<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1998
REGISTRATION NO. 333-57377
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SOUND FEDERAL BANCORP
(Exact Name of Registrant as Specified in Its Charter)
FEDERAL 6712 (TO BE APPLIED FOR)
(State or Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Code Identification No.)
Organization) Number)
300 MAMARONECK AVENUE
MAMARONECK, NEW YORK 10543-2647
(914) 698-6400
(Address and Telephone Number of Principal Executive Offices)
300 MAMARONECK AVENUE
MAMARONECK, NEW YORK 10543-2647
(Address of Principal Place of Business or Intended Principal Place of Business)
RICHARD P. MCSTRAVICK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
300 MAMARONECK AVENUE
MAMARONECK, NEW YORK 10543-2647
(914) 698-6400
(Name, Address and Telephone Number of Agent for Service)
COPIES TO:
ALAN SCHICK, ESQ.
ERIC LUSE, ESQ.
LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.
5335 WISCONSIN AVENUE, N.W., SUITE 400
(202) 274-2000
WASHINGTON, D.C. 20015
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
this registration statement becomes effective.
If this Form is filed to register additional shares for an offering pursuant to
Rule 462(b) under the Securities Act please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
<PAGE> 2
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================
PROPOSED PROPOSED
AMOUNT TO BE MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF REGISTERED OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED PER SHARE OFFERING REGISTRATION FEE
PRICE (1)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.10 par value 3,661,077 $10.00 $36,610,770 $10,801
per share
===========================================================================================
</TABLE>
- ----------
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
<PAGE> 3
SOUND FEDERAL BANCORP
(PROPOSED HOLDING COMPANY FOR SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION)
$10.00 PER SHARE
2,252,925 SHARES OF COMMON STOCK (MINIMUM)
3,048,075 SHARES OF COMMON STOCK (MAXIMUM)
3,505,286 SHARES OF COMMON STOCK (ADJUSTED MAXIMUM)
Sound Federal Savings and Loan Association, a federally-chartered
mutual savings association (the "Association"), is reorganizing to form a
federally-chartered mutual holding company (the "Reorganization"). As part of
the Reorganization, the Association will convert to a stock savings association
and will become a wholly-owned subsidiary of Sound Federal Bancorp, a federal
stock corporation (the "Company"). The Company will become the majority-owned
subsidiary of Sound Federal, MHC (the "Mutual Holding Company"), a federal
mutual holding company. Concurrently with the Reorganization, the Company is
offering for sale between 2,252,925 and 3,048,075 shares of its common stock,
par value $0.10 per share (the "Common Stock"), in a subscription offering to
qualifying depositors and borrowers, the Association's tax-qualified employee
benefit plans including its employee stock ownership plan and to employees,
officers and directors of the Association. Any unsubscribed shares may be
offered for sale to the public in a community offering or syndicated community
offering (the subscription and community offerings are referred to collectively
as the "Offering"). The Common Stock offered for sale in the Offering will
represent a minority ownership interest of 45% of the Company's total
outstanding shares of Common Stock. As part of the Reorganization, the Company
will contribute shares of Common Stock equal to 2% of its issued and outstanding
shares to the Sound Federal Savings and Loan Association Charitable Foundation
(the "Charitable Foundation"). The Reorganization and Offering are being made
pursuant to the terms of a plan of reorganization which must be approved by a
majority of the eligible votes of members of the Association and by the Office
of Thrift Supervision (the "OTS"). The Reorganization will not go forward if the
Association does not receive these approvals and the Company does not sell at
least 2,252,925 shares of Common Stock.
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") will use its best
efforts to assist the Company in selling at least the minimum number of shares,
but does not guarantee that this number will be sold. All funds received from
subscribers will be held in an interest bearing account at the Association until
the completion or termination of the Reorganization.
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE,
PLEASE CALL THE STOCK CONVERSION CENTER AT (914) ___-____
----------------------------------------------------------------------------
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
----------------------------------------------------------------------------
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE ___ OF THIS DOCUMENT.
----------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, NOR ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------------------------------------------------------------
TERMS OF THE OFFERING
An independent appraiser has estimated that as of June 12, 1998, the
pro forma market value of the Common Stock of the Company was between $50.1
million and $67.7 million, with a midpoint of $58.9 million. The 2,252,925 to
3,048,075 shares of Common Stock being sold in the Offering represent a minority
ownership interest in the Company equal to 45% of the minimum and maximum of the
estimated pro forma value of the Common Stock of the Company. Subject to OTS
approval, up to 3,505,286 shares of Common Stock will be offered for sale in the
Offering in the event of an increase in the pro forma market value of the Common
Stock. Based on these estimates, the Company is making the following Offering of
shares of Common Stock.
<TABLE>
<CAPTION>
PURCHASE PRICE REORGANIZATION EXPENSES NET PROCEEDS
-------------- ----------------------- ------------
<S> <C> <C> <C>
Minimum Per Share $ 10.00 $ 0.39 $ 9.61
Midpoint Per Share $ 10.00 $ 0.35 $ 9.65
Maximum Per Share $ 10.00 $ 0.33 $ 9.67
Minimum Total $22,529,250 $ 883,000 $21,646,250
Midpoint Total $26,505,000 $ 937,000 $25,568,000
Maximum Total $30,480,750 $ 992,000 $29,488,750
Adjusted Maximum $35,052,860 $ 1,055,000 $33,997,860
</TABLE>
SANDLER O'NEILL & PARTNERS, L.P.
PROSPECTUS DATED _______________, 1998
<PAGE> 4
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
"RISK FACTORS" BEGINNING ON PAGE _____ OF THIS PROSPECTUS.
PLEASE SEE THE GLOSSARY BEGINNING ON PAGE G-L FOR THE MEANING OF
CAPITALIZED TERMS THAT ARE USED IN THIS PROSPECTUS.
<PAGE> 5
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: WHAT IS THE MUTUAL HOLDING COMPANY?
A: Sound Federal, MHC (the "Mutual Holding Company") is a
federally-chartered mutual corporation that is being established in
connection with the mutual holding company reorganization (the
"Reorganization") of Sound Federal Savings and Loan Association (the
"Association"). The Mutual Holding Company will be chartered under the
laws of the United States and will be regulated by the Office of Thrift
Supervision ("OTS"). The Mutual Holding Company will own 53% of the
outstanding Common Stock of Sound Federal Bancorp (the "Company"), or
3,121,818 shares at the midpoint of the valuation range established by
the independent appraisal. The remaining 47% of the Common Stock of the
Company will be owned by persons who purchase Common Stock in the
Offering, and the Sound Federal Savings and Loan Association Charitable
Foundation (the "Charitable Foundation"). Members of the Association
currently have voting rights in the Association. After the
Reorganization is completed, all of the current membership and voting
rights of the Association's members will be transferred to the Mutual
Holding Company. The former members of the Association who controlled
100% of the votes eligible to be cast by the Association's members
prior to the Reorganization will, through the Mutual Holding Company,
control 53% of the votes eligible to be cast by the Company's
stockholders following the Reorganization.
Q: WHO WILL BE THE MINORITY STOCKHOLDERS OF THE COMPANY?
A: All persons who purchase Common Stock in the Offering, including the
employee stock ownership plan ("ESOP") of the Association as well as
the Charitable Foundation will be the minority stockholders (the
"Minority Stockholders") of the Company, and will own 47% of its Common
Stock upon completion of the Offering. The Mutual Holding Company will
own 53% of the Common Stock of the Company, and will remain its
majority stockholder as long as the Mutual Holding Company remains in
existence.
Q: WHAT IS THE PURPOSE OF THE REORGANIZATION AND OFFERING?
A: The primary purpose of the Reorganization and Offering is to raise
additional equity capital to support the growth and expansion of the
Association. The increased capital also will be used to expand the
Association's lending and investment activities. The Reorganization
will create a holding company and a stock charter, which is the
corporate form used by all commercial banks and an increasing number of
savings institutions. The holding company structure will expand the
investment and operating authority currently available to the
Association. The Offering also will provide you with the opportunity to
become a stockholder of the Company. We are also establishing the
Charitable Foundation that will be dedicated exclusively to supporting
charitable causes and community development activities in our market
area.
Q: WHY IS THE ASSOCIATION FORMING A TWO-TIER MUTUAL HOLDING COMPANY AND
CONDUCTING A MINORITY STOCK OFFERING INSTEAD OF UNDERGOING A FULL
CONVERSION TO STOCK FORM?
A: At the present time, the Association does not need all of the capital
that would be raised in a full stock conversion. A savings institution
that converts to stock form using the mutual holding company structure
sells only a minority of its shares to the public. By doing so, the
converting institution raises less than half the capital that would be
raised in a full conversion. However, with the mutual holding company
structure the Association will have the flexibility to raise additional
capital in the future. Moreover, the Association's Board of Directors
intends to maintain the independence and community control of the
Association. Because the Mutual Holding Company will control a majority
of the Company's Common Stock, the Reorganization will permit the
Association to achieve the benefits of being a stock company without
the loss of control.
<PAGE> 6
Q: HOW DO I ORDER THE COMMON STOCK?
A: You must complete and return the Stock Order Form to the Association,
together with your payment, on or before September ___, 1998. Please
review the Stock Order Form carefully before sending us any payment.
Q: HOW MUCH STOCK MAY I ORDER?
A: The minimum order is 25 shares (or $250). The maximum order for any
individual person or persons ordering through a single account is
15,000 shares (or $150,000). In certain instances, your order may be
grouped together with orders by other persons who are associated with
you (such as your spouse, child or relatives living in your home or
corporations, partnership and trusts of which you are an officer,
director or trustee), or with whom you are acting in concert, and, in
that event, the aggregate order may not exceed 30,000 shares (or
$300,000). The maximum purchase limitation may be decreased or
increased without notifying you. However, if the maximum purchase
limitation is increased, and you previously subscribed for the maximum
number of shares, you will be notified of the increase, as well as the
opportunity to subscribe for additional shares.
Q: WHO HAS SUBSCRIPTION RIGHTS AND WHAT ARE THE SUBSCRIPTION PRIORITIES?
A: Subscription rights to purchase Common Stock will be offered on a
priority basis to the following classes of persons:
- First, to persons who had one or more deposit accounts with
the Association aggregating at least $50 on March 31, 1997.
(The Association's tax-qualified employee benefit plans,
including the Association's ESOP will have priority over such
persons if more than 3,048,075 shares are sold. Assuming that
3,505,286 (the adjusted maximum) shares of Common Stock are
sold, the ESOP may purchase 280,423 shares, all of which would
be purchased in the first priority.)
- Second, to the Association's tax-qualified employee benefit
plans, including the Association's ESOP.
- Third, to persons who had one or more deposit accounts with
the Association aggregating at least $50 on June 30, 1998.
- Fourth, to depositors (who are not eligible depositors as of
March 31, 1997 or June 30, 1998) and borrowers of the
Association as of ___________.
- Fifth, to employees, officers and directors of the
Association.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A: If the Offering is oversubscribed, you may not receive any or all of
the shares you wish to purchase. Shares will be allocated based upon a
formula set forth in the Plan of Reorganization. In recent periods a
number of stock offerings by financial institutions have been
oversubscribed. There can be no assurance that a subscriber in the
offering will have his or her subscription filled. If insufficient
shares of Common Stock are available in the first or third categories,
the Association will allocate shares in such a manner that will allow
Eligible Account Holders or Supplemental Eligible Account Holders to
purchase the lesser of 100 shares or the amount subscribed for.
2
<PAGE> 7
Q: WILL SHARES BE OFFERED TO ANYONE OTHER THAN PERSONS WITH SUBSCRIPTION
RIGHTS?
A: If persons with subscription rights do not subscribe for all of the
shares offered, the remaining shares will be offered to certain members
of the general public in a community offering, with a preference for
natural persons residing in Westchester County.
Q: WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER OR NOT
TO BUY COMMON STOCK?
A: Before you decide to purchase Common Stock, you should read the entire
Prospectus, including the Risk Factors section on pages _____ of the
Prospectus.
Q: AS A DEPOSITOR OR BORROWER OF THE ASSOCIATION, WHAT WILL HAPPEN IF I DO
NOT ORDER ANY COMMON STOCK?
A: You presently have membership rights in the Association, which include
the right to elect directors and vote on certain other matters.
However, once the Reorganization is completed these membership rights
in the Association will be converted into membership rights in the
Mutual Holding Company, regardless of whether or not you purchase
Common Stock. You will retain your membership rights in the Mutual
Holding Company so long as your existing borrowings from the
Association remain outstanding, or so long as you remain a depositor of
the Association. If you purchase Common Stock, you will also have
voting rights in the Company, but such rights will depend on the amount
of Common Stock that you own and not on your deposit account or lending
relationship at the Association. YOU ARE NOT REQUIRED TO PURCHASE
COMMON STOCK. YOUR DEPOSIT ACCOUNT, CERTIFICATE ACCOUNTS AND ANY LOANS
YOU MAY HAVE WITH THE ASSOCIATION WILL NOT BE AFFECTED BY THE
REORGANIZATION.
Q: WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE OFFERING?
A: In order to make an informed investment decision, you should read this
entire Prospectus. This question and answer section highlights selected
information and may not contain all of the information that is
important to you. In addition, you may contact:
STOCK CONVERSION CENTER
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
MAMARONECK, NEW YORK 10543
(914) ________
SELLING OR ASSIGNING YOUR SUBSCRIPTION RIGHTS IS ILLEGAL. ALL PERSONS
EXERCISING THEIR SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT THEY ARE
PURCHASING SHARES SOLELY FOR THEIR OWN ACCOUNT AND THAT THEY HAVE NO AGREEMENT
OR UNDERSTANDING REGARDING THE SALE OR TRANSFER OF SUCH SHARES. THE ASSOCIATION
INTENDS TO PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT IT
BECOMES AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS. ORDERS KNOWN TO INVOLVE
THE TRANSFER OF SUBSCRIPTION RIGHTS WILL NOT BE HONORED. IN ADDITION, PERSONS
WHO VIOLATE THE PURCHASE LIMITATIONS MAY BE SUBJECT TO SANCTIONS AND PENALTIES
IMPOSED BY THE OFFICE OF THRIFT SUPERVISION.
3
<PAGE> 8
SUMMARY
This summary highlights selected information from this Prospectus and
does not contain all the information that you need to know before making an
informed investment decision. To understand the Offering fully, you should read
the entire Prospectus carefully, including the financial statements and the
notes to the financial statements of Sound Federal Savings and Loan Association.
Certain financial information contained in the Prospectus has been derived from
the audited financial statements of Sound Federal Savings and Loan Association.
You should note as you read this Prospectus that at times capitalized
terms are used. These capitalized terms are generally defined in the glossary
that is at the end of this Prospectus. Defined terms are used to help you
differentiate between the various components of the transaction, to simplify the
discussion and to avoid unnecessary repetition by not having to define or
describe a term each time it is used. For example, to avoid confusion, all of
the steps that are part of the transactions described in this Prospectus are
referred to as the "Reorganization," and the offer and sale of 45% of the
Company's Common Stock is referred to as the Offering. References to the
"Association" refer to Sound Federal Savings and Loan Association. References to
"Company" refer to Sound Federal Bancorp, and references to the "Mutual Holding
Company" refer to Sound Federal, MHC. To further assist you in reading this
Prospectus, in addition to including a glossary, each term defined in the
glossary is also defined the first time that it is used in the Prospectus.
THE REORGANIZATION AND OFFERING
The Reorganization involves a number of steps, including the following:
- The Association will establish the Company and the Mutual
Holding Company, neither of which will have any assets prior
to the completion of the Reorganization.
- The Association will convert from the mutual form of
organization to the capital stock form of organization and
issue 100% of its capital stock to the Company.
- The Company will issue between 5,006,500 and 6,773,500 shares
of its Common Stock in the Reorganization; 53% of these shares
(or between 2,653,545 shares and 3,590,090 shares) will be
issued to the Mutual Holding Company, 2% (or between 100,030
shares and 135,335 shares) will be contributed to the
Charitable Foundation and 45% (or between 2,252,925 shares and
3,048,075 shares) will be offered for sale in the Offering.
- Membership interests that depositors had in the Association
will become membership interests in the Mutual Holding
Company. As a result, members of the Association who
controlled 100% of the votes eligible to be cast by members
prior to the Reorganization will control 100% of the votes
eligible to be cast by members of the Mutual Holding Company
immediately after the Reorganization, and will through the
Mutual Holding Company, control 53% of the votes eligible to
be cast by the Company's stockholders immediately following
the reorganization.
DESCRIPTION OF THE MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure differs in significant respects
from the savings and loan holding company structure that is used in a standard
mutual to stock conversion. A savings institution that converts from the mutual
to stock form of organization using the mutual holding company structure sells
only a minority of its shares at the time of the reorganization and offering. By
doing so, a converting institution will raise less than half the capital that
would be raised in a "standard" mutual-to-stock conversion. The shares that are
issued to the Mutual Holding Company may be subsequently offered for sale to the
Association's depositors and others if the mutual holding organization. See
"Conversion of the Mutual Holding
4
<PAGE> 9
Company to the Stock Form of Organization." In addition, because the Mutual
Holding Company will control a majority of the Company's Common Stock, the
Reorganization and Offering will permit the Association to become a stock
company without a loss of control that may occur after a standard conversion
from mutual to stock form.
Because the Mutual Holding Company is a mutual corporation, its actions
will not necessarily always be in the interests of the Company's stockholders.
In making business decisions, the Mutual Holding Company's Board of Directors
will consider a variety of constituencies, including the depositors of the
Association, the employees of the Company and the Association, and the
communities in which the Association operates. As the majority stockholder of
the Company, the Mutual Holding Company is also interested in the continued
success and profitability of the Association and the Company. Consequently, the
Mutual Holding Company will act in a manner that furthers the general interest
of all of its constituencies, including, but not limited to, the interest of the
stockholders of the Company. The interests of the stockholders of the Company
and those of the Mutual Holding Company's other constituencies will be the same
in many circumstances, such as the ongoing profitability of the Company and
Association and continued service to the communities in which the Association
operates.
CONVERSION OF THE MUTUAL HOLDING COMPANY TO THE STOCK FORM OF ORGANIZATION
OTS regulations and the Plan of Reorganization permit the Mutual
Holding Company to convert from the mutual to the capital stock form of
organization. There can be no assurance that such a transaction will ever occur,
and the Board of Directors has no current intention or plan to undertake such a
transaction. If the Mutual Holding Company were to convert to the capital stock
form of organization, eligible depositors would receive the right to subscribe
for additional shares of the new stock holding company that would be formed in
the transaction. In such a transaction, each share of Common Stock outstanding
and held by persons other than the Mutual Holding Company would be converted
automatically into shares of common stock of the new stock holding company. The
number of shares that each stockholder would receive would be determined
pursuant to an exchange ratio that ensures that after the transaction, subject
to an adjustment to reflect any dividends that the Mutual Holding Company may
have waived and any assets that the Mutual Holding Company may have other than
common stock of the Company, the percentage of the to-be outstanding shares of
the new stock holding company received by such stockholder in exchange for
his/her Common Stock, equals the percentage of the outstanding shares of Common
Stock owned by such stockholder immediately prior to the conversion transaction.
THE COMPANIES
Sound Federal, MHC
300 Mamaroneck Avenue
Mamaroneck, New York 10543
(914) 698-6400
The Mutual Holding Company is not currently an operating company and
has not engaged in any business to date. Upon completion of the Reorganization,
the Mutual Holding Company will be chartered under Federal law and will own 53%
of the outstanding Common Stock of the Company. So long as the Mutual Holding
Company exists, it will own at least 50.1% of the Company's voting stock.
Following completion of the Reorganization, persons who were members of the
Association will become members of the Mutual Holding Company, so long as their
existing borrowings from the Association remain outstanding or they continue to
maintain a deposit account with the Association.
5
<PAGE> 10
Sound Federal Bancorp
300 Mamaroneck Avenue
Mamaroneck, New York 10543
(914) 698-6400
The Company is not currently an operating company and has not engaged
in any business to date. The Company will be chartered under Federal law and
will own 100% of the common stock of the Association. The Company will sell 45%
of its Common Stock in the Offering, contribute 2% of its Common Stock to the
Charitable Foundation and issue the remaining 53% of the Common Stock to the
Mutual Holding Company.
Sound Federal Savings and Loan Association
300 Mamaroneck Avenue
Mamaroneck, New York 10543
(914) 698-6400
The Association was organized as a New York chartered savings bank in
1891 and became a federally chartered savings association in 1934. The
Association is a community-oriented federal mutual savings association,
providing banking and financial services to individuals, families and small
businesses from its main office in Mamaroneck and branch offices in Harrison and
Rye Brook, New York. Historically, the Association has emphasized residential
mortgage lending. At March 31, 1998, the Association had total assets of $254.7
million, total deposits of $219.9 million, and retained earnings of $31.9
million. See pages _____ to _____.
THE OFFERING
The Company is offering for sale between 2,252,925 and 3,048,075 shares
of its Common Stock, par value $0.10 per share (the "Common Stock"), at a
price of $10.00 per share. The Offering may be increased to 3,505,286 shares
without further notice to you if the estimated pro forma market value of the
Common Stock (the "Independent Valuation") is increased as a result of changes
in market or financial conditions prior to the completion of the Offering. The
shares sold in the Offering will represent a minority ownership interest of 45%
of the shares of Common Stock of the Company which, together with the 2% of the
shares of Common Stock to be contributed to the Charitable Foundation, will
constitute the "Minority Ownership Interest". The remaining 53% of the shares of
Common Stock of the Company will be issued to the Mutual Holding Company.
STOCK PURCHASE PRIORITIES
The Common Stock is being offered for sale in the following order of
priority in a Subscription Offering:
(i) the Association's Eligible Account Holders (holders of deposit
accounts totaling $50 or more as of March 31, 1997);
(ii) the Association's tax-qualified employee benefit plans,
including the Association's ESOP;
(iii) the Association's Supplemental Eligible Account Holders
(holders of deposit accounts totaling $50 or more as of June
30, 1998);
(iv) depositors and borrowers of the Association as of the Voting
Record Date who are not Eligible Account Holders or
Supplemental Eligible Account Holders; and
(v) employees, officers and directors of the Association.
6
<PAGE> 11
Any shares of Common Stock not subscribed for in the Subscription
Offering may be offered for sale in a Community Offering and a Syndicated
Community Offering. See pages _____ to _____. Sandler O'Neill will assist in
selling the Common Stock on a best efforts basis.
THE OFFERING RANGE AND OFFERING PRICE PER SHARE
FinPro, Inc. ("FinPro"), an appraisal firm independent of the
Association and experienced in appraisals of savings associations, has estimated
that in its opinion, as of June 12, 1998, the aggregate pro forma market value
of the Company and the Association ranged from $50.1 million to $67.7 million
(the "Estimated Valuation Range") with a midpoint of $58.9 million. The Company
is offering to sell 45% of its Common Stock in the Offering and, based on the
Independent Valuation, 45% of the Common Stock ranged in value from $22.5
million to $30.5 million, with a midpoint of $26.5 million (the "Offering
Range"). The Company is offering its Common Stock for sale at $10.00 per share,
representing 2,252,925 shares and 3,048,075 shares at the minimum and maximum of
the Offering Range, respectively, with a midpoint of 2,650,500 shares. The
$10.00 per share offering price was determined in consultation with Sandler
O'Neill and represents the price most commonly used in initial public stock
offerings involving financial institutions. The Independent Valuation was based
in part upon the Association's financial condition and operations and the effect
of the additional capital raised by the sale of Common Stock in the Offering. In
addition to the 2,252,925 to 3,048,075 shares to be sold in the Offering,
between 2,653,545 and 3,590,090 shares will be issued to the Mutual Holding
Company, which will represent 53% of the outstanding shares of Common Stock and
100,030 to 135,335 shares will be contributed to the Charitable Foundation,
which represents 2% of the outstanding shares of Common Stock. The Independent
Valuation will be updated prior to the completion of the Offering. If the
Independent Valuation increases, there will be a corresponding change in the
total number of shares issued to the Mutual Holding Company in the
Reorganization and sold to subscribers in the Offering, but the percentage of
shares of the Company's Common Stock owned by the Mutual Holding Company and the
Minority Stockholders will not change as a result of a change in the Independent
Valuation. If the Independent Valuation increases by 15%, or up to $77,895,250,
the number of shares sold in the Offering will, subject to OTS approval,
increase to 3,505,286 shares and the number of shares issued to the Mutual
Holding Company will increase to 4,128,604 shares. Prospective purchasers will
be given the opportunity to change or withdraw their purchase orders only if the
Estimated Valuation Range decreases below the minimum or increases by more than
15% above the maximum of such range, or if fewer than 2,252,925 shares or more
than 3,505,286 shares are sold in the Offering. See pages _____ to _____.
TERMINATION OF THE OFFERING
The Subscription Offering will terminate at ________ ___, New York
time, on ___________, 1998. The Community Offering, if one is held, is expected
to begin immediately after the termination of the Subscription Offering, but may
begin at any time during the Subscription Offering. The Community Offering may
terminate on or after __________, 1998, but in any event, no later than
__________, 1998, without OTS approval.
BENEFITS TO MANAGEMENT AND EMPLOYEES FROM THE OFFERING
The Company intends to implement for the benefit of the employees,
directors and officers of the Company and the Association the ESOP, a stock
option plan ("Stock Option Plan") and a stock award plan ("Stock Award Plan").
These benefit plans would result in employees, officers and directors being
eligible to receive in the aggregate 583,110 shares of Common Stock (at the
midpoint of the Offering Range). Assuming that the Stock Option Plan and Stock
Award Plan were funded from shares purchased in the open market, employees,
directors and officers would own 22% of the outstanding Minority Ownership
Interest, inclusive of ESOP shares but exclusive of other shares such persons
may have acquired individually. Full-time employees of the Association will
participate in an ESOP, which is a form of retirement plan, that will purchase
shares of Common Stock. The ESOP intends to purchase up to 8% of the Minority
Ownership Interest. The estimated cost to fund the ESOP is $1.9 million at the
minimum of the Offering Range and $2.5 million at the maximum of the Offering
Range. A portion of the net proceeds of the
7
<PAGE> 12
Offering will be used to fund the purchase of shares for the ESOP. The Stock
Award Plan may award up to 4% of the Minority Ownership Interest to executive
officers and directors of the Association at no cost to them, if the Stock Award
Plan is adopted within one year after the completion of the Offering. If the
Stock Award Plan is adopted later than one year after the completion of the
Offering, up to 5% of the Minority Ownership Interest may be granted, subject
to stockholder approval. The Stock Option Plan may grant options for the
purchase of Common Stock up to 10% of the Minority Ownership Interest to
employees, officers and directors of the Association. Stock awards and stock
options would be granted at fair market value. Shares of Common Stock awarded
under the Stock Award Plan will be at no cost to the recipient, and in the
aggregate will have a value of $941,000 at the minimum of the Offering Range and
$1.5 million at the adjusted maximum of the Offering Range, assuming a value of
$10 per share. The Stock Award Plan and Stock Option Plan may not be adopted
until at least six months after the completion of the Reorganization, and are
subject to shareholder approval and compliance with OTS regulations. See pages
_____ to _____.
The following table presents the dollar value of the shares to be
granted pursuant to the proposed stock benefit plans and the percentage of the
Company's outstanding Common Stock which will be represented by these shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
VALUE OF OUTSTANDING
SHARES GRANTED(1) COMMON STOCK
----------- -----------
<S> <C> <C>
BENEFIT PLAN:
ESOP...................................... $ 2,214,546 3.76%
Stock Award Plan.......................... 1,107,273 1.88
Stock Option Plan......................... -- (2) 10.04
----------- -----------
$ 3,321,819 9.69%
=========== ===========
</TABLE>
- ----------
(1) Assumes shares are granted at $10.00 per share and that shares are sold
in the Offering at the midpoint of the Offering Range.
(2) Recipients of stock options realize value only in the event of an
increase in the price of the Common Stock of the Company following the
date of grant of the stock options. Options to purchase 276,830 shares
at the midpoint of the Offering Range may be granted should the Stock
Option Plan be adopted by shareholders.
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
The Company will retain up to 50% of the net proceeds from the Offering
and will contribute the remainder of the net proceeds to the Association. The
Company intends to use part of the net proceeds to make a loan to the ESOP to
fund its purchase of up to 8% of the Minority Ownership Interest. The remainder
of the net proceeds will be used for general corporate purposes, and initially
is expected to be invested in U.S. Government securities and other federal
agency securities. See pages _____ to _____.
DIVIDENDS
The Company does not initially intend to pay a dividend. Future
decisions as to whether or not to declare dividends by the Company will depend
upon a number of factors including investment opportunities available to the
Company or the Association and the Company's financial condition and results of
operations. If the Company decides to pay dividends on the Common Stock, the
Mutual Holding Company may waive its receipt of cash dividends, subject to
regulatory approval. See page _____.
8
<PAGE> 13
THE CHARITABLE FOUNDATION
In furtherance of its commitment to its local community, the Company
intends to establish a Charitable Foundation as part of the Reorganization. Upon
completion of the Reorganization, the Company will contribute 2% of its issued
and outstanding shares of Common Stock to the Charitable Foundation. By forming
the Charitable Foundation, the Company will recognize an expense equal to the
value of the shares contributed, less applicable tax benefits, during the
quarter in which the contribution is made, which is expected to be the calendar
quarter ending December 31, 1998. Such expense will reduce earnings and have a
material impact on the Company's earnings for such quarter and for the year
ending March 31, 1999. See "Risk Factors--The Expense Effect of the Contribution
of Shares to the Charitable Foundation," "Pro Forma Data," and "The
Reorganization and Offering--Establishment of the Charitable
Foundation--Structure of the Charitable Foundation." Due to the issuance of
shares of Common Stock to the Charitable Foundation, persons purchasing shares
of Common Stock will have their ownership and voting interest in the Company
diluted by approximately 2.0%.
MARKET FOR THE COMMON STOCK
The Company has never issued capital stock. The Company expects that
the Common Stock will be quoted on the Nasdaq National Market under the symbol
"SFFS", but there can be no assurance that an active and liquid trading market
in the Common Stock will develop or be maintained. The requirements for listing
include a minimum number of publicly traded shares, market makers and record
holders, and a minimum market capitalization. Sandler O'Neill has indicated its
intention to make a market in the Common Stock, subject to compliance with
applicable provisions of federal and state securities laws and other regulatory
requirements, although Sandler O'Neill is not required to do so. If you purchase
shares, you may not be able to sell them when you want to at a price that is
equal to or more than the price you paid. See pages _____ to _____.
PROHIBITION ON TRANSFER OF SUBSCRIPTION RIGHTS
SELLING OR ASSIGNING YOUR SUBSCRIPTION RIGHTS IS ILLEGAL. IF YOU
EXERCISE YOUR SUBSCRIPTION RIGHTS YOU WILL BE REQUIRED TO CERTIFY THAT YOU ARE
PURCHASING SHARES SOLELY FOR YOUR OWN ACCOUNT AND THAT YOU HAVE NO AGREEMENT OR
UNDERSTANDING REGARDING THE SALE OR TRANSFER OF SUCH SHARES. THE ASSOCIATION
INTENDS TO PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT THE
ASSOCIATION BECOMES AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS, AND THE
ASSOCIATION WILL NOT HONOR ORDERS KNOWN TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
IN ADDITION, PERSONS WHO VIOLATE THE PURCHASE LIMITATIONS MAY BE SUBJECT TO
SANCTIONS AND PENALTIES IMPOSED BY THE OTS.
IMPORTANT RISKS IN PURCHASING AND OWNING THE COMMON STOCK
Before you decide to purchase Common Stock in the Offering, you should
read the Risk Factors section on pages _____ of this Prospectus, in addition to
the other sections of this Prospectus.
9
<PAGE> 14
SELECTED FINANCIAL AND OTHER DATA OF
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
The following selected historical financial data at and for each of the
years in the five-year period ended March 31, 1998 is derived in part from the
audited financial statements of the Association. The following selected
financial data of the Association is qualified in its entirety by, and should be
read in conjunction with, the financial statements, including the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets........................................... $ 254,749 $ 242,983 $230,026 $214,225 $204,283
Loans, net............................................. 128,558 121,617 113,532 108,584 104,127
Mortgage-backed securities:(1)
Held to maturity..................................... 53,421 52,901 48,307 40,046 --
Held for investment.................................. -- -- -- -- 36,332
Other securities(1):
Held to maturity..................................... 11,477 10,452 11,184 13,005 --
Held for investment.................................. -- -- -- -- 12,013
Available for sale................................... 2,994 1,995 1,994 1,986 --
Deposits............................................... 219,913 211,223 200,611 186,951 179,980
Equity................................................. 31,901 29,017 26,726 24,325 21,591
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest and dividend income........................... $ 17,618 $ 16,637 $ 15,732 $ 14,033 $ 13,429
Interest expense....................................... 8,743 7,917 7,848 5,594 5,278
--------- --------- -------- -------- --------
Net interest income.................................. 8,875 8,720 7,884 8,439 8,151
Provision for loan losses.............................. 155 146 98 82 82
--------- --------- -------- -------- --------
Net interest income after provision for loan
losses......................................... 8,720 8,574 7,786 8,357 8,069
Noninterest income..................................... 186 301 208 201 236
Noninterest expense (excluding special assessment)..... 3,956 4,028 3,865 3,526 3,311
SAIF special assessment(2)............................. -- 1,232 -- -- --
--------- --------- -------- -------- --------
Income before income tax expense..................... 4,950 3,615 4,129 5,032 4,994
Income tax expense..................................... 2,065 1,325 1,732 2,290 2,149
--------- --------- -------- -------- --------
Net income........................................... $ 2,885 $ 2,290 $ 2,397 $ 2,742 $ 2,845
========= ========= ======== ======== ========
</TABLE>
(footnotes on next page)
10
<PAGE> 15
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED MARCH 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average total
assets)(3)................................................ 1.16% 0.97% 1.09% 1.33% 1.47%
Return on equity (ratio of net income to average equity)(3) ..... 9.47 8.17 9.35 11.89 14.08
Average interest rate spread(3)(4) .............................. 3.29 3.42 3.31 3.91 4.10
Net interest margin(3)(5) ....................................... 3.69 3.78 3.68 4.23 4.34
Efficiency ratio(6) ............................................. 43.66 44.65 47.76 40.81 39.48
Noninterest expense to average total assets(3)(7) ............... 1.60 2.22 1.75 1.71 1.71
Average interest-earning assets to average interest-bearing
liabilities(3) ................................................ 110.98 110.51 110.04 109.40 108.40
ASSET QUALITY RATIOS:
Nonperforming assets to total assets ............................ 0.82 0.98 1.37 1.17 0.87
Nonperforming loans to total loans .............................. 1.50 1.83 2.65 2.04 1.63
Allowance for loan losses to nonperforming loans ................ 50.26 37.32 23.48 29.03 33.08
Allowance for loan losses to total loans ........................ 0.75 0.68 0.62 0.59 0.54
CAPITAL RATIOS:
Equity to total assets at end of period ......................... 12.52 11.94 11.62 11.35 10.57
Average equity to average assets for the period ................. 12.29 11.82 11.60 11.20 10.43
OTHER DATA:
Number of full-service offices .................................. 3 3 3 3 3
</TABLE>
- ----------
(1) The Association has classified its securities as "held to maturity" or
"available for sale" since April 1, 1994, when it adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Prior thereto, all securities were
classified as "held for investment."
(2) Represents the Association's share of a special assessment imposed on all
financial institutions with deposits insured by the Savings Association
Insurance Fund (the "SAIF"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Comparison of Results of
Operations for the Years Ended March 31, 1998 and 1997."
(3) Ratio is based on average monthly balances during the indicated periods.
(4) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities for the period.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(6) The efficiency ratio represents noninterest expense (other than the special
assessment described in note (2) in fiscal 1997) divided by the sum of net
interest income and noninterest income.
(7) Excluding the SAIF special assessment described in note (2), the ratio of
noninterest expense to average total assets for fiscal 1997 was 1.70%.
11
<PAGE> 16
RECENT DEVELOPMENTS
The following tables set forth certain financial and other information
of the Association for the periods and as of the dates indicated. The financial
data as of March 31, 1998 has been derived in part from the audited financial
statements of the Association and notes thereto presented elsewhere in the
Prospectus. The financial data as of June 30, 1998 and 1997 and for the
three-month periods then ended has been derived in part from unaudited financial
statements of the Association which, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) necessary for the fair
presentation of such information. The results of operations for the three months
ended June 30, 1998 are not necessarily indicative of the results of operations
which may be expected for the year ending March 31, 1999.
<TABLE>
<CAPTION>
At At
June 30, 1998 March 31, 1998
-------- --------
(In Thousands)
<S> <C> <C>
Selected Financial Condition Data:
Total assets ............................................................ $256,753 $254,749
Loans, net .............................................................. 130,503 128,558
Mortgage-backed securities held to maturity ............................. 53,489 53,421
Other securities:
Held to maturity ...................................................... 12,046 11,477
Available for sale .................................................... 2,998 2,994
Deposits .................................................................. 222,200 219,913
Equity .................................................................... 32,644 31,901
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Selected Operating Data:
Interest and dividend income ............................................ $ 4,544 $ 4,345
Interest expense ........................................................ 2,256 2,125
-------- --------
Net interest income ................................................... 2,288 2,220
Provision for loan losses ............................................... 81 37
-------- --------
Net interest income after provision for loan losses ................... 2,207 2,183
Noninterest income ...................................................... 50 55
Noninterest expense ..................................................... 994 931
-------- --------
Income before income tax expense ...................................... 1,263 1,307
Income tax expense ...................................................... 517 545
-------- --------
Net income ............................................................ $ 746 $ 762
======== ========
<CAPTION>
At or for the Three Months Ended June 30,
-----------------------------------------
1998 1997
-------- --------
<S> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios (1):
Return on assets (ratio of net income to average total assets) ........ 1.17% 1.25%
Return on equity (ratio of net income to average equity) .............. 9.24 10.41
Average interest rate spread .......................................... 3.28 3.35
Net interest margin ................................................... 3.70 3.73
Efficiency ratio ...................................................... 42.51 40.92
Noninterest expense to average total assets ........................... 1.56 1.52
Average interest-earning assets to average interest-bearing
liabilities.......................................................... 111.30 110.70
Asset Quality Ratios:
Nonperforming assets to total assets .................................. 0.62 1.06
Nonperforming loans to total loans .................................... 1.11 2.00
Allowance for loan losses to nonperforming loans ...................... 72.30 35.44
Allowance for loan losses to total loans .............................. 0.81 0.71
</TABLE>
12
<PAGE> 17
<TABLE>
<CAPTION>
At or for the Three Months Ended June 30,
1998 1997
-------- --------
<S> <C> <C>
Capital Ratios:
Equity to total assets at end of period ................................. 12.71% 12.09%
Average equity to average assets for the period ......................... 12.66 11.96
Other Data:
Number of full-service offices .......................................... 3 3
</TABLE>
- ----------
(1) Where applicable, ratios for the three-month periods were annualized and
computed based on the monthly average balances.
REGULATORY CAPITAL
The table below sets forth the Association's regulatory capital at June 30,
1998:
<TABLE>
<CAPTION>
AMOUNT PERCENT
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Equity under generally accepted accounting principles ..................... $ 32,644 12.71%
-------- --------
Tangible capital .......................................................... $ 32,644 12.71%
Tangible capital requirement .............................................. 3,851 1.50
-------- --------
Excess .................................................................... $ 28,793 11.21%
-------- --------
Core capital .............................................................. $ 32,644 12.71%
Core capital requirement .................................................. 7,703 3.00
-------- --------
Excess .................................................................... $ 24,941 9.71%
-------- --------
Risk-based capital ........................................................ $ 33,709 35.33
Risk-based capital requirement ............................................ 7,634 8.00
-------- --------
Excess .................................................................... $ 26,075 27.33%
======== ========
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND MARCH 31, 1998
ASSETS. Total assets increased $2.0 million or 0.8% to $256.7 million
at June 30, 1998 as compared to $254.7 million at March 31, 1998. This increase
is primarily a result of a $1.9 million increase in net loans to $130.5 million
at June 30, 1998 from $128.6 million at March 31, 1998. In addition, securities
held to maturity increased slightly to $65.5 million at June 30, 1998 from $64.9
million at March 31, 1998.
LIABILITIES. Deposits totaled $222.2 million at June 30, 1998,
representing an increase of $2.3 million compared to $219.9 million at March 31,
1998.
EQUITY. Total equity increased $743,000 to $32.6 million at June
30,1998 as compared to $31.9 million at March 31, 1998. This increase was
primarily due to net income of $746,000 for the quarter ended June 30, 1998.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
1997
NET INCOME. Net income was $746,000 for the three months ended June 30,
1998 as compared to $762,000 for the three months ended June 30, 1997. The
$16,000 decrease in net income is due primarily to a $63,000 increase in
noninterest expenses to $994,000 and a $44,000 increase in the provision for
loan losses to $81,000, partially offset by a $68,000 increase in net interest
income to $2.3 million and a $28,000 decrease in income tax expense to $517,000.
INTEREST INCOME. Interest income increased $199,000 or 4.6% to $4.5
million for the three months ended June 30, 1998 as compared to $4.3 million for
the same period in 1997. This increase was due to a $9.7 million increase in the
average balance of interest-earning assets to $247.6 million and a 3 basis point
increase in the average yield on interest-earning assets to 7.34%.
13
<PAGE> 18
Interest income on loans totaled $2.7 million for the three months
ended June 30, 1998 as compared to $2.5 million for the same period in 1997.
This $189,000 or 7.4% increase was due to an $8.2 million increase in the
average balance of loans to $129.9 million and a 6 basis point increase in the
yield earned to 8.43%.
Interest income on mortgage-backed securities remained virtually
unchanged at $873,000 for the three months ended June 30, 1998 as compared to
$872,000 for the same period in 1997. The average balance of mortgage-backed
securities amounted to $53.6 million for the 1998 period as compared to $53.0
million for the 1997 period. The increase in the average balance was offset by a
7 basis point decrease in the average yield to 6.51% for the three months ended
June 30, 1998 as compared to the three months ended June 30, 1997. Interest
income on federal funds sold increased $17,000 or 3.6% to $494,000 for the three
months ended June 30, 1998 as compared to $477,000 for the three months ended
June 30, 1997. This increase is due to an $850,000 increase in the average
balance of federal funds sold to $35.0 million and a 6 basis point increase in
the yield earned to 5.65%.
Interest income on certificates of deposit decreased $11,000 to
$178,000 for the three months ended June 30, 1998 as compared to $189,000 for
the three months ended June 30, 1997. For these periods, the average balances of
certificates of deposit were $11.6 million and $12.4 million, respectively, and
the average yields earned were 6.12% and 6.09%, respectively.
INTEREST EXPENSE. Interest expense amounted to $2.3 million for the
three months ended June 30, 1998 as compared to $2.1 million for the same period
in 1997. The $131,000 or 6.2% increase was due to a $7.6 million increase in the
average balance of interest-bearing liabilities to $222.5 million. The average
cost of interest-bearing liabilities increased from 3.96% to 4.06%. The increase
in the average balance of interest-bearing liabilities is due primarily to an
$8.3 million increase in certificates of deposit to $120.4 million for the three
months ended June 30, 1998 as compared to the same period in 1997. Interest
expense on certificates of deposit totaled $1.6 million for three months ended
June 30, 1998 as compared to $1.5 million for the same period in the prior year.
In addition to the increase in the average balances, the average cost of
certificates of deposit increased 8 basis points to 5.36%. Certificates of
deposit comprised 54.1% of the average interest-bearing liabilities during the
three months ended June 30, 1998 as compared to 52.2% for the same period in
1997, reflecting growth in certificate accounts attributable to the
Association's marketing efforts. Total interest expense on other deposit
accounts (passbook, club, money market and NOW accounts) totaled $632,000 for
the three months ended June 30, 1998 as compared to $635,000 for the same period
in 1997. For these periods, the average balances of such accounts amounted to
$100.5 million and $101.2 million, respectively, and the average cost was 2.52%
for both periods.
NET INTEREST INCOME. Net interest income amounted to $2.3 million and
$2.2 million for the three months ended June 30, 1998 and 1997, respectively.
For these periods, the Association's average interest rate spread was 3.28% and
3.35%, respectively, and the net interest margin was 3.70% and 3.73%,
respectively. The ratio of average interest-earning assets to average
interest-bearing liabilities was 111.30% and 110.70% for the three months ended
June 30, 1998 and 1997, respectively.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $81,000
and $37,000 for the three months ended June 30, 1998 and 1997, respectively.
Provisions for loans losses represent charges to income in order to maintain the
allowance for loan losses at a level which is adequate to cover probable losses
inherent in the existing loan portfolio. The allowance for loan losses was $1.06
million or 0.8% of total loans at June 30, 1998, compared to $984,000 or 0.75%
at March 31, 1998 and $881,000 or 0.71% at June 30, 1997. The increases in the
allowance for loan losses were made in light of the continued growth in the loan
portfolio and management's ongoing assessment of the inherent risk in the
portfolio. Management regularly reviews the Association's loan portfolio and
makes provisions for loan losses in order to maintain the adequacy of the
allowance. At June 30, 1998, the allowance for loan losses as a percentage of
total nonperforming loans was 72.30%, compared to 50.26% at March 31, 1998 and
35.44% at June 30, 1997.
14
<PAGE> 19
NONINTEREST INCOME. Non-interest income totaled $50,000 and $55,000 for
the three months ended June 30, 1998 and 1997, respectively. Noninterest income
primarily consists of service charges and fees.
NONINTEREST EXPENSE. Noninterest expense amounted to $994,000 for the
three months ended June 30, 1998 as compared to $931,000 for the same period in
1997, representing a $63,000 increase. Compensation and benefits increased
$30,000 to $542,000 for the three months ended June 30, 1998 as compared to the
three months ended June 30, 1997. For those same periods, other noninterest
expense increased $69,000 and occupancy equipment expense decreased $46,000.
INCOME TAX EXPENSE. Income tax expense was $517,000 and $545,000 for
the three months ended June 30, 1998 and 1997, respectively. The effective tax
rates for these periods were 40.9% and 41.7%, respectively.
15
<PAGE> 20
RISK FACTORS
In addition to the other information in this Prospectus, you should
consider carefully the following risk factors in evaluating an investment in the
Common Stock.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT
The Association's profitability, like that of most financial
institutions, depends substantially on its net interest income, which is the
difference between the interest income earned on interest-earning assets (such
as loans and securities) and the interest expense paid on interest-bearing
liabilities (such as deposits). The Association's net interest income is
affected primarily by market interest rates and the amount, maturity and yield
on the Association's interest-earning assets relative to the amount, maturity
and cost of its interest-bearing liabilities. If an institution's
interest-earning assets have longer effective maturities than its
interest-bearing liabilities, the yield on the institution's interest-earning
assets generally will adjust more slowly than the cost of its interest-bearing
liabilities and, as a result, the institution's net interest income and interest
rate spread would be adversely affected by material and prolonged increases in
interest rates.
The Association's primary lending activity is the origination of fixed
rate mortgage loans with terms of up to 30 years, and a substantial percentage
of the Association's interest-earning assets have longer effective maturities
than its interest-bearing liabilities. Accordingly, an increase in interest
rates generally would result in a decrease in the Association's average interest
rate spread and net interest income. During the year ended March 31, 1998, the
Association originated $28.6 million of loans with fixed rates of interest,
which represented 99.0% of all loans originated by the Association during the
year. Furthermore, at March 31, 1998, $124.0 million, or 95.1%, of the
Association's loan portfolio consisted of fixed rate loans. The Association has
sought to increase the interest rate sensitivity of its interest-earning assets
by investing in adjustable rate mortgage-backed securities. In addition,
management has sought to protect the Association from increases in interest
rates by investing a significant portion of the Association's assets in shorter
term investment securities and in liquid federal funds sold and certificates of
deposit at other financial institutions. At March 31, 1998, the Association held
$52.2 million in adjustable rate mortgage-backed securities, which represented
20.5% of total assets and $8.0 million in other securities with terms of five
years or less, which represented 3.1% of total assets. Moreover, at March 31,
1998, the Association had invested $47.9 million, or 18.8% of total assets, in
federal funds sold and in short-term certificates of deposit. By investing in
short-term, liquid securities the Association believes it is better positioned
to react to increases in market interest rates. However, investments in shorter
term securities generally bear lower yields than longer term investments. These
strategies may result in the Association receiving less interest income than
could be obtained by investing in longer term fixed rate loans. The Association
has also emphasized offering certificate of deposit accounts which mature in two
years or less. At March 31, 1998, the Association had $108.9 million in
certificate of deposit accounts with remaining terms to maturity of one year or
less. By emphasizing short-term certificate of deposit accounts the Association
may, in a rising interest rate environment, experience an increased cost of
funds in order to retain maturing certificates of deposit. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Management of Market Risk-Interest Rate Risk."
Changes in interest rates can also affect the average life of loans and
mortgage-backed securities. Relatively lower interest rates in recent periods
have resulted in increased prepayments of loans and mortgage-backed securities,
as borrowers have refinanced their mortgages to reduce their borrowing costs.
Under these circumstances, the Association is subject to risk to the extent that
it is not able to reinvest such prepayments at rates which are comparable to the
rates on the prepaid loans or securities. Moreover, volatility in interest rates
can also result in the flow of funds away from the Association into investments
such as U.S. Government and corporate securities and other investments that
generally pay higher rates of return than the rates paid on deposits by savings
institutions.
16
<PAGE> 21
POSSIBLE INCREASE IN INDEPENDENT VALUATION AND NUMBER OF SHARES SOLD - DILUTION
OF OWNERSHIP INTERESTS OF PURCHASERS
As a result of changes in market and economic conditions, the
Independent Valuation may increase when it is updated at the conclusion of the
Offering, and, in such event, the number of shares to be sold in the Offering
will increase. INVESTORS WILL NOT BE RESOLICITED UNLESS THE INDEPENDENT
VALUATION INCREASES BY MORE THAN 15%, OR TO MORE THAN $77,895,250, OR THE NUMBER
OF SHARES SOLD IN THE OFFERING INCREASES BY MORE THAN 15%, OR TO MORE THAN
3,505,286 SHARES. If the Independent Valuation increases, then the interests of
those who purchase shares in the Offering will be diluted because more shares
will be outstanding at the conclusion of the Offering. See "Pro Forma Data" and
"The Reorganization and Stock Offering--Stock Pricing and Number of Shares to be
Issued."
REDUCED RETURN ON EQUITY AFTER REORGANIZATION
Return on equity (net income for a given period divided by average
equity during that period) is a ratio used by many investors to compare the
performance of a particular financial institution to its peers. The
Association's equity as a percentage of assets will significantly increase as a
result of the net proceeds received in the Offering. The Association anticipates
that it will take time to prudently deploy the capital raised in the Offering.
Consequently, the Company's post-Reorganization return on equity is expected to
be less than the average return on equity for publicly traded thrift
institutions and their holding companies. See "Selected Financial and Other Data
of Sound Federal Savings and Loan Association" for numerical information
regarding the Association's historical return on equity and "Capitalization" for
a discussion of the Company's estimated pro forma consolidated capitalization as
a result of the Reorganization and Offering. In addition, the expenses
associated with the ESOP and the Stock Award Plan (see "Pro Forma Data"), along
with other ongoing post-Reorganization expenses, are expected to contribute
initially to reduced earnings. In the short term, the Association will have
difficulty in improving its interest rate spread and thus the return on equity
to stockholders. Consequently, for the foreseeable future, investors should not
expect a return on equity that will meet or exceed the average return on equity
for publicly traded thrift institutions, and no assurances can be given that
this goal can be attained.
THE EXPENSE AND DILUTIVE EFFECT OF THE CONTRIBUTION OF SHARES TO THE CHARITABLE
FOUNDATION
Pursuant to the Plan of Reorganization, we intend to establish a
Charitable Foundation in connection with the Reorganization. In addition to the
shares to be sold to depositors and the public, the Company intends to
contribute shares to the Charitable Foundation equal to 2% of the shares
outstanding after the Offering, or 117,682 shares at the midpoint of the
Offering, which contribution would have a value equal to $1,176,820 based upon
the Common Stock's initial offering price of $10.00 per share. Due to the
issuance of shares of Common Stock to the Charitable Foundation, persons
purchasing shares in the Offering will have their voting and ownership interests
in the Company diluted by approximately 2.0%. The contribution of Common Stock
to the Charitable Foundation will have an adverse impact on the reported
earnings of the Company in fiscal 1999, the fiscal year in which the Charitable
Foundation is to be established and the contribution made. If the Charitable
Foundation had been established at March 31, 1998, the Association would have
reported net income of $2.2 million, compared to net income of $2.9 million
actually reported for the year. Upon completion of the Reorganization, the
Charitable Foundation will own approximately 2% of the total shares of the
Common Stock to be issued and outstanding. The OTS has imposed a condition
(which may be waived in certain circumstances) on its approval of the
Reorganization that the shares held by the Charitable Foundation will be voted
in the same ratio as all other shares of the Company as to any proposals
considered by the stockholders. The establishment of the Charitable Foundation
is subject to the approval of the Association's members. See "The Reorganization
and Offering--Establishment of the Charitable Foundation."
CONTROL BY CURRENT DIRECTORS
As the majority stockholder of the Company, the Mutual Holding Company
will be able to elect all of the directors of the Company and direct its
business and affairs. The Company will be controlled by its Board of
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<PAGE> 22
Directors which will consist initially of those persons who currently are
directors of the Association. After the Reorganization, the initial Board of
Directors of the Mutual Holding Company will also consist of those persons who
currently are members of the Board of Directors of the Association. As a result,
it is expected that the Board of Directors of the Mutual Holding Company will
exercise control over the Mutual Holding Company and, consequently, may be
capable of perpetuating the Board of Directors and management of the Mutual
Holding Company, the Company and the Association. Executive officers and
directors of the Company will own 2.5% of the Common Stock outstanding at the
completion of the Offering (assuming shares are sold at the midpoint of the
Offering Range and executive officers and directors receive all the shares for
which they are expected to subscribe). Assuming shares are sold at the midpoint
of the Offering Range and including shares held by the Mutual Holding Company,
directors may control up to 55.5% of the Common Stock following the Offering.
Such percentage may increase if the Stock Award Plan and Stock Option Plan are
approved by the stockholders. THE PURCHASERS OF THE COMMON STOCK IN THE OFFERING
WILL BE MINORITY STOCKHOLDERS OF THE COMPANY AND WILL HAVE LIMITED INFLUENCE IN
ELECTING DIRECTORS OR OTHERWISE DIRECTING THE AFFAIRS OF THE COMPANY AS LONG AS
THE MUTUAL HOLDING COMPANY REMAINS IN EXISTENCE. THE COMPANY'S FEDERAL CHARTER
WILL PROHIBIT CUMULATIVE VOTING. THEREFORE, THE MUTUAL HOLDING COMPANY WILL HAVE
THE POWER TO ELECT ALL THE DIRECTORS OF THE COMPANY. NO ASSURANCES CAN BE GIVEN
THAT THE MUTUAL HOLDING COMPANY WILL NOT TAKE ACTION THAT INDIVIDUAL MINORITY
STOCKHOLDERS BELIEVE TO BE CONTRARY TO THEIR INTERESTS.
WAIVER OF DIVIDENDS BY THE MUTUAL HOLDING COMPANY
The Company does not initially intend to pay dividends on its Common
Stock. However, in the event the Company pays cash dividends, the Mutual Holding
Company may, if permitted by regulatory authorities, waive the receipt of such
dividends if the Mutual Holding Company's board of directors determines that
such waiver is in the best interests of the Mutual Holding Company. The Board of
Directors of the Association, which will be the initial Board of Directors of
the Mutual Holding Company, currently believes that it will be in the best
interests of the Mutual Holding Company to waive the receipt of cash dividends.
A waiver of cash dividends by the Mutual Holding Company will result in a
greater likelihood that dividends will be paid to Minority Stockholders. There
is no assurance that the Mutual Holding Company will waive the receipt of cash
dividends, and any dividend waiver by the Mutual Holding Company will require
the prior approval of the OTS.
