bank to attract and maintain time deposits
and the rates paid on these deposits has been and will continue to be
significantly affected by market conditions.
75
<PAGE>
The following table illustrates the Bank's deposit flows by account
type during the periods indicated.
<TABLE>
<CAPTION>
N.O.W./ Non-
Time Money interest Total Number
Savings Deposits Markets Bearing Total of Accounts
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance as of March 31, 1995.... $138,621 $263,840 $92,511 $19,479 $514,451
Net deposits/withdrawals........ (12,864) 22,201 (1,524) 9,004 16,817
Interest credited............... 4,275 16,713 2,932 --- 23,920
-------- -------- ------- ------- --------
Balance as of March 31, 1996.... 130,032 302,754 93,919 28,483 555,188 60,138
Net deposits/withdrawals........ 1,554 (13,095) (4,403) 274 (15,670)
Interest credited............... 4,523 17,727 2,831 --- 25,081
-------- -------- ------- ------- --------
Balance as of March 31, 1997.... 136,109 307,386 92,347 28,757 564,599 63,866
Net deposits/withdrawals........ 790 (5,618) (479) 7,664 2,357
Interest credited............... 3,584 13,513 2,178 --- 19,275
-------- -------- ------- ------- --------
Balance as of December 31, 1997 $140,483 $315,281 $94,046 $36,421 $586,231 76,854
======== ======== ======= ======= ========
</TABLE>
76
<PAGE>
The following tables sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Bank as of the dates indicated.
<TABLE>
<CAPTION>
Balance as of Balance as of
December 31, March 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>
Savings accounts (3.00% to 3.92%). $140,483 23.97% $136,109 24.11% $130,032 23.42% $138,621 26.94%
N.O.W. and money market accounts
(2.00% to 4.88%).................. 94,046 16.04 92,347 16.36 93,919 16.92 92,511 17.98
Time deposits:
2.00 - 2.99%...................... 470 0.08 --- --- --- --- --- ---
3.00 - 3.99%...................... 419 0.07 824 0.15 958 0.17 6,625 1.29
4.00 - 4.99%...................... 3,497 0.60 15,319 2.71 32,165 5.79 44,052 8.56
5.00 - 5.99%...................... 259,419 44.25 228,732 40.51 149,852 26.99 93,839 18.24
6.00 - 6.99%...................... 15,659 2.67 27,070 4.79 84,703 15.26 86,972 16.91
7.00 - 7.99%...................... 35,817 6.11 35,441 6.28 34,516 6.22 31,024 6.03
8.00 - 8.99%...................... --- --- --- --- 560 0.10 1,328 0.26
------- ----- ------- ------ -------- ------- -------- ------
Total time deposit accounts..... 315,281 53.78 307,386 54.44 302,754 54.53 263,840 51.29
------- ----- ------- ------ -------- ------- -------- ------
Non-interest bearing accounts..... 36,421 6.21 28,757 5.09 28,483 5.13 19,479 3.79
Total deposits.................... $586,231 100.00% $564,599 100.00% $555,188 100.00% $514,451 100.00%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
77
<PAGE>
The following table shows rate and maturity information for the Bank's
time deposits as of December 31, 1997.
<TABLE>
<CAPTION>
Amount Due
12 month 12 month 12 month 12 month 12 month
period period period period period
ended ended ended ended ended
December December December December December Thereafter Total
31, 1998 31, 1999 31, 2000 31, 2001 31, 2002
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
2.00 - 2.99%..... $ 470 $ --- $ --- $ --- $ --- $ --- $ 470
3.00 - 3.99%..... 419 --- --- --- --- --- 419
4.00 - 4.99%..... 3,377 120 --- --- --- --- 3,497
5.00 - 5.99%..... 164,824 69,240 14,155 8,364 2,037 799 259,419
6.00 - 6.99%..... 7,737 5,609 1,203 902 208 --- 15,659
7.00 - 7.99%..... 1,533 26,050 2,824 5,410 --- --- 35,817
8.00 - 8.99%..... --- --- --- --- --- --- ---
------- -------- ------- ------- ------ ------ --------
Total......... $178,360 $101,019 $18,182 $14,676 $2,245 $ 799 $315,281
======== ======== ======= ======= ====== ====== ========
</TABLE>
78
<PAGE>
The following table indicates, as of December 31, 1997, the amount of
the Bank's time deposits of $100,000 or more by time remaining until maturity.
Maturity
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
(In Thousands)
Time Deposits
of $100,000
or more.......... $ 5,861 $4,401 $11,839 $20,344 $42,445
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's practice has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread or when the
Bank needs additional funds to satisfy loan demand.
HCSI's borrowings historically have consisted of advances from the FHLB
of New York. Such advances can be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
Bank currently maintains available lines of credit and is currently authorized
to borrow up to $65.2 million on lines of credit with the FHLB of New York. At
December 31, 1997, the Bank had outstanding $2.0 million in borrowings from the
FHLB of New York. See Note 15 of the Notes to Consolidated Financial Statements.
The Bank may increase its borrowings in order to fund the acquisition of
additional securities or other assets in the future.
Subsidiary and Other Activities
Hudson City Associates, Inc. Hudson City Associates, Inc. ("HCAI"), a
wholly owned subsidiary of the Bank, was incorporated in 1984 but remained
inactive until 1990. In 1990, HCAI formed a partnership known as Premium Payment
Plan (referred to herein as "PPP"), pursuant to which the Bank provides premium
financing for non-standard and sub-standard personal automobile insurance and
certain lines of commercial insurance. See "Lending Activities -- Consumer
Lending."
Hudson River Mortgage Corporation. A wholly owned subsidiary of the
Bank, Hudson River Mortgage Corporation ("HRMC") was organized in 1996 to broker
mortgages to the Bank and other financial institutions.
Hudson River Funding Corp. Hudson River Funding Corp. ("HRFC") is a
Real Estate Investment Trust formed in 1997 to enhance liquidity, portfolio
yields and capital growth. The Bank funded HRFC with approximately $185.0
million of earning assets consisting of residential mortgage loans, commercial
real estate loans, home equity loans, home improvement loans and debt
securities. Interest income earned on the assets held by HRFC is passed through
to the Bank in the form of dividends.
Trust Operations. The Bank began operating a trust department in 1995. The
Trust Department provides trust-related services for a variety of trust account
types, including personal trusts and estates and employee benefit trusts. The
Trust Department is administered by the Trust
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Committee of the Bank. Income from the Trust Department is currently an
immaterial portion of the Bank's total other operating income.
Competition
HCSI faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks, credit
unions and mortgage bankers making loans secured by real estate located in the
Bank's primary market area. Other savings institutions, commercial banks, credit
unions and finance companies provide vigorous competition in consumer lending.
The Bank also faces strong competition in its efforts to provide insurance
premium financing through PPP from a variety of other lenders, some of which
have much greater assets and resources than the Bank.
The Bank attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from mutual funds and
other savings institutions, commercial banks and credit unions located in the
same communities. The Bank competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with interbranch deposit and withdrawal privileges. Automated
teller machine facilities are also available.
Employees
At December 31, 1997, the Bank had 269 full-time employees and 30 part-time
employees. The Bank's employees are not represented by any collective bargaining
group. Management considers its employee relations to be good.
Properties
The Bank conducts its business at its main office and 11 other banking
offices. The following table sets forth information relating to each of the
Bank's offices as of December 31, 1997. The net book value of the Bank's
premises and equipment (including land, building and leasehold improvements and
furniture, fixtures and equipment) at December 31, 1997 was $15.8 million. See
Note 7 of Notes to Consolidated Financial Statements. HCSI believes that its
current facilities are adequate to meet the present and foreseeable needs of the
Bank and the Holding Company, subject to possible future expansion.
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<TABLE>
<CAPTION>
Total
Owned Lease Approximate
Date or Expiration Square Net Book
Location Acquired Leased Date Footage Value
<S> <C> <C> <C> <C> <C>
Main Office:
One Hudson City Centre(1) 1990 Owned --- 64,433 8,611,213
Corner of State and Green Streets
Hudson, New York 12534
Branch Offices:
Coleman Street 1970 Owned --- 6,330 402,466
Chatham, New York 12037
Route 9 (3) 1994 Owned --- 4,873 1,508,599
Valatie, New York 12184
Church Street 1974 Owned --- 1,798 270,073
Copake, New York 12516
Route 20 and McClellen 1975 Owned --- 3,260 269,316
Nassau, New York 12123
23 Fairview Plaza 1983 Leased April 1998(5) 4,500 48,368
160 Fairview Avene
Hudson, New York 12534
41 State Street 1989 Leased September 1999(5) 3,200 1,038
Albany, New York 12201
Greenport Town Center(2) 1994 Leased June 1999(5) 362 32,148
Fairview Avenue
Hudson, New York 12534
Route 44 East 1994 Owned --- 2,560 269,508
Millerton, New York 12546
622 Columbia Turnpike (4) 1996 Owned/ July 2000(5) 2,996 643,478
East Greenbush, New York 12061 Leased
3-93 Carman Road 1996 Leased December 2000(5) 2,300 137,638
Schenectady, New York 12303
2628 Route 23(2) 1997 Leased May 2002(5) 374 34,807
Hillsdale, New York 12529
<FN>
(1) On January 5, 1998, the Bank's Warren Street branch was relocated to the
Bank's main office.
(2) Banking operations are located inside of supermarkets at these locations.
(3) Branch relocated to this address in 1994 from previous location.
(4) Bank owns the building and leases the land.
(5) Does not include renewable terms.
</FN>
</TABLE>
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Legal Proceedings
HCSI is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, management, after
consultation with counsel representing HCSI in the proceedings, does not expect
that the resolution of these proceedings will have a material effect on the
Bank's financial condition and results of operations.
REGULATION
Set forth below is a brief description of the laws and regulations
applicable to the Holding Company and the Bank which management currently
believes are material to an investor's decision whether to purchase Holding
Company Common Stock in the Offering. No assurance can be given, however, that
under certain circumstances, other laws and regulations will not be applicable
to and materially affect the Holding Company and the Bank. The description of
the laws and regulations hereunder, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is
qualified in its entirety by reference to applicable laws and regulations.
The Holding Company
General. Upon consummation of the Conversion, the Holding Company will
become subject to regulation as a savings and loan holding company under the
Home Owners Loan Act, as amended ("HOLA"), instead of being subject to
regulation as a bank holding company under the Bank Holding Company Act of 1956
because the Bank has made an election under Section 10(1) of HOLA to be treated
as a "savings association" for purposes of Section 10(e) of HOLA. As a result,
the Holding Company will be required to register with the OTS and will be
subject to OTS regulations, examinations, supervision and reporting requirements
relating to savings and loan holding companies. The Holding Company will also be
required to file certain reports with, and otherwise comply with the rules and
regulations of, the New York State Banking Board (the "NYBB" or the "Board") and
the Securities and Exchange Commission ("SEC"). As a subsidiary of a savings and
loan holding company, the Bank will be subject to certain restrictions in its
dealings with the Holding Company and affiliates thereof.
Activities Restrictions. Upon consummation of the Conversion, the Bank
will be the sole savings association subsidiary of the Holding Company. There
are generally no restrictions on the activities of a savings and loan holding
company which holds only one subsidiary savings institution. However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, he may impose such restrictions as are
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if
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the savings institution subsidiary of such a holding company fails to meet the
qualified thrift lender ("QTL") test, as discussed under "--Qualified Thrift
Lender Test," then such unitary holding company also shall become subject to the
activities restrictions applicable to multiple savings and loan holding
companies and, unless the savings institution requalifies as a QTL within one
year thereafter, shall register as, and become subject to the restrictions
applicable to, a bank holding company. See "--Qualified Thrift Lender Test."
If the Holding Company were to acquire control of another savings
institution, other than through merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, as set forth below, the activities of the
Holding Company and any of its subsidiaries (other than the Bank or other
subsidiary savings institutions) would thereafter be subject to further
restrictions. Among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings institution shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof any business activity other than: (i)
furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the FRB as permissible for
bank holding companies. Those activities described in clause (vii) above also
must be approved by the Director of the OTS prior to being engaged in by a
multiple savings and loan holding company.
Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended. A savings bank subsidiary of a savings and loan holding
company that does not comply with the QTL test must comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank, (iii)
the institution shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings institution ceases to meet the QTL test, it must
cease any activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
The QTL test set forth in the HOLA requires that qualified thrift
investments ("QTLs") represent 65% of portfolio assets of the savings
institution and its consolidated subsidiaries. Portfolio assets are defined as
total assets less intangibles, property used by a savings association
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in its business and liquidity investments in an amount not exceeding 20% of
assets. Generally, QTLs are residential housing related assets. The 1996
amendments allow small business loans, credit card loans, student loans and
loans for personal, family and household purposes to be included without
limitation as qualified investments. At December 31, 1997, approximately 88% of
the Bank's assets were invested in QTIs, which was in excess of the percentage
required to qualify the Bank under the QTL test in effect at that time.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and their affiliates are governed by Sections 23A and 23B
of the Federal Reserve Act. An affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Holding Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or,
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22 (h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At December 31, 1997, the Bank was in compliance with the
above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the OTS, (i) control of any other savings institution or savings and
loan holding company or substantially all the assets thereof or (ii) more than
5% of the voting shares of a savings institution or holding company thereof
which is not a subsidiary. Except with the prior approval of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
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<PAGE>
The OTS may only approve acquisitions resulting in the formation of a
multiple savings and loan holding company which controls savings institutions in
more than one state if (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
located in the state of the institution to be acquired as of March 5, 1987; (ii)
the acquiror is authorized to acquire control of the savings institution
pursuant,,to the emergency acquisition provisions of the Federal Deposit
Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state chartered savings institutions).
Federal Securities Laws. The Holding 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 Holding Company's Common Stock will be registered with the SEC
under Section 12(g) of the Exchange Act. The Holding Company will then be
subject to the proxy and tender offer rules, insider trading reporting
requirements and restrictions, and certain 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 Common Stock purchased by persons who are not affiliates of the Holding
Company may generally be sold without registration. Shares purchased by an
affiliate of the Holding Company generally may not be resold without complying
with the resale restrictions of Rule 144 under the Securities Act. If the
Holding Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Holding 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 Holding Company or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks.
The Bank
General. The Bank is subject to extensive regulation and examination by
the NYSBD, as its chartering authority, and by the FDIC, as the insurer of its
deposits, and, upon Conversion, will be subject to certain requirements
established by the OTS as a result of the Holding Company's savings and loan
holding company status. The federal and state laws and regulations which are
applicable to banks and their holding companies regulate, among other things,
the scope of their business, their investments, their reserves against deposits,
the timing of the availability of deposited funds and the nature and amount of
and collateral for certain loans. The Bank must file reports with the NYSBD and
the FDIC concerning its activities and financial condition, in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as establishing branches and mergers with, or acquisitions of, other depository
institutions. There are periodic examinations by the NYSBD and the FDIC to test
the Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and
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depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the NYSBD,
the FDIC or as a result of the enactment of legislation, could have a material
adverse impact on the Holding Company, the Bank and their operations.
Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, are not members ("non-members") of the Federal Reserve
System.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, the highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization and are rated composite I under the
Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory goodwill and certain mortgage servicing rights.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier 1 capital and
supplementary (Tier 2) capital) to risk-weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item. The components of Tier
I capital are equivalent to those discussed above under the 3% leverage capital
standard. The components of supplementary capital include certain perpetual
preferred stock, certain mandatory convertible securities, certain subordinated
debt and intermediate preferred stock and general allowances for loan and lease
losses. Allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core capital.
At December 31, 1997, the Bank met each of its capital requirements.
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 an institution's capital and economic value to changes in
interest rate risk in assessing an institution'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
institution and the level of other risks at the institution for which capital is
needed. Institutions with significant interest rate risk may be required to hold
additional capital. The agencies recently issued a joint policy statement
providing guidance on interest rate risk management, including a discussion of
the critical factors affecting the
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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.
See "-- Capital Requirements" for information with respect to the
Bank's historical leverage and risk-based capital at December 31, 1997 and pro
forma after giving effect to the issuance of shares in the Offerings.
Activities and Investments of New York-Chartered Savings Banks. The
Bank derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and regulations, as limited
by FDIC regulations and other federal laws and regulations. See "--Activities
and Investments of FDIC-Insured State-Chartered Banks." The New York laws and
regulations authorize savings banks, including the Bank, to 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 stock of a single
corporation is limited to the lesser of 2% of the outstanding stock of such
corporation or 1% of the savings bank's assets, except as set forth below. Such
equity securities must meet certain tests of financial performance. A savings
bank's lending powers are not subject to percentage of asset limitations,
although there are limits applicable to single borrowers. A savings bank may
also, pursuant to the "leeway" authority, make investments not otherwise
permitted under the New York State Banking Law. This authority permits
investments in otherwise impermissible investments of up to 1% of the savings
bank's assets in any single investment, subject to certain restrictions and to
an aggregate limit for all such investments of up to 5% of assets. Additionally,
in lieu of investing in such securities in accordance with the 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 chartered stock savings bank may also exercise trust powers upon approval
of the Department.
New York-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.
With certain limited exceptions, a New York-chartered savings bank may
not make loans or extend credit for commercial, corporate or business purposes
(including lease financing) to a single
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borrower, the aggregate amount of which would be in excess of 15% of the bank's
net worth. The Bank currently complies with all applicable loans-to-one-borrower
limitations.
Activities and Investments of FDIC-Insured State-Chartered Banks. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an
FDIC-insured state-chartered bank may not directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements.
Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
Under the New York State Banking Law, the Department may issue an order
to a New York-chartered banking institution to appear and explain an apparent
violation of law, to discontinue unauthorized or unsafe practices and to keep
prescribed books and accounts. Upon a finding by the Department 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 Department to
discontinue such practices, such director, trustee or officer may be removed
from office by the Department 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 Department against the Bank or any of its
directors or officers. The Department also may take possession of a banking
organization under specified statutory criteria.
Prompt Corrective Action. Section 38 of the Federal Deposit Insurance
Act ("FDIA") provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
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"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking regulators,
an institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure, (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. The regulations also
provide that a federal banking regulator may, after notice and an opportunity
for a hearing, reclassify a "well capitalized" institution as "adequately
capitalized" and may require an "adequately capitalized" institution or an
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. The federal banking
regulator may not, however, reclassify a "significantly undercapitalized"
institution as "critically undercapitalized."
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with an appropriate federal banking
regulator within 45 days of the date that the institution receives notice or is
deemed to have notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Immediately upon becoming
undercapitalized, an institution becomes subject to statutory provisions which,
among other things, set forth various mandatory and discretionary restrictions
on the operations of such an institution.
At December 31, 1997, the Bank had capital levels which qualified it as
a "well capitalized" institution.
FDIC Insurance Premiums. The Bank is a member of the Bank Insurance
Fund ("BIF") administered by the FDIC but has accounts insured by both the BIF
and the Savings Association Insurance Fund ("SAIF"). The SAIF-insured accounts
are held by the Bank as a result of certain acquisitions and branch purchases
and amounted to $4.1 million as of December 31, 1997. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the
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permanent termination of insurance, if the institution has no tangible capital.
If insurance of accounts is terminated, the accounts at the institution at the
time of the termination, less subsequent withdrawals, shall continue to be
insured for a period of six months to two years, as determined by the FDIC.
Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Brokered Deposits. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a "well capitalized insured depository institution" may solicit and accept,
renew or roll over any brokered deposit without restriction, (ii) an "adequately
capitalized insured depository institution" may not accept, renew or roll over
any brokered deposit unless it has applied for and been granted a waiver of this
prohibition by the FDIC and (iii) an "undercapitalized insured depository
institution" may not (x) accept, renew or roll over any brokered deposit or (y)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited. The term "undercapitalized insured depository
institution" is defined to mean any insured depository institution that fails to
meet the minimum regulatory capital requirement prescribed by its appropriate
federal banking agency. The FDIC may, on a case-by-case basis and upon
application by an adequately capitalized insured depository institution, waive
the restriction on brokered deposits upon a finding that the acceptance of
brokered deposits does not constitute an unsafe or unsound practice with respect
to such institution. The Bank had no brokered deposits outstanding at December
31, 1997.
Community Investment and Consumer Protection Laws. In connection with
its lending activities, the Bank is subject to a variety of federal laws
designed to protect borrowers and promote lending to various sectors of the
economy and population. Included among these are the federal Home Mortgage
Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act,
Equal Credit Opportunity Act, Fair Credit Reporting Act and Community
Reinvestment Act ("CRA").
The CRA requires insured institutions to define the communities that
they serve, identify the credit needs of those communities and adopt and
implement a "Community Reinvestment Act Statement" pursuant to which they offer
credit products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the Bank,
the FDIC) must conduct regular CRA examinations of insured financial
institutions and assign to them a CRA rating of "outstanding," "satisfactory,"
"needs improvement" or "unsatisfactory." The Bank's current CRA rating is
"outstanding."
The Bank is also subject to provisions of the New York State Banking
Law which impose continuing and affirmative obligations upon banking
institutions organized in New York State to serve the credit needs of its local
community ("NYCRA"), which are similar to those imposed by the CRA. Pursuant to
the NYCRA, a bank must file an annual NYCRA report and copies of all federal CRA
reports with the Department. The NYCRA requires the Department to make an annual
written assessment of a bank's compliance with the NYCRA, utilizing a
four-tiered rating system, and make such assessment available to the public. The
NYCRA also requires the Department to
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consider a bank's NYCRA rating when reviewing a bank's application to engage in
certain transactions, including mergers, asset purchases and the establishment
of branch offices or automated teller machines, and provides that such
assessment may serve as a basis for the denial of any such application. The
Bank's latest NYCRA rating received from the Department was "satisfactory."
Limitations on Dividends. The Holding Company is a legal entity
separate and distinct from the Bank. The Holding Company's principal source of
revenue consists of dividends from the Bank. The payment of dividends by the
Bank is subject to various regulatory requirements including a requirement, as a
result of the Holding Company's savings and loan holding company status, that
the Bank notify the Director of the OTS not less than 30 days in advance of any
proposed declaration by its directors of a dividend.
Under New York State Banking Law, a New York-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 Department 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.
Miscellaneous. The Bank is subject to certain restrictions on loans to
the Holding Company or its non-bank subsidiaries, on investments in the stock or
securities thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on
behalf of the Holding Company or its non-bank subsidiaries. The Bank also is
subject to certain restrictions on most types of transactions with the Holding
Company or its non-bank subsidiaries, requiring that the terms of such
transactions be substantially equivalent to terms of similar transactions with
non-affiliated firms.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. The Bank had
$2.0 million of FHLB advances at December 31, 1997.
As a FHLB member, the Bank is required to purchase and maintain stock
in the FHLB of New York in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of its advances from the FHLB of
New York, whichever is greater. At December 31, 1997, the Bank had approximately
$2.8 million in FHLB stock, which resulted in its compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
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continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily checking
accounts, including NOW and Super NOW accounts) and non-personal time deposits.
As of December 31, 1997, the Bank was in compliance with applicable
requirements. However, because required reserves must be maintained in the form
of vault cash or a non-interest-bearing account at a Federal Reserve Bank, the
effect of this reserve requirement is to reduce an institution's earning assets.
TAXATION
Federal Taxation
General. The Holding Company and the Bank will be subject to federal
income taxation in the same general manner as other corporations with some
exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Bank. The
Bank's federal income tax returns have been audited or closed without audit by
the Internal Revenue Service through 1993.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its consolidated federal
income tax returns. As of March 31, 1998, the Bank will file its consolidated
federal income tax returns using a tax year ending March 31. The Small Business
Protection Act of 1996 (the "1996 Act") eliminated the use of the reserve method
of accounting for bad debt reserves by savings institutions, effective for
taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of December 31, 1997 is approximately
$540,000.
As discussed more fully below, the Bank and subsidiaries file combined
New York State Franchise tax returns. The basis of the determination of the tax
is the greater of a tax on entire net income (or on alternative entire net
income) or a tax computed on taxable assets. However, for state purposes, New
York State enacted legislation in 1996, which among other things, decoupled the
Federal and New York State tax laws regarding thrift bad debt deductions and
permits the continued use of the bad debt reserve method under section 593.
Thus, provided the Bank continues to satisfy certain definitional tests and
other conditions, for New York State income tax purposes, the Bank is permitted
to continue to use the special reserve method for bad debt deductions. The
deductible
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annual addition to the state reserve may be computed using a specific formula
based on the Bank's loss history ("Experience Method") or a statutory percentage
equal to 32% of the Bank's New York State taxable income ("Percentage Method").
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions, dividend distributions in
excess of historical earnings and profits or cease to maintain a bank charter.
At March 31, 1997, the Bank's total federal base-year reserve was
approximately $2.7 million and the "supplemental" reserve (as defined) was
approximately $10.3 million. These reserves reflect the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount and regular income tax. Net
operating losses can offset no more than 90% of AMTI. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. The Bank has not been subject to the alternative minimum tax
and has no such amounts available as credits for carryover.
Net Operating Loss Carryovers. For the years beginning after August 5,
1997, a financial institution may carry back net operating losses to the
preceding two taxable years and forward to the succeeding 20 taxable years. At
March 31, 1997, the Bank had no net operating loss carryforwards for federal
income tax purposes.
Corporate Dividends-Received Deduction. The Holding 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
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
State and Local Taxation
New York State Taxation. The Holding Company and the Bank will report
income on a combined basis utilizing a fiscal year. New York State Franchise Tax
on corporations is imposed in an amount equal to the greater of (a) 9% of
"entire net income" allocable to New York State (b) 3% of "alternative entire
net income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications.
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Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Holding Company is exempt from Delaware corporate income
tax but is required to file an annual report with and pay an annual franchise
tax to the State of Delaware. The tax is imposed as a percentage of the capital
base of the Holding Company with an annual maximum of $150,000.
MANAGEMENT OF THE HOLDING COMPANY
Directors and Executive Officers
The Board of Directors of the Holding Company currently consists of
nine members, each of whom is also a trustee of the Bank. As discussed below,
upon consummation of the Conversion, the current trustees of the Bank will
become directors of the stock-chartered Bank. See "Management of the Bank --
Trustees." Each director of the Holding Company has served as such since the
Holding Company's incorporation in March 1998. Directors of the Holding Company
will serve three-year staggered terms so that one-third of the directors will be
elected at each annual meeting of stockholders. One class of directors,
consisting of Earl Schram Jr., William E. Collins and Carl A. Florio, has a term
of office expiring at the Holding Company's first Annual Meeting of
Stockholders, a second class, consisting of Marilyn A. Herrington, John E. Kelly
and Stanley Bardwell, M.D., has a term of office expiring at the Holding
Company's second Annual Meeting of Stockholders, and a third class, consisting
of Marcia M. Race, William H. Jones and Joseph W. Phelan, has a term expiring at
the Holding Company's third Annual Meeting of Stockholders. For biographical
information regarding each director of the Holding Company, see "Management of
the Bank -- Trustees."
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are as follows: Carl A. Florio, President and
Chief Executive Officer; Timothy E. Blow, Chief Financial Officer; Sidney D.
Richter, Senior Vice President; and Pamela M. Wood, Senior Vice President and
Secretary. It is not anticipated that the executive officers of the Holding
Company will receive any remuneration in their capacity as Holding Company
executive officers. For information regarding compensation of trustees and
executive officers of the Bank, see "Management of the Bank--Meetings and
Committees of the Board of Trustees of the Bank" and "--Executive Compensation."
Indemnification
The certificate of incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Holding Company. Delaware law
requires that such director, officer, employee or agent, in order to be
indemnified, must have acted in good faith and in a manner reasonably
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believed to be not opposed to the best interests of the Holding Company and,
with respect to any criminal action or proceeding, did not have reasonable cause
to believe his conduct was unlawful.