MINORITY PUBLIC OWNERSHIP AND CERTAIN ANTI-TAKEOVER PROVISIONS
VOTING CONTROL OF THE MUTUAL HOLDING COMPANY. Under OTS regulations and
the Plan of Reorganization, a majority of the Company's voting shares must be
owned by the Mutual Holding Company, and the Mutual Holding Company will own 53%
of the Common Stock outstanding at the completion of the Offering. The Mutual
Holding Company will be controlled by its executive officers and directors, who
initially will consist of persons who are executive officers and directors of
the Company. Assuming shares are sold at the midpoint of the Offering Range and
including shares held by the Mutual Holding Company, executive officers and
directors may control up to 55.5% of the Common Stock outstanding following the
Offering. Such percentage may increase assuming the exercise of stock options
granted pursuant to the Stock Option Plan and the awards of shares under the
Stock Award Plan. The Mutual Holding Company will elect all members of the Board
of Directors of the Company and, with certain exceptions, will control the
outcome of matters presented to the stockholders of the Company for resolution
by vote. The situations in which the Mutual Holding Company may not control the
outcome of such vote include any stockholder vote to approve a restricted stock
plan or stock option plan instituted within one year of the Offering (which
would require the approval of a majority of the shares other than shares held by
the Mutual Holding Company), any stockholder vote relating to the Mutual Holding
Company's conversion from the mutual to the stock form of organization (which
would require the approval of a majority of shares other than shares held by the
Mutual Holding Company and of two-thirds of all shares including shares held by
the Mutual Holding Company), the decision to contribute additional Common Stock
to the Charitable Foundation (which must be approved by a majority of the
Minority Stockholders) or any other stockholder vote in which the OTS may impose
such a requirement. The Mutual Holding Company, acting through its Board of
Directors, will be able to control the business and operations of the Company
and the Association and will be able to prevent any challenge to the ownership
or control of the Company
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<PAGE> 23
by stockholders other than the Mutual Holding Company. Although OTS regulations
and the Plan of Reorganization permit the Mutual Holding Company to convert from
the mutual to the capital stock form of organization, there can be no assurance
when, if ever, a conversion of the Mutual Holding Company will occur.
PROVISIONS IN THE COMPANY'S AND THE ASSOCIATION'S GOVERNING
INSTRUMENTS. In addition, certain provisions of the Company's Charter and
Bylaws, particularly a provision limiting voting rights, as well as certain
federal regulations will assist the Company in maintaining its status as an
independent, publicly owned corporation. These provisions provide for, among
other things, staggered boards of directors, no cumulative voting for directors,
limits on the calling of special meetings of shareholders, and limits on the
ability to vote Common Stock in excess of 10% of outstanding shares (except as
to shares held by the Mutual Holding Company and the ESOP).
CONVERSION OF MUTUAL HOLDING COMPANY TO STOCK FORM - IMPACT OF WAIVED DIVIDENDS
ON MINORITY STOCKHOLDERS AND LIMITATIONS ON STOCKHOLDER PURCHASES IN A
CONVERSION TRANSACTION
OTS regulations permit a mutual holding company to convert to stock
form (a "Conversion Transaction"). The Plan provides that in a Conversion
Transaction, the Mutual Holding Company may merge into the Company or the
Association, with either the Company or the Association as the surviving entity,
and depositors of the Association will have the right to subscribe for shares of
Common Stock of the Company or its successor. The additional shares of Common
Stock would be sold at their aggregate pro forma market value as determined by
an independent appraisal at the time of the Conversion Transaction. Pursuant to
the Plan, in any Conversion Transaction the Minority Stockholders will be
entitled to maintain the same percentage ownership interest in the Company after
the Conversion Transaction as their percentage ownership interest in the Company
immediately before the Conversion Transaction (the "Minority Ownership
Interest"), subject only to the following adjustments if required by federal
law, regulation or policy to reflect: (i) the cumulative effect of the aggregate
amount of dividends waived by the Mutual Holding Company, and (ii) the market
value of the Mutual Holding Company's assets other than its Common Stock of the
Company. Pursuant to OTS policy and the Association's Plan, the benefit to
Minority Stockholders of any dividends waived by the Mutual Holding Company must
be taken into account in any Conversion Transaction, and would likely reduce the
percentage of Common Stock of the Company owned by Minority Stockholders
following a Conversion Transaction.
The adjustment referred to in clause (i) of the preceding paragraph
would require that the Minority Ownership Interest be adjusted by multiplying
the Minority Ownership Interest (expressed as a percentage) immediately prior to
the Conversion Transaction by the following fraction:
(Company stockholders' equity immediately prior to Conversion Transaction) -
(aggregate amount of dividends waived by Mutual Holding Company)
- --------------------------------------------------------------------------------
Company stockholders' equity immediately prior to Conversion Transaction
The adjustment referred to in clause (ii) above would further adjust
the Minority Ownership Interest (expressed as a percentage) by multiplying it by
the following fraction:
(pro forma market value of Company) - (market value of assets of Mutual Holding
Company other than Company Common Stock)
- --------------------------------------------------------------------------------
pro forma market value of Company
At the sole discretion of the Board of Directors of the Mutual Holding
Company and the Company, a Conversion Transaction may be effected in any other
manner necessary to qualify the Conversion Transaction as a tax-free
reorganization under applicable federal and state tax laws, provided such
Conversion Transaction does not diminish the rights and ownership interest of
Minority Stockholders. Management of the Association has no current intention to
conduct a Conversion Transaction. A Conversion Transaction would require the
approval of applicable federal regulators and a majority of the eligible votes
of the members of the Mutual Holding Company.
In addition, if the Mutual Holding Company conducts a Conversion
Transaction, the Plan of Conversion or OTS policy will require that shares of
the resulting entity received by Minority Stockholders in exchange for their
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<PAGE> 24
shares of Common Stock be included in determining whether a purchaser has
reached the maximum purchase limitation applicable to the Stock Offering
conducted as part of the Conversion Transaction. If this occurs, certain
Minority Stockholders will be unable to fully exercise their subscription
rights, and in certain circumstances may be required by the OTS to divest shares
of Common Stock. A Conversion Transaction must receive the affirmative vote of a
majority of (i) all shares of Common Stock outstanding, (ii) shares of Common
Stock held by Minority Stockholders, and (iii) votes eligible to be cast by the
Mutual Holding Company's members.
COMPETITION
Numerous commercial banks and savings institutions have branches in the
immediate vicinity of the Association. There is strong competition from
financial institutions and mortgage brokers in the Association's local market as
well as from mutual funds in both originating loans and attracting funds. The
Association's primary competitors are other savings institutions, commercial
banks, mortgage banking companies and mortgage brokers. Trends toward the
consolidation of the financial institutions industry and removal of restrictions
on interstate banking and branching may make it more difficult for smaller
institutions such as the Association to compete effectively with large national
and regional banking institutions. Such competition may have an adverse effect
on the Association's growth and profitability in the future. See "Competition."
GEOGRAPHIC CONCENTRATION OF LOANS
The Association's mortgage loans are secured by real estate properties
located primarily in Westchester County, New York. If the local economy,
national economy or real estate market weakens, the financial condition and
results of operations of the Association could be adversely affected. A
weakening in the local real estate market or a decline in the local economy
could increase the number of delinquent or nonperforming loans and reduce the
value of the collateral securing such loans, which would reduce the
Association's net income.
INTENT TO REMAIN INDEPENDENT
The Association has operated as an independent community-oriented
savings association since 1891. The Association intends to continue to operate
as an independent community-oriented savings association following the
Reorganization. The Association and the Company will be controlled by the Mutual
Holding Company, and, under current OTS policy, control of the Mutual Holding
Company may not be sold to a third party. Accordingly, you are urged not to
subscribe for shares of Common Stock if you are anticipating a sale of control
of the Association or the Company. See "Business of the Association."
LACK OF ACTIVE MARKET FOR THE COMMON STOCK
The Company has never issued capital stock to the public, and there can
be no assurance that an active and liquid trading market for the Common Stock
will develop or be maintained. It is anticipated that the Common Stock will be
quoted on the Nasdaq National Market under the symbol "SFFS." Sandler O'Neill
has indicated its intention to make a market in the Common Stock, subject to
compliance with applicable provisions of federal and state securities laws and
other regulatory requirements, although Sandler O'Neill is not required to do
so. If you purchase shares of Common Stock, you may not be able to sell them
when you want to at a price that equals or exceeds the price you paid for the
Common Stock.
EXPENSES ASSOCIATED WITH ESOP AND STOCK AWARD PLAN
The Association will recognize material employee compensation and
benefit expenses assuming the ESOP and the Stock Award Plan are implemented. The
actual aggregate amount of these new expenses cannot be predicted at the present
time because applicable accounting practices require that such expenses be
measured based on the fair market value of the shares of Common Stock. In the
case of the ESOP, fair market value would be measured when
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<PAGE> 25
shares are committed to be released for allocation to the ESOP participants; in
the case of the Stock Award Plan, fair market value would be measured at the
grant date and amortized over the award's vesting period. These expenses have
been reflected in the pro forma financial information under "Pro Forma Data"
assuming the Purchase Price ($10.00 per share) represents the fair market value
for accounting purposes. Actual expenses, however, will be based on the fair
market value of the Common Stock at future dates, which may be higher or lower
than the Purchase Price. See "Management of The Association--Benefits--Employee
Stock Ownership Plan" and "--Benefits--Stock Award Plan."
DILUTIVE EFFECT OF STOCK AWARD, STOCK OPTION PLAN AND ESOP
If the Reorganization and Offering are completed and stockholders
approve the Stock Award Plan and Stock Option Plan, the Company intends to issue
shares of Common Stock to officers and directors of the Association through
these plans. If the shares for these plans are issued from the Company's
authorized but unissued Common Stock, the book value and earnings per share of
minority stockholders would be diluted, and the trading price of the Company's
Common Stock may be reduced. It is expected that earnings per share would be
reduced by approximately $.02 and stockholders' equity per share would be
reduced by approximately $0.19 as a result of the implementation of the Stock
Award Plan. In addition, it is expected that earnings per share would be reduced
by $.02 and stockholders' equity per share would be reduced by $.38 as a result
of establishing the ESOP and funding it with shares equal to 8% of the Minority
Ownership Interest. See "Pro Forma Data" and "Executive Compensation and Related
Transactions of the Association."
CAPABILITY OF THE ASSOCIATION'S DATA PROCESSING TO ACCOMMODATE THE YEAR 2000
Like many financial institutions, the Association relies upon computers
for the daily conduct of its business and for data processing generally. There
is concern that on January 1, 2000 computers will be unable to "read" the new
year and as a consequence, there may be widespread computer malfunctions. The
Association's loan portfolio primarily consists of loans secured by real estate.
Consequently, the Association does not believe that its lending operations are
dependent on borrowers' compliance with the year 2000 issue. The Association
generally relies on independent third parties to provide data processing
services to the Association, and has been advised by such parties that the issue
is being addressed and that it should not affect the Association's external data
processing. The Association is in the process of testing its computer
applications and hardware to ensure that they will be able to read the year
2000, and intends to complete testing by December 1998. At March 31, 1998, the
costs incurred to address the year 2000 issue have not been significant.
Management does not expect that the additional costs to be incurred in
connection with the year 2000 issue will have a material impact on the
Association's financial condition and results of operations. However, there can
be no assurance that the Association's third party data service provider will be
able to satisfactorily address the year 2000 issue, or that the associated costs
will not exceed management's estimate. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Capability of the
Association's Data Processing to Accommodate the Year 2000."
RISK OF DELAYED OFFERING
Although the Reorganization and Offering are expected to be completed
within the time periods indicated in this Prospectus, it is possible that
adverse market, economic or other factors may significantly delay the completion
of the Reorganization and Offering, which could significantly increase the costs
of the Reorganization and Offering.
See "The Reorganization."
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<PAGE> 26
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the approximate purchases of Common Stock
by each director and executive officer of the Association and their Associates
in the Offering. All shares will be purchased for investment purposes and not
for purposes of resale. This table excludes shares to be purchased by the ESOP,
as well as Stock Award Plan awards and grants under the Stock Option Plan that
may be made no earlier than six months after the completion of the
Reorganization. The table assumes that 2,650,500 shares (the midpoint of the
Offering Range) of Common Stock will be sold at $10.00 per share and that
sufficient shares will be available to satisfy subscriptions.
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<PAGE> 27
<TABLE>
<CAPTION>
TOTAL SHARES AGGREGATE PRICE
PROPOSED TO BE OF INTENDED PERCENT OF
NAME POSITION SUBSCRIBED FOR (1) PURCHASES SHARES SOLD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bruno J. Gioffre Chairman of the Board 30,000 $ 300,000 1.13%
Richard P. McStravick President, Chief 25,000 250,000 0.94%
Executive Officer
and Director
Joseph Dinolfo Director 15,000 150,000 0.57%
Donald H. Heithaus Director 20,000 200,000 0.75%
Robert P. Joyce Director 16,000 160,000 0.6%
Joseph A. Lanza Director 14,000 140,000 0.53%
Arthur C. Phillips, Jr. Director 20,000 200,000 0.75%
James Staudt Director 5,000 50,000 0.19%
Stephen P. Milliot Chief Financial Officer 200 2,000 0.01%
and Treasurer
William H. Morel Senior Vice President 7,500 75,000 0.28%
and Secretary
All directors and executive
officers as a group (10 persons) 152,700 $ 1,527,000 5.76%
</TABLE>
- ---------------------------
(1)Includes purchases by associates.
SOUND FEDERAL, MHC
The Mutual Holding Company will at all times own a majority of the
outstanding shares of Common Stock. Each member of the Association immediately
prior to the Reorganization will receive the same membership rights in the
Mutual Holding Company after the Reorganization that such person had in the
Association before the Reorganization so long as such member continues to
maintain a deposit account with the Association after the Reorganization, or, in
the case of a borrower member, such member's borrowings from the Association, as
of the effective date of the Reorganization, remain outstanding. Borrowers will
not receive membership rights for any new borrowings from the Stock Association
after the completion of the Reorganization. The Mutual Holding Company will be
chartered as a federal mutual holding company and will be subject to regulation
by the OTS.
Although many federal mutual holding companies waive the receipt of cash
dividends declared by their subsidiaries, the Mutual Holding Company intends to
make such a determination at the time the Company declares a dividend. OTS
regulations require the Mutual Holding Company to give the OTS prior written
notice of any such waiver, and the conditions pursuant to which the OTS
generally approves dividend waivers are described in "Regulation--Holding
Company Regulation." The Mutual Holding Company's Board of Directors will waive
dividends paid by the Company if the Board determines that such a waiver is in
the Mutual Holding Company's members' best interest because, among other
reasons: (i) the Mutual Holding Company has no need for the dividend considering
its business operations; (ii) the cash that would be received could be invested
by the Company or the Association at a more favorable rate of return; (iii) such
waiver may increase the capital of the Association and enhance its business so
that members will continue to have access to the services of the Association;
and (iv) such waiver preserves the net worth of the Mutual Holding Company
through its principal asset (the Company, and indirectly, the Association),
which would be available for distribution in the unlikely event of a voluntary
liquidation
23
<PAGE> 28
of the Company and the Association after satisfaction of claims of depositors
and creditors. The Board of Directors may consider other factors in determining
whether such waiver is consistent with its fiduciary duties to members of the
Mutual Holding Company. Any waiver of dividends by the Mutual Holding Company is
likely to result in an adjustment to the ratio pursuant to which shares of
Common Stock are exchanged for shares of the resulting company in a Conversion
Transaction.
The Mutual Holding Company's Board of Directors may accept dividends paid
by the Company in an amount necessary to pay the Mutual Holding Company's
expenses, and will accept additional dividends if it determines that accepting
such dividends is in the Mutual Holding Company's members' best interest
because, among other reasons: (i) the Mutual Holding Company may increase its
direct ownership of the Company, and indirect ownership of the Association, by
using cash dividends to purchase additional shares of Common Stock in the open
market from time to time; and (ii) such dividends may be used to promote
activities that are in the interest of members and the members' community. Any
purchases of Common Stock by the Mutual Holding Company will increase the
percentage of the Company's Common Stock held by the Mutual Holding Company and,
in a Conversion Transaction, will decrease the aggregate number of shares of the
resulting company issued to Minority Stockholders in exchange for their shares
of Common Stock.
Immediately after the Reorganization, it is expected that the only
business activity of the Mutual Holding Company will be to own a majority of the
Common Stock. The Mutual Holding Company, however, will be authorized to engage
in any other business activities that are permissible for mutual holding
companies under federal law, including investing in loans and securities.
SOUND FEDERAL BANCORP
The Company will be formed as a federal corporation and will own 100% of
the Association's common stock. The Company has not engaged in any business to
date and, for that reason, its financial statements are not included in this
Prospectus. The Company has received approval from the OTS to become a savings
and loan holding company through the acquisition of all of the capital stock of
the Association to be issued and outstanding upon completion of the
Reorganization. The Company will have all of the powers set forth in its Federal
charter and under Federal law. The Company will be subject to the same
restrictions on its permissible business activities under federal law that are
applicable to the Mutual Holding Company.
The Company will retain up to 50% of the net proceeds of the Offering.
Part of the net proceeds will be used to fund a loan to the ESOP, which is
expected to purchase shares of Common Stock up to 8% of the Minority Ownership
Interest. The remainder of the net proceeds will be used for general corporate
purposes. The Company has no specific plans at present regarding
diversification, acquisitions or expansion. The Company initially will not
conduct any active business and does not intend to employ any persons other than
its officers, although it may utilize the Association's support staff from time
to time.
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
The Association was organized as a New York chartered institution in 1891
and became a federally chartered savings association in 1934. The Association's
deposits are insured by the FDIC. The Association currently conducts its
business from its main office in Mamaroneck and two full-service branches,
located in Harrison and Rye Brook, New York. The Association is a
community-oriented institution engaged primarily in the business of accepting
deposits from customers, most of whom live or work in Westchester County, and
investing these deposits together with funds generated from operations, in
one-to-four family residential mortgage loans and home equity lines of credit,
and to a much lesser extent, multi-family and commercial mortgage, construction
and consumer loans. At March 31, 1998, net loans totalled $128.6 million. The
Association also invests in mortgage-backed and other securities. At March 31,
1998, mortgage-backed securities totalled $53.4 million and other securities
totalled $14.5 million. At
24
<PAGE> 29
March 31, 1998, the Association had total assets of $254.7 million, total
deposits of $219.9 million and total equity of $31.9 million, or 12.5% of
assets.
SUMMARY DESCRIPTION OF THE REORGANIZATION
Pursuant to the Plan, the Association will reorganize into a two-tier
mutual holding company structure by forming: (i) the Mutual Holding Company as a
federally-chartered mutual holding company; (ii) the Company as a
federally-chartered stock holding company that will sell 45% of its Common Stock
in the Offering, will contribute 2% of its Common Stock to the Charitable
Foundation, and will issue the remaining 53% of its Common Stock to the Mutual
Holding Company; and (iii) the Stock Association as a federally-chartered stock
savings association which will be the successor to the Association in its
current mutual form, and which will be wholly-owned by the Company.
Public
Stockholders
Sound Federal, MHC (Including ESOP)
and Charitable
Foundation)
53% of the 47% of the
Common Common
Stock Stock
Sound Federal Bancorp
100% of the
Common Stock
Sound Federal Savings and Loan Association
The Reorganization will structure the Association in the stock form of
ownership, which is the corporate form used by commercial banks, most major
businesses and a large number of savings institutions. The primary purpose of
the Reorganization is to raise equity capital and establish a holding company to
enable the Association to compete more effectively in the financial services
marketplace. See "The Reorganization and Offering--Reasons for the
Reorganization."
MARKET AREA
The Association is a community-oriented savings institution that offers a
variety of financial products and services from its main office and two branch
offices. The Association's primary lending area is concentrated in the
neighborhoods surrounding the Association's office locations. Most of the
Association's deposit customers are residents of Westchester County. To a lesser
extent, the Association obtains deposits from, and originates loans to, persons
in Fairfield County, Connecticut. The Association's market area is
characterized by middle income and upper income communities. Significant
employers headquartered in the Association's market area include IBM and
Texaco, however the local economy is not dependent upon any single employer, but
is affected by the general economy of the New York City metropolitan area.
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<PAGE> 30
COMPETITION
The Association has significant competition in originating loans from
savings and loan associations, savings banks, mortgage banking companies,
insurance companies and commercial banks, many of which have greater financial
and marketing resources than the Association. The Association also faces
significant competition in attracting deposits from savings and loan
associations, savings banks, commercial banks and credit unions. The Association
faces additional competition for deposits from common stock mutual funds, money
market funds and other corporate and government securities funds, and from other
financial service providers such as brokerage firms and insurance companies.
The Association attracts and retains deposits by offering personalized
service, convenient office locations and competitive interest rates. Loan
originations are obtained primarily through (i) direct contacts by employees
with individuals, businesses and attorneys in the Association's community, (ii)
personalized service that the Association provides borrowers, and (iii)
competitive pricing. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors that management cannot readily predict.
USE OF PROCEEDS
The Company will retain up to 50% of the net proceeds from the Offering
(or $12.8 million at the midpoint), and will use the balance of the net proceeds
to purchase all of the Common Stock issued by the Association. A portion of the
net proceeds retained by the Company will be loaned to the ESOP to fund its
purchase of up to 8% of the Minority Ownership Interest (assuming such amount of
shares can be purchased in the Offering, the ESOP loan would be $2.2 million at
the midpoint). On a short-term basis, the remaining net proceeds retained by the
Company may be invested in U.S. Government securities and other federal agency
securities. On a longer-term basis, the Company will use the net proceeds for
general corporate purposes. The Company may also use a portion of the net
proceeds to fund the purchase of Common Stock for the Stock Award Plan. The
Stock Award Plan may not be adopted by the Company's Board of Directors earlier
than six months following the completion of the Reorganization, and is subject
to the approval of stockholders.
The Association intends to use a portion of the net proceeds that it
receives from the Company to make one-to-four family, multi-family and
commercial mortgage loans, subject to market conditions. The Association may use
a portion of the net proceeds to expand its branch franchise as opportunities
arise. The Association is currently evaluating a number of branching
opportunities. On an interim basis, a portion of the net proceeds may be
invested in U.S. Government securities and other Federal agency securities. See
"Business of the Association--Investment Activities."
26
<PAGE> 31
The following table shows estimated gross and net proceeds based on the
sale of Common Stock at the minimum, midpoint, maximum and 15% above the
maximum, of the Offering Range.
<TABLE>
<CAPTION>
15% ABOVE
MINIMUM, MIDPOINT MAXIMUM MAXIMUM,
2,252,925 2,650,500 3,048,075 3,505,286
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD AT
AT PRICE OF $10.00 AT PRICE OF $10.00 AT PRICE OF $10.00 PRICE OF $10.00(2)
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross proceeds.................................. $ 22,529 $ 26,505 $ 30,481 $ 35,053
Less offering expenses (estimated underwriting
commissions and other costs)(1)............. 883 937 992 1,055
---------- ---------- ---------- ----------
Estimated net proceeds(1)....................... $ 21,646 $ 25,568 $ 29,489 $ 33,998
========== ========== ========== ==========
</TABLE>
- -------------------------
(1) In calculating estimated net proceeds, it has been assumed that no sales
will be made through selected dealers.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% to
reflect changes in market or financial conditions following the
commencement of the Subscription Offering and the Community Offering, if
any, as well as to reflect the demand for the Common Stock.
The actual net proceeds may differ from the estimated net proceeds
calculated above for various reasons, including variances in the actual amount
of legal and accounting expenses incurred in connection with the Reorganization
and Offering, commissions paid for sales made through other dealers, and the
actual number of shares of Common Stock sold in the Offering. Any variance in
the actual net proceeds from the estimates provided in the table above is not
expected to be material.
DIVIDENDS
The Company has no present plans to pay a dividend on the Common Stock,
although it may consider the payment of such dividends in the future. Dividends
will be subject to determination and declaration by the Company's Board of
Directors in its discretion, which will take into account the Company's
consolidated financial condition and results of operations, tax considerations,
industry standards, economic conditions, capital levels, regulatory restrictions
on dividend payments by the Association to the Company, general business
practices and other factors. See "Regulation--Savings Association Regulatory
Capital" and "--Dividend Limitations."
The Company will not be subject to OTS regulatory restrictions on the
payment of dividends, although its ability to pay dividends will depend in part
upon the receipt of dividends from the Association. The Association must provide
the OTS with 30 days prior notice of its intention to pay a dividend or other
capital distribution to the Company. Additional limits on the dollar amount of
any capital distribution by the Association to the Company are set forth in OTS
regulations. The Company will not undertake any action within a year from the
completion of the Reorganization towards the furtherance of a tax-free return of
capital. See "Regulation--Dividend Limitations."
If permitted by regulatory authorities, the Mutual Holding Company may
waive the receipt of any cash dividends declared on the Common Stock if the
Mutual Holding Company's Board of Directors determines that such waiver is in
the best interests of the Mutual Holding Company. The Board of Directors may
conclude that such waiver, which permits retention of capital by the Company, is
in the best interests of the Mutual Holding Company because, among other
reasons, (i) the Mutual Holding Company has no need for the dividend considering
its current business operations, and (ii) the cash that would be received could
be invested by the Company at a more favorable rate of return. The Board of
Directors may consider other factors in determining whether such waiver is
consistent with its fiduciary duties to the Mutual Holding Company. A waiver of
dividends by the Mutual Holding Company will result in a greater likelihood that
dividends will be paid to stockholders other than the Mutual Holding Company.
There is no assurance that the Mutual Holding Company will waive the receipt of
dividends.
27
<PAGE> 32
In addition to the foregoing, the portion of the Association's earnings
which has been appropriated for bad debt reserves and deducted for federal
income tax purposes cannot be used by the Association to pay cash dividends to
the Company without the payment of federal income taxes by the Association at
the then current income tax rate on the amount deemed distributed, which would
include the amount of any federal income taxes attributable to the distribution.
See "Taxation--Federal Taxation" and Note 8 to the Financial Statements. The
Company does not contemplate any distribution by the Association that would
result in a recapture of the Association's bad debt reserve or otherwise create
federal tax liabilities.
MARKET FOR THE COMMON STOCK
The Company has never issued Common Stock to the public. Consequently,
there is no established market for the Common Stock. The Company intends to have
the Common Stock traded on the Nasdaq National Market under the symbol "SFFS",
but there can be no assurance that an active and liquid trading market will
develop or be maintained. The requirements for listing include a minimum number
of publicly traded shares, market makers and shareholders, and a minimum market
capitalization. Sandler O'Neill has advised the Association that it intends to
act as a market maker for the Common Stock, subject to compliance with
applicable provisions of federal and state securities laws and other regulatory
requirements, but it is under no obligation to do so.
The existence of a public trading market will depend upon the presence in
the market of both willing buyers and willing sellers at any given time. The
presence of a sufficient number of buyers and sellers at any given time is a
factor over which neither the Company nor any broker or dealer has control.
CAPITALIZATION
The following table presents the Association's historical capitalization
at March 31, 1998, and the pro forma consolidated capitalization of the Company
as of that date, giving effect to the sale of Common Stock offered by this
Prospectus based on the number of shares indicated in the table, and subject to
the other assumptions set forth below. The pro forma data set forth below may
change significantly at the time the Company completes the Reorganization and
Offering due to, among other factors, a change in the Independent Valuation or a
change in the current estimated expenses of the Reorganization and Offering. If
the Offering Range changes so that between 2,252,925 and 3,505,286 shares are
not sold in the Offering, subscriptions will be returned to subscribers who do
not affirmatively elect to continue their subscriptions at the revised Offering
Range.
28
<PAGE> 33
<TABLE>
<CAPTION>
AT MARCH 31, 1998
PRO FORMA COMPANY CAPITALIZATION BASED ON SALE OF
------------------------------------------------------
2,252,925 2,650,500 3,048,075 3,505,286
SHARES AT SHARES AT SHARES AT SHARES AT
PRICE OF PRICE OF PRICE OF PRICE OF
HISTORICAL $10.00 $10.00 $10.00 $10.00
---------- ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(1) ............................................. $ 219,913 $ 219,913 $ 219,913 $ 219,913 $ 219,913
========== ========= ========== =========== =========
FHLB borrowings.......................................... 87 87 87 87 87
Stockholders' equity (2):
Preferred stock, $0.10 par value per share; 10,000,000
shares authorized; none to be issued.................. $ -- $ -- $ -- $ -- $ --
Common stock, $0.10 par value per share; 20,000,000
shares authorized; shares to be issued as shown(3)(4) -- 501 589 677 779
Additional paid-in capital(3)............................ -- 22,135 26,146 30,155 34,765
Net unrealized loss on securities available-for-sale,
net of taxes.......................................... (4) (4) (4) (4) (4)
Retained earnings........................................ 31,905 31,905 31,905 31,905 31,905
Less pre-tax expense recognized for shares
contributed to Charitable Foundation.................. -- (1,000) (1,177) (1,353) (1,556)
Plus tax benefit of contribution to Charitable Foundation -- 400 471 541 622
Less common stock acquired by ESOP(5).................... -- (1,882) (2,215) (2,547) (2,929)
Less common stock acquired by Stock Award Plan(6) -- (941) (1,107) (1,273) (1,464)
---------- --------- ---------- ----------- ---------
Total stockholders' equity............................... $ 31,901 $ 51,114 $ 54,608 $ 58,101 $ 62,118
========== ========= ========== =========== =========
</TABLE>
- -------------------------
(1) Excludes withdrawals from deposit accounts for the purchase of Common
Stock. Such withdrawals will reduce pro forma deposits by the amount
thereof.
(2) Pro forma stockholders' equity is not intended to represent the fair
market value of the Common Stock, the net fair market value of the
Company's assets and liabilities or the amounts, if any, that would be
available for distribution to stockholders in the event of liquidation.
Such pro forma data may be affected by a change in the number of shares to
be sold in the Offering and by other factors.
(3) Includes all shares to be issued by the Company (i) in the Offering, (ii)
to the Charitable Foundation and (iii) to the Mutual Holding Company. The
number of shares to be issued in the Offering may be increased or
decreased based on market and financial conditions prior to the completion
of the Offering. Assumes estimated offering expenses of $883,000,
$937,000, $992,000 and $1,055,000 at the minimum, midpoint, maximum and
adjusted maximum of the Offering Range, respectively. See "Use of
Proceeds." Additional paid-in capital has been reduced to reflect the
capitalization of the Mutual Holding Company at $10,000.
(4) Does not reflect additional shares of Common Stock that could be issued
pursuant to the Stock Option Plan, if implemented, under which directors,
executive officers and other employees of the Company would be granted
options to purchase an aggregate amount of Common Stock equal to 10% of
the Minority Ownership Interest. Implementation of the Stock Option Plan
requires shareholder approval, which is expected to be sought at a meeting
of stockholders to be held no earlier than six months following the
Reorganization.
(5) Assumes purchases by the ESOP of a number of shares equal to 8% of the
Minority Ownership Interest. The funds used to acquire the ESOP shares
will be borrowed from the Company. See "Use of Proceeds." The Association
intends to make contributions to the ESOP sufficient to service and
ultimately retire its debt. The Common Stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. As the ESOP debt is
repaid, shares will be released and allocated to participants' accounts,
and a corresponding reduction in the charge against stockholders' equity
will occur. See "Executive Compensation and Related Transactions of the
Association--Employee Stock Ownership Plan and Trust."
(6) Assuming the receipt of shareholder approval, the Company intends to
implement the Stock Award Plan. Assuming such implementation, the Stock
Award Plan will purchase an amount of shares equal to 4% of the Minority
Ownership Interest if the Stock Award Plan is adopted within one year of
the completion of the Reorganization or up to 5% of the Minority Ownership
Interest if the Stock Award Plan is adopted more than one year after the
Reorganization. Such shares may be purchased from authorized but unissued
shares or in the open market. Under the terms of the Stock Award Plan,
assuming it is adopted within one year of the Reorganization, shares
awarded to officers and directors will vest at the rate of 20% per year.
The Common Stock to be purchased by the Stock Award Plan represents
unearned compensation and is, accordingly, reflected as a reduction to pro
forma stockholders' equity. As shares of the Common Stock granted pursuant
to the Stock Award Plan vest, a corresponding reduction in the charge
against stockholders' equity will occur. In the event that authorized but
unissued shares are awarded under the Stock Award Plan, the interests of
existing stockholders will be diluted. Assuming that 5,890,000 shares of
Common Stock, the midpoint of the Offering Range, are issued in the
Reorganization, and that all awards under the Stock Award Plan are from
authorized but unissued shares, the Company estimates that the per share
book value for the Common Stock would be diluted by $0.17 per share, or
1.83% on a pro forma basis at March 31, 1998. The voting rights of
existing stockholders would be diluted by 1.85%. The dilution would be
$0.18 per share (1.76%) and $0.15 per share (1.75%) at the minimum and
maximum levels, respectively, of the Offering Range on a pro forma basis
at March 31, 1998.
29
<PAGE> 34
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Independent Valuation and Offering
Range of up to 15% to reflect changes in market or financial conditions
following the commencement of the Subscription Offering and Community
Offering, if any.
PRO FORMA DATA
The following table sets forth the pro forma consolidated net income of
the Company and the Association for the year ended March 31, 1998, as though the
Offering had been consummated at the beginning of the fiscal year and the
investable net proceeds had been invested at 5.41% which was the one-year
Treasury bill rate at March 31, 1998. The one-year Treasury bill rate was used
to calculate the reinvestment of net proceeds because it more appropriately
reflects a market rate of return, as compared to using the rate equal to the
arithmetic average yield of the Association's interest-earning assets and cost
of deposits. Management believes the difference in income that would be
generated by using the one-year Treasury bill rate as opposed to the arithmetic
average yield of the Association's interest-earning assets and cost of deposits
to be immaterial. The pro forma after-tax return for the Company on a
consolidated basis is assumed to be 3.25% for the year ended March 31, 1998,
after giving effect to (i) the yield on investable net proceeds from the
Offering and (ii) adjusting for taxes using a combined federal and state income
tax rate of 40%. Historical and per share amounts have been calculated by
dividing historical amounts and pro forma amounts by the indicated number of
shares of Common Stock, assuming that such number of shares had been outstanding
during the entire period. The 2,252,925, 2,650,500, 3,048,075 and 3,505,286
shares represent 45% of minimum, midpoint, maximum and adjusted maximum,
respectively, of the Estimated Valuation Range.
The estimated net proceeds from the Offering, based on the assumptions set
forth in the notes to the table, are $21.6 million, $25.6 million, $29.5 million
and $34.0 million for the minimum, midpoint, maximum and adjusted maximum of the
Offering Range, respectively. The net proceeds do not include the value of
shares issued to the Charitable Foundation and are net of Offering expenses. The
amount of actual net proceeds cannot be determined until the Offering is
completed and actual offering expenses may vary from the estimates used in
preparing the pro forma data.
Book value represents the difference between the stated amount of
consolidated assets and consolidated liabilities of the Company computed in
accordance with generally accepted accounting principles. Book value does not
necessarily reflect current market value of assets and liabilities, or the
amounts, if any, that would be available for distribution to shareholders in the
event of liquidation. See "The Reorganization--Principal Effects of
Reorganization--Effect on Liquidation Rights." Book value also does not reflect
the federal income tax consequences of the restoration to income of the
Association's bad debt reserve for income tax purposes, which would be required
in the unlikely event of liquidation or if a substantial portion of retained
earnings were otherwise used for a purpose other than absorption of bad debt
losses. See "Taxation--Federal Taxation." Pro forma book value includes only net
proceeds from the Offering as though it occurred as of the indicated date and
does not include earnings on the proceeds for the period then ended.
The pro forma net income derived from the assumptions set forth above
should not be considered indicative of the actual consolidated results of
operations of the Company and the Association that would have been attained for
the year ended March 31, 1998 if the Offering had been actually consummated at
the beginning of such year, and the assumptions regarding investment yields
should not be considered indicative of the actual yield expected to be achieved
during any future period. The pro forma book values at the date indicated should
not be considered as reflecting the potential trading value of the Common Stock.
There can be no assurance that an investor will be able to sell the Common Stock
purchased in the Offering at prices within the range of the pro forma book
values of the Common Stock or at or above the Purchase Price. The pro forma data
may not total due to rounding differences.
30
<PAGE> 35
<TABLE>
<CAPTION>
At or for the Year Ended March 31, 1998
Based on the Sale of Common Stock for $10.00 Per Share
--------------------------------------------------------------
2,252,925 2,650,500 3,048,075 3,505,286
Shares Shares Shares Shares
Sold Sold Sold Sold(1)
-------- -------- -------- --------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Gross proceeds ............................................... $ 22,529 $ 26,505 $ 30,481 $ 35,053
Plus value of shares issued to the Charitable Foundation ..... 1,000 1,177 1,353 1,556
-------- -------- -------- --------
Pro forma market capitalization .............................. $ 23,529 $ 27,682 $ 31,834 $ 36,609
Gross proceeds ............................................... $ 22,529 $ 26,505 $ 30,481 $ 35,053
Less equity retained by the MHC .............................. (10) (10) (10) (10)
Less offering expenses ....................................... (883) (937) (992) (1,055)
-------- -------- -------- --------
Estimated net proceeds ..................................... 21,636 25,558 29,479 33,988
Less common stock acquired by ESOP ........................... (1,882) (2,215) (2,547) (2,929)
Less common stock acquired by Stock Award Plan ............... (941) (1,107) (1,273) (1,464)
-------- -------- -------- --------
Estimated investable proceeds .............................. $ 18,813 $ 22,236 $ 25,659 $ 29,595
======== ======== ======== ========
Net earnings:
Historical ................................................. $ 2,885 $ 2,885 $ 2,885 $ 2,885
Pro forma income on net proceeds(3) ........................ 611 722 833 961
Less pro forma ESOP adjustment(4) .......................... (113) (133) (153) (176)
Less pro forma Stock Award Plan adjustment(5) .............. (113) (133) (153) (176)
-------- -------- -------- --------
Pro forma net earnings .................................. $ 3,270 $ 3,341 $ 3,412 $ 3,494
======== ======== ======== ========
Per share net earnings:(6)
Historical ................................................. $ 0.60 $ 0.51 $ 0.44 $ 0.38
Pro forma income on net proceeds(3) ........................ 0.13 0.13 0.13 0.13
Less pro forma ESOP adjustment(4) .......................... (0.02) (0.02) (0.02) (0.02)
Less pro forma Stock Award Plan adjustment(5) .............. (0.02) (0.02) (0.02) (0.02)
-------- -------- -------- --------
Pro forma net earnings per share(6)(7)(11) .............. $ 0.69 $ 0.60 $ 0.53 $ 0.47
======== ======== ======== ========
Stockholders' equity:
Historical(8) .............................................. $ 31,901 $ 31,901 $ 31,901 $ 31,901
Estimated adjusted net proceeds(9) ......................... 21,636 25,558 29,479 33,988
Plus tax benefit of contribution to Charitable Foundation(2) 400 471 541 622
Less common stock acquired by ESOP(4) ...................... (1,882) (2,215) (2,547) (2,929)
Less common stock acquired by Stock Award Plan(5) .......... (941) (1,107) (1,273) (1,464)
-------- -------- -------- --------
Pro forma stockholders' equity .......................... $ 51,114 $ 54,608 $ 58,101 $ 62,118
======== ======== ======== ========
Stockholders' equity per share:(8)
Historical ................................................. $ 6.37 $ 5.42 $ 4.71 $ 4.10
Estimated adjusted net proceeds(9) ......................... 4.32 4.34 4.35 4.36
Plus tax benefit of contribution to Charitable Foundation(2) 0.08 0.08 0.08 0.08
Less common stock acquired by ESOP(4) ...................... (0.38) (0.38) (0.38) (0.38)
Less common stock acquired by Stock Award Plan(5) .......... (0.19) (0.19) (0.19) (0.19)
-------- -------- -------- --------
Pro forma stockholders' equity per share(7)(11) ......... $ 10.20 $ 9.27 $ 8.57 $ 7.97
======== ======== ======== ========
Offering price to pro forma stockholders' equity per share ... 98.04% 107.87% 116.69% 125.47%
======== ======== ======== ========
Offering price to pro forma net earnings per share(6) ........ 14.49x 16.67x 18.87x 21.28x
======== ======== ======== ========
Minority Ownership Interest(10) .............................. 47% 47% 47% 47%
======== ======== ======== ========
</TABLE>
(footnotes on following page)
31
<PAGE> 36
(1) Assumes that at the conclusion of the Offering the Independent Valuation
increases by 15% to $77,895,250 and that the Association increases the
number of shares sold in the Offering to 3,505,286.
(2) Assumes the issuance of 117,682 shares of authorized but unissued shares to
the Charitable Foundation. The issuance of shares to the Charitable
Foundation and the contribution to the Charitable Foundation (excluding the
tax benefit of the contribution) represent offsetting amounts to
stockholders' equity. As such, these offsetting amounts are not shown
separately in the table. Stockholders' equity is increased by the tax
benefit arising from the contribution which amounts to $400,000, $471,000,
$541,000 and $622,000 at the minimum, midpoint, maximum and adjusted maximum
of the Offering Range, respectively. Pro forma net income and pro forma
income per share do not give effect to the nonrecurring expense that will be
recognized upon establishment of the Charitable Foundation and the
contribution of shares to it. The after tax expense is expected to be
approximately $706,000, assuming a marginal tax rate of 40%. Assuming the
contribution was expensed during the year ended March 31, 1998, the pro
forma net earnings per share would be $0.55, $0.46, $0.40 and $0.34 at the
minimum, midpoint, maximum and maximum as adjusted, respectively.
(3) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock. Since funds on deposit at the
Association may be withdrawn to purchase shares of Common Stock (which will
reduce deposits by the amount of such purchases), the net amount of
additional funds available to the Association for investment following
receipt of the net proceeds of the Offering will be reduced by the amount of
such withdrawals.
(4) Assumes that 8% of the shares representing the Minority Ownership Interest
will be purchased by the ESOP. The funds used to acquire such shares will be
borrowed by the ESOP from the Company; accordingly, interest income earned
by the Company on the ESOP loan will offset the interest paid by the
Association and only the principal payments on the ESOP debt are recorded as
an expense (tax-effected) on a consolidated basis. The amount of ESOP debt
is reflected as a reduction to stockholders' equity. The Association intends
to make annual contributions to the ESOP in an amount at least equal to the
principal and interest requirements of the debt, which is expected to have a
maturity of 10 years. The pro forma net earnings assume that: (i) the
Association's total annual contribution is equivalent to the debt service
requirement for the year ended March 31, 1998, and was made at the end of
the year; and (ii) the marginal tax rate applicable to the ESOP expense was
40%. For purposes of this table, the purchase price of $10.00 was utilized
to calculate ESOP expense. The Association will account for the ESOP in
accordance with Statement of Position ("SOP") No. 93-6, "Employers'
Accounting for Employee Stock Ownership Plans." Accordingly, the Association
will recognize compensation expense equal to the fair value of ESOP shares
at the time they are committed to be released to participants. As a result,
to the extent the fair value of the Common Stock appreciates over time,
compensation expense related to the ESOP will increase. SOP No. 93-6 also
requires that, for the earnings per share computations for leveraged ESOPs,
outstanding shares include only such shares as have been committed to be
released to participants. The table above assumes that the number of ESOP
shares are allocated on a straight-line basis over 10 years and that 10% of
the ESOP shares are committed to be released during the first year. For
purposes of pro forma per share calculations, the number of ESOP shares
committed to be released during the first year was assumed to be 18,824,
22,146, 25,468 and 29,289 at the minimum, midpoint, maximum and maximum as
adjusted, respectively.
(5) Subsequent to the completion of the Offering, and subject to the approval by
stockholders other than the Mutual Holding Company at the first annual
meeting of stockholders if established within the first year following
completion of the Reorganization, the Stock Award Plan intends to purchase
an aggregate number of shares of common stock equal to 4.0% of the Minority
Ownership Interest if the Stock Award Plan is adopted within one year of the
completion of the Reorganization. If the Stock Award Plan is adopted
later than one year after the completion of the Offering, up to 5% of the
Minority Ownership Interest may be granted, subject to stockholder approval.
The shares may be acquired directly from the Company from authorized but
unissued shares, or through open market purchases. The funds to be used by
the Stock Award Plan to purchase the shares will be provided by the Company
or the Association. The table is based on the assumption that the Stock
Award Plan acquires the shares on the open market at the offering price with
funds contributed by the Company, and that 20% of the amount contributed to
the Stock Award Plan is amortized as an expense in the year ended March 31,
1998.
(6) For purposes of computing net earnings per share, it is assumed that
4,837,087 shares, 5,690,691 shares, 6,544,295 shares, and 7,525,939 shares
are outstanding at the minimum, midpoint, maximum, and adjusted maximum of
the Valuation Range, respectively. Such number of shares includes shares
sold in the Offering, shares issued to the Mutual Holding Company in the
Reorganization, and shares issued to the Charitable foundation. The number
of shares outstanding excludes shares to be acquired by the ESOP amounting
to 188,244, 221,464, 254,684 and 292,886 at the minimum, midpoint, maximum
and adjusted maximum of the Offering Range, respectively. The number of
shares outstanding includes ESOP shares committed to be released of 18,824,
22,146, 25,468 and 29,298 at the minimum, midpoint, maximum and adjusted
maximum, respectively. No effect has been given to the issuance of
additional shares of Common Stock pursuant to the Company's stock option
plans (which will not be established within the first year after the
conclusion of the Offering unless approved by Minority Stockholders). Stock
Award Plan shares are assumed to be fully vested for purposes of computing
net earnings per share.
(7) If the Stock Award Plan purchases 110,727 shares of Common Stock in the open
market after the Offering (i.e., 4% of the Minority Ownership Interest at
the midpoint of the Offering Range) at an assumed fair market value of
$10.00 per share, the pro forma stockholders' equity and earnings per share
would be $9.10 and $0.58, respectively, at and for the fiscal year ended
March 31, 1998. If authorized but unissued shares are awarded under the
Stock Award Plan, the voting rights of existing stockholders would be
diluted 1.85%.
(8) Stockholders' equity represents the excess of the carrying value of the
assets of the Association over its liabilities. The amounts shown do not
reflect the federal income tax consequences of the potential restoration to
income of the bad debt reserves for income tax purposes, which would be
required in the event of liquidation. Retained earnings will be
substantially restricted following the Reorganization. See "Dividends" and
"The Reorganization - Principle Effects of Reorganization Effect on
Liquidation Rights". See Note 8 of Notes to the Financial Statements. For
purposes of calculating pro forma stockholders' equity per share, shares
outstanding represent total shares issued
32
<PAGE> 37
in the Offering of 5,006,500, 5,890,000, 6,773,500; and 7,789,525 at the
minimum, midpoint, maximum and adjusted maximum of the Offering Range,
respectively.
(9) Includes assumed proceeds from sale to the Stock Award Plans for $10.00 per
share of a number of authorized but unissued shares equal to 4% of the
Minority Ownership Interest. Purchases by the Stock Award Plans will be made
at the fair market value of such shares at the time of purchase, which may
be more or less than $10.00.
(10)"Minority Ownership Interest" represents the aggregate of the number of
shares of common stock sold in the Offering and the shares issued to the
Charitable Foundation as a percentage of 5,006,500 shares, 5,890,000
shares, 6,773,500 shares and 7,789,525 shares at the minimum, midpoint,
maximum and adjusted maximum of the Offering Range, respectively.
(11)Does not reflect additional shares of Common Stock that could be issued
pursuant to the Stock Option Plan, if implemented, under which directors,
executive officers and other employees of the Company would be granted
options to purchase an aggregate amount of Common Stock equal to 10% of the
Minority Ownership Interest or 235,306, 276,830, 318,355 and 366,108 shares
at the minimum, midpoint, maximum and adjusted maximum of the Offering
Range, respectively. The issuance of Common Stock pursuant to the exercise
of options would result in dilution of existing stockholders' interests.
Assuming stockholder approval the Stock Option Plan and the exercise of all
options at an exercise price of $10.00 per share and the resulting issuance
of common shares, the pro forma net earnings per share would be $0.64,
$0.56, $0.50 and $0.44, respectively. Pro forma stockholders' equity would
be $10.20, $9.30, $8.64 and $8.07, respectively.
33
<PAGE> 38
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT CHARITABLE FOUNDATION
In the event that the Charitable Foundation was not being established as
part of the Reorganization, FinPro has estimated that the pro forma aggregate
market capitalization of the Company would be approximately $61.5 million at the
midpoint, which is approximately $2.6 million greater than the pro forma
aggregate market capitalization of the Company if the Charitable Foundation is
included, and would result in an increase of approximately $1.2 million in the
amount of Common Stock offered for sale in the Offering. Based on a Minority
Ownership Interest equal to 47% of the total shares of Common Stock to be issued
and outstanding, the pro forma market capitalization without the Charitable
Foundation would be $27.7 million at the midpoint of the Estimated Valuation
Range. The pro forma price to book ratio and pro forma price to earnings ratio
would be different under both the current appraisal and the estimate of the
value of the Company without the Charitable Foundation. Further, assuming the
midpoint of the Estimated Valuation Range, pro forma stockholders' equity per
share and pro forma earnings per share would be $9.27 and $0.60, respectively,
with the Charitable Foundation and $8.99 and $0.57, respectively, without the
Charitable Foundation. The pro forma price to book ratio and the pro forma price
to earnings ratio at the midpoint are 107.87% and 16.67x, respectively, with the
Charitable Foundation and 111.23% and 17.54x, respectively, without the
Charitable Foundation. There is no assurance that in the event the Charitable
Foundation was not formed that the appraisal prepared at the time would have
concluded that the pro forma market value of the Company would be the same as
that estimated herein. Any appraisals prepared at that time would be based on
the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Valuation Range, assuming the Reorganization was
completed at March 31, 1998.
<TABLE>
<CAPTION>
MINIMUM MIDPOINT
------------------------- -------------------------
WITH WITHOUT WITH WITHOUT
CHARITABLE CHARITABLE CHARITABLE CHARITABLE
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Estimated offering amount............................................... $ 22,529 $ 23,524 $ 26,505 $ 27,675
Pro forma market capitalization......................................... 23,529 23,524 27,682 27,675
Pro forma total assets.................................................. 273,962 274,542 277,456 278,138
Total liabilities....................................................... 222,848 222,848 222,848 222,848
Pro forma stockholders' equity.......................................... 51,114 51,694 54,608 55,290
Pro forma net earnings.................................................. 3,270 3,301 3,341 3,378
Pro forma stockholders' equity per share................................ 10.20 9.89 9.27 8.99
Pro forma net earnings per share........................................ 0.69 0.66 0.60 0.57
Pro forma pricing ratios:
Offering price as a percentage of pro forma stockholders' equity
per share............................................................... 98.04% 101.11% 107.87% 111.23%
Offering price to pro forma net earnings per share(1)................... 14.49x 15.15x 16.67x 17.54x
Pro forma market capitalization to total assets......................... 18.28% 19.04% 21.23% 22.11%
Pro forma financial ratios:
Return on assets(2)..................................................... 1.19% 1.20% 1.20% 1.21%
Return on equity(3)..................................................... 6.40 6.39 6.12 6.11
Equity to assets........................................................ 18.66 18.83 19.68 19.88
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM,
MAXIMUM AS ADJUSTED
------------------------- -------------------------
WITH WITHOUT WITH WITHOUT
CHARITABLE CHARITABLE CHARITABLE CHARITABLE
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Estimated offering amount............................................... $ 30,481 $ 31,826 $ 35,053 $ 36,600
Pro forma market capitalization......................................... 31,834 31,826 36,609 36,600
Pro forma total assets.................................................. 280,949 281,734 284,966 285,869
Total liabilities....................................................... 222,848 222,848 222,848 222,848
Pro forma stockholders' equity.......................................... 58,101 58,886 62,118 63,021
Pro forma net earnings.................................................. 3,412 3,455 3,494 3,543
Pro forma stockholders' equity per share................................ 8.57 8.33 7.97 7.75
Pro forma net earnings per share........................................ 0.53 0.51 0.47 0.46
Pro forma pricing ratios:
Offering price as a percentage of pro forma stockholders' equity
per share............................................................... 116.69% 120.05% 125.47% 129.03%
Offering price to pro forma net earnings per share(1)................... 18.87x 19.61x 21.28x 21.74x
Pro forma market capitalization to total assets......................... 24.11% 25.11% 27.34% 28.45%
Pro forma financial ratios:
Return on assets(2)..................................................... 1.21% 1.23% 1.23% 1.24%
Return on equity(3)..................................................... 5.87 5.87 5.62 5.62
Equity to assets........................................................ 20.68 20.90 21.80 22.05
</TABLE>
- ----------
(1) If the contribution to the Charitable Foundation had been expensed during
the year ended March 31, 1998, the ratio of the offering price to pro
forma net earnings per share would have been 18.18x, 21.74x, 25.00x and
29.41x at the minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(2) If the contribution to the Foundation had been expensed during the year
ended March 31, 1998, the return on assets would have been 0.97%, 0.95%,
0.93% and 0.90% at the minimum, midpoint, maximum and maximum, as
adjusted, respectively.
(3) If the contribution to the Charitable Foundation had been expensed during
the year ended March 31, 1998, return on equity would have been 5.22%,
4.82%, 4.48% and 4.12% at the minimum, midpoint, maximum and maximum, as
adjusted, respectively.
34
<PAGE> 39
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table compares the Association's historical and pro forma
regulatory capital levels as of March 31, 1998 to the OTS' capital requirements
after giving effect to the Offering. The table is based on the assumption that
the Association will receive 50% of the estimated net proceeds from the
offering, reduced by all shares assumed to be acquired by the ESOP and Stock
Award Plan.
<TABLE>
<CAPTION>
PRO FORMA BASED UPON SALE OF
----------------------------
MINIMUM OF
OFFERING
RANGE
HISTORICAL AT (2,252,925 SHARES
MARCH 31, 1998 AT $10.00 PER SHARE)
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Equity under generally accepted accounting principles $ 31,901 12.52% $ 39,896 15.18%
========== ======== ========== ========
Tangible capital(2).................................. $ 31,901 12.52% 39,896 15.18%
Tangible capital requirement(3)...................... 3,821 1.50 3,942 1.50
---------- -------- ---------- --------
Excess............................................. $ 28,080 11.02% $ 35,954 13.68%
========== ======== ========== ========
Core capital(2)...................................... $ 31,901 12.52% 39,896 15.18%
Core capital requirement(2)(4)....................... 7,642 3.00 7,885 3.00
---------- -------- ---------- --------
Excess............................................. $ 24,259 9.52% $ 32,011 12.18%
========== ======== ========== ========
Risk-based capital(2)(3)............................. $ 32,885 34.95% 40,880 41.68%
Risk-based capital requirement....................... 7,527 8.00 7,847 8.00
---------- -------- ---------- --------
Excess............................................. $ 25,358 26.95% $ 33,033 33.68%
========== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA BASED UPON SALE OF
--------------------------------------------------------------------------
MIDPOINT OF MAXIMUM OF MAXIMUM, AS ADJUSTED,
OFFERING OFFERING OF OFFERING
RANGE RANGE RANGE
(2,650,500 SHARES (3,048,075 SHARES (3,505,286 SHARES
AT $10.00 PER SHARE) AT $10.00 PER SHARE) AT $10.00 PER SHARE(1))
-------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- -------- --------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Equity under generally accepted accounting principles $ 41,358 15.65% $ 42,821 16.12% $ 44,502 16.65%
========= ======= ======== ======= ======== =======
Tangible capital(2).................................. 41,358 15.65% 42,821 16.12% 44,502 16.65%
Tangible capital requirement(3)...................... 3,964 1.50 3,986 1.50 4,011 1.50
--------- -------- --------- ------- -------- -------
Excess............................................. $ 77,394 14.15% $ 38,835 14.62% $ 40,491 15.15%
========= ======== ========= ======= ======== =======
Core capital(2)...................................... 41,358 15.65% 42,821 16.12% 44,502 16.65%
Core capital requirement(2)(4)....................... 7,929 3.00 7,973 3.00 8,023 3.00
--------- -------- --------- ------- -------- -------
Excess............................................. $ 33,433 12.65% $ 34,848 13.12% $ 36,479 13.65%
========= ======== ========= ======= ======== =======
Risk-based capital(2)(3)............................. 42,342 42.85% 43,805 44.00% 45,486 45.31%
Risk-based capital requirement....................... 7,905 8.00 7,964 8.00 8,031 8.00
--------- -------- --------- ------- -------- -------
Excess............................................. $ 34,437 34.85% $ 35,841 36.00% $ 37,455 37.31%
========= ======== ========= ======= ======== =======
</TABLE>
- ----------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% to
reflect changes in market and financial conditions following commencement
of the Subscription Offering and the Community Offering, if any, as well
as to reflect demand for the Common Stock.
(2) Tangible and core capital levels are shown as a percentage of total
assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(3) Pro forma risk-based capital amounts and percentages assume net proceeds
have been invested in 50% risk-weighted assets.
(4) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements
which would require a core capital ratio of 3% of total adjusted assets
for thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
35
<PAGE> 40
THE REORGANIZATION AND OFFERING
THE BOARD OF DIRECTORS OF THE ASSOCIATION AND THE OTS HAVE APPROVED THE
PLAN SUBJECT TO THE PLAN'S APPROVAL BY MEMBERS AT A SPECIAL MEETING OF MEMBERS,
AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS
IN ITS APPROVAL. OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN BY THE OTS.
GENERAL
On May 13, 1998, the Board of Directors unanimously adopted the Plan,
pursuant to which the Association will reorganize from a federally chartered
mutual savings and loan association into a two-tier federal mutual holding
company structure. The Plan has been approved by the OTS subject to, among other
things, approval of the Plan by the Association's members as of the Voting
Record Date. A special meeting of members has been called for this purpose, to
be held on __________, 1998, (the "Special Meeting"). The Reorganization will be
completed as follows:
(i) the Association will organize an interim stock savings association
as a wholly-owned subsidiary ("Interim One");
(ii) Interim One will organize an interim stock savings association as a
wholly-owned subsidiary ("Interim Two");
(iii) Interim One will organize the Company as a wholly-owned subsidiary;
(iv) the Association will amend its charter to read in the form of a
federal stock savings association charter at which time the
Association will become the Stock Association, and Interim One will
exchange its charter for a federal mutual holding company charter to
become the Mutual Holding Company;
(v) simultaneously with step (vi), Interim Two will merge with and into
the Stock Association, and the Stock Association will be the
surviving institution;
(vi) all of the stock constructively issued by the Stock Association will
be transferred to the Mutual Holding Company in exchange for
membership interests in the Mutual Holding Company; and
(vii) the Mutual Holding Company will contribute the Stock Association's
stock to the Company, and the Stock Association will become a
wholly-owned subsidiary of the Company.
Concurrently with the Reorganization the Company will offer for sale 45%
of its Common Stock representing 45% of the pro forma market value of the
Company and the Association.
The Association has mailed to each person eligible to vote at the Special
Meeting a proxy statement (the "Proxy Statement") containing information
concerning the business purposes of the Reorganization and the effects of the
Plan and the Reorganization on voting rights, liquidation rights, the
continuation of the Association's business and existing savings accounts, FDIC
insurance and loans. The Proxy Statement also describes the manner in which the
Plan may be amended or terminated. Included with the Proxy Statement is a proxy
card which should be used to vote on the Plan.
As part of the Reorganization, the Association intends to establish the
Charitable Foundation to which the Company will contribute shares equal to 2% of
the shares of Common Stock issued and outstanding. The Charitable Foundation is
being formed as a means of complementing our existing community reinvestment
activities and to share
36
<PAGE> 41
our financial success as a locally headquartered, community-oriented financial
services institution. The Charitable Foundation will be dedicated to the
promotion of charitable purposes including community development, grants or
donations to support housing assistance, not-for-profit community groups and
other types of organizations or civic projects. See "--Establishment of the
Charitable Foundation."
The following is a summary of the material aspects of the Plan, the
Subscription Offering, and the Community Offering. The Plan should be consulted
for a more detailed description of its terms.
REASONS FOR REORGANIZATION
The primary purpose of the Reorganization is to establish a holding
company and to convert the Association to the stock form of ownership in order
to compete and expand more effectively in the financial services marketplace.
The stock form of ownership, is the corporate form used by commercial banks,
most major businesses and a large number of savings institutions. The
Reorganization also will enable customers, employees, management and directors
to have an equity ownership interest in the Association, which management
believes will enhance the long-term growth and performance of the Association
and the Company by enabling the Association to attract and retain qualified
employees who have a direct interest in the financial success of the
Association. The Reorganization will permit the Company to issue and sell
capital stock, which is a source of capital not available to mutual savings
associations. Since the Company will not be offering all of its Common Stock for
sale in the Offering, the Reorganization will result in less capital raised in
comparison to a standard mutual-to-stock conversion. The Reorganization,
however, also will allow the Association to raise additional capital in the
future because a majority of the Company's Common Stock will be available for
sale in the event of a conversion of the Mutual Holding Company to stock form.
The Reorganization also will provide the Association with greater flexibility to
structure and finance the expansion of its operations, both directly and through
the Company, including the potential acquisition of other financial
institutions, and to diversify into other financial services, to the extent
permissible by applicable law and regulation. Although there are no current
arrangements, understandings or agreements regarding any such opportunities, the
Company will be in a position after the Reorganization, subject to regulatory
limitations and the Company's financial position, to take advantage of any such
opportunities that may arise. Lastly, the Reorganization will enable the
Association to better manage its capital by providing broader investment
opportunities through the holding company structure and by enabling the Company
to repurchase its common stock as market conditions permit. Although the
Reorganization and Offering will create a stock savings association and stock
holding company, only a minority of the Common Stock will be offered for sale in
the Offering. As a result, the Association's mutual form of ownership and its
ability to provide community-oriented financial services will be preserved
through the mutual holding company structure.
The Board of Directors believes that these advantages outweigh the
potential disadvantages of the mutual holding company structure to Minority
Stockholders, which may include: (i) the inability of stockholders other than
the Mutual Holding Company to obtain majority ownership of the Company and the
Stock Association, which may result in the perpetuation of the management and
Board of Directors of the Stock Association and the Company; and (ii) that the
mutual holding company structure is a relatively new form of corporate
ownership, and new regulatory policies relating to the mutual interest in the
Mutual Holding Company and the corporate structure of the Company that may be
adopted from time-to-time may have an adverse impact on Minority Stockholders. A
majority of the voting stock of the Company will be owned by the Mutual Holding
Company, which will be controlled by its Board of Directors. While this
structure will permit management to focus on the Company's and the Association's
long-term business strategy for growth and capital redeployment without undue
pressure from stockholders, it will also serve to perpetuate the existing
management and directors of the Association. The Mutual Holding Company will be
able to elect all members of the Board of Directors of the Company, and will be
able to control the outcome of all matters presented to the stockholders of the
Company for resolution by vote except for certain matters, such as the approval
of the Stock Award Plan and the Stock Option Plan, that, if established within
the first year after the conclusion of the Offering, must be approved by a
majority of the votes of the Minority Stockholders of the Company. No assurance
can be given that the Mutual Holding Company will not take action adverse to the
interests of the Minority Stockholders. For example, the Mutual Holding Company
could revise the dividend policy, prevent the sale of control
37
<PAGE> 42
of the Company, or defeat a candidate for the Board of Directors of the Company
or other proposals put forth by the Minority Stockholders.
The Reorganization does not preclude the conversion of the Mutual Holding
Company from the mutual to stock form of organization following the
reorganization. No assurance can be given when, if ever, the Mutual Holding
Company will convert to stock form or what conditions the OTS or other
regulatory agencies may impose on such a transaction. See "Risk Factors,"
"Conversion of Mutual Holding Company to Stock Form--Impact of Waived Dividends
on Minority Stockholders and Limitations on Stockholder Purchases in a
Conversion Transaction."
Following the completion of the Reorganization, all depositors who had
liquidation rights with respect to the Association as of the Effective date of
the Reorganization will continue to have such rights solely with respect to the
Mutual Holding Company so long as they continue to hold deposit accounts with
the Association. In addition, all persons who become depositors of the
Association subsequent to the Reorganization will have such liquidation rights
with respect to the Mutual Holding Company.
Under the Plan, each depositor of the Association at the time of the
Reorganization will automatically continue as a depositor after the
Reorganization, and each such deposit account will remain the same with respect
to deposit balance, interest rate and other terms, except to the extent such
deposit is reduced by withdrawals to purchase Common Stock in the Offering. All
insured deposit accounts of the Association will continue to be federally
insured by the FDIC and the SAIF up to the legal maximum limit in the same
manner as deposit accounts existing in the Association immediately prior to the
Reorganization. Furthermore, no loan outstanding will be affected by the
Reorganization, and the amounts, interest rates, maturity and security for each
loan will remain the same as they were prior to the Reorganization. Upon
completion of the Reorganization, the Association may exercise any and all
powers, rights and privileges of, and shall be subject to all limitations
applicable to, capital stock savings associations under Federal law and OTS
regulations. Although the Company will have the power to issue shares of capital
stock to persons other than the Mutual Holding Company, as long as the Mutual
Holding Company is in existence, the Mutual Holding Company will be required to
own a majority of the voting stock of the Company. The Company may issue any
amount of non-voting stock to persons other than the Mutual Holding Company, and
the Company must own 100% of the voting stock of the Association. The
Association and the Company may issue any amount of non-voting stock or debt to
persons other than the Mutual Holding Company.
TAX EFFECTS OF THE REORGANIZATION
The Association intends to proceed with the Reorganization on the basis of
an opinion from its special counsel, Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C., as to certain tax matters that are material to the
Reorganization. The opinion is based, among other things, on factual
representations made by the Association, including the representation that the
exercise price of the subscription rights to purchase the Common Stock will be
approximately equal to the fair market value of the stock at the time of the
completion of the Reorganization. With respect to the subscription rights, the
Association has received an opinion of FinPro which, based on certain
assumptions, concludes that the subscription rights to be received by Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members do not
have any economic value at the time of distribution or the time the subscription
rights are exercised, whether or not a Community Offering takes place, and Luse
Lehman Gorman Pomerenk & Schick, P.C.'s opinion is given in reliance thereon.
Luse Lehman Gorman Pomerenk & Schick, P.C.'s opinion provides substantially as
follows:
1. The conversion of the Association's charter from a mutual
savings association charter to a stock savings association charter
will qualify as a reorganization under section 368(a)(1)(F) of the
Internal Revenue Code of 1986 (the "Code"), and no gain or loss
will be recognized by the Association in either its mutual form or
stock form (as the "Stock Association") as a result.
38
<PAGE> 43
2. The Stock Association's holding period for the assets received from
the Association in the charter conversion will include the period
during which such assets were held by the Association.
3. The Stock Association's basis in the assets received from the
Association in the charter conversion will be the same as the
Association's basis for such asset immediately prior to the
charter conversion.
4. The Stock Association will succeed to and take into account the
Association's earnings and profits or deficits in earnings and
profits, as of the date of the charter conversion.
5. The Association's depositors will recognize no gain or loss upon
their constructive receipt, in the charter conversion, of Stock
Association stock solely in exchange for their interest in the
Association.
6. The basis in the shares of Stock Association stock constructively
received by each of the Association's depositors in the charter
conversion will be the same as the basis of such depositors interest
in the Association constructively surrendered in exchange therefor.
7. The holding period for the shares of Stock Association stock
constructively received by each of the Association's depositors in
the charter conversion will include the holding period of such
depositor's interest in the Association constructively surrendered
in exchange therefor.
8. The transfer by the Association's depositors to the Mutual Holding
Company of the Stock Association stock constructively received by
such depositors in the charter conversion in exchange for interests
in the Mutual Holding Company (the "Exchange") will qualify as an
exchange of property for stock under Section 351 of the Code, and
such depositors will recognize no gain or loss by reason of the
Exchange.
9. The basis of the interest in the Mutual Holding Company received by
each of the Association's depositors in exchange for such
depositor's Stock Association stock pursuant to the Exchange will be
equal to the basis of such Stock Association stock.
10. The holding period of the interest in the Mutual Holding Company
received by each of the Association's depositors pursuant to the
Exchange will, as of the date of the Exchange, be the same as the
holding period of the Stock Association stock transferred in
exchange therefor, provided such Stock Association stock was held as
a capital asset on the date of the Exchange.
11. The Mutual Holding Company will recognize no gain or loss upon its
constructive receipt from the Association's depositors of Stock
Association stock in exchange for interests in the Mutual Holding
Company.
12. The Mutual Holding Company's basis for each share of Stock
Association stock constructively received from an Association's
depositor in exchange for an interest in the Mutual Holding Company
will be the same as the basis of such share of stock in the hands of
such depositor.
13. The Mutual Holding Company's holding period for each share of Stock
Association stock constructively received from an Association's
depositor in exchange for an interest in the Mutual Holding Company
will include the period during which such share of stock was held by
the Association's depositors.
39
<PAGE> 44
14. The Mutual Holding Company and the Minority Stockholders will
recognize no gain or loss upon their respective transfers of Stock
Association stock and cash to the Company in exchange for Common
Stock of the Company.
15. The Company will recognize no gain or loss upon the receipt of such
property and cash from the Mutual Holding Company and the Minority
Stockholders in exchange for Common Stock of the Company.
16. The basis of the Company Common Stock in the hands of the Minority
Stockholders will be the purchase price therefor, and the holding
period for Company Common Stock acquired through the exercise of
subscription rights will begin on the date such rights are
exercised.
The opinions of Luse Lehman Gorman Pomerenk & Schick, P.C., unlike a
letter ruling issued by the Internal Revenue Service, are not binding on the
Service and the conclusions expressed therein may be challenged at a future
date. The Service has issued favorable rulings for transactions substantially
similar to the proposed Reorganization, but any such ruling may not be cited as
precedent by any taxpayer other than the taxpayer to whom the ruling is
addressed. The Association does not plan to apply for a letter ruling concerning
the transactions described herein.
The Association has also received an opinion from KPMG Peat Marwick LLP
that the New York State Franchise Tax on banking corporation and New York State
personal income tax consequences of the proposed transaction are consistent with
the federal income tax consequences.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Association's commitment to the
communities that it serves, the Board of Directors has determined to establish
the Charitable Foundation, which will be incorporated under Delaware law as a
non-stock corporation. The Charitable Foundation will be funded with a
contribution of 2% of the shares of Common Stock to be issued and outstanding
following the Reorganization (4.4% of the Minority Ownership Interest) or
100,030, 117,800, 135,335 and 155,790 shares of Common Stock at the minimum,
midpoint, maximum and adjusted maximum of the Offering. As a result of the
Association's contribution of those shares to the Charitable Foundation rather
than selling the shares as part of the Offering, the Offering will result in the
sale of 99,450, 117,000, 134,500 and 154,733 fewer shares than would otherwise
be contemplated in the Offering at the minimum, midpoint, maximum and adjusted
maximum of the Offering Range, respectively. This will result in the receipt of
$995,000, $1,170,000, $1,345,000 and $1,547,330 less proceeds at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range. See "Comparison of
Valuation and Pro Forma Information Without Charitable Foundation". By further
enhancing the Association's visibility and reputation in the communities that it
serves, the Board believes that the Charitable Foundation will enhance the
long-term value of the Association's community banking franchise. The Charitable
Foundation will be dedicated exclusively to charitable purposes within the
communities served by the Association, including community development
activities. Neither the Association nor the Company intends to make any further
contributions to the Charitable Foundation within the next five years.
PURPOSE OF THE CHARITABLE FOUNDATION. The purpose of the Charitable
Foundation is to provide funding to support charitable and not-for-profit causes
and community development activities. The Charitable Foundation is being formed
as a complement to the Association's existing community activities, not as a
replacement for such services. While the Association intends to continue to
emphasize community lending and community development activities following the
Reorganization, such activities are not the Association's sole corporate
purpose. The Charitable Foundation, conversely, will be completely dedicated to
community activities and the promotion of charitable and not-for-profit causes,
and may be able to support such activities in ways that are not currently
available to the Association. The Charitable Foundation will enhance the
Association's current activities under the Community Reinvestment Act. In this
regard, the Board of Directors of the Association believes the establishment of
the Charitable Foundation is consistent with the Association's commitment to
community service. The Board further believes that the funding of
40
<PAGE> 45
the Charitable Foundation with Common Stock is a means of enabling the
communities served by the Association to share in the growth and success of the
Company long after completion of the Reorganization. The Charitable Foundation
will accomplish that goal by providing for continued ties between the Charitable
Foundation and the Association, thereby forming a partnership with the
Association's community. Charitable foundations have been formed by other
financial institutions for this purpose, among others. The Association, however,
does not expect the contribution to the Charitable Foundation to take the place
of the Association's traditional community lending activities.
STRUCTURE OF THE CHARITABLE FOUNDATION. The Charitable Foundation will be
incorporated under Delaware law as a non-stock corporation. Pursuant to the
Charitable Foundation's Bylaws, the Charitable Foundation's initial board of
directors will be comprised of two members of the Company's and the
Association's Board of Directors and one person who is unaffiliated with the
Association. Bruno J. Gioffre, the Association's Chairman of the Board and
Richard P. McStravick, the Association's President and Chief Executive Officer
will serve on the Charitable Foundation's board of directors. Messrs Gioffre and
McStravick intend to purchase 30,000 shares and 25,000 shares, or 1.13% and
0.94%, respectively, of the shares sold at the midpoint of the offering. At the
midpoint of the offering the aggregate number of shares owned by the Charitable
Foundation, and its directors and officers will total 172, 682, or 6.5% of the
Minority Ownership Interest. In addition, the Board of Directors is in the
process of selecting a person to serve on the Charitable Foundation's board of
directors who is unaffiliated with the Association but who has business and
community ties within the Association's market area, and who has experience
serving on local charities or other non-profit organizations. Other individuals
may be selected as board members (there is no present intention to expand the
board of directors of the Charitable Foundation). A nominating committee of the
Charitable Foundation's Board will nominate individuals eligible for election to
the Board of Directors. The members of the Charitable Foundation, who are
comprised of its Board members, will elect the directors at the annual meeting
of the Charitable Foundation from those nominated by the nominating committee.
Only persons serving as directors of the Charitable Foundation qualify as
members of the Charitable Foundation, with voting authority. Directors will be
elected annually. The certificate of incorporation of the Charitable Foundation
provides that the corporation is organized exclusively for charitable purposes,
including community development, as set forth in Section 501(c)(3) of the Code.
The Charitable Foundation's certificate of incorporation further provides that
no part of the net earnings of the Charitable Foundation will inure to the
benefit of, or be distributable to its directors, officers or members.
The authority for the affairs of the Charitable Foundation will be vested
in the Board of Directors of the Charitable Foundation. The Directors of the
Charitable Foundation will be responsible for establishing the policies of the
Charitable Foundation with respect to grants or donations by the Charitable
Foundation, consistent with the purposes for which the Charitable Foundation was
established. Although no formal policy governing Charitable Foundation grants
exists at this time, the Charitable Foundation's Board of Directors will adopt
such a policy upon establishment of the Charitable Foundation. As directors of a
nonprofit corporation, directors of the Charitable Foundation will at all times
be bound by their fiduciary duty to advance the Charitable Foundation's
charitable goals, to protect the assets of the Charitable Foundation and to act
in a manner consistent with the charitable purpose for which the Charitable
Foundation is established. The Directors of the Charitable Foundation will also
be responsible for directing the activities of the Charitable Foundation,
including the management of the Common Stock of the Company held by the
Charitable Foundation. However, it is expected that as a condition to receiving
OTS approval of the Reorganization, that the Charitable Foundation will be
required to commit to the OTS that all shares of Common Stock held by the
Charitable Foundation will be voted in the same ratio as all other shares of
Common Stock on all proposals considered by stockholders of the Company;
provided, however, that, consistent with such expected condition, the OTS would
waive this voting restriction under certain circumstances if compliance with the
voting restriction would: (i) cause a violation of the law of the State of
Delaware and the OTS determines that federal law would not preempt the
application of the laws of Delaware to the Charitable Foundation; (ii) cause the
Charitable Foundation to lose its tax-exempt status, or cause the Internal
Revenue Service to deny the Charitable Foundation's request for a determination
that it is an exempt organization or otherwise have a material and adverse tax
consequence on the Charitable Foundation; or (iii) cause the Charitable
Foundation to be subject to an excise tax under Section 4941 of the Code. In
order for the OTS to waive such voting restriction, the Company's or the
Charitable Foundation's legal counsel would be required to render an opinion
satisfactory to the OTS that compliance with the voting requirement
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would have the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS would grant a waiver of the voting restriction upon
submission of such legal opinion(s) by the Company or the Charitable Foundation
that are satisfactory to the OTS. In the event that the OTS were to waive the
voting requirement, the directors would direct the voting of the Common Stock
held by the Charitable Foundation.
In addition, a person who is a director, officer or employee of the
Association, or who has the power to direct its management or policies, or
otherwise owes a fiduciary duty to the Association, the Company, or the Mutual
Holding Company and who also serves as an officer, director or employee of the
Charitable Foundation will be subject to the OTS' conflicts of interest
regulations.
The Charitable Foundation's place of business will be located at the
Association's main office and initially the Charitable Foundation is expected to
have no employees but will utilize the members of the staff of the Company. The
Board of Directors of the Charitable Foundation will appoint such officers as
may be necessary to manage the operations of the Charitable Foundation. In this
regard, it is expected that the Association will be required to provide the OTS
with a commitment that, to the extent applicable, the Association 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 Association and the
Charitable Foundation.
The Company and the Association determined to fund the Charitable
Foundation with Common Stock rather than cash because Common Stock will provide
the Charitable Foundation with a potentially larger endowment if the Common
Stock appreciates in value. The contribution of Common Stock to the Charitable
Foundation may reduce the amount of cash that the Company would have to
contribute to the Charitable Foundation in future years in order to maintain a
level amount of charitable grants and donations.
The Charitable Foundation will receive working capital from any dividends
that may be paid on the Common Stock from loans collateralized by the Common
Stock subject to applicable federal and state laws or from the proceeds of the
sale of any of the Common Stock in the open market from time to time. As a
private Charitable Foundation under Section 501(c)(3) of the Code, the
Charitable 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.
DILUTION OF SHAREHOLDERS' INTERESTS. Shares of Common Stock contributed to
the Charitable Foundation are in addition to the shares to be issued and sold to
depositors, members and the public. Consequently, persons purchasing shares of
common stock in the Offering will have their ownership and voting interests in
the Company diluted by approximately 2.0%. See "Pro Forma Data."
IMPACT ON EARNINGS. The contribution of Common Stock to the Charitable
Foundation will have an adverse impact on the Company's earnings in the year in
which the contribution is made. The Company will recognize expense in the full
amount of the contribution of common stock to the Charitable Foundation in the
quarter in which the contribution occurs, which is expected to be the quarter
ending December 31, 1998. The contribution expense will be partially offset by
related tax benefits. We have been advised that the contribution to the
Charitable Foundation will be tax deductible, subject to an annual limitation
based on 10% of the Company's annual taxable income. The Association estimates
that, at the midpoint of the offering range, the contribution of shares will
result in a reduction in net income of approximately $700,000. If the Charitable
Foundation had been established at March 31, 1998 based on the midpoint of the
Offering Range, the Association would have reported net income of $2.2 million
compared to net income of $2.9 million actually reported for the year then
ended. The Association and the Company do not currently anticipate making
additional contributions to the Charitable Foundation within the first five
years following the initial contribution.
TAX CONSIDERATIONS. The Association has been advised that an organization
created and operated for the above charitable purposes would general qualify as
a Section 501(c)(3) exempt organization under the Code, and further that such an
organization would likely be classified as a private foundation. This opinion
presumes that the Charitable
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Foundation will submit a timely request to the IRS to be recognized as an exempt
organization. As long as the Charitable Foundation files its application for
recognition of tax-exempt status within 15 months from the date of its
organization, and provided the IRS approves the application, the effective date
of the Charitable Foundation's status as a Section 501(c)(3) organization will
be the date of its organization. The Association's tax advisor, however, has not
rendered any advice on the condition to the contribution to be agreed to by the
Charitable Foundation which requires that all shares of Common Stock of the
Company held by the Charitable Foundation must be voted in the same ratio as all
other outstanding shares of Common Stock on all proposals considered by
stockholders of the Company. Consistent with the expected condition, in the
event that the Company or the Charitable Foundation receives an opinion of its
legal counsel that compliance with this voting restriction would have the effect
of causing the Charitable Foundation to lose its tax-exempt status or otherwise
have a material and adverse tax consequence on the Charitable Foundation, or
subject the Charitable Foundation to an excise tax under Section 4941 of the
Code, it is expected that the OTS would waive such voting restriction upon
submission of a legal opinion(s) by the Company or the Charitable Foundation
satisfactory to the OTS. See "--Regulatory Conditions Imposed on the Charitable
Foundation."
Under the Code, the Company is generally allowed a deduction for
charitable contributions made to qualifying donees within the taxable year of up
to 10% of its taxable income (with certain modifications) for such year.
Charitable contributions made by the Company in excess of the annual deductible
amount will be deductible over each of the five succeeding taxable years,
subject to certain limitations. The Board of Directors believes that the
Reorganization presents a unique opportunity to establish and fund a Charitable
Foundation given the substantial amount of additional capital being raised in
the Offering. In making such a determination, the Board of Directors considered
the impact on earnings of the contribution of Common Stock to the Charitable
Foundation. Based on such consideration, the Company and the Association believe
that the contribution to the Charitable Foundation in excess of the 10% annual
deduction limitation is justified given the Association's capital position and
its earnings, the substantial additional capital being raised in the Offering
and the potential benefits of the Charitable Foundation to the communities
served by the Association. In this regard, and assuming the sale of the Common
Stock at the midpoint of the Estimated Valuation Range, the Company would have
pro forma stockholders' equity of $54.6 million or 19.68% of pro forma
consolidated assets and the Association's pro forma tangible, core and total
risk-based capital ratios would be 15.65%, 15.65% and 42.85%, respectively. See
"Pro Forma Data--Historical and Pro Forma Regulatory Capital Compliance," and
"Capitalization." Thus, the amount of the contribution will not adversely impact
the Association's financial condition and management believes that the amount of
the charitable contribution is reasonable given the Association's pro forma
capital positions. As such, management believes that the contribution does not
raise safety and soundness concerns.
The Association has received an opinion of its tax advisors that the
Company's contribution of its own stock to the Charitable Foundation would not
constitute an act of self-dealing, and that the Company will be entitled to a
deduction in the amount of the fair market value of the stock at the time of the
contribution, subject to the annual deduction limitation described above. The
Company, however, would be able to carry forward any unused portion of the
deduction for five years following the contribution, subject to certain
limitations. The Association's tax advisor, however, has not rendered advice as
to fair market value for purposes of determining the amount of the tax
deduction. If the Charitable Foundation had been established in the year ended
December 31, 1997 based on the midpoint of the Offering Range, the Company would
have realized a current federal tax benefit of approximately $150,000 based
on the Association's taxable income reported in its 1997 calendar year tax
return and considering the annual limitation on deductibility of charitable
contributions. The Association is permitted under the Code to carry over the
excess contribution over the five-year period following the contribution to the
Charitable Foundation. The Association estimates that all of the contribution
should be deductible over the six-year period. Neither the Company nor the
Association expect to make any further contributions to the Charitable
Foundation within the first five years following the initial contribution. After
that time, the Association and the Company may consider future contributions to
the Charitable Foundation. Any such decisions would be based on an assessment
of, among other factors, our financial condition, the interests of stockholders
of the Company, and the financial condition and operations of the Charitable
Foundation.
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Although the Association has received an opinion that the Company will be
entitled to a deduction for the charitable contribution, there can be no
assurances that the IRS will recognize the Charitable Foundation as a Section
501(c)(3) exempt organization or that a deduction for the charitable
contribution will be allowed. In such event, the contribution to the Charitable
Foundation would be expensed without partial offset for any tax benefit,
resulting in a reduction in earnings in the year in which the IRS makes such a
determination.
The Charitable Foundation will be required to make an annual filing with
the IRS within four and one-half months after the close of the Charitable
Foundation's fiscal year to maintain its tax-exempt status. The Charitable
Foundation will be required to publish a notice that the annual information
return will be available for public inspection for a period of 180 days after
the date of such public notice. The information return for a private foundation
must include, among other things, an itemized list of all grants made or
approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Charitable Foundation's managers and a concise
statement of the purpose of each grant.
Under current tax laws, the Charitable Foundation cannot own more than 2%
of the Company's voting common stock without incurring a significant excise tax
on its "excess business holdings." For these purposes, "excess business
holdings" include, among other things, any interest in a corporation which, when
aggregated with the interests of "disqualified persons" exceeds 20% of the
interests in such corporation. A "disqualified person" includes (1) a
substantial contributor (i.e., a contributor of more than 2% of the total
contributions to the Charitable Foundation); (2) a foundation manager, or (3) a
person who owns more than 20% of a corporation, partnership, trust or
unincorporated enterprise which is also a substantial contributor. Since the
Mutual Holding Company owns more than 20% of the Company and the Company is a
substantial contributor to the Charitable Foundation, the Company and the Mutual
Holding Company are disqualified persons. As such, the Mutual Holding Company's
interest in the Company will be aggregated with that interests of the Charitable
Foundation to determine if the Charitable Foundation has excess business
holdings. The limitation on excess business holdings, however, is subject to a
de minimus rule that the Charitable Foundation's ownership of 2% or less of the
voting stock and 2% or less of the value of all outstanding shares in such
corporation will be disregarded and will not subject the Charitable Foundation
to an excise tax. In the event the Company undertakes a stock repurchase program
or engages in any other activity that would reduce the number of shares
outstanding, the Charitable Foundation would have to sell a sufficient number of
shares in order to maintain ownership of 2% or less of the outstanding Common
Stock.
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE CHARITABLE
FOUNDATION IS NOT ESTABLISHED AS PART OF THE REORGANIZATION. The establishment
of the Charitable Foundation was taken into account by FinPro in determining the
estimated pro forma market value of the Common Stock. The aggregate price of the
shares of Common Stock being offered in the Offering is based upon the
independent appraisal conducted by FinPro of the estimated pro forma market
value of the Common Stock. The pro forma aggregate price of the Common Stock
being offered for sale in the Offering is currently estimated to be between
$22.5 million and $30.5 million, with a midpoint of $26.5 million. The pro forma
price to book ratio and the pro forma price to earnings ratio, at and for the
year ended March 31, 1998, are 107.87% and 16.67x, respectively, at the midpoint
of the Estimated Valuation Range. In the event that the Reorganization did not
include the Charitable Foundation, FinPro has estimated that the estimated pro
forma market value of the Common Stock being offered for sale in the Offering
would be $27.7 million at the midpoint, with a pro forma price to book ratio and
a pro forma price to earnings ratio of 111.23% and 17.54x, respectively. The
amount of Common Stock being offered for sale in the Offering at the midpoint of
the Estimated Valuation Range is approximately $1.2 million less than the
estimated amount of Common Stock that would be sold in the Offering without the
Charitable Foundation based on the estimate provided by FinPro. Accordingly,
persons who subscribe to purchase Common Stock in the Offering would receive
fewer shares depending on the size of a subscriber's stock order and the amount
of his or her qualifying deposits in the Association and the overall level of
subscriptions. See "Comparison of Valuation and Pro Forma Information Without
Charitable Foundation." This estimate by FinPro was prepared solely for purposes
of providing subscribers with information with which to make an informed
decision on the Reorganization and Offering.
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The decrease in the amount of Common Stock being offered for sale as a
result of the contribution of Common Stock to the Charitable Foundation will not
have a significant effect on the Company or the Association's capital position.
The Association's regulatory capital is significantly in excess of its
regulatory capital requirements and will further exceed such requirements
following the Reorganization. The Association's leverage (core) and risk-based
capital ratios at March 31, 1998 were 12.5% and 34.9%, respectively. Assuming
the sale of shares at the midpoint of the Estimated Valuation Range, the Bank's
pro forma core and risk-based capital ratios at March 31, 1998 would be 15.65%
and 42.85%, respectively. On a consolidated basis, the Company's pro forma
stockholders' equity would be $54.6 million, or approximately 19.68% of pro
forma consolidated assets, assuming the sale of shares at the midpoint of the
Estimated Price Range. Pro forma stockholders' equity per share and pro forma
net income per share would be $9.27 and $0.60, respectively. If the Charitable
Foundation was not being established in the Reorganization, based on the FinPro
estimate, the Company's pro forma stockholders' equity would be approximately
$55.3 million, or approximately 19.88% of pro forma consolidated assets at the
midpoint of the estimated value, and pro forma stockholders' equity per share
and pro forma net income per share would be higher with the Charitable
Foundation as without the establishment of the Charitable Foundation. See
"Comparison of Valuation and Pro Forma Information Without Charitable
Foundation."
REGULATORY CONDITIONS IMPOSED ON THE CHARITABLE FOUNDATION. Establishment
of the Charitable Foundation is expected to be subject to the following
conditions being agreed to by the Charitable Foundation in writing as a
condition to receiving OTS approval of the Reorganization and Offering: (i) the
Charitable Foundation will be subject to examination by the OTS; (ii) the
Charitable Foundation must comply with supervisory directives imposed by the
OTS; (iii) the Charitable Foundation will operate in accordance with written
policies adopted by its board of directors, including a conflict of interest
policy; (iv) any shares of Common Stock held by the Charitable Foundation must
be voted in the same ratio as all other outstanding shares of Common Stock on
all proposals considered by stockholders of the Company; provided, however,
that, consistent with the condition, the OTS may waive this voting restriction
under certain circumstances if compliance with the voting restriction would: (a)
cause a violation of the law of the State of Delaware and the OTS determines
that federal law would not preempt the application of the laws of Delaware to
the Charitable Foundation; (b) would cause the Charitable Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Charitable Foundation; or (c) would cause the Charitable Foundation to be
subject to an excise tax under Section 4941 of the Code; and (v) any shares of
Common Stock subsequently purchased by the Charitable Foundation will be
aggregated with any shares repurchased by the Company or the Association for
purposes of calculating the number of shares which may be repurchased during the
three-year period subsequent to the Reorganization. In order for the OTS to
waive such voting restriction, the Company's or the Charitable Foundation's
legal counsel would be required to render an opinion satisfactory to the OTS.
While there is no current intention for the Company or the Charitable Foundation
to seek a waiver from the OTS from such restrictions, there can be no assurances
that a legal opinion addressing these issues could be rendered, or if rendered,
that the OTS would grant an unconditional waiver of the voting restriction. In
no event would the voting restriction survive the sale of shares of the Common
Stock held by the Charitable Foundation.
Various OTS regulations may be deemed to apply to the Charitable
Foundation including regulations regarding (i) transactions with affiliates,
(ii) conflicts of interest, (iii) capital distributions and (iv) repurchases of
capital stock within the three-year period subsequent to a mutual-to-stock
conversion. Because only two of the eight directors of the Company and the
Association are expected to serve as directors of the Charitable Foundation, the
Company and the Association do not believe that the Charitable Foundation should
be deemed an affiliate of the Association. The Company and the Association
anticipate that the Charitable Foundation's affairs will be conducted in a
manner consistent with the OTS' conflict of interest regulations. The
Association has provided information to the OTS demonstrating that the initial
contribution of common stock to the Charitable Foundation would be within the
amount which the Association would be permitted to make as a capital
distribution assuming such contribution is deemed to have been made by the
Association.
POTENTIAL CHALLENGES. To date, there has been limited precedent with
respect to the establishment and funding of a foundation as part of the
reorganization of a mutual savings institution to stock form. In addition,
establishment
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and funding of the Charitable Foundation will require the OTS to grant the
Association and the Company waivers from its mutual-to-stock conversion
regulations and mutual holding company regulations. As such, the Charitable
Foundation and the OTS's non-objection to the Reorganization may be subject to
potential challenges with respect to, among other things, the Company's and the
Association's ability to establish the Charitable Foundation, notwithstanding
that the Board of Directors have carefully considered the various factors
involved in the establishment of the Charitable Foundation in reaching its
determination to establish the Charitable Foundation as part of the
Reorganization, and/or with respect to the OTS' authority to grant the waivers
necessary to establish the Charitable Foundation. If challenges were to be
instituted seeking management to terminate the establishment of the Charitable
Foundation no assurances could be made that the resolution of such challenges
would not result in a delay in the consummation of the Reorganization or that
any objecting persons would not be ultimately successful in obtaining such
relief.
APPROVAL OF MEMBERS. Establishment of the Charitable Foundation is subject
to the approval of a majority of the total outstanding votes of the
Association's members eligible to be cast at the Special Meeting. The Charitable
Foundation will be considered as a separate matter from approval of the Plan. If
the members approve the Plan, but not the establishment of the Charitable
Foundation, the Association intends to complete the Reorganization without
establishing of the Charitable Foundation. Failure to approve the Charitable
Foundation may materially increase the pro forma market value of the Common
Stock being offered for sale in the Offering because the Estimated Valuation
Range takes into account the proposed contribution to the Charitable Foundation.
If the pro forma market value of the Company without the Charitable Foundation
is either greater than $67.7 million or less than $50.1 million, or if the OTS
otherwise requires a resolicitation of subscribers, the Association will
establish a new Estimated Valuation Range and resolicit subscribers (i.e.,
subscribers will be permitted to continue their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscription funds will be promptly
refunded with interest). Any change in the Estimated Valuation Range must be
approved by the OTS. See "--Stock Pricing and Number of Shares to be Issued."
Further, if the Mutual Holding Company were to undertake a Conversion
Transaction, and in connection with such a transaction additional shares of
stock of the Company or its successor were contributed to the Charitable
Foundation, such contribution of additional shares of Common Stock to the
Charitable Foundation would be voted on as a separate matters and would require
the approval of: (i) a majority of the total outstanding vote of the members of
the Mutual Holding Company eligible to be cast; and (ii) a majority vote of the
total outstanding shares of Common Stock held by stockholders other than the
Mutual Holding Company and the Charitable Foundation.
LIQUIDATION RIGHTS
In the unlikely event of a voluntary liquidation, dissolution or
winding-up of the Association in its present mutual form prior to the
Reorganization, holders of deposit accounts in the Association would be
entitled, pro rata to the value of their accounts, to distribution of any assets
of the Association remaining after the claims of such depositors (to the extent
of their deposit balances) and all other creditors are satisfied. Following the
Reorganization, the holders of the Common Stock would be entitled to any assets
remaining upon a liquidation, dissolution or winding-up of the Association and,
except through their liquidation interests in the Mutual Holding Company,
discussed below, holders of deposit accounts in the Association would have no
interest in any such assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding-up or the Mutual Holding Company following consummation of the
Reorganization, holders of deposit accounts in the Association would be
entitled, pro rate to the value of their accounts, to distribution of any assets
of the Mutual Holding Company remaining after the claims of all creditors of the
Mutual Holding Company are satisfied. The Mutual Holding Company will establish,
upon the completion of the Reorganization, a special "liquidation account" for
the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders in an amount equal to the net worth of the Mutual Holding Company as of
that date. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he or she were to continue to maintain his or her deposit account at
the Association, would be entitled, on a complete liquidation of the Mutual
Holding Company after the Reorganization, to an interest in the liquidation
account. Each Eligible Account Holder and Supplemental Eligible Account Holder
would have an initial interest in such liquidation account for each
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deposit account, including regular accounts, transaction accounts such as NOW
accounts, money market deposit accounts, and certificates of deposit, with a
balance of $50 or more held in the Association on March 31, 1997 (with respect
to an Eligible Account Holder) and June 30, 1998 (with respect to a Supplemental
Eligible Account Holder) ("Qualifying Deposit"). Each Eligible Account Holder
and Supplemental Eligible Account Holder will have a pro rata interest in the
total liquidation account for each of his or her deposit accounts based on the
proportion that the balance of such person's Qualifying Deposits on the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
bore to the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the Association. For
deposit accounts in existence at both dates separate subaccounts shall be
determined on the basis of the Qualifying Deposits in such deposit accounts on
each such record date.
If, however, on any annual closing date of the Association, commencing
March 31, 1999, the amount in any deposit account is less than the amount in
such deposit account on March 31, 1997 (with respect to an Eligible Account
Holder) and June 30, 1998 (with respect to a Supplemental Eligible Account
Holder) or any other annual closing date, then the interest in the liquidation
account relating to such deposit account would be reduced from time to time by
the proportion of any such reduction, and such interest will cease to exist if
such deposit account is closed. In addition, no interest in the liquidation
account would ever be increased despite any subsequent increase in the related
deposit account. Stockholders of the Association will have no liquidation or
other rights with respect to the Mutual Holding Company in their capacities as
such.
There currently are no plans to liquidate the Association or the Mutual
Holding Company in the future.
OFFERING OF COMMON STOCK
Under the Plan, up to 3,048,075 shares of Common Stock are being offered
for sale, initially through the Subscription Offering (subject to a possible
increase to 3,505,286 shares). See "--Subscription Offering." The Plan requires,
with certain exceptions, that at least 2,252,925 shares be sold in order for the
Reorganization to be effective.
The Subscription Offering expires at __________, New York time, on
__________, 1998. OTS regulations and the Plan require that the sale of Common
Stock be completed within 45 days after the close of the Subscription Offering.
This 45-day period expires on ____________, 1998. In the event the Association
is unable to complete the sale of common stock within this 45-day period, the
Association may request an extension of this time period from the OTS. No single
extension granted by the OTS, however, may exceed 90 days. No assurance can be
given that an extension would be granted if requested. If an extension is
granted, the Association would promptly notify subscribers of the granting of
the extension of time and would promptly return subscriptions unless subscribers
affirmatively elect to continue their subscriptions during the period of
extension. Such extensions may not be made beyond _____________, 2001.
Shares may also be offered to the public in a Community Offering. In the
event a Community Offering is held, it may begin immediately after the
Subscription Offering, or any time during the Subscription Offering. The
Community Offering may end at the same time as or after the Subscription
Offering, but not later than ___________1998, unless further extended with the
approval of the OTS. The actual number of shares to be sold in the Offering will
depend upon market and financial conditions at the time of the Offering,
provided that no fewer than 2,252,925 shares or more than 3,505,286 shares are
sold in the Offering. The per share price to be paid by prospective purchasers
in the Community Offering, if any, for any remaining shares will be $10.00, the
same price paid by subscribers in the Subscription Offering. See "--Stock
Pricing." It is anticipated that all shares not subscribed for in the
Subscription Offering and the Community Offering if held, will be offered for
sale by the Company to the general public in a Syndicated Community Offering.
As permitted by OTS regulations, the Plan provides that if, for any
reason, purchasers cannot be found for an insignificant number of unsubscribed
shares of the common stock, the Board of Directors will seek to make other
arrangements for the sale of the remaining shares. Such other arrangements will
be subject to the approval of the OTS.
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If such other purchase arrangements cannot be made, the Plan will terminate. In
the event that the Offering is not completed, the Association will remain a
mutual savings association, all subscription funds will be promptly returned to
subscribers with interest earned thereon at the passbook rate, which is
currently 2.50% per annum (except for payments to have been made through
withdrawal authorizations which will have continued to earn interest at the
contractual account rates), and all withdrawal authorizations will be canceled.
SUBSCRIPTION OFFERING
In accordance with OTS regulations, nontransferable rights to subscribe
for the purchase of the Company's Common Stock have been granted under the Plan
to the following persons in the following order of priority: (1) Eligible
Account Holders; (2) the Association's tax-qualified plans including the ESOP;
(3) Supplemental Eligible Account Holders; (4) depositors and borrowers other
than Eligible Account Holders and Supplemental Eligible Account Holders, at the
close of business on ___________, 1998, the voting record date for the Special
Meeting ("Other Members"); and (5) employees, officers and directors. 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 (and described below). The March 31, 1997 date for determining
who qualifies as Eligible Account Holders, and the June 30, 1998 date for
determining who qualifies as Supplemental Eligible Account Holders, were
selected in accordance with federal regulations applicable to the
Reorganization.
CATEGORY I: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without cost to him or her, nontransferable subscription rights to
subscribe for an amount of shares equal to the greater of (i) $150,000 of the
Common Stock sold in the Offering; or (ii) 15 times the product (rounded down to
the whole next number) obtained by multiplying the total number of shares to be
issued by a fraction of which the numerator is the amount of qualifying deposits
of such subscriber and the denominator is the total qualifying deposits of all
account holders in this category on the qualifying date; provided, however, that
no Eligible Account Holder may purchase with his or her Associates (as defined
in this Prospectus) and persons acting in concert, more than $300,000 (30,000
shares) of Common Stock. The Company may, in its sole discretion and without
further notice to, or solicitation of, subscribers or other prospective
purchasers, increase the maximum purchase limitation up to 5% of the maximum
number of shares offered in the Offering.
If sufficient shares are not available in this Category I, the Association
will allocate shares in a manner that will allow each Eligible Account Holder
purchase the lesser of 100 shares or the amount subscribed for. Thereafter,
unallocated shares will be allocated to subscribing Eligible Account Holders in
the proportion that the amounts of their respective qualifying deposits bear to
the total amount of qualifying deposits of all subscribing Eligible Account
Holders. To ensure a proper allocation of Common Stock, each Eligible Account
Holder must list on the Stock Order Form all accounts in which the Eligible
Account Holder had an ownership interest as of March 31, 1997. Failure to list
all such qualifying deposit accounts may result in the inability of the Company
or the Association to fill all or part of a subscription order. Neither the
Company, the Association, nor any of their agents shall be responsible for
orders on which all qualifying deposit accounts have not been fully and
accurately disclosed.
The "qualifying deposits" of an Eligible Account Holder are the aggregate
amount of the deposit balances (provided such aggregate balance is not less than
$50.00) in one or more deposit accounts with the Association, including money
market accounts, as of the close of business on March 31, 1997. Subscription
rights received by directors and officers in this category based upon their
increased deposits in the Association during the year preceding March 31, 1997,
are subordinated to the subscription rights of other Eligible Account Holders.
Notwithstanding the foregoing, shares of Common Stock with a value in excess of
$150,000, may be sold to the Association's tax-qualified benefit plans,
including the ESOP before satisfying the subscriptions of Eligible Account
Holders in the event the number of shares sold in the Offering is increased to
more than 3,048,075 shares. For allocation purposes, qualifying deposits will be
divided in the case of multiple orders.
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CATEGORY II: TAX-QUALIFIED EMPLOYEE BENEFIT PLANS. The Association's
tax-qualified employee benefit plans, including the ESOP will receive
nontransferable subscription rights to purchase up to 10% of the Minority
Ownership Interest, provided that shares remain available after satisfying the
subscription rights of Eligible Account Holders. The ESOP currently intends to
purchase shares equal to 8% of the Minority Ownership Interest. If the ESOP is
unable to purchase all or part of the shares of Common Stock for which it
subscribes, the ESOP may purchase such shares in the open market or may purchase
authorized but unissued shares of the Company. Any purchase by the ESOP of
authorized but unissued shares would dilute the interests of the Company's
shareholders.
CATEGORY III: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without cost to him or her,
nontransferable subscription rights to subscribe for an amount of shares equal
to the greater of (i) $150,000 of the Common Stock sold in the Offering; or (ii)
15 times the product (rounded down to the whole next number) obtained by
multiplying the total number of shares to be issued by a fraction of which the
numerator is the amount of qualifying deposits of such subscriber and the
denominator is the total qualifying deposits of all account holders in this
category on the qualifying date. The subscription rights of each Supplemental
Eligible Account Holder shall be reduced to the extent of such person's
subscription rights as an Eligible Account Holder; provided, however, that no
Supplemental Eligible Account Holder may purchase with his or her Associates and
persons acting in concert, more than $300,000 (30,000 shares) of common stock.
Such subscription rights will be applicable only to shares that remain available
after the subscriptions of Eligible Account Holders and the tax-qualified
benefit plans have been satisfied. The Company may, in its sole discretion, and
without further notice to, or solicitation of, subscribers or other prospective
purchasers, increase the maximum purchase limitation to up to 5% of the maximum
number of shares offered in the Offering.
If sufficient shares are not available in this Category III, the
Association will allocate shares in a manner that will allow each Supplemental
Eligible Account Holder to purchase the lesser of 100 shares or the amount
subscribed for. Thereafter, unallocated shares will be allocated to each
subscribing Supplemental Eligible Account Holders in the proportion that the
amounts of his or her qualifying deposits bears to the total amount of
qualifying deposits of all subscribing Supplemental Eligible Account Holders. To
ensure a proper allocation of Common Stock, each Supplemental Eligible Account
Holder must list on the Stock Order Form all accounts in which he or she has an
ownership interest as of June 30, 1998. Failure to list all such qualifying
deposit accounts may result in the inability of the Company or the Association
to fill all or part of a subscription order. Neither the Company, the
Association nor any of their agents shall be responsible for orders on which all
qualifying deposit accounts have not been fully and accurately disclosed.
The "qualifying deposits" of a Supplemental Eligible Account Holder are
the aggregate amount of the deposit balances (provided such aggregate balance is
not less than $50.00) in his or her deposit accounts, including money market
accounts, as of the close of business on June 30, 1998.
CATEGORY IV: OTHER MEMBERS. Each Other Member will receive, without cost
to him or her, nontransferable subscription rights to subscribe for up to
$150,000 (15,000 shares) of the Common Stock; provided, however, that no Other
Member may purchase with his or her Associates and persons acting in concert,
more than $300,000 (30,000 shares) of Common Stock. Such subscription rights
will be applicable only to shares that remain available after the subscriptions
of Eligible Account Holders, the tax-qualified benefit plans and Supplemental
Eligible Account Holders have been satisfied. The Company may in its sole
discretion increase the maximum purchase limitation to up to 5% of the maximum
number of shares offered in the Offering or decrease the maximum purchase
limitation to as low as 0.1% of the maximum number of shares offered in the
Offering.
If sufficient shares are not available in this Category IV, shares will be
allocated pro rata among subscribing Other Members in the same proportion that
the number of shares subscribed for by each Other Member bears to the total
number of shares subscribed for by all Other Members.
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CATEGORY V: EMPLOYEES, OFFICERS AND DIRECTORS. Employees, officers and
directors of the Association will receive, without cost to them, nontransferable
subscription rights to subscribe for up to $150,000 (15,000 shares) of the
Common Stock; provided that no employee, officer or director may purchase with
his or her Associates and persons acting in concert more than $300,000 (30,000
shares) of Common Stock. For purposes of the Plan directors, officers and
employees are not Associates of one another, nor are they acting in concert
solely as a result of their positions as directors, officers or employees of the
Association. Such subscription rights will only be provided after subscriptions
of Eligible Account holders, the tax-qualified benefit plans, Supplemental
Eligible Account Holders and other Members have been satisfied. If sufficient
shares are not available in this Category V, shares will be allocated among
directors, officers and employees on a pro rata basis based on the size of each
person's order.
TIMING OF OFFERING AND METHOD OF PAYMENT. The Association will not execute
orders until all shares of Common Stock have been subscribed for or otherwise
sold. If all shares have not been subscribed for or sold within 45 days after
the Expiration Date, unless such period is extended with the consent of the OTS,
all funds delivered to the Association pursuant to the Subscription Offering
will be returned promptly to the subscribers with interest and all withdrawal
authorizations will be canceled. If an extension beyond the 45-day period
following the Expiration Date is granted, the Association will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions. The Subscription Offering will expire at
__________, New York time, on ___________, 1998 (the "Expiration Date"). The
Expiration Date may be extended by the Association and the Company for
successive 90-day periods, subject to OTS approval, to ___________, 2000. If the
Offering is extended beyond ______________, 2000, subscribers will be given the
right to increase, decrease, confirm or modify their orders.
Before the Expiration Date, or any extension of such date, each subscriber
must return the Order Forms to the Association, properly completed, together
with checks or money orders in an amount equal to the Purchase Price multiplied
by the number of shares for which subscription is made. Payment for stock
purchases can also be accomplished through authorization on the order form of
withdrawals from accounts with the Association (including a certificate of
deposit). The Association has the right to reject any orders transmitted by
facsimile and any payments made by wire transfer.
Until completion or termination of the Reorganization, subscribers who
elect to make payment through authorization of withdrawal from accounts with the
Association will not be permitted to reduce the deposit balance in any such
accounts below the amount required to purchase the shares for which they
subscribed. In such cases interest will continue to be credited on deposits
authorized for withdrawal until the completion of the Reorganization. Interest
at the passbook rate, which is currently 2.50% per annum, will be paid on
amounts submitted by check. Authorized withdrawals from certificate accounts for
the purchase of Common Stock will be permitted without the imposition of early
withdrawal penalties or loss of interest. However, withdrawals from certificate
accounts that reduce the balance of such accounts below the required minimum for
specific interest rate qualification will cause the cancellation of the
certificate accounts at the effective date of the Reorganization, and the
remaining balance will earn interest at the passbook savings rate or will be
returned to the depositor. Stock subscriptions received and accepted by the
Association are final. Subscriptions may be withdrawn only in the event that the
Reorganization is not completed by __________, 1998.
MEMBERS IN NON-QUALIFIED STATES OR FOREIGN COUNTRIES. The Association 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, no person will be offered or sold any stock in the
Subscription Offering if such person resides in a foreign country or resides in
a state in the United States with respect to which all of the following apply:
(i) a small number of persons otherwise eligible to subscribe for shares of
Common Stock reside in such state; (ii) the granting of subscription rights or
the offer or sale of Common Stock to such persons would require the Association
or the Company or its respective officers and directors, under the securities
laws of such state, to register as a broker, dealer, salesman or selling agent,
or to register or otherwise qualify the Common Stock for sale in such
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state; and (iii) such registration, qualification or filing in its judgment or
in the judgment of the Company would be impracticable or unduly burdensome for
reasons of cost or otherwise.
To assist in the Offering, the Association has established a Stock
Information Center that you may contact at (914) _________ . Callers to the
Stock Information Center will be able to request a Prospectus and other
information relating to the Offering.
COMMUNITY OFFERING
To the extent shares remain available for purchase after filling all
orders received in the Subscription Offering, the Company may offer shares of
the common stock in a Community Offering to the general public, with preference
given to residents in Westchester County, the county where the Association
maintains its offices. The Association may terminate the Community Offering as
soon as it has received orders for at least the minimum number of shares
available for purchase in the Offering.
Persons wishing to purchase stock in the Community Offering, if conducted,
should return the Order Form to the Association, properly completed, together
with a check or money order in the amount equal to the Purchase Price multiplied
by the number of shares which that person desires to purchase. Order Forms will
be accepted until the completion of the Community Offering. However, the
Association may terminate the Community Offering as soon as orders are received
for at least the minimum number of shares available for purchase in the
Offering.
The amount of Common Stock which may be purchased in the Community
Offering by any person (including such person's Associates) or persons acting in
concert is $150,000 (15,000 shares) in the aggregate. A member who, together
with his Associates and persons acting in concert, has subscribed for shares in
the Subscription Offering may subscribe for additional shares of Common Stock in
the Community Offering that does not exceed the lesser of (i) $150,000 (15,000
shares) or (ii) a number of shares which, when added to the number of shares
subscribed for by the member (and his Associates and persons acting in concert)
in the Subscription Offering, would not exceed $300,000 (30,000 shares). The
Association reserves the right in its sole discretion to reject any orders
received in the Community Offering in whole or in part.
If all the Common Stock offered in the Subscription Offering is subscribed
for, no Common Stock will be available for purchase in the Community Offering.
In the event of an oversubscription, purchase orders received during the
Community Offering will be filled up to a maximum of 1,000 shares of Common
Stock issued in the Offering, with any remaining unfilled purchase orders to be
allocated on a pro rata basis based on a fair and equitable manner. If the
Community Offering continues for more than 45 days after the expiration of the
Subscription Offering, subscribers will have the right to increase, decrease or
rescind subscriptions for stock previously submitted. All sales of Common Stock
in the Community Offering will be at the same price per share as the sales of
Common Stock in the Subscription Offering.
Cash and checks received in the Community Offering will be placed in an
interest bearing account with the Association, and will earn interest at the
passbook rate, which is currently 2.50% per annum, from the date of deposit
until completion or termination of the Reorganization. In the event that the
Reorganization is not consummated for any reason, all funds submitted pursuant
to the Community Offering will be promptly refunded with interest as described
above.
SYNDICATED COMMUNITY OFFERING
Any shares of Common Stock not sold in the Subscription Offering or in the
Community Offering, if any, may be offered for sale to the general public by a
selling group of broker-dealers to be managed by Sandler O'Neill in a Syndicated
Community Offering, subject to terms, conditions and procedures as may be
determined by the Association and the Company in a manner that is intended to
achieve the widest distribution of the Common Stock
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subject to the rights of the Company to accept or reject in whole or in part all
orders in the Syndicated Community Offering. It is expected that the Syndicated
Community Offering will commence as soon as practicable after termination of the
Subscription Offering and the Community Offering, if any. The Syndicated
Community Offering shall be completed within 45 days after the termination of
the Subscription Offering, unless such period is extended as provided herein.
If for any reason a Syndicated Community Offering of unsubscribed shares
of Common Stock cannot be effected and any shares remain unsold after the
Subscription Offering and any Community Offering, the Boards of Directors of the
Company and the Association will seek to make other arrangements to sell the
remaining shares. Such other arrangements will be subject to OTS approval and to
compliance with applicable state and federal securities laws.