The certificate of incorporation of the Holding Company and Delaware
law also provide that the indemnification provisions of such certificate and the
statute are not exclusive of any other right which a person seeking
indemnification may have or later acquire under any statute, or provision of the
certificate of incorporation, bylaws of the Holding Company, agreement, vote of
shareholders or disinterested directors or otherwise.
These provisions may have the effect of deterring shareholder
derivative actions, since the Holding Company may ultimately be responsible for
expenses for both parties to the action.
In addition, the certificate of incorporation of the Holding Company
and Delaware law also provide that the Holding Company may maintain insurance,
at its expense, to protect itself and any director, officer, employee or agent
of the Holding Company or another corporation, partnership, joint venture, trust
or other enterprise against any expense, liability or loss, whether or not the
Holding Company has the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law. The Holding
Company intends to obtain such insurance.
MANAGEMENT OF THE BANK
Trustees
The direction and control of the Bank, as a mutual savings bank, has
been vested in its Board of Trustees. Upon consummation of the Conversion, each
of the current trustees of the Bank will become directors of the Bank in stock
form. The Board of Directors of the converted Bank will consist of nine
directors divided into three classes, with approximately one-third of the
directors elected at each annual meeting of stockholders. Because the Holding
Company will own all of the issued and outstanding shares of capital stock of
the Bank after the Conversion, the Holding Company, as sole stockholder, will
elect the directors of the Bank.
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The following table sets forth certain information regarding the
trustees of the Bank.
Position(s) Held Trustee
Name With the Bank Age(1) Since
Carl A. Florio, CPA Trustee, President and Chief Executive 49 1997
Officer
Earl Schram, Jr. Trustee and Chairman of the Board 74 1987
Stanley Bardwell, M.D. Trustee 73 1981
William E. Collins Trustee 72 1983
John E. Kelly Trustee 72 1981
Joseph W. Phelan Trustee 55 1990
William H. Jones Trustee 54 1991
Marilyn A. Herrington Trustee 54 1994
Marcia M. Race Trustee 53 1989
- -------------------
(1) At December 31, 1997.
The business experience of each trustee for at least the past five
years is set forth below.
Carl A. Florio, CPA. Mr. Florio has served as President and Chief Executive
Officer of the Bank since 1996. From 1993 until his appointment as President and
Chief Executive Officer, Mr. Florio served as Chief Financial Officer of the
Bank. Prior to his becoming the Bank's Chief Financial Officer, Mr. Florio was a
partner in the accounting firm of Pattison, Koskey, Rath & Florio. Mr. Florio
serves on the Executive Committee, Trust Committee and as a director of Hudson
City Associates, Inc.
Earl Schram, Jr. Mr. Schram is currently Chairman of the Board of Trustees
of the Bank, a position he has held since 1995. Mr. Schram is an attorney and
President of the law firm of Connor, Curran & Schram, P.C. in Hudson, New York.
He is also Vice President and Director of Taconic Farms, Inc. Mr. Schram serves
on the Charitable Contributions Committee, Executive Committee and Trust
Committee.
Stanley Bardwell, M.D. Dr. Bardwell is a retired physician in Craryville,
New York. From 1958 until 1988, Dr. Bardwell specialized in internal medicine
and cardiology. He has served as Chief of Medicine in Columbia Memorial Hospital
and Greene County Hospital, served on the Board of Health and was President of
the Potts Memorial Foundation as well as other various charitable groups. Dr.
Bardwell serves on the Executive Committee, Examining Committee and Charitable
Contributions Committee.
William E. Collins. Mr. Collins served as President and Chief Executive
Officer of the Bank from 1983 until his retirement in 1990. Prior to becoming
President and Chief Executive Officer, Mr. Collins served as Executive Vice
President of the Bank from March 1982 to December 1982. From 1991 to 1996, Mr.
Collins served as a director of Hudson City Associates, Inc., a wholly owned
subsidiary of the Bank and general partner of Premium Payment Plan. See
"Business of the Bank--Lending Activities-Consumer Lending," and "--Subsidiary
and Other Activities." Mr. Collins serves on the Executive Committee and the
Examining Committee.
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John E. Kelly. Since 1992, Mr. Kelly has owned and operated Berkshire
Telephone Corp. Kinderhook, New York. Mr. Kelly is Chairman of the Board of
Berkshire Telephone Corp. He has been with Berkshire Telephone Company since
1946 in various capacities. Berkshire Telephone Corp. provides long distance,
internet, cellular, paging and TV cable services. Mr. Kelly serves on the
Executive Committee and Compensation Committee.
Joseph W. Phelan. Since 1983, Mr. Phelan has served as President of Taconic
Farms, Inc. Germantown, New York, a provider of laboratory animals for research.
He is also Treasurer of the Reformed Church in Germantown, New York. Mr Phelan
serves on the Executive Committee, Trust Committee and Compensation Committee.
William H. (Tony) Jones. Since 1986, Mr. Jones has owned and served as
President and Publisher of Roe Jan Independent Publishing Co., Inc., Hillsdale,
New York, a publisher of community newspapers and similar publications. Mr.
Jones serves on the Executive Committee, Charitable Contributions Committee,
Examining Committee and as a director of Hudson City Associates, Inc.
Marilyn A. Herrington. Ms. Herrington is the Vice President and Secretary
of Herrington- Yaffe Auto Center, an auto repair facility, Secretary of Richmond
Telephone Company, a provider of long distance telephone service and involved in
real estate investments. Ms. Herrington serves on the Executive Committee,
Charitable Contributions Committee and Compensation Committee.
Marcia M. Race. Ms. Race was employed by the Bank from 1962 until her
retirement in 1997. Ms. Race served as Assistant Secretary of the Bank from 1972
to 1978, Corporate Secretary from 1978 to 1989 and Assistant to the President
from 1989 to 1997. She is also Trustee of the Nativity/St. Mary's Parish
Community Church. Ms. Race serves on the Executive Committee.
Executive Officers Who Are Not Trustees
Each of the executive officers of the Bank will retain his or her
office in the Bank after the Conversion. Officers are elected annually by the
Board of Trustees of the Bank (Board of Directors, after the Conversion). There
are no arrangements or understandings between the person named and any other
person pursuant to which such officer was selected.
The business experience of the executive officers who are not also
trustees is set forth below.
Timothy E. Blow, CPA. Mr. Blow, age 31, became Chief Financial Officer of
the Bank in May 1997. Prior to his appointment as Chief Financial Officer, Mr.
Blow was a senior manager at the accounting firm of KPMG Peat Marwick LLP. Mr.
Blow also serves as a director of Hudson City Associates, Inc. and as Secretary
and Treasurer of Hudson River Funding Corp., wholly owned subsidiaries of the
Bank. See "Business of the Bank--Subsidiary and Other Activities."
Pamela M. Wood. Ms. Wood, age 50, has been employed by the Bank since 1969
and has served as Senior Vice President and Corporate Secretary since 1993. She
also serves as Secretary of Hudson River Mortgage Corporation, Hudson City
Center, Inc. and Hudson City Associates, Inc.
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From 1990 to 1993, she served as Vice President and Corporate Secretary. From
1984 to 1990 she served as Assistant Vice President. From 1969 to 1984 she
served as Administrative Assistant and Executive Secretary.
Sidney D. Richter. Mr. Richter, age 57, has served as the Bank's Senior
Vice President of Lending since 1993. From 1990 to 1993, Mr. Richter served as
the Bank's Vice President for Commercial Lending. Mr. Richter also serves as a
director of each of the Bank's wholly owned subsidiaries. See
"Business--Subsidiary and Other Activities."
Meetings and Committees of the Board of Trustees of the Bank
The Bank's Board of Trustees meets at least monthly and held 12
meetings during the fiscal year ended March 31, 1997. During fiscal 1997, no
trustee of the Bank attended fewer than 75% of the aggregate of the total number
of Board meetings and the total number of meetings held by the committees of the
Board of Trustee on which he or she served. The current committees of the Board
of Trustees of the Bank are the Executive Committee, Trust Committee, Audit
Committee, Examining Committee and the Compensation Committee. Following the
Conversion, the Board of Directors of the Bank may revise the membership and
structure of the current committees of the Board of Trustees.
The Executive Committee is comprised of all of the Trustees with John
E. Kelly serving as Chairman. The Executive Committee meets on an as needed
basis and exercises the power of the Board of Trustees between Board meetings,
to the extent permitted by applicable law. The Executive Committee met 14 times
during fiscal 1997.
The Audit Committee is responsible for the oversight of the Bank's
Internal Audit Department and for the review of the Bank's annual audit report
prepared by the Bank's independent auditors. Only non-employee directors may
serve on the Audit Committee. The current members of the committee are Trustees
Bardwell (Chairman), Collins and Phelan. The Audit Committee met one time during
fiscal 1997.
The Trust Committee oversees the Bank's trust operations. The current
members of the Trust Committee are Trustees Florio, Phelan and Schram and
officers Richter and Blow and trust officer Willsey. The Trust Committee met 12
times during fiscal 1997.
Trustee Compensation
During fiscal 1997, each trustee of the Bank received a fee of $1,100
per Board meeting attended. During fiscal 1997, members of the Executive
Committee each received $550 per committee meeting attended, members of the
Audit Committee each received $450 per committee meeting attended and members of
the Trust Committee each received $200 per committee meeting attended. In
addition, non-employee Directors of Hudson City Associates, Inc. receive $200
per meeting attended.
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Trustees Emeritus
Under the Bank's Bylaws, a retiring Trustee may, with the approval of
the Board of Trustees, serve as a Trustee Emeritus of the Bank. A Trustee
Emeritus is entitled to attend all meetings of the Board of Trustees,
participate in all discussions and receive the same fees as a Trustee or a
Trustee Emeritus may elect to receive an annual retainer of $10,000 for
attendance at Board of Trustee meetings only. Trustees Emeritus are not,
however, entitled to vote or meet as a separate body. Warren H. Bohnsack and
Morton A. Ginsberg currently serve as Trustees Emeritus of the Bank. It is
anticipated that following the Conversion, Messrs. Bohnsack and Ginsberg will
serve as Directors Emeritus of the Bank and the Holding Company and act in an
advisory capacity to the Board of Directors of the Bank and the Holding Company
but have no voting rights.
Executive Compensation
The following table sets forth information concerning the compensation
paid to the Bank's Chief Executive Officer and the Bank's only other executive
officer whose salary and bonus for fiscal 1997 exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
<S> <C> <C> <C> <C> <C> <C> <C>
Other Annual Restricted Stock Options All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Award ($)(1) (#)(1) Compensation($)
(2)
Carl A. Florio, President and 1997 $150,000(3) $13,125 $--- N/A N/A $4,700
Chief Executive Officer
Sidney D. Richter 1997 103,000 13,375 --- N/A N/A 4,300
Senior Vice President
<FN>
(1) As a mutual institution, the Bank does not have any stock options or
restricted stock plans. The Holding Company does, however, intend to adopt
such plans following the Conversion. See "-- Benefit Plans - Employee Stock
Ownership Plan" and "-- Recognition and Retention Plan."
(2) Represents $400 and $400 of life insurance premiums paid by the Bank and
the Bank's contributions of $4,300 and $3,900 to the Bank's 401(k) plan on
behalf of Messrs. Florio and Richter, respectively.
(3) Represents service as Chief Financial Officer of the Bank from April 1996
to June 1996 and as the Chief Executive officer from June 1996 to March
1997.
</FN>
</TABLE>
Employment Agreements
Upon the Conversion, the Bank and the Holding Company intend to enter into
employment agreements with Mr. Florio and three other officers of the Bank
(individually, the "Executive") and the Holding Company intends to enter into
employment agreements with Carl Florio, Sidney Richter and two other executive
officers of the Bank (collectively, the "Employment Agreements"). The Employment
Agreements are intended to ensure that the Bank and the Holding Company will be
able to maintain a stable and competent management base after the Conversion.
The continued success of the Bank and the Holding 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
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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.
Florio will be $235,000. In addition to the base salary, the Employment
Agreements provide for, among other things, participation in stock benefit plans
and other fringe benefits applicable to executive personnel. The agreements
provide for termination by the Bank or the Holding Company for cause, as defined
in the Employment Agreements, at any time. In the event the Bank or the Holding
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
Holding 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 Holding Company; or (v) a breach of the agreement
by the Bank or the Holding 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 Holding Company during
the remaining term of the agreement. The Bank and the Holding 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 Holding 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 Holding 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 Holding Company Employment Agreements provide for a severance
payment in the event of a change in control, the Executive would only be
entitled to receive a severance payment under one agreement.
Payments to the Executive under the Bank's Employment Agreement will be
guaranteed by the Holding Company in the event that payments or benefits are not
paid by the Bank. Payment under the Holding Company's Employment Agreement would
be made by the Holding Company. The Holding Company's Employment Agreement also
provides that the Holding 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 Holding
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 Holding Company shall indemnify the Executive to the
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fullest extent allowable under New York and Delaware law, respectively. In the
event of a change in control of the Bank or the Holding 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 $2.2 million.
Change in Control Agreements
Upon Conversion, the Bank intends to enter into two-year Change in Control
Agreements (the "CIC Agreements") with five officers of the Bank, none of whom
will be covered by employment contracts. Commencing on the first anniversary
date and continuing on each anniversary thereafter, the Bank CIC Agreements may
be renewed by the Board of Directors of the Bank for an additional year. The
Bank's CIC Agreements will provide that in the event voluntary or involuntary
termination follows a change in control of the Holding 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 to 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 Holding 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 $876,000.
Employee Severance Compensation Plan
The Bank's Board of Directors intends to, upon the Conversion, establish
the Hudson River Bank & Trust Company 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 Holding 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 Holding 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 100% 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 $196,000. However, it
is management's belief that substantially all of the Bank's employees would be
retained in their current
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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.
Independent Compensation Expert
Pursuant to NYBB regulations, an independent compensation expert must
review the total compensation for the executive officers and trustees of the
Bank as a whole and on an individual basis and determine whether such
compensation is reasonable and proper in comparison to the compensation provided
to executive officers, directors or trustees of similar publicly-traded
financial institutions. William M. Mercer, Incorporated has conducted such
review on behalf of the Bank and determined that, based upon published
professional survey data of similarly situated publicly-traded financial
institutions operating in the relevant markets, with respect to the total cash
compensation for executive officers and total remuneration for trustees of the
Bank, such compensation, viewed as a whole and on an individual basis, is
reasonable and proper in comparison to the compensation provided to similarly
situated publicly-traded financial institutions, and that, with respect to the
amount of shares of Common Stock to be reserved under the ESOP, and expected to
be reserved under the RRP and the Stock Option Plan, as a whole, such amounts
reserved for granting are reasonable in comparison to similar publicly-traded
financial institutions.
Benefit Plans
General. The Bank currently provides health care benefits to its employees,
including hospitalization, major medical, dental, life and disability insurance,
subject to certain deductibles and copayments by employees.
Defined Benefit Pension Plan. The Bank sponsors a defined benefit pension
plan for its employees (the "Pension Plan"). Salaried employees are eligible to
participate in the Pension Plan following the completion of one year of service
(1,000 hours worked during a continuous 12-month period) and attainment of 21
years of age. A participant must reach five years of service before attaining a
vested interest in his or her retirement benefits, after which such participant
is 100% vested. The Pension Plan is funded solely through contributions made by
the Bank.
The benefit provided to a participant at normal retirement age (generally
age 65) is based on the average of the participant's basic annual compensation
during the 36 consecutive months of service within the last 120 completed months
of a participant's service which yields the highest average compensation
("average annual compensation"). Compensation for this purpose is the
participant's basic annual salary, including any contributions through a salary
reduction arrangement to a cash or deferred plan under Section 401(k) of the
Code, but exclusive of overtime, bonuses, severance pay, or any special payments
or other deferred compensation arrangements. The annual benefit provided to a
participant, without offset for the participant's anticipated Social Security
benefit, who retires at age 65 is equal to 2% of average annual compensation for
each year of service up to a maximum of 30 years.
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The annual benefit provided to participants (i) at early retirement age
(generally age 62) with five years of service who elect to defer the payment of
their benefits to normal retirement age, (ii) at early retirement age with five
years of service who elect to receive payment of their benefits prior to normal
retirement age, or (iii) who postpone annual benefits beyond normal retirement
age, are calculated basically the same as the benefits for normal retirement
age, with annual average compensation being multiplied by 2% for each year of
such individual's actual years of service. A participant eligible for early
retirement benefits who does not meet the requirements set forth above will have
his or her benefits adjusted as further described in the Pension Plan.
The Pension Plan also provides for disability and death benefits.
The following table sets forth, as of March 31, 1997, estimated annual
pension benefits for individuals at age 65 payable in the form of a life annuity
under the most advantageous plan provisions for various levels of compensation
and years of service. The figures in this table are based upon the assumption
that the Pension Plan continues in its present form and does not reflect offsets
for Social Security benefits and does not reflect benefits payable under the
ESOP. At March 31, 1997, the estimated years of credited service of Messrs.
Florio and Richter were three and six years, respectively.
Pension Plan Table
Years of Credited Service
Remuneration 15 20 25 30 35*
$ 75,000 $22,500 $30,000 $37,500 $45,000 $46,875
$100,000 $30,000 $40,000 $50,000 $60,000 $62,500
$125,000 $37,500 $50,000 $62,500 $75,000 $78,125
$150,000 $45,000 $60,000 $75,000 $90,000 $93,750
$175,000 $45,000 $60,000 $75,000 $90,000 $93,750
$200,000 $45,000 $60,000 $75,000 $90,000 $93,750
$225,000 $45,000 $60,000 $75,000 $90,000 $93,750
$250,000 $45,000 $60,000 $75,000 $90,000 $93,750
$300,000 $45,000 $60,000 $75,000 $90,000 $93,750
$400,000 $45,000 $60,000 $75,000 $90,000 $93,750
$500,000 $45,000 $60,000 $75,000 $90,000 $93,750
--------------------
*Assumes that participant had 30 or more years of Credited Servie as of
July 14, 1995.
401(k) Savings Plan. The Bank has a qualified, tax-exempt savings plan with
a cash or deferred feature qualifying under Section 401(k) of the Code (the
"401(k) Plan"). All salaried employees who have attained age 21 and completed
one year of employment, during which they worked at least 1,000 hours, are
eligible to participate.
Participants are permitted to make salary reduction contributions to the
401(k) Plan of between 2% to 10% of the participant's annual salary. Each
participant's salary reduction contribution is matched by the Bank in an amount
equal to 50% of the participant's before-tax contribution up to a maximum
contribution by the Bank of 4% of such participant's annual salary for the Plan
Year. All participant contributions and earnings are fully and immediately
vested. All
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matching contributions are vested at a rate of 20% per year over a five year
period commencing after one year of employment with the Bank. However, in the
event of retirement, permanent disability or death, a participant will
automatically become 100% vested in the value of all matching contributions and
earnings thereon, regardless of the number of years of employment with the Bank.
Participants may invest amounts contributed to their 401(k) Plan accounts
in one or more investment options available under the 401(k) Plan. Changes in
investment directions among the funds are permitted on a quarterly basis
pursuant to procedures established by the Plan Administrator. Each participant
receives a quarterly statement which provides information regarding, among other
things, the market value of his investments and contributions made to the 401(k)
Plan on his behalf. Participants are permitted to borrow against their account
balance in the 401(k) Plan. For the year ended March 31, 1997, the Bank's
contributions to the 401(k) Plan on behalf of Messrs. Florio and Richter were
$4,300 and $3,900, respectively.
Employee Stock Ownership Plan. The Board of Trustees of HCSI and the Board
of Directors of the Holding Company have approved the adoption of an ESOP for
the benefit of full-time salaried employees of HCSI. The ESOP is designed to
meet the requirements of an employee stock ownership plan as described at
Section 4975(e)(7) of the Code and Section 407(d)(6) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and, as such, the ESOP is
empowered to borrow in order to finance purchases of the Holding Company's
Common Stock.
It is anticipated that the ESOP will be initially funded with a loan from
the Holding Company. The proceeds from this loan are expected to be used by the
ESOP to purchase 8% of the Common Stock issued in the Conversion, including
shares issued to the Foundation. After the Conversion, as a qualified employee
pension plan under Section 401(a) of the Code, the ESOP will be in the form of a
stock bonus plan and will provide for contributions, predominantly in the form
of either the Holding Company's Common Stock or cash, which will be used within
a reasonable period after the date of contributions primarily to purchase the
Holding Company Common Stock. The maximum tax-deductible contribution by the
Bank in any year is an amount equal to the maximum amount that may be deducted
by the Bank under Section 404 of the Code, subject to reduction based on
contributions to other tax-qualified employee plans. Additionally, the Bank will
not make contributions if such contributions would cause the Bank to violate its
regulatory capital requirements. The assets of the ESOP will be invested
primarily in the Holding Company's Common Stock. The Bank will receive a tax
deduction equal to the amount it contributes to the ESOP.
From time to time the ESOP may purchase additional shares of Common Stock
for the benefit of plan participants through purchases of outstanding shares in
the market, upon the original issuance of additional shares by the Holding
Company or upon the sale of shares held in treasury by the Holding Company. Such
purchases, which are not currently contemplated, would be subject to
then-applicable laws, regulations and market conditions.
All employees of the Bank are eligible to participate in the ESOP after
they attain age 21 and complete one year of service during which they work at
least 1,000 hours. Employees will be credited for years of service to the Bank
prior to the adoption of the ESOP for participation and
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vesting purposes. The Bank's contribution to the ESOP is allocated among
participants on the basis of compensation. Each participant's account will be
credited with cash and shares of Holding Company Common Stock based upon
compensation earned during the year with respect to which the contribution is
made. A participant will become vested in his or her ESOP account at a rate of
20% per year and after completing five years of service a participant will be
100% vested in his or her ESOP account. ESOP participants are entitled to
receive distributions from their ESOP accounts only upon termination of service.
Distribution will be made in cash and in whole shares of the Holding Company's
Common Stock. Fractional shares will be paid in cash. Participants will not
incur a tax liability until a distribution is made.
Participating employees are entitled to instruct the trustee of the ESOP as
to how to vote the shares held in their account. Unallocated shares will be
voted by the trustee in the same proportion as allocated shares. First Bankers
Trust, the trustee, who has dispositive power over the shares in the Plan, is an
independent party and will not be affiliated with the Holding Company or HCSI
following the Conversion. The ESOP may be amended by the Board of Directors of
the Holding Company, except that no amendment may be made which would reduce the
interest of any participant in the ESOP trust fund or divert any of the assets
of the ESOP trust fund to purposes other than the benefit of participants or
their beneficiaries.
Benefit Restoration Plan. The Bank also maintains a non-qualified deferral
compensation plan, known as the Hudson River Bank & Trust Company Benefit
Restoration Plan (the "Restoration Plan"). The Restoration Plan provides certain
officers and highly compensated executives 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 Restoration Plan 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. In addition,
the Restoration Plan is intended to make up benefits lost under the ESOP
allocation procedures to certain participants named by the Compensation
Committee who retire prior to the complete repayment of the ESOP loan. At the
retirement of a participant, the benefits under the Restoration Plan 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 Restoration Plan vest in
20% annual increments over a five year period commencing as of the date of a
Participant's participation in the Restoration Plan . The vested portion of the
Restoration Plan 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.
Stock Option and Incentive Plan. Among the benefits to the Bank and the
Holding Company anticipated from the Conversion is the ability to attract and
retain directors and key personnel through stock option and other stock-related
incentive programs. A Stock Option Plan is intended to be adopted by the Board
of Directors of the Holding Company and then submitted to the Holding
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Company's Stockholders for their approval (at a meeting to be held no earlier
than six months following the Conversion).
The Holding 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 1,552,500 shares based upon the issuance of 15,525,000 shares),
for issuance under the Stock Option Plan. If the Holding 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 implemented within
one year after the Conversion 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.
It is anticipated that the Stock Option Plan will allow for the granting
of: (i) stock options for employees intended to qualify as incentive stock
options under Section 422 of the Code ("Incentive Stock Options"); (ii) options
for all plan 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 Holding Company. Unless sooner terminated, the Stock Option Plan will
remain in effect for a period of ten years from the earlier of adoption by the
Board of Directors or approval by the Holding Company's stockholders. Subject to
applicable regulations, upon exercise of a "Limited Option Right" in the event
of a change in control, the optionee 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 in lieu of purchasing the stock underlying the option. A change in
control would be defined in the Stock Option Plan 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 Holding 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 Holding
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.
It is intended that under the Stock Option Plan, an optionee would not be
required to make any payment for an option granted thereunder; accordingly,
until the optionee exercised the option, he or she would not be placing any
personal funds at risk. The Stock Option Plan will be administered by a
committee (the "Compensation Committee") the members of which are each
"non-employee directors," as defined in the SEC's regulations, and "outside
directors," as defined under Section 162(m) of the Code and the regulations
thereunder. The Stock Option Committee will determine which directors, officers
and employees may receive options and Limited Options, whether such options will
qualify as Incentive Stock Options, the number of shares subject to each
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option, the exercise price of each option, the manner of exercise of the options
and the time when such options will become exercisable.
The Holding Company anticipates that options granted pursuant to the Stock
Option Plan will remain exercisable for at least three months following the date
on which a participant ceases to perform services for the Bank or the Holding
Company, except in the event of death or disability, in which case options would
accelerate and become fully vested and remain exercisable for up to one year
thereafter, or such longer period as determined by the Stock Option Committee,
and in the event of termination of service of a participant by the Bank or
Holding Company for cause, in which case options held by the participant would
be immediately forfeited. However, any Incentive Stock Option exercised more
than three months following the date on which an employee ceased to perform
services as an employee, other than termination due to death or disability,
would not be treated for tax purposes as an Incentive Stock Option. It is
intended that the Stock Option Plan would provide that the Stock Option
Committee, 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.
Recognition and Retention Plan. Following consummation of the Conversion,
the Board of Directors of the Holding Company intends to adopt a Recognition and
Retention Plan ("RRP") for directors, officers and employees. The objective of
the RRP will be to enable the Holding Company to provide directors, officers and
employees with a proprietary interest in the Holding Company as an incentive to
contribute to its success. The Holding Company intends to present the RRP to
stockholders for their approval at a meeting of stockholders which, pursuant to
applicable NYBB and FDIC regulations, may be held no earlier than six months
subsequent to completion of the Conversion.
The RRP will be administered by the Compensation Committee of the Board of
Directors. The Holding Company will contribute funds to the RRP to enable it to
acquire in the open market or from authorized but unissued shares, following
stockholder ratification of such plan, an amount of stock equal to 4% of the
shares of Common Stock issued in the Conversion, including shares issued to the
Foundation (representing 621,000 shares in the aggregate, having a value of
$6,210,000 based on the offering price per share of $10.00). Although no
specific awards have been made, the Holding Company anticipates that it will
provide stock awards to the directors, executive officers and employees of the
Holding Company or the Bank or their affiliates to the extent permitted by
applicable regulations. NYBB regulations provide that, to the extent the Holding
Company implements the RRP within one year after 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 Awards granted under the RRP may not be accelerated except
upon death or disability for plans adopted within one year after conversion.
Under the terms of the proposed RRP, awards ("Awards") can be granted to
key employees in the form of shares of Common Stock held by the RRP. Awards are
non-transferable and non-assignable. Recipients will earn (i.e., become vested
in), over a period of time, the shares of Common Stock covered by the Award.
Certain Transactions
The Bank's policies do not permit the Bank to make loans to any of its
Trustees. Federal laws 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. As of March
31, 1997, all outstanding loans to the Bank's executive officers were made in
the ordinary course of business and on the same terms, including collateral and
interest rates, as those prevailing at the time for comparable transactions with
the general public, and do not involve more than the normal risk of
collectiblity.