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON STOCK
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the end of the Offering, in accordance with Rule 15c2-8 under the
Securities Exchange Act of 1934, no Prospectus will be mailed later than five
days or hand delivered any later than two days prior to the end of the Offering.
Execution of the Order Form will confirm receipt or delivery of a Prospectus in
accordance with Rule 15c2-8. Order Forms will be distributed only with a
Prospectus. Neither the Company, the Association, nor Sandler O'Neill is
obligated to deliver a Prospectus and an Order Form by any means other than the
U.S. Postal Service.
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts, or in the case of Other
Members who are borrowers only, loans held at the Association, on the Order Form
giving all names on each deposit account and/or loan and the account and/or loan
numbers at the applicable eligibility date.
Full payment by check, cash (except by mail), money order, bank draft or
withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original Order Form. THE COMPANY IS NOT OBLIGATED TO ACCEPT AN
ORDER SUBMITTED ON PHOTOCOPIED OR TELECOPIED ORDER FORMS. ORDERS CANNOT AND WILL
NOT BE ACCEPTED WITHOUT THE EXECUTION OF THE CERTIFICATION APPEARING ON THE
ORDER FORM.
If the ESOP purchases shares of Common Stock, it will not be required to
pay for such shares until consummation of the Offering, provided that there is
in force from the time the order is received a loan commitment to lend to the
ESOP the amount of funds necessary to purchase the number of shares ordered.
DELIVERY OF CERTIFICATES
Certificates representing shares issued in the Subscription Offering and
in the Community Offering, if any, pursuant to Order Forms will be mailed to the
persons entitled to them to such address as may be specified in properly
completed Order Forms as soon as practicable following consummation of the
Reorganization. The Company will not accept orders registered "in care of" or
instructed to be mailed to a third party. Any certificates returned as
undeliverable will be held by the Company until claimed by the person legally
entitled to them or otherwise disposed of in accordance with applicable law.
Purchasers may not be able to sell the shares of Common Stock which they
purchase until certificates for the Common Stock are available and delivered to
them, even though trading of the common stock may have commenced. Shares sold
prior to receipt of a stock certificate are the responsibility of the purchaser.
MARKETING AGENT
The Association has engaged Sandler O'Neill as a consultant and financial
advisor in connection with the offering of the Common Stock, and Sandler O'Neill
has agreed to assist the Association in its solicitation of subscriptions and
purchase orders for shares of Common Stock in the Offerings. Sandler O'Neill
will receive a fee
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equal to 1.5% of the aggregate purchase price of all shares sold in the
Subscription Offering or Community Offering, excluding in each case shares
purchased by directors, officers of employees of the Association and any
immediate family member thereof and the ESOP, for which Sandler O'Neill will not
receive a fee. In the event that a selected dealers agreement is entered into in
connection with a Syndicated Community Offering, the Association will pay a fee
(to be negotiated at such time under such agreement) to such selected dealers,
any sponsoring dealers fees, and a management fee to Sandler O'Neill of 1.5% for
shares sold by a NASD member firm pursuant to a selected dealers agreement;
provided, however, that the aggregate fees payable to Sandler O'Neill for Common
Stock sold by them pursuant to such a selected dealers agreement shall not
exceed 1.5% of the aggregate purchase price and provided, further, however, that
the aggregate fees payable to Sandler O'Neill and the selected dealers will not
exceed 5% of the aggregate purchase price of the Common Stock sold by selected
dealers. Fees to Sandler O'Neill and to any other broker-dealer may be deemed to
be underwriting fees, and Sandler O'Neill and such broker-dealers may be deemed
to be underwriters. Sandler O'Neill will also be reimbursed for its reasonable
out-of-pocket expense, including legal fees, in an amount not to exceed $45,000.
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 Association,
Sandler O'Neill will be reimbursed for its reasonable out-of-pocket expenses as
described above. The Association has agreed to indemnify Sandler O'Neill for
reasonable costs and expense in connection with certain claims or liabilities,
including certain liabilities under the Securities Act.
Sandler O'Neill will also perform proxy solicitation services,
Reorganization agent services and records management services for the
Association in the Reorganization and will receive a fee for these services of
$______, plus reimbursement of reasonable out-of-pocket expenses.
Directors and executive officers of the Association 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 Association may participate in the Offering in
ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers to
purchase Common Stock or provide advice regarding the purchase of Common Stock.
The Association 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 executive officers, directors and employees to participate in the sale of
Common Stock. No executive officer, director or employee of the Association will
be compensated in connection with his or her participation by the payment of
commission or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
Sandler O'Neill has not prepared any report or opinion constituting
recommendations or advice to the Association. In addition, Sandler O'Neill has
expressed no opinion as to the prices at which the Common Stock to be issued in
the Offering may trade. Furthermore, Sandler O'Neill has not verified the
accuracy or completeness of the information contained in the Prospectus.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes a number of limitations on the number of shares of
Common Stock which may be purchased in the Offering. These are summarized below:
1. The aggregate amount of outstanding Common Stock owned or controlled
by persons other than the Mutual Holding Company at the close of the
Offering shall be less than 50% of the total outstanding Common
Stock.
2. No Person, Associate thereof, or group of persons acting in concert,
may purchase more than the greater of $300,000 or 1.0% of Common
Stock offered in the Offering to persons other than the Mutual
Holding Company except that: (i) the Company may, in its sole
discretion and without further notice to or solicitation of
subscribers or other prospective purchasers, increase the maximum
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purchase limitation to up to 5% of the number of shares offered in
the Offering; (ii) Tax-qualified employee benefit plans may purchase
up to 10% of the shares offered in the Offering; and (iii) shares
held by any Tax-Qualified Employee Plan and attributable to a person
will not be aggregated with other shares purchased directly by or
otherwise attributable to such person.
3. The aggregate amount of Common Stock acquired in the Offering by all
officers and directors of the Association or any affiliate of the
Association, and any person acting in concert with such officer or
director and their Associates, exclusive of any stock acquired by
such persons in the secondary market, may not exceed 30% of the
outstanding shares of Common Stock held by persons other than the
Mutual Holding Company at the close of the Offering. In calculating
the number of shares held by officers or directors of the
Association or any Affiliate of the Association and any person
acting in concert with any such officer or director and their
Associates under this paragraph or under the provisions of Section 4
of this section, shares held by any Tax-Qualified Employee Benefit
Plans of the Association that are attributable to such persons shall
not be counted.
4. The aggregate amount of Common Stock acquired in the Offering by all
officers and directors of the Association or any affiliate of the
Association and any person acting in concert with any such officer
or director and their Associates, exclusive of any Common Stock
acquired by such plans or persons in the secondary market, may not
exceed 30% of the stockholders' equity of the Company other than the
Mutual Holding Company at the close of the Offering.
5. The Boards of Directors of the Association and the Company may, in
their sole discretion, increase the maximum purchase limitation set
forth in paragraph 2 above to up to 9.9%, provided that the
percentage amount by which orders for Common Stock in excess of 5%
of the total number of shares of Common Stock offered in the
Offering shall not, in the aggregate exceed 10% of the total shares
of Common Stock offered in the Offering (except that this limitation
shall not apply to purchases by Tax-qualified employee benefit
plans). If such 5% limitation is increased, subscribers for the
maximum amount will be, and certain other large subscribers in the
sole discretion of the Company and the Association may be, given the
opportunity to increase their subscriptions up to the then
applicable limit. Requests to purchase additional shares of Common
Stock under this provision will be determined by the Board of
Directors of the Company, in its sole discretion.
6. Notwithstanding any other provision of this Plan, no person shall be
entitled to purchase any Common Stock to the extent such purchase
would be illegal under any federal law or state law or regulation or
would violate regulations or policies of the National Association of
Securities Dealers, Inc., particularly those regarding free riding
and withholding. The Company and/or its agents may ask for an
acceptable legal opinion from any purchaser as to the legality of
such purchase and may refuse to honor any purchase order if such
opinion is not timely furnished.
7. The Board of Directors of the Company has the right in its sole
discretion to reject any order submitted by a person whose
representations the Board of Directors believes to be false or who
it otherwise believes, either alone or acting in concert with
others, is violating, circumventing, or intends to violate, evade or
circumvent the terms and conditions of this Plan.
OTS regulations define "acting in concert" as (i) knowing participation in
a joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. THE ASSOCIATION WILL PRESUME
THAT CERTAIN PERSONS ARE ACTING IN CONCERT BASED UPON VARIOUS FACTS, INCLUDING
THE FACT THAT PERSONS HAVE JOINT ACCOUNT RELATIONSHIPS OR THE FACT THAT SUCH
PERSONS HAVE FILED JOINT SCHEDULES 13D WITH THE SEC WITH RESPECT TO OTHER
COMPANIES.
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Directors are not treated as Associates of one another solely because
of their board membership. Compliance with the foregoing limitations does not
necessarily constitute compliance with other regulatory restrictions on
acquisitions of the Common Stock. For a further discussion of limitations on
purchases of the Common Stock during and subsequent to Reorganization, see
"--Restrictions on Sale of Stock by Directors and Officers," "--Restrictions on
Purchase of Stock by Directors and Officers Following Reorganization," and
"Restrictions on Acquisition of the Company."
RESTRICTIONS ON REPURCHASE OF COMMON STOCK BY THE COMPANY
Repurchases of its shares by the Company will be restricted for a
period of three years from the date of the completion of Reorganization. OTS
regulations currently prohibit the Company from repurchasing any of its shares
within three years following the Reorganization except under exceptional
circumstances. The Company may not, for a period of three years from the date of
the Reorganization, repurchase any of its capital stock from any person, except
in the event of an offer to purchase by the Company on a pro rata basis from all
of its shareholders (excluding the Mutual Holding Company) which is approved in
advance by the OTS, the repurchasing of qualifying shares of a director or
purchases of shares required to fund a tax qualified or non-tax qualified plan.
OTS regulations permit limited repurchases of Common Stock during the second and
third year following the Reorganization.
RESTRICTIONS ON SALE OF STOCK BY DIRECTORS AND OFFICERS
Any shares of the Common Stock purchased in the Offering by directors
and officers of the Association or the Company may not be sold or otherwise
disposed of for value for a period of one year following the date of purchase,
except for any disposition of such shares (i) following the death of the
original purchaser or (ii) by reason of an exchange of securities in connection
with a merger or acquisition approved by the applicable regulatory authorities.
Sales of shares of the Common Stock by the Company's directors and officers will
also be subject to certain insider trading and other transfer restrictions under
the federal securities laws. See "Regulation--Federal Securities Laws" and
"Description of Capital Stock."
Each certificate for such restricted shares will bear a legend
prominently stamped on its face giving notice of the restrictions on transfer,
and instructions will be issued to the Company's transfer agent 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 pursuant to a stock dividend, stock split or
otherwise with respect to restricted shares will be subject to the same
restrictions on sale.
RESTRICTIONS ON PURCHASE OF STOCK BY DIRECTORS AND OFFICERS IN THE
REORGANIZATION AND OFFERING
OTS regulations provide that for a period of three years following the
Reorganization, without prior written approval of the OTS, neither directors or
officers of the Association or the Company, nor their Associates, may purchase
the Common Stock of the Company except from a dealer registered with the SEC.
This restriction, however, does not apply to negotiated transactions involving
more than 1% of the Company's outstanding Common Stock, to shares purchased
pursuant to stock option or other incentive stock plans approved by the
Company's shareholders, or to shares purchased by employee benefit plans
maintained by the Company which may be attributable to individual officers or
directors.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND COMMON STOCK
Prior to the completion of the Reorganization, OTS regulations and the
Plan prohibit any person with subscription rights, under the Plan from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the subscription rights issued under the Plan
or the shares of Common Stock to be issued upon their exercise. Such rights may
be exercised only by the person to whom they are granted and only for his or her
account. Each person exercising such subscription rights will be required to
certify that he or she is
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purchasing shares solely for his or her own account and that there is no
agreement or understanding regarding the sale or transfer of such shares. The
regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase such subscription rights or
shares of Common Stock prior to the completion of the Reorganization and
Offering. THE ASSOCIATION INTENDS TO PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES IN THE EVENT IT BECOMES AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS
AND WILL NOT HONOR ORDERS KNOWN TO INVOLVE THE TRANSFER OF SUCH RIGHTS. IN
ADDITION, PERSONS WHO VIOLATE THE PURCHASE LIMITATIONS MAY BE SUBJECT TO
SANCTIONS AND PENALTIES IMPOSED BY THE OTS.
STOCK PRICING
The aggregate purchase price of the Company Common Stock being sold in
the Reorganization will be based on the appraised aggregate pro forma market
value of the Common Stock, as determined by the Independent Valuation. FinPro,
which is experienced in the valuation and appraisal of financial institutions,
including savings associations forming mutual holding companies, has been
retained to prepare the Independent Valuation. FinPro will receive a fee of
$25,000 for its appraisal and business plan services, not including
out-of-pocket expenses. The Association has agreed to indemnify FinPro, under
certain circumstances, against liabilities and expenses (including legal fees)
arising out of FinPro's engagement.
The Independent Valuation states that the pro forma market value of the
Common Stock was $58.9 million as of June 12, 1998. A copy of the appraisal is
on file and available for inspection at the offices of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and the Northeast Regional Office of the OTS, 10
Exchange Place, Jersey City, New Jersey. The Independent Valuation has also been
filed as an exhibit to the Company's Registration Statement with the SEC, and
may be reviewed at the SEC's public reference facilities. See "Additional
Information." The Independent Valuation involved a comparative valuation of the
Association's operating and financial statistics with those of other financial
institutions. The Independent Valuation also took into account such other
factors as the market for savings associations generally, prevailing economic
conditions, both nationally and in New York, which affect the operations of
savings associations, the competitive environment within which the Association
operates, and the effect of the Association becoming a subsidiary of the
Company. No detailed individual analysis of the separate components of the
Association's and the Company's assets and liabilities was performed in
connection with the valuation. The Board of Directors reviewed with management
FinPro's methods and assumptions, and accepted FinPro's appraisal as reasonable
and adequate. The Association has determined to establish an Offering Range of
2,252,925 shares to 3,048,075 shares at the minimum and maximum of the Estimated
Valuation Range. Notwithstanding any change in the number of shares sold in the
Offering due to a change to the Independent Valuation, the Minority Ownership
Interest sold in the Offering will remain 45%. The Association, in consultation
with Sandler O'Neill, has determined to offer the Common Stock in the Offering
at a price of $10.00 per share. The Association's decision regarding the
Purchase Price was based solely on its determination that $10.00 per share is a
customary purchase price in initial public offerings for mutual savings
associations converting to stock form. The Offering Range may be increased or
decreased to reflect market and financial conditions prior to the completion of
the Offering.
Promptly after the completion of the Subscription Offering and the
Community Offering, if any, FinPro will confirm to the Association that, to the
best of its knowledge and judgment, nothing of a material nature has occurred
which would cause it to conclude that the amount of the aggregate proceeds
received from the sale of the Common Stock in the Offering was incompatible with
FinPro's estimate of the Company's total pro forma market value at the time of
the sale. If, however, the facts do not justify such a statement, a new Offering
Range and price per share may be set. Under such circumstances, the Company will
be required to resolicit subscriptions. In that event, subscribers would have
the right to modify or rescind their subscriptions and to have their
subscription funds returned promptly with interest and holds on funds authorized
for withdrawal from deposit accounts would be released or reduced; provided that
if the Association's pro forma market value upon reorganization has increased to
an amount which does not exceed $77,895,250 (15% above the maximum of the
Independent Valuation), the Company and the Association do not intend to
resolicit subscriptions unless it is determined after consultation with the OTS
that a resolicitation is required.
56
<PAGE> 61
Depending upon market and financial conditions, the number of shares
issued may be more or less than the range in number of shares shown above. In
the event of an increase in the maximum number of shares being offered, persons
who exercise their maximum subscription rights will be notified of such increase
and of their right to purchase additional shares. Conversely, in the event of a
decrease in the maximum number of shares being offered, persons who exercise
their maximum subscription rights will be notified of such decrease and of the
reduction in the number of shares for which subscriptions may be made. In the
event of a resolicitation, subscribers will be afforded the opportunity to
increase, decrease or maintain their previously submitted order. The Company
will be required to resolicit if the price per share is changed such that the
total aggregate purchase price is not within the minimum and 15% above the
maximum of the Offering Range.
THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE
REORGANIZATION OR OF PURCHASING THE SHARES OF THE COMMON STOCK. MOREOVER,
BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A
NUMBER OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE AMOUNT OF NET
PROCEEDS AND THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME
TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN THE
OFFERING WILL THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES THAT EXCEED THE
PURCHASE PRICE IN THE OFFERING.
NUMBER OF SHARES TO BE ISSUED
It is anticipated that the total offering of Common Stock (the number
of shares of Common Stock issued in the Offering multiplied by the Purchase
Price of $10.00 per share) will be within the current minimum and 15% above the
maximum of the Offering Range. Unless otherwise required by the OTS, no
resolicitation of subscribers will be made and subscribers will not be permitted
to modify or cancel their subscriptions so long as the change in the number of
shares to be issued in the Offering, in combination with the Purchase Price,
results in an offering of at least the minimum and no more than 15% above the
maximum of the Offering Range.
Any increase in the total number of shares of Common Stock to be issued
in the Offering would decrease both an individual subscriber's ownership
interest and the Company's pro forma stockholders' equity and net income on a
per share basis while increasing (assuming no change in the per share price) pro
forma stockholders' equity and net income on an aggregate basis. A decrease in
the number of shares to be issued in the Offering would increase both an
individual subscriber's ownership interest and the Company's pro forma
stockholders' equity and net income on a per share basis while decreasing
(assuming no change in the per share price) pro forma stockholders' equity and
net income on an aggregate basis. For a presentation of the effects of such
changes, see "Pro Forma Data."
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Association and the Company will be final. The Plan provides that, if deemed
necessary or desirable by the Boards of Directors of the Company and the
Association, the Plan may be substantively amended by the Boards of Directors,
as a result of comments from regulatory authorities or otherwise, with the
concurrence of the OTS. Moreover, if the Plan is so amended, subscriptions which
have been received prior to such amendment will not be refunded unless otherwise
required by the OTS.
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<PAGE> 62
CONDITIONS AND TERMINATION
Completion of the Reorganization requires the approval of the Plan by
the affirmative vote of not less than a majority of the total number of votes of
members eligible to be cast at the Special Meeting and the sale of all shares of
the Common Stock within 24 months following approval of the Plan by the members.
If these conditions are not satisfied, the Plan will be terminated and the
Association will continue business in the mutual form of organization. The Plan
may be terminated by the Board of Directors of the Association at any time prior
to the Special Meeting and, with the approval of the OTS, by such Board of
Directors at any time thereafter. Furthermore, OTS regulations and the Plan
require that the Company complete the sale of Common Stock within 45 days after
the close of the Subscription Offering. The OTS may grant an extension of this
time period if necessary, but no assurance can be given that an extension would
be granted. See "--Offering of Common Stock."
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<PAGE> 63
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF INCOME
The following Statements of Income of the Association for the fiscal
years ended March 31, 1998, 1997 and 1996 have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, whose report on the financial
statements appears elsewhere in this Prospectus. These Statements of Income
should be read in conjunction with the Financial Statements of the Association
and the Notes thereto included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------
1998 1997 1996
----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and dividend income:
Loans............................................................. $10,456 $ 9,987 $ 9,468
Securities........................................................ 4,341 4,012 3,536
Federal funds sold and certificates of deposit.................... 2,667 2,493 2,569
Other earning assets.............................................. 154 145 159
------- -------- --------
Total interest and dividend income.............................. 17,618 16,637 15,732
------- -------- --------
Interest expense:
Deposits (Note 6)................................................. 8,700 7,876 7,809
Borrowings and mortgage escrow.................................... 43 41 39
------- -------- --------
Total interest expense.......................................... 8,743 7,917 7,848
------- -------- --------
Net interest income............................................. 8,875 8,720 7,884
Provision for loan losses (Note 3)................................... 155 146 98
------- -------- --------
Net interest income after provision for loan losses............. 8,720 8,574 7,786
------- -------- --------
Noninterest income:
Banking service charges and fees.................................. 186 167 193
Gain on sales of real estate owned................................ -- 134 15
------- -------- --------
Total noninterest income........................................ 186 301 208
------- -------- --------
Noninterest expense:
Compensation and benefits (Note 9)................................ 2,147 1,999 1,920
Federal deposit insurance costs, including a special assessment of
$1,232,000 in 1997 (Note 6)..................................... 139 1,584 430
Occupancy and equipment........................................... 390 376 383
Data processing service fees...................................... 231 212 208
Advertising and promotion......................................... 170 137 108
Other............................................................. 879 952 816
------- -------- --------
Total noninterest expense....................................... 3,956 5,260 3,865
------- -------- --------
Income before income tax expense................................ 4,950 3,615 4,129
Income tax expense (Note 8).......................................... 2,065 1,325 1,732
------- -------- --------
Net income...................................................... $ 2,885 $ 2,290 $ 2,397
======= ======== ========
</TABLE>
- ---------------------
Note references are to the Notes to Financial Statements beginning on page F-6.
59
<PAGE> 64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Sound Federal Bancorp will be formed as a federal corporation for the
purpose of issuing the Common Stock and owning all of the capital stock of the
Association issued in the Reorganization. Consequently, the Company has no
operating history. All information in this section should be read in conjunction
with the financial statements and notes thereto included in this Prospectus.
The Association's principal business has historically consisted of
offering savings and other deposits to the general public and using the funds
from such deposits to make loans secured by residential real estate. The
Association's results of operations depend primarily upon its net interest
income, which is the difference between income earned on interest-earning
assets, such as loans and investments, and the interest expense paid on
deposits. The Association's operations are affected to a much lesser degree by
noninterest income, such as banking service charges and fees. The Association's
net income is also affected by, among other things, provisions for loan losses
and noninterest expenses. The Association's principal operating expenses, aside
from interest expense, consist of compensation and benefits, occupancy and
equipment, deposit insurance costs and other expenses such as ATM expenses,
professional fees and insurance premiums. The Association's results of
operations also are affected significantly by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation and policies affecting fiscal affairs, housing and financial
institutions, monetary policies of the Federal Reserve System, and the actions
of bank regulatory authorities. Management intends to initially invest the net
proceeds from the Offering in interest-earning assets and believes that the
Company and the Association will derive additional interest income from such
sources.
CAPABILITY OF THE ASSOCIATION'S DATA PROCESSING TO ACCOMMODATE THE YEAR 2000
Like many financial institutions, the Association relies upon computers
for the daily conduct of its business and for data processing generally. There
is concern that on January 1, 2000 computers will be unable to "read" the new
year and as a consequence, there may be widespread computer malfunctions.
Management has reviewed this issue and has been advised by the Association's
data processing service center that they are addressing this issue and that it
should not affect the Association's external data processing. The Association is
in the process of testing its computer applications and hardware to ensure that
they will be able to read the year 2000. Based on the current timetable, testing
is expected to be completed by December 1998. The Association has contacted each
of its vendors to ensure that they will be able to provide service in light of
the year 2000 issue. Most vendors have represented to management that they are
addressing the year 2000 issue and they expect to be able to provide the
services for which the Association has contracted. Management will continue to
monitor this issue and report to the Board of Directors on a quarterly basis
until full compliance is obtained from all vendors. Costs related to the year
2000 issue will be expensed as they are incurred, except for the costs, if any,
for new hardware and software that is purchased, which will be capitalized. At
March 31, 1998, the costs incurred to address the year 2000 issue have not been
significant. Management does not expect that the additional costs to be incurred
in connection with the year 2000 issue will have a material impact on the
Association's financial condition or results of operations. Since over 98% of
the Association's loans are secured by real property and the remaining portion
of the loan portfolio is composed of consumer loans and personal loans, the
ability of the Association's borrowers to be year 2000 compliant is not material
to the Association's lending.
The costs of the project are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant
60
<PAGE> 65
computer codes and similar uncertainties. In addition, there can be no guarantee
that the systems of other companies on which the Association's systems rely will
be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Association's systems, would not have a
material adverse effect on the Association.
OPERATING STRATEGY
In guiding the Association's operations, management has implemented
various strategies designed to continue the institution's profitability
consistent with safety and soundness. These strategies include: (i) operating a
community-oriented financial institution that provides quality service by
monitoring the needs of its customers and offering customers personalized
service; (ii) emphasizing one-to-four family residential real estate lending;
(iii) maintaining high levels of liquidity; and (iv) conservative underwriting
standards to reduce nonperforming loans. It is anticipated, subject to market
conditions, that the strategies presently in place will be continued following
completion of the Reorganization.
COMMUNITY ORIENTED INSTITUTION. The Association was established in
Mamaroneck, New York in 1891 and has been operating continuously since that
time. Throughout its history, the Association has been committed to meeting the
financial needs of the communities in which it operates and is dedicated to
providing quality service to its customers. Management believes that the
Association can be more effective than many of its competitors in serving its
customers because of its ability to promptly and effectively provide senior
management responses to customer needs and inquiries. The Association's ability
to provide these services is enhanced by the stability of senior management
which has an average tenure with the Association of over 20 years. In addition,
the Association intends to use the mutual holding company structure to maintain
the Association as a community-oriented, independent savings institution, and to
establish the Charitable Foundation as a means of furthering the Association's
commitment to the communities in which it conducts business.
EMPHASIS ON RESIDENTIAL REAL ESTATE LENDING. Historically, the
Association has emphasized the origination of one-to-four family residential
loans within Westchester County. As of March 31, 1998, approximately 83.8% of
the loan portfolio consisted of one-to-four family residential mortgage loans
and 98.5% of the loan portfolio consisted of loans secured by real estate.
During the fiscal year ended March 31, 1998, the Association originated $14.8
million of one-to-four family mortgage loans. The Association has emphasized
traditionally the origination of fixed rate residential mortgage loans. Of the
$28.9 million of total loans originated in fiscal year 1998, $28.6 million had
fixed rates of interest.
MAINTAINING HIGH LEVELS OF LIQUID INVESTMENTS. The Association
primarily originates loans fixed rate mortgage loans with terms up to 30 years.
At March 31, 1998, $124.0 million, or 95.1% of the Association's loan portfolio
consisted of fixed rate loans. In the current low interest rate environment,
management believes that the origination of fixed rate loans provides the
Association with greater income than would be available if the Association chose
to emphasize adjustable rate loans which frequently have to be offered with
initial below market interest rates. In addition, the Association's customers
have shown a preference for fixed rate loans in the current low interest rate
environment. However, in order to position the Association to be able to
redeploy assets profitability in a rising interest rate environment, management
has determined to invest a significant portion of its assets in short term
liquid investments. The Association maintains a significant portion of its
assets in short term U.S. Government and agency securities and other interest
earning assets (which consist of federal funds sold and certificates of deposit
at other financial institutions). At March 31, 1998, U.S. Government or agency
securities due in five years or less totalled $8.0 million, and federal funds
sold and certificates of deposit totalled $47.9 million, or 18.8% of the
Association's assets. In addition, at March 31, 1998, $52.2 million, or 20.5% of
the Association's assets were invested in adjustable rate mortgage-backed
securities guaranteed by Fannie Mae and the Government National Mortgage
Association ("GNMA"). See "Risk Factors--Potential Impact of Changes in Interest
Rates and the Current Interest Rate Environment" and "--Management of Market
Risk--Interest Rate Risk."
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<PAGE> 66
MAINTAINING ASSET QUALITY. The Association's high asset quality is a
result of its conservative underwriting standards, the diligence of its loan
collection personnel and the stability of the local economy. In addition, the
Association also invests in mortgage-backed securities issued by GNMA, Freddie
Mac and Fannie Mae and other investment securities, primarily U.S. Government
securities and federal agency obligations. At March 31, 1998, the Association's
ratio of nonperforming assets to total assets was 0.82% compared to 0.98% and
1.37% at March 31, 1997 and 1996, respectively.
MANAGEMENT OF MARKET RISK - INTEREST RATE RISK
The Association's most significant form of market risk is interest rate
risk, as the majority of the Association's assets and liabilities are sensitive
to changes in interest rates. The Association's mortgage loan portfolio,
consisting primarily of loans on residential real property located in
Westchester County, is subject to risks associated with the local economy. The
Association does not own any trading assets. At March 31, 1998, the Association
did not have any hedging transactions in place, such as interest rate swaps and
caps. The Association's interest rate risk management program focuses primarily
on evaluating and managing the composition of the Association's assets and
liabilities in the context of various interest rate scenarios. Factors beyond
management's control, such as market interest rates and competition, also have
an impact on interest income and interest expense. The Association's assets
consist primarily of fixed rate mortgage loans which have longer maturities than
the Association's liabilities which consist primarily of deposits.
A principal part of the Association's business strategy is to manage
interest rate risk and to minimize the Association's exposure to changes in
market interest rates. In recent years, the Association has followed the
following strategies to manage interest rate risk: (i) purchasing adjustable
rate mortgage-backed securities guaranteed by Fannie Mae or GNMA; (ii) investing
in short-term U.S. Government securities and federal agency obligations; and
(iii) maintaining a high level of liquid interest earning assets such as
short-term federal funds sold and certificates of deposit. By investing in
short-term, liquid securities, the Association believes it is better positioned
to react to increases in market interest rates. However, investments in shorter
term securities generally bear lower yields than longer term investments. In
addition, these strategies may result in lower levels of interest income than
would be obtained by investing in longer term fixed rate loans. Management
believes that maintaining a significant portion of its assets in short term
investments reduces the Association's exposure to interest rate fluctuations and
enhances long-term profitability.
NET PORTFOLIO VALUE. Management monitors the Association's interest
rate sensitivity through the use of a model which estimates the change in net
portfolio value ("NPV") in response to a range of assumed changes in market
interest rates. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet items. Management is not aware of any known
trends that would significantly affect the timing or amount of the expected cash
flows utilized in the NPV model. The model estimates the effect on the
Association's NPV of instantaneous and permanent 100 to 400 basis point
increases and decreases in market interest rates with no effect given to any
steps that management might take to counter the effect of interest rate
movements.
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<PAGE> 67
The table below sets forth, as of March 31, 1998, the estimated changes
in the Association's NPV which would result from the designated instantaneous
changes in interest rates.
<TABLE>
<CAPTION>
Estimated Increase
Changes in (Decrease) in NPV(1)
Interest Rates Estimated --------------------------------
(basis points) NPV Amount Percent
------------- ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 $ 28,163 $ (12,120) (30)%
+300 31,757 (8,526) (21)
+200 35,127 (5,156) (13)
+100 38,133 (2,150) (5)
0 40,283 -- --
-100 41,765 1,482 4
-200 42,620 2,337 6
-300 43,949 3,666 9
-400 46,301 6,018 15
</TABLE>
- --------------------
(1) Represents the increase (decrease) in the estimated NPV at the
indicated change in interest rates compared to the NPV assuming no
change in interest rates.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions including relative levels of market
interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results. Further, the computations do not reflect
any actions management may undertake in response to changes in interest rates.
The table set forth above indicates that at March 31, 1998, in the
event of a 200 basis point decrease in interest rates, the Association would be
expected to experience a 6% increase in NPV. In the event of a 200 basis point
increase in interest rates, the Association would be expected to experience a
13% decrease in NPV. Since March 31, 1998, there have been no changes in the
Association's interest rate risk exposures or how those exposures would be
managed.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV require making certain
assumptions which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of the Association's interest sensitive
assets and liabilities existing at the beginning of a period remain constant
over the period being measured and assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
or repricing of specific assets and liabilities. Accordingly, although the NPV
table provides an indication of the Association's interest rate risk exposure at
a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Association's net interest income, and will differ from actual results.
Additionally, the guidelines established by the Board of Directors are not
strict limitations. While a goal of the Asset/Liability Management Committee and
the Board of Directors is to limit projected NPV changes within the Board's
guidelines, the Association will not necessarily limit projected changes in NPV
if the required action would present disproportionate risk to the Association's
continued profitability.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND 1997
ASSETS. Total assets increased $11.7 million, or 4.8%, to $254.7
million at March 31, 1998 from $243.0 million at March 31, 1997. The increase in
total assets resulted primarily from: a $7.0 million, or 5.7%, increase in net
loans to $128.6 million from $121.6 million; a $1.5 million, or 2.4%, increase
in held-to-maturity securities to
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<PAGE> 68
$64.9 million from $63.4 million; and a $2.6 million, or 6.5%, increase in cash
and cash equivalents to $42.1 million from $39.5 million. Asset growth was
funded through deposit inflows and cash provided by the Association's
operations. Overall asset growth reflects the Association's strategy of
investing in fixed rate residential loans, short-term liquid investments and
adjustable rate mortgage-backed securities. The increase in net loans primarily
reflects an increase of $5.6 million, or 5.4%, in one-to-four family mortgage
loans and a $3.6 million, or 38.5%, increase in advances on home equity lines of
credit, partially offset by a decrease of $3.3 million in outstanding
construction loans. The increase in loans is primarily a result of the increased
demand for fixed rate mortgage loans, given the low interest rate environment.
The Association is primarily a fixed rate lender. One-to-four family mortgage
loans totalled $109.2 million, or 83.8% of total loans at March 31, 1998,
compared to $103.6 million or 83.6% at March 31, 1997. The increase in
held-to-maturity securities is a result of the investment of funds provided by
deposit inflows in excess of loan demand.
LIABILITIES. Total liabilities increased $8.8 million, or 4.1%, to
$222.8 million at March 31, 1998 from $214.0 million at March 31, 1997. The
increase in total liabilities is primarily attributable to an $8.7 million, or
4.1%, increase in deposits to $219.9 million from $211.2 million. The deposit
growth reflects an increase of $9.4 million, or 8.5%, in certificate accounts
partially offset by a $677,000, or 0.7%, decrease in passbook and other
accounts. The increase in certificate accounts is due primarily to the
Association's marketing efforts.
EQUITY. Retained earnings increased by $2.9 million, or 10.0%, to $31.9
million at March 31, 1998 from $29.0 million at March 31, 1997, reflecting net
income of $2.9 million for the fiscal year.
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<PAGE> 69
AVERAGE BALANCE SHEETS
The following table sets forth actual and average balance sheets,
average yields and costs, and certain other information at March 31, 1998 and
for the years ended March 31, 1998, 1997 and 1996. The table reflects the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities (derived by dividing interest income or expense by
the monthly average balance of interest-earning assets or interest-bearing
liabilities, respectively), as well as the net yield on interest-earning assets.
Management believes that the use of monthly average balances rather than daily
average balances did not have a material effect on the data presented. No
tax-equivalent adjustments were made, as the effect thereof was not material.
Nonaccrual loans were included in the computation of average balances, but have
been included in the table as loans having a zero yield. The yields set forth
below include the effect of deferred fees, discounts and premiums which are
included in interest income.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------
ACTUAL AVERAGE
BALANCE YIELD/RATE
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest-earning assets:
Loans(1) $128,558 8.20%
Mortgage-backed securities(2) 53,421 6.91
Other securities(2) 14,471 6.21
Federal funds sold 36,400 5.45
Certificates of deposit 11,483 6.16
Other interest-earning assets 3,515 6.04
--------
Total interest-earning assets 247,848 7.28
Noninterest earning assets 6,901
--------
Total assets $254,749
========
Interest-bearing liabilities:
Passbook and club accounts $ 61,347 2.54%
Money market accounts 17,676 3.05
NOW and Super NOW accounts 21,261 2.04
Certificates of deposit 119,629 5.60
Other interest-bearing liabilities 2,451 2.22
--------
Total interest-bearing liabilities 222,364 4.18
Noninterest bearing liabilities 484
--------
Total liabilities 222,848
Equity 31,901
--------
Total liabilities and equity $254,749
========
Net interest income
Net interest rate spread(3) 3.10%
Net earning assets(4) $ 25,484
========
Net interest margin(5)
Average interest-earning assets to average
interest-bearing liabilities 111.46%
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------------
1998
--------------------------------------
AVERAGE
OUTSTANDING AVERAGE
BALANCE INTEREST YIELD/RATE
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans(1) $124,646 $ 10,456 8.39%
Mortgage-backed securities(2) 53,475 3,515 6.57
Other securities(2) 13,789 826 5.99
Federal funds sold 34,292 1,929 5.63
Certificates of deposit 12,002 738 6.15
Other interest-earning assets 2,512 154 6.13
-------- --------
Total interest-earning assets 240,716 $ 17,618 7.32
========
Noninterest earning assets 7,100
--------
Total assets $247,816
========
Interest-bearing liabilities:
Passbook and club accounts $ 62,197 $ 1,573 2.53%
Money market accounts 18,556 550 2.96
NOW and Super NOW accounts 20,269 412 2.03
Certificates of deposit 114,015 6,165 5.41
Other interest-bearing liabilities 1,870 43 2.30
-------- --------
Total interest-bearing liabilities 216,907 $ 8,743 4.03
========
Noninterest bearing liabilities 448
--------
Total liabilities 217,355
Equity 30,461
--------
Total liabilities and equity $247,816
========
Net interest income $ 8,875
========
Net interest rate spread(3) 3.29%
Net earning assets(4) $ 23,809
========
Net interest margin(5) 3.69%
Average interest-earning assets to average
interest-bearing liabilities 110.98%
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
1997
------------------------------------
AVERAGE
OUTSTANDING AVERAGE
BALANCE INTEREST YIELD/RATE
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans(1) $118,986 $ 9,987 8.39%
Mortgage-backed securities(2) 50,930 3,244 6.37
Other securities(2) 12,956 768 5.93
Federal funds sold 33,523 1,793 5.35
Certificates of deposit 11,765 700 5.95
Other interest-earning assets 2,360 145 6.14
-------- --------
Total interest-earning assets 230,520 $ 16,637 7.22
========
Noninterest earning assets 6,606
--------
Total assets $237,126
========
Interest-bearing liabilities:
Passbook and club accounts $ 64,537 $ 1,640 2.54%
Money market accounts 17,845 525 2.94
NOW and Super NOW accounts 19,454 393 2.02
Certificates of deposit 104,991 5,318 5.07
Other interest-bearing liabilities 1,771 41 2.32
-------- --------
Total interest-bearing liabilities 208,598 $ 7,917 3.80
========
Noninterest bearing liabilities 508
-------
Total liabilities 209,106
Equity 28,020
--------
Total liabilities and equity $237,126
========
Net interest income $ 8,720
========
Net interest rate spread(3) 3.42%
Net earning assets(4) $ 21,922
========
Net interest margin(5) 3.78%
Average interest-earning assets to average
interest-bearing liabilities 110.51%
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------
AVERAGE
OUTSTANDING AVERAGE
BALANCE INTEREST YIELD/RATE
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans(1) $111,022 $ 9,468 8.53%
Mortgage-backed securities(2) 43,440 2,819 6.49
Other securities(2) 14,280 717 5.02
Federal funds sold 31,685 1,870 5.90
Certificates of deposit 11,317 699 6.18
Other interest-earning assets 2,623 159 6.06
----------- --------
Total interest-earning assets 214,367 $ 15,732 7.34
=======
Noninterest earning assets 6,459
-----------
Total assets $ 220,826
===========
Interest-bearing liabilities:
Passbook and club accounts $ 67,537 $ 1,903 2.82%
Money market accounts 16,446 516 3.14
NOW and Super NOW accounts 17,615 358 2.03
Certificates of deposit 91,557 5,032 5.50
Other interest-bearing liabilities 1,651 39 2.36
----------- --------
Total interest-bearing liabilities 194,806 $ 7,848 4.03
========
Noninterest bearing liabilities 395
-----------
Total liabilities 195,201
Equity 25,625
-----------
Total liabilities and equity $ 220,826
===========
Net interest income $ 7,884
========
Net interest rate spread(3) 3.31%
Net earning assets(4) $ 19,561
===========
Net interest margin(5) 3.68%
Average interest-earning assets to average
interest-bearing liabilities 110.04%
</TABLE>
- ----------------------
(1) Balances are net of deferred loan fees, construction loans in process and
the allowance for loan losses.
(2) Average outstanding balances are based on amortized cost.
(3) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net earning assets represent total interest-earning assets less total
interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total
interest-earning assets.
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RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest
income and interest expense for the major categories of the Association's
interest-earning assets and interest-bearing liabilities. Information is
provided for each category of interest-earning assets and interest-bearing
liabilities, with respect to (i) changes attributable to changes in volume
(i.e., changes in balances multiplied by the prior-period rate) and (ii) changes
attributable to rate (i.e., changes in rate multiplied by prior-period
balances). 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>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
----------------------------------- -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO TOTAL DUE TO TOTAL
--------------------- INCREASE --------------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ................................. $ 475 $ (6) $ 469 $ 672 $ (153) $ 519
Mortgage-backed securities ............ 163 108 271 483 (58) 425
Other securities ...................... 50 8 58 (66) 117 51
Federal funds sold .................... 41 95 136 112 (189) (77)
Certificates of deposit ............... 14 24 38 27 (26) 1
Other ................................. 9 -- 9 (14) -- (14)
------- ------- ------- ------- ------- -------
Total interest-earning assets ...... $ 752 $ 229 $ 981 $ 1,214 $ (309) $ 905
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Passbook and club accounts ............ $ (59) $ (8) $ (67) $ (82) $ (181) $ (263)
Money market accounts ................. 21 (36) (15) 41 (32) 9
NOW and Super NOW accounts ............ 16 43 59 37 (2) 35
Certificates of deposit ............... 464 383 847 718 (432) 286
Other ................................. 2 -- 2 3 (1) 2
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities.. $ 444 $ 382 $ 826 $ 717 $ (648) $ 69
======= ======= ======= ======= ======= =======
Net interest income ....................... $ 308 $ (153) $ 155 $ 497 $ 339 $ 836
======= ======= ======= ======= ======= =======
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
NET INCOME. Net income increased by $595,000, or 26.0%, to $2.9 million
for the year ended March 31, 1998 from $2.3 million for the prior year. The
increase was primarily attributable to a $1.3 million decrease in noninterest
expense (primarily due to the absence in fiscal 1998 of a $1.2 million special
assessment incurred in fiscal 1997 to recapitalize the SAIF) and a $155,000
increase in net interest income. Partially offsetting these items was a $740,000
increase in income tax expense and a $115,000 decrease in noninterest income.
Tax expense for fiscal 1997 was reduced by a tax benefit of $250,000 due to a
change in New York State tax law. Excluding the after-tax effect of the special
assessment and the State tax benefit, net income for the year ended March 31,
1997 would have been approximately $2.8 million.
INTEREST INCOME. Interest income increased by $981,000, or 5.9%, to
$17.6 million for the year ended March 31, 1998 from $16.6 million for the year
ended March 31, 1997. The increase in interest income was primarily attributable
to a $10.2 million increase in the average balance of interest earning assets to
$240.7 million for the year ended March 31, 1998 from $230.5 million for the
prior year, and an increase in the average yield on interest earning assets to
7.32% from 7.22%. The increase in the average yield was primarily attributable
to increases in the average yield on mortgage-backed securities, federal funds
and certificates of deposit. Interest income on loans increased by $469,000, or
4.7%, for the year ended March 31, 1998 compared to the prior year, primarily
reflecting a $5.6 million increase in average loan balances to $124.6 million
from $119.0 million. The Association originated new loans of
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<PAGE> 71
$28.9 million (including one-to-four family fixed rate mortgage loans and home
equity lines of credit which totalled $21.7 million) and collected principal
repayments of $22.4 million during fiscal 1998. The growth in the loan portfolio
was due to the low interest rate environment which has created strong demand for
fixed rate loans (the Association's primary mortgage product). The low interest
rate environment has also created a strong market for home purchases and the
refinancing of existing mortgage loans. Interest income on mortgage-backed
securities increased $271,000, or 8.4%, for the year ended March 31, 1998
compared to the prior year, reflecting an increase in the average balance of
mortgage-backed securities to $53.5 million from $50.9 million and an increase
in the average yield to 6.57% from 6.37%. Interest income on other securities
increased $58,000, or 7.6%, for the year ended March 31, 1998 compared to the
prior year, primarily due to an increase in the average yield to 5.99% from
5.93%. Interest income on federal funds sold increased by $136,000, or 7.6%, for
the year ended March 31, 1998 compared to the prior year, reflecting an increase
in the average balance of federal funds sold to $34.3 million from $33.5 million
and an increase in the average yield to 5.63% from 5.35%. Interest income on
certificates of deposit increased $38,000, or 5.4%, for the year ended March 31,
1998 compared to the prior year, due to an increase in the average balance of
certificates of deposit to $12.0 million from $11.8 million and an increase in
the average yield to 6.15% from 5.95%.
INTEREST EXPENSE. Interest expense increased $826,000, or 10.4%, to
$8.7 million for the year ended March 31, 1998 from $7.9 million for the prior
year. The increase in interest expense was attributable to an increase in the
average balance of interest-bearing liabilities (consisting primarily of
deposits) to $216.9 million from $208.6 million and an increase in the average
cost of interest-bearing liabilities to 4.03% from 3.80%. The increase in the
cost of interest-bearing liabilities reflected the continued change in the mix
of deposit accounts from lower-cost passbook and club accounts to higher-cost
certificate accounts. Certificates of deposit comprised 52.6% of total average
interest-bearing liabilities in fiscal 1998 compared to 50.3% in the prior year,
reflecting growth in certificate accounts attributable to the Association's
marketing efforts. Interest expense on certificate accounts increased $847,000,
or 15.9%, for the year ended March 31, 1998 compared to the prior year, as the
average balance of certificate accounts increased to $114.0 million from $105.0
million and the average rate increased to 5.41% from 5.07%. Total interest
expense on other deposit accounts (passbook, club accounts, money market and NOW
accounts) was relatively unchanged at approximately $2.5 million in both fiscal
1998 and 1997. The average balances of these accounts totalled $101.0 million in
fiscal 1998 compared to $101.8 million in fiscal 1997, and the overall average
rate was 2.51% in both years.
NET INTEREST INCOME. For the years ended March 31, 1998 and 1997, net
interest income was $8.9 million and $8.7 million, respectively. The $155,000
increase in net interest income in fiscal 1998 was primarily attributable to the
positive effect of a $1.9 million increase in net earning assets
(interest-earning assets less interest-bearing liabilities), partially offset by
a 13 basis point decrease in the interest rate spread to 3.29% from 3.42%. The
ratio of interest-earning assets to interest-bearing liabilities remained stable
at 110.98% and 110.51% for the years ended March 31, 1998 and 1997,
respectively. The Association's net interest margin decreased to 3.69% in fiscal
1998 from 3.78% in the prior year.
PROVISION FOR LOAN LOSSES. Provisions for loan losses represent
charges to income in order to maintain the allowance for loan losses at a level
which is adequate to cover probable losses inherent in the existing loan
portfolio. Management regularly reviews the Association's loan portfolio and
makes provisions for loan losses in order to maintain the adequacy of the
allowance. Factors considered by management in determining the allowance include
historical experience, the volume and type of lending conducted by the
Association, the level of the Association's non-performing loans and general
economic conditions, particularly as they relate to the Association's market
area. The provision for loan losses was $155,000 and $146,000 for the years
ended March 31,1998 and 1997, respectively. At March 31, 1998 and 1997,
nonperforming loans totaled $2.0 million and $2.3 million, respectively, and the
allowance for loan losses was $984,000 and $845,000, respectively. The
provision and allowance for loan losses were increased in fiscal 1998 and 1997
in light of changes in the levels of inherent losses due to changes in the size
of the loan portfolio. The loan portfolio increased to $128.6 million at March
31, 1998 from $121.6 million at March 31, 1997 and $113.5 million at March 31,
1996. At March 31, 1998 and 1997, the allowance for loan losses as a
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<PAGE> 72
percentage of total loans was 0.75% and 0.68%, respectively. The allowance for
loan losses as a percentage of total nonperforming loans was 50.26% and 37.32%,
respectively, at March 31, 1998 and 1997.
NONINTEREST INCOME. Noninterest income totaled $186,000 and $301,000
for the years ended March 31, 1998 and 1997, respectively. The $115,000 decrease
in noninterest income was attributable to the absence in fiscal 1998 of gains on
sale of real estate owned which amounted to $134,000 in fiscal 1997, partially
offset by a $19,000 increase in banking service charges and fees.
NONINTEREST EXPENSE. Noninterest expense decreased by $1.3 million, or
24.5%, to $4.0 million for the year ended March 31, 1998 from $5.3 million for
the year ended March 31, 1997. The decrease in noninterest expense is primarily
attributable to the absence in fiscal 1998 of a special one-time assessment of
$1.2 million incurred in fiscal 1997 to recapitalize the Savings Association
Insurance Fund (the "SAIF"). In addition, other deposit insurance costs
decreased by $213,000 in fiscal 1998 compared to the prior year (reflecting
lower costs subsequent to the SAIF recapitalization) and other noninterest
expenses decreased by $73,000 (primarily reflecting lower net costs of real
estate owned). Partially offsetting these decreases was a $148,000 increase in
compensation and benefits to $2.1 million from $2.0 million reflecting normal
salary increases and an increase in directors' fees.
INCOME TAXES. Income tax expense was $2.1 million for the year ended
March 31, 1998, compared to $1.3 million for the year ended March 31, 1997 and
the effective tax rates were 41.7% and 36.7%, respectively. The change in income
tax expense in fiscal 1998 resulted from higher pre-tax income, as well as a tax
benefit of $250,000 in fiscal 1997 due to a decrease in deferred tax liabilities
caused by an amendment to the New York State tax law enacted in July 1996. The
amendment changed the base-year for tax bad debt reserves and eliminated the
need for a deferred tax liability previously recognized for reserves in excess
of the base-year amount. See Note 8 of the Notes to Financial Statements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
NET INCOME. Net income decreased $107,000, or 4.5%, to $2.3 million for
the year ended March 31, 1997 from $2.4 million for the prior year. The decrease
was primarily attributable to a $1.4 million increase in noninterest expense
(primarily due to a $1.2 million special assessment in fiscal 1997 to
recapitalize the SAIF), substantially offset by an $836,000 increase in net
interest income and a $407,000 decrease in income tax expense. Income tax
expense for fiscal 1997 was reduced by a tax benefit of $250,000 due to a change
in New York State tax law. Excluding the after-tax effect of the special
assessment and the state tax benefit, net income for the year ended March 31,
1997 would have been approximately $2.8 million.
INTEREST INCOME. Interest income increased $905,000, or 5.8%, to $16.6
million for the year ended March 31, 1997 from $15.7 million for the year ended
March 31, 1996. The increase in interest income was primarily attributable to a
$16.1 million increase in the average balance of interest earning assets to
$230.5 million for the year ended March 31, 1997 from $214.4 million for the
prior year, partially offset by a decrease in the average yield on interest
earning assets to 7.22% from 7.34% reflecting the general decline in market
interest rates. Interest income on loans increased $519,000, or 5.5%, for the
year ended March 31, 1997 compared to the prior year, primarily reflecting an
$8.0 million increase in average loan balances to $119.0 million from $111.0
million. The Association originated new loans of $24.1 million (including fixed
rate one-to-four family mortgage loans and home equity lines of credit which
totalled $19.7 million) and collected principal repayments of $16.6 million
during fiscal 1997. Interest income on mortgage-backed securities increased
$425,000, or 15.1%, for the year ended March 31, 1997 compared to the prior
year, reflecting an increase in the average balance of mortgage-backed
securities to $50.9 million from $43.4 million partially offset by a decrease in
the average yield to 6.37% from 6.49%. Interest income on other securities
increased $51,000, or 7.1%, for the year ended March 31, 1997 compared to the
prior year, primarily due to an increase in the average yield to 5.93% from
5.02%. Interest income on federal funds sold decreased $77,000, or 4.1%, for the
year ended March 31, 1997 compared to the prior year, reflecting a decrease in
the average yield on federal funds sold to 5.35% from 5.90%, partially offset by
an increase in the average balance to $33.5 million from
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<PAGE> 73
$31.7 million. Interest income on certificates of deposit was substantially
unchanged at $700,000 for the year ended March 31, 1997. Interest and dividend
income on other interest earning assets decreased $14,000, or 8.8%, for the year
ended March 31, 1997 compared to the prior fiscal year.
INTEREST EXPENSE. Interest expense increased $69,000, or 0.9%, to $7.9
million for the year ended March 31, 1997 from $7.8 million for the prior year.
The increase in interest expense was attributable to an increase in the average
balance of interest-bearing liabilities (consisting primarily of deposits) to
$208.6 million from $194.8 million and a decrease in the average cost of
interest-bearing liabilities to 3.80% from 4.03%. The decrease in the cost of
interest-bearing liabilities reflected the general decrease in market interest
rates. Certificate accounts comprised 50.3% of total average interest-bearing
liabilities in fiscal 1997 compared to 47.0% in the prior year, reflecting
growth in certificate accounts attributable to the Association's marketing
efforts. Interest expense on certificate accounts increased $286,000, or 5.7%,
for the year ended March 31, 1997 compared to the prior year, as the average
balance of certificate accounts increased to $105.0 million from $91.6 million.
The effect of the higher average balance was partially offset by a decrease in
the average rate to 5.07% from 5.50%. Total interest expense on other deposit
accounts (passbook, club, money market and NOW) decreased $219,000 or 7.9%, for
the year ended March 31, 1997 compared to prior year, as the average rate on
these accounts decreased to 2.51% from 2.73%.
NET INTEREST INCOME. For the years ended March 31, 1997 and 1996, net
interest income was $8.7 million and $7.9 million, respectively. The $836,000
increase in net interest income was primarily attributable to the positive
effect of a $2.4 million increase in net earning assets (interest-earning assets
less interest-bearing liabilities) and an 11 basis point increase in the
interest rate spread to 3.42% from 3.31%. The ratio of interest-earning assets
to interest-bearing liabilities remained stable at 110.51% and 110.04% for the
years ended March 31, 1997 and 1996, respectively. The Association's net
interest margin increased to 3.78% in fiscal 1997 from 3.68% in the prior year.
PROVISION FOR LOAN LOSSES. The provision for loan losses was
$146,000 and $98,000 for the years ended March 31, 1997 and 1996, respectively.
At March 31, 1997 and 1996, nonperforming loans totaled $2.3 million and $3.1
million, respectively, and the allowance for loan losses was $845,000 and
$725,000, respectively. The provision and allowance for loan losses were
increased in fiscal 1997 in light of changes in the levels of inherent losses
due to changes in the size of the loan portfolio. The loan portfolio increased
to $121.6 million at March 31, 1997 from $113.5 million at March 31, 1996. At
March 31, 1997 and 1996, the allowance for loan losses as a percentage of total
loans was 0.68% and 0.62%, respectively. The Association's allowance for loan
losses as a percentage of total nonperforming loans was 37.32% and 23.48%,
respectively, at March 31, 1997 and 1996.
NONINTEREST INCOME. Noninterest income totaled $301,000 and $208,000
for the years ended March 31, 1997 and 1996, respectively. The $93,000 increase
in noninterest income was attributable to a $119,000 increase in gains on sales
of real estate owned, partially offset by a $26,000 decrease in banking service
charges and fees.
NONINTEREST EXPENSE. Noninterest expense increased by $1.4 million, or
36.1%, to $5.3 million for the year ended March 31, 1997 from $3.9 million for
the year ended March 31, 1996. The increase in noninterest expense was primarily
attributable to the payment in fiscal 1997 of a special one-time assessment of
$1.2 million to recapitalize the SAIF. Other changes in noninterest expense in
fiscal 1997 compared to the prior year included increases of $79,000 in
compensation and benefits and $136,000 in other noninterest expenses (including
increases in real estate owned expense), and a decrease of $78,000 in other
deposit insurance costs subsequent to the SAIF recapitalization.
INCOME TAXES. Income tax expense was $1.3 million for the year ended
March 31, 1997, compared to $1.7 million for the year ended March 31, 1996. The
effective tax rate decreased to 36.7% from 41.9% primarily as a result of a tax
benefit of $250,000 in fiscal 1997 due to a decrease in deferred tax liabilities
caused by an amendment to the New York State tax law enacted in July 1996.
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CAPITAL RESOURCES AND LIQUIDITY
The objective of the Association's liquidity management is to ensure
the availability of sufficient cash flows to meet all financial commitments and
to capitalize on opportunities for expansion. Liquidity management addresses the
Association's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Association's primary investing activities are the origination of
mortgage loans, and the purchase of short-term investments and adjustable rate
mortgage-backed securities. These activities are funded by deposit growth and
principal repayments on loans, mortgage-backed securities and other investment
securities. During fiscal 1998, the Association originated $29.4 million in
loans and purchased approximately $22.4 million of securities. These
disbursements were funded by $19.8 million in principal payments, maturities and
calls of securities, $22.4 million in loan principal repayments and an $8.7
million increase in deposits.