Chairman of the Board of Trustees Earl Schram, Jr. is President of the law
firm of Connor, Curran & Schram P.C. ("Connor Curran"). Connor Curran serves as
outside counsel to the Bank and performs various legal services for the Bank.
During fiscal 1997, the Bank paid Connor Curran approximately $184 thousand in
fees for services rendered. Connor Curran also receives an indirect benefit from
the Bank to the extent borrowers of Hudson City engage Connor Curran to close
their loans. Services provided by Connor Curran to the Bank are provided on
terms comparable to those which are available to unaffiliated parties.
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Proposed Purchases by Executive Officers and Trustees
The following table sets forth the number of shares of Common Stock that
the executive officers and trustees, and their associates, propose to purchase
in the Offerings, assuming shares of Common Stock are issued at $10.00 per share
at the minimum ($111,407,770) and maximum ($150,728,150) of the Estimated
Valuation Range and that sufficient shares will be available to satisfy their
orders. The table also sets forth the total expected beneficial ownership of
Common Stock as to all trustees and executive officers as a group.
At the Minimum At the Maximum
of the of the
Estimated Valuation Estimated Valuation
Range(1) Range(1)
As a As a
Percent Percent
of of
Number of Shares Number of Shares
Name Amount Shares Offered Shares Offered
Carl A. Florio............. $ 400,000 40,000 .36% 40,000 .27%
Earl Schram, Jr............ 1,000,000 100,000 .90 100,000 .66
Stanley Bardwell........... 200,000 20,000 .18 20,000 .13
William E. Collins......... 150,000 15,000 .13 15,000 .10
John E. Kelly.............. 3,000 300 --(2) 300 --(2)
Joseph W. Phelan........... 250,000 25,000 .22 25,000 .17
William H. Jones........... 200,000 20,000 .18 20,000 .13
Marilyn A. Herrington...... 250,000 25,000 .22 25,000 .17
Marcia M. Race............. 15,000 1,500 .01 1,500 .01
Timothy E. Blow............ 20,000 2,000 .02 2,000 .01
Pamela M. Wood............. 20,000 2,000 .02 2,000 .01
Sidney D. Richter.......... 200,000 20,000 .18 20,000 .13
--------- -------- ----- ------ -----
All directors and executive
officers as a group
(12 persons)............. $2,708,000 270,800 2.43 % 270,800 1.80 %
========== ======= ====== ======= =====
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares issued in the Conversion, including shares
issued to the Foundation. Also does not include shares to be contributed to
the Foundation equal to 3% of the Common Stock sold or 334,223 shares and
452,184 shares at the minimum and the maximum, respectively of the
Estimated Valuation Range, Common Stock which may be awarded under the
Recognition and Retention Plan to be adopted equal to 4% of the Common
Stock issued in the Conversion, including shares issued to the Foundation
(or 459,000 shares and 621,000 shares at the minimum and the maximum,
respectively, of the Estimated Valuation Range), 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 (or 1,147,500
shares or 1,552,500 shares at the minimum and the maximum, respectively, of
the Estimated Valuation Range.)
(2) Less than .01%.
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THE CONVERSION
THE BOARD OF TRUSTEES OF THE BANK AND THE SUPERINTENDENT OF BANKS OF THE
STATE OF NEW YORK HAVE APPROVED THE PLAN OF CONVERSION, SUBJECT TO APPROVAL BY
THE BANK'S DEPOSITORS ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF
CERTAIN OTHER CONDITIONS. SUCH APPROVAL, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE SUPERINTENDENT.
General
On November 20, 1997, the Bank's Board of Trustees unanimously adopted
the Plan of Conversion pursuant to which the Bank will be converted from a New
York mutual savings bank to a New York stock savings bank. The Plan was amended
by the Board of Trustees as of February 19, 1998. It is currently intended that
all of the outstanding capital stock issued by the Bank pursuant to the Plan
will be held by the Holding Company, which is incorporated under Delaware law.
The Plan was approved by the Superintendent, and the Bank has received a notice
of intent not to object to the Plan from the FDIC, subject to, among other
things, approval of the Plan by the Bank's depositors. A special meeting of
depositors has been called for this purpose to be held on June 29, 1998.
The Holding Company has received approval from the OTS to become a
savings and loan holding company and to acquire all of the capital stock of the
Bank to be issued in the Conversion. The Holding Company plans to retain 50% of
the net proceeds from the sale of the Common Stock and to use the remaining net
proceeds to purchase all of the then issued and outstanding capital stock of the
Bank. The Conversion will be effected only upon completion of the sale of all of
the shares of Common Stock of the Holding Company (or of the Bank, if the
holding company form of organization is not utilized) to be issued pursuant to
the Plan.
The Plan provides that the Board of Trustees of the Bank may, at any
time prior to the issuance of the Common Stock and for any reason, decide not to
use the holding company form of organization. Such reasons may include possible
delays resulting from overlapping regulatory processing or policies which could
adversely affect the Bank's or the Holding Company's ability to consummate the
Conversion and transact its business as contemplated herein and in accordance
with the Bank's operating policies. In the event such a decision is made, the
Bank will withdraw the Holding Company's registration statement from the SEC and
take steps necessary to complete the Conversion without the Holding Company,
including filing any necessary documents with the NYSBD and the FDIC. In such
event, and provided there is no regulatory action, directive or other
consideration upon which basis the Bank determines not to complete the
Conversion, if permitted by the NYSBD, the Bank will issue and sell the common
stock of the Bank and subscribers will be notified of the elimination of a
holding company and will be solicited (i.e., be permitted to affirm their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
funds will be promptly refunded with interest at the Bank's passbook rate of
interest; or be permitted to modify or rescind their subscriptions), and
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notified of the time period within which the subscriber must affirmatively
notify the Bank of such subscriber's intention to affirm, modify or rescind such
subscriber's subscription. The following description of the Plan assumes that a
holding company form of organization will be used in the Conversion. In the
event that a holding company form of organization is not used, all other
pertinent terms of the Plan as described below will apply to the conversion of
the Bank from the mutual to stock form of organization and the sale of the
Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a
mutual savings bank to a capital stock savings bank and (ii) the Holding Company
will offer shares of Common Stock for sale in the Subscription Offering to the
Bank's Eligible Account Holders, Employee Plans, including the ESOP and
Supplemental Eligible Account Holders. The Plan also provides that shares not
subscribed for in the Subscription Offering may be offered in a Community
Offering to certain members of the general public. It is anticipated that all
shares not subscribed for in the Subscription and Community Offerings will be
offered for sale by the Holding Company to the general public in a Syndicated
Community Offering. The Holding Company and the Bank have reserved the right to
accept or reject, in whole or in part, any orders to purchase shares of the
Common Stock received in the Community Offering or in the Syndicated Community
Offering. See "-Community Offering" and "- Syndicated Community Offering."
The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Valuation Range, currently estimated to be
between $111,407,770 and $150,728,150 is based upon an independent appraisal
prepared by RP Financial, a consulting firm experienced in the valuation and
appraisal of savings institutions, of the estimated pro forma market value of
the Common Stock of the Holding Company. All shares of Common Stock to be issued
and sold in the Conversion will be sold at the same price. The independent
appraisal will be affirmed or, if necessary, updated at the completion of the
Offerings. See "- Stock Pricing" for additional information as to the
determination of the estimated pro forma market value of the Common Stock.
The following is a brief summary of pertinent aspects of the Plan. The
summary is qualified in its entirety by reference to the provisions of the Plan.
A copy of the Plan is available from the Bank upon written request and is
available for inspection at the offices of the Bank and at the office of the
Superintendent. The Plan is also filed as an Exhibit to the Registration
Statement of which this Prospectus is a part, copies of which may be obtained
from the SEC.
Purposes of Conversion
The Bank, as a New York mutual savings bank, does not have shareholders
and has no authority to issue capital stock. By converting to the capital stock
form of organization, the Bank will be structured in the form used by commercial
banks, other business entities and a growing number of savings institutions. The
Conversion will be important to the future growth and performance of the Bank by
providing a larger capital base on which the Bank may operate, enhanced future
access to capital markets, enhanced ability to diversify into other financial
services related activities and enhanced ability to render services to the
public.
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The holding company form of organization, if used, would provide
additional flexibility to diversify the Bank's business activities through
newly-formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there are no
current arrangements, understandings or agreements, written or oral, regarding
any such opportunities, the Holding Company will be in a position after the
Conversion, subject to regulatory limitations and the Holding Company's
financial position, to take advantage of any such opportunities that may arise.
While there are benefits associated with the holding company form of
organization, such form of organization may involve additional costs associated
with its maintenance and regulation as a savings and loan company, such as
additional administrative expenses, taxes and regulatory filings or examination
fees.
The potential impact of the Conversion upon the Bank's capital base is
significant. The Bank had Tier I Leverage Capital of $66.8 million, or 10.1% of
assets, at December 31, 1997. Assuming that $148.0 million of net proceeds are
realized from the sale of Common Stock (being the maximum of the Estimated
Valuation Range established by the Board of Directors based on the Valuation
Range which has been estimated by RP Financial to be from a minimum of
$111,407,770 to a maximum of $150,728,150 (see "Pro Forma Data" for the basis of
this assumption)) and assuming that $74.0 million of the net proceeds are used
by the Holding Company to purchase the capital stock of the Bank, the Bank's
Tier I Leverage capital ratio, on a pro forma basis, will increase to 17.0%
after the Conversion. The investment of the net proceeds from the sale of the
Common Stock will provide the Bank with additional income to further enhance its
capital position. The additional capital may also assist the Bank in offering
new programs and expanded services to its customers.
After completion of the Conversion, the unissued common and preferred
stock authorized by the Holding Company's Certificate of Incorporation will
permit the Holding Company, subject to market conditions and regulatory
approval, to raise additional equity capital through further sales of securities
and to issue securities in connection with possible acquisitions. At the present
time, the Holding Company has no plans with respect to additional offerings of
securities, other than the issuance of additional shares to the Foundation or
upon exercise of stock options granted pursuant to the Stock Option Plan or the
possible issuance of authorized but unissued shares pursuant to the RRP.
Following the Conversion, the Holding Company will also be able to use
stock-related incentive programs to attract and retain executive and other
personnel for itself and its subsidiaries.
See "Management of the Bank - Executive Compensation."
Effects of Conversion
General. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the equity of
the institution based upon the balance in such depositor's account, which
interest may only be realized in the event of a liquidation of the institution.
However, this ownership interest is tied to the depositor's account and has no
tangible market value separate from such deposit account. Any depositor who
opens a deposit account obtains a pro rata ownership interest in the equity of
the institution without any additional payment beyond the amount of the deposit.
A depositor who reduces or closes such depositor's account receives the balance
in the account but receives nothing for such depositor's ownership interest in
the equity of the institution, which is lost to the extent that the balance in
the account is reduced.
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Consequently, depositors of a mutual savings bank have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings bank is liquidated. In such event,
the depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves after other claims, including claims of depositors
to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of, depositors is
thereafter represented exclusively by their liquidation rights. See
"--Liquidation Rights." Such common stock is separate and apart from deposit
accounts and cannot be and is not insured by the FDIC or any other governmental
agency. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable, and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.
Continuity. While the Conversion is being accomplished, and after the
consummation of the Conversion, the normal business of the Bank of accepting
deposits and making loans will continue without interruption. The Bank will
continue to be subject to regulation by the Superintendent and the FDIC. After
Conversion, the Bank will continue to provide services for depositors and
borrowers under current policies by its present management and staff.
The trustees serving the Bank immediately before the Conversion will
serve as directors of the Bank after the Conversion. The directors of the
Holding Company will consist of all of the individuals currently serving on the
Board of Trustees of the Bank. It is anticipated that all officers of the Bank
serving immediately before the Conversion will retain their positions after the
Conversion. See "Management of the Holding Company" and "Management of the
Bank."
Deposit Accounts and Loans. Under the Plan, each depositor in the Bank
at the time of Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms, except to the extent affected by
withdrawals made to purchase Common Stock in the Conversion. See "--Procedure
for Purchasing Shares in Subscription and Community Offerings." Each such
account will be insured by the FDIC to the same extent as before the Conversion
(i.e., up to $100,000 per depositor). Depositors will continue to hold their
existing certificates of deposit, passbooks and other evidences of their
accounts.
Furthermore, no loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.
Voting Rights. In its current mutual form, voting rights and control of
the Bank are vested exclusively in the Board of Trustees. After the Conversion,
direction of the Bank will be under the control of the Board of Directors of the
Bank. The Holding Company, as the holder of all of the outstanding capital stock
of the Bank, will have exclusive voting rights with respect to any matters
concerning the Bank requiring shareholder approval, including the election of
directors of the Bank.
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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 Holding
Company. Each holder of Common Stock will, subject to the restrictions and
limitations set forth in the Holding Company's Certificate of Incorporation
discussed below, be entitled to vote on any matters to be considered by the
Holding Company's shareholders, including the election of directors of the
Holding Company.
Liquidation Rights. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each depositor would receive such
depositor's pro rata share of any assets of the Bank remaining after payment of
claims of all creditors (including the claims of all depositors to the
withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of such
depositor's deposit account was to the total value of all deposit accounts in
the Bank at the time of liquidation. After the Conversion, each depositor, in
the event of a complete liquidation, would have a claim as a creditor of the
same general priority as the claims of all other general creditors of the Bank.
However, except as described below, such depositor's claim would be solely in
the amount of the balance in such depositor's deposit account plus accrued
interest. Such depositor would not have an interest in the value or assets of
the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" (which is a memorandum account
only) for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders in an amount equal to the surplus and reserves of the Bank as of
the date of its latest balance sheet contained in the final Prospectus used in
connection with the Conversion. Each Eligible Account Holder and Supplemental
Eligible Account Holder, if such account holder were to continue to maintain
such account holder's deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the shareholders of the Bank,
whether or not such Eligible Account Holder or Supplemental Eligible Account
Holder purchased Common Stock in the Conversion. Each Eligible Account Holder
and Supplemental Eligible Account Holder would have an initial interest in such
liquidation account for each deposit account, including passbook accounts,
demand accounts, money market deposit accounts and time deposits, with an
aggregate balance of $100 or more held in the Bank on September 30, 1996 (with
respect to an Eligible Account Holder) and March 31, 1998 (with respect to a
Supplemental Eligible Account Holder) (each a "Qualifying Deposit"). Each
Eligible Account Holder and Supplemental Eligible Account Holder will have a pro
rata interest in the total liquidation account for such account holder's deposit
accounts based on the proportion that the aggregate balance of such person's
Qualifying Deposits on the Eligibility Record Date or Supplemental Eligibility
Record Date, as applicable, bore to the total amount of all Qualifying Deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders.
If, however, on any annual closing date (i.e., the anniversary of the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable) of the Bank, commencing on or after the effective date of the
Conversion, the amount in any deposit account is less than the amount in such
deposit account on September 30, 1996 (with respect to an Eligible Account
Holder), or March 31, 1998 (with respect to a Supplemental Eligible Account
Holder), or any other annual closing date,
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then the interest in the liquidation account relating to such deposit account
would be reduced from time to time by the proportion of any such reduction, and
such interest will cease to exist if such deposit account is closed. For
purposes of the liquidation account, time deposit accounts shall be deemed to be
closed upon maturity regardless of renewal. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. Any assets remaining after the above liquidation
rights of Eligible Account Holders and Supplemental Eligible Account Holders are
satisfied would be distributed to the Holding Company as the sole shareholder of
the Bank.
Tax Aspects. Consummation of the Conversion is expressly conditioned
upon the receipt by the Bank of either a favorable ruling from the IRS and New
York taxing authorities or opinions of counsel with respect to federal and New
York income taxation, to the effect that the Conversion will not be a taxable
transaction to the Holding Company, the Bank, Eligible Account Holders or
Supplemental Eligible Account Holders, except as noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Silver, Freedman & Taff, L.L.P., based on customary certificates delivered by
management of the Holding Company and the Bank, that for federal income tax
purposes, among other matters: (i) the Bank's change in form from mutual to
stock ownership will constitute a reorganization under section 368(a)(I)(F) of
the Code, (ii) neither the Bank nor the Holding Company will recognize any gain
or loss as a result of the Conversion; (iii) no gain or loss will be recognized
by the Bank or the Holding Company upon the purchase of the Bank's capital stock
by the Holding Company or by the Holding Company upon the purchase of its Common
Stock in the Conversion; (iv) no gain or loss will be recognized by Eligible
Account Holders or Supplemental Eligible Accounts Holders upon the issuance to
them of deposit accounts in the Bank in its stock form plus their interests in
the liquidation account in exchange for their deposit accounts in the Bank; (v)
the tax basis of the depositors' deposit accounts in the Bank immediately after
the Conversion will be the same as the basis of their deposit accounts
immediately prior to the Conversion; (vi) the tax basis of each Eligible Account
Holder's and each Supplemental Eligible Account Holders interest in the
liquidation account will be zero; (vii) no gain or loss will be recognized by
Eligible Account Holders or Supplemental Eligible Account Holders upon the
distribution to them of non-transferable subscription rights to purchase shares
of the Common Stock, provided, that the amount to be paid for the Common Stock
is equal to the fair market value of such stock; and (viii) the tax basis to the
shareholders of the Common Stock of the Holding Company purchased in the
Conversion pursuant to the subscription rights 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.
KPMG Peat Marwick LLP has also opined, subject to the limitations and
qualifications in its opinion, that the Conversion will not be a taxable
transaction to the Holding Company or to the Bank for New York income and
franchise tax purposes or to Eligible Account Holders or to Supplemental
Eligible Account Holders for New York income tax purposes. The opinions of
Silver, Freedman & Taff, L.L.P. and KPMG Peat Marwick LLP have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
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Unlike private rulings, opinions of counsel or other professionals are
not binding on the IRS or the New York taxing authorities and the IRS or the New
York taxing authorities could disagree with conclusions reached therein. In the
event of such disagreement, there can be no assurance that the IRS or the New
York taxing authorities would not prevail in a judicial or administrative
proceeding.
Certain portions of both the federal and the state tax opinions are
based upon the opinion of RP Financial that subscription rights issued in
connection with the Conversion will have no value. In the opinion of RP
Financial, which opinion is not binding on the IRS or the New York taxing
authorities, the subscription rights do not have any value based on the fact
that such rights are acquired by the recipients without cost, are
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, Supplemental Eligible Account Holders and Other Depositors are deemed
to have an ascertainable value, such Eligible Account Holders, Supplemental
Eligible Account Holders and Other Depositors could be taxed upon the receipt or
exercise of the subscription rights in an amount equal to such value, and the
Bank could recognize gain on such distribution. Eligible Account Holders,
Supplemental Eligible Account Holders and Other Depositors are encouraged to
consult with their own tax advisors as to the tax consequences in the event that
such subscription rights are deemed to have an ascertainable value.
Establishment of The Hudson River Bank & Trust Company Foundation
General. In furtherance of the Bank's commitment to its local
community, the Plan of Conversion provides for the establishment of a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Holding Company will incorporate the Foundation under Delaware law as a
non-stock corporation and will fund the Foundation with Common Stock of the
Holding Company, as further described below. The Holding Company and the Bank
believe that the funding of the Foundation with Common Stock of the Holding
Company is a means to establish a common bond between the Bank and its
community, enabling the Bank's community to share in the potential growth and
success of the Holding Company over the long term. By further enhancing the
Bank's visibility and reputation in its local community, the Bank believes that
the Foundation will enhance the long-term value of the Bank's community banking
franchise. The Foundation will be dedicated to charitable purposes within the
Bank's local community, including community development activities.
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and community
development activities within the Bank's local community. The Bank received a
"satisfactory" CRA rating in its last CRA examination. The Foundation is being
formed to complement the Bank's existing community activities, not as a
replacement for such activities. The Bank intends to continue to emphasize
community lending and community development activities following the Conversion.
However, such activities are not the Bank's sole corporate purpose. The
Foundation will be completely dedicated to community activities and the
promotion of charitable causes, and may be able to support such activities in
ways that are not
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presently available to the Bank. In this regard, the Board of Trustees believes
the establishment of a charitable foundation is consistent with the Bank's
commitment to community service. The Board further believes that the funding of
the Foundation with Common Stock of the Holding Company is a means of enabling
the Bank's community to share in the potential growth and success of the Holding
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 Holding Company and the Bank to develop a
unified charitable donation strategy and will centralize the responsibility for
administration and allocation of corporate charitable funds. Charitable
foundations have been formed by other financial institutions for this purpose,
among others. The Bank, however, does not expect the contribution to the
Foundation to take the place of the Bank's traditional community lending and
charitable activities.
Although the Board of Trustees of the Bank and the Board of Directors
of the Holding Company have carefully considered each of the above factors, the
establishment of a charitable foundation in connection with a mutual to stock
conversion is a relatively new concept that has been implemented by only a few
other converting institutions. Accordingly, certain persons may raise challenges
as to the validity of the establishment of the Foundation that, if not resolved
promptly, could delay the consummation of the Conversion or result in the
elimination of the Foundation.
Structure of the Foundation. The Foundation was incorporated under
Delaware law as a non-stock corporation. The Foundation's Certificate of
Incorporation provides that it is organized exclusively for charitable purposes,
including community development, as set forth in Section 501 (c) (3) of the
Code. The Foundation's Certificate of Incorporation further provides that no
part of the net earnings of the Foundation will inure to the benefit of, or be
distributable to its directors, officers or members. The Board of Directors of
the Foundation will consist of four individuals who are officers or trustees of
the Bank, and two individuals who are civic and community leaders within the
Bank's local community. A Nominating Committee of such Board, which is to be
comprised of a minimum of three members of the Board, will nominate individuals
eligible for election to the Board of Directors. The members of the Foundation,
who are comprised of its Board members, will elect the directors at the annual
meeting of the Foundation from those nominated by the Nominating Committee. Only
persons serving as directors of the Foundation qualify as members of the
Foundation, with voting authority. Directors will be divided into three classes
with each class appointed for three-year terms.
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt such
a policy upon establishment of the Foundation. As directors of a non-profit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established. The directors of the Foundation
will also be responsible for directing the activities of the Foundation,
including the management of the Common Stock of the Holding
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Company held by the Foundation. However, as a condition to receiving the
non-objection of the FDIC to the Bank's Conversion and the approval of the
Conversion by the Superintendent, the Foundation will commit in writing to the
FDIC and the Superintendent that all shares of Common Stock held by the
Foundation will be voted in the same ratio as all other shares of the Holding
Company's Common Stock on all proposals considered by shareholders of the
Holding Company; provided, however, that, consistent with the condition, the
FDIC and the Superintendent shall waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (i) cause a
violation of the law of the State of Delaware; (ii) cause the Foundation to lose
its tax-exempt status, or cause the IRS to deny the Foundation's request for a
determination that it is an exempt organization or otherwise have a material and
adverse tax consequence on the Foundation; or (iii) cause the Foundation to be
subject to an excise tax under Section 4941 of the Code. In order for the FDIC
and the Superintendent to waive such voting restriction, the Holding Company's
or the Foundation's legal counsel must render an opinion satisfactory to the
FDIC and the Superintendent that compliance with the voting restriction would
have an effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the FDIC and the Superintendent shall grant a waiver of the
voting requirement upon submission of such legal opinion(s) by the Holding
Company or the Foundation that are satisfactory to the FDIC and the
Superintendent. In the event that the FDIC and the Superintendent were to waive
such voting requirement, the directors would direct the voting of the Common
Stock held by the Foundation. However, the Superintendent may, in the case of a
waiver, impose additional conditions regarding the composition of the Board of
Directors. As of the date hereof, no event has occurred which would require the
Holding Company to seek a waiver of the voting restriction.
The Foundation's place of business will be located at the Bank's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the staff of the Holding Company and the Bank. The
Board of Directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. In this regard, the Bank
has provided the FDIC with a commitment that, to the extent applicable, the Bank
will comply with the affiliate restrictions set forth in Sections 23A and 23B of
the Federal Reserve Act with respect to any transactions between the Bank and
the Foundation.
The Holding Company intends to capitalize the Foundation with Common
Stock of the Holding Company in an amount equal to 3% of the total amount of
Common Stock to be sold in connection with the Conversion. At the minimum,
midpoint and maximum of the Estimated Valuation Range, the contribution to the
Foundation would equal 334,223, 393,204 and 452,184 shares, which would have a
market value of $3.3 million, $3.9 million and $4.5 million, respectively,
assuming the Purchase Price of $10.00 per share. The Holding 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 Holding
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 Holding Company contributed cash to the Foundation since, as a shareholder,
the Foundation will share in the potential growth and success of the Holding
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 Holding Company, if it were not making the stock donation, would have
to
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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 Holding 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 Holding Company is
that the amount of Common Stock that may be sold by the Foundation in any one
year shall not exceed 5% of the average market value of the assets held by the
Foundation, except where the Board of Directors of the Foundation determines
that the failure to sell an amount of common stock greater than such amount
would result in a long-term reduction of the value of the Foundation's assets
and as such would jeopardize the Foundation's capacity to carry out its
charitable purposes. Upon completion of the Conversion and the contribution of
shares to the Foundation immediately following the Conversion, the Holding
Company would have 11,475,000, 13,500,000 and 15,525,000 shares issued and
outstanding at the minimum, midpoint and maximum of the Estimated Valuation
Range. Because the Holding Company will have an increased number of shares
outstanding, the voting and ownership interests of shareholders in the Holding
Company's common stock would be diluted by 2.9%, as compared to their interests
in the Holding Company if the Foundation were not established. For additional
discussion of the dilutive effect, see "Pro Forma Data."
Tax Considerations. The Holding Company and the Bank have received an
opinion of Silver, Freedman & Taff, L.L.P. that an organization created for the
above purposes would qualify as an organization exempt from taxation under
Section 501(c)(3) of the Code, and would likely be classified as a private
foundation. The Foundation will submit an application to the IRS to be
recognized as an exempt organization. If the Foundation files such an
application within 15 months from the date of its organization, and if the IRS
approves the application, the effective date of the Foundation's status as a
Section 501(c)(3) organization will be retroactive to the date of its
organization. Silver, Freedman & Taff, L.L.P., however, has not rendered any
advice on the condition to the contribution to be agreed to by the Foundation
which requires that all shares of Common Stock of the Holding Company held by
the Foundation must be voted in the same ratio as all other outstanding shares
of Common Stock of the Holding Company on all proposals considered by
shareholders of the Holding Company. Consistent with this condition, in the
event that the Holding Company or the Foundation receives an opinion of its
legal counsel that compliance with this voting restriction would have the effect
of causing the Foundation to lose its tax-exempt status or otherwise have a
material and adverse tax consequence on the Foundation, or subject the
Foundation to an excise tax for "self-dealing" under Section 4941 of the Code,
the Holding Company would request a waiver from the FDIC and the Superintendent
of such voting restriction upon submission by the Holding Company or the
Foundation of a legal opinion(s) to that effect satisfactory to the FDIC and the
Superintendent. However, no assurance can be given that such waiver would be
granted. See "- Regulatory Conditions Imposed on the Foundation."
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Under the Code, the Holding Company is entitled to a deduction for
charitable contributions in an amount not exceeding 10% of its taxable income
(computed without regard to the contributions) for the year of the contribution,
and any contributions in excess of the deductible amount may be carried forward
and deducted in the Holding Company's five succeeding taxable years, subject, in
each such year, to the 10% of taxable income limitation. The Holding 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
Holding 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 Holding
Company and Bank believe that the contribution to the Foundation in excess of
the 10% annual limitation is justified given the Bank's capital position and its
earnings, the substantial additional capital being raised in the Conversion and
the potential benefits of the Foundation to the Bank's community. In this regard
assuming the sale of the Common Stock at the maximum of the Estimated Valuation
Range, the Holding Company would have pro forma consolidated capital of $198.5
million or 24.94% of pro forma consolidated assets and the Bank's pro forma
leverage and risk-based capital ratios would be 17.01% and 25.59%, respectively.