At March 31, 1998, the Association had outstanding $6.4 million in
commitments to originate loans. If the Association requires funds beyond its
internal funding capabilities, advances from the FHLB of New York are available.
At March 31, 1998, approximately $108.9 million in certificates of deposit were
scheduled to mature within a year. The Association's experience has been that a
substantial portion of its maturing certificate of deposit accounts are renewed.
The Association is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet applicable liquidity
requirements. At March 31, 1998, the Association's liquidity, as measured for
regulatory purposes, was 31.5%, or $56.5 million in excess of the minimum OTS
requirement.
Following the Reorganization, the Company will initially conduct no
business other than holding the capital stock of the Association and the loan it
will make to the ESOP. The Company expects to retain up to 50% of the net
proceeds of the Offering. See "Use of Proceeds." In the future, the Company's
primary source of funds, other than income from its investments and principal
and interest payments received on the ESOP loan, is expected to be capital
distributions from the Stock Association. As a stock savings association, the
Stock Association may not declare or pay a cash dividend on or repurchase any of
its capital stock if the effect of such transaction would be to reduce its
equity to an amount which is less than the minimum amount required by applicable
regulatory federal regulations. At March 31, 1998, the Association was in
compliance with all applicable regulatory capital requirements. See "Historical
and Pro Forma Regulatory Capital Compliance."
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and related Notes have been prepared in
conformity with generally accepted accounting principles, which generally
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Association's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Association are
financial. As a result, the Association's net income is directly impacted by
changes in interest rates, which are indirectly influenced by inflationary
expectations. The Association's ability to match the interest sensitivity of its
financial assets to the interest sensitivity of its financial liabilities as
part of its interest rate risk management program may reduce the effect of
changes in interest rates on the Association's net income. Changes in interest
rates do not necessarily move to the same extent as changes in the price of
goods and services. In the current interest rate environment, liquidity and the
maturity structure of the Association's assets and liabilities are critical to
the maintenance of acceptable levels of net income. Management has concluded
that
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<PAGE> 75
by maintaining a significant portion of the Association's assets in short-term
investments and adjustable rate mortgage-backed securities, the Association will
be able to redeploy its assets in a rising interest rate environment.
IMPACT OF NEW ACCOUNTING STANDARDS
FASB STATEMENT ON EARNINGS PER SHARE. In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128. The Statement establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. This Statement simplifies the prior
accounting standards for computing earnings per share, as set forth in
Accounting Principles Board ("APB") Opinion No. 15. SFAS No. 128 replaces the
presentation of primary EPS with basic EPS and requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
(such as stock options) 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 will apply to the Association's earnings per share
disclosures which will be made from the date of completion of the Reorganization
and Offering.
FASB STATEMENT ON ACCOUNTING FOR STOCK-BASED COMPENSATION. In October
1995, the FASB issued SFAS No. 123 which addresses accounting for stock-based
compensation arrangements such as the Stock Option Plan and Stock Award Plan
which are expected to be implemented subsequent to the Reorganization. SFAS No.
123 defines a "fair-value-based method" of accounting whereby compensation cost
is measured at the grant date of a stock-based compensation award based on the
fair value of the award; such compensation cost is recognized as expense over
the service (vesting) period. The FASB has encouraged all entities to adopt the
fair-value-based method; however, SFAS No. 123 allows entities to continue the
use of the "intrinsic-value-based method" prescribed by APB Opinion No. 25.
Under the intrinsic-value-based method, compensation cost is measured based on
the award's intrinsic value, or the excess (if any) of the market price of the
stock at the grant date over the exercise price, i.e., the amount (if any) that
the employee must pay to acquire the stock. However, most stock option grants
have no intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue to apply APB
Opinion No. 25 must make certain pro forma disclosures of net income and
earnings per share, as if the fair-value-based method had been applied to awards
granted in fiscal years beginning after December 15, 1994. The Association
expects to adopt the "intrinsic-value-based method" as prescribed by APB Opinion
No. 25. Accordingly, no compensation expense will be recognized for the Stock
Option Plan since the exercise price of the options will equal the market price
of the underlying stock at the grant date. The grant date fair value of shares
awarded under the Stock Award Plan will be recognized as expense on a
straight-line basis over the five-year vesting period. See "Pro Forma Data."
FASB STATEMENT ON TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. In June 1996, the FASB issued SFAS No. 125 which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. SFAS No.
125 applies to transactions such as loan securitizations, sales of partial
interests in financial assets, repurchase agreements, securities lending,
pledges of collateral, loan syndications and participations, sales of
receivables with recourse, servicing of mortgage and other loans, and
in-substance defeasances of debt. The Statement distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Under the financial-components approach, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. If a transfer does not
meet the criteria for a sale, the transaction is accounted for as a secured
borrowing with a pledge of collateral. SFAS No. 125 applies prospectively to
transactions occurring after January 1, 1997, although the effective date of
certain provisions was January 1, 1998. SFAS No. 125 has not had, and is not
expected to have, a material impact on the Association's financial statements.
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FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the
FASB issued SFAS No. 130 which establishes standards for the reporting and
display of comprehensive income (and its components) in financial statements.
The standard does not, however, specify when to recognize or how to measure
items that make up comprehensive income. Comprehensive income represents net
income and certain amounts reported directly in equity, such as the net
unrealized gain or loss on available-for-sale securities. While SFAS No. 130
does not require a specific reporting format, it does require that an enterprise
display in the financial statements an amount representing total comprehensive
income for the period. This Statement will be effective for the Association's
fiscal year ending March 31, 1999. Had this Statement applied to the Association
in fiscal 1998, 1997 and 1996, the Association would have reported comprehensive
income substantially equal to its reported net income for each of those years.
FASB STATEMENT ON SEGMENT DISCLOSURES AND RELATED INFORMATION. In June
1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which changes the way public companies report
information about segments of their business and requires them to report
selected segment information in their quarterly reports issued to shareholders.
Among other things, SFAS No. 131 requires public companies to report (i) certain
financial and descriptive information about its reportable operating segments
(as defined), and (ii) certain enterprise-wide financial information about
products and services, geographic areas and major customers. The required
segment financial disclosures include a measure of profit or loss, certain
specific revenue and expense items, and total assets. This statement is
effective for reporting by public companies in fiscal years beginning after
December 15, 1997 and, accordingly, would be adopted by the Association upon
completion of the Reorganization and Offering. SFAS No. 131 is not expected to
have a significant impact on the Association's financial reporting.
FASB STATEMENT ON EMPLOYER DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS. In February 1998, the FASB issued SFAS No. 132 which
standardizes the disclosure requirements for pensions and other postretirement
benefits; requires additional information on changes in the benefit obligations
and fair values of plan assets; and eliminates certain present disclosure
requirements. The Statement does not change the measurement or recognition
requirements for postretirement benefits. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997 and, accordingly, will be adopted by the
Association in the year ending March 31, 1999. Management does not expect that
this standard will significantly affect the Association's financial reporting.
FASB STATEMENT ON DERIVATIVES AND HEDGING ACTIVITIES. In June 1998, the
FASB issued SFAS No. 133 which establishes accounting and reporting standards
for derivative instruments and for hedging activities. The Statement requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value hedge, a cash flow hedge, or a foreign
currency hedge. A specific accounting treatment applies to each type of hedge.
Entities may reclassify securities from the held-to-maturity category to the
available-for-sale category at the time adopting SFAS No. 133. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999
and, accordingly, would apply to the Association beginning on April 1, 2000. The
Association plans to adopt the standard at that time and does not presently
intend to reclassify securities between categories. The Association has not
engaged in derivatives and hedging activities covered by the new standard, and
does not expect to do so in the foreseeable future. Accordingly, SFAS No. 133 is
not expected to have a material impact on the Association's financial
statements.
BUSINESS OF THE ASSOCIATION
GENERAL
The Association was organized in 1891 as a New York chartered savings
association and obtained its federal charter in 1934. The Association has
operated continuously in Westchester County since its inception. The Association
conducts its business from its main office in Mamaroneck and two branch offices
located in Harrison and Rye Brook, New York. The Association is primarily
engaged in the business of offering savings and other deposits to the general
public, and using the funds from such deposits to make one-to-four family
mortgage loans secured primarily by
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<PAGE> 77
properties in Westchester County, New York. The Association's deposit accounts
are insured up to applicable limits by the FDIC.
LENDING ACTIVITIES
Historically, the Association's principal lending activity has been the
origination of fixed rate first mortgage loans for the purchase or refinancing
of one-to-four family residential real property. The Association retains all
loans that it originates. One-to-four family residential mortgage loans
represented $109.2 million, or 83.8%, of the Association's loan portfolio at
March 31, 1998. Home equity lines of credit represented $13.1 million, or 10.1%
of the Association's loan portfolio at March 31, 1998. The Association also
offers multi-family mortgage loans, commercial mortgage loans and construction
loans. Multi-family mortgage loans totaled $412,000, or 0.3%, of the loan
portfolio at March 31, 1998. Commercial mortgage loans totaled approximately
$3.8 million, or 2.9% of the loan portfolio at March 31, 1998. Construction
loans totaled $1.8 million, or 1.4% of the loan portfolio at March 31, 1998. The
Association also makes consumer loans, which primarily consist of automobile,
passbook, home improvement and secured personal loans. Consumer loans totaled
$2.0 million, or 1.5% of the loan portfolio at March 31, 1998.
73
<PAGE> 78
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Association's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------ --------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family................ $109,207 83.8% $103,595 83.6% $98,865 84.7% $98,675 89.5%
Home equity lines of credit....... 13,138 10.1 9,487 7.7 7,131 6.1 5,146 4.6
Multi-family...................... 412 0.3 348 0.3 373 0.3 395 0.4
Commercial........................ 3,811 2.9 3,416 2.8 3,469 3.0 3,188 2.9
Construction...................... 1,800 1.4 5,539 4.5 5,193 4.5 1,451 1.3
------- ----- ------- ------ ------- ------ ------- ------
Total mortgage loans............ 128,368 98.5 122,385 98.9 115,031 98.6 108,855 98.7
------- ----- ------- ------ ------- ------ ------- ------
Consumer loans:
Automobile loans.................. 1,011 0.8 1,028 0.8 968 0.8 647 0.6
Other(1).......................... 1,016 0.7 426 0.3 665 0.6 737 0.7
------- ----- ------- ------ ------- ------ ------- ------
Total consumer loans............ 2,027 1.5 1,454 1.1 1,633 1.4 1,384 1.3
------- ----- ------- ------ ------- ------ ------- ------
Total loans.......................... 130,395 100.0% 123,839 100.0% 116,664 100.0% 110,239 100.0%
===== ====== ====== ======
Construction loans in process........ (573) (1,049) (2,023) (500)
Allowance for loan losses............ (984) (845) (725) (652)
Deferred loan origination fees, net (280) (328) (384) (503)
----- ------ ------ ------
Total loans, net..................... $128,558 $121,617 $113,532 $108,584
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
------------------
1994
------------------
Amount Percent
<S> <C> <C>
Mortgage loans:
One-to-four family................ $94,089 89.3%
Home equity lines of credit....... 5,304 5.0
Multi-family...................... 680 0.7
Commercial........................ 3,088 2.9
Construction...................... 365 0.4
------- ------
Total mortgage loans............ 103,526 98.3
------- ------
Consumer loans:
Automobile loans.................. 185 0.2
Other(1).......................... 1,625 1.5
------- ------
Total consumer loans............ 1,810 1.7
------- ------
Total loans.......................... 105,336 100.0%
======
Construction loans in process........ (112)
Allowance for loan losses............ (568)
Deferred loan origination fees, net.. (529)
------
Total loans, net..................... $104,127
========
</TABLE>
- -------------------------
(1) Primarily secured personal loans, loans secured by deposit accounts and home
improvement loans.
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<PAGE> 79
The following table sets forth the composition of the Association's
loan portfolio by fixed and adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995
----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------- ------ ------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans
Mortgage loans:
One-to-four family............... $103,887 79.7% $96,801 78.2% $90,881 77.9% $90,132 81.8%
Home equity lines of credit...... 12,094 9.3 8,145 6.6 5,528 4.7 2,826 2.5
Multi-family..................... 412 0.3 348 0.3 373 0.3 395 0.4
Commercial....................... 3,811 2.9 3,380 2.7 3,403 2.9 3,087 2.8
Construction..................... 1,800 1.4 5,539 4.5 5,193 4.5 1,451 1.3
------- ------ ------- ------ ------- ------ ------- ------
Total mortgage loans........... 122,004 93.6 114,213 92.3 105,378 90.3 97,891 88.8
Consumer loans(1).................. 2,027 1.5 1,454 1.1 1,633 1.4 1,384 1.3
------- ------ ------- ------ ------- ------ ------- ------
Total fixed rate loans......... 124,031 95.1 115,667 93.4 107,011 91.7 99,275 90.1
------- ------ ------- ------ ------- ------ ------- ------
Adjustable Rate Loans
Mortgage loans:
One-to-four family............... 5,320 4.1 6,794 5.5 7,984 6.8 8,543 7.8
Home equity lines of credit...... 1,044 0.8 1,342 1.1 1,603 1.4 2,320 2.1
Commercial....................... -- -- 36 -- 66 0.1 101 --
------- ------ ------- ------ ------- ------ ------- ------
Total adjustable-rate loans.... 6,364 4.9 8,172 6.6 9,653 8.3 10,964 9.9
------- ------ ------- ------ ------- ------- ------ ------
Total loans........................... 130,395 100.0% 123,839 100.0% 116,664 100.0% 110,239 100.0%
====== ====== ====== ======
Construction loans in process......... (573) (1,049) (2,023) (500)
Allowance for loan losses............. (984) (845) (725) (652)
Deferred loan origination fees, net... (280) (328) (384) (503)
-------- -------- -------- --------
Total loans, net...................... $128,558 $121,617 $113,532 $108,584
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
-----------------
1994
-----------------
Amount Percent
------- ------
<S> <C> <C>
Fixed Rate Loans
Mortgage loans:
One-to-four family............... $85,930 81.6%
Home equity lines of credit...... 2,227 2.1
Multi-family..................... 680 0.7
Commercial....................... 2,959 2.8
Construction..................... 365 0.3
------- ------
Total mortgage loans........... 92,161 87.5
Consumer loans(1).................. 1,810 1.7
------- ------
Total fixed rate loans......... 93,971 89.2
------- ------
Adjustable Rate Loans
Mortgage loans:
One-to-four family............... 8,159 7.8
Home equity lines of credit...... 3,077 2.9
Commercial....................... 129 0.1
------- ------
Total adjustable-rate loans.... 11,365 10.8
------- ------
Total loans........................... 105,336 100.0%
======
Construction loans in process......... (112)
Allowance for loan losses............. (568)
Deferred loan origination fees, net... (529)
--------
Total loans, net...................... $104,127
========
</TABLE>
- --------------------
(1) Primarily secured personal loans, loans secured by deposit accounts and home
improvement loans.
75
<PAGE> 80
LOAN MATURITY SCHEDULE. The following table summarizes the contractual
maturities of the Association's loan portfolio at March 31, 1998. Loans with
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The table reflects the entire unpaid principal
balance of a loan in the maturity period that includes the final payment date,
and accordingly, does not reflect the effects of scheduled payments, possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
MULTI-FAMILY, COMMERCIAL,
ONE-TO-FOUR FAMILY(1) CONSTRUCTION AND CONSUMER TOTAL
---------------------- -------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Due During the Years Ending March 31,
1999(2) ..................... $ 471 8.13% $ 2,737 8.95% $ 3,208 8.83%
2000 ........................ 465 8.94 179 7.41 644 8.51
2001 ........................ 621 9.46 399 8.92 1,020 9.25
2002 and 2003 ............... 2,519 8.68 1,131 7.98 3,650 8.46
2004 to 2008 ................ 13,653 8.28 1,585 9.67 15,238 8.42
2009 to 2013 ................ 28,408 7.92 1,316 10.00 29,724 8.01
2014 and following .......... 76,208 8.17 703 8.77 76,911 8.18
-------- -------- --------
Total..................... $122,345 8.14 $ 8,050 9.08 $130,395 8.20
======== ======== ========
</TABLE>
____________
(1) Includes home equity lines of credit.
(2) Includes demand loans having no stated maturity.
The following table sets forth the dollar amounts of fixed and
adjustable rate loans at March 31, 1998 that are contractually due after March
31, 1999.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1999
--------------------------------
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
One-to-four family...................................................... $115,510 $ 6,364 $121,874
Multi-family, commercial, construction and consumer..................... 5,313 -- 5,313
-------- -------- --------
Total loans.......................................................... $120,823 $ 6,364 $127,187
======== ======== ========
</TABLE>
ONE-TO-FOUR FAMILY RESIDENTIAL LOANS. The Association's primary lending
activity is the origination of one-to-four family residential mortgage loans
secured by property located in the Association's primary lending area.
Generally, one-to-four family residential mortgage loans are made in amounts up
to 80% of the lesser of the appraised value or purchase price of the property.
Since March 31, 1998, the Association has offered one-to-four family loans with
loan-to-value ratios of up to 90%, with private mortgage insurance required.
Generally, fixed rate loans are originated for terms of up to 30 years.
One-to-four family loans are offered with a monthly or bi-weekly payment
feature. The Association does not sell the loans that it originates.
The Association originates fixed rate loans; however, the Association
also offers adjustable rate mortgage ("ARM") loans with one year adjustment
periods. The interest rate on ARM loans is indexed to the prime interest rate as
published in The Wall Street Journal. The Association's ARM loans currently
provide for maximum rate adjustments of 1.75% per year and 6% over the term of
the loan. The Association does not offer ARM loans with initial interest rates
that are below market, referred to as "teaser rates." Residential ARM loans
amortize over terms of up to 30 years. In the current low interest rate
environment, borrowers have shown a preference for fixed rate loans.
ARM loans decrease the risk associated with changes in market interest
rates by periodically repricing, but involve other risks because as interest
rates increase, the underlying payments by the borrower increase, thus
increasing the potential for default by the borrower. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the
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<PAGE> 81
maximum periodic and lifetime interest rate adjustment permitted by the terms of
the ARM loans, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At March 31, 1998, 4.9% of the
Association's one-to-four family residential loans had adjustable interest
rates.
All one-to-four family residential mortgage loans originated by the
Association include "due-on-sale" clauses, which give the Association the right
to declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
At March 31, 1998, approximately $109.2 million, or 83.8% of the
Association's loan portfolio, consisted of one-to-four family residential loans.
Approximately $1.7 million of such loans (representing 13 loans) were included
in nonperforming loans as of that date. See "--Nonperforming and Problem
Assets."
HOME EQUITY LINES OF CREDIT. The Association offers home equity lines
of credit that are secured by the borrower's primary residence. The borrower is
permitted to draw on the home equity line of credit during the first five years
after it is originated and may repay the outstanding balance over a term not to
exceed 20 years from the date the line of credit is originated. Home equity
lines of credit are generally underwritten under the same criteria that the
Association uses to underwrite one-to-four family fixed rate loans. Home equity
lines of credit may be underwritten with a loan to value ratio of 75% when
combined with the principal balance of the existing mortgage loan, if the
Association has the first mortgage on the property securing the loan, and up to
a 65% loan to value ratio when combined with the principal balance of the
existing mortgage loan if the first mortgage is held by another financial
institution; however, the maximum principal amount of a home equity line of
credit may not exceed $200,000 unless approved by the Board of Directors. The
Association appraises the property securing the loan at the time of the loan
application (but not thereafter) in order to determine the value of the property
securing the home equity lines of credit. At March 31, 1998, the outstanding
balances of home equity line of credit totalled $13.1 million, or 10.1% of the
Association's loan portfolio.
COMMERCIAL MORTGAGE LOANS. At March 31, 1998, $3.8 million, or 2.9%, of
the total loan portfolio consisted of commercial mortgage loans. Commercial
mortgage loans are secured by office buildings, private schools, religious
facilities and other commercial properties. The Association generally originates
fixed rate and adjustable rate commercial mortgage loans with maximum terms of
up to 10 years. The maximum loan-to-value ratio of commercial mortgage loans is
75%. At March 31, 1998, the largest commercial mortgage loan had a principal
balance of $721,000 and was secured by a commercial complex which includes
retail stores, a warehouse and residential apartment. As of March 31, 1998,
nonperforming loans included one commercial mortgage loan with a balance of
$236,000. The Association has begun foreclosure proceedings and does not
anticipate incurring any significant loss from the disposition of the property
securing the loan.
In underwriting commercial mortgage loans, the Association reviews the
expected net operating income generated by the real estate to ensure that it is
at least 125% of the amount of the monthly debt service; the age and condition
of the collateral; the financial resources and income level of the borrower; and
the borrower's business experience. Personal guarantees have always been
obtained from all commercial mortgage borrowers.
Loans secured by commercial real estate generally are larger than
one-to-four family residential loans and involve a greater degree of risk.
Commercial mortgage loans often involve large loan balances to single borrowers
or groups of related borrowers. Payments on these loans depend to a large degree
on the results of operations and management of the properties or underlying
businesses, and may be affected to a greater extent by adverse conditions in the
real estate market or the economy in general. Accordingly, the nature of
commercial real estate loans makes them more difficult for Association
management to monitor and evaluate.
MULTI-FAMILY MORTGAGE LOANS. Loans secured by multi-family real estate
totaled approximately $412,000, or 0.3% of the total loan portfolio at March 31,
1998. Multi-family mortgage loans generally are secured by multi-family rental
properties (including mixed-use buildings and walk-up apartments). Substantially
all multi-family
77
<PAGE> 82
mortgage loans were secured by properties located within the Association's
primary lending area. At March 31, 1998, the Association had four multi-family
mortgage loans with an average principal balance of approximately $103,000. The
largest multi-family mortgage loan had a principal balance of $257,000.
Multi-family mortgage loans generally are offered with both fixed and adjustable
interest rates, although in the current interest rate environment the
Association has not recently originated adjustable rate multi-family loans.
Multi-family loans are originated for terms of up to 30 years.
In underwriting multi-family mortgage loans, the Association reviews
the expected net operating income generated by the real estate to ensure that it
is at least 125% of the amount of the monthly debt service; the age and
condition of the collateral; the financial resources and income level of the
borrower; and the borrower's experience in owning or managing similar
properties. Multi-family mortgage loans are originated in amounts up to 75% of
the appraised value of the property securing the loan. Personal guarantees are
always obtained from multi-family mortgage borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to-four family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects 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 multi-family real
estate typically depends upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
CONSTRUCTION LENDING. To a limited extent, the Association originates
residential construction loans to local home builders, generally with whom it
has an established relationship, and to individuals who have a contract with a
builder for the construction of their residence. Construction loans are
disbursed as certain portions of the project are completed. The Association's
construction loans are secured by property located in the Association's market
area. At March 31, 1998, the Association had construction loans totaling $1.8
million, or 1.4% of total loans.
The Association's construction loans to home builders generally have
fixed interest rates, are for a term of 12 months and have a maximum loan to
value ratio of 80%. Loans to builders are made on either a pre-sold or
speculative (unsold) basis. Construction loans to individuals are generally
originated pursuant to the same policy guidelines regarding loan to value ratios
and interest rates that are used in connection with loans secured by one-to-four
family residential real estate. Construction loans to individuals who intend to
occupy the completed dwelling may be converted to permanent financing after the
construction phase is completed.
The Association generally limits the number of outstanding loans on
unsold homes under construction to individual builders, with the amount
dependent on the financial strength, including existing borrowings, of the
builder and prior sales of homes in the development. Prior to making a
commitment to fund a construction loan, the Association requires an appraisal of
the property, and all appraisals are reviewed by management. Loan proceeds are
disbursed after an inspection of the property based on a percentage of
completion. Monthly payment of accrued interest is required.
Construction loans are generally considered to involve a higher degree
of risk than single-family permanent mortgage loans because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost of the project. If the estimate of construction costs is
inaccurate, the Association may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion is inaccurate, the value of the property may be
insufficient to assure full repayment. Projects may also be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no purchaser
has been identified carry more risk because the repayment of the loan depends on
the builder's ability to sell the property prior to the time that the
construction loan is due. The Association has attempted to minimize the
foregoing risks by, among other things,
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<PAGE> 83
limiting its construction lending primarily to residential properties and
generally requiring personal guarantees from the principals of its corporate
borrowers.
CONSUMER LENDING. The Association's consumer loans consist of
automobile loans, passbook loans, home improvement loans and secured personal
loans. At March 31, 1998, consumer loans totaled $2.0 million, or 1.5% of the
total loan portfolio.
Consumer loans generally have shorter terms and higher interest rates
than one-to-four family mortgage loans. In addition, consumer loans expand the
products and services offered by the Association to better meet the financial
services needs of its customers. Consumer loans generally involve greater credit
risk than residential mortgage loans because of the difference in the underlying
collateral. Repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance because of the
greater likelihood of damage to loss of or depreciation in the underlying
collateral. The remaining deficiency often does not warrant further substantial
collection efforts against the borrower beyond obtaining a deficiency judgment.
In addition, consumer loan collections depend on the borrower's personal
financial stability. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans.
The Association's underwriting procedures for consumer loans include an
assessment of the applicant's credit history and the ability to meet existing
and proposed debt obligations. Although the applicant's creditworthiness is the
primary consideration, the underwriting process also includes a comparison of
the value of the security, to the proposed loan amount. The Association
underwrites and originates its consumer loans internally, which the Association
believes limits its exposure to credit risks associated with loans underwritten
or purchased from brokers and other external sources.
ORIGINATION OF LOANS. Generally, the Association originates mortgage
loans pursuant to underwriting standards that generally conform with the Fannie
Mae guidelines. The Association will originate nonconforming loans with respect
to loan principal amount only. Loan origination activities are primarily
concentrated in Westchester, New York. New loans are generated primarily from
customer referrals, local real estate agents, local attorneys and other parties
with whom the Association does business, and from the efforts of employees and
advertising. Historically, the Association has not used mortgage brokers to
obtain loans. Loan applications are underwritten and processed at the
Association's main office.
The loan approval process is intended to assess the borrower's ability
to repay the loan, the viability of the loan, and the adequacy of the value of
the property that will secure the loan. To assess the borrower's ability to
repay, the Association reviews the employment and credit history and information
on the historical and projected income and expenses of borrowers. Loans of up to
$750,000 with loan to value ratios of 70% or less may be approved by the
Association's President and Senior Lending Officer acting together. Loans up to
$500,000 with a loan-to-value ratio between 70% and 80% (or up to 90% with
private mortgage insurance) may be approved by the President and Senior Lending
Officer acting together. All loans in excess of $750,000 must be approved by the
Board of Directors. In addition, the Board of Directors ratifies all loan
commitments. Under current policy, the Association will not originate a loan
with a principal balance in excess of $1.0 million.
The Association requires appraisals of all real property securing
loans. Appraisals are performed by independent appraisers who are licensed by
the state, and who are approved by the Board of Directors annually. The
Association requires fire and extended coverage insurance in amounts at least
equal to the principal amount of the loan. Where appropriate, flood insurance is
also required. Subsequent to March 31, 1998, the Association began offering
one-to-four family loans with loan to value ratios up to 90%. Private mortgage
insurance is required for all residential mortgage loans with loan to value
ratios of greater than 80%.
79
<PAGE> 84
The following table sets forth the Association's loan originations,
principal repayments and other portfolio activity for the periods indicated. The
Association did not purchase or sell any loans during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------
1998 1997 1996
----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Unpaid principal balances at beginning of year.................... $123,839 $ 116,664 $ 110,239
-------- --------- ---------
LOANS ORIGINATED BY TYPE:
Fixed rate:
Mortgage loans:
One-to-four family......................................... 14,794 15,191 9,609
Advances under home equity lines of credit................. 6,925 4,525 4,041
Multi-family............................................... 257 -- --
Commercial................................................. 660 -- --
Construction............................................... 4,159 3,431 5,006
Consumer loans............................................... 1,843 942 645
-------- --------- ---------
Total fixed rate........................................... 28,638 24,089 19,301
Adjustable rate mortgage loans:
One-to-four family........................................... 225 46 386
Advances under home equity lines of credit................. 72 -- 247
-------- --------- ---------
Total loans originated..................................... 28,935 24,135 19,934
-------- --------- ---------
PRINCIPAL REPAYMENTS:
Mortgage loans................................................. (21,093) (15,445) (12,917)
Consumer loans................................................. (1,270) (1,124) (397)
-------- --------- ---------
Total principal repayments................................... (22,363) (16,569) (13,314)
-------- --------- ---------
Net charge-offs................................................... (16) (26) (25)
Transfers to real estate owned.................................... -- (365) (170)
-------- --------- ---------
Unpaid principal balances at end of year.......................... 130,395 123,839 116,664
Construction loans in process..................................... (573) (1,049) (2,023)
Allowance for loan losses......................................... (984) (845) (725)
Deferred loan origination fees, net............................... (280) (328) (384)
-------- --------- ---------
Net loans at end of year.......................................... $128,558 $ 121,617 $ 113,532
======== ========= =========
</TABLE>
FEES. The Association realizes income from late charges and origination
fees. Late charges are generally assessed if payment is not received within 15
days after it is due. The Association also charges loan origination fees.
NONPERFORMING AND PROBLEM ASSETS
After a mortgage loan becomes ten days past due, the Association
delivers a computer generated delinquency notice to the borrower. A second
delinquency notice is sent once the loan becomes 15 days past due. When loans
become 30 days past due, the Association sends additional delinquency notices
and attempts to make personal contact by letter or telephone with the borrower
to establish acceptable repayment schedules. The Board of Directors is advised
of all loans delinquent 60 days or more. The Board will consider the borrower's
willingness to comply with the loan terms, the Association's actions to date,
and the value of the loan collateral in determining what actions, if any, are to
be taken. Generally, when a mortgage loan is 90 days delinquent and no
acceptable resolution has been reached, the Association will send the borrower a
demand letter. If the delinquency is not cured within 120 days, the Association
will generally refer the matter to its attorney. Generally, management will
begin foreclosure proceedings on any loan after it is delinquent over 120 days
unless management is engaged in active discussions with the borrower.
80
<PAGE> 85
Mortgage loans are reviewed on a regular basis and such loans are
placed on nonaccrual status when they become 90 days delinquent. When loans are
placed on nonaccrual status, unpaid accrued interest is fully reserved, and
further income is recognized only to the extent of interest payments received.
NONPERFORMING ASSETS. The table below sets forth the amounts and
categories of the Association's nonperforming assets at the dates indicated. At
each date presented, the Association had no troubled debt restructurings (which
involve forgiving a portion of interest or principal or making loans at rates
materially less than current market rates).
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Mortgage loans:
One-to-four family(1)..................... $ 1,721 $ 1,832 $ 2,831 $ 2,246 $1,717
Commercial................................ 236 432 236 -- --
Consumer loans.............................. 1 -- 21 -- --
------- ------- ------- ------- ------
Total..................................... 1,958 2,264 3,088 2,246 1,717
Real estate owned:
One-to-four family properties............... 129 129 55 261 55
------- ------- ------- ------- ------
Total nonperforming assets................ $ 2,087 $ 2,393 $ 3,143 $ 2,507 $1,772
======= ======= ======= ======= ======
Ratios:
Nonperforming loans to total loans.......... 1.50% 1.83% 2.65% 2.04% 1.63%
Nonperforming assets to total assets........ 0.82 0.98 1.37 1.17 0.87
</TABLE>
- --------------
(1) Includes home equity lines of credit.
For the year ended March 31, 1998, gross interest income which would
have been recorded had the non-accrual loans been current in accordance with
their original terms amounted to $205,000. Interest amounts on such loans that
were included in interest income totaled $55,000 for the year ended March 31,
1998.
The following table sets forth certain information with respect to the
Association's loan portfolio delinquencies at the dates indicated.
<TABLE>
<CAPTION>
LOANS DELINQUENT FOR:
----------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL
------------------- -------------------- -------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
---- ------- ----- ------- ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
At March 31, 1998
Mortgage loans:
One-to-four family.......... 8 $ 526 13 $ 1,721 21 $2,247
Commercial.................. -- -- 1 236 1 236
Consumer loans................ 1 4 1 1 2 5
---- ------- ----- ------- ---- ------
Total..................... 9 $ 530 15 $ 1,958 24 $2,488
==== ======= ===== ======= ==== ======
At March 31, 1997
Mortgage loans:
One-to-four family.......... 5 $ 469 11 $ 1,832 16 $2,301
Commercial.................. -- -- 3 432 3 432
Consumer loans................ 1 2 -- -- 1 2
---- ------- ----- ------- ---- ------
Total..................... 6 $ 471 14 $ 2,264 20 $2,735
==== ======= ===== ======= ==== ======
At March 31, 1996
Mortgage loans:
One-to-four family.......... 5 $ 526 22 $ 2,831 27 $3,357
Commercial.................. 2 203 1 236 3 439
Consumer loans................ 1 4 1 21 2 25
---- ------- ----- ------- ---- ------
Total..................... 8 $ 733 24 $ 3,088 32 $3,821
==== ======= ===== ======= ==== ======
</TABLE>
81
<PAGE> 86
CLASSIFIED ASSETS. Federal regulations and the Association's Asset
Classification Policy provide for the classification of loans and other assets,
such as debt and equity securities, considered by the OTS to be of lesser
quality as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
At March 31, 1998, the Association's assets classified as substandard
or doubtful totalled $1.2 million and $810,000, respectively. At March 31, 1998
the Association had no assets classified as loss. The loan portfolio is reviewed
on a regular basis to determine whether any loans require classification in
accordance with applicable regulations.
ALLOWANCE FOR LOAN LOSSES
The Association provides for loan losses on the allowance method.
Accordingly, all loan losses are charged to the related allowance and all
recoveries are credited to it. Additions to the allowance for loan losses are
provided by charges to income based on various factors which, in management's
judgment, deserve current recognition in estimating probable losses. Such
factors considered by management include the market value of the underlying
collateral, growth and composition of the loan portfolio, the relationship of
the allowance for loan losses to outstanding loans, delinquency trends, and
economic conditions. The carrying values of loans are periodically evaluated and
the allowance is adjusted accordingly. While management uses the best
information available to make evaluations, future adjustments to the allowance
may be necessary if conditions differ substantially from the assumptions used in
making the evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Association's allowance for loan
losses. Such agencies may require the Association to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination.
82
<PAGE> 87
The following table sets forth activity in the Association's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 845 $ 725 $ 652 $ 568 $ 480
----- ----- ----- ----- -----
Charge-offs:
One-to-four family mortgage loans (16) (30) (26) -- --
Consumer loans -- (15) -- -- --
----- ----- ----- ----- -----
Total charge-offs (16) (45) (26) -- --
Recoveries:
One-to-four family mortgage loans -- -- 1 -- --
Consumer loans -- 19 -- 2 6
----- ----- ----- ----- -----
Net (charge-offs) recoveries (16) (26) (25) 2 6
Provision for loan losses 155 146 98 82 82
----- ----- ----- ----- -----
Balance at end of year $ 984 $ 845 $ 725 $ 652 $ 568
===== ===== ===== ===== =====
Ratios:
Net charge-offs to average loans outstanding 0.01% 0.02% 0.02% --% --%
Allowance for loan losses to nonperforming loans 50.26 37.32 23.48 29.03 33.08
Allowance for loan losses to total loans 0.75 0.68 0.62 0.59 0.54
</TABLE>
83
<PAGE> 88
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table presents
an analysis of the allocation of the allowance for loan losses at the dates
indicated. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict the
use of the allowance to absorb losses in other categories.
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- ---------------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
LOAN EACH LOAN EACH LOAN EACH
BALANCES CATEGORY BALANCES CATEGORY BALANCES CATEGORY
LOAN LOSS BY TO TOTAL LOAN LOSS BY TO TOTAL LOAN LOSS BY TO TOTAL
ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS
-------- -------- ----- -------- -------- ----- -------- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family(1) $ 668 $122,345 93.9% $ 514 $113,082 91.3% $ 390 $105,996 90.8%
Multi-family..... 27 412 0.3 10 348 0.3 11 373 0.3
Commercial....... 152 3,811 2.9 137 3,416 2.8 139 3,469 3.0
Construction..... 36 1,800 1.4 111 5,539 4.5 103 5,193 4.5
Consumer.......... 101 2,027 1.5 73 1,454 1.1 82 1,633 1.4
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total........ $ 984 $130,395 100.0% $ 845 $123,839 100.0% $ 725 $116,664 100.0%
======== ======== ===== ======== ======== ===== ======== ======== =====
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------------------------
1995 1994
------------------------------- ------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
LOAN EACH LOAN EACH
BALANCES CATEGORY BALANCES CATEGORY
LOAN LOSS BY TO TOTAL LOAN LOSS BY TO TOTAL
ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS
------- --------- ----- -------- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family(1) $ 414 $ 103,821 94.1% $ 326 $99,393 94.3%
Multi-family..... 12 395 0.4 20 680 0.7
Commercial....... 128 3,188 2.9 124 3,088 2.9
Construction..... 29 1,451 1.3 7 365 0.4
Consumer.......... 69 1,384 1.3 91 1,810 1.7
------- --------- ----- -------- -------- -----
Total........ $ 652 $ 110,239 100.0% $ 568 105,336 100.0%
======= ========= ===== ======== ======== =====
</TABLE>
- ------------
(1) Includes home equity lines of credit.
84
<PAGE> 89
INVESTMENT ACTIVITIES
The Association's investments include mortgage-backed securities, U.S.
Government and agency securities, federal funds sold, certificates of deposit
at other financial institutions, mutual funds and FHLB stock. Management has
determined to invest a significant portion of the Association's assets in
short-term investments and adjustable rate mortgage-backed securities in order
to increase the Association's ability to deploy assets should market interest
rates begin to rise. See "Risk Factors--Potential Impact of Changes in Interest
Rates and the Current Interest Rate Environment."
The Association's mortgage-backed securities portfolio totalled $53.4
million, or 21.0% of total assets at March 31, 1998. Of this amount, $52.2
million of mortgage-backed securities had adjustable rates of interest and $1.2
million had fixed rates of interest. Mortgage-backed securities are created by
the pooling of mortgages and the issuance of a security with an interest rate
that is less than the interest rate on the underlying the mortgages. The
Association's mortgage-backed securities are insured or guaranteed by Fannie
Mae, GNMA or Freddie Mac. Mortgage-backed securities increase the liquidity and
the quality of the Association's assets by virtue of their greater liquidity
compared to individual mortgage loans and the guarantees that back the
securities themselves. The Association has not invested in collateralized
mortgage obligations or privately issued mortgage-backed securities.
A significant portion of the Association's assets are invested in
federal funds sold and certificates of deposit at other financial institutions.
At March 31, 1998, $47.9 million, or 18.8% of total assets were invested in
federal funds sold and certificates of deposit at other financial institutions.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management of Market Risk--Interest Rate Risk."
At March 31, 1998, the Association's other investment securities
included $11.5 million in U.S. Government and agency securities which consisted
of fixed rate Fannie Mae and FHLB issues generally with maturities of three
years or less, as well as adjustable rate Small Business Administration
participation certificates that are guaranteed by the U.S. Government with
contractual terms of up to 30 years. At March 31, 1998, the Association had
invested $3.0 million in two mutual funds that provide a rate of return that
adjusts daily. The first mutual fund in which the Association had a $1.0 million
investment, invests primarily in repurchase agreements secured by U.S.
Government and Agency securities and federal funds. The average maturity of the
underlying securities can be from one to seven days, but primarily are
overnight. The second mutual fund in which the Association had a $2.0 million
investment, is an adjustable rate mortgage fund that invests primarily in
securities backed by or representing an interest in mortgages on residential
properties meeting the definition of such assets for purposes of the qualified
thrift lender test under OTS regulations.
The following table sets forth the composition of the Association's
mortgage-backed securities (all of which were classified as held to maturity) at
the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
-----------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Adjustable rate:
GNMA $45,260 $45,411 $44,811 $44,741 $39,725 $39,239
Fannie Mae 6,935 6,940 6,438 6,424 6,534 6,552
Fixed rate:
GNMA 1,129 1,211 1,518 1,593 1,873 1,978
Freddie Mac 97 99 134 134 175 177
------- ------- ------- ------- ------- -------
Total mortgage-backed securities $53,421 $53,661 $52,901 $52,892 $48,307 $47,946
======= ======= ======= ======= ======= =======
</TABLE>
85
<PAGE> 90
The following table sets forth the composition of the Association's
other securities portfolio, and certain other categories of earning assets, at
the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. Government securities...... $ 4,012 $ 4,030 $ 6,004 $ 5,993 $ 6,003 $ 6,005
Federal agency obligations...... 7,465 7,400 4,448 4,407 5,181 5,170
Securities available for sale:
Mutual fund investments......... 3,000 2,994 2,000 1,995 2,000 1,994
--------- --------- --------- --------- --------- --------
Total other securities........ $ 14,477 $ 14,424 $ 12,452 $ 12,395 $ 13,184 $ 13,169
========= ========= ========= ========= ========= ========
Average remaining contractual term of
other securities................ 7.2 years 2.8 years 3.8 years
Other earning assets:
Federal funds sold.............. $ 36,400 $ 35,200 $ 34,800
Certificates of deposit......... 11,483 11,986 11,594
FHLB stock...................... 1,745 1,607 1,513
--------- --------- ---------
Total......................... $ 49,628 $ 48,793 $ 47,907
========= ========= =========
</TABLE>
86
<PAGE> 91
The composition and contractual maturities of mortgage-backed
securities and other debt securities at March 31, 1998 are indicated in the
following table. The table does not reflect the impact of prepayments or
redemptions which may occur.
<TABLE>
<CAPTION>
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS MORE THAN TEN YEARS
--------------------- ---------------------- ----------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD
------- ------ ------- ------- ------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA $ -- --% $ 123 6.85% $ 432 8.25% $45,834 6.88%
Fannie Mae -- -- -- -- -- -- 6,935 6.99
Freddie Mac -- -- 69 7.22 28 8.00 -- --
------- ------- ------- -------
Total $ -- -- $ 192 6.98 $ 460 8.23 $52,769 6.89
======= ======= ======= =======
Other debt securities:
U.S. Government securities $ 4,012 6.15% $ -- --% $ -- --% $ -- --%
Federal agency obligations -- -- 3,998 5.91 -- -- 3,467 6.62
------- ------- ------- -------
Total $ 4,012 6.15 $ 3,998 5.91 $ -- -- $ 3,467 6.62
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
TOTAL SECURITIES
-------------------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
-------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities:
GNMA $46,389 $46,622 6.89%
Fannie Mae 6,935 6,940 6.99
Freddie Mac 97 99 7.45
------- -------
Total $53,421 $53,661 6.91
======= =======
Other debt securities:
U.S. Government securities $ 4,012 $ 4,030 6.15%
Federal agency obligations 7,465 7,400 6.24
------- -------
Total $11,477 $11,430 6.21
======= =======
</TABLE>
87
<PAGE> 92
The following table sets forth the activity in the mortgage-backed
securities portfolio for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortized cost at beginning of year............................... $ 52,901 $ 48,307 $ 40,046
Purchases of adjustable rate pass-through securities.............. 12,237 13,276 15,311
Principal repayments.............................................. (11,591) (8,493) (7,028)
Premium amortization and discount accretion, net.................. (126) (189) (22)
--------- --------- ---------
Amortized cost at end of year..................................... $ 53,421 $ 52,901 $ 48,307
========= ========= =========
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits have traditionally been the primary source of funds
for use in lending and investment activities. In addition to deposits, funds are
derived from scheduled loan payments, investment maturities, loan prepayments,
retained earnings, income on earning assets and borrowings. While scheduled loan
payments and income on earning assets are relatively stable sources of funds,
deposit inflows and outflows can vary widely and are influenced by prevailing
interest rates, market conditions and levels of competition. Borrowings from the
FHLB of New York may be used in the short-term to compensate for reductions in
deposits and to fund growth, although the Association has not had to borrow
funds in recent periods.
DEPOSITS. Deposits are obtained primarily from customers who live or
work in Westchester County. The Association offers a selection of deposit
instruments, including passbook and club accounts, money market accounts, NOW
accounts and fixed-term certificate of deposit accounts. Deposits are not
actively solicited outside of the Association's market area. Deposit account
terms vary, with the principal differences being the minimum balance required,
the amount of time the funds must remain on deposit and the interest rate. The
Association does not pay broker fees for any deposits.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established on a periodic basis. Deposit rates and terms are based
primarily on current operating strategies and market rates, liquidity
requirements, rates paid by competitors and growth goals. Personalized customer
service and long-standing relationships with customers are relied upon to
attract and retain deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money markets and other prevailing interest rates and
competition. The variety of deposit accounts offered allows the Association to
be competitive in obtaining funds and responding to changes in consumer demand.
In recent years, the Association has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. Deposits are priced to reflect the Association's interest rate risk
management and profitability objectives. Based on experience, management
believes that passbook accounts and money market accounts are relatively stable
sources of deposits. However, the ability to attract and maintain certificates
of deposit, and the rates paid on these deposits, have been and will continue to
be significantly affected by market conditions. At March 31, 1998, $119.6
million, or 54.4% of the Association's deposit accounts were certificates of
deposit, of which $108.9 million have maturities of one year or less.
88
<PAGE> 93
The following table sets forth the distribution of the Association's
deposit accounts by account type at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT PERCENT RATE AMOUNT PERCENT RATE AMOUNT PERCENT RATE
--------- ------- -------- --------- ------- -------- --------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts and
savings deposits:
Passbook and club accounts.... $ 61,347 27.9% 2.54% $ 63,579 30.1% 2.54% $ 67,637 33.7% 2.54%
Money market accounts......... 17,676 8.0 3.05 17,497 8.3 3.10 16,561 8.3 3.10
NOW and Super NOW accounts.... 21,261 9.7 2.04 19,885 9.4 2.04 19,320 9.6 2.04
--------- ----- --------- ----- --------- -----
Total....................... 100,284 45.6 2.52 100,961 47.8 2.54 103,518 51.6 2.54
--------- ----- --------- ----- --------- -----
Certificates of deposit maturing:
Within one year............... 108,902 49.5 5.60 101,169 47.9 5.39 82,431 41.1 5.44
After one but within three years 9,613 4.4 5.72 7,597 3.6 5.72 12,160 6.1 5.44
After three years............. 1,114 0.5 4.49 1,496 0.7 4.53 2,502 1.2 5.05
--------- ----- --------- ----- --------- -----
Total....................... 119,629 54.4 5.60 110,262 52.2 5.40 97,093 48.4 5.43
--------- ----- --------- ----- --------- -----
Total deposits................... $ 219,913 100.0% 4.20% $ 211,223 100.0% 4.03% $ 200,611 100.0% 3.94%
========= ===== ========= ===== ========= =====
</TABLE>
The following table sets forth the deposit activity of the Association
for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year...................................... $ 211,223 $ 200,611 $ 186,951
Deposits.......................................................... 279,709 278,371 241,365
Withdrawals....................................................... (279,719) (275,635) (235,514)
Interest credited................................................. 8,700 7,876 7,809
--------- --------- ---------
Balance at end of year............................................ $ 219,913 $ 211,223 $ 200,611
========= ========= =========
Net increase during the year:
Amount......................................................... $ 8,690 $ 10,612 $ 13,660
Percent........................................................ 4.1% 5.3% 7.3%
========= ========= =========
</TABLE>
The following table indicates the amount of the Association's
certificates of deposits by time remaining until maturity as of March 31, 1998.
<TABLE>
<CAPTION>
MATURITY
---------------------------------------------------------
3 MONTHS OVER 3 TO 6 OVER 6 TO 12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
-------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000...... $26,673 $38,485 $30,508 $ 9,855 $105,521
Certificates of deposit of $100,000 or more(1).. 4,136 4,855 4,245 872 14,108
-------- ------- ------- -------- --------
Total of certificates of deposit................ $ 30,809 $43,340 $34,753 $ 10,727 $119,629
======== ======= ======= ======== ========
</TABLE>
- -----------------
(1) The weighted average interest rates for these accounts, by maturity period,
are 5.25% for 3 months or less; 5.51% for 3 to 6 months; 5.58% for 6 to 12
months; and 5.57% for over 12 months. The overall weighted average rate for
accounts of $100,000 or more was 5.46%.
BORROWINGS. The Association's other available sources of funds include
advances from the FHLB of New York. As a member of the FHLB of New York, the
Association is required to own capital stock in the FHLB of New York and is
authorized to apply for advances from the FHLB of New York. Each FHLB credit
program has its own
89
<PAGE> 94
interest rate, which may be fixed or variable, and range of maturities. The FHLB
of New York may prescribe the acceptable uses for these advances, as well as
limitations on the size of the advances and repayment provisions. At March 31,
1998, the Association had an outstanding FHLB advance of $87,000 which it
obtained during fiscal 1996. This advance bears interest at a fixed rate of
8.29% and matures in 2002. At March 31, 1998, the Association had a collateral
pledge arrangement with FHLB of New York pursuant to which the Association may
borrow up to $63.7 million. The Association had no borrowings other than the
foregoing FHLB advance during the years ended March 31, 1998, 1997 and 1996.
PROPERTIES
The following table provides certain information with respect to the
Association's offices as of March 31, 1998:
<TABLE>
<CAPTION>
NET BOOK VALUE OF REAL
LOCATION LEASED OR OWNED YEAR ACQUIRED PROPERTY
- ----------------------------- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Main Office Owned 1954 $569,000
300 Mamaroneck Avenue
Mamaroneck, NY 10543
Branch Office Owned 1961 20,300
189 Halstead Avenue
Harrison, NY 10528
Branch Office Owned 1972 487,000
115 South Ridge Street
Rye Brook, NY 10573
</TABLE>
The total net book value of the Association's premises, land and
equipment was approximately $1.6 million at March 31, 1998.
SERVICE CORPORATION SUBSIDIARY
The Association does not have any subsidiary corporations. However, OTS
regulations permit federal savings associations to invest in the capital stock,
obligations or other specified types of securities of subsidiaries (referred to
as "service corporations") and to make loans to such subsidiaries and joint
ventures in which such subsidiaries are participants in an aggregate amount not
exceeding 2% of an association's assets, plus an additional 1% of assets if the
amount over 2% is used for specified community or inner-city development
purposes. In addition, federal regulations permit associations to make specified
types of loans to such subsidiaries (other than special purpose finance
subsidiaries) in which the association owns more than 10% of the stock, in an
aggregate amount not exceeding 50% of the association's regulatory capital if
the association's regulatory capital is in compliance with applicable
regulations.
EMPLOYEES
As of March 31, 1998, the Association employed 37 persons on a
full-time basis and 11 persons on a part-time basis. None of the Association's
employees is represented by a collective bargaining group and management
considers employee relations to be good.
90
<PAGE> 95
LEGAL PROCEEDINGS
Although the Association is involved, from time to time, in various
legal proceedings in the normal course of business, there are no material legal
proceedings to which the Association presently is a party or to which any of its
property is subject.
MANAGEMENT OF SOUND FEDERAL BANCORP
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of the same individuals
who serve as directors of the Association. The Company's Federal charter and
bylaws require that directors be divided into three classes with each class of
directors to serve for a three-year period. Approximately one-third of the
directors will be elected each year. The Company's officers will be elected
annually by its Board of Directors and will serve at the Board's discretion. The
Company's President and Chief Executive Officer will be Richard P. McStravick
and the Chairman of the Board will be Bruno J. Gioffre. For information
regarding the directors and officers, see "Management of the Association."
MANAGEMENT OF THE ASSOCIATION
DIRECTORS AND OFFICERS OF THE ASSOCIATION
The Board of Directors currently consists of eight persons. Each
director holds office for a term of three years, and one-third of the Board is
elected at each annual meeting of members. During the year ended March 31, 1998,
Paul F. Starck retired as Chairman of the Board of Directors of the Association.
The directors of the Association will continue to serve as directors of the
Association after the Reorganization. It is anticipated that all officers of the
Association serving immediately before the Reorganization will retain their
position after the Reorganization.
The Board of Directors met 15 times during the fiscal year ended March
31, 1998. No director attended fewer than 75% of the aggregate number of
meetings of the Board of Directors and the Board's committees in the past 12
months.
Listed below are the current directors and officers of the Association:
<TABLE>
<CAPTION>
AGE AT
NAME MARCH 31, 1998 POSITION DIRECTOR SINCE CURRENT TERM EXPIRES
- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Bruno J. Gioffre 63 Chairman of the Board 1975 1999
Richard P. McStravick 49 President, Chief 1996 1999
Executive Officer and
Director
Joseph Dinolfo 64 Director 1985 2001
Donald H. Heithaus 63 Director 1978 2000
Robert P. Joyce 69 Director 1980 2001
Joseph A. Lanza 51 Director 1998 2000
Arthur C. Phillips, Jr. 74 Director 1976 2001
James Staudt 45 Director 1987 1999
</TABLE>
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<TABLE>
<CAPTION>
AGE AT
NAME MARCH 31, 1998 POSITION DIRECTOR SINCE CURRENT TERM EXPIRES
- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Stephen P. Milliot 50 Treasurer
William H. Morel 65 Senior Vice President
and Secretary
</TABLE>
The business experience for the past five years for each of the
Association's directors and officers is as follows:
BRUNO J. GIOFFRE is the Chairman of the Board of Directors and has been
so since December 1997. Mr. Gioffre is also general counsel to the Association.
Mr. Gioffre is a counsel to the law firm Gioffre & Gioffre, Professional
Corporation and the Senior Justice for the Town of Rye, New York.
RICHARD P. MCSTRAVICK is President and Chief Executive Officer of the
Association. Mr. McStravick has been employed by the Association in various
capacities since 1977. Mr. McStravick was appointed to the Board of Directors in
1996.
JOSEPH DINOLFO is the President of the Dinolfo Wilson Agency, Inc. an
insurance agency located in Mamaroneck, New York.
DONALD H. HEITHAUS is the President and Chief Executive Officer of the
Happiness Laundry Service, Inc. in Mamaroneck, New York.
ROBERT P. JOYCE is retired. Prior to his retirement, Mr. Joyce was the
President of Joyce Marketing Corporation.
JOSEPH A. LANZA is the Mayor of the Village of Mamaroneck. Mr. Lanza is
the President of Lanza Electric, a private electrical contractor.
JAMES STAUDT is an attorney practicing with the firm of McCullough,
Goldberger & Staudt.
ARTHUR C. PHILLIPS, JR. is the Pension and Welfare Funds Manager for
the Industry and Local 338 Pension and Welfare Fund.
STEPHEN P. MILLIOT has been the Treasurer and Chief Financial Officer
since 1996. Prior to that time, Mr. Milliot was the Association's internal
auditor.
WILLIAM H. MOREL is the Association's Senior Vice President, Chief
Lending Officer and Corporate Secretary. He has been employed by the Association
is various capacities since 1969.
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COMMITTEES OF THE BOARDS OF DIRECTORS OF THE ASSOCIATION AND THE COMPANY
The Board of Directors of the Association has the following committees:
The Audit Committee meets quarterly to review audit reports. It also recommends
to the Board of Directors the appointment of the independent auditors for the
upcoming fiscal year. The Audit Committee is composed of Directors Phillips,
Joyce and Staudt.
The Executive Committee acts as the Association's Compensation
Committee. No employee director is a member of the Executive Committee. The
Executive Committee is composed of Directors Gioffre, Phillips, Heithaus and
Joyce. The Executive Committee met three times in fiscal 1998.
The Association has no nominating committee.
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF THE ASSOCIATION
REMUNERATION OF NAMED EXECUTIVE OFFICER
The following table sets forth information as to annual and other
compensation for services in all capacities for the President and Chief
Executive Officer during the fiscal year ended March 31, 1998. No other
executive officer earned more than $100,000 in salary and bonuses during fiscal
year 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation(1) Awards
- ----------------------------------------------------------------------------------------------------------------------------------
Other Restricted Options/
Name and Principal Fiscal Annual Stock SARs ALL OTHER
Position Year(1) Salary Bonus Compensation(2) Awards (#) COMPENSATION
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard P. McStravick, 1998 $124,375 $7,491 $14,175 -- -- $3,807(3)
President and Chief
Executive Officer
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with the rules on executive officer and director
compensation disclosure adopted by the SEC, Summary Compensation
information is excluded for the fiscal years ended March 31, 1997 and
1996, as the Association was not a public company during such periods.
(2) Represents director's fees for service on the Association's Board.
(3) Consists of the use of the Association's automobile.