See "Regulation - The Bank Capital Requirements," "Capitalization," and
"Comparison of Valuation and Pro Forma Information with No Stock Contribution."
Thus, the amount of the contribution will not adversely impact the financial
condition of the Holding Company and the Bank, and the Holding Company and the
Bank therefore believe that the amount of the charitable contribution is
reasonable and will not raise safety and soundness concerns.
The Holding Company and the Bank have received the opinion of Silver,
Freedman & Taff, L.L.P. that the Holding Company's contribution of its own stock
to the Foundation would not constitute an act of self-dealing, and that the
Holding Company will be entitled to a deduction in the amount of the fair market
value of the stock at the time of the contribution, subject to the 10% of
taxable income limitation. As discussed above, the Holding Company will be able
to carry forward and deduct any portion of the contribution in excess of such
10% limitation for five years following the year of the contribution. If the
Holding Company and the Foundation had been established in the fiscal year ended
March 31, 1997, the Holding Company would have been entitled to a charitable
contribution deduction in its taxable year ended December 31, 1997 of
approximately $756,000 and would have been able to carry forward and deduct
approximately $3.8 million over its next succeeding five taxable years (based on
the Bank's estimated pre-tax income for 1997 and a contribution in 1997 of
Common Stock equal to $4.5 million). Assuming the close of the Offering at the
maximum of the Estimated Valuation Range, the Holding Company estimates that the
entire amount of the contribution should be deductible over a six-year period.
Neither the Holding 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 Holding 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
Holding Company and the Bank at that time, the interests of shareholders and
depositors of the Holding Company and the Bank, and the financial condition and
operations of the Foundation.
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Although the Holding Company and the Bank have received the opinion of
Silver, Freedman & Taff, L.L.P. that the Holding Company is entitled to a
deduction for the charitable contribution, there can be no assurances that the
IRS will recognize the Foundation as an organization exempt from taxation under
section 501(c)(3) of the Code or that the deduction will be permitted. If the
IRS successfully maintains that the Foundation is not so exempt or that the
deduction is not permitted, the Holding Company's tax benefit related to the
contribution to the Foundation would be expensed without tax benefit, resulting
in a reduction in earnings in the year in which the IRS makes such a
determination. See "Risk Factors - Establishment of the Charitable Foundation."
In general, the income of a private foundation is exempt from federal
and state taxation. However, investment income, such as interest, dividends and
capital gains, will be subject to a federal excise tax of 2.0%. The Foundation
will be required to make an annual filing with the IRS within four and one-half
months after the close of the Foundation's taxable year to maintain its
tax-exempt status. The Foundation will also be required to publish a notice that
the annual information return will be available for public inspection for a
period of 180 days after the date of such public notice. The information return
for a private foundation must include, among other things, an itemized list of
all grants made or approved, showing the amount of each grant, the recipient,
any relationship between a grant recipient and the Foundation's managers, and a
concise statement of the purpose of each grant. The Foundation will also be
required to file an annual report with the Charities Bureau of the Office of the
Attorney General of the State of New York.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions to be agreed to by the
Foundation in writing as a condition to receiving the FDIC's nonobjection of the
Bank's Conversion and the approval of the Conversion by the Superintendent: (i)
the Foundation will be subject to examination by the FDIC and the
Superintendent; (ii) the Foundation must comply with supervisory directives
imposed by the FDIC and the Superintendent; (iii) the Foundation will operate in
accordance with written policies adopted by its Board of Directors, including a
conflict of interest policy; and (iv) any shares of Common Stock of the Holding
Company held by the Foundation must be voted in the same ratio as all other
outstanding shares of Common Stock of the Holding Company on all proposals
considered by shareholders of the Holding Company; provided, however that,
consistent with this condition, the FDIC and the Superintendent shall waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware;
(b) would cause the Foundation to lose its tax-exempt status or otherwise have a
material and adverse tax consequence on the Foundation; or (c) would cause the
Foundation to be subject to an excise tax under Section 4941 of the Code. In
order for the FDIC and the Superintendent to waive such voting restriction, the
Holding Company's or the Foundation's legal counsel must render an opinion
satisfactory to FDIC and the Superintendent that compliance with the voting
restriction would have the effect described in clauses (a), (b) or (c) above.
Under those circumstances, the FDIC and the Superintendent shall grant a waiver
of the voting restriction upon submission of such opinion(s) by the Holding
Company or the Foundation which are satisfactory to the FDIC and the
Superintendent. There can be no assurances that a legal opinion addressing these
issues will be rendered, or if rendered, that the FDIC and the Superintendent
will grant an unconditional waiver of the voting restriction. If the
Superintendent waives the voting restriction, the NYSBD may (1) impose a
condition that a certain portion of the members of the Foundation's Board of
Directors shall
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be persons who are not directors, officers or employees of the Bank or the
Holding Company or any affiliate thereof or (2) impose such other condition
relating to control of the Common Stock held by the Foundation as determined by
the NYSBD to be appropriate. In no event will the voting restriction survive the
sale of shares of the Common Stock held by the Foundation.
Stock Pricing
The Plan of Conversion requires that the purchase price of the Common
Stock must be based on the appraised pro forma market value of the Common Stock,
as determined on the basis of an independent valuation. The Bank and the Holding
Company have retained RP Financial to make such valuation. For its services in
making such appraisal, RP Financial will receive a fee of $37,500, plus
out-of-pocket expenses. The Bank and the Holding Company have agreed to
indemnify RP Financial and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as appraiser, except where RP's liability
results from its negligence or bad faith.
An appraisal has been made by RP Financial in reliance upon the
information contained in this Prospectus, including the financial statements. RP
Financial also considered the following factors, among others: the present and
projected operating results and financial condition of the Holding Company and
the Bank, and the economic and demographic conditions in the Bank's existing
market area; certain historical, financial and other information relating to the
Bank; a comparative evaluation of the operating and financial statistics of the
Bank with those of other similarly situated publicly-traded savings associations
and savings institutions located in the Bank's market area and the State of New
York; the aggregate size of the offering of the Common Stock; the impact of the
Conversion on the Bank's equity and earnings potential; the proposed dividend
policy of the Holding Company and the Bank; and the trading market for
securities of comparable institutions and general conditions in the market for
such securities.
On the basis of the foregoing, RP Financial has advised the Holding
Company and the Bank that, in its opinion, dated as of February 27, 1998, the
estimated pro forma market value of the Common Stock ranged from a minimum of
$111,407,770 to a maximum of $150,728,150 with a midpoint of $131,067,960. The
Board of Trustees of the Bank held a meeting to review and discuss the appraisal
report prepared by RP Financial. A representative of RP Financial participated
in the meeting to explain the contents of the appraisal report. In connection
with its review of the reasonableness and adequacy of such appraisal consistent
with NYBB and FDIC regulations and policies, the Board of Trustees reviewed the
methodology that RP Financial employed to determine the pro forma market value
of the Common Stock and the appropriateness of the assumptions that RP Financial
used in determining this value.
Based upon the Valuation Range and the Purchase Price of $10.00 per
share for the Common Stock established by the Board of Trustees, the Board of
Trustees has established the Estimated Valuation Range of $111,407,770 to
$150,728,150, with a midpoint of $131,067,960, and the Holding Company expects
to issue between 11,140,777 and 15,072,815 shares of Common Stock. The Estimated
Valuation Range may be amended with the approval of the Superintendent and FDIC
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(if required), if necessitated by subsequent developments in the financial
condition of the Holding Company or the Bank or market conditions generally.
The valuation prepared by RP Financial is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the financial statements
and other information provided by the Bank, nor did RP Financial value
independently the assets or liabilities of the Bank. The valuation considers the
Bank as a going concern and should not be considered as an indication of the
liquidation value of the Bank. Moreover, because such valuation is necessarily
based upon estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing such shares in the Conversion will thereafter be able to sell such
shares at prices at or above the Purchase Price or in the range of the foregoing
valuation of the pro forma market value thereof.
Following commencement of the Subscription Offering or Community
Offering, if any, the maximum of the Estimated Valuation Range may be increased
up to 15% and the number of shares of Common Stock to be issued in the
Conversion may be increased to 17,333,738 shares due to regulatory
considerations, changes in the market and general financial and economic
conditions, without the resolicitation of subscribers. See "-- Limitations on
Common Stock Purchases" as to the method of distribution and allocation of
additional shares that may be issued in the event of an increase in the
Estimated Valuation Range to fill unfilled orders in the Subscription and
Community Offerings.
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, RP Financial confirms to the Bank, Holding 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 RP Financial to conclude that the value of the Common Stock at the
price so determined is incompatible with its estimate of the pro forma market
value of the Common Stock at the conclusion of the Subscription Offering and
Community Offering, if any.
If, based on RP Financial's estimate, the pro forma market value of the
Common Stock, as of the date that RP Financial so confirms, is not more than 15%
above the maximum and not less than the minimum of the Estimated Valuation Range
then, (1) with the approval of the Superintendent, if required, and the FDIC,
the number of shares of Common Stock to be issued in the Conversion may be
increased or decreased, pro rata to the increase or decrease in value, without
resolicitation of subscriptions, to no more than 17,333,738 shares or no less
than 11,140,777 shares, and (2) all shares purchased in the Subscription and
Community Offerings will be purchased for the Purchase Price of $10.00 per
share. If the number of shares issued in the Conversion is increased due to an
increase of up to 15% in the Estimated Valuation Range to reflect changes in
market or financial conditions, persons who subscribed for the maximum number of
shares will not be given the opportunity to subscribe for an adjusted maximum
number of shares, except for the Employee Plans which will be able to subscribe
for such adjusted amount up to their 10% subscription. See "- Limitations on
Common Stock Purchases."
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If the pro forma market value of the Common Stock is either more than
15% above the maximum of the Estimated Valuation Range or less than the minimum
of the Estimated Valuation Range, the Bank and the Holding Company, after
consulting with the Superintendent and the FDIC, may terminate the Plan and
return all funds promptly with interest at the Bank's passbook rate of interest
on payments made by check, draft or money order, extend or hold new Subscription
and Community Offerings, establish a new Estimated Valuation Range, commence a
resolicitation of subscribers or take such other actions as permitted by the
Superintendent and the FDIC in order to complete the Conversion. In the event
that a resolicitation is commenced, unless an affirmative response is received
within a reasonable period of time, all funds will be promptly returned to
investors as described above. A resolicitation, if any, following the conclusion
of the Subscription and Community Offerings would not exceed 45 days unless such
resolicitation is further extended by the Superintendent and the FDIC for
periods of up to 60 days not to extend beyond June 29, 2000.
If all shares of Common Stock are not sold through the Subscription and
Community Offerings, then the Bank and the Holding Company expect to offer the
remaining shares in a Syndicated Community Offering, which would occur as soon
as practicable following the close of the Subscription Offering or Community
Offering, if any, but may commence during the Subscription Offering and
Community Offering, if any, subject to the prior rights of subscribers. All
shares of Common Stock will be sold at the same price per share in the
Syndicated Community Offering as in the Subscription and Community Offerings.
See "--Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, RP Financial confirms to the Bank, the Holding Company,
Superintendent and the FDIC that, to the best of its knowledge, nothing of a
material nature has occurred which, taking into account all relevant factors,
including those which would be involved in a cancellation of the Syndicated
Community Offering, would cause RP Financial 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 Holding
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 Valuation Range would be subject to Superintendent and FDIC
approval. If such confirmation is not received, the Bank may extend the
Conversion, extend, reopen or commence new Subscription and Community Offerings
or a Syndicated Community Offering, establish a new Estimated Valuation 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 Valuation Range or more than 15% above the maximum of such range, and
the Holding Company and the Bank determine to continue the Conversion,
subscribers will be resolicited (i.e., be permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Bank's passbook rate of interest,
or be permitted to decrease or cancel their subscriptions). Any change in the
Estimated Valuation Range must be approved by the Superintendent and FDIC. A
resolicitation, if any, following the conclusion of the Subscription Offering or
the Community Offering would not
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exceed 45 days, or if following the Syndicated Community Offering, 60 days,
unless further extended by the Superintendent for periods up to 60 days not to
extend beyond June 29, 2000. If such resolicitation is not effected, the Bank
will return with interest all funds promptly at the Bank's passbook rate of
interest on payments made by check, savings bank draft or money order.
Copies of the appraisal report of RP Financial, including any
amendments thereto, and the detailed memorandum of the appraiser setting forth
the method and assumptions for such appraisal are available for inspection at
the offices of the Bank and the other locations specified under "Additional
Information."
Number of Shares to be Issued
Depending upon market or financial conditions following the
commencement of the Subscription Offering and Community Offering, if any, the
total number of shares to be issued in the Conversion may be increased or
decreased without a resolicitation of subscribers; provided, that the product of
the total number of shares times the price per share is not below the minimum or
more than 15% above the maximum of the Estimated Valuation Range, and the total
number of shares to be issued in the Conversion is not less than 11,140,777 or
greater than 15,072,815 (or 17,333,738 if the Estimated Valuation Range is
increased by 15%).
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Valuation Range or more than 15% above the maximum of such range, if the Plan is
not terminated by the Holding 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 Valuation 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
Valuation Range to reflect changes in market or financial condition, persons who
subscribed for the maximum number of shares will not be given the opportunity to
subscribe for an adjusted maximum number of shares, except for the Employee
Plans, which will be able to subscribe for such adjusted amount up to their 10%
subscription. See "-- Limitations on Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Holding Company's pro forma net
earnings and shareholders' equity on a per share basis while increasing pro
forma net earnings and shareholders' equity on an aggregate basis. A decrease in
the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Holding Company's pro forma net earnings
and shareholders' equity on a per share basis while decreasing pro forma net
earnings and shareholder's equity on an aggregate basis. For a presentation of
the effects of such changes see "Pro Forma Data."
To fund the Foundation, the number of shares to be issued and
outstanding as a result of the sale of Common Stock in the Conversion will be
increased by a number of shares equal to 3% of the
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Common Stock sold in the Conversion. Assuming the sale of shares in the
Offerings at the maximum of the Estimated Valuation Range, the Holding Company
will contribute 452,184 shares of its Common Stock from authorized but unissued
shares to the Foundation immediately following the completion of the Conversion.
In that event, the Holding Company will have total shares of Common Stock
outstanding of 15,525,000 shares. Funding the Foundation with authorized but
unissued shares will have the effect of diluting the ownership and voting
interests of persons purchasing shares in the Conversion by 2.9% since a greater
number of shares will be outstanding upon completion of the Conversion than
would be if the Foundation were not established. See "Pro Forma Data."
Subscription Offering and Subscription Rights
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) depositors
whose deposits in qualifying accounts in the Bank totaled $100 or more on
September 30, 1996 ("Eligible Account Holders"); (2) the Employee Plans,
including the ESOP; and (3) depositors whose deposits in qualifying accounts in
the Bank totaled $100 or more on March 31, 1998, other than (i) those depositors
who would otherwise qualify as Eligible Account Holders or (ii) trustees or
executive officers of the Bank or their Associates, (as defined herein)
("Supplemental Eligible Account Holders"). All subscriptions received will be
subject to the availability of Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering
and to the maximum and minimum purchase limitations set forth in the Plan of
Conversion and as described below under "- Limitations on Common Stock
Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, non-transferable subscription
rights to subscribe for Common Stock in the Subscription Offering up to the
greatest of (i) the amount permitted to be purchased in the Community Offering,
which amount is currently $250,000 of the Common Stock offered, (ii) one- tenth
of one percent (0.10%) of the total offering of shares of Common Stock or (iii)
fifteen times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction the numerator of which is the amount of the Eligible Account Holder's
qualifying deposit and the denominator of which is the total amount of
qualifying deposits of all Eligible Account Holders ($555,383,314), in each case
on the Eligibility Record Date, subject to the overall maximum and minimum
purchase limitations and exclusive of an increase in the shares issued pursuant
to an increase in the Estimated Valuation Range of up to 15%. See "- Limitations
on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights
for a number of shares in excess of the total number of shares eligible for
subscription, the shares will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make such
Eligible Account Holder's total allocation equal to the lesser of 100 shares or
the number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the
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amounts of their respective qualifying deposits bear to the total amount of
qualifying deposits of all remaining Eligible Account Holders whose
subscriptions remain unfilled.
To ensure a proper allocation of stock, each Eligible Account Holder
must list on his or her stock order form all accounts in which such Eligible
Account Holder has an ownership interest. Failure to list an account could
result in fewer shares being allocated than if all accounts had been disclosed.
The subscription rights of Eligible Account Holders who are also trustees or
executive officers of the Bank or their Associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the one-year period preceding the Eligibility Record
Date.
Priority 2: The Employee Plans. To the extent that there are sufficient
shares remaining after satisfaction of the subscriptions by Eligible Account
Holders, the Employee Plans, including the ESOP, will receive, without payment
therefor, second priority, non-transferable subscription rights to purchase up
to 10% of the Common Stock to be issued in the Conversion, including shares to
be issued to the Foundation, subject to the purchase limitations set forth in
the Plan of Conversion and as described below under "- Limitations on Common
Stock Purchases." As an Employee Plan, the ESOP intends to purchase 8% of the
shares to be issued in the Conversion, or 918,000 shares and 1,242,000 shares,
based on the issuance of 11,475,000 shares and 15,525,000 shares, respectively,
at the minimum and the maximum of the Estimated Valuation Range, including the
shares of Common Stock to be issued to the Foundation. Subscriptions by the ESOP
will not be aggregated with shares of Common Stock purchased directly by or
which are otherwise attributable to any other participants in the Subscription
and Community Offerings, including subscriptions of any of the Bank's trustees,
officers, employees or associates thereof. See "Management of the Bank--Benefit
Plans--Employee Stock Ownership Plan."
Priority 3.- Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of the subscriptions by
the Eligible Account Holders and Employee Plans, Supplemental Eligible Account
Holders will receive, without payment therefor, third priority, non-transferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greatest of (i) the amount permitted to be subscribed for in the
Community Offering, which amount is currently $250,000 of the Common Stock
offered, (ii) one- tenth of one, percent (0.10%) of the total offering of shares
of Common Stock or (iii) fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Common Stock
to be issued by a fraction 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 ($583,673,542), in each case on the Supplemental Eligibility Record
Date, subject to the overall maximum and minimum purchase limitations and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Valuation Range of up to 15%. See "--Limitations on Common Stock
Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares in excess of the total number of
shares eligible for subscription, the shares will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make such Supplemental Eligible
Account
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Holder's total allocation equal to the lesser of 100 shares or the number of
shares subscribed for. Thereafter, unallocated shares will be allocated among
the remaining subscribing Supplemental Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all remaining Supplemental Eligible Account Holders whose subscriptions
remain unfilled.
To ensure a proper allocation of stock, each Supplemental Eligible
Account Holder must list on his or her stock order form all accounts in which
such Supplemental Eligible Account Holder has an ownership interest. Failure to
list an account could result in fewer shares being allocated than if all
accounts had been disclosed.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire at 12:00 noon, Eastern time, on June 15, 1998, unless
extended for an initial period of up to 45 days by the Bank or additional 60 day
periods with the approval of the Superintendent and if necessary, the FDIC.
Subscription rights which have not been exercised prior to the Expiration Date
will become void.
The Bank will not execute orders until all shares of Common Stock have
been subscribed for or otherwise sold. If all shares have not been subscribed
for or sold within 45 days after the Subscription Expiration Date, unless such
period is extended with the consent of the Superintendent, all funds delivered
to the Bank pursuant to the Subscription Offering will be returned with interest
promptly to the subscribers and all withdrawal authorizations will be canceled.
If an extension beyond the 45-day period following the Subscription Expiration
Date is granted, the Bank will notify subscribers of the extension of time and
of any rights of subscribers to modify or rescind their subscriptions. Each such
extension may not exceed 60 days, and such extensions, in the aggregate, may not
last beyond June 29, 2000.
Persons in Non-qualified States or Foreign Countries. The Holding
Company and the Bank will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for stock pursuant to the Plan reside. However, the Bank and the Holding Company
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country.
Community Offering
Upon completion of the Subscription Offering, to the extent that shares
remain available for purchase after satisfaction of all subscriptions of the
Eligible Account Holders, the Employee Plans and the Supplemental Eligible
Account Holders, the Bank will offer shares pursuant to the Plan in the
Community Offering to certain members of the general public to whom a copy of
this prospectus has been delivered, subject to the right of the Holding Company
and the Bank to accept or reject any such orders, in whole or in part, in its
sole discretion. The Community Offering, if any, shall commence upon the
completion of the Subscription Offering and shall terminate seven days after the
close of the Subscription Offering unless extended by the Bank and the Holding
Company, with the approval of the Superintendent and the FDIC, if necessary.
Such persons, together with associates of and persons acting in concert with
such persons, may purchase up to $250,000 of
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Common Stock subject to the maximum purchase limitation. See "- Limitations on
Common Stock Purchases." This amount may be increased to up to a maximum of 5%
or decreased to less than $250,000 of Common Stock at the discretion of the
Holding 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 Holding Company, in their sole discretion, to accept or reject any such
orders in whole or in part either at the time of receipt of an order or as soon
as practicable following the Expiration Date. However, no such rejection will be
in contravention of any applicable law or regulation. If the Holding Company or
the Bank rejects a subscription in part, the subscriber will not have the right
to cancel the remainder of his or her subscription.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of subscribers in the Community Offering after
completion of the Subscription and Community Offerings, such stock will be
allocated first to each subscriber whose order is accepted by the Bank, in an
amount equal to 2% of the shares offered in the Conversion.
Marketing and Underwriting Arrangements
The Bank and the Holding Company have engaged Sandler O'Neill as a
financial and marketing advisor in connection with the offering of the Common
Stock and Sandler O'Neill has agreed to use its best efforts to assist the
Holding Company with the solicitation of subscriptions and purchase orders for
shares of Common Stock in the Offerings. Based upon negotiations between the
Bank and the Holding Company, Sandler O'Neill will receive a fee for services
provided in connection with the Offerings equal to 1.10% of the aggregate
Purchase Price of Common Stock sold in the Offerings less $100,000. No fees will
be paid to Sandler O'Neill with respect to any shares of Common Stock purchased
by any trustee, director, executive officer or employee of the Bank or the
Holding Company or members of their immediate families or any employee benefit
plan of the Holding Company or the Bank. In the event of a Syndicated Community
Offering, Sandler O'Neill will negotiate with the Holding Company for the
receipt of an additional fee to be remitted to selected dealers under one or
more selected dealer agreements to be entered into by Sandler O'Neill with
certain dealers; provided, however, that the aggregate fees payable to Sandler
O'Neill and any selected dealers in connection with any Syndicated Community
Offering will not exceed 7% of the aggregate Purchase Price of the Common Stock
sold in the Syndicated Community Offering. Fees to Sandler O'Neill and to any
other broker-dealer may be deemed to be underwriting fees and Sandler O'Neill
and such broker-dealer may be deemed to be underwriters. Sandler O'Neill will
also be reimbursed for its reasonable out-of pocket expenses, including legal
fees and expenses up to a maximum of $125,000. 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 Holding Company, Sandler O'Neill will be
entitled to reimbursement for its reasonable out-of-pocket expenses as described
above. The Holding Company and the Bank have agreed to indemnify Sandler O'Neill
for costs and expenses in connection with certain claims or liabilities related
to or arising out of the services to be provided by Sandler O'Neill pursuant to
its engagement by the Bank and the Holding Company as financial advisor in
connection with the Conversion, including certain liabilities under the
Securities Act. Total marketing fees to Sandler O'Neill are estimated to be $1.2
million and $1.6
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million at the minimum and the maximum of the Estimated Valuation 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 $25,000, plus
reimbursement of reasonable out-of-pocket expenses.
Directors, trustees and executive officers of the Holding Company and
the Bank may participate in the solicitation of offers to purchase Common Stock.
Questions of prospective purchasers will be directed to executive officers or
registered representatives. Other employees of the Bank may participate in the
Offerings in ministerial capacities or provide clerical work in effecting a
sales transaction. Such other employees have been instructed not to solicit
offers to purchase Common Stock or provide advice regarding the purchase of
Common Stock. The Holding Company will rely on Rule 3a4-1 under the Exchange
Act, and sales of Common Stock will be conducted within the requirements of Rule
3a4-1, so as to permit officers, trustees, directors and employees to
participate in the sale of Common Stock. No officer, director or employee of the
Holding Company or the Bank will be compensated in connection with his or her
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.
Procedure for Purchasing Shares in Subscription and Community Offerings
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the respective expiration dates for the Offerings, in accordance with
Rule 15c2-8 of the Exchange Act, no Prospectus will be mailed later than five
days prior to such date or hand delivered any later than two days prior to such
date. Execution of the stock order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order forms will only be distributed with a
Prospectus and a certification form requiring each prospective investor to
acknowledge, among other things, that the shares of Common Stock are not insured
by the Bank, the FDIC or any other governmental agency and that such prospective
investor has received a copy of this Prospectus, which, among other things,
describes the risks involved in the investment in the Common Stock.
To purchase shares in the Subscription Offering and, if a Community
Offering is held, the Community Offering, an executed order form with the
required payment for each share subscribed for, or with appropriate
authorization for withdrawal from the Bank's deposit account (which may be given
by completing the appropriate blanks in the stock order form), must be received
by the Bank at its office by 12:00 noon, Eastern time, on the Expiration Date,
in the case of the Subscription Offering, or 7 days after the close of the
Subscription Offering, in the case of the Community Offering. Stock order forms
which are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Holding Company and Bank are not obligated to
accept orders submitted on photocopied or facsimile order forms and will not
accept order forms unaccompanied by an executed certification form. The Holding
Company and the Bank have the power to waive or permit the correction of
incomplete or improperly executed forms, but do not represent that they will do
so. Once received, an executed order form may not be modified, amended
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or rescinded without the consent of the Bank unless the Conversion has not been
completed within 45 days after the end of the Subscription and Community
Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders and Supplemental
Eligible Account Holders are properly identified as to their stock purchase
priorities, depositors must list all accounts on the stock order form giving all
names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in
person to the office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. No wire transfers will be accepted. Interest will be paid on payments made
by cash, check, cashier's check or money order at the Bank's passbook rate of
interest from the date payment is received until the completion or termination
of the Conversion. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion. Notwithstanding the foregoing, the Holding Company shall have the
right, in its sole discretion, to permit institutional investors to submit
irrevocable orders together with a legally binding commitment for payment and to
thereafter pay for the shares of Common Stock for which they subscribe in the
Community Offering at any time prior to 48 hours before the completion of the
Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from such subscriber's deposit account, the Bank will do so as of
the effective date of the Conversion. The Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will be converted into a passbook
account and will earn interest at the passbook rate. Upon completion of the
Conversion, funds withdrawn from depositors' accounts for stock purchases will
no longer be insured by the FDIC.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes but, rather, may pay for such shares of Common Stock
subscribed for at the Purchase Price upon consummation of the Offerings;
provided, that there is in force from the time of its subscription until such
time, a loan commitment acceptable to the Holding Company from an unrelated
financial institution or the Holding Company to lend to the ESOP, at such time,
the aggregate Purchase Price of the shares for which it subscribed. The Holding
Company intends to provide such a loan to the ESOP.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use
the assets of such IRAs to purchase shares of Common Stock in the Subscription
and Community Offerings, provided that such IRAs are not maintained at the Bank.