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COMPENSATION OF DIRECTORS
Directors of the Association receive $1,250 for each regular meeting of
the Board of Directors, except for the Chairman of the Board who receives $2,500
for each regular meeting of the Board of Directors and $175 for each committee
meeting of the Board of Directors. Each committee chairman receives $250 for
each committee meeting. The Chairman of the Executive Committee receives $2,500
for each committee meeting attended and the other members of the Executive
Committee receive $1,250.
Directors of the Company are not currently paid directors' fees. The
Company may adopt a policy of paying directors' fees if it believes it is
necessary to attract qualified directors or is otherwise beneficial or
appropriate for to the Company,
BENEFITS
DIRECTORS DEFERRED FEE PLAN. The Director Deferred Fee Plan ("Directors
Plan") is a non-qualified deferred compensation plan into which a director can
defer up to 100% of his or her board fees earned during the calendar year. All
amounts deferred by a director are fully vested at all times. Amounts credited
to a deferred fee account are assumed to be invested, without charge, at a 6%
interest rate. Upon cessation of a director's service with the Association, the
Association will pay the director the amounts credited to the director's
deferred fee account. The amounts will be paid in substantially equal annual
installments, as selected by the director. The date of the first installment
payment also will be selected by the director. In connection with the
Reorganization and the Offering, the Directors Plan has been amended to permit
each director to determine whether to invest all or a portion of his account in
Common Stock. If a director elects to invest all or a portion of his account in
Common Stock, the amount so invested will be credited with earnings and
appreciation (or depreciation) equivalent to that which would be earned on such
investment and the amount not invested in Common Stock will continue to earn
interest at a 6% interest rate.
If the director dies before all payments have been made, the remaining
payments will be made to the beneficiary designated by the director in the same
form that payments were made to the director. If a director dies before
receiving any payments, the Association shall pay the directors account to the
directors beneficiary, commencing within 30 days of the director's death over
the period initially elected by the director. At the request of the beneficiary,
and with the approval of the Committee, the director's benefits may be paid to
the beneficiary in a lump sum. The director may request a hardship distribution
of all or part of his or her benefits if the director suffers an unforeseeable
emergency, defined as a severe financial hardship to the director resulting
from a sudden and unexpected illness or accident of the director or his
dependent, loss of the director's property due to casualty, or other similar
extraordinary and unforeseeable circumstances arising as a result of events
beyond the director's control.
DIRECTOR EMERITUS PLAN. The Director Emeritus Plan is a non-qualified
retirement plan. Under the Director Emeritus Plan, any director that attains the
age of 70 years after the completion of 15 years of service as a director
qualifies for director emeritus status. A director that has completed five years
of service as a director qualifies for director emeritus if termination of
service is due to the merger, consolidation, takeover or dissolution of the
Association. Under the Director Emeritus Plan, a director emeritus is entitled
to the same compensation that he received when he retired as a director, without
the obligation of attendance at meetings of the Board of Directors. Compensation
is paid to the director emeritus from the date of attainment of such status
until his death.
EXECUTIVE AGREEMENTS. The Association has employment agreements with
Messrs. McStravick and Morel. Each of these agreements has a term of three years
and may be extended for an additional 12 months on each anniversary date so that
the remaining term shall be 36 months. If the agreement is not renewed, the
agreement will expire 36 months following the anniversary date. Under the
agreements, the base salaries for Messrs. McStravick and Morel are $130,000 and
$95,000, respectively. In addition to the base salary, each agreement provides
for, among other things, participation in retirement plans, stock option plans
and other employee and fringe benefits applicable to other employees. The
agreements provide for termination by the Association for cause at any time, in
which event,
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the executive would have no right to receive compensation or other benefits for
any period after termination. In the event the Bank terminates the executive's
employment for reasons other than disability or for cause, or in the event of
the executive's termination of employment upon (i) failure by the Association to
comply with any material provision of the agreement, (ii) following a change in
control of the Association where there is a material change in the executive's
positions, duties or responsibilities, or a removal of the executive from, or
any failure to reelect the executive to any of these positions, a reduction in
salary or failure of the Association to continue in effect, or reduction in
benefits under, any bonus, benefit or compensation plan or fringe benefit plan,
or (iii) any purported termination of the executive's employment which is not
pursuant to a valid notice of termination, the executive would be entitled to
severance pay in an amount equal to three times the average annual compensation
(computed on the basis of the most recent five (5) taxable years) includable in
gross income for federal income tax purposes. Messrs. McStravick and Morel would
receive an aggregate of $337,773 and $233,926, respectively, pursuant to their
employment agreements upon a change in control of the Association, based upon
current levels of compensation. The Association would also continue, at the
Association's expense, the executive's life, health, dental and other applicable
benefit plan coverage until the executive attains the age of 70 years, provided,
however, that the Association's obligation terminates if the executive receives
equivalent medical or dental coverage from a new employer. The executive is
entitled to participate in the Association's medical, dental and life insurance
coverage and reimbursement plans to the extent that such plans exist, until the
executive's death.
Under the agreement, if the executive becomes disabled or incapacitated
to the extent that the executive is unable to perform his duties, he will be
entitled to 100% of his compensation for the first six months, and 60%
thereafter of the remaining term of the agreement. Any disability payment is
reduced to the extent benefits are received under disability insurance, workers'
compensation or other similar program.
DEFINED BENEFIT PENSION PLAN. The Association maintains the Sound
Federal Savings and Loan Association Retirement Income Plan ("Retirement Plan")
which is a qualified, tax-exempt defined benefit plan. Employees age 21 or older
who have worked at the Association for a period of one year and have been
credited with 1,000 or more hours of service with the Association during the
year are eligible to accrue benefits under the Retirement Plan. The Association
contributes each year, if necessary, an amount to the Retirement Plan to satisfy
the actuarially determined minimum funding requirements in accordance with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). For the
plan year ended December 31, 1997, no contribution was required to be made to
the Retirement Plan, however, the Association elected to make a contribution of
approximately $62,000. At December 31, 1997, the total market value of the
assets in the Retirement Plan trust fund was approximately $3.8 million.
In the event of retirement on or after the normal retirement date
(i.e., the first day of the calendar month coincident with or next following the
later of age 65 or the 5th anniversary of participation in the Retirement Plan,
or, for a participant prior to January 1, 1992, age 65), the plan is designed to
provide a single life annuity. For a married participant, the normal form of
benefit is an actuarially reduced joint and survivor annuity where, upon the
participant's death, the participant's spouse is entitled to receive a benefit
equal to 50% of that paid during the participant's lifetime. Alternatively, a
participant may elect (with proper spousal consent, if necessary) from various
other options, including a joint and 100% survivor annuity, joint and 66-2/3%
survivor annuity, joint and 50% survivor annuity, years certain option and
social security option. The normal retirement benefit provided is an amount
equal to the difference between 4% of final earnings (as defined in the plan)
and 0.65% of the final average compensation (average earnings during the last
three (3) calendar years of service) up to the Social Security taxable wage
base, multiplied by the participant's years of credited service (up to a maximum
of 15 years). Retirement benefits are also payable upon retirement due to early
and late retirement or death. A reduced benefit is payable upon early retirement
at age 55 and the completion of 5 years of vested service with the Association.
Fifty percent of the normal retirement benefit will be paid to a surviving
spouse if the participant dies while in active service and has attained age 50
and 10 years of vested service. The preretirement death benefit is reduced by 2%
for each year the spouse is more than 10 years younger than the participant. If
the participant has not attained age 50 with 10 years of service, but has
completed 5 years of service, the spouse will be eligible for a reduced benefit
payable as a joint and 50% annuity. Upon termination of employment
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<PAGE> 100
other than as specified above, a participant who has five years of vested
service is eligible to receive his or her accrued benefit commencing, generally,
on his normal retirement date, or, if elected, on or after reaching age 55.
The following table indicates the annual retirement benefit that would
be payable under the Retirement Plan upon retirement at age 65 in calendar year
1998, expressed in the form of a single life annuity for the final average
salary and benefit service classifications specified below.
<TABLE>
<CAPTION>
Years of Service and Benefit Payable at Retirement
Final Average --------------------------------------------------
Compensation 15 20 25 30
------------------ -------- ------- ------- -------
<S> <C> <C> <C> <C>
$50,000 $26,965 $26,965 $26,965 $26,965
$75,000 $41,965 $41,965 $41,965 $41,965
$100,000 $56,965 $56,965 $56,965 $56,965
$125,000 $71,965 $71,965 $71,965 $71,965
$160,000 and above $92,965 $92,965 $92,965 $92,965
</TABLE>
As of December 31, 1997, Mr. McStravick had 20 years of credited
service (i.e., benefit service) under the Retirement Plan.
401(k) PLAN. The Association maintains the Sound Federal Savings and
Loan Association 401(k) Savings Plan in RSI Retirement Trust (the "401(k) Plan")
which is a qualified, tax-exempt profit sharing plan with a salary deferral
feature under Section 401(k) of the Code. Employees who have attained age 21 and
have completed one year of employment are eligible to participate, provided,
however, that leased employees, employees paid on an hourly or contract basis,
employees covered by a collective bargaining agreement and owner employees (as
defined in the plan) are not eligible to participate. Eligible employees are
entitled to enter the 401(k) Plan on a monthly basis.
Under the 401(k) Plan, participants are permitted to make salary
reduction contributions (in whole percentages) equal to the lesser of (i) from
1% to 10% of compensation or (ii) $10,000 (as indexed annually). For these
purposes, "compensation" includes wages, salary, fees and other amounts received
for personal services prior to reduction for the participant contribution to the
401(k) plan, commissions, compensation based on profits, overtime, bonuses, wage
continuation payments due to illness or disability of a short-term nature,
amounts paid or reimbursed for moving expenses, and the value of any
nonqualified stock option granted to the extent includable in gross income for
the year granted. Compensation does not include contributions made by the
Association to any other pension, deferred compensation, welfare or other
employee benefit plan, amounts realized from the exercise of a nonqualified
stock option or the sale of a qualified stock option, and other amounts which
received special tax benefits. Compensation does not include compensation in
excess of the Code Section 401(a)(17) limits (i.e., $160,000 in 1997). The
Association will match 50% of the first 10% of salary that a participant
contributes to the 401(k) Plan. All contributions and earnings are fully and
immediately vested. A participant may withdraw salary reduction contributions,
rollover contributions and matching contributions in the event the participant
suffers a financial hardship. A participant may make a withdrawal from his
accounts for any reason after age 59 1/2.
The 401(k) Plan permits employees to direct the investment of his or
her own accounts into various investment options. In connection with the
Offering, the 401(k) Plan intends to offer participants the opportunity to
invest in an "Employer Stock Fund" which intends to purchase Common Stock in the
Offering. Each participant who directs the trustee to invest all or part of his
or her account in the Employer Stock Fund will have assets in his or her account
applied to the purchase of shares of Common Stock. Participants will be entitled
to direct the trustee as to how to vote his or her allocable shares of Common
Stock.
Plan benefits will be paid to each participant in the form of a single
cash payment at normal retirement age unless earlier payment is selected. If a
participant dies prior to receipt of the entire value of his or her 401(k) Plan
accounts, payment will generally be made to the beneficiary in a single cash
payment as soon as possible following the
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<PAGE> 101
participant's death. Payment will be deferred if the participant had previously
elected a later payment date. If the beneficiary is not the participant's
spouse, payment will be made within one year of the date of death. If the spouse
is the designated beneficiary, payment will be made no later than the date the
participant would have attained age 70 1/2. Normal retirement age under the
401(k) Plan is age 65. Early retirement age is age 55.
At December 31, 1997, the total market value of the assets in the
401(k) Plan was approximately $760,000. The Association's matching contributions
to the 401(k) Plan for the Plan year ended December 31, 1997 totalled
approximately $30,000.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Association has established an ESOP for eligible employees
effective in January 1998, subject to the completion of the Offering. Employees
age 21 or older who have worked at the Association for a period of one year and
have been credited with 1,000 or more hours of service during the year are
eligible to participate. As part of the Offering, the ESOP intends to borrow
funds from the Company and use those funds to purchase a number of shares equal
to up to 8.0% of the Minority Ownership Interest. Collateral for the loan will
be the Common Stock purchased by the ESOP. The loan will be repaid principally
from the Association's discretionary contributions to the ESOP and dividends on
unallocated shares over a period expected to be no more than 10 years. It is
anticipated that the interest rate for the loan will be a floating rate equal to
the prime interest rate published in The Wall Street Journal from time to time.
Shares purchased by the ESOP will be held in a suspense account for allocation
among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense
accounts in an amount proportional to the repayment of the ESOP loan will be
allocated among ESOP participants on the basis of compensation in the year of
allocation. Participants in the ESOP will receive credit for service prior to
the effective date of the ESOP. A participant will vest in 100% of his or
her account balance after 5 years of credited service. A participant who
terminates employment for reasons other than death, retirement, disability or
following a change in control prior to five years of credited service will
forfeit the nonvested portion of his or her benefits under the ESOP. Benefits
will be payable in the form of Common Stock and cash upon death, retirement,
disability or separation from service. Alternatively, a participant may request
that the benefits be paid entirely in the form of Common Stock. Contributions by
the Association to the ESOP are discretionary, subject to the loan terms and tax
law limits, and, therefore, benefits payable under the ESOP cannot be estimated.
In November 1993, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
No. 93-6, which requires the Association to record compensation expense in an
amount equal to the fair market value of the shares committed to be released
from the suspense account to participant accounts.
In connection with the establishment of the ESOP, the Association will
establish a committee of non-employee directors to administer the ESOP. The
Association will either appoint its non-employee directors or an independent
financial institution to serve as trustee of the ESOP. The ESOP committee may
instruct the trustee regarding investment of funds contributed to the ESOP. The
ESOP trustee, subject to its fiduciary duty, must vote all allocated shares held
in the ESOP in accordance with the instructions of participating employees.
Under the ESOP, nondirected shares, and shares held in the suspense account,
will be voted in a manner calculated to most accurately reflect the instructions
it has received from participants regarding the allocated stock so long as such
vote is in accordance with the provisions of ERISA.
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STOCK OPTION PLAN
At a meeting of the Company's shareholders to be held no earlier than
six months after the completion of the Reorganization, the Board of Directors
intends to submit for shareholder approval the Stock Option Plan for directors
and officers of the Association and of the Company. If approved by the
shareholders, Common Stock in an aggregate amount equal to 10% of the Minority
Ownership Interest would be reserved for issuance by the Company upon the
exercise of the stock options granted under the Stock Option Plan. No options
would be granted under the Stock Option Plan until the date on which shareholder
approval is received. The Stock Option Plan may not be adopted by stockholders
until at least six months after the completion of the Reorganization.
It is anticipated that options would be granted for terms of 10 years
(in the case of incentive options) or 10 years and one day (in the case of
non-qualified options), and at an option price per share equal to the fair
market value of the shares on the date of grant of the stock options. If the
Stock Option Plan is adopted within one year following the Reorganization,
options will become exercisable at a rate of 20% at the end of each 12 months of
service with the Association after the date of grant, subject to early vesting
in the event of death or disability. Options granted under the Stock Option Plan
would be adjusted for capital changes such as stock splits and stock dividends.
Notwithstanding the foregoing, awards will be 100% vested upon termination of
employment due to death or disability, and if the Stock Option Plan is adopted
more than 12 months after the Reorganization, awards would be 100% vested upon
normal retirement or a change in control of the Association or the Company.
Unless the Company decides to call an earlier special meeting of shareholders,
the date of grant of these options is expected to be the date of the Company's
annual meeting of shareholders to be held at least six months after the
Reorganization. Under OTS rules, if the Stock Option Plan is adopted within the
first 12 months after the Reorganization, no individual officer can receive more
than 25% of the awards under the plan, no outside director can receive more than
5% of the awards under the plan, and all outside directors as a group can
receive no more than 30% of the awards under the plan in the aggregate. These
restrictions would not be applicable if the Stock Option Plan is adopted more
than one year after the completion of the Reorganization.
The Stock Option Plan would be administered by a committee of
non-employee members of the Company's Board of Directors. Options granted under
the Stock Option Plan to employees may be treated as "incentive" stock options
which offer beneficial tax treatment to the employee but no tax deduction to the
Company. Non-qualified stock options may also be granted under the Stock Option
Plan, and will be granted to the non-employee directors who receive grants of
stock options. In the event an option recipient terminates his or her employment
or service as an employee or director, the options would terminate during
certain specified periods.
STOCK AWARD PLAN
At a meeting of the Company's shareholders to be held no earlier than
six months after the completion of the Reorganization, the Board of Directors
also intends to submit a Stock Award Plan for shareholder approval. The Stock
Award Plan will grant directors and officers an ownership interest in the
Company in a manner designed to encourage their continued service with the
Association. The Association will contribute funds to the Stock Award Plan from
time to time to enable it to acquire an aggregate amount of Common Stock equal
to up to 4% of the Minority Ownership Interest, or a larger percentage of the
Common Stock issued in the Offering if the Stock Award Plan is adopted more than
a year after the completion of the Offering, either directly from the Company or
in open market purchases. In the event that additional authorized but unissued
shares would be acquired by the Stock Award Plan after the Reorganization, the
interests of existing shareholders would be diluted. Executive officers and
directors will be awarded Common Stock under the Stock Award Plan without having
to pay cash for the shares. No awards under the Stock Award Plan would be made
until the date the Stock Award Plan is approved by the Company's shareholders.
The Stock Award Plan may not be adopted by stockholders until at least six
months after the completion of the Reorganization.
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Awards would be nontransferable and nonassignable, and during the
lifetime of the recipient could only be earned by him or her. If the Stock Award
Plan is adopted within one year following the Reorganization, the shares which
are subject to an award would vest and be earned by the recipient at a rate of
20% of the shares awarded at the end of each full 12 months of service with the
Association after the date of grant of the award. Any Common Stock purchased by
the Stock Award Plan will represent unearned compensation and, accordingly, will
be reflected on the Company's financial statement as a reduction to
stockholders' equity. As shares of the Common Stock awarded under the Stock
Award Plan vest, the Association will recognize a proportionate amount of
compensation expense with a corresponding reduction in the charge to
stockholders' equity. Awards would be adjusted for capital changes such as stock
dividends and stock splits. Notwithstanding the foregoing, awards would be 100%
vested upon termination of employment or service due to death or disability, and
if the Stock Award Plan is adopted more than 12 months after the Reorganization,
awards would be 100% vested upon normal retirement or a change in control of the
Association or the Company. If employment or service were to terminate for other
reasons, the award recipient would forfeit any nonvested award. If employment or
service is terminated for cause (as would be defined in the Stock Award Plan),
shares not already delivered under the Stock Award Plan would be forfeited.
Under OTS rules, if the Stock Award Plan is adopted within the first 12 months
after the Reorganization, shares of Common Stock granted under the Stock Award
Plan may not exceed 4% of the Minority Ownership Interest, no individual officer
may receive more than 25% of the awards under the plan, no outside director may
receive more than 5% of the awards under the plan, and all outside directors as
a group may receive no more than 30% of the awards under the plan in the
aggregate. These restrictions would not be applicable if the Stock Award Plan is
adopted more than one year after the completion of the Reorganization.
When shares become vested under the Stock Award Plan, the participant
will recognize income equal to the fair market value of the common stock earned,
determined as of the date of vesting, unless the recipient makes an election
under Section 83(b) of the Code to be taxed earlier. The amount of income
recognized by the participant would be a deductible expense for tax purposes for
the Company. If the Stock Award Plan is adopted within one year following the
Reorganization, dividends and other earnings will accrue and be payable to the
award recipient when the shares vest. Shares not yet vested under the Stock
Award Plan will be voted by the Trustee of the Stock Award Plan, taking into
account the best interests of the recipients of the awards under the plan.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Association offers to directors, officers, and employees mortgage
loans secured by their principal residence. All loans to the Association's
directors, officers and employees are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions, and do not involve more than minimal risk of
collectibility.
Bruno J. Gioffre, in addition to his duties as Chairman of the Board of
the Association, counsel to the law firm of Gioffre & Gioffre, Professional
Corporation which represents the Association in mortgage loan transactions. Mr.
Gioffre also acts as general counsel to the Association. For the year ended
March 31, 1998, the Association paid Gioffre & Gioffre, Professional Corporation
fees of $23,100 and Mr. Gioffre legal fees of $15,300 for his services as
general counsel. The terms and conditions of these fees and services are
substantially the same as those for similar transactions with other parties.
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REGULATION
GENERAL
As a federally chartered, SAIF-insured savings association, the
Association is subject to extensive regulation by the OTS and the FDIC. For
example, the Association must obtain OTS approval before it may engage in
certain activities and must file reports with the OTS regarding its activities
and financial condition. The OTS periodically examines the Association's books
and records and, in conjunction with the FDIC in certain situations, has
examination and enforcement powers. This supervision and regulation are intended
primarily for the protection of depositors and the FDIC insurance funds. The
Association's present semi-annual assessment owed to the OTS, which is based
upon a specified percentage of assets, is approximately $34,000.
The Association is also subject to federal regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, and the issuance or
retirements of its securities. In addition, the Association's activities and
operations are subject to a number of additional detailed, complex and sometimes
overlapping federal and state laws and regulations. These include state usury
and consumer credit laws, state laws relating to fiduciaries, the Federal
Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act
and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act,
the Fair Lending Act and antitrust laws.
The United States Congress is considering legislation that would
require all federal savings associations, such as the Association, to either
convert to a national bank or a state-chartered bank by a specified date to be
determined. In addition, under the legislation, the Mutual Holding Company and
the Company likely would not be regulated as savings and loan holding companies
but rather as bank holding companies. This proposed legislation would abolish
the OTS and transfer its functions to other federal banking regulators. No
assurance can be given as to whether or in what form the legislation will be
enacted or its effect on the Company and the Association.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
Upon completion of the Reorganization, the Mutual Holding Company and
the Company will be regulated as savings and loan holding companies under the
Home Owners' Loan Act (the "HOLA"). As such, the Mutual Holding Company and the
Company will register with and will be subject to OTS regulation and examination
and supervision as well as certain reporting requirements. The OTS has indicated
that the Company will be regulated in the same manner as a mutual holding
company pursuant to Section 10(o) of the HOLA. As a federally-insured savings
and loan association, the Association will be subject to certain restrictions
in dealing with the Mutual Holding Company and with other persons affiliated
with the Mutual Holding Company and the Company, and will continue to be subject
to examination and supervision by the OTS.
Pursuant to Section 10(o) of the HOLA, and OTS regulations and policy,
a mutual holding company and a federally chartered mid-tier holding company may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c)
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of the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest of any non-conforming
investments.
HOLA prohibits a savings and loan holding company, including the
Company and the Mutual Holding Company, directly or indirectly, or through one
or more subsidiaries, from acquiring another savings institution or holding
company thereof, without prior written approval of the OTS. It also prohibits
the acquisition or retention of, with certain exceptions, more than 5% of a non-
subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies; and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
In addition, OTS regulations require the Mutual Holding Company to
notify the OTS of any proposed waiver of its right to receive dividends. The OTS
reviews dividend waiver notices on a case-by-case basis, and, in general, does
not object to a waiver if: (i) the mutual holding company's board of directors
determines that waiver is consistent with its fiduciary duties to the mutual
holding company's members; (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company is considered as a restriction in
the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with SFAS No.
5, where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; (iv) the amount of any waived dividend is considered as having
been paid by the savings association in evaluating any proposed dividend under
OTS capital distribution regulations; and (v) in the event the mutual holding
company converts to stock form, the appraisal submitted to the OTS in connection
with the conversion application takes into account the aggregate amount of the
dividends waived by the mutual holding company.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB of New York, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from funds deposited
by savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members ("FHLB advances") in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System, including the FHLB of New York.
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As a member, the Association 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. At March 31, 1998, the Association's
investment in stock of the FHLB of New York was $1.7 million. The FHLB imposes
various limitations on advances such as limiting the amount of certain types of
real estate-related collateral to 30% of a member's capital and limiting total
advances to a member. Interest rates charged for advances vary depending upon
maturity, the cost of funds to the FHLB of New York and the purpose of the
borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations 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 and could continue to do so
in the future. For the fiscal year ended March 31, 1998, dividends paid by the
FHLB of New York to the Association were approximately $111,000 for an annual
rate of 6.86%.
INSURANCE OF DEPOSITS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures deposits of banks and thrift institutions up to certain specified limits
and regulates such institutions for safety and soundness. The FDIC administers
two separate insurance funds, the Bank Insurance Fund ("BIF") for commercial
banks and state savings banks, and the SAIF for savings associations such as the
Association and banks that have acquired deposits from savings associations. The
FDIC is required to maintain designated levels of reserves in each fund.
ASSESSMENTS. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time, and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital levels, and the FDIC's level of supervisory
concern about the institution.
In 1996, federal legislation was enacted to recapitalize the SAIF and
eliminate the significant premium disparity between the BIF and the SAIF. Under
that law, the Association and other institutions with SAIF-insured deposits were
charged a one-time special assessment equal to $0.657 per $100 of assessable
deposits at March 31,1995. The Association recognized this special assessment as
a charge to noninterest expense of $1.2 million during the three-month period
ended September 30, 1996. The assessment was fully deductible for both federal
and state income tax purposes. Assessment rates for regular ongoing, deposit
insurance premiums currently range from 0.0% of deposits for an institution in
the highest category (i.e., well-capitalized and financially sound, with no more
than a few minor weaknesses) to 0.27% of deposits for an institution in the
lowest category (i.e., undercapitalized and substantial supervisory consent).
The Association's assessment rate for deposit insurance was 0.23% of deposits
for 1996, and it was reduced to 0.0% of deposits beginning on January 1, 1997.
The FDIC is authorized to raise the assessment rates as necessary to maintain
the required reserve ratio of 1.25%, and both the BIF and the SAIF currently
satisfy the reserve ratio requirement. The annual rate of assessments on
SAIF-assessable deposits for the payments on the FICO bonds was 0.0648% for the
semi-annual period beginning on January 1, 1997, 0.0630% for the semi-annual
period beginning on July 1, 1997 and 0.0622% currently. The 1996 law also
provides for the merger of the SAIF and the BIF by 1999, but not until such time
as bank and thrift charters are combined. Until the charters are combined,
savings associations with SAIF deposits may not transfer deposits to the BIF
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
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SAVINGS ASSOCIATION REGULATORY CAPITAL
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage ratio requirement, (ii) a
tangible capital requirement, and (iii) a risk-based capital requirement. The
leverage limit requires that savings associations maintain "core capital" of at
least 3% of total assets. Core capital is generally defined as common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, certain minority equity interests in
subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing
rights and purchased credit card relationships (subject to certain limits) less
nonqualifying intangibles. The OTS and the federal banking regulators have
proposed amendments to their minimum capital regulations to provide that the
minimum leverage capital ratio for a depository institution that has been
assigned the highest composite rating of 1 under the Uniform Financial
Institutions Rating System will be 3% and that the minimum leverage capital
ratio for any other depository institution will be 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the depository institution. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except a limited amount of purchased mortgage servicing rights and credit
card relationships) of at least 1.5% of total assets. Under the risk-based
capital requirements, a minimum amount of capital must be maintained by a
savings association to account for the relative risks inherent in the type and
amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt, less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four risk-weight
categories (0%, 20%, 50% or 100%). A credit risk-free asset, such as cash,
requires no risk-based capital, while an asset with a potentially greater credit
risk, such as a commercial loan, requires a risk weight of 100%. Moreover, a
savings association must deduct from capital, for purposes of meeting the core
capital, tangible capital and risk-based capital ratio requirements, its entire
equity and debt investment in and loans to a subsidiary engaged in activities
not permissible for a national bank (other than exclusively agency activities
for its customers or mortgage banking subsidiaries). At March 31, 1998, the
Association was in compliance with all capital requirements imposed by law. See
"Historical and Pro Form Regulatory Capital Compliance" and Note 11 of the Notes
to Financial Statements.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory risk-based capital. The OTS has delayed the
implementation of this rule, however. The rule requires savings associations
with "above normal" interest rate risk (institutions whose portfolio equity
would decline in value by more than 2% of assets in the event of a hypothetical
200-basis-point move in interest rates) to maintain additional capital for
interest rate risk under the risk-based capital framework. If the OTS were to
implement this regulation, the Association would be exempt from its provisions
because it has less than $300 million in assets and a risk-based capital ratio
in excess of 12%. The Association nevertheless measures its interest rate risk
in conformity with the OTS regulation. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Asset Liability Management."
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations and
activities of the association, imposing a capital directive, cease and desist
order, or civil money penalties, or imposing harsher measures such as appointing
a receiver or conservator or forcing the association to merge into another
institution.
PROMPT CORRECTIVE REGULATORY ACTION
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, federal law
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized,
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and critically undercapitalized. At March 31, 1998, the Association was
categorized as "well capitalized," meaning that the Association's total
risk-based capital ratio exceeded 10%, Tier I risk-based capital ratio exceeded
6%, leverage capital ratio exceeded 5%, and the Association was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
DIVIDEND LIMITATIONS
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility given to well-capitalized associations. A savings
association which has total capital (immediately prior to and after giving
effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An association that has total capital at least equal to its
minimum capital requirements, but less than its capital requirements, would be a
Tier 2 institution ("Tier 2 Institution"). An institution having total capital
that is less than its minimum capital requirements would be a Tier 3 institution
("Tier 3 Institution"). However, an institution which otherwise qualifies as a
Tier 1 Institution may be designated by the OTS as a Tier 2 or Tier 3
Institution if the OTS determines that the institution is "in need of more than
normal supervision." The Association is currently a Tier 1 Institution.
A Tier 1 Institution may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of (a) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" at the beginning of
the calendar year (the smallest excess over its capital requirements), or (b)
75% of its net income over the most recent four-quarter period. Any additional
amount of capital distributions would require prior regulatory approval.
Accordingly, at March 31, 1998, the Association had available approximately
$12.0 million available for distribution, without consideration of any capital
infusion from the Reorganization.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
LIMITATIONS ON RATES PAID FOR DEPOSITS
FDIC regulations place limitations on the ability of insured depository
institutions to accept, renew or roll over deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions having the same type
of charter in the institution's normal market area. Under these regulations,
"well-capitalized" depository institutions may accept, renew or roll such
deposits over without restriction, "adequately capitalized" depository
institutions may accept, renew or roll such deposits over with a waiver from the
FDIC (subject to the above restrictions on payments of rates), and
"undercapitalized" depository institutions may not accept, renew or roll over
such deposits . The regulations provide that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions of federal law. Management does do not believe that these
regulations will have a materially adverse effect on the Association's current
operations.
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SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have also adopted safety and soundness
standards for all insured depository institutions. The standards, which were
issued in the form of guidelines rather than regulations, relate to internal
controls, information systems, internal audit systems, loan underwriting and
documentation, asset growth, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earnings standards to the safety and soundness guidelines.
LOANS TO ONE BORROWER
Under OTS regulations, a savings association may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of
unimpaired capital and surplus. Additional amounts may be lent, not in excess of
10% of unimpaired capital and surplus, if such loans or extensions of credit are
fully secured by readily marketable collateral, including certain debt and
equity securities, but not including real estate. In some cases, a savings
association may lend up to 30% of unimpaired capital and surplus to one borrower
for purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At March 31, 1998, the
Association had no loans to a single or related group of borrowers in excess of
its lending limits. Management does not believe that the loans-to-one-borrower
limits will have a significant impact on the Association's business operations
or earnings following the Reorganization.
QUALIFIED THRIFT LENDER
Savings associations must meet a QTL test. If the Association maintains
an appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it may exercise
full borrowing privileges from the FHLB of New York. The required percentage of
QTIs is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the association in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with
the QTL test is determined on a monthly basis and requires compliance in nine
out of every twelve months.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and education loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10% of total assets, plus an additional 10%
for small business loans. Loans for personal, family and household purposes
(other than credit card, small business and educational loans) are now included
without limit with other assets that, in the aggregate, may account for up to
20% of total assets. At March 31, 1998, under the expanded QTL test,
approximately 87.0% of the Association's portfolio assets were qualified thrift
investments.
A savings association that fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to the SAIF) or be subject to the following penalties: (i) it
may not enter into any new activity except for those permissible for a national
bank and for a savings association; (ii) its branching activities will be
limited to those of a national bank; (iii) it will not be eligible for any new
FHLB advances; and (iv) it will be bound by regulations applicable to national
banks regarding the payment of dividends. Three years after failing the QTL
test, the association must (i) dispose of any investment or activity not
permissible for a national bank and a savings association, and (ii) repay all
outstanding FHLB advances. If such a savings association is controlled by a
savings and loan holding company, then such holding company must, within a
prescribed time period, become
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registered as a bank holding company and become subject to all rules and
regulations applicable to bank holding companies (including restrictions as to
the scope of permissible business activities).
ACQUISITIONS AND BRANCHING
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a non-diversified savings and loan holding company may acquire control of a
bank. Moreover, federal savings associations may acquire or be acquired by any
insured depository institution. Savings associations acquired by bank holding
companies may be converted to banks if they continue to pay SAIF premiums, but
as such they become subject to branching and activity restrictions applicable to
banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered by the FDIC in
connection with a failed bank or savings association affiliate. Institutions are
commonly controlled if one is owned by another or if both are owned by the same
holding company. Such claims by the FDIC under this provision are subordinate to
claims of depositors, secured creditors, and holders of subordinated debt, other
than affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in Section 7701(a)(19) of the Code or the asset
composition test of Section 7701(c) of the Code. Branching that would result in
the formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion.
TRANSACTIONS WITH AFFILIATES
The Association is subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies. The statutes limit the amount of credit and other
transactions between a bank or savings association and its executive officers
and its affiliates, prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and
restricts the types of collateral security permitted in connection with a bank's
extension of credit to an affiliate.
FEDERAL SECURITIES LAW
The shares of Common Stock of the Company will be registered with the
SEC under the Securities Exchange Act of 1934 (the "1934 Act"). The Company will
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements the 1934 Act and the rules of the SEC thereunder. After
three years following the reorganization to stock form, if the Company has fewer
than 300 shareholders, it may deregister its shares under the 1934 Act and cease
to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Company meets the
current public information requirements under Rule 144, each affiliate of the
Company that 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
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any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks.
COMMUNITY REINVESTMENT ACT MATTERS
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating--outstanding, satisfactory, needs to
improve, and substantial noncompliance--and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first time home
buyers. The OTS has designated the Association's record of meeting community
credit needs as "satisfactory."
TAXATION
FEDERAL TAXATION
GENERAL. The following is a discussion of material federal income tax
matters and does not purport to be a comprehensive description of the federal
income tax rules applicable to the Association or the Company. For federal
income tax purposes, after the Reorganization, the Company and the Association
will file consolidated income tax returns and report their income on a calendar
year basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Association's tax reserve for bad debts, discussed
below.
Historically, savings associations, such as the Association, were
permitted to compute bad debt deductions using either the experience method or
the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using either the experience method or the specific charge-off method.
As a result of the repeal of the percentage of taxable income method, reserve
additions (tax bad debt deductions) made after 1987 using the percentage of
taxable income method generally must be included in future taxable income (or
"recaptured") over a six-year period, although a two-year delay may be permitted
for associations meeting a residential mortgage loan origination test. The
Association has established a deferred tax liability for the amount of taxes to
be paid under this recapture rule. In addition, the pre-1988 reserve, for which
a deferred tax liability has not been recorded, need not be recaptured into
income unless: (i) the Association's retained earnings represented by the
pre-1988 reserve are used for purposes other than to absorb losses from bad
debts, including excess dividend distributions or distributions in liquidation;
(ii) the Association redeems its stock; (iii) the Association fails to meet the
definition provided by the Code for a bank; or (iv) there is a change in the
federal tax law. See Note 8 of the Notes to Financial Statements for a
discussion of the Association's tax bad debt reserves.
DISTRIBUTIONS. If the Association makes "non-dividend distributions" to
the Company, such distribution will be considered to have been made from the
Association's unrecaptured tax bad debt reserves (including the balance of its
reserves as of December 31, 1987) and then from the Association's supplemental
reserve for losses on loans, to the extent thereof, and an amount based on the
amount distributed (but not in excess of the amount of such reserves) will be
included in the Association's income. Non-dividend distributions include
distributions in excess of the Association's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distribution in partial or complete liquidation.
Dividends paid out of the Association's current or accumulated earnings and
profits will not be so included in the Association's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
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Reorganization, the Association makes a non-dividend distribution to the
Company, approximately one and one-half times the amount of such distribution
(but not in excess of the amount of such reserves) would be includable in income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. See "Regulation" and "Dividend Limitations" for limits on the payment of
dividends by the Association. The Association does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserves.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax on the amount (if any) by which
20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption
varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable
income increased or decreased by certain tax preferences and adjustments,
including depreciation deductions in excess of that allowable for alternative
minimum tax purposes, tax-exempt interest on most private activity bonds issued
after August 7, 1986 (reduced by any related interest expense disallowed for
regular tax purposes), and 75% of the excess of adjusted current earnings over
AMTI (before this adjustment and before any alternative tax net operating loss).
AMTI may be reduced only up to 90% by net operating loss carryovers, but
alternative minimum tax paid can be credited against regular tax due in later
years. Under pending legislative proposals, for taxable years beginning after
December 31, 1997 and before January 1, 2009, an environmental tax of 0.12% of
the excess of AMTI (with certain modification) over $2 million would be imposed
on corporations, including the Association, whether or not an AMT is paid.
For federal income tax purposes, the Association files a calendar year
tax return and reports its income and expenses on the accrual method of
accounting. The Association's federal income tax returns have been audited for
tax years through 1994, and all tax deficiencies have been satisfied.
NEW YORK STATE TAXATION
The Company and the Association will report income on a combined
calendar year basis to New York State. The 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) a nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications. Alternative
entire net income is equal to entire net income without certain modifications.
A temporary Metropolitan Transportation Business Tax Surcharge on
banking corporations doing business in the Metropolitan District has been
applied since 1982. The Association transacts a significant portion of its
business within this District and is subject to this surcharge. The current
surcharge rate is 17% of the State franchise tax liability.
In July 1996, New York State enacted legislation to preserve the use of
the percentage of taxable income bad debt deduction for state tax purposes. In
general, the legislation provides for a deduction equal to 32% of the
Association's New York State taxable income, which is comparable to the
deductions permitted under the prior tax law. The legislation also provides for
a floating base year, which will allow the Association to change from the
percentage of taxable income method to the experience method without recapture
of any reserve. Previously, the Association had established a deferred New York
State tax liability for the excess of its New York State tax bad debt reserves
over the amount of its base-year New York State reserves. Since the new
legislation effectively eliminated the reserves in excess of the base-year
balances, the Association reduced its deferred tax liability by $250,000 (with a
corresponding reduction in income tax expense) during the year ended March 31,
1997.
Generally, New York State tax law has requirements similar to federal
requirements regarding the recapture of base-year tax bad debt reserves. One
notable exception is that, after the 1996 legislation, New York continues to
require that at least 60% of the Association's assets consist of specified
assets (generally, loans secured by residential real estate or deposits,
educational loans, cash and certain government obligations). The Association
expects to
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<PAGE> 113
continue to meet the 60% requirement and does not anticipate engaging in any of
the transactions which would require recapture of its base-year reserves (such
as changing to a commercial bank charter). Accordingly, under SFAS No. 109, it
has not provided any deferred tax liability on such reserves. See also Note 8 of
the Notes to Financial Statements.
For further information relating to the tax consequences of the
Reorganization, see "The Reorganization--Principal Effects of
Reorganization--Tax Effects."
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY
GENERAL
The following discussion is a general summary of regulatory and other
restrictions on the acquisition of the Common Stock. In addition, the following
discussion generally summarizes certain provisions of the Company's Federal
Charter ("Charter") and Bylaws and certain regulatory provisions that may be
deemed to have an "anti-takeover" effect.
MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure restricts the ability of
stockholders of the Company to effect a change of control of management because
the Mutual Holding Company, as long as it remains in existence, will control a
majority of the voting stock of the Company. In addition, the Mutual Holding
Company will be owned by members of the Association (i.e., depositors) and such
members have granted proxies to the Board of Directors of the Association. In
the future, proxies will be granted to the Mutual Holding Company. As such, the
Board of Directors of the Mutual Holding Company will be able to exert voting
control over the Company.
CHANGE IN BANK CONTROL ACT AND SAVINGS AND LOAN HOLDING COMPANY PROVISIONS OF
THE HOLA
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings association unless the OTS has been given 60 days'
prior written notice. The Home Owners' Loan Act provides that no company may
acquire "control" of a savings association without the prior approval of the
OTS. Any company that acquires such control becomes a "savings and loan holding
company" subject to registration, examination, and regulation by the OTS.
Pursuant to federal regulations, control of a savings association is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of an association or
the ability to control the election of a majority of the directors of an
association. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock, of a savings association, where certain
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit an acquisition of control if (i) it would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or (iii) the
competence, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or of the public to permit the
acquisition of control by such person. The foregoing restrictions do not apply
to the acquisition of the Company's capital stock by one or more tax-qualified
employee stock benefit plans, provided that the plan or plans do not have
beneficial ownership in the aggregate of more than 25% of any class of equity
security of the Company.
THE COMPANY'S CHARTER AND BYLAWS
The Company's Charter and Bylaws contain provisions that affect
corporate governance as well as the voting and ownership rights of stockholders.
The following discussion is a general summary of certain provisions of the
Company's Charter and Bylaws relating to provisions which may be deemed to have
an "anti-takeover" effect. The
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<PAGE> 114
description of these provisions is necessarily general, and reference should be
made in each case to the Charter and Bylaws of the Company.
CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS
The Company's Charter provides that the Board of Directors is to be
divided into three classes which shall be as nearly equal in number as possible.
The initial directors in each class will hold office for terms of either one
year, two years or three years, and, upon reelection, will serve for terms of
three years and until their successors are elected and qualified. Each director
serves until his successor is elected and qualified. The Bylaws provide that a
director may be removed for cause by the affirmative vote of the holders of at
least a majority of the outstanding shares entitled to vote at an election of
directors.
A classified board of directors may make it more difficult for
stockholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the Board of
Directors. Because the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the stockholders to
change a majority, whereas a majority of a non-classified board may be changed
in one year. In the absence of provisions in the Company's Charter or Bylaws
that classify the Board of Directors, all of the directors would be elected each
year.
Management of the Company believes that the staggered election of
directors tends to promote continuity of management, although continuity of
management has not been a problem in the past, because only one-third of the
Board of Directors is subject to election each year. Staggered terms guarantee
that in the ordinary course approximately two-thirds of the directors at any one
time have had at least one year's experience as directors of the Company, and
moderate the pace of changes in the Board of Directors by extending the minimum
time required to elect a majority of directors from one to two years.
ABSENCE OF CUMULATIVE VOTING
The Company's Charter and Bylaws provide that there shall be no
cumulative voting for the election of directors.
AUTHORIZATION OF PREFERRED STOCK
The Federal Charter authorizes 10,000,000 shares of serial preferred
stock, par value $0.10. The Company is authorized to issue preferred stock
from time to time in one or more series subject to applicable provisions of law,
and the Board of Directors is authorized to fix the designations, and relative
preferences, limitations, voting rights, if any, including without limitation,
conversion rights of such shares (which could be multiple or as a separate
class). In the event of a proposed merger, tender offer or other attempt to gain
control of the Company that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of preferred stock,
therefore, may be to deter a future takeover attempt. The Board of Directors has
no present plans or understandings for the issuance of any preferred stock but
it may issue any preferred stock on terms which the Board deems to be in the
best interests of the Company and its stockholders.
INSIDER VOTING CONTROL
Directors and executive officers are expected to purchase up to 147,700
shares of Common Stock in the Offering and are expected to control the voting of
5.57% of the shares of Common Stock sold in the Offering (approximately 2.5% of
all shares outstanding), assuming the sale of 2,650,500 shares, and may control
the voting of an additional 8% of the Minority Ownership Interest through the
ESOP. In addition, current officers and directors of the Association will be
officers and directors of the Mutual Holding Company which, after the
Reorganization and
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<PAGE> 115
Stock Offering, will own 53% of the total shares outstanding. The Company
intends to adopt (i) a Stock Option Plan which may award options to purchase
shares of Common Stock in an amount equal to up to 10% of the Minority Ownership
Interest, and (ii) a Stock Award Plan which may award shares of Common Stock in
an amount equal to at least 4% of the Minority Ownership Interest.
DESCRIPTION OF CAPITAL STOCK
COMPANY CAPITAL STOCK
The 30,000,000 shares of capital stock authorized by the Company's
Federal Charter are divided into two classes, consisting of 20,000,000 shares of
common stock ($0.10 par value) and 10,000,000 shares of serial preferred stock.
The Company currently expects to issue between 2,252,925 and 3,048,075 shares of
Common Stock in the Offering, with an adjusted maximum of 3,505,286 shares. The
aggregate stated value of the issued shares will constitute the capital account
of the Company on a consolidated basis. The balance of the Purchase Price of
Common Stock, less expenses of the Reorganization and Offering, will be
reflected as paid-in capital on a consolidated basis. See "Capitalization." Upon
payment of the Purchase Price for the Common Stock, all such stock will be duly
authorized, fully paid, validly issued and nonassessable.
COMMON STOCK. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with each other share of
the Common Stock. THE COMMON STOCK OF THE COMPANY WILL REPRESENT
NON-WITHDRAWABLE CAPITAL, WILL NOT BE OF AN INSURABLE TYPE AND WILL NOT BE
INSURED BY THE FDIC.
The holders of the Common Stock will possess exclusive voting power in
the Company. Each stockholder will be entitled to one vote for each share held
on all matters voted upon by stockholders. If the Company issues preferred stock
subsequent to the Reorganization, holders of the preferred stock may also
possess voting powers.
LIQUIDATION OR DISSOLUTION. In the unlikely event of the complete
liquidation or dissolution of the Association, the holders of the Common Stock
will be entitled to receive all the assets of the Association available for
distribution in or in kind, after payment, provision for payment or settlement
of (i) all debts and liabilities of the Association, (ii) the Association's
liquidation account, and (iii) the liquidation preference of any class or
series of stock that may be issued in the future having preference over the
Common Stock in the liquidation, dissolution or winding up of the Association.
NO PREEMPTIVE RIGHTS. Holders of the Common Stock or other capital
stock of the Company issued in the future will not be entitled to preemptive
rights with respect to any shares which may be issued. The Common Stock may not
be redeemed at the option of the stockholders and, upon receipt by the Company
of the full purchase price for the stock, each share of the Common Stock will be
fully paid and nonassessable.
PREFERRED STOCK. After the Reorganization, the Board of Directors of
the Company will be authorized to issue preferred stock in series and to fix and
state the voting powers, designations, preferences and relative, participating,
optional or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. Preferred stock may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both, and may have full or limited voting rights. The holders of preferred stock
will be entitled to vote as a separate class or series under certain
circumstances, regardless of any other voting rights which such holders may
have.
Except as discussed in this Prospectus, the Company has no present
plans for the issuance of the additional authorized shares of Common Stock or
for the issuance of any shares of preferred stock. In the future, the authorized
but unissued and unreserved shares of Common Stock will be available for general
corporate purposes including but not limited to possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering or under an employee stock ownership plan, stock option or
restricted stock plan. The authorized but unissued shares of preferred stock
will
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<PAGE> 116
similarly be available for issuance in future mergers or acquisitions, in a
future underwritten public offering or private placement or for other general
corporate purposes. Except as described above or as otherwise required to
approve the transaction in which the additional authorized shares of Common
Stock or authorized shares of preferred stock would be issued, no stockholder
approval will be required for the issuance of these shares. Accordingly, the
Board of Directors of the Company, without stockholder approval, can issue
preferred stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock.
DIVIDENDS. When the Reorganization is completed, the Company's only
asset will be the common stock of the Association and up to 50% of the net
proceeds of the Offering. As a result, dividends from the Association will be an
important source of future income for the Company. Should the Association elect
to retain its income, the ability of the Company to pay dividends to its own
shareholders may be adversely affected. Furthermore, if at any time in the
future the Company owns less than 100% of the outstanding stock of the
Association, certain tax benefits under the Code as to inter-company
distributions would not be fully available to the Company and it would be
required to pay federal income tax on a portion of the dividends received from
the Association, thereby reducing the amount of income available for
distribution to the shareholders of the Company.
SPECIAL MEETINGS
The Company's Bylaws provide that a special meeting of the shareholders
may be called at any time by the Chairman of the Board, the President, or a
majority of the Board of Directors, and shall be called by the Chairman of the
Board, the President, or the Secretary upon the written request of the holders
of at least one-tenth of all of the outstanding capital stock of the Company
entitled to vote at the meeting.
TRANSFER AGENT
________________________ will act as transfer agent and registrar for
the Common Stock. __________________'s phone number is (_____) ________________
or (800) __________________.
REGISTRATION REQUIREMENTS
The Company's Common Stock will be registered pursuant to Section 12(g)
of the 1934 Act and may not be deregistered for a period of at least three years
following the Reorganization. As a result of the registration under the 1934
Act, certain holders of Common Stock will be subject to certain reporting and
other requirements imposed by the 1934 Act. For example, beneficial owners of
more than 5% of the outstanding Common Stock will be required to file reports
pursuant to Section 13(d) or Section 13(g) of the 1934 Act, and officers,
directors and 10% shareholders of the Company will generally be subject to
reporting requirements of Section 16(a) and to the liability provisions for
profits derived from purchases and sales of Company Common Stock occurring
within a six-month period pursuant to Section 16(b) of the 1934 Act. In
addition, certain transactions in Common Stock, such as proxy solicitations and
tender offers, will be subject to the disclosure and filing requirements imposed
by Section 14 of the 1934 Act and the regulations promulgated thereunder.
LEGAL AND TAX MATTERS
Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C. 20015,
special counsel to the Association, will pass upon the legality and validity of
the shares of Common Stock being issued in the Offering. Luse Lehman Gorman
Pomerenk & Schick, P.C. has issued an opinion concerning certain federal income
tax aspects of the Reorganization and that the Reorganization, as proposed,
constitutes a tax-free reorganization under federal law. KPMG Peat Marwick LLP
has issued an opinion concerning certain state income tax aspects of the
Reorganization. Luse Lehman Gorman Pomerenk & Schick, P.C. and KPMG Peat Marwick
LLP have consented to the references herein to their opinions. Certain legal
matters related to the Offering will be passed upon for Sandler O'Neill by
Thacher Proffitt & Wood, New York, New York.
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<PAGE> 117
EXPERTS
The Association's financial statements as of March 31,1998 and 1997 and
for each of the years in the three-year period ended March 31, 1998, included in
this Prospectus and Registration Statement, have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, as indicated in their
report thereon appearing elsewhere herein, and are included herein in reliance
upon the authority of said firm as experts in accounting and auditing.
FinPro has consented to the publication of the summary herein of its
appraisal report as to the estimated pro forma market value of the Common Stock
of the Company to be issued in the Offering, to the reference to its opinion
relating to the value of the subscription rights, and to the filing of the
Independent Valuation as an exhibit to the registration statement filed by the
Company under the 1933 Act.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
1933 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 can be
inspected and copied at the SEC's public reference facilities located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional Office in
New York (Seven World Trade Center, 13th Floor, New York, New York 10048) and
Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511) and copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. This information can also be found on the SEC's
website, located at http: www.sec.gov.
In connection with the Reorganization, the Association filed with the
OTS a notice of its intent to reorganize into a mutual holding company and to
conduct a minority stock issuance, and the Company filed with the OTS an
application to become a savings and loan holding company. This Prospectus omits
certain information contained in such applications. The applications may be
inspected at the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552
and at the Northeast Regional Office of the OTS, 10 Exchange Place, Jersey City,
New Jersey 07302.
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SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report..................................................................... F-2
Balance Sheets at March 31, 1998 and 1997........................................................ F-3
Statements of Income for the Years Ended March 31, 1998, 1997 and 1996........................... 59
Statements of Changes in Equity for the Years Ended March 31, 1998,
1997 and 1996................................................................................ F-4
Statements of Cash Flows for the Years Ended March 31, 1998, 1997 and 1996....................... F-5
Notes to Financial Statements.................................................................... F-6
</TABLE>
The Financial Statements of the Company are omitted because the Company has not
yet issued any stock, has no assets or liabilities, and has not conducted any
business other than that of an organizational nature.
All schedules are omitted because the required information is not applicable or
is included in the Financial Statements and related Notes.
F-1
<PAGE> 119
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sound Federal Savings and Loan Association:
We have audited the accompanying balance sheets of Sound Federal Savings and
Loan Association as of March 31, 1998 and 1997, and the related statements of
income, changes in equity, and cash flows for each of the years in the
three-year period ended March 31, 1998. These financial statements are the
responsibility of the Association's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sound Federal Savings and Loan
Association as of March 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the years in the three-year period ended March 31,
1998 in conformity with generally accepted accounting principles.
[KPMG PEAT MARWICK LLP]
KPMG PEAT MARWICK LLP
Stamford, Connecticut
June 5, 1998
F-2
<PAGE> 120
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
AT MARCH 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks .............................. $ 5,711 $ 4,352
Federal funds sold ................................... 36,400 35,200
Certificates of deposit .............................. 11,483 11,986
Securities (Note 2):
Held-to-maturity, at amortized cost (fair value of
$65,091 in 1998 and $63,292 in 1997) .......... 64,898 63,353
Available-for-sale, at fair value ................ 2,994 1,995
--------- ---------
Total securities .............................. 67,892 65,348
--------- ---------
Loans, net (Note 3):
Mortgage loans ................................... 127,515 121,008
Consumer loans ................................... 2,027 1,454
Allowance for loan losses ........................ (984) (845)
--------- ---------
Total loans, net .............................. 128,558 121,617
--------- ---------
Accrued interest receivable (Note 4) ................. 888 877
Federal Home Loan Bank stock ......................... 1,745 1,607
Office properties and equipment, net (Note 5) ........ 1,552 1,452
Other assets ......................................... 520 544
--------- ---------
Total assets .................................. $ 254,749 $ 242,983
========= =========
LIABILITIES AND EQUITY
Liabilities:
Deposits (Note 6) ................................ $ 219,913 $ 211,223
Mortgage escrow funds ............................ 2,364 2,348
Other liabilities ................................ 571 395
--------- ---------
Total liabilities ............................. 222,848 213,966
--------- ---------
Commitments and contingencies (Note 10)
Equity (Note 11):
Retained earnings ................................ 31,905 29,020
Net unrealized loss on securities
available-for-sale, net of taxes .............. (4) (3)
--------- ---------
Total equity .................................. 31,901 29,017
--------- ---------
Total liabilities and equity .................. $ 254,749 $ 242,983
========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 121
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CHANGES IN EQUITY
(In Thousands)
<TABLE>
<CAPTION>
NET
UNREALIZED
RETAINED LOSS ON TOTAL
EARNINGS SECURITIES EQUITY
-------- ---------- ------
<S> <C> <C> <C>
Balances at March 31, 1995 .................... $ 24,333 $ (8) $ 24,325
Net income .................................... 2,397 -- 2,397
Net decrease in net unrealized loss on
available-for-sale securities, net of taxes -- 4 4
-------- -------- --------
Balances at March 31, 1996 .................... 26,730 (4) 26,726
Net income .................................... 2,290 -- 2,290
Net decrease in net unrealized loss on
available-for-sale securities, net of taxes -- 1 1
-------- -------- --------
Balances at March 31, 1997 .................... 29,020 (3) 29,017
Net income .................................... 2,885 -- 2,885
Net increase in net unrealized loss on
available-for-sale securities, net of taxes -- (1) (1)
-------- -------- --------
Balances at March 31, 1998 .................... $ 31,905 $ (4) $ 31,901
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 122
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 2,885 $ 2,290 $ 2,397
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ................................ 155 146 98
Depreciation expense ..................................... 115 106 94
Amortization of deferred fees, discounts and premiums, net 54 110 (58)
Deferred income tax benefit .............................. (170) (337) (32)
Other adjustments, net ................................... 440 (22) 248
-------- -------- --------
Net cash provided by operating activities ............. 3,479 2,293 2,747
-------- -------- --------
Cash flows from investing activities:
Purchases of securities:
Held-to-maturity ......................................... (21,445) (22,772) (22,039)
Available-for-sale ....................................... (1,000) -- --
Proceeds from principal payments, maturities and
calls of securities held-to-maturity ..................... 19,778 18,723 15,587
Disbursements for loan originations ......................... (29,391) (25,088) (18,460)
Principal collections on loans .............................. 22,363 16,569 13,314
Net decrease (increase) in certificates of deposit .......... 503 (392) (1,605)
Purchases of Federal Home Loan Bank stock ................... (138) (94) (85)
Purchases of office properties and equipment ................ (296) (140) (142)
Proceeds from sales of real estate owned .................... -- 400 --
-------- -------- --------
Net cash used in investing activities ................. (9,626) (12,794) (13,430)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits .................................... 8,690 10,612 13,660
Net increase (decrease) in mortgage escrow funds ............ 16 237 (186)
-------- -------- --------
Net cash provided by financing activities ............. 8,706 10,849 13,474
-------- -------- --------
Net increase in cash and cash equivalents ....................... 2,559 348 2,791
Cash and cash equivalents at beginning of year .................. 39,552 39,204 36,413
-------- -------- --------
Cash and cash equivalents at end of year ........................ $ 42,111 $ 39,552 $ 39,204
======== ======== ========
Supplemental information:
Interest paid ............................................... $ 8,736 $ 7,910 $ 7,841
Income taxes paid ........................................... 1,876 1,650 1,772
Loans transferred to real estate owned ...................... -- 365 170
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 123
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sound Federal Savings and Loan Association (the "Association") is a
community-oriented savings institution whose business primarily consists
of accepting deposits from customers within its market area (Westchester
County, New York) and investing those funds in mortgage loans secured by
one-to-four family residences and in mortgage-backed and other
securities. To a significantly lesser extent, funds are invested in
commercial mortgage, construction and consumer loans.