Persons with IRAs maintained at the Bank must have their accounts transferred to
an unaffiliated institution or broker to purchase shares of Common
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Stock in the Subscription and Community Offerings. In addition, the provisions
of ERISA and IRS regulations require that officers, trustees and ten percent
shareholders who use self-directed IRA funds to purchase shares of Common Stock
in the Subscription and Community Offerings make such purchases for the
exclusive benefit of the IRAs.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Bank, or to such other address specified in properly completed
order forms, as soon as practicable following consummation of the sale of all
shares of Common Stock. Any certificates returned as undeliverable will be
disposed of in accordance with applicable law.
Restrictions on Transfer of Subscription Rights and Shares of Common Stock
Prior to the completion of the Conversion, the NYBB conversion
regulations prohibit any person with subscription rights (i.e., the Eligible
Account Holders, the Employee Plans and the 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.
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 registrations
will be allowed only if the qualifying deposit account is so registered. Such
rights may be exercised only by the person to whom they are granted and only for
such person's account. Each person exercising such subscription rights will be
required to certify that such person is purchasing shares solely for such
person's own account and that such person has no agreement or understanding
regarding the sale or transfer of such shares. The regulations also prohibit any
person from offering or making an announcement of an offer or an intent to make
an offer to purchase such subscription rights or shares of Common Stock prior to
the completion of the Conversion.
The Bank and the Holding 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 or the
Community Offering, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Holding
Company. There are no known agreements between Sandler O'Neill and any
broker-dealer in connection with a possible Syndicated Community Offering. The
Holding Company and the Bank have reserved the right to reject orders in whole
or in part in their sole discretion in the Syndicated Community Offering.
However, no such rejection will be in contravention of any applicable law or
regulation. If the Holding Company or the Bank rejects an order in part, the
subscriber will not have the right to cancel the remainder of his or her
subscription. Neither Sandler O'Neill nor any registered broker-dealer shall
have any obligation to take or purchase any shares of the Common
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Stock in the Syndicated Community Offering; however, Sandler O'Neill has agreed
to use its best efforts in the sale of shares in the Syndicated Community
Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "- Stock Pricing." Subject
to overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than 1% of the Common Stock offered in the
Conversion; provided, however, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons acting
in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to a maximum purchase limitation of
1% of the Common Stock offered.
Payments made in the form of a check, bank draft, money order or in
cash will earn interest at the Bank's passbook rate of interest from the date
such payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his or her shares with funds held by or deposited with a
selected dealer. If an order form is executed and forwarded to the selected
dealer or if the selected dealer is authorized to execute the order form on
behalf of a purchaser, the selected dealer is required to forward the order form
and funds to the Bank for deposit in a segregated account on or before noon of
the business day following receipt of the order form or execution of the order
form by the selected dealer. Alternatively, selected dealers may solicit
indications of interest from their customers to place orders for shares. Such
selected dealers shall subsequently contact their customers who indicated an
interest and seek their confirmation as to their intent to purchase. Those
indicating an intent to purchase shall execute order forms and forward them to
their selected dealer or authorize the selected dealer to execute such forms.
The selected dealer will acknowledge receipt of the order to its customer in
writing on the following business day and will debit such customer's account on
the third business day after the customer has confirmed his or her intent to
purchase ("debit date") and on or before noon of the next business day following
the debit date, will send order forms and funds to the Bank for deposit in a
segregated account. Although purchasers' funds are not required to be in their
accounts with selected dealers until the debit date, in the event that such
alternative procedure is employed once a confirmation of an intent to purchase
has been received by the selected dealer, the purchaser has no right to rescind
his or her order.
Certificates representing shares of Common Stock purchased, together
with any refund due, will be mailed to purchasers at the address specified in
the order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Holding
Company with the approval of the Superintendent and FDIC. Such extensions may
not be beyond June 29, 2000. See "- Stock Pricing" above for a discussion of
rights of subscribers, if any, in the event an extension is granted.
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Limitations on Common Stock Purchases
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No subscription for fewer than 25 shares will be accepted;
(2) Each Eligible Account Holder may subscribe for and purchase Common
Stock in the Subscription Offering in an amount up to the greatest of (a) the
amount permitted to be purchased in the Community Offering, currently $250,000
of the Common Stock offered, (b) one-tenth of one percent (0.10%) of the total
offering of shares of Common Stock or (c) fifteen times the product (rounded
down to the net whole number) obtained by multiplying the total number of shares
of Common Stock to be issued in the Conversion by a fraction the numerator of
which is the amount of the qualifying deposit of the Eligible Account Holder and
the denominator of which is the total amount of qualifying deposits of all
Eligible Account Holders in each case on the Eligibility Record Date, subject to
the overall limitation in (7) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Valuation Range of
up to 15%;
(3) The Employee Plans are permitted to purchase up to 10% of the
shares of Common Stock issued in the Conversion and as an Employee Plan, the
ESOP intends to purchase 8% of the shares of Common Stock issued in the
Conversion, in each case, including shares to be issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase Common Stock in the Subscription Offering in an amount up to the
greatest of (a) the amount permitted to be purchased in the Community Offering,
currently $250,000 of the Common Stock offered, (b) one-tenth of one percent
(0.10%) of the total offering of shares of Common Stock or (c) fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued in the Conversion by a
fraction the numerator of which is the amount of the qualifying deposit of the
Supplemental Eligible Account Holder and the denominator of which is the total
amount of qualifying deposits of all Supplemental Eligible Account Holders in
each case on the Supplemental Eligibility Record Date, subject to the overall
limitation in (7) below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Valuation Range of up to 15%;
(5) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons acting in concert
with such persons, may purchase Common Stock in the Community Offering in an
amount up to $250,000 of the Common Stock offered in the Conversion subject to
the overall limitation in (7) below;
(6) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of and persons acting in concert
with such persons, may purchase Common Stock in the Syndicated Offering in an
amount up to $250,000 of the shares of Common Stock offered in the Conversion
subject to the overall limitation in (7) below; provided, that shares of Common
Stock purchased in the Community Offering by any persons, together with
associates of
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and persons acting in concert with such persons, will be aggregated with
purchases by such persons in the Syndicated Community Offering in applying the
$250,000 purchase limitation;
(7) Eligible Account Holders, Supplemental Eligible Account Holders and
certain members of the general public 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 Employee Plans,
the maximum number of shares of Common Stock subscribed for or purchased in all
categories of the Conversion by any person, together with associates of and
groups of persons acting in concert with such persons, shall not exceed 1.0% of
the shares of Common Stock offered for sale in the Conversion; and
(8) The directors and officers of the Bank and their associates in the
aggregate, excluding purchases by the Employee Plans, may purchase up to 25% of
shares offered for sale in the Conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the depositors
of the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% of
the shares offered for sale in the Offering at the sole discretion of the
Holding Company and the Bank. It is currently anticipated that the overall
maximum purchase limitation may be increased if, after a Community Offering, the
Holding Company has not received subscriptions for an aggregate amount equal to
at least the minimum of the Estimated Valuation Range. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Holding Company and the Bank may be,
given the opportunity to increase their subscriptions up to the then applicable
limit. Requests to purchase additional shares of Common Stock under this
provision will be determined by the Board of Directors of the Holding Company
and the Board of Trustees of the Bank and, if approved, allocated on a pro rata
basis giving priority in accordance with the priority rights set forth in the
Plan and described herein.
The overall maximum purchase limitation may not be reduced to less than
1.0%; the individual amount permitted to be subscribed for in the Offerings,
however, may be reduced by the Bank to less than $250,000 of the Common Stock
offered. An individual Eligible Account Holder or Supplemental Eligible Account
Holder may not purchase individually in the Subscription Offering the overall
maximum purchase limitation of 1.0% of the shares offered for sale, but may make
such purchase, together with associates of and persons acting in concert with
such person, by also purchasing in other available categories of the Conversion,
subject to availability of shares and the maximum overall purchase limitation
for purchases in the Conversion.
In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the Estimated Valuation Range of up to 15%
("Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) in the event that there is an
oversubscription by Eligible Account Holders, to fill unfilled subscriptions of
Eligible Account Holders, exclusive of the Adjusted Maximum; (ii) to fill the
Employee Plans' subscription of up to 10% of the Adjusted Maximum number of
shares; (iii) in the event that there
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is an oversubscription by Supplemental Eligible Account Holders, to fill
unfilled subscriptions of Supplemental Eligible Account Holders exclusive of the
Adjusted Maximum; and (iv) to fill unfilled subscriptions in the Community
Offering, exclusive of the Adjusted Maximum, each to the extent possible.
The term "Associate" of a person is defined to mean: (i) any
corporation or organization (other than the Holding Company, the Bank or a
majority-owned subsidiary of the Bank) of which such person is an officer,
partner or is directly or indirectly, either alone or with one or more members
of his or her immediate family, the beneficial owner of 10% or more of any class
of equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, except that the term "Associate" does not
include any employee stock benefit plan maintained by the Holding Company or the
Bank in which a person has a substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity, and except that, for purposes of
aggregating total shares that may be acquired or held by officers and directors
and their Associates, the term "Associate" does not include any tax-qualified
employee stock benefit plan; and (iii) any relative or spouse of such person, or
any relative of such spouse, who has the same home as such person or who is a
director or officer of the Holding Company or the Bank. Trustees, directors and
officers are not treated as associates of each other solely by virtue of holding
such positions. For a further discussion of limitations on purchases of a
converting institution's stock at the time of Conversion and subsequent to
Conversion, see "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion," "Management of the Bank - Proposed Purchases by Executive Officers
and Directors" and "Restrictions on Acquisition of the Holding Company and the
Bank."
Certain Restrictions on Purchase or Transfer of Shares After Conversion
All shares of Common Stock purchased in connection with the Conversion
by a director or an executive officer of the Bank will be subject to a
restriction that the shares not be sold for a period of one year following the
Conversion, except in the event of the death or judicial declaration of
incompetence of such director or executive officer. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Common
Stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the same restrictions.
The directors and executive officers of the Holding Company and the Bank will
also be subject to the insider trading rules promulgated pursuant to the
Exchange Act and any other applicable requirements of the federal securities
laws.
Purchases of outstanding shares of Common Stock of the Holding Company
by directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the Superintendent. This restriction does not apply,
however, to the purchase of stock pursuant to the Stock Option Plan or the RP
Financial to be established after the Conversion.
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Interpretation, Amendment and Termination
All interpretations of the Plan by the Board of the Bank will be final,
subject to the authority of the Superintendent and FDIC. The Plan provides that,
if deemed necessary or desirable by the Board of Trustees of the Bank, the Plan
may be substantively amended prior to the solicitation of proxies from
depositors by a vote of the Board of Trustees; amendment of the Plan thereafter
requires the approval of the Superintendent and FDIC. The Plan will terminate if
the sale of all shares of stock being offered pursuant to the Plan is not
completed prior to 24 months after the date of the approval of the Plan by the
Superintendent unless a longer time period is permitted by governing laws and
regulations. The Plan may be terminated by a vote of the Board of Trustees of
the Bank at any time prior to the Special Meeting, and thereafter by such a vote
with the approval of the Superintendent and FDIC.
RESTRICTIONS ON ACQUISITION OF THE HOLDING 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 depositors of
the Bank. The Plan also provides for the concurrent formation of a holding
company, which form of organization may or may not be utilized at the option of
the Board of Trustees of the Bank. See "The Conversion - General." In the event
that the holding company form of organization is utilized, as described below,
certain provisions in the Holding Company's Certificate of Incorporation and
Bylaws and in its management remuneration plans and agreements entered into in
connection with the Conversion, together with provisions of the Delaware General
Corporation Law ("DGCL"), may have anti-takeover effects. In the event that the
holding company form of organization is not utilized, the Bank's Restated
Organization Certificate and Bylaws and management remuneration plans and
agreements entered into in connection with the Conversion may have anti-takeover
effects as described below. In addition, regulatory restrictions may make it
difficult for persons or companies to acquire control of either the Holding
Company or the Bank.
Restrictions in the Holding Company's Certificate of Incorporation and Bylaws
The following discussion is a general summary of certain provisions of
the Holding 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, that might have a potential
"anti-takeover" effect. The Certificate of Incorporation and Bylaws of the
Holding Company are filed as exhibits to the Registration Statement, of which
this Prospectus is a part, and the descriptions herein of such documents are
qualified in their entirety by reference to such documents. A number of
provisions of the Holding Company's Certificate of Incorporation and Bylaws deal
with matters of corporate governance and certain rights of shareholders. These
provisions might have the effect of discouraging future takeover attempts which
are not approved by the Board of Directors but which individual Holding Company
shareholders may deem to be in their best interests or in which shareholders may
receive substantial premiums
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for their shares over then current market prices. As a result, shareholders who
might desire to participate in such transactions may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Holding Company more difficult. The following
description of certain of the provisions of the Certificate of Incorporation and
Bylaws of the Holding 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
Holding Company provides that any record owner of any outstanding Common Stock
which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock ("Limit") shall be entitled or permitted to only one one-hundredth (1
/100) of a vote with respect of each share held in excess of the Limit.
Beneficial ownership of shares includes shares beneficially owned by such person
or any of his affiliates, shares which such person or his affiliates have the
right to acquire upon the exercise of conversion rights or options and shares as
to which such person and his affiliates have or share investment or voting
power, but shall not include shares beneficially owned by the ESOP or shares
that are subject to a revocable proxy and that are not otherwise beneficially
owned or deemed by the Holding Company to be beneficially owned by such person
and his affiliates. The Certificate of Incorporation further provides that this
provision limiting voting rights may only be amended upon (i) the approval of
the Board of Directors, and (ii) the affirmative vote of the holders of a
majority of the total votes eligible to be cast by the holders of all
outstanding shares of capital stock entitled to vote thereon and (iii) by the
affirmative vote of either (1) not less than a majority of the authorized number
of directors and, if one or more Interested Shareholders exist, by not less than
a majority of the Disinterested Directors (as defined in the Certificate of
Incorporation) or (2) the holders of not less than two-thirds of the total votes
eligible to be cast by the holders of all outstanding shares of the capital
stock of the Holding Company entitled to vote thereon and, if the amendment is
proposed by or on behalf of an Interested Shareholder or a director who is an
Affiliate or Associate of an Interested Shareholder, by the affirmative vote of
the holders of not less than a majority of the total votes eligible to be cast
by holders of all outstanding shares entitled to vote thereon not beneficially
owned by an Interested Shareholder or an Affiliate or Associate thereof.
Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the total number of members of the Board. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. The Holding Company's Certificate of Incorporation and Bylaws
provide that the size of the Board shall be determined by a majority of the
directors but shall not be less than seven nor more than 20. The Certificate of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a shareholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Holding Company. The Certificate of
Incorporation of the Holding
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Company provides that a director may be removed from the Board of Directors
prior to the expiration of his term only for cause, upon the affirmative vote of
at least 80% of the outstanding shares of voting stock. In the absence of these
provisions, the vote of the holders of a majority of the shares could remove the
entire Board, with or without cause, and replace it with persons of such
holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of shareholders of the Holding Company may
be called only by resolution of at least three-fourths of the Board of Directors
then in office or by the Chairman, if one has been elected by the Board, or the
Chief Executive Officer of the Holding Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
shareholders of the Holding Company may be taken only at an annual or special
meeting and prohibits shareholder action by written consent in lieu of a
meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of forty five million (45,000,000) shares of capital stock, consisting
of forty million (40,000,000) shares of Common Stock and five million
(5,000,000) shares of preferred stock ("Preferred Stock"). The shares of Common
Stock and Preferred Stock were authorized in an amount greater than that to be
issued in the Conversion to provide the Holding 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 Holding 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 Holding Company's Board of Directors currently has no plans for the issuance
of additional shares, other than the issuance of additional shares pursuant to
the terms of the RRP and upon exercise of stock options to be issued pursuant to
the terms of the Stock Option Plan, all of which, if implemented prior to the
first anniversary of the Conversion, will be presented to shareholders for
approval at a meeting of shareholders to be held no earlier than six months
after completion of the Conversion.
Shareholder Vote Required to Approve Business Combinations with
Principal Shareholders. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Holding Company's outstanding shares of
voting stock, together with the affirmative vote of at least 50% of the Holding
Company's outstanding shares of voting stock not beneficially owned by an
Interested Shareholder (as defined below) to approve certain "Business
Combinations," as defined therein, and related transactions. Under Delaware law,
absent this provision, Business Combinations, including mergers, consolidations
and sales of all or substantially all of the assets of a corporation must,
subject to certain exceptions, be approved by the vote of the holders of only a
majority of the outstanding shares of Common Stock of the Holding Company and
any other affected class of stock.
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Under the Certificate of Incorporation, at least 80% approval of shareholders is
required in connection with any transaction involving an Interested Shareholder
except (i) in cases where the proposed transaction has been approved in advance
by a majority of those members of the Holding Company's Board of Directors who
are unaffiliated with the Interested Shareholder and were directors prior to the
time when the Interested Shareholder became an Interested Shareholder or (ii) if
the proposed transaction meets certain conditions set forth therein which are
designed to afford the shareholders a fair price in consideration for their
shares in which case, if a shareholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The term
"Interested Shareholder" is defined to include any individual, corporation,
partnership or other entity (other than the Holding Company or its subsidiary or
any employee benefit plan maintained by the Holding Company or its subsidiary)
which owns beneficially or controls, directly or indirectly, 10% or more of the
outstanding shares of voting stock of the Holding 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 Holding Company or any
of its subsidiaries with or into any Interested Shareholder or Affiliate (as
defined in the Certificate of Incorporation) of an Interested Shareholder-, (ii)
any sale, lease, exchange, mortgage, pledge, transfer, or other disposition to
or with any Interested Shareholder or Affiliate of 5% or more of the assets of
the Holding Company or combined assets of the Holding Company and its
subsidiary; (iii) the issuance or transfer to any Interested Shareholder or its
Affiliate by the Holding Company (or any subsidiary) of any securities of the
Holding Company other than on a pro rata basis to all shareholders; (iv) the
adoption of any plan for the liquidation or dissolution of the Holding Company
proposed by or on behalf of any Interested Shareholder or Affiliate thereof, (v)
any reclassification of securities, recapitalization, merger or consolidation of
the Holding Company which has the effect of increasing the proportionate share
of Common Stock or any class of equity or convertible securities of the Holding
Company owned directly or indirectly by an Interested Shareholder or Affiliate
thereof-, and (vi) the acquisition by the Holding Company or its subsidiary of
any securities of an Interested Shareholder or its Affiliates or Associates.
The trustees and executive officers of the Bank are purchasing in the
aggregate approximately 1.80% of the shares of the Common Stock at the maximum
of the Estimated Valuation Range. In addition, the ESOP intends to purchase 8%
of the Common Stock to be issued in the Conversion, including shares to be
issued to the Foundation. Additionally, if, the proposed RRP and Stock Options
Plan are implemented, the Holding Company expects to acquire 4% of the Common
Stock issued in the Conversion, including shares to be issued to the Foundation,
on behalf of the RRP and expects to issue an amount equal to 10% of the Common
Stock issued in the Conversion, including shares to be issued to the Foundation,
under the Stock Option Plan to directors, executive officers and employees. As a
result, assuming the RRP and Stock Option Plan are implemented, the directors,
executive officers and employees have the potential to control the voting of
approximately 25% of the Holding Company's Common Stock, on a fully diluted
basis at the maximum of the Estimated Valuation Range, thereby enabling them to
prevent the approval of the transactions requiring the approval of at least 80%
of the Holding Company's outstanding shares of voting stock described
hereinabove,
Amendment of Certificate of Incorporation and Bylaws. The Certificate of
Incorporation provides that certain provisions of the Certificate of
Incorporation may not be altered, amended,
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repealed or rescinded without the affirmative vote of either (1) not less than a
majority of the authorized number of directors and, if one or more Interested
Shareholders exist, by not less than a majority of the Disinterested Directors
(as defined in the Certificate of Incorporation) or (2) the holders of not less
than two-thirds of the total votes eligible to be cast by the holders of all
outstanding shares of the capital stock of the Holding Company entitled to vote
thereon and, if the alteration, amendment, repeal, or rescission is proposed by
or on behalf of an Interested Shareholder or a director who is an Affiliate or
Associate of an Interested Shareholder, by the affirmative vote of the holders
of not less than a majority of the total votes eligible to be cast by holders of
all outstanding shares entitled to vote thereon not beneficially owned by an
Interested Shareholder or an Affiliate or Associate thereof. Amendment of the
provision relating to business combinations must also be approved by either (i)
a majority of the Disinterested Directors, or (ii) the affirmative vote of not
less than eighty percent (80%) of the total number of votes eligible to be cast
by the holders of all outstanding shares of the Voting Stock, voting together as
a single class, together with the affirmative vote of not less than fifty
percent (50%) of the total number of votes eligible to be cast by the holders of
all outstanding shares of the Voting Stock not beneficially owned by any
Interested Shareholder or Affiliate or Associate thereof, voting together as a
single class. Furthermore, the Holding Company's Certificate of Incorporation
provides that provisions of the Bylaws that contain supermajority voting
requirements may not be altered, amended, repealed or rescinded without a vote
of the Board or holders of capital stock entitled to vote thereon that is not
less than the supermajority specified in such provision. Absent these
provisions, the DGCL provides that a corporation's certificate of incorporation
and bylaws may be amended by the holders of a majority of the corporation's
outstanding capital stock. The Certificate of Incorporation also provides that
the Board of Directors is authorized to make, alter, amend, rescind or repeal
any of the Holding Company's bylaws in accordance with the terms thereof,
regardless of whether the Bylaw was initially adopted by the shareholders.
However, this authorization neither divests the shareholders of their right, nor
limits their power to adopt, amend, rescind or repeal any Bylaw under the DGCL.
These provisions could have the effect of discouraging a tender offer or other
takeover attempt where the ability to make fundamental changes through Bylaw
amendments is an important element of the takeover strategy of the acquiror.
Certain By-Law Provisions. The Bylaws of the Holding Company also
require a shareholder who intends to nominate a candidate for election to the
Board of Directors, or to raise new business at an annual shareholder meeting to
give approximately 60 days notice in advance of the anniversary of the prior
year's annual shareholders' meeting to the Secretary of the Holding Company. The
notice provision requires a shareholder who desires to raise new business to
provide certain information to the Holding Company concerning the nature of the
new business, the shareholder and the shareholder's interest in the business
matter. Similarly, a shareholder wishing to nominate any person for election as
a director must provide the Holding Company with certain information concerning
the nominee and the proposing shareholder.
Anti-Takeover Effects of the Holding Company's Certificate of Incorporation and
Bylaws and Certain Benefit Plans Adopted in the Conversion
The provisions described above are intended to reduce the Holding
Company's vulnerability to takeover attempts and certain other transactions
which have not been negotiated with and
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approved by members of its Board of Directors. The provisions of the Employment
Agreements, the ESOP, the RRP and the Stock Option Plan to be established may
also discourage takeover attempts by increasing the costs to be incurred by the
Bank and the Holding Company in the event of a takeover. See "Management of the
Bank--Employment Agreements," and "-- Benefit Plans Employee Stock Ownership
Plan," and "-- Recognition and Retention Plan."
The Holding Company's Board of Directors believes that the provisions
of the Certificate of Incorporation, Bylaws and management remuneration plans to
be established are in the best interests of the Holding Company and its
shareholders. An unsolicited non-negotiated proposal can seriously disrupt the
business and management of a corporation and cause it great expense.
Accordingly, the Board of Directors believes it is in the best interests of the
Holding Company and its shareholders to encourage potential acquirers to
negotiate directly with management and that these provisions will encourage such
negotiations and discourage non-negotiated takeover attempts. It is also the
Board of Directors' view that these provisions should not discourage persons
from proposing a merger or other transaction at a price that reflects the true
value of the Holding Company and that otherwise is in the best interests of all
shareholders.
Delaware Corporate Law
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the DGCL ("Section 203"), is
intended to discourage certain takeover practices by impeding the ability of a
hostile acquiror to engage in certain transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(a "DGCL Interested Shareholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became a DGCL Interested Shareholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
a DGCL Interested Shareholder, the Board of Directors approved either the
business combination or the transaction which resulted in the shareholder
becoming a DGCL Interested Shareholder; (ii) any business combination involving
a person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became a DGCL Interested Shareholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Shareholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the DGCL Interested Shareholder; and (iv) certain
business combinations that are proposed after the corporation had received other
acquisition proposals and which are approved or not opposed by a majority of
certain continuing members of the Board of Directors. A corporation may exempt
itself from the requirement of the statute by adopting an amendment to its
Certificate of Incorporation or
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Bylaws electing not to be governed by Section 203 of the DGCL. At the present
time, the Board of Directors does not intend to propose any such amendment.
Restrictions in the Bank's Restated Organization Certificate and 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 the Conversion, the Board
of Directors believes that it is appropriate to adopt certain provisions
permitted by the Banking Law and the conversion regulations of the NYBB to
protect the interests of the converted Bank and its shareholders from any
hostile takeover. Such provisions may, indirectly, inhibit a change in control
of the Holding Company, as the Bank's sole stockholder. See "Risk Factors -
Takeover Defensive Provisions."
In the event that the Holding Company is not formed and the
subscription rights are deemed to be subscriptions to purchase the common stock
of the Bank, the provisions contained in the Restated Organization Certificate
and Bylaws of the Bank, to be effective on the effective date of the Conversion,
will govern corporate procedure and certain rights of shareholders. The
anti-takeover effects of such provisions are generally similar to those
described above for the Holding Company, except that the issuance of any
additional capital stock of the Bank would require the prior approval of the
Superintendent, and the consent of the holders of two-thirds of the outstanding
shares of capital stock of the Bank would be required prior to effecting a
merger of, or certain acquisitions of assets by the Bank.
Limitation on Voting Rights. The Bank's Restated Organization
Certificate will contain a provision whereby the acquisition of or offer to
acquire beneficial ownership of more than 10% of the issued and outstanding
shares of any class of equity securities of the Bank by any person (i.e., any
individual, corporation, group acting in concert, trust, partnership, joint
stock company or similar organization), either directly or indirectly, will be
prohibited for a period of three years following the date of completion of the
Conversion. Any stock in excess of 10% acquired in violation of this provision
will not be counted as outstanding for voting purposes. This limitation shall
not apply to (a) any offer or sale with a view towards public resale made
exclusively by the Bank to any underwriter acting on behalf of the Bank in
connection with a public offering of the common stock of the Bank; (b) any
corporation formed by the Bank in connection with its conversion from mutual to
stock form to acquire all of the shares of stock of the Bank to be issued in
connection with such conversion; or (c) any reclassification of securities
(including any reverse stock split), or recapitalization of the Bank, or any
merger or consolidation of the Bank with any of its subsidiaries or any other
transaction or reorganization (including a transaction in which the Bank shall
form a holding company) that does not have the effect, directly or indirectly,
of changing the beneficial ownership interests of the Bank's shareholders, other
than pursuant to the exercise of any appraisal rights.
In the event that holders of revocable proxies for more than 10% of the
shares of the Common Stock of the Holding Company seek, among other things, to
elect one-third or more of the Holding Company's Board of Directors, to cause
the Holding Company's shareholders to approve the acquisition or corporate
reorganization of the Holding Company or to exert a continuing influence on a
material aspect of the business operations of the Holding Company, which actions
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could indirectly result in a change in control of the Bank, the Board of
Directors of the Bank will be able to assert this provision of the Bank's
Restated Organization Certificate against such holders. Although the Board of
Directors of the Bank is not currently able to determine when and if it would
assert this provision of the Bank's Restated Organization Certificate, the
Bank's Board of Directors, in exercising its fiduciary duty, may assert this
provision if it were deemed to be in the best interests of the Bank, the Holding
Company and its shareholders. It is unclear, however, whether this provision, if
asserted, would be successful against such persons in a proxy contest which
could result in a change in control of the Bank indirectly through a change in
control of the Holding Company.
Board of Directors. The Board of Directors of the Bank is divided into
three classes, each of which shall contain approximately one-third of the total
number of members of the Board of Directors. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. The staggered terms of the Bank's Board of Directors could
have an anti-takeover effect by making it more difficult for a majority of
shares to force an immediate change in the Board since only one-third of the
Board is elected each year. The purpose of these provisions is to assure
stability and continuity of management of the Bank in the years immediately
following the Conversion. In addition, shareholders will not be permitted to
cumulate their votes in the election of directors. The Restated Organization
Certificate and Bylaws of the Bank provide that any director, or the entire
Board of Directors, may be removed at any time, but only for cause and only by
the affirmative vote of at least 80% of the outstanding shares of voting stock.
The Restated Organization Certificate and Bylaws of the Bank also provide that
any vacancy occurring in the Board of Directors, including any vacancy created
by an increase in the number of directors, shall be filled by the shareholders
of the Bank, except that vacancies not exceeding one-third of the entire Board
of Directors may be filled by the affirmative vote of a majority of the
directors then holding office.
Preferred Stock. Although the Bank has no arrangements, understandings
or plans at the present time, the Board of Directors believes that the
availability of unissued shares of Preferred Stock will provide the Bank with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other corporate needs which may arise. In the event of a proposed
merger, tender offer or other attempt to gain control of the Bank of which
management does not approve, it might be possible for the Bank's Board of
Directors to authorize the issuance of one or more series of Preferred Stock
with rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Preferred Stock,
therefore, may be to deter a future takeover attempt. The Bank's Board of
Directors does not intend to issue any Preferred Stock except on terms which the
Board deems to be in the best interests of the Bank and its then existing
shareholders.
Shareholder Vote Required for Certain Business Combinations. The Bank's
Restated Organization Certificate contains provisions requiring a higher
shareholder vote for certain business combinations, which provisions are
substantially identical to those contained in the Holding Company's Certificate
of Incorporation. See "- Restrictions in the Holding Company's Certificate of
Incorporation and Bylaws - Shareholder Vote Required to Approve Business
Combinations with Principal Shareholders."
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Evaluation of Offers. The Restated Organization Certificate of the Bank
also provides that the Board of Directors of the Bank, when evaluating any offer
to the Bank or to the shareholders of the Bank from another party relating to a
change or potential change in control of the Bank, including, without
limitation, any offer to (a) purchase for cash or exchange any securities or
property for any outstanding equity securities of the Bank, (b) merge or
consolidate the Bank with another corporation or (c) purchase or otherwise
acquire all or substantially all of the properties and assets of the Bank,
shall, in connection with the exercise of its judgment in determining what is in
the best interest of the Bank and its shareholders, give due consideration not
only to the price or other consideration being offered, but also to all other
relevant factors including, without limitation, (1) both the long-term and the
short-term interests of the Bank and its shareholders and (2) the effects that
the Bank's actions may have in the short-term or in the long-term upon any of
the following: (i) the prospects for potential growth, development, productivity
and profitability of the Bank; (ii) the Bank's current employees; (iii) the
Bank's retired employees and other beneficiaries receiving or entitled to
receive retirement, welfare or similar benefits from or pursuant to any plan
sponsored, or agreement entered into, by the Bank; (iv) the Bank's customers and
creditors; and (v) the ability of the Bank to provide, as a going concern,
goods, services, employment opportunities and employment benefits and otherwise
to contribute to the communities in which is does business. By having these
standards in the Restated Organization Certificate, the Board of Directors of
the Bank may be in a stronger position to oppose such a transaction if the Board
concludes that the transaction would not be in the best interests of the Bank,
even if the price offered is significantly greater than the then market price of
any equity security of the Bank.
Amendment of Restated Organization Certificate and Bylaws. The Bank's
Restated Organization Certificate provides that certain provisions of the
Restated Organization Certificate may not be altered, amended, repealed or
rescinded without the affirmative vote of either (i) not less than a majority of
the authorized number of directors and, if one or more Interested Shareholders
exist, by not less than a majority of the Disinterested Directors, or (ii) the
holders of not less than two-thirds of the total votes eligible to be cast by
the holders of all outstanding shares of capital stock entitled to vote thereon
and, if the alteration, amendment, repeal or rescission is proposed by or on
behalf of an Interested Shareholder or a director who is an Affiliate or
Associate of an Interested Shareholder, the holders of not less than a majority
of the total votes eligible to be cast by holders of all outstanding shares of
capital stock entitled to vote thereon not beneficially owned by an Interested
Shareholder or an Affiliate or Associate thereof.
In addition, provisions of the Bylaws of the Bank that contain
supermajority voting requirements may not be altered, amended, repealed or
rescinded without a vote of the Board or holders of capital stock entitled to
vote thereon that is not less than the supermajority specified in such
provision.
Regulatory Restrictions
New York State Banking Board Conversion Regulations. NYBB regulations
prohibit any person, prior to the completion of the Conversion, from
transferring, or from entering into any agreement or understanding to transfer,
to the account of another, legal or beneficial ownership of the subscription
rights issued under the Plan of Conversion or the Common Stock to be issued upon
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their exercise. The NYBB regulations also prohibit any person, prior to the
completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock. See "The Conversion - Restrictions on Transfer of Subscription Rights and
Shares." For one year following the Conversion, NYBB regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except with the prior approval of the
Superintendent.
OTS Regulations. In addition, any proposal to acquire 10% of any class
of equity security of the Holding 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 the 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
10% aggregate beneficial ownership limit. Such regulatory restrictions may
prevent or inhibit proxy contests for control of the Holding 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 Holding 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 NYBB is required before: (1) any action is taken
that causes any company to become a bank holding company; (2) any action is
taken that causes any banking institution to become or 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
- --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 Holding 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
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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 stocking 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 Holding Company.
Federal Reserve Board Regulations. In the event the Bank does not
qualify to be 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.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue forty million (40,000,000)
shares of Common Stock having a par value of $.0l per share and five million
(5,000,000) shares of Preferred Stock having a par value of $.0l per share. In
connection with the Conversion, the Holding Company currently expects to issue
15,072,815 shares of Common Stock (or 17,333,738 in the event of an increase of
15% in the Estimated Valuation Range) and does not expect to issue any shares of
Preferred Stock. Except as discussed above in "Restrictions on Acquisition of
the Holding Company and the Bank," each share of the Holding Company's Common
Stock will have the same relative rights as, and will be identical in all
respects with, each other share of Common Stock. Upon payment of the Purchase
Price for the Common Stock, in accordance with the Plan, all such stock will be
duly authorized, fully paid and non-assessable. The Common Stock of the Holding
Company will represent non-withdrawable capital, will not be an account of an
insurable type, and will not be insured by the FDIC.
Common Stock
Dividends. The Holding 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 Holding Company is subject to
limitations which are imposed by law and applicable regulation. See "Dividends"
and "Regulation." The holders of Common Stock of the Holding Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Holding Company out of funds legally available
therefor. If the Holding Company issues Preferred Stock, the holders thereof may
have a priority over the holders of the Common Stock with respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the
Holding Company will possess exclusive voting rights in the Holding Company.
They will elect the Holding Company's Board of Directors and act on such other
matters as are required to be presented to them under Delaware law or the
Holding Company's Certificate of Incorporation or as are otherwise presented to
them by the Board of Directors. Except as discussed in "Restrictions on
Acquisition of the Holding Company and the Bank," each holder of Common Stock
will be entitled to one vote per share and will not have any right to cumulate
votes in the election of directors. If the Holding
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Company issues Preferred Stock, holders of the Preferred Stock may also possess
voting rights. Certain matters require an 80% or two-thirds shareholder vote.
See "Restrictions on Acquisition of the Holding Company and the Bank."
As a New York mutual savings bank, corporate powers and control of the
Bank are vested in its Board of Trustees, who elect the officers of the Bank and
who fill any vacancies on the Board of Trustees as it exists upon Conversion.
Subsequent to Conversion, voting rights will be vested exclusively in the owners
of the shares of capital stock of the Bank, which owner will be the Holding
Company, and voted at the direction of the Holding 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 Holding Company, as holder of the Bank's capital stock, would
be entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account, which is a memorandum account only, to Eligible Account Holders and
Supplemental Eligible Account Holders (see "The Conversion - Effects of
Conversion - Liquidation Rights"), all assets of the Bank available for
distribution in cash or in kind. In the event of liquidation, dissolution or
winding up of the Holding Company, the holders of its Common Stock would be
entitled to receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Holding Company available for
distribution. If Preferred Stock is issued, the holders thereof may have a
priority over the holders of the Common Stock in the event of the liquidation or
dissolution of the Holding Company.
Preemptive Rights. Holders of the Common Stock of the Holding Company will
not be entitled to preemptive rights with respect to any shares which may be
issued. The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Holding Company's authorized Preferred Stock
will be issued in the Conversion. Such stock may be issued with such preferences
and designations as the Board of Directors may from time to time determine. The
Board of Directors can, without shareholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unsolicited takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
General
The Restated Organization Certificate of the Bank, to be effective upon
the Conversion, authorizes the issuance of capital stock consisting of forty
million (40,000,000) shares of common stock, par value $.0l per share, and five
million (5,000,000) shares of preferred stock, par value $.01 per share, which
preferred stock may be issued in series and classes having such rights,
preferences,
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privileges and restrictions as the Board of Directors may determine. Except as
discussed above in "Restrictions on Acquisition of the Holding Company and the
Bank," each share of common stock of the Bank will have the same relative rights
as, and will be identical in all respects with, each other share of common
stock. After the Conversion, the Board of Directors will be authorized to
approve the issuance of Common Stock up to the amount authorized by the Restated
Organization Certificate without the approval of the Bank's shareholders, except
to the extent that such approval is required by governing law. All of the issued
and outstanding common stock of the Bank will be held by the Holding Company as
the Bank's sole shareholder. The capital stock of the Bank will represent
non-withdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC.
Common Stock
Dividends. The holders of the Bank's common stock (the Holding Company
upon consummation of the Conversion) will be entitled to receive and to share
equally in such dividends as may be declared by the Board of Directors of the
Bank out of funds legally available therefor. See "Dividends" for certain
restrictions on the payment of dividends and "Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the
Bank's common stock (the Holding Company upon consummation of the Conversion)
will possess exclusive voting rights in the Bank. Each holder of shares of
common stock will be entitled to one vote for each share held. Cumulation of
votes will not be permitted. See "Restrictions on Acquisition of the Holding
Company and the Bank - Anti-Takeover Effects of the Holding Company's
Certificate of Incorporation and Bylaws and Certain Benefit Plans Adopted in the
Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of its common stock (the Holding Company upon
consummation of the Conversion) will be entitled to receive, after payment of
all debts and liabilities of the Bank (including all deposit accounts and
accrued interest thereon), and distribution of the balance in the special
liquidation account, which is a memorandum account only, to Eligible Account
Holders and Supplemental Eligible Account Holders (see "The Conversion - Effects
of Conversion - Liquidation Rights"), all assets of the Bank available for
distribution in cash or in kind. If preferred stock is issued subsequent to the
Conversion, the holders thereof may also have priority over the holders of
common stock in the event of liquidation or dissolution.
Preemptive Rights and Redemption. Holders of the common stock of the
Bank (the Holding Company upon consummation of the Conversion) will not be
entitled to preemptive rights with respect to any shares of the Bank which may
be issued. The common stock will not be subject to redemption. Upon receipt by
the Bank of the full specified purchase price therefor, the common stock will be
fully paid and non-assessable.
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Preferred Stock
None of the shares of the Bank's authorized preferred stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without shareholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights.
EXPERTS
The consolidated financial statements of the Bank as of March 31, 1997
and 1996 and for each of the years in the three-year period ended March 31,
1997, included in this Prospectus have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said report.
RP Financial has consented to the publication herein of the summary of
its report to the Bank and Holding Company setting forth its belief as to the
estimated pro forma market value of the Common Stock upon Conversion and its
belief 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 the Holding
Company by Silver, Freedman & Taff, L.L.P., Washington, D.C., special counsel to
the Bank and the Holding Company. The New York State income tax consequences of
the Conversion will be passed upon for the Bank and the Holding Company by KPMG
Peat Marwick LLP, Albany, New York. Certain legal matters will be passed upon
for Sandler O'Neill by Peabody & Brown, Boston, Massachusetts.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a registration statement
under the Securities Act with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all the information set forth in the registration statement. Such
information, including the Conversion Valuation Appraisal Report, which is an
exhibit to the Registration Statement, can be examined without charge at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the SEC
at prescribed rates. In addition, the SEC maintain 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 Holding Company. The Conversion Valuation Appraisal Report may
also be inspected by 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
149
<PAGE>
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 Holding 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 Holding Company will register
its Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, the Holding 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 Holding 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 Holding 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
Holding Company and the Restated Organization Certificate and Bylaws of the Bank
are available without charge from the Bank. See "Restrictions on Acquisition of
the Holding Company and the Bank," "Description of Capital Stock of the Holding
Company" and "Description of Capital Stock of the Bank." The Bank's principal
office is located at One Hudson City Centre, Hudson, New York, 12534, and its
telephone number is (518) 828-4600.
150
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 1997 (unaudited) and
March 31, 1997 and 1996................................................ F-3
Consolidated Income Statements for the Nine Months Ended
December 31, 1997 and 1996 (unaudited) and the Years Ended
March 31, 1997, 1996 and 1995.......................................... F-4
Consolidated Statements of Changes in Equity for the Nine Months Ended
December 31, 1997 (unaudited) and the Years Ended March 31, 1997,
1996 and 1995.......................................................... F-5
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 1997 and 1996 (unaudited) and the Years Ended
March 31, 1997, 1996 and 1995.......................................... F-6
Notes to Consolidated Financial Statements (data as of
December 31, 1997 and for the nine months ended December 31, 1997
and 1996 is unaudited)................................................. F-8
All schedules are omitted because the required information is not applicable or
is included in the Consolidated Financial Statements and related Notes.
The financial statements of the Holding Company have been omitted because the
Holding Company has not yet issued any stock, has no assets, no liabilities and
has not conducted any business other than that of an organizational nature.
F-1
<PAGE>
Independent Auditors' Report
The Board of Trustees
The Hudson City Savings Institution:
We have audited the accompanying consolidated balance sheets of The Hudson City
Savings Institution and subsidiaries (the Bank) as of March 31, 1997 and 1996,
and the related consolidated income statements, changes in equity and cash flows
for each of the years in the three-year period ended March 31, 1997. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Hudson City
Savings Institution and subsidiaries as of March 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Albany, New York
June 20, 1997, except for note 17,
which is as of November 20, 1997
F-2
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited) March 31,
December 31, -----------------
Assets 1997 1997 1996
- ------ ------------ ---- ----
(In thousands)
Cash and due from banks $ 12,284 10,457 9,243
Federal funds sold 3,336 -- 4,990
-------- ------- -------
Cash and cash equivalents 15,620 10,457 14,233
-------- ------- -------
Loans held for sale -- 84 201
Securities available for sale 43,282 45,623 51,429
Investment securities 71,244 79,068 83,003
Federal Home Loan Bank of New York stock 2,812 2,812 2,596
Loans receivable 511,898 493,019 450,671
Less: Allowance for loan losses (6,756) (5,872) (3,546)
-------- ------- -------
Net loans receivable 505,142 487,147 447,125
-------- ------- -------
Accrued interest receivable 4,946 4,880 5,254
Premises and equipment, net 15,840 14,965 14,349
Other real estate owned and repossessed property 1,059 3,447 1,716
Other assets 5,106 2,551 3,314
-------- ------- -------
Total assets $665,051 651,034 623,220
======== ======= =======
Liabilities and Equity
- ----------------------
Liabilities:
Deposits 586,231 564,599 555,188
Short-term borrowings 2,000 12,585 --
Urban Development Action Grant payable -- 835 835
Mortgagors' escrow deposits 4,935 3,746 4,027
Other liabilities 4,490 4,140 3,564
-------- ------- -------
Total liabilities 597,656 585,905 563,614
-------- ------- -------
Commitments and contingent liabilities (note 14)
Equity:
Surplus 13,839 13,839 13,689
Undivided profits 53,524 51,638 46,128
Net unrealized gain (loss) on securities
available for sale, net of tax 32 (348) (211)
-------- ------- -------
Total equity 67,395 65,129 59,606
-------- ------- -------
Total liabilities and equity $665,051 651,034 623,220
======== ======= =======
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Consolidated Income Statements
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended Years Ended
December 31, March 31,
----------------- ------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 35,575 32,220 43,585 40,780 35,135
Securities available for sale 1,960 2,879 3,658 1,782 917
Investment securities 3,565 4,063 5,385 6,062 6,503
Federal funds sold 202 87 89 271 344
Federal Home Loan Bank of New York stock 151 124 164 187 160
-------- ------ ------ ------ ------
Total interest and dividend income 41,453 39,373 52,881 49,082 43,059
-------- ------ ------ ------ ------
Interest expense:
Deposits 19,364 18,961 25,187 24,044 19,208
Short-term borrowings 176 130 239 42 101
-------- ------ ------ ------ ------
Total interest expense 19,540 19,091 25,426 24,086 19,309
-------- ------ ------ ------ ------
Net interest income 21,913 20,282 27,455 24,996 23,750
Provision for loan losses 6,408 1,858 3,826 1,090 1,169
-------- ------ ------ ------ ------
Net interest income after provision
for loan losses 15,505 18,424 23,629 23,906 22,581
-------- ------ ------ ------ ------
Other operating income:
Service charges on deposit accounts 840 815 1,063 1,026 1,033
Loan servicing income 353 402 480 272 265
Net securities transactions 12 28 28 28 (16)
Net gain (loss) on sale of loans 39 (5) 17 92 14
Other income 646 121 237 217 236
-------- ------ ------ ------ ------
Total other operating income 1,890 1,361 1,825 1,635 1,532
-------- ------ ------ ------ ------
Other operating expenses:
Compensation and benefits 6,985 6,436 8,592 7,471 6,840
Occupancy 993 916 1,285 1,184 1,162
Equipment 1,232 860 1,230 1,057 1,194
FDIC assessment 55 8 27 299 1,170
Other real estate owned and repossessed
property expenses 274 190 292 348 851
Legal and other professional fees 843 314 397 330 371
Postage and item transportation 557 470 655 510 447
Other expenses 3,249 2,564 3,709 3,000 3,188
-------- ------ ------ ------ ------
Total other operating expenses 14,188 11,758 16,187 14,199 15,223
-------- ------ ------ ------ ------
Income before income tax expense 3,207 8,027 9,267 11,342 8,890
Income tax expense 1,321 3,142 3,607 4,298 2,917
-------- ------ ------ ------ ------
Net income $ 1,886 4,885 5,660 7,044 5,973
======== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Securities
Available
Undivided for Sale, Net Total
Surplus Profits of Tax Equity
------- --------- -------------- ------
(In thousands)
<S> <C> <C> <C> <C>
Balance as of April 1, 1994 $12,470 33,769 111 46,350
Net income -- 5,973 -- 5,973
Transfers to surplus 549 (549) -- --
Adjustment of securities available for sale
to fair value, net of tax -- -- (185) (185)
------- ------ ---- ------
Balance as of March 31, 1995 13,019 39,193 (74) 52,138
Net income -- 7,044 -- 7,044
Transfers to surplus 670 (670) -- --
Net increase in equity from acquisition -- 561 -- 561
Adjustment of securities available for sale
to fair value, net of tax -- -- (137) (137)
------- ------ ---- ------
Balance as of March 31, 1996 13,689 46,128 (211) 59,606
Net income -- 5,660 -- 5,660
Transfers to surplus 150 (150) -- --
Adjustment of securities available for sale
to fair value, net of tax -- -- (137) (137)
------- ------ ---- ------
Balance as of March 31, 1997 13,839 51,638 (348) 65,129
Net income (unaudited) -- 1,886 -- 1,886
Adjustment of securities available for sale
to fair value, net of tax (unaudited) -- -- 380 380
------- ------ ---- ------
Balance as of December 31, 1997 (unaudited) $13,839 53,524 32 67,395
======= ====== ==== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended Years Ended
December 31, March 31,
------------------ ----------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,886 4,885 5,660 7,044 5,973
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,021 832 1,183 1,000 1,090
Provision for loan losses 6,408 1,858 3,826 1,090 1,169
Deferred tax benefit (682) (63) (791) (394) (105)
Net securities transactions (12) (28) (28) (28) 16
Net (gain) loss on sales of loans held for sale (39) 5 (17) (92) (14)
Net loans originated for sale (2,342) (1,911) (2,539) (4,632) (2,101)
Proceeds from sales of loans held for sale 2,465 2,037 2,673 6,697 5,958
Adjustments of other real estate owned and
repossessed property to fair value 217 103 169 336 207
Net gain on sales of other real estate owned and
repossessed property (441) (444) (556) (454) (67)
(Increase) decrease in accrued interest receivable (66) (13) 374 (863) (624)
(Increase) decrease in other assets (2,125) 133 763 (559) (483)
Increase in other liabilities 350 1,541 1,323 1,031 892
------- ------- ------- ------- -------
Total adjustments 4,754 4,050 6,380 3,132 5,938
------- ------- ------- ------- -------
Net cash provided by operating activities 6,640 8,935 12,040 10,176 11,911
------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of securities available for sale -- 7,025 7,025 3,982 7,067
Proceeds from maturities and calls of securities
available for sale 17,995 19,564 21,564 5,024 --
Purchases of securities available for sale (15,010) (21,976) (22,975) (38,998) (2,939)
Proceeds from sales of investment securities -- 2,979 2,979 -- 1,020
Proceeds from maturities, calls and paydowns of
investment securities 13,805 6,237 8,860 10,057 18,817
Purchases of investment securities (5,981) (7,911) (7,911) (13,165) (30,725)
Purchase of FHLB of New York stock -- -- (309) -- (2,569)
Redemption of FHLB of New York stock -- 93 93 -- --
Net loans made to customers (27,506) (35,958) (49,875) (13,952) (33,860)
Proceeds from sales of and payments received on
other real estate owned and repossessed property 5,715 3,443 4,817 3,281 4,213
Capital expenditures (1,896) (1,547) (1,799) (1,713) (1,041)
Net cash provided by acquisition activity -- -- -- 195 --
------- ------- ------- ------- -------
Net cash used in investing activities (12,878) (28,051) (37,531) (45,289) (40,017)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net increase in deposits 21,632 14,143 9,411 37,181 15,774
Net (decrease) increase in short-term borrowings (10,585) 1,715 12,585 -- --
Repayment of UDAG payable (835) -- -- -- --
Increase (decrease) in mortgagors' escrow deposits 1,189 943 (281) (1,767) 68
------- ------- ------- ------- -------
Net cash provided by financing activities 11,401 16,801 21,715 35,414 15,842
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 5,163 (2,315) (3,776) 301 (12,264)
Cash and cash equivalents at beginning of period 10,457 14,233 14,233 13,932 26,196
------- ------- ------- ------- -------
Cash and cash equivalents at end of period $15,620 11,918 10,457 14,233 13,932
======= ======= ======= ======= =======
</TABLE>
(Continued)
F-6
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended Years Ended
December 31, March 31,
------------------ ----------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Supplemental information:
Interest paid $19,538 19,336 25,305 24,086 19,561
======= ======= ======= ======= =======
Taxes paid $ 4,012 3,812 4,593 3,981 2,976
======= ======= ======= ======= =======
Non-cash investing and financing activities:
Loans transferred to other real estate owned
and repossessed property $ 3,103 4,944 6,027 3,557 3,075
======= ======= ======= ======= =======
Loans transferred from loans held for sale to
the loan portfolio $ -- -- -- 239 --
======= ======= ======= ======= =======
Investment securities transferred to securities
available for sale $ -- -- -- 13,775 --
======= ======= ======= ======= =======
Securities available for sale transferred to
investment securities $ -- -- -- 2,000 --
======= ======= ======= ======= =======
Adjustment of securities available for sale to
fair value, net of tax $ 380 136 (137) (137) (185)
======= ======= ======= ======= =======
Acquisition activity (see note 2):
Non-cash assets acquired $ -- -- -- 4,004 --
Non-cash liabilities assumed -- -- -- 3,638 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of The Hudson City Savings Institution and its subsidiaries
(the "Bank"). All material intercompany accounts and transactions have
been eliminated.
The consolidated balance sheet as of December 31, 1997 and the related
consolidated income statements and consolidated statements of cash
flows for the nine month periods ended December 31, 1997 and 1996 and
consolidated statement of changes in equity for the nine month period
ended December 31, 1997 are unaudited and, in the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been made as of December 31,
1997 and for the results for the unaudited periods.
(b) Basis of Presentation
---------------------
The accompanying consolidated financial statements conform, in all
material respects, to generally accepted accounting principles and to
general practice within the banking industry. The Bank utilizes the
accrual method of accounting for financial reporting purposes.
(c) Use of Estimates
----------------
Management of the Bank has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance
for loan losses and the valuation of other real estate owned and
repossessed property acquired in connection with foreclosures or
in-substance foreclosures. In connection with the determination of the
allowance for loan losses and the valuation of other real estate owned
and repossessed property, management obtains appraisals for
significant properties.
Management believes that the allowance for loan losses is adequate and
that other real estate owned and repossessed property is recorded at
its fair value less an estimate of the costs to sell the properties.
While management uses available information to recognize losses on
loans, other real estate owned and repossessed property, future
additions to the allowance or write downs of other real estate owned
and repossessed property may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's
allowance for loan losses and other real estate owned and repossessed
property. Such agencies may require the Bank to recognize additions to
the allowance or write downs of other real estate owned and
repossessed property based on their judgments about information
available to them at the time of their examination which may not be
currently available to management.
(Continued)
F-8
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
A substantial portion of the Bank's loans are secured by real estate
located in the New York State counties of Columbia, Albany,
Rensselaer, Dutchess, and Schenectady. In addition, a substantial
portion of the other real estate owned and repossessed property is
located in those same markets, as well as in the states contiguous to
New York. Accordingly, the ultimate collectibility of a substantial
portion of the Bank's loan portfolio and the recovery of a substantial
portion of the carrying amount of other real estate owned and
repossessed property is dependent upon market conditions in these
market areas.
(d) Cash and Cash Equivalents
-------------------------
For purposes of the consolidated statements of cash flows, cash and
cash equivalents consists of cash on hand, due from banks, and federal
funds sold.
(e) Securities Available for Sale, Investment Securities and Federal Home
----------------------------------------------------------------------
Loan Bank of New York Stock
---------------------------
Management determines the appropriate classification of securities at
the time of purchase. If management has the positive intent and
ability to hold debt securities to maturity, they are stated at
amortized cost. If securities are purchased for the purpose of selling
them in the near term, they are classified as trading securities and
are reported at fair value with unrealized holding gains and losses
reflected in current earnings. All other debt and marketable equity
securities are classified as securities available for sale and are
reported at fair value, with net unrealized gains or losses reported,
net of income taxes, as a separate component of equity. As a member of
the Federal Home Loan Bank of New York (FHLB), the Bank is required to
hold FHLB stock which is carried at cost since there is no readily
available market value. At December 31, 1997, March 31, 1997 and 1996,
the Bank did not hold any securities considered to be trading
securities.
Gains or losses on disposition of securities are based on the net
proceeds and the adjusted carrying amount of the securities sold,
using the specific identification method. Unrealized losses on
securities which reflect a decline in value which is other than
temporary are charged to income and reported as a component of "net
securities transactions" in the consolidated income statements. The
carrying amount of securities is adjusted for amortization of premium
and accretion of discount, which is calculated on an effective
interest method.