Deposits are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation. The
Association is a federally-chartered mutual savings association, and its
primary regulator is the Office of Thrift Supervision ("OTS"). As
discussed in Note 14, the Association's Board of Directors has adopted a
Plan of Reorganization pursuant to which the Association will convert to
a stock savings and loan association under a mutual holding company
structure.
BASIS OF PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets, liabilities, income and expense. A material
estimate that is particularly susceptible to near-term change is the
allowance for loan losses, which is discussed below.
For purposes of reporting cash flows, cash equivalents represent Federal
funds sold for one-day periods.
SECURITIES
The Association classifies and accounts for its securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Securities classified as held-to-maturity under SFAS No. 115 are limited
to debt securities for which the entity has the positive intent and
ability to hold to maturity. Trading securities are debt and equity
securities that are bought principally for the purpose of selling them in
the near term. All other debt and equity securities are classified as
available-for-sale.
Held-to-maturity securities are carried at amortized cost.
Available-for-sale securities are carried at fair value, with unrealized
gains and losses excluded from earnings and reported on a net-of-tax
basis as a separate component of equity. The Association has no trading
securities. Federal Home Loan Bank stock is a non-marketable security
held in accordance with certain regulatory requirements and, accordingly,
is carried at cost.
F-6
<PAGE> 124
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Premiums and discounts on debt securities are amortized to interest
income on a level-yield basis over the terms of the securities. Realized
gains and losses on sales of securities are determined based on the
amortized cost of the specific securities sold. Unrealized losses on
securities are charged to earnings when the decline in fair value of a
security is judged to be other than temporary.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions for losses
charged to income. Losses are charged to the allowance when all or a
portion of a loan is deemed to be uncollectible. Recoveries of loans
previously charged-off are credited to the allowance for loan losses when
realized. Management's periodic evaluation of the adequacy of the
allowance for loan losses is based on the Association's past loan loss
experience, known and inherent risks in the portfolio, adverse situations
that may affect a borrower's ability to repay, estimated value of
underlying collateral, and current economic conditions. In management's
judgment, the allowance for loan losses is adequate to absorb probable
losses in the existing loan portfolio.
Establishing the allowance for loan losses involves significant
management judgments utilizing the best information available at the time
of review. Those judgments are subject to further review by various
sources, including the Association's regulators. Adjustments to the
allowance may be necessary in the future based on changes in economic and
real estate market conditions, further information obtained regarding
known problem loans, the identification of additional problem loans, and
other factors.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118, a loan is considered to be
impaired when, based on current information and events, it is probable
that the Association will be unable to collect all principal and interest
contractually due. Under SFAS No. 114, creditors are permitted to measure
impaired loans based on (i) the present value of expected future cash
flows discounted at the loan's effective interest rate, (ii) the loan's
observable market price or (iii) the fair value of the collateral if the
loan is collateral dependent. If the measure of an impaired loan is less
than its recorded investment, an impairment loss is recognized as part of
the allowance for loan losses. SFAS No. 118 allows creditors to continue
to use existing methods for recognizing interest income on impaired
loans.
F-7
<PAGE> 125
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
INTEREST AND FEES ON LOANS
Interest is accrued monthly based on outstanding principal balances
unless management considers the collection of interest to be doubtful
(generally, when loans are contractually past due ninety days or more).
When loans are placed on nonaccrual status, unpaid interest is reversed
by charging interest income and crediting an allowance for uncollected
interest. Interest payments received on nonaccrual loans (including
impaired loans) are recognized as income unless future collections are
doubtful. Loans are returned to accrual status when collectibility is no
longer considered doubtful (generally, when all payments have been
brought current).
Loan origination fees and certain direct loan origination costs are
deferred and the net fee or cost is amortized to interest income, using
the level-yield method, over the contractual term of the related loan.
Unamortized fees and costs applicable to prepaid loans are recognized in
interest income at the time of prepayment.
REAL ESTATE OWNED
Real estate properties acquired through foreclosure are recorded
initially at fair value less estimated sales costs, with the resulting
writedown charged to the allowance for loan losses. Thereafter, an
allowance for losses on real estate owned is established by a charge to
expense to reflect any subsequent declines in fair value. Fair value
estimates are based on recent appraisals and other available information.
Costs incurred to develop or improve properties are capitalized, while
holding costs are charged to expense.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are comprised of land (carried at cost)
and buildings, improvements, furniture, fixtures and equipment (carried
at cost less accumulated depreciation). Depreciation expense is
recognized on a straight-line basis over the estimated useful lives of
the related assets which range from 5 to 50 years. Costs incurred to
improve or extend the life of existing assets are capitalized. Repairs
and maintenance, as well as renewals and replacements of a routine
nature, are charged to expense.
INCOME TAXES
In accordance with the asset and liability method required by SFAS No.
109, "Accounting for Income Taxes," deferred taxes are recognized for the
estimated future tax effects attributable to "temporary differences"
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. A deferred tax liability is
recognized for all temporary differences that will result in future
taxable income. A deferred tax asset is recognized for all temporary
differences that will result in future tax deductions, subject to
reduction of the asset by a valuation allowance in certain circumstances.
This
F-8
<PAGE> 126
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
valuation allowance is recognized if, based on an analysis of available
evidence, management determines that it is more likely than not that a
portion or all of the deferred tax asset will not be realized. The
valuation allowance is subject to ongoing adjustment based on changes in
circumstances that affect management's judgment about the realizability
of the deferred tax asset. 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 temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of an enacted change in tax laws or
rates is recognized in income tax expense in the period that includes the
enactment date of the change.
(2) SECURITIES
The following is a summary of securities at March 31, 1998 and 1997:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------------- FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
March 31, 1998 Securities held-to-maturity:
Mortgage-backed securities ............ $ 53,421 $ 445 $ (205) $ 53,661
U.S. Government and agency
securities ........................ 11,477 21 (68) 11,430
-------- -------- -------- --------
$ 64,898 $ 466 $ (273) $ 65,091
======== ======== ======== ========
Securities available-for-sale:
Mutual fund investments ............... $ 3,000 $ -- $ (6) $ 2,994
======== ======== ======== ========
MARCH 31, 1997 Securities held-to-maturity:
Mortgage-backed securities ............ $ 52,901 $ 326 $ (335) $ 52,892
U.S. Government and agency
securities ........................ 10,452 3 (55) 10,400
-------- -------- -------- --------
$ 63,353 $ 329 $ (390) $ 63,292
======== ======== ======== ========
Securities available-for-sale:
Mutual fund investments ............... $ 2,000 $ -- $ (5) $ 1,995
======== ======== ======== ========
</TABLE>
F-9
<PAGE> 127
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Debt securities at March 31, 1998 consisted of adjustable rate securities
and fixed rate securities with amortized costs of $55.7 million and $9.2
million, respectively, and weighted average yields of 6.85% and 6.37%,
respectively. Adjustable rate and fixed rate debt securities at March 31,
1997 totaled $52.2 million and $11.2 million, respectively, with weighted
average yields of 6.79% and 6.54%, respectively.
Mortgage-backed securities consist of pass-through securities guaranteed
by the Government National Mortgage Association, Fannie Mae and Freddie
Mac with amortized costs of $46.4 million, $6.9 million and $0.1 million,
respectively, at March 31, 1998 ($46.4 million, $6.4 million and $0.1
million, respectively, at March 31, 1997).
There were no sales of securities or transfers between classifications
during the years ended March 31, 1998, 1997 and 1996.
The following is a summary of the amortized cost and fair value of debt
securities held-to-maturity at March 31, 1998, by remaining term to
contractual maturity. Actual maturities may differ from these amounts
because certain issuers have the right to call or redeem their
obligations prior to contractual maturity.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---- -----
(IN THOUSANDS)
<S> <C> <C>
Mortgage-backed securities ........... $53,421 $53,661
U.S. Government and agency securities:
One year or less ................. 4,012 4,030
Over one to five years ........... 3,998 3,982
Over ten years ................... 3,467 3,418
------- -------
Total ................. $64,898 $65,091
======= =======
</TABLE>
F-10
<PAGE> 128
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(3) LOANS
A summary of loans at March 31 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
Residential properties:
One-to-four family ....................................... $ 109,207 $ 103,595
Home equity lines of credit .............................. 13,138 9,487
Multi-family ............................................. 412 348
Commercial properties ....................................... 3,811 3,416
Construction loans .......................................... 1,800 5,539
Construction loans in process ............................... (573) (1,049)
Deferred loan origination fees, net ......................... (280) (328)
--------- ---------
127,515 121,008
--------- ---------
Consumer loans:
Automobile loans ............................................ 1,011 1,028
Secured personal loans ...................................... 707 132
Other ....................................................... 309 294
--------- ---------
2,027 1,454
--------- ---------
Total loans .............................................. 129,542 122,462
Allowance for loan losses ...................................... (984) (845)
--------- ---------
Total loans, net ......................................... $ 128,558 $ 121,617
========= =========
</TABLE>
Gross loans at March 31, 1998 consisted of fixed rate loans of $124.0
million and adjustable rate loans of $6.4 million with weighted average
yields of 8.18% and 8.64%, respectively. Fixed rate and adjustable rate
loans at March 31, 1997 totaled $115.6 million and $8.2 million,
respectively, with weighted average yields of 8.33% and 8.59%,
respectively.
F-11
<PAGE> 129
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Association primarily originates mortgage loans secured by existing
single-family residential properties. The Association also originates
multi-family and commercial mortgage loans, construction loans and
consumer loans. Substantially all of the mortgage loan portfolio is
secured by real estate properties located in Westchester County, New
York. The ability of the Association's borrowers to make principal and
interest payments is dependent upon, among other things, the level of
overall economic activity and the real estate market conditions
prevailing within the Association's concentrated lending area.
Activity in the allowance for loan losses is summarized as follows for
the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 845 $ 725 $ 652
Provision for losses ....... 155 146 98
Charge-offs ................ (16) (45) (26)
Recoveries ................. -- 19 1
----- ----- -----
Balance at end of year ..... $ 984 $ 845 $ 725
===== ===== =====
</TABLE>
The principal balances of nonaccrual loans past due ninety days or more
at March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One-to-four family ........ $1,721 $1,832 $2,671
Home equity lines of credit -- -- 160
Commercial ................ 236 432 236
Consumer loans ................ 1 -- 21
------ ------ ------
Total nonaccrual loans .... $1,958 $2,264 $3,088
====== ====== ======
</TABLE>
Gross interest income that would have been recorded if the foregoing
nonaccrual loans had remained current in accordance with their
contractual terms totaled $205,000, $231,000 and $288,000 for the years
ended March 31, 1998, 1997 and 1996, respectively, compared to interest
income actually recognized of $55,000, $52,000 and $77,000, respectively.
SFAS No. 114 applies to loans that are individually evaluated for
collectibility in accordance with the Association's normal loan review
procedures (principally loans in the multi-family, commercial mortgage
and construction loan portfolios). The standard does not generally apply
to smaller-balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage and consumer loans. The
Association's impaired loans consisted of nonaccrual commercial mortgage
loans with a recorded investment totaling $236,000 and $432,000 at March
31, 1998 and 1997, respectively. All of these loans were
F-12
<PAGE> 130
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
collateral-dependent loans measured based on the fair value of the
collateral in accordance with SFAS No. 114. The Association determines
the need for an allowance for loan impairment under SFAS No. 114 on a
loan-by-loan basis. At March 31, 1998 and 1997, such an allowance was
not required with respect to the Association's impaired loans due to the
sufficiency of the related collateral values. The Association's average
recorded investment in impaired loans was approximately $330,000,
$299,000 and $142,000 for the years ended March 31, 1998, 1997 and 1996,
respectively. Interest collections and income recognized on impaired
loans (while such loans were considered impaired) were insignificant
during each of these years.
Other assets at both March 31, 1998 and 1997 include single-family real
estate owned properties with net carrying values of $129,000. Provisions
for losses and other activity in the allowance for losses on real estate
owned were insignificant during the years ended March 31, 1998, 1997 and
1996.
(4) ACCRUED INTEREST RECEIVABLE
A summary of accrued interest receivable at March 31 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Loans ................. $780 $749
Securities ............ 91 105
Certificates of deposit 17 23
---- ----
Total ............. $888 $877
==== ====
</TABLE>
(5) OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment at March 31 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land .................................. $ 537 $ 537
Buildings and improvements ............ 1,501 1,482
Furniture, fixtures and equipment ..... 1,325 1,129
------- -------
3,363 3,148
Less accumulated depreciation ......... $(1,811) $(1,696)
------- -------
Office properties and equipment, net $ 1,552 $ 1,452
======= =======
</TABLE>
F-13
<PAGE> 131
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(6) DEPOSITS
The following is a summary of deposit balances and weighted average
stated interest rates at March 31:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
RATE AMOUNT RATE AMOUNT
---- ------ ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Passbook and club accounts .............. 2.54% $ 61,347 2.54% $ 63,579
Money market accounts ................... 3.05 17,676 3.10 17,497
NOW and Super NOW accounts .............. 2.04 21,261 2.04 19,885
-------- --------
Total ................................ 2.52 100,284 2.54 100,961
-------- --------
Certificates of deposit by remaining
term to contractual maturity:
Within one year ...................... 5.60 108,902 5.39 101,169
After one but within three years ..... 5.72 9,613 5.72 7,597
After three years .................... 4.49 1,114 4.53 1,496
-------- --------
Total ................................ 5.60 119,629 5.40 110,262
-------- --------
Total deposits ....................... 4.20% $219,913 4.03% $211,223
======== ========
</TABLE>
Certificates of deposit in denominations of $100,000 or more totaled
$14.1 million and $12.3 million at March 31, 1998 and 1997, respectively.
The Federal Deposit Insurance Corporation generally insures deposit
accounts up to $100,000, as defined in the applicable regulations.
The following is a summary of interest expense on deposits for the years
ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook and club accounts....................................... $ 1,573 $ 1,640 $ 1,903
Money market, NOW and Super NOW accounts ........................ 962 918 874
Certificates of deposit ......................................... 6,165 5,318 5,032
-------- -------- --------
Total........................................................ $ 8,700 $ 7,876 $ 7,809
======== ======== ========
</TABLE>
F-14
<PAGE> 132
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted
into law on September 30, 1996. Among other things, the Funds Act
required depository institutions to pay a one-time special assessment of
65.7 basis points on their SAIF-assessable deposits held on March 31,
1995, in order to recapitalize the SAIF to the level required by law. The
Association's special assessment of $1.2 million was paid in November
1996 and is reflected in non-interest expense for the year ended March
31, 1997.
(7) FEDERAL HOME LOAN BANK BORROWINGS
As a member of the Federal Home Loan Bank ("FHLB") of New York, the
Association may have outstanding FHLB borrowings of up to 25% of its
total assets, or approximately $63.7 million at March 31, 1998, in a
combination of term advances and overnight funds. Borrowings are secured
by the Association's investment in FHLB stock and by a blanket security
agreement. This agreement requires the Association to maintain as
collateral certain qualifying assets (such as securities and
single-family residential mortgage loans) with a fair value, as defined,
at least equal to 115% of any outstanding advances.
At March 31, 1998 and 1997, an outstanding FHLB advance of $87,000 is
included in other liabilities in the balance sheets. This advance bears
interest at a fixed rate of 8.29% and matures in 2002.
(8) INCOME TAXES
Income tax expense consists of the following components for the years
ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current ........................................................... $ 1,679 $ 1,173 $ 1,321
Deferred .......................................................... (135) 121 (37)
------- ------- -------
1,544 1,294 1,284
------- ------- -------
New York State:
Current ........................................................... 556 489 443
Deferred .......................................................... (35) (458) 5
------- ------- -------
521 31 448
------- ------- -------
Total:
Current ........................................................... 2,235 1,662 1,764
Deferred .......................................................... (170) (337) (32)
------- ------- -------
$ 2,065 $ 1,325 $ 1,732
======= ======= =======
</TABLE>
F-15
<PAGE> 133
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The following is a reconciliation of expected income taxes (computed at
the applicable Federal statutory tax rate of 34%) to the Association's
actual income tax expense for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Taxes at Federal statutory rate ................ $1,683 $1,229 $1,404
State tax expense, net of Federal tax benefit .. 344 20 296
Other reconciling items, net ................... 38 76 32
------ ------ ------
Actual income tax expense ...................... $2,065 $1,325 $1,732
====== ====== ======
Effective income tax rate ...................... 41.7% 36.7% 41.9%
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to the
Association's deferred tax assets and liabilities at March 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ............................. $ 403 $ 347
Loan origination fees ................................. 114 135
Deferred compensation ................................. 191 173
Other deductible temporary differences ................ 81 2
----- -----
Total deferred tax assets ......................... 789 657
----- -----
Deferred tax liabilities:
Tax bad debt reserves in excess of base-year reserves .. 522 545
Other taxable temporary differences .................... - 15
----- -----
Total deferred tax liabilities .................... 522 560
----- -----
Net deferred tax asset ..................................... $ 267 $ 97
===== =====
</TABLE>
Based on the Association's historical and anticipated future pre-tax
earnings, management believes that it is more likely than not that the
deferred tax assets will be realized.
As a thrift institution, the Association 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 were determined using methods based on loss experience or a
percentage of taxable income. Tax bad debt reserves represent the excess
of
F-16
<PAGE> 134
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 1996. The Federal amendments include
elimination of the percentage-of-taxable-income method for tax years
beginning after December 31, 1995 and imposition of a requirement to
recapture into taxable income (over a six-year period) the reserves in
excess of the base-year amounts. The Association previously established,
and continues to maintain, a deferred tax liability with respect to such
excess Federal reserves. The New York State amendments redesignate the
Association's State bad debt reserves as the base-year amount and provide
for future additions to the base-year reserve using the
percentage-of-taxable-income method. These changes effectively eliminated
the excess New York State reserves for which a deferred tax liability had
been recognized and, accordingly, the Association reduced its deferred
tax liability by $250,000 (with a corresponding reduction in income tax
expense) during the year ended March 31, 1997.
At March 31, 1998, the Association's base-year tax bad debt reserves
totaled $5.2 million for Federal tax purposes and $8.7 million for State
tax purposes. In accordance with SFAS No. 109, deferred tax liabilities
have not been recognized with respect to these reserves, since the
Association does not expect that these amounts will become taxable in the
foreseeable future. Under the tax laws as amended, events that would
result in taxation of these reserves include failure of the Association
to maintain a specified qualifying assets ratio or meet other thrift
definition tests for New York State tax purposes. At March 31, 1998, the
Association's unrecognized deferred tax liabilities with respect to the
Federal and State tax bad debt reserves were approximately $1.8 million
and $0.6 million, respectively.
(9) EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Association maintains a non-contributory defined benefit pension plan
which covers substantially all full-time employees who meet certain age
and length of service requirements. Benefits are based on the employee's
years of accredited service and average compensation for the three
consecutive years that produce the highest average. The Association's
funding policy is to contribute the amounts required by applicable
regulations, although additional amounts may be contributed from time to
time.
F-17
<PAGE> 135
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The following is a reconciliation of the funded status of the pension
plan and the accrued cost recognized in the balance sheets at March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $4,019 in 1998 and $3,443 in 1997 ................. $(4,042) $(3,454)
Effect of projected future compensation levels .......... (773) (808)
------- -------
Projected benefit obligation ............................ (4,815) (4,262)
Plan assets (primarily insurance contract, at contract value) 4,108 3,602
------- -------
Excess of projected benefit obligation over plan assets ..... (707) (660)
Unrecognized net loss ....................................... 526 335
Unrecognized prior service cost ............................. 100 146
Unrecognized net transition obligation ...................... 54 40
------- -------
Accrued pension cost .................................... $ (27) $ (139)
======= =======
</TABLE>
A discount rate of 6.75% and a rate of increase in future compensation
levels of 4.50% were used in determining the actuarial present value of
the projected benefit obligation at March 31, 1998 (7.50% and 5.50%,
respectively, at March 31, 1997). The expected long-term rate of return
on plan assets was 9.00% for 1998, 1997 and 1996.
The net periodic pension cost consisted of the following for the years
ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost (benefits earned during the year) ... $ 64 $ 74 $ 63
Interest cost on projected benefit obligation .... 318 283 273
Actual return on plan assets ..................... (343) (295) (295)
Net amortization and deferral .................... 53 58 52
----- ----- -----
Net periodic pension cost .................... $ 92 $ 120 $ 93
===== ===== =====
</TABLE>
SAVINGS PLAN
The Association also maintains an employee savings plan under Section
401(k) of the Internal Revenue Code. Eligible employees may make
contributions to the plan of up to 10% of their compensation. The
Association makes matching contributions of 50% of the participant's
contributions to the plan. Participants vest immediately in both their
own contributions and Association contributions. Savings plan expense was
$41,000, $21,000 and $21,000 for the years ended March 31, 1998, 1997 and
1996, respectively.
F-18
<PAGE> 136
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(10) COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Association's off-balance sheet financial instruments at March 31,
1998 and 1997 were limited to loan origination commitments of $6.4
million and $2.7 million, respectively, and unused lines of credit
(principally home equity lines) extended to customers of $7.0 million and
$5.4 million, respectively. Substantially all of these commitments and
lines of credit carry fixed interest rates and have been provided to
customers within the Association's primary lending area described in Note
3. The Association's fixed rate loan origination commitments at March 31,
1998 provide for interest rates ranging from 6.50% to 9.50%.
These instruments involve elements of credit risk and interest rate risk
in addition to the amounts recognized in the balance sheets. The
contractual amounts represent the Association's maximum potential
exposure to credit loss, but do not necessarily represent future cash
requirements since certain commitments and lines of credit may expire
without being fully funded. Loan commitments generally have fixed
expiration dates (ranging up to 3 months) or other termination clauses
and may require the payment of a fee by the customer. Commitments and
lines of credit are subject to the same credit approval process applied
in the Association's general lending activities, including a case-by-case
evaluation of the customer's creditworthiness and related collateral
requirements.
LEGAL PROCEEDINGS
In the normal course of business, the Association is involved in various
outstanding legal proceedings. In the opinion of management, after
consultation with legal counsel, the outcome of such legal proceedings
should not have a material effect on the Association's financial
condition, results of operations or liquidity.
(11) REGULATORY CAPITAL REQUIREMENTS
OTS regulations require savings institutions to maintain a minimum ratio
of tangible capital to total adjusted assets of 1.5%; a minimum ratio of
Tier I (core) capital to total adjusted assets of 3.0%; and a minimum
ratio of Tier I (core and supplementary) capital to risk-weighted assets
of 8.0%.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions with respect to an undercapitalized
institution. Such actions could have a direct material effect on the
institution's financial statements. The regulations establish a framework
for the classification of depository institutions into five categories:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a Tier I (core)
capital ratio of at least 5.0%; a Tier I risk-based capital ratio of at
least 6.0%; and a total risk-based capital ratio of at least 10.0%.
F-19
<PAGE> 137
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 OTS
about capital components, risk weightings and other factors.
Management believes that, as of March 31, 1998 and 1997, the Association
met all capital adequacy requirements to which it was subject. Further,
the most recent OTS notification categorized the Association as a
well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Association's
capital classification.
The following is a summary of the Association's actual capital amounts
and ratios as of March 31, 1998 and 1997, compared to the OTS
requirements for minimum capital adequacy and for classification as a
well-capitalized institution:
<TABLE>
<CAPTION>
OTS REQUIREMENTS
--------------------------------------------
MINIMUM CAPITAL CLASSIFICATION AS
ASSOCIATION ACTUAL ADEQUACY WELL CAPITALIZED
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998
Tangible capital ..... $31,901 12.5% $ 3,821 1.5%
Tier I (core) capital 31,901 12.5 7,642 3.0 $12,737 5.0%
Risk-based capital:
Tier I ........... 31,901 33.9 5,645 6.0
Total ............ 32,885 34.9 7,527 8.0 9,409 10.0
March 31, 1997
Tangible capital ..... $29,017 11.9% $ 3,650 1.5%
Tier I (core) capital 29,017 11.9 7,301 3.0 $12,168 5.0%
Risk-based capital:
Tier I ........... 29,017 34.4 5,068 6.0
Total ............ 29,862 35.4 6,757 8.0 8,446 10.0
</TABLE>
The Association's tangible, tier I "core" and tier I risk-based capital
amounts equal equity under generally accepted accounting principles. The
Association's total risk-based capital represents tier I risk-based
capital plus general allowances for loan losses up to 1.25% of
risk-weighted assets.
(12) FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosures about the fair values of financial
instruments for which it is practicable to estimate fair value. The
definition of a financial instrument includes many of the assets and
liabilities recognized in the Association's balance sheets, as well as
certain off-balance sheet items. Fair value is defined in SFAS No. 107 as
the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale.
F-20
<PAGE> 138
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Quoted market prices are used to estimate fair values when those prices
are available. However, active markets do not exist for many types of
financial instruments. Consequently, fair values for these instruments
must be estimated by management using techniques such as discounted cash
flow analysis and comparison to similar instruments. Estimates developed
using these methods are highly subjective and require judgments regarding
significant matters such as the amount and timing of future cash flows
and the selection of discount rates that appropriately reflect market and
credit risks. Changes in these judgments often have a material effect on
the fair value estimates. Since these estimates are made as of a specific
point in time, they are susceptible to material near-term changes. Fair
values disclosed in accordance with SFAS No. 107 do not reflect any
premium or discount that could result from the sale of a large volume of
a particular financial instrument, nor do they reflect possible tax
ramifications or estimated transaction costs.
The following is a summary of the carrying amounts and estimated fair
values of the Association's financial assets and liabilities at March 31:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks .... $ 5.7 $ 5.7 $ 4.4 $ 4.4
Federal funds sold ......... 36.4 36.4 35.2 35.2
Certificates of deposit .... 11.5 11.5 12.0 12.0
Securities ................. 67.9 68.1 65.3 65.3
Loans ...................... 128.6 130.3 121.6 120.7
Accrued interest receivable 0.9 0.9 0.9 0.9
Federal Home Loan Bank stock 1.7 1.7 1.6 1.6
Financial liabilities:
Savings certificate accounts 119.6 119.6 110.3 109.8
Other deposit accounts ..... 100.3 100.3 101.0 101.0
Mortgage escrow funds ...... 2.4 2.4 2.3 2.3
FHLB advance ............... 0.1 0.1 0.1 0.1
======== ======== ======== ========
</TABLE>
The following is a description of the principal valuation methods used by
the Association to estimate the fair values of its financial instruments:
SECURITIES
The fair values of securities were based on market prices or dealer
quotes.
F-21
<PAGE> 139
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
LOANS
For valuation purposes, the loan portfolio was segregated into its
significant categories, such as residential mortgage loans and consumer
loans. These categories were further analyzed, where appropriate, into
components based on significant financial characteristics such as type of
interest rate (fixed or adjustable). Generally, management estimated fair
values by discounting the anticipated cash flows at current market rates
for loans with similar terms to borrowers of similar credit quality.
DEPOSIT LIABILITIES
The fair values of savings certificate accounts represent contractual
cash flows discounted using interest rates currently offered on
certificates with similar characteristics and remaining maturities. In
accordance with SFAS No. 107, the fair values of other deposit accounts
(those with no stated maturity such as passbook and money market
accounts) are equal to the carrying amounts payable on demand.
These fair values do not include the value of core deposit relationships
which comprise a significant portion of the Association's deposit base.
Management believes that the Association's core deposit relationships
provide a relatively stable, low-cost funding source which has a
substantial unrecognized value separate from the deposit balances.
OTHER FINANCIAL INSTRUMENTS
The other financial assets and liabilities listed in the preceding table
have fair values which approximate the respective carrying amounts in the
balance sheets because the instruments are payable on demand or have
short-term maturities and present relatively low credit risk and interest
rate risk. Fair values of the loan origination commitments and unused
lines of credit described in Note 10 were estimated based on an analysis
of the interest rates and fees currently charged to enter into similar
transactions, considering the remaining terms of the instruments and the
creditworthiness of the potential borrowers. At March 31, 1998 and 1997,
the fair values of these instruments approximated the related carrying
amounts which were not significant.
(13) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive income (and its
components) in financial statements. The standard does not, however,
specify when to recognize or how to measure items that make up
comprehensive income. Comprehensive income represents net income and
certain amounts reported directly in equity, such as the net unrealized
gain or loss on available-for-sale securities. While SFAS No. 130 does
not require a specific reporting format, it does require
F-22
<PAGE> 140
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
that an enterprise display in the financial statements an amount
representing total comprehensive income for the period.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," to revise present
disclosure requirements applicable to those benefits. Although the
standard does not change the measurement or recognition requirements for
postretirement benefit plans, it standardizes the disclosure
requirements; requires additional information on changes in benefit
obligations and fair values of plan assets; and eliminates certain
present disclosure requirements.
SFAS Nos. 130 and 132 are effective for fiscal years beginning after
December 15, 1997 and, accordingly, will be adopted by the Association in
the year ending March 31, 1999. Management does not expect that these
standards will significantly affect the Association's financial
reporting.
(14) MUTUAL HOLDING COMPANY REORGANIZATION AND OFFERING
On May 13, 1998, the Board of Directors of the Association adopted a Plan
of Reorganization ("the Plan") pursuant to which the Association will
convert to a stock savings and loan association under a two-tier mutual
holding company structure. As part of the Plan, the Association will
establish a federally-chartered mutual holding company known as Sound
Federal, MHC (the "Mutual Holding Company") and a capital stock holding
company known as Sound Federal Bancorp ("the Company"). The Association
will become a federally-chartered capital stock savings and loan
association, wholly owned by the Company.
The Company plans to offer for sale 45% of its common shares in a
subscription offering ("the Offering") initially to eligible Association
depositors; tax-qualified employee benefit plans of the Association;
certain other Association depositors and borrowers; and employees,
officers and directors of the Association. Any shares of common stock not
sold in the Offering will be offered to certain members of the general
public in a community offering, with a preference for natural persons
residing in Westchester County. The Company also plans to contribute 2%
of its common shares to a charitable foundation to be established
pursuant to the Plan. Such contribution will result in the Company `s
recognition of expense, equal to the fair value of the shares
contributed, in the period in which the contribution occurs. After
completion of these transactions, the Mutual Holding Company will own the
remaining 53% of the Company's issued common shares.
F-23
<PAGE> 141
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Following the completion of the reorganization, all depositors who had
liquidation rights with respect to the Association as of the effective
date of the reorganization will continue to have such rights solely with
respect to the Mutual Holding Company so long as they continue to hold
deposit accounts with the Association. In addition, all persons who
become depositors of the Association subsequent to the reorganization
will have such liquidation rights with respect to the Mutual Holding
Company.
Offering costs will be deferred and reduce the proceeds from the shares
sold in the Offering. If the Offering is not completed, all costs will be
charged to expense. The Association had incurred no offering costs as of
March 31, 1998.
F-24
<PAGE> 142
GLOSSARY
1933 Act Securities Act of 1933, as amended.
1934 Act Securities Exchange Act of 1934, as amended.
Associate The term "Associate" of a person means:
(i) any corporation or organization (other
than the Association or its subsidiaries or
the Company) of which such person is a
director, officer, partner or 10%
shareholder;
(ii) any trust or other estate in which such
person has a substantial beneficial interest
or serves as trustee or in a similar
fiduciary capacity; provided, however that
such term shall not include any employee
stock benefit plan of the Company or the
Association in which such a person has a
substantial beneficial interest or serves as
a trustee or in a similar fiduciary
capacity; and
(iii) any relative or spouse of such person,
or relative of such spouse, who either has
the same home as such person or who is a
director or officer of the Association or
its subsidiaries or the Company.
Association Sound Federal Savings and Loan Association
in its pre-Reorganization mutual form
BIF Bank Insurance Fund of the FDIC
Charitable Foundation Sound Federal Savings and Loan Association
Charitable Foundation
Code The Internal Revenue Code of 1986, as
amended
Common Stock The shares of Common Stock, par value of
$0.10 per share, issued by Sound Federal
Bancorp in connection with the
Reorganization and Offering
Community Offering The offering for sale to members of the
general public of any shares of Common Stock
not subscribed for in the Subscription
Offering with a preference given to natural
persons who are residents of Westchester
County, New York.
Company Sound Federal Bancorp
Eligible Account Holders Deposit account holders of the Association
with aggregate account balances of at
least $50 as of the close of business on
March 31, 1997
ERISA Employee Retirement Income Security Act of
1974, as amended
ESOP The Sound Federal Savings and Loan
Association Employee Stock Ownership Plan
and Trust
G-1
<PAGE> 143
Estimated Valuation Range The range of the estimated pro forma
market value of the total number of shares
of Common Stock to be issued by the
Company to the Mutual Holding Company and to
Minority Stockholders, as determined by
FinPro.
Expiration Date _________, New York Time, on _________,1998
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FHLB Federal Home Loan Bank
FinPro FinPro, Inc.
Independent Valuation The estimated pro forma market value of the
Company and the Association prepared by
FinPro
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Minority Ownership Interest The shares of Common Stock of the Company
owned by persons other than the Mutual
Holding Company
Mutual Holding Company Sound Federal, MHC, a federal mutual holding
company and the majority stockholder of the
Company
NASD National Association of Securities Dealers,
Inc.
NPV Net portfolio value
Offering The Subscription Offering and to the extent
shares remain available for subscription,
the Community Offering and Syndicated
Community Offering of Common Stock of the
Company
Offering Range The offering of the Common Stock in the
Offering at an aggregate Purchase Price
ranging from $22.5 million to $30.5 million,
subject to adjustment up to $35.1 million
Order Form The form for ordering stock accompanied by a
certification concerning certain matters
Other Members Persons holding a deposit account at the
Association (other than Eligible Account
Holders and Supplemental Eligible Account
Holders) on the Voting Record Date or who
have borrowings outstanding from the
Association on the Voting Record Date, and
who are entitled to vote at the Special
Meeting
OTS Office of Thrift Supervision
Plan or Plan of Reorganization The Sound Federal Savings and Loan
Association Plan of Reorganization from a
Mutual Savings Association to a Mutual
Holding Company and Stock Issuance
G-2
<PAGE> 144
` Plan, which will (i) establish the Stock
Association as a wholly-owned subsidiary
of the Company; (ii) establish the Company
as a mid-tier stock holding company which
will own all of the outstanding capital
stock of the Stock Association; and (iii)
establish the Mutual Holding Company as the
majority stockholder of the Company
Purchase Price $10.00 per share price of the Common Stock
QTI Qualified thrift investment
QTL Qualified thrift lender
REO Real estate owned
Reorganization The simultaneous (i) reorganization of the
Association into the mutual holding company
form of ownership, (ii) sale of up to 45% of
the Common Stock of the Company in the
Offering, (iii) contribution of 2% of the
Common Stock to the Charitable Foundation,
and (iv) issuance of the remaining 53% of
the Common Stock of the Company to the
Mutual Holding Company. The Reorganization
will create (i) the Mutual Holding Company
as a federal mutual holding company, (ii)
the Company as a federal stock holding
company that is majority-owned by the Mutual
Holding Company and (iii) the Stock
Association, as a federal stock savings
association wholly-owned by the Company.
SAIF Savings Association Insurance Fund of the
FDIC
SEC Securities and Exchange Commission
Special Meeting Special Meeting of members of the
Association called for the purpose of
approving the Plan
Stock Association Sound Federal Savings and Loan Association,
in its post-Reorganization stock form.
Stock Award Plan The stock award plan that will grant Common
Stock to certain officers and directors of
the Association, and that will be
established and submitted for approval of
the Company's stockholders no earlier than
six months after the completion of the
Reorganization
Stock Option Plan The stock option plan that will authorize
the granting to certain officers and
directors options to purchase up to 10% of
the Minority Ownership Interest, and that
will be established and submitted for
approval at a meeting of the Company's
stockholders no earlier than six months
after the completion of the Reorganization
Subscription Offering The offering of non-transferable rights to
subscribe for the Common Stock, in order of
priority, to Eligible Account Holders, the
ESOP, Supplemental Eligible Account Holders,
Other Members and employees, officers and
directors of the Association
G-3
<PAGE> 145
Supplemental Depositor account holders of the Association
Eligible Account Holders with aggregate account balances of at least
$50 as of the close of business on June 30,
1998, who are not Eligible Account Holders
or Supplemental Eligible Account Holders
Voting Record Date The close of business on
_____________, 1998, the date for
determining members entitled to vote at the
Special Meeting
G-4
<PAGE> 146
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK 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. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING................................................... 1
SUMMARY.......................................................................................... 4
SELECTED FINANCIAL AND OTHER DATA OF SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION.................. 9
RISK FACTORS..................................................................................... 11
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS........................................... 17
SOUND FEDERAL, MHC............................................................................... 17
SOUND FEDERAL BANCORP............................................................................ 18
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION....................................................... 19
SUMMARY DESCRIPTION OF THE REORGANIZATION........................................................ 19
MARKET AREA...................................................................................... 20
COMPETITION...................................................................................... 20
USE OF PROCEEDS.................................................................................. 20
DIVIDENDS........................................................................................ 21
MARKET FOR THE COMMON STOCK...................................................................... 22
CAPITALIZATION................................................................................... 22
PRO FORMA DATA................................................................................... 24
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE........................................... 30
THE REORGANIZATION AND OFFERING.................................................................. 31
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION STATEMENTS OF INCOME.................................. 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 52
BUSINESS OF THE ASSOCIATION...................................................................... 64
MANAGEMENT OF SOUND FEDERAL BANCORP.............................................................. 82
MANAGEMENT OF THE ASSOCIATION.................................................................... 82
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF THE ASSOCIATION............................... 84
REGULATION....................................................................................... 90
TAXATION ........................................................................................ 97
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY................................................... 98
DESCRIPTION OF CAPITAL STOCK..................................................................... 100
TRANSFER AGENT................................................................................... 101
REGISTRATION REQUIREMENTS........................................................................ 101
LEGAL AND TAX MATTERS............................................................................ 101
EXPERTS ........................................................................................ 101
ADDITIONAL INFORMATION........................................................................... 102
</TABLE>
Until _____________, or 25 days after the 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 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.
SOUND FEDERAL BANCORP
(PROPOSED HOLDING COMPANY FOR
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION)
UP TO 3,505,286 SHARES
Common Stock
($0.10 par value per share)
PROSPECTUS
SANDLER O'NEILL & PARTNERS, L.P.
_________________, 1998
THESE SECURITIES ARE NOT DEPOSITS OR
ACCOUNTS AND ARE NOT FEDERALLY
INSURED OR GUARANTEED
<PAGE> 147
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
Amount
------
<S> <C>
* Legal Fees and Expenses............................................ $ 100,000
** Marketing Agent's fees............................................. 390,000
* Printing, Postage and Mailing...................................... 140,000
* Appraisal and Business Plan Fees and Expenses...................... 25,000
* Accounting Fees and Expenses....................................... 125,000
** Marketing Agent's Counsel Fees..................................... 45,000
* Filing Fees (NASD, OTS and SEC).................................... 74,000
* Other Expenses..................................................... 30,000
---------
** Total ............................................................. $ 937,000
=========
</TABLE>
* Estimated
** Sound Federal Bancorp has retained Sandler O'Neill & Partners, LP
("Sandler O'Neill") to assist in the sale of common stock on a best
efforts basis in the Offerings. Sandler O'Neill will receive fees of
approximately $390,000, at the mid-point of the Offering, exclusive of
estimated expenses of $45,000.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF SOUND FEDERAL
SAVINGS AND LOAN ASSOCIATION, AND SOUND FEDERAL BANCORP
Generally, federal regulations define areas for indemnity coverage for federal
savings associations, and proposed federal regulations define areas for
indemnity coverage for federal MHC subsidiary holding companies, as follows:
(a) Any person against whom any action is brought or
threatened because that person is or was a director or officer of the savings
association shall be indemnified by the savings association for:
(i) Any amount for which that person becomes liable
under a judgment in such action; and
(ii) Reasonable costs and expenses, including
reasonable attorneys' fees, actually paid or incurred by that
person in defending or settling such action, or in enforcing
his or her rights under this section if he or she attains a
favorable judgement in such enforcement action.
(b) Indemnification shall be made to such person under
paragraph (b) of this Section only if:
(i) Final judgement on the merits is in his or
her favor; or
(ii) In case of:
a. Settlement,
b. Final judgement against him or her,
or
c. Final judgement in his or her favor,
other than on the merits, if a
majority of the disinterested
directors of the savings association
determine that he or she was acting
in good faith within the scope of
his or her employment or authority
as he or she could reasonably have
perceived it under the circumstances
and for a purpose he or she could
reasonably have believed under the
circumstances was in the best
interest of the savings association
or its members. However, no
indemnification
<PAGE> 148
shall be made unless the association
gives the Office at least 60 days
notice of its intention to make such
indemnification. Such notice shall
state the facts on which the action
arose, the terms of any settlement,
and any disposition of the action by
a court. Such notice, a copy
thereof, and a certified copy of the
resolution containing the required
determination by the board of
directors shall be sent to the
Regional Director, who shall
promptly acknowledge receipt
thereof. The notice period shall run
from the date of such receipt. No
such indemnification shall be made
if the OTS advises the association
in writing, within such notice
period, of its objection thereto.
(c) As used in this paragraph:
(i) "Action" means any judicial or administrative
proceeding, or threatened proceeding, whether civil, criminal,
or otherwise, including any appeal or other proceeding for
review;
(ii) "Court" includes, without limitation, any court
to which or in which any appeal or any proceeding for review
is brought;
(iii) "Final Judgment" means a judgment, decree, or
order which is not appealable or as to which the period for
appeal has expired with no appeal taken;
(iv) "Settlement" includes the entry of a judgment by
consent or confession or a plea of guilty or of nolo
contendere.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
The exhibits filed as part of this registration statement are
as follows:
(a) LIST OF EXHIBITS
1.1 Engagement Letter between Sound Federal Savings and Loan Association
and Sandler O'Neill & Partners, LP.**
1.2 Agency Agreement among Sound Federal Bancorp, Sound Federal Savings and
Loan Association and Sandler O'Neill & Partners, LP.
2 Plan of Reorganization from Mutual Savings Association to Mutual
Holding Company and Stock Issuance Plan.**
3.1 Proposed Federal Holding Company Charter of Sound Federal Bancorp.**
3.2 Proposed Bylaws of Sound Federal Bancorp.**
4 Form of Common Stock Certificate of Sound Federal Bancorp.**
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding
legality of securities being registered.**
<PAGE> 149
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.**
8.2 Opinion of FinPro, Inc. with respect to Subscription Rights.**
10.1 Form of Employee Stock Ownership Plan.**
10.2 Employment Agreement with Richard P. McStravick.**
10.3 Employment Agreement with William H. Morel**
10.4 Directors Deferred Fee Plan.**
10.5 Directors Emeritus Program.**
21 Subsidiaries of the Registrant.**
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
Opinions included on Exhibits 5 and 8.1).**
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of FinPro, Inc.**
24 Power of Attorney (set forth on signature page).
27.1 EDGAR Financial Data Schedule.**
99.1 Appraisal Agreement between Sound Federal Savings and Loan Association
and FinPro, Inc.**
99.2 Appraisal Report of FinPro, Inc.**
99.3 Proxy Statement.
99.4 Marketing Materials.**
99.5 Order and Acknowledgment Form and Certification Form.**
99.6 401(k) Supplement.**
* To be filed supplementally or by amendment
** Previously filed
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of
<PAGE> 150
securities offered would not exceed that which was registered) and
any duration from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
The registrant will provide to the underwriter at the closing
specified in the Underwriting Agreement certificates in such documentation and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE> 151
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, in the city of Mamaroneck, State of New York on July
30, 1998.
SOUND FEDERAL BANCORP (IN FORMATION)
By: /s/ Richard P. McStravick
-------------------------------------
Richard P. McStravick
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Sound Federal Bancorp
(the "Company") hereby severally constitute and appoint Richard P. McStravick as
our true and lawful attorney and agent, to do any and all things in our names in
the capacities indicated below which said Richard P. McStravick may deem
necessary or advisable to enable the Company to comply with the Securities Act
of 1933, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the registration statement on Form S-1
relating to the offering of the Company's Common Stock, including specifically,
but not limited to, power and authority to sign for us in our names in the
capacities indicated below the registration statement and any and all amendments
(including post-effective amendments) thereto; and we hereby approve, ratify and
confirm all that said Richard P. McStravick shall do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
Signatures Title Date
/s/ Richard P. McStravick President, Chief Executive July 30, 1998
- ------------------------------- Officer and Director
Richard P. McStravick (Principal Executive Officer)
/s/ Stephen P. Milliot Senior Vice President and July 30, 1998
- ------------------------------- Chief Financial Officer
Stephen P. Milliot (Principal Financial and
Accounting Officer)
/s/ Bruno J. Gioffre Chairman of the Board July 30, 1998
- -------------------------------
Bruno J. Gioffre
/s/ Joseph Dinolfo Director July 30, 1998
- -------------------------------
Joseph Dinolfo
/s/ Donald H. Heithaus Director July 30, 1998
- -------------------------------
Donald H. Heithaus
<PAGE> 152
Signatures Title Date
/s/ James Staudt Director July 30, 1998
- -------------------------------
James Staudt
/s/ Robert P. Joyce Director July 30, 1998
- -------------------------------
Robert P. Joyce
/s/ Joseph A. Lanza Director July 30, 1998
- -------------------------------
Joseph A. Lanza
/s/ Arthur C. Phillips, Jr. Director July 30, 1998
- -------------------------------
Arthur C. Phillips, Jr.
<PAGE> 153
EXHIBIT INDEX
1.1 Engagement Letter between Sound Federal Savings and Loan Association
and Sandler O'Neill & Partners, LP.**
1.2 Agency Agreement among Sound Federal Bancorp, Sound Federal Savings and
Loan Association and Sandler O'Neill & Partners, LP.
2 Plan of Reorganization from Mutual Savings Association to
Mutual Holding Company and Stock Issuance Plan.**
3.1 Proposed Federal Holding Company Charter of Sound Federal Bancorp.**
3.2 Proposed Bylaws of Sound Federal Bancorp.**
4 Form of Common Stock Certificate of Sound Federal Bancorp.**
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding
legality of securities being registered.**
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.**
8.2 Opinion of FinPro, Inc. with respect to Subscription Rights.**
10.1 Form of Employee Stock Ownership Plan.**
10.2 Employment Agreement with Richard P. McStravick **
10.3 Employment Agreement with William H. Morel.**
10.4 Directors Deferred Fee Plan.**
10.5 Directors Emeritus Program.**
21 Subsidiaries of the Registrant.**
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
Opinions included on Exhibits 5 and 8.1).**
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of FinPro, Inc.**
24 Power of Attorney (set forth on signature page).
27.1 EDGAR Financial Data Schedule.**
99.1 Appraisal Agreement between Sound Federal Savings and Loan Association
and FinPro, Inc.**
99.2 Appraisal Report of FinPro, Inc.**
99.3 Proxy Statement.
99.4 Marketing Materials.**
99.5 Order and Acknowledgment Form and Certification Form.**
99.6 401(k) Supplement.**
- ------------------------------------
* To be filed supplementally or by amendment.
** Previously filed
<PAGE> 1
3,048,075 Shares
(subject to increase up to 3,505,286 shares
in the event of an increase in the pro forma market
value of the Company's Common Stock)
SOUND FEDERAL BANCORP
(a federal stock corporation)
Common Stock
(par value $1.00 per share)
AGENCY AGREEMENT
August __, 1998
SANDLER O'NEILL & PARTNERS, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
Sound Federal, MHC, a federal mutual holding company (the "MHC"), Sound
Federal Bancorp, a federal stock corporation (the "Company"), and Sound Federal
Savings and Loan Association, a federally chartered mutual savings association
(the "Association"), hereby confirm their agreement with Sandler O'Neill &
Partners, L.P. ("Sandler O'Neill" or the "Agent") with respect to the offer and
sale by the Company of 3,048,075 shares, subject to increase up to 3,505,286
shares in the event of an increase in the pro forma market value of the
Company's Common Stock, par value $1.00 per share (the "Common Stock"). The
Common Stock will be offered in connection with the reorganization of the
Association into the MHC (the "Reorganization"). The Common Stock is being
offered for sale and the Charitable Foundation Shares (defined hereinafter) are
being contributed in accordance with the plan of reorganization and stock
issuance (the "Plan") adopted by the Board of Directors of the Association. As
part of the Reorganization, the Association will convert to a stock savings
association and will become a wholly owned subsidiary of the Company. The
Company will become the majority-owned subsidiary of the MHC. The Common Stock
will be offered in a subscription offering to qualifying depositors and
borrowers, the Association's tax qualified employee stock benefit plans,
including the Association's employee stock ownership plan, and to employees,
officers and directors of the Association (the "Subscription Offering"). Any
<PAGE> 2
unsubscribed shares may be offered for sale to the public in a community
offering or syndicated community offering. The Subscription Offering, the
community offering and the syndicated community offering are referred to
collectively as the "Offering". The shares of Common Stock to be sold by the
Company in the Offering are hereinafter called the "Securities." In addition, as
part of the Reorganization, and subject to compliance with certain conditions as
may be imposed by regulatory authorities, the Company will contribute newly
issued shares of Common Stock in an amount equal to 2% of its issued and
outstanding shares to the Sound Federal Savings and Loan Association Charitable
Foundation (the "Charitable Foundation"), such shares hereinafter being referred
to as the "Charitable Foundation Shares." The Securities offered for sale in the
Offering and the Charitable Foundation Shares will represent a minority
ownership interest of 45% of the Company's total outstanding shares of Common
Stock.
The Reorganization and Offering are being made pursuant to the terms of
the Plan of reorganization which must be approved by a majority of the eligible
votes of members of the Association and by the Office of Thrift Supervision (the
"OTS"). The Reorganization will not go forward if the Association does not
receive these approvals and the Company does not sell at least 2,252,925 shares
of Common Stock.
It is acknowledged that the number of Securities to be sold in the
Offerings may be increased or decreased as described in the Prospectus (as
hereinafter defined). If the number of Securities is increased or decreased in
accordance with the Plan, the term "Securities" shall mean such greater or
lesser number, where applicable.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-_______) including a
prospectus for the registration of the Securities and the Charitable Foundation
Shares under the Securities Act of 1933, as amended (the "1933 Act"), has filed
such amendments thereto, if any, and such amended prospectuses as may have been
required to the date hereof by the Commission in order to declare such
registration statement effective, and will file such additional amendments
thereto and such amended prospectuses and prospectus supplements as may
hereafter be required. Such registration statement (as amended to date, if
applicable, and as from time to time amended or supplemented hereafter) and the
prospectus constituting a part thereof (including, in each case, all documents
incorporated or deemed to be incorporated by reference therein, and the
information, if any, deemed to be part thereof pursuant to the rules and
regulations of the Commission under the 1933 Act, as from time to time amended
or supplemented pursuant to the 1933 Act or otherwise (the "1933 Act
Regulations")), are hereinafter referred to as the "Registration Statement" and
the "Prospectus," respectively, except that if any revised prospectus shall be
used by the Company in connection with the Offering which differs from the
Prospectus on file with the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) of the 1933 Act Regulations), the
term "Prospectus" shall refer to such revised prospectus from and after the time
it is first provided to the Agent for such use.
Concurrently with the execution of this Agreement, the Company is
delivering to the Agent copies of the Prospectus to be used in the Offering.
Such Prospectus contains information with respect to the Association, the
Company and the Common Stock.
2
<PAGE> 3
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company, the Association and the MHC jointly and severally
represent and warrant to the Agent as of the date hereof as follows:
(i) The Registration Statement has been declared effective by the
Commission, no stop order has been issued with respect thereto
and no proceedings therefor have been initiated or, to the
knowledge of the Company, the Association and the MHC,
threatened by the Commission. At the time the Registration
Statement became effective and at the Closing Time referred to
in Section 2 hereof, the Registration Statement complied and
will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will
not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The
Prospectus at the date hereof does not, and at the Closing
Time referred to in Section 2 hereof will not, include an
untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the
representations and warranties in this subsection shall not
apply to statements in or omissions from the Prospectus made
in reliance upon and in conformity with information with
respect to the Agent furnished to the Company in writing by
the Agent expressly for use in the Prospectus (the "Agent
Information," which the MHC, the Company and the Association
acknowledge appears only in the first two paragraphs and the
last paragraph of the section captioned "THE REORGANIZATION
AND OFFERING - Marketing Agent" of the Prospectus).
(ii) The Company has filed with the Office of Thrift Supervision,
Department of the Treasury (the "OTS") the Company's
application for approval of its acquisition of the Association
(the "Holding Company Application") on Form H-(e)1 promulgated
under the savings and loan holding company provisions of the
Home Owners' Loan Act, as amended ("HOLA") and the regulations
promulgated thereunder. The Company has received written
notice from the OTS of its approval of the acquisition of the
Association, such approval remains in full force and effect
and no order has been issued by the OTS suspending or revoking
such approval and no proceedings therefor have been initiated
or, to the knowledge of the Company, the Association or the
MHC, threatened by the OTS. At the date of such approval, the
Holding Company Application complied in all material respects
with the applicable provisions of HOLA and the regulations
promulgated thereunder.
(iii) The Association has filed with the OTS a Notice of Mutual
Holding Company Reorganization on Form MHC-1 and Application
for Approval of an Issuance by a Subsidiary of a Mutual
Holding Company on Form
3
<PAGE> 4
MHC-2, including exhibits and any amendment or amendments
thereto (together, the "MHC Application"). The MHC Application
will have been approved by the OTS prior to the consummation
of the Offering. No order has been issued by the OTS
preventing or suspending the use of the Prospectus and no
action by or before the OTS to revoke such approval is pending
or threatened. The Offering and Plan have been duly adopted by
the Board of Directors of the Association and such adoption
has not since been rescinded or revoked. At the time the MHC
Application was approved, the MHC Application, including the
Prospectus contained therein, complied in all respects with
the requirements for an MHC-1 and an MHC-2 established by the
OTS, and the MHC Application, any preliminary or final
Prospectus, and any Blue Sky application(s) authorized by the
Association for use in connection with the Offering did not
contain an untrue statement of a material fact or omit to
state any material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they are made, not misleading. At the Closing Time, the
MHC Application, any preliminary or final Prospectus, any Blue
Sky application (as such terms are defined herein) authorized
by the Association for use in connection with the Offering
will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they are made, not misleading, provided, however, that
the representations and warranties in this Section 1 (a) (iii)
shall not apply to statements in or omissions from such MHC
Application, Prospectus or Blue Sky application made in
reliance upon and in conformity with any Agent Information.
(iv) At the time of their use, the Proxy Statement and any other
proxy solicitation materials will comply in all material
respects with the applicable provisions of the Reorganization
Regulations and will not contain an untrue statement of a
material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The
Company, the MHC and the Association will promptly file the
Prospectus and any supplemental sales literature with the
Commission and the OTS. The Prospectus and all supplemental
sales literature, as of the date the Registration Statement
became effective and at the Closing Time referred to in
Section 2, complied and will comply in all material respects
with the applicable requirements of the Reorganization
Regulations and, at or prior to the time of their first use,
will have received all required authorizations of the
Commission and the OTS for use in final form.