In November 1995, the staff of the Financial Accounting Standards
Board released its Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." The Special Report contained, among other things, a
unique provision that allowed entities to, concurrent with the initial
adoption of the Special Report (November 15, 1995) but not later than
December 31, 1995, reassess the appropriateness of the classifications
of all securities held at that time. In conjunction with the
provisions of this Special Report, as of December 31, 1995, the Bank
transferred securities with an amortized cost of $13,775,000 and an
estimated fair value of $14,017,000 from investment securities to
securities available for sale.
(Continued)
F-9
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
(f) Net Loans Receivable
--------------------
Loans are carried at the principal amount outstanding net of unearned
discount, net deferred loan origination fees and costs and the
allowance for loan losses.
Non-performing loans include non-accrual loans, loans which are
contractually past due 90 days or more and still accruing interest and
troubled debt restructurings. Generally, loans are placed on
non-accrual status, either due to the delinquency status of principal
and/or interest payments, or a judgment by management that, although
payments of principal and/or interest are current, such action is
prudent. Loans are generally placed on non-accrual status when
principal and/or interest payments are contractually past due 90 days
or more. When a loan is placed on non-accrual status, all interest
previously accrued but not collected is reversed against current year
interest income. Interest income on non-accrual loans is recognized
only if received, if considered appropriate by management. Loans are
removed from non-accrual status when they become current as to
principal and interest or when, in the opinion of management, the
loans are expected to be fully collectible as to principal and
interest.
The Bank accounts for fees and costs associated with loan originations
in accordance with Statement of Financial Accounting Standards (SFAS)
No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating and Acquiring Loans and Initial Direct Costs of Leases."
As of April 1, 1995, the Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Under these Statements, a loan (generally
commercial-type loans) is considered impaired when it is probable that
the borrower will not make principal and interest payments according
to the original contractual terms of the loan agreement, or when a
loan (of any loan type) is restructured in a troubled debt
restructuring subsequent to the adoption of these Statements. These
Statements prescribe recognition criteria for loan impairment,
generally related to commercial type loans, and measurement methods
for impaired loans. Impaired loans are included in non-performing
loans, generally as non-accrual commercial type loans.
The allowance for loan losses related to impaired loans is based on
the discounted cash flows using the loan's initial effective rate or
the fair value of the collateral for certain loans where repayment of
the loan is expected to be provided solely by the underlying
collateral (collateral dependent loans). The Bank's impaired loans are
generally collateral dependent. The Bank considers estimated costs to
sell, on a discounted basis, when determining the fair value of
collateral in the measurement of impairment if those costs are
expected to reduce the cash flows available to repay or otherwise
satisfy the loans. The adoption of SFAS Nos. 114 and 118 did not have
a significant effect on the Bank's consolidated financial statements.
(Continued)
F-10
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
(g) Allowance for Loan Losses
-------------------------
The allowance for loan losses is replenished through a provision for
loan losses charged to operations. Loans are charged against the
allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Recoveries on loans
previously charged-off are credited to the allowance for loan losses.
The allowance is an amount that management believes will be adequate
to absorb losses on existing loans that may become uncollectible.
Management's evaluation of the adequacy of the allowance for loan
losses is performed on a periodic basis and takes into consideration
such factors as the historical loan loss experience, changes in the
nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans and current economic conditions that
may affect borrowers' ability to pay.
(h) Loans Held for Sale
-------------------
Loans are classified as held for investment purposes or held for sale
when the Bank enters into interest rate lock agreements with the
potential borrowers. Loans held for sale are recorded at the lower of
aggregate cost or fair value. Gains and losses on the disposition of
loans held for sale are determined on the specific identification
method. Loans held for sale at March 31, 1997 and 1996 was comprised
of residental mortgage loans. There were no loans held for sale at
December 31, 1997.
(i) Premises and Equipment
----------------------
Premises and equipment are carried at cost, less accumulated
depreciation. Depreciation is computed on a straight-line basis over
the estimated useful lives of the assets (up to fifty years for
buildings and generally five years for furniture and equipment).
Leasehold improvements are depreciated over the shorter of the term of
the related leases or the estimated useful lives of the assets.
(j) Other Real Estate Owned and Repossessed Property
------------------------------------------------
Other real estate owned, comprised of real estate acquired through
foreclosure and in-substance foreclosures, and repossessed property
are recorded at the lower of "cost" (defined as the fair value at
initial foreclosure) or fair value of the asset acquired, less
estimated costs to dispose of the property. A loan is categorized as
an in-substance foreclosure when the Bank has taken possession of the
collateral, regardless of whether formal foreclosure proceedings have
taken place. At the time of foreclosure, or when foreclosure occurs
in-substance, the excess, if any, of the loan value over the fair
value of the property received is charged to the allowance for loan
losses. Subsequent declines in the value of such property and net
operating expenses of such properties are charged directly to other
operating expenses. Properties are reappraised, as considered
necessary by management, and written down to the fair value less the
estimated cost to sell the property, if necessary. Repossessed
property consists primarily of manufactured homes abandoned by their
owners or repossessed by the Bank.
(Continued)
F-11
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
(k) Income Taxes
------------
The Bank accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets are
recognized subject to management's judgment that those assets will
more likely than not be realized. A valuation allowance is recognized
if, based on an analysis of available evidence, management believes
that all or a portion of the deferred tax assets will not be realized.
Adjustments to increase or decrease the valuation allowance are
charged or credited, respectively, to income tax expense. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(l) Statutory Transfer of Surplus
-----------------------------
A required quarterly transfer of 10% of net income is made to surplus
in accordance with New York State Banking Regulations. No transfer is
required if total equity as a percent of deposits exceeds 10% at the
end of each quarter. In accordance with State of New York Banking Law,
surplus is subject to certain restrictions, including a prohibition of
its use for payment of dividends, except with the approval of the
Superintendent of Banks.
(m) Financial Instruments
---------------------
In the normal course of business, the Bank is a party to certain
financial instruments with off-balance-sheet risk such as commitments
to extend credit, unused lines of credit and standby letters of
credit. The Bank's policy is to record such instruments when funded.
(n) Mortgage Servicing Rights
-------------------------
SFAS No. 122, "Accounting for Mortgage Servicing Rights," as
superceded by SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," requires that
entities recognize, as separate assets, the rights to service mortgage
loans for others, regardless of how those servicing rights are
acquired. Additionally, SFAS No. 125 requires that the capitalized
mortgage servicing rights be assessed for impairment based on the fair
value of those rights, and that impairment, if any, be recognized
through a valuation allowance. The Bank's adoption of SFAS No. 122, as
superceded by SFAS No. 125, as of April 1, 1996, did not have a
material effect on the consolidated financial statements.
(o) Trust Department Assets and Service Fees
----------------------------------------
Assets held by the Bank in a fiduciary or agency capacity for its
customers are not included in the consolidated balance sheets since
these items are not assets of the Bank. Trust service fees are
reported on the accrual basis.
(Continued)
F-12
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
(p) Transfers of Financial Assets and Extinguishment of Liabilities
---------------------------------------------------------------
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," provides accounting and
reporting standards for determining whether a variety of transactions
should be accounted for as sales or financings, based on consistent
application of a financial-components approach that focuses on control
and superceded SFAS No. 122, as discussed above. SFAS No. 125 is
generally effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996.
Certain aspects of SFAS No. 125 were amended by SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." The adoption of SFAS No. 125, as amended, did not
have a material impact on the Bank's consolidated financial
statements.
(q) Reclassifications
-----------------
Amounts in the prior years' consolidated financial statements are
reclassified whenever necessary to conform with the current year's
presentation.
(2) Acquisition Activity
--------------------
On December 20, 1995, The Hudson City Savings Institution acquired all of
the assets and assumed all of the liabilities of Valatie Savings and Loan
Association. This transaction was accounted for as a pooling-of-interests
and resulted in an increase in equity of $561,000. Amounts related to this
transaction are not material.
(3) Securities Available for Sale
-----------------------------
The amortized cost and approximate fair value of securities available for
sale at December 31, 1997, March 31, 1997 and 1996, are as follows:
December 31, 1997
----------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- -----------
(In thousands)
U.S. Government and Agency
securities $36,955 55 (67) 36,943
Corporate debt securities 6,274 68 (3) 6,339
------- --- ---- ------
Total securities available
for sale $43,229 123 (70) 43,282
======= === ==== ======
March 31, 1997
----------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- -----------
(In thousands)
U.S. Government and Agency
securities $37,933 7 (611) 37,329
Corporate debt securities 8,269 47 (22) 8,294
------- --- ---- ------
Total securities available
for sale $46,202 54 (633) 45,623
======= === ==== ======
(Continued)
F-13
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
March 31, 1996
----------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- -----------
(In thousands)
U.S. Government and Agency
securities $33,990 16 (554) 33,452
Corporate debt securities 17,791 216 (30) 17,977
------- --- ---- ------
Total securities available
for sale $51,781 232 (584) 51,429
======= === ==== ======
The following sets forth information with regard to contractual maturities
of securities available for sale as of December 31 and March 31, 1997
(actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties):
December 31, 1997
-----------------------------------------------------------------
U.S. Government and Corporate Debt Total Securities
Agency Securities Securities Available for Sale
--------------------- --------------------- ---------------------
Amortized Approximate Amortized Approximate Amortized Approximate
cost fair value cost fair value cost fair value
--------- ----------- --------- ----------- --------- -----------
(In thousands)
Within one year $ -- -- 1,000 1,006 1,000 1,006
One through
five years 33,955 33,941 5,274 5,333 39,229 39,274
Five through
ten years 3,000 3,002 -- -- 3,000 3,002
------- ------ ----- ----- ------ ------
$36,955 36,943 6,274 6,339 43,229 43,282
======= ====== ===== ===== ====== ======
March 31, 1997
-----------------------------------------------------------------
U.S. Government and Corporate Debt Total Securities
Agency Securities Securities Available for Sale
--------------------- --------------------- ---------------------
Amortized Approximate Amortized Approximate Amortized Approximate
cost fair value cost fair value cost fair value
--------- ----------- --------- ----------- --------- -----------
(In thousands)
Within one year $ -- -- 4,003 4,014 4,003 4,014
One through
five years 37,933 37,329 4,266 4,280 42,199 41,609
------- ------ ----- ----- ------ ------
$37,933 37,329 8,269 8,294 46,202 45,623
======= ====== ===== ===== ====== ======
(Continued)
F-14
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
During the years ended March 31, 1997, 1996 and 1995, and the nine months
ended December 31, 1996, the Bank received $7,025,000, $3,982,000,
$7,067,000, and $7,025,000, respectively, in proceeds from the sale of
securities available for sale, realizing gross gains of $36,000, $28,000,
$46,000, and $36,000, respectively, and gross losses of $0, $0, $7,000, and
$0, respectively. The Bank realized gross gains of $12,000 and no gross
losses during the nine months ended December 31, 1997, related to calls of
securities available for sale. Write-downs of securities available for sale
due to credit deterioration amounted to $76,000 during the year ended March
31, 1995.
(4) Investment Securities
---------------------
The amortized cost and approximate fair value of investment securities as
of December 31, 1997, March 31, 1997 and 1996, are as follows:
December 31, 1997
----------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- -----------
(In thousands)
U.S. Government and Agency
securities $19,974 90 (30) 20,034
Corporate debt securities 46,743 318 (12) 47,049
Mortgage backed securities 4,517 26 (28) 4,515
State, county and municipal 10 -- -- 10
------- --- ---- ------
Total investment securities $71,244 434 (70) 71,608
======= === ==== ======
March 31, 1997
----------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- -----------
(In thousands)
U.S. Government and Agency
securities $17,960 14 (135) 17,839
Corporate debt securities 57,648 110 (219) 57,539
Mortgage backed securities 3,050 37 (123) 2,964
State, county and municipal 410 1 -- 411
------- --- ---- ------
Total investment securities $79,068 162 (477) 78,753
======= === ==== ======
March 31, 1996
----------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- -----------
(In thousands)
U.S. Government and Agency
securities $13,957 43 (170) 13,830
Corporate debt securities 63,557 439 (152) 63,844
Mortgage backed securities 4,221 58 (113) 4,166
State, county and municipal 1,268 14 -- 1,282
------- --- ---- ------
Total investment securities $83,003 554 (435) 83,122
======= === ==== ======
(Continued)
F-15
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
At December 31, 1997, March 31, 1997 and 1996, mortgage backed securities
consisted entirely of Government National Mortgage Association (GNMA),
Fannie Mae, and Freddie Mac securities.
The amortized cost and approximate fair value of investment securities at
December 31 and March 31, 1997, by contractual maturity (mortgage backed
securities are included by final contractual maturity), are as follows
(actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties):
December 31, 1997
----------------------------------------------
U.S. Government
and Agency Corporate Debt
Securities Securities
---------------------- ----------------------
Approximate Approximate
Amortized fair Amortized fair
cost value cost value
--------- ----------- --------- -----------
(In thousands)
Within one year $ 4,998 4,989 20,894 20,935
One through five years 14,976 15,045 24,863 25,116
Five through ten years -- -- 986 998
After ten years -- -- -- --
------- ------ ------ ------
$19,974 20,034 46,743 47,049
======= ====== ====== ======
<TABLE>
<CAPTION>
Mortgage Backed State, County Total
Securities and Municipal Investment Securities
--------------------- --------------------- ---------------------
Approximate Approximate Approximate
Amortized fair Amortized fair Amortized fair
cost value cost value cost value
--------- ----------- --------- ----------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Within one year $ -- -- -- -- 25,892 25,924
One through five years 280 272 -- -- 40,119 40,433
Five through ten years 2,586 2,643 10 10 3,582 3,651
After ten years 1,651 1,600 -- -- 1,651 1,600
------ ----- --- --- ------ ------
$4,517 4,515 10 10 71,244 71,608
====== ===== === === ====== ======
</TABLE>
(Continued)
F-16
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
<TABLE>
<CAPTION>
March 31, 1997
---------------------------------------------------------------------
U.S. Government
and Agency Corporate Debt Mortgage Backed
Securities Securities Securities
---------------------- ---------------------- ---------------------
Approximate Approximate Approximate
Amortized fair Amortized fair Amortized fair
cost value cost value cost value
--------- ----------- --------- ----------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Within one year $ 999 1,000 12,953 12,970 373 374
One through five years 16,961 16,839 44,695 44,569 308 293
Five through ten years -- -- -- -- 656 674
After ten years -- -- -- -- 1,713 1,623
------- ------ ------ ------ ----- -----
$17,960 17,839 57,648 57,539 3,050 2,964
======= ====== ====== ====== ===== =====
</TABLE>
State, County Total
and Municipal Investment Securities
--------------------- ---------------------
Approximate Approximate
Amortized fair Amortized fair
cost value cost value
--------- ----------- --------- -----------
(In thousands)
Within one year $400 401 14,726 14,745
One through five years -- -- 61,963 61,701
Five through ten years 10 10 666 684
After ten years -- -- 1,713 1,623
---- --- ------ ------
$410 411 79,068 78,753
==== === ====== ======
Investment securities with a carrying value of $6.0 million, $5.0 million
and $5.0 million at December 31, 1997, March 31, 1997 and 1996,
respectively, were pledged to secure public deposits and for other purposes
as required by law.
During the year ended March 31, 1997, the nine months ended December 31,
1996, and the year ended March 31, 1995, the Bank received $2,979,000,
$2,979,000, and $1,020,000, respectively, in proceeds from the sale of
investment securities, realizing gross gains of $0, $0, and $21,000,
respectively, and gross losses of $8,000, $8,000, and $0, respectively.
These securities were sold due to significant deterioration in the issuers'
creditworthiness. No investment securities were sold during the nine months
ended December 31, 1997 or the year ended March 31, 1996.
(Continued)
F-17
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
(5) Net Loans Receivable
--------------------
A summary of net loans receivable as of December 31, 1997, March 31, 1997
and 1996 is as follows:
March 31,
December 31, ------------------
1997 1997 1996
------------ ---- ----
(In thousands)
Loans secured by real estate:
Residential one-to-four-family $250,649 246,462 214,226
Home equity 27,441 27,630 26,936
Commercial 73,902 67,697 70,854
Construction 3,980 2,725 4,317
-------- ------- -------
Total loans secured by real estate 355,972 344,514 316,333
-------- ------- -------
Other loans:
Manufactured housing 98,307 92,651 80,399
Commercial 13,907 16,146 17,393
Mortgage warehouse lines of credit 7,062 3,567 11,797
Financed insurance premiums 23,395 23,535 13,503
Consumer and other 12,140 11,577 10,155
-------- ------- -------
Total other loans 154,811 147,476 133,247
-------- ------- -------
Net deferred loan origination costs and
unearned discount 1,115 1,029 1,091
Allowance for loan losses (6,756) (5,872) (3,546)
-------- ------- -------
Net loans receivable $505,142 487,147 447,125
======== ======= =======
Changes in the allowance for loan losses during the nine months ended
December 31, 1997 and 1996, and the years ended March 31, 1997, 1996 and
1995 were as follows:
Nine Months Ended Years Ended
December 31, March 31,
----------------- -------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Allowance for loan losses
at beginning of period $ 5,872 3,546 3,546 3,187 2,917
Provision charged to operations 6,408 1,858 3,826 1,090 1,169
Loans charged-off (5,953) (1,676) (2,070) (1,197) (1,263)
Recoveries on loans charged-off 429 464 570 423 364
Allowance acquired through
merger -- -- -- 43 --
------- ------ ------ ------ ------
Allowance for loan losses
at end of period $ 6,756 4,192 5,872 3,546 3,187
======= ====== ====== ====== ======
(Continued)
F-18
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
The following table sets forth information with regard to non-performing
loans:
March 31,
December 31, ------------------------
1997 1997 1996 1995
---- ---- ---- ----
(In thousands)
Loans in non-accrual status $15,081 15,282 8,286 6,221
Loans contractually past due 90 days or
more and still accruing interest 1,302 4,711 2,600 1,129
------- ------ ------ -----
$16,383 19,993 10,886 7,350
======= ====== ====== =====
At December 31, 1997, March 31, 1997, 1996 and 1995, respectively, there
were no troubled debt restructurings. There are no material commitments to
extend further credit to borrowers with non-performing loans.
Accumulated interest on non-accrual loans, as shown above, of approximately
$493,000 and $586,000, was not recognized in interest income during the
nine months ended December 31, 1997 and the year ended March 31, 1997,
respectively. Approximately $637,000 and $937,000 of interest on
non-accrual loans, as shown above, was collected and recognized in interest
income during the nine months ended December 31, 1997 and the year ended
March 31, 1997, respectively. Accumulated interest on non-accrual loans, as
shown above, not recognized in interest income and collected and recognized
in interest income for the years ended March 31, 1996 and 1995 was not
significant.
At December 31, 1997 and March 31, 1997 and 1996, the recorded investment
in loans that are considered to be impaired under SFAS No. 114 totaled
$4,279,000, $5,361,000, and $646,000, respectively, for which the related
allowance for loan losses was $682,000, $2,010,000, and $71,000,
respectively. As of December 31, 1997, March 31, 1997 and 1996, there were
no impaired loans which did not have an allowance for loan losses
determined in accordance with SFAS No. 114. The average recorded investment
in impaired loans during the nine months ended December 31, 1997 and 1996,
and the years ended March 31, 1997 and 1996, was $5,975,000, $1,304,000,
$1,621,000, and $569,000, respectively. The interest income recognized on
those impaired loans and the interest income recognized on those impaired
loans using the cash basis of income recognition was not significant for
the nine months ended Decmeber 31, 1997 and 1996, and the years ended March
31, 1997 and 1996.
Certain executive officers of the Bank were customers of and had other
transactions with the Bank in the ordinary course of business. Loans to
these parties were made in the ordinary course of business at the Bank's
normal credit terms, including interest rate and collateralization. The
aggregate of such loans totaled less than 5% of total equity at December
31, 1997, March 31, 1997 and 1996.
(Continued)
F-19
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
(6) Accrued Interest Receivable
---------------------------
Accrued interest receivable consists of the following at December 31, 1997,
March 31, 1997 and 1996:
March 31,
December 31, -----------------
1997 1997 1996
---- ---- ----
(In thousands)
Loans and loans held for sale $3,090 3,115 3,097
Securities available for sale 739 664 851
Investment securities 1,117 1,101 1,306
------ ----- -----
$4,946 4,880 5,254
====== ===== =====
(7) Premises and Equipment
----------------------
A summary of premises and equipment at December 31, 1997, March 31, 1997
and 1996 is as follows:
March 31,
December 31, -----------------
1997 1997 1996
---- ---- ----
(In thousands)
Bank buildings and land $16,576 15,224 15,182
Furniture and equipment 4,923 4,505 2,997
Leasehold improvements 854 786 759
------- ------ ------
22,353 20,515 18,938
Less: Accumulated depreciation (6,513) (5,550) (4,589)
------- ------ ------
Premises and equipment, net $15,840 14,965 14,349
======= ====== ======
Depreciation was approximately $1.0 million and $832,000 for the nine
months ended December 31, 1997 and 1996, respectively. Depreciation was
approximately $1.2 million, $1.0 million, and $1.1 million for the years
ended March 31, 1997, 1996, and 1995, respectively.
At December 31 and March 31, 1997, the Bank held one of its branch
buildings for sale. The carrying value of the building was approximately
$750,000 at both December 31 and March 31, 1997, which represented the
lower of the cost basis of the building or fair value less estimated costs
to sell.
(8) Other Real Estate Owned and Repossessed Property
------------------------------------------------
Other real estate owned and repossessed property consists of the following
at December 31, 1997, March 31, 1997 and 1996:
March 31,
December 31, -----------------
1997 1997 1996
---- ---- ----
(In thousands)
Repossessed real estate:
Commercial $ 300 2,860 921
Residential 59 48 160
Repossessed property 700 539 635
------ ----- -----
$1,059 3,447 1,716
====== ===== =====
(Continued)
F-20
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
(9) Deposits
--------
Deposit account balances at December 31, 1997 and March 31, 1997 and 1996
are summarized as follows:
March 31,
December 31, -----------------
1997 1997 1996
---- ---- ----
(In thousands)
Savings accounts (3.00% to 3.92%) $140,483 136,109 130,032
N.O.W. and money market accounts
(2.00% to 4.88%) 94,046 92,347 93,919
Time deposit accounts:
2.00 to 2.99% 470 -- --
3.00 to 3.99% 419 824 958
4.00 to 4.99% 3,497 15,319 32,165
5.00 to 5.99% 259,419 228,732 149,852
6.00 to 6.99% 15,659 27,070 84,703
7.00 to 7.99% 35,817 35,441 34,516
8.00 to 8.99% -- -- 560
-------- ------- -------
Total time deposit accounts 315,281 307,386 302,754
-------- ------- -------
Non-interest bearing accounts 36,421 28,757 28,483
-------- ------- -------
Total deposits $586,231 564,599 555,188
======== ======= =======
The aggregate amount of time deposit accounts with a balance of $100,000 or
greater was $42.4 million, $44.3 million, and $46.5 million at December 31,
1997, March 31, 1997 and 1996, respectively.
The approximate amounts of contractual maturities of time deposit accounts
at December 31, 1997 are as follows:
(In thousands)
Years ending December 31,
1998 $178,360
1999 101,019
2000 18,182
2001 14,676
2002 2,245
Thereafter 799
--------
$315,281
========
The approximate amounts of contractual maturities of time deposit accounts
at March 31, 1997 are as follows:
(In thousands)
Years ending March 31,
1998 $153,807
1999 110,830
2000 22,208
2001 15,380
2002 3,288
Thereafter 1,049
--------
$306,562
========
(Continued)
F-21
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
Interest expense on deposits for the nine months ended December 31, 1997
and 1996, and the years ended March 31, 1997, 1996 and 1995 is summarized
as follows:
Nine Months Ended Years Ended
December 31, March 31,
----------------- -------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Time deposit accounts $13,513 13,342 17,727 16,713 10,796
Savings accounts 3,584 3,388 4,523 4,275 5,501
N.O.W. and money market accounts 2,178 2,144 2,831 2,932 2,769
Mortgagors' escrow deposits 89 87 106 124 142
------- ------ ------ ------ ------
$19,364 18,961 25,187 24,044 19,208
======= ====== ====== ====== ======
(10) Urban Development Action Grant Payable
--------------------------------------
Hudson City Center, Inc. (a subsidiary of the Bank) was awarded an $835,000
"Urban Development Action Grant (UDAG) Equity Participation in Cash Flow"
by the Hudson Development Corporation for the purpose of constructing an
office building in the City of Hudson, New York. This loan was to be repaid
in December 2000. Since January 1991, the Bank had expensed approximately
$25,000 per year under the terms of the agreement. During September 1997,
the loan was satisfied.
(11) Income Taxes
------------
The components of income tax expense for the nine months ended December 31,
1997 and 1996 and the years ended March 31, 1997, 1996, and 1995 are as
follows:
Nine Months Ended Years Ended
December 31, March 31,
----------------- -------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Current tax expense:
Federal $1,724 2,710 3,702 3,951 2,697
State 279 495 696 741 325
Deferred tax benefit (682) (63) (791) (394) (105)
------ ----- ----- ----- -----
$1,321 3,142 3,607 4,298 2,917
====== ===== ===== ===== =====
(Continued)
F-22
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
The following is a reconciliation of the expected income tax expense and
the actual income tax expense. The expected income tax expense has been
computed by applying the statutory federal tax rate to income before income
tax expense:
Nine Months Ended Years Ended
December 31, March 31,
----------------- -------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Income tax at applicable
federal statutory rate $1,090 2,729 3,151 3,856 3,023
Increase (decrease) in income
tax expense resulting from:
Tax exempt securities income (8) (12) (14) (82) (85)
State income taxes, net of
federal tax benefit 184 327 459 489 214
Reduction in the valuation
allowance for deferred
tax assets -- -- -- -- (248)
Other 55 98 11 35 13
------ ----- ----- ----- -----
Income tax expense $1,321 3,142 3,607 4,298 2,917
====== ===== ===== ===== =====
Effective tax rate 41.2% 39.1% 38.9% 37.9% 32.8%
====== ===== ===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997, March 31, 1997 and 1996 are presented below:
March 31,
December 31, -----------------
1997 1997 1996
---- ---- ----
(In thousands)
Deferred tax assets:
Differences in reporting the provision for
loan losses and tax bad debt deduction $2,547 1,880 1,344
Differences in reporting other real estate
owned and repossessed property 157 221 102
Accrued postretirement benefits 268 203 115
Deferred compensation 163 136 107
Other 69 49 47
------ ----- -----
Total gross deferred tax assets 3,204 2,489 1,715
Less valuation allowance (141) (141) (141)
------ ----- -----
Net deferred tax assets 3,063 2,348 1,574
------ ----- -----
Deferred tax liabilities:
Differences in reporting depreciation (73) (60) (35)
Differences in reporting bond discount
accretion (232) (184) (199)
Differences in reporting pension costs (465) (493) (520)
------ ----- -----
Total deferred tax liabilities (770) (737) (754)
------ ----- -----
Net deferred tax asset at end of period 2,293 1,611 820
Net deferred tax asset at beginning of period 1,611 820 426
------ ----- -----
Deferred tax benefit for the period $ (682) (791) (394)
====== ===== =====
(Continued)
F-23
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
In addition to the deferred tax assets and liabilities described above, the
Bank had a deferred tax liability of $21,000 at December 31, 1997, and a
deferred tax asset of $232,000 and $141,000 at March 31, 1997 and 1996,
respectively, related to the net unrealized gain or loss on securities
available for sale.
The valuation allowance, as established by the Bank at December 31, 1997,
March 31, 1997 and 1996, takes into consideration the nature and timing of
the deferred tax asset items, as well as the amount of available open tax
carrybacks. The Bank has fully reserved its New York State net deferred tax
asset, which is a component of deferred tax assets, due to the lack of
carryback and carryforward provisions available in New York State. The
decrease of $248,000 in the deferred tax asset valuation allowance during
the year ended March 31, 1995 was based upon the Bank's continuing
evaluation of the level of such allowance and the realizability of the
temporary differences creating the deferred tax assets, particularly
reserves for loan losses, and after considering the estimates of future
taxable income. Based on recent historical and anticipated future taxable
income, management believes it is more likely than not that the Company
will realize its net deferred tax assets.
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically
have been determined using methods based on loss experience or a percentage
of taxable income. Tax bad debt reserves are maintained equal to the excess
of allowable deductions over actual bad debt losses and other reserve
reductions. These reserves consist of a defined base-year amount, plus
additional amounts ("excess reserves") accumulated after the base year.
SFAS No. 109 requires recognition of deferred tax liabilities with respect
to such excess reserves, as well as any portion of the base-year amount
which is expected to become taxable (or "recaptured") in the foreseeable
future.
Certain amendments to the Federal and New York State tax laws regarding bad
debt deductions were enacted in July and August 1996. The Federal
amendments include elimination of the percentage of taxable income method
for tax years beginning after December 31, 1995, and imposition of a
requirement to recapture into taxable income (over a period of
approximately six years) the bad debt reserves in excess of the base-year
amounts. The Bank previously established, and will continue to maintain, a
deferred tax liability with respect to such excess Federal reserves. The
New York State amendments redesignate the Bank's state bad debt reserves at
December 31, 1995 as the base-year amount and also provide for future
additions to the base-year reserve using the percentage of taxable income
method.
(Continued)
F-24
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the Federal base-year reserve of $2.7 million
and "supplemental" reserve (as defined) of $10.3 million at both December
31 and March 31 1997, and the state base-year reserve of $18.3 million at
both December 31 and March 31, 1997, since the Bank does not expect that
these amounts will become taxable in the foreseeable future. Under New York
State tax law, as amended, events that would result in taxation of these
reserves include the failure of the Bank to maintain a specified qualifying
assets ratio or meet other thrift definition tests for tax purposes. The
unrecognized deferred tax liability at both December 31 and March 31, 1997
with respect to the Federal base-year reserve and supplemental reserve was
$933,000 and $3.5 million, respectively. The unrecognized deferred tax
liability at December 31 and March 31, 1997 with respect to the state
base-year reserve was $1.1 million (net of Federal benefit).
(12) Employee Benefit Plans
----------------------
The Bank maintains a non-contributory pension plan with Retirement Systems
Incorporated (RSI) Retirement Trust, covering substantially all of its
employees meeting certain eligibility requirements. The benefits are
computed as a percentage of the highest three year average annual earnings,
as defined by the Plan, multiplied by years of credited service. Prior to
July 14, 1995, the percentages utilized were two percent for the first
thirty years of credited service and one-half percent thereafter.
Subsequent to July 14, 1995, the Plan was amended to limit credited service
for benefit calculations to a maximum of thirty years. The amounts
contributed to the plan are determined annually on the basis of (a) the
maximum amount that can be deducted for federal income tax purposes or (b)
the amount certified by a consulting actuary as necessary to avoid an
accumulated funding deficiency as defined by the Employee Retirement Income
Security Act of 1974. Contributions are intended to provide not only for
benefits attributed to service to date but also those expected to be earned
in the future. Plan assets consist primarily of investments in RSI
Retirement Trust administered fixed-income and equity funds.
The following table sets forth the Plan's funded status and amounts
recognized in the Bank's consolidated financial statements at March 31,
1997 and 1996:
1997 1996
---- ----
(In thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $6,477,000 and $5,947,000 at
March 31, 1997 and 1996, respectively $(6,659) (6,387)
======= ======
Projected benefit obligation (8,183) (7,977)
Estimated fair value of Plan assets 9,272 8,647
------- ------
Plan assets in excess of projected benefit obligation 1,089 670
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions 149 575
Unrecognized transition asset at January 1, 1988 being
recognized over approximately 12 years (71) (124)
Unrecognized past service liability 64 72
------- ------
Prepaid pension cost included in other assets $ 1,231 1,193
======= ======
(Continued)
F-25
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
Net periodic pension cost included in the Bank's consolidated income
statements for the years ended March 31, 1997, 1996, and 1995 included the
following components:
1997 1996 1995
---- ---- ----
(In thousands)
Service cost $353 327 321
Interest cost 573 536 471
Actual return on plan assets (753) (1,160) (544)
Net amortization and deferral 40 543 (44)
---- ------ ----
Net periodic pension cost $213 246 204
==== ====== ====
The actuarial assumptions used in determining the actuarial present value
of the projected benefit obligation as of March 31 were as follows:
1997 1996 1995
---- ---- ----
Weighted average discount rate 7.75% 7.50% 8.25%
Rate of increase in future compensation levels 5.50 5.50 6.00
Expected long term rate of return 8.00 8.00 8.00
In addition, the Bank provides a defined benefit postretirement plan which
provides medical and life insurance benefits to substantially all
employees, as well as dental benefits to a closed group of retirees. The
Bank adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," as of April 1, 1995. Under SFAS No. 106, the
cost of postretirement benefits other than pensions must be recognized on
an accrual basis as employees perform services to earn the benefits.
Active employees are eligible for retiree medical and life insurance
coverage upon reaching age 55 with 10 years of service. The medical portion
of the plan is contributory, with retiree contributions based on years of
service and their retirement date. The Bank's contributions for employees
retiring on or after September 1, 1995 are limited to 150% of the premium
rates in effect at the time of retirement. The life insurance portion of
the plan is non-contributory, with the pre-retirement benefit equal to two
times annual earnings. The post-retirement life insurance benefit is
reduced based on the retiree's age and the length of time since retirement,
with a maximum retiree benefit of $50,000. Post-retirement dental coverage
is in effect for a closed group of retirees. The dental portion of the plan
is non-contributory. The funding policy of the plan is to pay claims and/or
insurance premiums as they come due.
(Continued)
F-26
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
The following table presents the amounts recogized in the Bank's
consolidated financial statements at March 31, 1997 and 1996:
1997 1996
---- ----
(In thousands)
Accumulated post-retirement benefit obligation:
Retirees and eligible beneficiaries $(1,856) (1,815)
Active employees fully eligible for benefits (190) (214)
Other active plan participants (533) (545)
------- ------
(2,579) (2,574)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 32 130
Unrecognized transition obligation at
April 1, 1995 being recognized over 20 years 2,126 2,244
------- ------
Accrued post-retirement benefit cost included
in other liabilities $ (421) (200)
======= ======
Net periodic post-retirement benefit cost included in the Bank's
consolidated income statements for the years ended March 31, 1997 and 1996,
included the following components:
1997 1996
---- ----
(In thousands)
Service cost $ 60 47
Interest cost 188 189
Net amortization and deferral 118 118
---- ----
Net periodic post-retirement benefit cost $366 354
==== ====
The discount rate used in determining the accumulated post-retirement
benefit obligation was 7.75% and 7.50% at March 31, 1997 and 1996,
respectively.
For measurement purposes, an 8.00% annual rate of increase in the per
capita cost of covered health benefits was assumed for medical coverage
starting in 1998; the rate was assumed to decrease uniformly to 5.00% by
2001 and to remain at that level thereafter. A 5.00% annual rate of
increase in the per capita cost of covered dental benefits was assumed for
dental coverage starting in 1998; the rate was assumed to decrease
uniformly to 4.00% by 2000 and to remain at that level thereafter The
medical and dental care cost trend rate assumptions have a significant
effect on the amounts reported. To illustrate, increasing the assumed
medical and dental care cost trend rates by one percentage point in each
year would increase the accumulated post-retirement benefit obligation as
of March 31, 1997 by $217,000 and the aggregate of the service and interest
cost for the year ended March 31, 1997 would increase by $20,000.
(Continued)
F-27
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
The Bank also sponsors a defined contribution 401(k) plan covering
substantially all employees meeting certain eligibility requirements. The
Bank matches 50% of employee pre-tax contributions up to a maximum
contribution by the Bank of 4% of the employee's annual salary. The amount
of 401(k) contribution expense was $88,000, $88,000, $117,000, $100,000,
and $89,000 for the nine months ended December 31, 1997 and 1996 and the
years ended March 31, 1997, 1996, and 1995, respectively.
(13) Regulatory Capital
------------------
Federal Deposit Insurance Corporation (FDIC) regulations require banks to
maintain a minimum leverage ratio of Tier 1 capital to total adjusted
quarterly average assets of 4.0%, and minimum ratios of Tier 1 capital and
total capital to risk-weighted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized bank. Such actions could have
a direct material effect on a bank's financial statements. The regulations
establish a framework for the classification of banks into five categories:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, a bank is
considered well capitalized if it has a Tier 1 capital ratio of at least
5.0% (based on total adjusted quarterly average assets); a Tier 1
risk-based capital ratio of at least 6.0%; and a total risk-based capital
ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about capital components, risk weightings, and other factors.
Management believes that, as of December 31 and March 31, 1997, the Bank
met all capital adequacy requirements to which it was subject. Further, the
most recent FDIC notification categorized the Bank as a well capitalized
institution under the prompt corrective action regulations. There have been
no conditions or events since the notification that management believes
have changed the Bank's capital classification.
(Continued)
F-28
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
The following is a summary of actual capital amounts and ratios as of
December 31 and March 31, 1997 for the Bank, compared to the requirements
for minimum capital adequacy and for classification as well capitalized:
December 31, 1997
---------------------------------------------------
Required Ratios
Actual Captial ----------------------------------
-------------- Minimum Capital Classification as
Amount Ratio Adequacy Well Capitalized
------ ----- --------------- -----------------
(Dollars in thousands)
Tier 1 (leverage) capital $66,753 10.1% 4.0% 5.0%
Risk-based capital:
Tier 1 66,753 14.1 4.0 6.0
Total 72,672 15.4 8.0 10.0
March 31, 1997
---------------------------------------------------
Required Ratios
Actual Captial ----------------------------------
-------------- Minimum Capital Classification as
Amount Ratio Adequacy Well Capitalized
------ ----- --------------- -----------------
(Dollars in thousands)
Tier 1 (leverage) capital $65,133 10.1% 4.0% 5.0%
Risk-based capital:
Tier 1 65,133 13.8 4.0 6.0
Total 71,005 15.1 8.0 10.0
(14) Commitments and Contingent Liabilities
--------------------------------------
(a) Off-Balance-Sheet Financing and Concentrations of Credit
--------------------------------------------------------
The Bank is a party to certain financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
the Bank's commitments to extend credit. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated financial statements. The contract
amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the commitments to extend credit is represented by
the contractual notional amount of those instruments. The Bank uses
the same credit policies in making commitments as it does for
on-balance-sheet instruments.
Unless otherwise noted, the Bank does not require collateral or other
security to support financial instruments with credit risk.
(Continued)
F-29
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
Contract amounts of financial instruments that represent credit risk
as of December 31, 1997, March 31, 1997 and 1996, at fixed and
variable interest rates, are as follows:
December 31, 1997
-----------------------------
Fixed Variable Total
----- -------- -----
(In thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments outstanding:
Residential mortgages $ 4,863 3,264 8,127
Residential construction loans 185 421 606
Commercial mortgage loans 736 522 1,258
Commercial loans -- 915 915
Home equity loans 306 197 503
Manufactured home loans 1,586 -- 1,586
------- ------ ------
7,676 5,319 12,995
------- ------ ------
Unused lines of credit on advanced funds:
Construction loans 361 1,297 1,658
Home equity loans 4,574 7,288 11,862
Commercial lines of credit 269 9,424 9,693
Personal lines of credit 1,972 -- 1,972
------- ------ ------
7,176 18,009 25,185
------- ------ ------
Standby letters of credit -- 3,422 3,422
------- ------ ------
$14,852 26,750 41,602
======= ====== ======
March 31, 1997
-----------------------------
Fixed Variable Total
----- -------- -----
(In thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments outstanding:
Residential mortgages $ 4,541 5,501 10,042
Residential construction loans 285 427 712
Commercial mortgage loans 1,400 1,099 2,499
Commercial loans 600 160 760
Home equity loans 808 130 938
Manufactured home loans 3,182 866 4,048
------- ------ ------
10,816 8,183 18,999
------- ------ ------
Unused lines of credit on advanced funds:
Construction loans 753 369 1,122
Home equity loans 3,844 6,036 9,880
Commercial lines of credit 226 15,356 15,582
Personal lines of credit 1,889 -- 1,889
------- ------ ------
6,712 21,761 28,473
------- ------ ------
Standby letters of credit -- 2,523 2,523
------- ------ ------
$17,528 32,467 49,995
======= ====== ======
(Continued)
F-30
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
March 31, 1996
-----------------------------
Fixed Variable Total
----- -------- -----
(In thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments outstanding:
Residential mortgages $ 2,603 1,739 4,342
Residential construction loans 118 299 417
Commercial mortgage loans 300 2,319 2,619
Commercial loans 55 171 226
Home equity loans 768 274 1,042
Manufactured home loans 2,118 706 2,824
------- ------ ------
5,962 5,508 11,470
------- ------ ------
Unused lines of credit on advanced funds:
Construction loans 126 1,117 1,243
Home equity loans 3,193 7,916 11,109
Commercial lines of credit 1,635 11,602 13,237
Personal lines of credit 1,830 -- 1,830
------- ------ ------
6,784 20,635 27,419
------- ------ ------
Standby letters of credit -- 2,538 2,538
------- ------ ------
$12,746 28,681 41,427
======= ====== ======
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since certain
commitments are expected to expire without being fully drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral, if any, required by the
Bank upon the extension of credit is based on management's credit
evaluation of the customer.
Commitments to extend credit may be written on a fixed rate basis
exposing the Bank to interest rate risk given the possibility that
market rates may change between commitment and actual extension of
credit.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee payment on behalf of a customer and guarantee the
performance of a customer to a third party. The credit risk involved
in issuing these instruments is essentially the same as that involved
in extending loans to customers. Since a portion of these instruments
will expire unused, the total amounts do not necessarily represent
future cash requirements. Each customer is evaluated individually for
creditworthiness under the same underwriting standards used for
commitments to extend credit and on-balance sheet instruments. Bank
policies governing loan collateral apply to standby letters of credit
at the time of credit extension.
(Continued)
F-31
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
Certain mortgage loans are written on an adjustable basis and include
interest rate caps which limit annual and lifetime increases in the
interest rates on such loans. Generally, adjustable rate mortgages
have an annual rate increase cap of 2% and lifetime rate increase cap
of 5% to 6%. These caps expose the Bank to interest rate risk should
market rates increase above these limits. As of December 31 and March
31, 1997, approximately $203.6 million and $202.2 million,
respectively, of mortgage loans had interest rate caps.
The Bank generally enters into rate lock agreements at the time that
residential mortgage loan applications are taken. These rate lock
agreements fix the interest rate at which the loan, if ultimately
made, will be originated. Such agreements may exist with borrowers
with whom commitments to extend loans have been made, as well as with
individuals who have not yet received a commitment. The Bank makes its
determination of whether or not to identify a loan as held for sale at
the time rate lock agreements are entered into. Accordingly, the Bank
is exposed to interest rate risk to the extent that a rate lock
agreement is associated with a loan application or a loan commitment
which is intended to be held for sale, as well as with respect to
loans held for sale.
At December 31, 1997, March 31, 1997 and 1996, the Bank had rate lock
agreements (certain of which relate to loan applications for which no
formal commitment has been made) and conventional mortgage loans held
for sale amounting to approximately $1,201,000, $300,000, and
$753,000, respectively.
In order to reduce the interest rate risk associated with the
portfolio of conventional mortgage loans held for sale, as well as
outstanding loan commitments and uncommitted loan applications with
rate lock agreements which are intended to be held for sale, the Bank
enters into agreements to sell loans in the secondary market to
unrelated investors on a loan by loan basis. At December 31, 1997,
March 31, 1997 and 1996, the Bank had commitments to sell conventional
fixed rate mortgage loans amounting to approximately $1,130,000,
$216,000, and $448,000, respectively. The remaining conventional
mortgage loans held for sale, as well as the outstanding loan
commitments and uncommitted loan applications with rate lock
agreements which are intended to be held for sale, exposed the Bank to
interest rate risk.
(b) Concentrations of Credit
------------------------
The Bank originates residential loans (including home equity and
construction loans) and commercial-related loans primarily to
customers located in the New York State counties of Columbia, Albany,
Rensselaer, Dutchess, and Schenectady. Manufactured home loans are
originated primarily in New York State and in states contiguous to New
York. Financed insurance premiums are originated primarily in New
York, New Jersey, and Pennsylvania. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon economic conditions
in these areas.
(Continued)
F-32
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
(c) Leases
------
The Bank leases certain of its branches and equipment under various
noncancelable operating leases. The future minimum payments by year
and in the aggregate under all significant noncancelable operating
leases with initial or remaining terms of one year or more as of
December 31 and March 31, 1997 are as follows:
(In thousands)
Years ending December 31,
1998 $ 216
1999 200
2000 153
2001 114
2002 105
Thereafter 1,118
------
$1,906
======
(In thousands)
Years ending March 31,
1998 $ 193
1999 138
2000 91
2001 58
2002 30
Thereafter 1,003
------
$1,513
======
(d) Serviced Loans
--------------
The total amount of loans serviced by the Bank for unrelated third
parties was approximately $56.2 million, $67.7 million, and $68.1
million at December 31, 1997, March 31, 1997 and 1996, respectively.
(e) Reserve Requirement
-------------------
The Bank is required to maintain certain reserves of vault cash and/or
deposits with the Federal Reserve Bank. The amount of this reserve
requirement, included in cash and due from banks, was approximately
$4.5 million and $3.8 million at December 31 and March 31, 1997,
respectively.
(f) Contingent Liabilities
----------------------
In the ordinary course of business there are various legal proceedings
pending against the Bank. Based on consultation with outside counsel,
management considers that the aggregate exposure, if any, arising from
such litigation would not have a material adverse effect on the Bank's
consolidated financial statements.
(Continued)
F-33
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
(15) Borrowing Arrangements
----------------------
The Bank has two lines of credit, expiring in October 1998, which are
available with the FHLB of New York. The first is an overnight line of
credit for approximately $32.6 million with interest based on existing
market conditions. The second is a one-month overnight repricing line of
credit for approximately $32.6 million with interest based on existing
market conditions. There were no amounts outstanding on these lines at
December 31, 1997. There was approximately $12.6 million outstanding under
the overnight line of credit at March 31, 1997, which carried an interest
rate of 6.88%. There were no amounts outstanding under the one-month
overnight repricing line of credit at March 31, 1997. At December 31, 1997,
the Bank had $2.0 million in short-term borrowings from the FHLB of New
York in the form of an advance which comes due in August 1998 and carries
an interest rate of 5.88%. Borrowings from the FHLB of New York are secured
by a blanket lien on all assets of the Bank, including FHLB stock.
(16) Disclosures About the Fair Value of Financial Instruments
---------------------------------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Bank disclose estimated fair values for its financial
instruments. The definition of a financial instrument includes many of the
assets and liabilities recognized in the Bank's consolidated balance
sheets, as well as certain off-balance sheet items.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Bank's financial instruments, fair value estimates are based
on judgments regarding future expected net cash flows, current economic
conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in the estimates of fair value under SFAS No. 107.
In addition there are significant intangible assets that SFAS No. 107 does
not recognize, such as the value of "core deposits," the Bank's branch
network, and other items generally referred to as "goodwill."
Short-Term Financial Instruments
--------------------------------
The fair value of certain financial instruments is estimated to approximate
their carrying value because the remaining term to maturity or period to
repricing of the financial instrument is less than 90 days. Such financial
instruments include cash and cash equivalents, accrued interest receivable,
and short-term borrowings.
(Continued)
F-34
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
Securities Available for Sale and Investment Securities
-------------------------------------------------------
Securities available for sale and investment securities are financial
instruments which are usually traded in broad markets. Fair values are
generally based upon market prices. If a quoted market price is not
available for a particular security, the fair value is determined by
reference to quoted market prices for securities with similar
characteristics.
Federal Home Loan Bank of New York Stock
----------------------------------------
The estimated fair value of stock in the Federal Home Loan Bank of New York
equals the carrying value since the stock is non-marketable but redeemable
at its par value.
Loans
-----
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type including residential real
estate, commercial real estate, other commercial loans and consumer loans.
The estimated fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in
the respective loan portfolio.
Estimated fair value for non-performing loans is based on estimated cash
flows discounted using a rate commensurate with the risk associated with
the estimated cash flows. Assumptions regarding credit risk, cash flows,
and discount rates are judgmentally determined using available market
information and specific borrower information.
Management has made estimates of fair value discount rates that it believes
to be reasonable. However, because there is no market for many of these
financial instruments, management has no basis to determine whether the
estimated fair value would be indicative of the value negotiated in an
actual sale.
Loans Held for Sale
-------------------
The estimated fair value of loans held for sale is based on quoted market
rates or, in the case where a firm commitment has been made to sell the
loan, the firm committed price.
Deposit Liabilities
-------------------
The estimated fair value of deposits with no stated maturity, such as
savings, N.O.W., money market, non-interest bearing accounts, and
mortgagors' escrow deposits, is regarded to be the amount payable on
demand. The estimated fair value of time deposit accounts is based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining
maturities. The fair value estimates for deposits do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities as compared to the cost of borrowing funds in the market.
Urban Development Action Grant Payable
--------------------------------------
Based on the terms of the grant agreement and rates currently available
under similar programs, the estimated fair value of the Urban Development
Action Grant payable approximates its carrying value at both March 31, 1997
and 1996.
(Continued)
F-35
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
The carrying values and estimated fair values of financial assets and
liabilities as of December 31, 1997 and March 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
March 31,
December 31, ----------------------------------------
1997 1997 1996
------------------- ------------------- -------------------
Estimated Estimated Estimated
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
-------- --------- -------- --------- -------- ---------
(In thousands)
Financial assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 15,620 15,620 10,457 10,457 14,233 14,233
Loans held for sale -- -- 84 84 70 72
Securities available
for sale 43,282 43,282 45,623 45,623 51,429 51,429
Investment securities 71,244 71,608 79,068 78,753 83,003 83,122
Federal Home Loan Bank
of New York stock 2,812 2,812 2,812 2,812 2,596 2,596
Loans receivable 511,898 511,241 493,019 492,236 450,671 451,306
Less: Allowance for
loan losses (6,756) -- (5,872) -- (3,546) --
-------- ------- ------- ------- ------- -------
Net loans receivable $505,142 511,241 487,147 492,236 447,125 451,306
======== ======= ======= ======= ======= =======
Accrued interest receivable 4,946 4,946 4,880 4,880 5,254 5,254
Financial liabilities:
Deposits:
Savings, N.O.W., money
market, and non-interest
bearing accounts 270,950 270,950 257,213 257,213 252,434 252,434
Time deposit accounts 315,281 317,192 307,386 309,550 302,754 306,685
Short-term borrowings 2,000 2,000 12,585 12,585 -- --
Urban Development
Action Grant payable -- -- 835 835 835 835
Mortgagors' escrow deposits 4,935 4,935 3,746 3,746 4,027 4,027
</TABLE>
Note: Loans held for sale represent the only trading financial instruments;
all other financial instruments are considered to be held for purposes
other than trading.
(Continued)
F-36
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
The fair value of commitments to extend credit, unused lines of credit and
standby letters of credit is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of
the agreements and the present credit worthiness of the counterparties. For
fixed rate commitments to extend credit and unused lines of credit, fair
value also considers the difference between current levels of interest
rates and the committed rates. Based upon the estimated fair value of
commitments to extend credit, unused lines of credit, and standby letters
of credit, there are no significant unrealized gains or losses associated
with these financial instruments.
(17) Subsequent Event - Adoption of Plan of Conversion
-------------------------------------------------
On November 20, 1997, the Board of Trustees of the Bank, subject to
regulatory approval and approval by members of the Bank, unanimously
adopted a Plan of Conversion (the Plan) to convert from a New York State
chartered mutual savings bank to a New York State chartered stock savings
bank with the concurrent formation of a holding company. The conversion is
expected to be accomplished through amendment of the Bank charter and the
sale of the holding company's common stock in an amount equal to the
proforma market value of the Bank after giving effect to the conversion. A
subscription offering of the sale of the holding company's common stock
will be offered initially to the Bank's depositors, then to other members
and trustees, officers and employees of the Bank. Any shares of the holding
company's common stock not sold in the subscription offering will be
offered for sale to the general public in the Bank's market area.
At the time of conversion, the Bank will establish a liquidation account in
an amount equal to its total equity as of the date of the latest
consolidated balance sheet appearing in the final prospectus. The
liquidation account will be maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to the extent
that eligible depositors have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying
balances for accounts then held. The Bank may not pay dividends that would
reduce stockholders' equity below the required liquidation account balance.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. If the conversion is not completed, all
costs will be charged to expense. As of December 31, 1997, approximately
$164,000 of conversion costs had been deferred.
Pursuant to the Plan, the holding company intends to establish a Charitable
Foundation in connection with the conversion. The Plan provides that the
Bank and the holding company will create the Foundation immediately
following the conversion by contributing holding company common stock in an
amount equal to 3.0% of the total amount of common stock to be sold in the
conversion. The Foundation is being formed as a complement to the Bank's
existing community activities and will be dedicated to community activities
and the promotion of charitable causes.
(Continued)
F-37
<PAGE>
THE HUDSON CITY SAVINGS INSTITUTION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Data as of December 31, 1997 and for the nine months ended
December 31, 1997 and 1996 is unaudited)
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and will likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
holding company would be tax deductible, subject to an annual limitation
based on 10% of the holding company's annual taxable income. The holding
company, however, would be able to carry forward any unused portion of the
deduction for five years following the contribution. Upon funding the
Foundation, the holding company will recognize an expense in the full
amount of the contribution, offset in part by the corresponding tax
benefit, during the quarter in which the contribution is made.
F-38
<PAGE>
No person has been authorized
to give any information or to make
any representation other than as
contained in this Prospectus in
connection with the offering made
hereby, and, if given or made, such
other information or representation
must not be relied upon as having
been authorized by the Holding
Company or the Bank. This 15,072,815 Shares
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 HUDSON RIVER BANCORP, INC.
in such jurisdiction. Neither the (Proposed Holding Company for
delivery of this Prospectus nor any The Hudson City Savings Institution)
sale hereunder shall under any
circumstances create any
implication that there has been no
change in the affairs of the
Holding Company or the Bank since
any of the dates as of which
information is furnished herein or
since the date hereof.
-------------- COMMON STOCK
TABLE OF CONTENTS
Page
Summary................................
Selected Consolidated Financial and
Other Data of the Bank..............
Risk Factors...........................
Hudson River Bancorp, Inc..............
The Hudson City Savings Institution.... --------------
Use of Proceeds........................
Dividends.............................. PROSPECTUS
Market for Common Stock................
Pro Forma Regulatory Capital Analysis.. --------------
Capitalization.........................
Pro Forma Data.........................
Comparison of Valuation and Pro Forma
Information With No Stock
Contribution..........................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.........................
Business of the Holding Company........
Business of the Bank...................
Regulation.............................
Taxation...............................
Management of the Holding Company......
Management of the Bank.................
The Conversion.........................
Restrictions on Acquisitions of the
Holding Company and the Bank..........
Description of Capital Stock of the
Holding Company.......................
Description of Capital Stock of the
Bank..................................
Experts................................
Legal and Tax Opinions.................
Additional Information.................
Index to Consolidated Financial
Statements............................
Until the later of June 11, Sandler O'Neill & Partners, L.P.
1998 or25 days after commencement
of the offering of Common Stock,
all dealers effecting transactions
in the registered securities,
whether or not participating in
this distribution, may be required May 12, 1998
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.