(v) Neither the Commission nor the OTS has, by order or otherwise,
prevented or suspended the use of the Prospectus or any
supplemental sales literature authorized by the Company, the
Association and the MHC for use in connection with the
Offering.
4
<PAGE> 5
(vi) At the Closing Time referred to in Section 2, the Company, the
Association, and the MHC will have completed the conditions
precedent to the Reorganization and the establishment of the
Charitable Foundation in accordance with the Plan, the
applicable Reorganization Regulations and all other applicable
laws, regulations, decisions and orders, including all
material terms, conditions and requirements precedent to the
Reorganization imposed upon the Company, the Association or
the MHC by the OTS or any other regulatory authority, other
than those which the regulatory authority permits to be
completed after the Reorganization.
(vii) FinPro, which prepared the valuation of the Association as
part of the Reorganization, satisfies all requirements for an
appraiser set forth in the Reorganization Regulations and any
interpretations or guidelines issued by the OTS with respect
thereto.
(viii) The accountants who certified the financial statements and
supporting schedules of the Association included in the
Registration Statement have advised the Company, the
Association and the MHC that they are independent public
accountants within the meaning of the Code of Ethics of the
American Institute of Certified Public Accountants; and such
accountants are, with respect to the Company, the Association
and the MHC, independent certified public accountants as
required by the 1933 Act and the 1933 Act Regulations.
(ix) The Association has no subsidiaries.
(x) The consolidated financial statements and the related notes
thereto included in the Registration Statement and the
Prospectus present fairly the consolidated financial position
of the Association as at the dates indicated and the results
of operations, retained earnings and cash flows for the
periods specified and comply as to form in all material
respects with the applicable accounting requirements of the
1933 Act Regulations and the Reorganization Regulations;
except as otherwise stated in the Registration Statement, said
financial statements have been prepared in conformity with
generally accepted accounting principles applied on a
consistent basis; and the supporting schedules and tables
included in the Registration Statement present fairly the
information required to be stated therein.
(xi) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as
otherwise stated therein (A) there has been no material
adverse change in the financial condition, results of
operations or business of the Company, the Association and the
MHC, taken as a whole, whether or not arising in the ordinary
course of business, and (B) except for transactions
specifically referred to or contemplated in the Prospectus,
there have been no transactions entered into by the Company,
the Association or the MHC,
5
<PAGE> 6
other than those in the ordinary course of business, which are
material with respect to the Company, the Association and the
MHC, taken as a whole.
(xii) The Company has been duly incorporated and is validly existing
as a federal corporation in good standing with corporate power
and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement;
and the Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of New
York and in each other jurisdiction in which such
qualification is required, whether by reason of the ownership
or leasing of property or the conduct of business, except
where the failure to so qualify would not have a material
adverse effect on the financial condition, results of
operations or business of the Company, the Association and the
MHC, taken as a whole.
(xiii) Upon consummation of the Reorganization and the contribution
of the Charitable Foundation Shares as described in the
Prospectus, the authorized, issued and outstanding capital
stock of the Company will be within the range as set forth in
the Prospectus under "Capitalization" (except for subsequent
issuances, if any, pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectus); no
shares of Common Stock have been or will be issued and
outstanding prior to the Closing Time referred to in Section
2; at the time of Reorganization, the Securities will have
been duly authorized for issuance and, when issued and
delivered by the Company pursuant to the Plan against payment
of the consideration calculated as set forth in the Plan, will
be duly and validly issued and fully paid and non-assessable;
the terms and provisions of the Common Stock and the capital
stock of the Company conform to all statements relating
thereto contained in the Prospectus; the certificates
representing the shares of Common Stock will conform with the
requirements of applicable laws and regulations; and the
issuance of the Securities is not subject to preemptive or
other similar rights.
(xiv) The Association, as of the date hereof, is a federally
chartered mutual savings association, and upon consummation of
the Reorganization will be a stock savings association, in
both instances with full corporate power and authority to own,
lease and operate its properties and to conduct its business
as described in the Prospectus; the Company, the Association
and the MHC have obtained all licenses, permits and
6
<PAGE> 7
other governmental authorizations currently required for the
conduct of their respective businesses or required for the
conduct of their respective businesses as contemplated by the
Holding Company Application and the Reorganization
Application, except where the failure to obtain such licenses,
permits or other governmental authorizations would not have a
material adverse effect on the financial condition, results of
operations or business of the Company, the Association and the
MHC, taken as a whole; all such licenses, permits and other
governmental authorizations are in full force and effect, and
the Company, the Association and the MHC are in all material
respects in compliance therewith; neither the Company, the
Association, nor the MHC have received notice of any
proceeding or action relating to the revocation or
modification of any such license, permit or other governmental
authorization which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might
have a material adverse effect on the financial condition,
results of operations or business of the Company, the
Association and the MHC, taken as a whole; and the Association
is in good standing under the laws of the United States and is
qualified to do business in any jurisdiction in which such
qualification is required, whether by reason of the ownership
or leasing of property or the conduct of business, except
where the failure to so qualify would not have a material
adverse effect on the financial condition, results of
operations or business of the Company, the Association and the
MHC, taken as a whole.
(xv) The deposit accounts of the Association are insured by the
FDIC up to the applicable limits and, upon consummation of the
Reorganization, the liquidation account for the benefit of
eligible account holders will be duly established in
accordance with the requirements of the Reorganization
Regulations. The Association is a "qualified thrift lender"
within the meaning of 12 U.S.C. Section 1467a(m).
(xvi) Upon consummation of the Reorganization, the authorized
capital stock of the Company will be 20,000,000 shares of
common stock, par value $.10 per share (the "Company Common
Stock"), and [________] shares of preferred stock (the
"Company Preferred Stock"), and the issued and outstanding
capital stock of the Company will be [_____________] shares of
Company Common Stock; no shares of Company Common Stock or
Company Preferred Stock have been or will be issued and
outstanding prior to the Closing Time referred to in Section
2; the shares of Company Common Stock to be issued to the MHC
will have been duly authorized for issuance and, when issued
and delivered by the Company pursuant to the Plan against
payment of the consideration calculated as set forth in the
Plan and as described in the Prospectus, will be duly and
validly issued and fully paid and nonassessable, and all such
Company Common Stock will be owned beneficially and of record
by the MHC free and clear of any security interest, mortgage,
pledge, lien, encumbrance or legal or equitable claim; the
terms and provisions of the Company Common Stock and the
Company Preferred Stock conform to all statements relating
thereto contained in the Prospectus, and the certificates
representing the shares of Company Common Stock will conform
with the requirements of applicable laws and regulations; and
the issuance of the Company Common Stock is not subject to
preemptive or similar rights.
7
<PAGE> 8
(xvii) Upon consummation of the Reorganization, the authorized
capital stock of the Association will be [_______] shares of
common stock, par value $[___] per share (the "Association
Common Stock"), and [______] shares of preferred stock (the
"Association Preferred Stock"), and the issued and outstanding
capital stock of the Association will be [_______] shares of
Association Common Stock; no shares of Association Common
Stock or Association Preferred Stock have been or will be
issued and outstanding prior to the Closing Time referred to
in Section 2; the shares of Association Common Stock to be
issued to the Company will have been duly authorized for
issuance and, when issued and delivered by the Association
pursuant to the Plan against payment of the consideration
calculated as set forth in the Plan and as described in the
Prospectus, will be duly and validly issued and fully paid and
nonassessable, and all such Association Common Stock will be
owned beneficially and of record by the Company free and clear
of any security interest, mortgage, pledge, lien, encumbrance
or legal or equitable claim; the terms and provisions of the
Association Common Stock and the Association Preferred Stock
conform to all statements relating thereto contained in the
Prospectus, and the certificates representing the shares of
Association Common Stock will conform with the requirements of
applicable laws and regulations; and the issuance of the
Association Common Stock is not subject to preemptive or
similar rights.
(xviii) The Charitable Foundation has been duly incorporated and is
validly existing as a non-stock corporation in good standing
under the laws of the State of Delaware with corporate power
and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus; the
Charitable Foundation will not be a savings and loan holding
company within the meaning of 12 C.F.R. Section 574.2(q) as a
result of the issuance of shares of Common Stock to it in
accordance with the terms of the Plan and in the amounts as
described in the Prospectus; no approvals are required to
establish the Charitable Foundation and to contribute the
shares of Common Stock thereto as described in the Prospectus
other than those imposed by the OTS and the FDIC; except as
specifically disclosed in the Prospectus and the Proxy
Statement, there are no agreements and/or understandings,
written or oral, between the Company, the Association and/or
the MHC and the Charitable Foundation with respect to the
control, directly or indirectly, over the voting and the
acquisition or disposition of the Charitable Foundation
Shares; at the time of the Reorganization, the Charitable
Foundation Shares will have been duly authorized for issuance
and, when issued and contributed by the Company pursuant to
the Plan, will be duly and validly issued and fully paid and
non-assessable; and the issuance of the Charitable Foundation
Shares is not subject to preemptive or similar rights.
(xix) The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated herein have
been duly
8
<PAGE> 9
authorized by all necessary corporate action of the Company,
the Association and the MHC, and this Agreement has been duly
executed and delivered by, and is the valid and binding
agreement of, the Company, the Association and the MHC,
enforceable in accordance with its terms, except as may be
limited by bankruptcy, insolvency or other laws affecting the
enforceability of the rights of creditors generally and
judicial limitations on the right of specific performance and
except as the enforceability of indemnification and
contribution provisions may be limited by applicable
securities laws.
(xx) The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated herein do
not and will not conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the
Company, the Association or the MHC pursuant to, any contract,
indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company, the Association and the MHC
is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company, the
Association and the MHC is subject, except for such conflicts,
breaches or defaults that would not, individually or in the
aggregate, have a material adverse effect on the financial
condition, results of operations or business of the Company,
the Association and the MHC, taken as whole, nor will such
action result in any violation of the provisions of the
certificate of incorporation, organization certificate,
articles of incorporation or charter, as the case may be, or
bylaws of the Company, the Association or the MHC or any
applicable law, regulation or administrative or court decree.
(xxi) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and
prior to the Closing Time, except as otherwise may be
specifically described or contemplated therein, none of the
Company, the Association or the MHC will have (A) issued any
securities or incurred any liability or obligation, direct or
contingent, for borrowed money, except borrowings in the
ordinary course of business from the same or similar sources
indicated in the Prospectus, or (B) entered into any
transaction or series of transactions which is material in
light of the business of the Company, the Association or the
MHC, taken as a whole, excluding the origination, purchase and
sale of loans or the purchase or sale of investment securities
or mortgage- backed securities in the ordinary course of
business.
(xxii) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and
delivery of this Agreement or the issuance of the Securities
and the Charitable Foundation Shares (except for the
declaration of effectiveness of any required post effective
amendment to the Registration Statement by the Commission,
approval
9
<PAGE> 10
thereof by the OTS, which has not been obtained and a copy of
which has been delivered to the Agent, except for the issuance
of the restated organization certificate by the OTS and as may
be required under the securities laws of various
jurisdictions.
(xxiii) Neither the MHC, the Company nor the Association is in
violation of its certificate of incorporation, restated
organization certificate, articles of incorporation, charter
or bylaws, as the case may be (and the Association will not be
in violation of its restated organization certificate or
bylaws in stock form upon consummation of the Reorganization);
neither the Company, the Association nor the MHC
Reorganization is in default (nor has any event occurred
which, with notice or lapse of time, or both, would constitute
a default) in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company, the Association or the MHC is
a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company, the
Association or the MHC, except for such defaults that would
not, individually or in the aggregate, have a material adverse
effect on the financial condition, results of operations or
business of the Company, the MHC and the Association, taken as
a whole; and there are no contracts or documents of the
Company, the MHC and the Association which are required to be
filed as exhibits to the Registration Statement or the
Reorganization Application which have not been so filed.
(xxiv) No labor dispute with the employees of the Company, the
Association or the MHC exists or, to the knowledge of the
Company, the Association or the MHC, is threatened; and the
Company, the Association and the MHC are not aware of any
existing or threatened labor disturbance by the employees of
any of their principal suppliers or contractors which might be
expected to result in any material adverse change in the
financial condition, results of operations or business of the
Company, the Association and the MHC, taken as a whole.
(xxv) Each of the Company, the Association and the MHC has good and
marketable title to all properties and assets for which
ownership is material to its business and to those properties
and assets described in the Prospectus as owned by it, free
and clear of all liens, charges, encumbrances or restrictions,
except such as are described in the Prospectus or are not
material in relation to the business of the Company, the
Association and the MHC, taken as a whole; and all of the
leases and subleases material to the business of the Company,
the Association and the MHC, taken as a whole, under which the
Company, the Association and the MHC holds properties,
including those described in the Prospectus, are the legal,
valid and binding agreements of the Company, the Association
or the MHC, enforceable in accordance with their terms.
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(xxvi) Neither the Company, the Association nor the MHC is in
violation of any directive from the OTS or the FDIC to make
any material change in the method of conducting its business;
the Association has conducted and is conducting its business
so as to comply with all applicable statutes, regulations and
administrative and court decrees (including, without
limitation, all regulations, decisions, directives and orders
of the OTS and the FDIC) except in such respects as would not
have a material adverse effect upon the Company, the
Association and the MHC, taken as a whole.
(xxvii) There is no action, suit or proceeding before or by any court
or governmental agency or body, domestic or foreign, now
pending, or, to the knowledge of the Company, the Association
or the MHC, threatened, against or affecting the Company, the
Association or the MHC which is required to be disclosed in
the Registration Statement (other than as disclosed therein),
or any action, suit or proceeding which might result in any
material adverse change in the financial condition, results of
operations or business of the Company, the Association and the
MHC, taken as a whole, or which might materially and adversely
affect the properties or assets thereof, the performance of
this Agreement or the consummation of the Reorganization; all
pending legal or governmental proceedings to which the
Company, the Association or the MHC is a party or of which any
of their respective properties or assets is the subject which
are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, are,
considered in the aggregate, not material.
(xxviii) The Association has obtained opinions of its counsel, Luse
Lehman Gorman Pomerenk & Schick, P.C., with respect to the
legality of the Securities and the Charitable Foundation
Shares to be issued and the federal income tax consequences of
the Reorganization, copies of which are filed as exhibits to
the Registration Statement; all material aspects of the
aforesaid opinions that are required to be disclosed are
accurately summarized in the Prospectus; the facts and
representations upon which such opinions are based are
truthful, accurate and complete in all material respects, and
neither the Association, the Company nor the MHC has taken or
will take any action inconsistent therewith.
(xxix) The Association has obtained an opinion of KPMG Peat Marwick
LLP, with respect to certain New York State tax consequences
of the Reorganization (relating to banking franchise tax,
sales or use tax, license fee on foreign corporations, stock
transfer tax, real property transfer gains tax and real estate
transfer tax) and to the federal income tax consequences of
the Charitable Foundation, copies of which are filed as
exhibits to the Registration Statement; all material aspects
of the aforesaid opinions that are required to be disclosed
are accurately summarized in the Prospectus; the facts and
representations upon which such opinions are based are
truthful, accurate and complete in all material respects, and
neither the
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<PAGE> 12
Association, the Company nor the MHC has taken or will take
any action inconsistent therewith which would in any way
affect the aforesaid opinions.
(xxx) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(xxxi) All of the loans represented as assets on the most recent
financial statements or selected financial information of the
Association included in the Prospectus meet or are exempt from
all requirements of federal, state and local law pertaining to
lending, including, without limitation, truth in lending
(including the requirements of Regulations Z and 12 C.F.R.
Part 226 and 12 C.F.R. Section 563.99), real estate settlement
procedures, consumer credit protection, equal credit
opportunity and all disclosure laws applicable to such loans,
except for violations which, if asserted, would not result in
a material adverse effect on the financial condition, results
of operations or business of the Company, the Association and
the MHC, taken as a whole.
(xxxii) With the exception of the Company's intended loan to the ESOP
for the purpose of enabling the Association's tax qualified
employee benefit plans, including the ESOP, to purchase shares
of Common Stock in an amount up to 10% of the Minority
Ownership Interest (as defined in the Prospectus), to the
knowledge of the Company, the Association and the MHC, none of
the Company, the Association or the MHC or any employee of the
Association has made any payment of funds of the Company, the
Association or the MHC as a loan for the purchase of the
Common Stock or made any other payment of funds prohibited by
law, and no funds have been set aside to be used for any
payment prohibited by law.
(xxxiii) The Company, the Association and the MHC are in compliance in
all material respects with the applicable financial
recordkeeping and reporting requirements of the Currency and
Foreign Transaction Reporting Act of 1970, as amended, and the
rules and regulations thereunder, and the lending practices of
the Association are and have been in conformity with the Real
Estate Settlement Procedures Act, as amended, and the rules
and regulations thereunder.
(xxxiv) Neither the Company, the Association nor the MHC nor any
properties owned or operated by the Company, the Association
or the MHC, is in violation of or liable under any
Environmental Law (as defined below), except for such
violations or liabilities that, individually or in the
aggregate, would not have a material adverse effect on the
financial condition, results of operations or business of the
Company, the Association and the MHC, taken as a whole. There
are no actions, suits or proceedings, or demands, claims,
notices or investigations (including, without limitation,
notices,
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<PAGE> 13
demand letters or requests for information from any
environmental agency) instituted or pending or, to the
knowledge of the Company, the Association or the MHC,
threatened relating to the liability of any property owned or
operated by the Company, the Association or the MHC under any
Environmental Law. For purposes of this subsection, the term
"Environmental Law" means any federal, state, local or foreign
law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, order, judgment,
decree, injunction or agreement with any regulatory authority
relating to (i) the protection, preservation or restoration of
the environment (including, without limitation, air, water,
vapor, surface water, groundwater, drinking water supply,
surface soil, subsurface soil, plant and animal life or any
other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing,
handling, labeling, production, release or disposal of any
substance presently listed, defined, designated or classified
as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, whether by type or by quantity, including any
material containing any such substance as a component.
(xxxv) The Company, the Association and the MHC have filed all
federal income and state and local franchise tax returns
required to be filed and have made timely payments of all
taxes shown as due and payable in respect of such returns, and
no deficiency has been asserted with respect thereto by any
taxing authority.
(xxxvi) The Company has received approval, subject to issuance, to
have the Common Stock quoted on the Nasdaq Stock Market (the
"Nasdaq National Market") effective at the Closing Time
referred to in Section 2 hereof.
(xxxvii) The Company has filed a registration statement for the Common
Stock under Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act Registration Statement")
and has requested that such registration statement be declared
effective concurrently with the effectiveness of the
Registration Statement.
(b) Any certificate signed by any officer of the Company, the
Association or the MHC and delivered to either of the Agent or counsel for the
Agent shall be deemed a representation and warranty by the Company, the
Association or the MHC as to each of the matters covered thereby.
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<PAGE> 14
SECTION 2. APPOINTMENT OF SANDLER O'NEILL; SALE AND DELIVERY OF THE SECURITIES;
CLOSING.
On the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, the Company hereby
appoints Sandler O'Neill as its Agent to consult with and advise the Company,
and to assist the Company with the solicitation of subscriptions and purchase
orders for Securities, in connection with the Company's sale of the Securities
in the Offering. On the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, Sandler
O'Neill accepts such appointment and agrees to use its best efforts to assist
the Company with the solicitation of subscriptions and purchase orders for
Securities in accordance with this Agreement; provided, however, that the Agent
shall not be obligated to take any action which is inconsistent with any
applicable laws, regulations, decisions or orders. The services to be rendered
by Sandler O'Neill pursuant to this appointment include the following: (i)
consulting as to the securities marketing implications of any aspect of the Plan
or related corporate documents; (ii) reviewing with the Association's Board of
Directors the independent appraiser's appraisal of the Common Stock,
particularly with regard to aspects of the appraisal involving the methodology
employed; (iii) reviewing all offering documents, including the Prospectus,
stock order forms and related offering materials (it being understood that the
preparation and filing of such documents are the sole responsibility of the
Company, the Association and the MHC and their counsel); (iv) assisting in the
design and implementation of a marketing strategy for the Offerings; (v)
assisting in obtaining all requisite regulatory approvals (vi) assisting in
connection with listing the Company's common stock on the Nasdaq Stock Market
(vii) assisting Association management in preparing for meetings with potential
investors and broker-dealers; and (viii) providing such other general advice and
assistance as may be requested to promote the successful completion of the
Offerings.
The appointment of the Agent hereunder shall terminate upon the
earliest to occur of (a) forty-five (45) days after the last day of the
Subscription Offering, unless the Company and the Agent agree in writing to
extend such period and the OTS agree to extend the period of time in which the
Securities may be sold, (b) the receipt and acceptance of subscriptions and
purchase orders for all of the Securities or (c) the completion of the
syndicated community offering.
If any of the Securities remain available after the expiration of the
Subscription Offering and, if held, the community offering, at the request of
the Company, the Association and the MHC, the Agent will seek to form a
syndicate of registered brokers or dealers ("Selected Dealers") to assist in the
solicitation of purchase orders of such Securities on a best efforts basis,
subject to the terms and conditions set forth in a selected dealers' agreement
(the "Selected Dealers' Agreement"), in substantially the form set forth as
Exhibit A to this Agreement. The Agent will endeavor to limit the aggregate fees
to be paid by the Company, the Association and the MHC under any such Selected
Dealers' Agreement to an amount competitive with gross underwriting discounts
charged at such time for underwritings of comparable amounts of stock sold at a
comparable price per share in a similar market environment; provided, however,
that the aggregate fees payable to the Agent and Selected Dealers shall not
exceed 5% of the actual purchase price of the Securities sold by such Selected
Dealers. The Agent will endeavor to distribute the Securities among the Selected
Dealers in a fashion which best meets the distribution objectives of the
Company, the Association and the MHC and the requirements of the Plan and
applicable law, which may result in limiting the
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<PAGE> 15
allocation of stock to certain Selected Dealers. It is understood that in no
event shall the Agent be obligated to act as a Selected Dealer or to take or
purchase any Securities.
In the event the Company is unable to sell at least the minimum number
of Securities, as disclosed on the cover of the Prospectus, within the period
herein provided, this Agreement shall terminate, and the Company shall refund to
any persons who have subscribed for any of the Securities the full amount which
it may have received from them, together with interest as provided in the
Prospectus, and no party to this Agreement shall have any obligation to the
others hereunder, except for the obligations of the Company and the Association
as set forth in Sections 4, 6(a) and 7 hereof and the obligations of the Agent
as set forth in Sections 6(b) and 7 hereof. Appropriate arrangements for placing
the funds received from subscriptions for Securities or other offers to purchase
Securities in special interest-bearing accounts with the Association until all
Securities are sold and paid for were made prior to the commencement of the
Offering, with provision for refund to the purchasers as set forth above, or for
delivery to the Company if all Securities are sold.
If at least the minimum number of Securities, as disclosed on the cover
of the Prospectus, are sold, the Company agrees to issue or have issued the
Securities sold and to release for delivery certificates for such Securities at
the Closing Time against payment therefor by release of funds from the special
interest-bearing accounts referred to above. The closing shall be held at the
offices of [_________________] at [____], [New York] time, or at such other
place and time as shall be agreed upon by the parties hereto, on a business day
to be agreed upon by the parties hereto. The Company shall notify the Agent by
telephone, confirmed in writing, when funds shall have been received for all the
Securities. Certificates for Securities shall be delivered directly to the
purchasers thereof according to the addresses specified in properly completed
Order Forms (as defined in the Prospectus). Notwithstanding the foregoing,
certificates for Securities purchased through Selected Dealers shall be made
available to the Agent for inspection at least 48 hours prior to the Closing
Time at such office as the Agent shall designate. The hour and date upon which
the Company shall release for delivery all of the Securities, in accordance with
the terms hereof, are herein called the "Closing Time."
The Company will pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Securities.
In addition to reimbursement of the expenses specified in Section 4
hereof, the Agent will receive the following compensation for its services
hereunder:
(a) one and one-half percent (1.5%) of the aggregate Purchase Price (as
defined in the Prospectus) of the Securities sold in the Subscription Offering
and in the Community Offering, excluding in each case shares purchased by (i)
any employee benefit plan of the Association established for the benefit of
their respective directors, officers and employees, (ii) any director, officer
or employee of the Company, the Association or the MHC or members of their
immediate families (which term shall mean parents, grandparents, spouse,
siblings, children and grandchildren) or any partner or employee of the
Association's general counsel; and
(b) with respect to any Securities sold by an NASD member firm (other
than Sandler O'Neill) under the Selected Dealers' Agreement in the Syndicated
Community Offering, (i)
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<PAGE> 16
the sales commission payable to Selected Dealers under any Selected Dealers'
Agreement, (ii) any sponsoring dealer's fees and (iii) a management fee to
Sandler O'Neill of one and one-half percent (1.5%) of the aggregate Purchase
Price of such Securities sold under such agreement. Any fees payable to Sandler
O'Neill for Securities sold by Sandler O'Neill under any such agreement shall be
limited to an aggregate of five percent (5%) of the aggregate Purchase Price of
such Securities.
If this Agreement is terminated by the Agent in accordance with the
provisions of Section 9(a) hereof or the Reorganization is terminated by the
Company, the Association or the MHC, no fees shall be payable by the Company,
the Association or the MHC to Sandler O'Neill; however, the Association shall
reimburse Sandler O'Neill for its reasonable out-of-pocket expenses incurred
prior to termination, including the reasonable fees and disbursements of counsel
for the Agent, in accordance with the provisions of Section 4 hereof.
All fees payable to the Agent hereunder shall be payable in immediately
available funds at Closing Time, or upon termination of this Agreement, as the
case may be. In recognition of the long lead times involved in the conversion
process, the Association agrees to make advance payments to the Agent in the
aggregate amount of $50,000, $20,000 of which was paid upon execution of the
engagement letter, dated April 14, 1998, and the remaining $30,000 of which
shall be payable upon commencement of the Subscription Offering, which shall be
credited against any fees or reimbursement of expenses payable under this
Section.
SECTION 3. COVENANTS OF THE COMPANY, THE ASSOCIATION AND THE MHC.
The Company, the Association and the MHC covenant with the Agent as
follows:
(a) The Company, the Association and the MHC will prepare and file such
amendments or supplements to the Registration Statement, the Prospectus, the
Reorganization Application and the Proxy Statement as may hereafter be required
by the 1933 Act Regulations or the Reorganization Regulations or as may
hereafter be reasonably requested by the Agent. Following completion of the
Offering, in the event of a Syndicated Community Offering, the Company, the
Association and the MHC will (i) promptly prepare and file with the Commission a
post-effective amendment to the Registration Statement relating to the results
of the Offering, any additional information with respect to the proposed plan of
distribution and any revised pricing information or (ii) if no such
post-effective amendment is required, will file with, or mail for filing to, the
Commission a prospectus or prospectus supplement containing information relating
to the results of the Offering and pricing information pursuant to Rule 424(c)
of the 1933 Act Regulations, in either case in a form acceptable to the Agent.
The Company, the Association and the MHC will notify the Agent immediately, and
confirm the notice in writing, (i) of the effectiveness of any post-effective
amendment of the Registration Statement, the filing of any supplement to the
Prospectus or the filing of any amendment to the Reorganization Application,
(ii) of the receipt of any comments from the OTS or the Commission with respect
to the transactions contemplated by this Agreement or the Plan, (iii) of any
request by the Commission or the OTS for any amendment to the Registration
Statement or the Reorganization Application or the Holding Company Application
or any amendment or supplement to the Prospectus or for additional information,
(iv) of the issuance by the OTS of any order suspending the Offerings or the use
of the Prospectus or the initiation of any proceedings for that purpose, (v) of
the issuance by the Commission of any stop order suspending
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<PAGE> 17
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose, and (vi) of the receipt of any notice with respect
to the suspension of any qualification of the Securities for offering or sale in
any jurisdiction. The Company, the Association and the MHC will make every
reasonable effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest possible moment.
(b) The Company, the Association and the MHC will give the Agent notice
of its intention to file or prepare any amendment to the Reorganization
Application, Holding Company Application or Registration Statement (including
any post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use in
connection with the Syndicated Community Offering of the Securities which
differs from the prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the 1933 Act Regulations),
will furnish the Agent with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such amendment or supplement or use any such
prospectus to which the Agent or counsel for the Agent may object.
(c) The Company, the Association and the MHC will deliver to the Agent
as many signed copies and as many conformed copies of the Conversion Application
and the Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) as the
Agent may reasonably request, and from time to time such number of copies of the
Prospectus as the Agent may reasonably request.
(d) During the period when the Prospectus is required to be delivered,
the Company, the Association and the MHC will comply, at their own expense, with
all requirements imposed upon them by the OTS and the FDIC, by the applicable
Reorganization Regulations, as from time to time in force, and by the 1933 Act,
the 1933 Act Regulations, the Securities Exchange Act of 1934, as amended (the
"1934 Act") and the rules and regulations of the Commission promulgated
thereunder, including, without limitation, Regulation M under the 1934 Act, so
far as necessary to permit the continuance of sales or dealing in shares of
Common Stock during such period in accordance with the provisions hereof and the
Prospectus.
(e) If any event or circumstance shall occur as a result of which it is
necessary, in the opinion of counsel for the Agent, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, the Company,
the Association and the MHC will forthwith amend or supplement the Prospectus
(in form and substance satisfactory to counsel for the Agent) so that, as so
amended or supplemented, the Prospectus will not include an untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time it is
delivered to a purchaser, not misleading, and the Company, the Association and
the MHC will furnish to the Agent a reasonable number of copies of such
amendment or supplement. For the purpose of this subsection, the Company, the
Association and the MHC will each furnish such information with respect to
itself as the Agent may from time to time reasonably request.
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(f) The Company, the Association and the MHC will take all necessary
action, in cooperation with the Agent, to qualify the Securities for offering
and sale under the applicable securities laws of such states of the United
States and other jurisdictions as the Reorganization Regulations may require and
as the Agent and the Company have agreed; provided, however, that neither the
Company, the Association nor the MHC shall be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified. In each jurisdiction in which the
Securities have been so qualified, the Company, the Association and the MHC will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement.
(g) The Company authorizes Sandler O'Neill and any Selected Dealer to
act as agent of the Company in distributing the Prospectus to persons entitled
to receive subscription rights and other persons having record addresses in the
states or jurisdictions set forth in a survey of the securities or "blue sky"
laws of the various jurisdictions in which the Offerings will be made (the "Blue
Sky Survey").
(h) The Company will make generally available to its security holders
as soon as practicable, but not later than 60 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 of the 1933 Act Regulations) covering a twelve-month period beginning
not later than the first day of the Company's fiscal quarter next following the
"effective date" (as defined in said Rule 158) of the Registration Statement.
(i) During the period ending on the third anniversary of the expiration
of the fiscal year during which the closing of the transactions contemplated
hereby occurs, the Company will furnish to its stockholders as soon as
practicable after the end of each fiscal year in such period an annual report
(including consolidated statements of financial condition and consolidated
statements of income, stockholders' equity and cash flows of the Company, the
Association and the MHC, certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year in such period (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), consolidated summary financial
information of the Company, and the Association and the MHC for such quarter in
reasonable detail. In addition, such annual report and quarterly consolidated
summary financial information shall be made public through the issuance of
appropriate press releases at the same time or prior to the time of the
furnishing thereof to stockholders of the Company.
(j) During the period ending on the third anniversary of the expiration
of the fiscal year during which the closing of the transactions contemplated
hereby occurs, the Company will furnish to the Agent (i) as soon as available, a
copy of each report or other document of the Company furnished generally to
stockholders of the Company or furnished to or filed with the Commission under
the 1934 Act or any national securities exchange or system on which any class of
securities of the Company is listed and (ii) from time to time, such other
information concerning the Company as the Agent may reasonably request.
(k) Each of the Company, the Association and the MHC will use the net
proceeds received by it from the sale of the Securities and the purchase of the
Common Stock by the
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<PAGE> 19
Company, as the case may be, in the manner specified in the Prospectus under
"Use of Proceeds." The Company, the Association and the MHC will conduct the
Reorganization (including the formation and operation of the Charitable
Foundation) in all material respects in accordance with the Plan and, to the
extent not waived by the provisions of any order of the OTS, the Reorganization
Regulations and all other applicable regulations, decisions and orders
thereunder, including all applicable terms, requirements and conditions
precedent to the Reorganization imposed upon the Company, the Association or the
MHC by the FDIC or the OTS.
(l) The Company will maintain the effectiveness of such registration
for not less than three years. The Company will file with the Nasdaq Stock
Market, Inc. all documents and notices required by the Nasdaq Stock Market, Inc.
of companies that have issued securities that are traded in the over-the-counter
market and quotations for which are reported by the Nasdaq National Market.
(m) During the period beginning on the date hereof and ending on the
later of the third anniversary of the Closing Time or the date on which the
Agent receives full payment in satisfaction of any claim for indemnification or
contribution to which it may be entitled pursuant to Sections 6 or 7,
respectively, neither the Company, the Association nor the MHC shall, without
the prior written consent of the Agent, which consent shall not be unreasonably
withheld, take or permit to be taken any action that could result in any Company
Common Stock, Company Preferred Stock, Association Common Stock or Association
Preferred Stock, becoming subject to any security interest, mortgage, pledge,
lien or encumbrance; provided, however, that this covenant shall be null and
void if the Board of Governors of the Federal Reserve System, or any other
federal agency having jurisdiction over the Association, by regulation, policy
statement or general or specific interpretive release or letter, permits
indemnification of the Agent by the Association as contemplated by Section 6(a)
hereof.
(n) The Company, the Association and the MHC will take such actions and
furnish such information as are reasonably requested by the Agent in order for
the Agent to ensure compliance with the National Association of Securities
Dealers, Inc.'s "Interpretation Relating to Free-Riding and Withholding."
(o) The Company, the Association or the MHC will furnish to Sandler
O'Neill as early as practicable prior to the Closing Date, but no later than two
(2) full business days prior thereto, a copy of the latest available unaudited
interim consolidated financial statements of the Association which have been
read by KPMG Peat Marwick LLP, as part of the procedures referred to in their
letters to be furnished pursuant to subsections (e) and (f) of Section 5 hereof.
(p) The Company, the Association and the MHC will comply with the
conditions imposed by or agreed to with the OTS in connection with its approval
of the Holding Company Application and the Reorganization Application including
those conditions relating to the establishment and the operation of the
Charitable Foundation; the Company, the Association and the MHC shall use their
best efforts to ensure that the Charitable Foundation submits within the time
frames required by applicable law a request to the Internal Revenue Service to
be recognized as a tax-exempt organization under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended (the "Code"); the Company, the
Association and the MHC will take no action which will result in
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the possible loss of the Charitable Foundation's tax-exempt status; and neither
the Company, the Association nor the MHC will contribute any additional assets
to the Charitable Foundation until such time that such additional contributions
will be deductible for federal and state income tax purposes.
(q) During the period ending on the first anniversary of the Closing
Time, the Association will comply with all applicable law and regulation
necessary for the Association to continue to be a "qualified thrift lender"
within the meaning of 12 U.S.C. Section 1467a(m).
(r) Other than in connection with any employee benefit plan or
arrangement described in the Prospectus, the Company will not, without the prior
written consent of the Agent, sell or issue, contract to sell or otherwise
dispose of, any shares of Common Stock other than the Securities or the
Charitable Foundation Shares for a period of 180 days following the Closing
Time.
SECTION 4. PAYMENT OF EXPENSES.
The Company, the Association and the MHC jointly and severally agree to
pay all expenses incident to the performance of their obligations under this
Agreement, including, but not limited to, (i) the cost of obtaining all
securities and bank regulatory approvals, (ii) the printing and filing of the
Registration Statement and the Reorganization Application as originally filed
and of each amendment thereto, (iii) the preparation, issuance and delivery of
the certificates for the Securities to the purchasers in the Offerings, (iv) the
fees and disbursements of the Company's, the Association's and the MHC's
counsel, accountants, conversion agent, appraiser and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the fees and
disbursements of counsel in connection therewith and in connection with the
preparation of the Blue Sky Survey, (vi) the printing and delivery to the Agent
of copies of the Registration Statement as originally filed and of each
amendment thereto and the printing and delivery of the Prospectus and any
amendments or supplements thereto to the purchasers in the Offerings and the
Agent, (vii) the printing and delivery to the Agent of copies of a Blue Sky
Survey and (viii) the fees and expenses incurred in connection with the listing
of the Common Stock on the Nasdaq Stock Market. In the event the Agent incurs
any such fees and expenses on behalf of the Association, the Company or the MHC,
the Association will reimburse the Agent for such fees and expenses whether or
not the Reorganization is consummated; provided, however, that the Agent shall
not incur any substantial expenses on behalf of the Association, the Company or
the MHC pursuant to this Section without the prior approval of the Association,
the Company or the MHC.
The Company, the Association and the MHC jointly and severally agree to
pay certain expenses incident to the performance of the Agent's obligations
under this Agreement, including (i) all reasonable out-of-pocket expenses
incurred by the Agent relating to the Offerings, including, without limitation,
advertising, promotional, syndication and travel expenses and fees and expenses
of the Agent's counsel (up to a maximum of $45,000), provided, however, that
Sandler O'Neill shall document such expenses to the reasonable satisfaction of
the Association; and (ii) the filing fees paid or incurred by the Agent in
connection with all filings with the National Association of Securities Dealers,
Inc. All fees and expenses to which the Agent is entitled to reimbursement under
this paragraph of this Section 4 shall be due and payable upon receipt by the
Company, the Association
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or the MHC of a written accounting therefor setting forth in reasonable detail
the expenses incurred by the Agent.
SECTION 5. CONDITIONS OF AGENT'S OBLIGATIONS.
The Company, the Association, the MHC and the Agent agree that the
issuance and sale of the Securities and all obligations of the Agent hereunder
are subject to the accuracy of the representations and warranties of the
Company, the Association and the MHC herein contained as of the date hereof and
the Closing Time, to the accuracy of the statements of officers and directors of
the Company, the Association and the MHC made pursuant to the provisions hereof,
to the performance by the Company, the Association and the MHC of their
obligations hereunder and to the following further conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, no order suspending the Offerings or
authorization for final use of the Prospectus shall have been issued or
proceedings therefor initiated or threatened by the OTS and no order suspending
the sale of the Securities in any jurisdiction shall have been issued.
(b) At Closing Time, the Agent shall have received:
(1) The favorable opinion, dated as of Closing Time, of
Luse Lehman Gorman Pomerenk & Schick, P.C., special
counsel for the Company, the Association and the MHC,
in form and substance satisfactory to counsel for the
Agent, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a federal stock corporation under the laws of the United
States; the MHC has been duly incorporated and is validly
existing as a federally-chartered mutual corporation under the
laws of the United States.
(ii) Each of the MHC and the Company has full corporate power and
authority to own, lease and operate its properties and to
conduct its business as described in the Registration
Statement and Prospectus and to enter into and perform its
obligations under this Agreement.
(iii) Each of the MHC and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in
the State of New York and in each other jurisdiction in which
such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business,
except where the failure to be so qualified would not have a
material adverse effect upon the financial condition, results
of operations or business of the Company, the Association and
the MHC, taken as a whole.
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(iv) Upon consummation of the Reorganization and the issuance of
Charitable Foundation Shares to the Charitable Foundation
immediately upon completion thereof, subject to compliance
with all conditions imposed upon the formation and
contribution thereof by the OTS under the terms of any written
notice or order of approval of the Reorganization Application
or the Holding Company Application, in an amount as described
in the Prospectus, the authorized, issued and outstanding
capital stock of the Company will be within the range as set
forth in the Prospectus under "Capitalization," and no shares
of Common Stock have been issued and outstanding prior to the
Closing Time.
(v) The Securities and the Charitable Foundation Shares have been
duly and validly authorized for issuance and sale and, when
issued and delivered by the Company pursuant to the Plan
against payment of the consideration calculated as set forth
in the Plan, or contributed by the Company pursuant to the
Plan in the case of the Charitable Foundation Shares, will be
duly and validly issued and fully paid and non-assessable.
(vi) The issuance of the Securities and the Charitable Foundation
Shares is not subject to preemptive or other similar rights
arising by operation of law or, to the best of such counsel's
knowledge, otherwise.
(vii) The Association has been at all times since the date hereof
and prior to the Closing Time organized, and is validly
existing as a federal stock savings association under the laws
of the United States, and, at Closing Time, has become duly
organized and validly existing as a federal stock savings
association, in both instances with full corporate power and
authority to own, lease and operate its properties and to
conduct its business as described in the Registration
Statement and the Prospectus; and the Association is duly
qualified as a foreign corporation in each jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business,
except where the failure to so qualify would not have a
material adverse effect upon the financial condition, results
of operations or business of the Association.
(viii) The deposit accounts of the Association are insured by the
FDIC up to the applicable limits.
(ix) The Charitable Foundation has been duly incorporated and is
validly existing as a non-stock corporation in good standing
under the laws of the State of Delaware with corporate power
and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus; the
Charitable Foundation is not a savings and loan holding
company within the meaning of 12 C.F.R. Section 574.2(q) as a
result of the issuance of shares of Common Stock to it in
accordance with the terms of the Plan and in the amounts as
described in the Prospectus; no approvals
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<PAGE> 23
are required to establish the Charitable Foundation and to
contribute the shares of Common Stock thereto as described in
the Prospectus other than those set forth in any written
notice or order of approval or non-objection of the
Reorganization, Reorganization Application or the Holding
Company Application copies of which were provided to the Agent
prior to the Closing Time.
(x) Upon consummation of the Reorganization, all of the issued and
outstanding capital stock of the Association will be duly
authorized and validly issued and fully paid and
nonassessable, and all such capital stock will be owned by the
Company free and clear of any security interest, mortgage,
pledge, lien, encumbrance or claim.
(xi) The OTS has approved the Holding Company Application and the
Reorganization Application, and no action is pending or, to
the best of such counsel's knowledge, threatened respecting
the Holding Company Application or the Reorganization
Application (including therewith, the establishment of the
Charitable Foundation and the contribution of shares of Common
Stock thereto) or the acquisition by the Company of all of the
Association's issued and outstanding capital stock; the
Holding Company Application complies as to form in all
material respects with the applicable requirements of the OTS,
and the Reorganization Application complies as to form in all
material respects with the applicable requirements of the OTS,
except as compliance therewith is specifically waived in
writing by the OTS, as the case may be, and, to the best of
such counsel's knowledge, include all documents required to be
filed as exhibits thereto and are complete as to form in all
material respects, excluding the Prospectus and any related
marketing materials filed as a part of the Holding Company
Application or the Reorganization Application as to which no
opinion need be given; the Company is duly authorized to
become a federal stock corporation and is duly authorized to
own all of the issued and outstanding capital stock of the
Association to be issued pursuant to the Plan; the MHC is duly
authorized to be a federal mutual holding company, and the MHC
is duly authorized to own a majority of the issued and
outstanding capital stock of the Company.
(xii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby,
including the establishment of the Charitable Foundation and
the contribution thereto of the Charitable Foundation Shares,
(A) have been duly and validly authorized by all necessary
action on the part of each of the Company, the Association and
the MHC, and this Agreement constitutes the legal, valid and
binding agreement of each of the Company, the Association and
the MHC, enforceable in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited
under applicable law (it being understood that such counsel
may avail itself of customary exceptions
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<PAGE> 24
concerning the effect of bankruptcy, insolvency or similar
laws and the availability of equitable remedies), (B) will not
conflict with or constitute a breach of, or default under, and
no default exists and no event has occurred which, with notice
or lapse of time or both, would constitute a default under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company, the
Association or the MHC pursuant to any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to
which the Company, the Association or the MHC is a party or by
which any of them may be bound, or to which any of the
property or assets of the Company, the Association or the MHC
is subject that, individually or in the aggregate, would have
a material adverse effect on the financial condition, results
of operations or business of the Company, the Association and
the MHC, taken as a whole, and (C) will not result in any
violation of the provisions of the certificate of
incorporation, organization certificate, articles of
incorporation or charter, as the case may be, or bylaws of the
Company, the Association or the MHC.
(xiii) The Prospectus has been duly authorized by the OTS for final
use pursuant to the Reorganization Regulations, and no action
has been taken or is pending, or, to the best of such
counsel's knowledge, threatened, by the OTS to revoke such
authorization.
(xiv) The Registration Statement is effective under the 1933 Act,
and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has
been issued under the 1933 Act or proceedings therefore
initiated or, to the best of such counsel's knowledge,
threatened by the Commission.
(xv) No further approval, authorization, consent or other order of
any public board or body is required in connection with the
execution and delivery of this Agreement, the issuance of the
Securities and the Charitable Foundation Shares and the
consummation of the Reorganization, except as may be required
under the securities or Blue Sky laws of various jurisdictions
as to which no opinion need be rendered.
(xvi) At the time the Registration Statement became effective, the
Registration Statement (except for the appraisal, financial
statements and schedules and other financial or statistical
data included therein, as to which counsel need make no
statement) complied as to form in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations
and the Reorganization Regulations.
(xvii) The Common Stock conforms to the description thereof contained
in the Prospectus, and the form of certificate used to
evidence the Common Stock is in due and proper form and
complies with all applicable statutory requirements.
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(xviii) There are no legal or governmental proceedings pending or
threatened against or affecting the Company, the Association,
the MHC or the Charitable Foundation which are required,
individually or in the aggregate, to be disclosed in the
Registration Statement and Prospectus, other than those
disclosed therein, and all pending legal or governmental
proceedings to which the Company, the Association or the MHC
is a party or to which any of their property is subject which
are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, are,
considered in the aggregate, not material.
(xix) The information in the Prospectus under "RISK FACTORS"
BUSINESS OF THE ASSOCIATION - Legal Proceedings," "TAXATION,"
"REGULATION," "THE REORGANIZATION AND OFFERING - Establishment
of the Charitable Foundation," "- [Effects of Conversion]," "-
[Liquidation Rights]" and "- Tax Considerations,"
"RESTRICTIONS ON THE ACQUISITION OF THE COMPANY," "DESCRIPTION
OF CAPITAL STOCK," to the extent that it constitutes matters
of law, summaries of legal matters, documents or proceedings,
or legal conclusions, has been reviewed by them and is
complete and accurate in all material respects and to the
extent it constitutes summaries of written legal opinions
rendered by a person or entity other than such counsel, has
been reviewed by such counsel and is a complete and accurate
summary of such opinions in all material respects.
(xx) To the best of such counsel's knowledge, there are no
contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments required to be described or
referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to
therein or filed as exhibits thereto, and the descriptions
thereof or references thereto are correct.
(xxi) The Plan has been duly authorized by the Boards of Directors
of the Company, the Association and the MHC and the OTS's
approval of the Plan remains in full force and effect; the
Association's charter has been amended and restated, effective
upon consummation of the Reorganization and the filing of such
amended and restated charter with the OTS, to authorize the
issuance of permanent capital stock; to the best of such
counsel's knowledge, the Company, the Association and the MHC
have conducted the Reorganization and the establishment and
funding of the Charitable Foundation in all material respects
in accordance with applicable requirements of the
Reorganization Regulations (except as compliance therewith is
specifically waived in writing by the OTS as the case may be),
the Plan and all other applicable regulations, decisions and
orders thereunder, including all material applicable terms,
conditions, requirements and conditions precedent to the
Reorganization imposed upon the Company or the Association by
the OTS, and no order has been issued
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<PAGE> 26
by the OTS to suspend the Reorganization or the Offerings, and
no action for such purpose has been instituted or, to the best
of such counsel's knowledge, threatened by the OTS; and, to
the best of such counsel's knowledge, no person has sought to
obtain review of the final action of the OTS in approving the
Reorganization Application (which includes the Plan which
provides for the establishment of the Charitable Foundation)
or of the OTS in approving the Holding Company Application.
(xxii) To the best of such counsel's knowledge, the Company, the
Association and the MHC have obtained all licenses, permits
and other governmental authorizations currently required for
the conduct of their respective businesses as described in the
Registration Statement and Prospectus, except for such
licenses, approvals or authorizations the failure of which to
have would not result in a material adverse change in the
financial condition, results of operations or the business of
the Company, the Association and the MHC, taken as a whole,
all such licenses, permits and other governmental
authorizations are in full force and effect, and the Company,
the Association and the MHC are in all material respects
complying therewith.
(xxiii) Neither the Company, the Association nor the MHC is in
violation of its certificate of incorporation, organization
certificate, articles of incorporation or charter, as the case
may be, or bylaws (and the Association will not be in
violation of its organization certificate and bylaws in stock
form upon consummation of the Reorganization); and to the best
of such counsel's knowledge, the Company, the Association and
the MHC are not in default (nor has any event occurred which,
with notice or lapse of time or both, would constitute a
default) in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company, the Association or the MHC is
a party or by which the Company, the Association or the MHC or
any of their property may be bound in any respect that would
have a material adverse effect upon the financial condition,
results of operations or business of the Company, the
Association and the MHC taken as a whole.
(2) The favorable opinion, dated as of Closing Time, of Thacher
Proffitt & Wood, counsel for the Agent, with respect to the
matters set forth in Section 5(b)(1)(i), (iv), (v), (vi)
(solely as to preemptive rights arising by operation of law),
(xvii) and (xviii) and such other matters as the Agent may
reasonably require.
(3) In giving their opinions required by subsections (b)(l) and
(b)(2), respectively, of this Section, Luse Lehman Gorman
Pomerenk & Schick, P.C. and Thacher Proffitt & Wood shall each
additionally state that nothing has come to their attention
that would lead them to believe that the
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<PAGE> 27
Registration Statement (except for the appraisal, financial
statements and schedules and other financial or statistical
data included therein, as to which counsel need make no
statement), at the time it became effective, contained an
untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading or that the
Prospectus (except for the appraisal, financial statements and
schedules and other financial or statistical data included
therein, as to which counsel need make no statement), at the
time the Registration Statement became effective or at Closing
Time, included an untrue statement of a material fact or
omitted to state a material fact necessary in order to make
the statements therein, in the light of the circumstances
under which they were made, not misleading. In giving their
opinions, Luse Lehman Gorman Pomerenk & Schick, P.C. and
Thacher Proffitt & Wood may rely as to matters of fact on
certificates of officers and directors of the Company, the
Association and the MHC and certificates of public officials,
and as to matters of Delaware law upon the opinion of
[___________], which opinions shall be in form and substance
satisfactory to the Agent, and Thacher Proffitt & Wood may
state that they have not independently verified the
information with respect to the Company, the MHC and the
Association contained in the Registration Statement, the
Prospectus and the Reorganization Application and may also
rely as to certain matters on the opinion of Luse Lehman
Gorman Pomerenk & Schick, P.C.
(c) At the Closing Time referred to in Section 2, the Company, the
Association and the MHC will have completed in all material respects the
conditions precedent to the Reorganization in accordance with the Plan, the
applicable Reorganization Regulations and all other applicable laws,
regulations, decisions and orders, including all terms, conditions, requirements
and provisions precedent to the Reorganization imposed upon the Company, the
Association or the MHC by the OTS, or any other regulatory authority other than
those which the OTS permit to be completed after the Reorganization.
(d) At the Closing Time, there shall not have been, since the date
hereof or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change in the
financial condition, results of operations or business of the Company, the
Association and the MHC, taken as a whole, whether or not arising in the
ordinary course of business, and the Agent shall have received a certificate of
the Chief Executive Officer and President of the Company and of the Association
and the chief financial or chief accounting officer of the Company, the
Association and the MHC, dated as of Closing Time, to the effect that (i) there
has been no such material adverse change, (ii) there has been no material
transaction entered into by the Company, the Association or the MHC from the
latest statement of financial condition of the Company, the Association or the
MHC as set forth in the Registration Statement and the Prospectus other than
transactions referred to or contemplated therein and transactions in the
ordinary course of business, (iii) neither the Company, the Association nor the
MHC has received from the OTS any direction (oral or written) to make any
material change in the method of conducting its business with which it has not
complied (which direction, if any, shall have
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<PAGE> 28
been disclosed to the Agent) or which materially and adversely would affect the
financial condition, results of operations or business of the Company, the
Association and the MHC, taken as a whole, (iv) the representations and
warranties in Section 1 hereof are true and correct with the same force and
effect as though expressly made at and as of the Closing Time, (v) the Company,
the Association and the MHC have complied with all agreements and satisfied all
conditions on their part to be performed or satisfied at or prior to Closing
Time, (vi) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
initiated or threatened by the Commission and (vii) no order suspending the
Offerings or the authorization for final use of the Prospectus has been issued
and no proceedings for that purpose have been initiated or threatened by the OTS
and no person has sought to obtain regulatory or judicial review of the action
of the OTS in approving the Plan in accordance with the Reorganization
Regulations, nor has any person sought to obtain regulatory or judicial review
of the action of the OTS in approving the Holding Company Application.
(e) At the time of the execution of this Agreement, the Agent shall
have received from KPMG Peat Marwick LLP a letter (the "Comfort Letter") dated
such date, in form and substance satisfactory to the Agent, to the effect that
(i) they are independent certified public accountants with respect to the
Company, the Association and the MHC within the meaning of the Code of Ethics of
the American Institute of Certified Public Accountants, the 1933 Act, the rules
and regulations adopted by the SEC and the Reorganization Regulations; (ii) it
is their opinion that the financial statements and supporting schedules included
in the Prospectus and covered by their opinion therein comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act,
the related rules and regulations adopted by the SEC and the Reorganization
Regulations; (iii) based upon limited procedures as agreed upon by the Agent and
KPMG Peat Marwick LLP and set forth in detail in such letter, nothing has come
to their attention which causes them to believe that (A) the unaudited financial
statements and supporting schedules of the Company, the Association and the MHC
included in the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act, the 1933 Act
Regulations and the Reorganization Regulations or are not presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Prospectus, (B) the unaudited amounts included under the captions
"Selected Consolidated Financial and Other Data of the Bank" and "Recent
Developments" in the Prospectus do not agree with the amounts set forth in the
unaudited consolidated financial statements as of and for the dates and periods
presented under such captions or such unaudited amounts were not determined on a
basis substantially consistent with that used in determining the corresponding
amounts in the audited financial statements included in the Prospectus, (C) at a
specified date not more than five days prior to the date of this Agreement,
there has been any increase in the consolidated long term or short term debt of
the Association or any decrease in consolidated total assets, allowance for loan
losses, total deposits or retained earnings of the Association, in each case as
compared with the amounts shown in the [March 31, 1998] balance sheet included
in the Registration Statement or, (D) during the period from [March 31, 1998] to
a specified date not more than five days prior to the date of this Agreement,
there was any increase in borrowings or decrease, as compared with the
corresponding amounts shown in the March 31, 1998 balance sheet included in the
Prospectus, in the Association's total assets, allowance for loan losses, total
deposits or total equity and (iv) in addition to the examination referred to in
their opinion and the limited procedures referred to in clause (iii) above, they
have carried out certain specified
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procedures, not constituting an audit, with respect to certain amounts,
percentages and financial information which are included in the Prospectus and
which are specified by the Agent and have found such amounts, percentages and
financial information to be in agreement with the relevant accounting, financial
and other records of the Company, the Association and the MHC identified in such
letter.
(f) At Closing Time, the Agent shall have received from KPMG Peat
Marwick LLP a letter, dated as of Closing Time, to the effect that they reaffirm
their statements made in the letter furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not more
than five days prior to Closing Time.
(g) At Closing Time, the Common Stock shall have been approved for
listing on the Nasdaq Stock Market upon notice of issuance.
(h) At Closing Time, the Agent shall have received a letter from
FinPro, dated as of the Closing Time, confirming its appraisal.
(i) At Closing Time, counsel for the Agent shall have been furnished
with such documents and opinions as they may require for the purpose of enabling
them to pass upon the issuance and sale of the Securities and the Charitable
Foundation Shares as herein contemplated and related proceedings, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
and the Charitable Foundation Shares as herein contemplated shall be
satisfactory in form and substance to the Agent and counsel for the Agent.
(j) At any time prior to Closing Time, (i) there shall not have
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effects of which, in the judgment of the Agent, are
so material and adverse as to make it impracticable to market the Securities or
to enforce contracts, including subscriptions or orders, for the sale of the
Securities, and (ii) trading generally on either the American Stock Exchange or
the New York Stock Exchange or the Nasdaq Stock Market shall not have been
suspended, and minimum or maximum prices for trading shall not have been fixed,
or maximum ranges for prices for securities have been required, by either of
said Exchanges or the Nasdaq Stock Market or by order of the Commission or any
other governmental authority, and a banking moratorium shall not have been
declared by either Federal or New York authorities.
SECTION 6. INDEMNIFICATION.
(a) The Company, the Association and the MHC, jointly and severally,
agree to indemnify and hold harmless the Agent, each person, if any, who
controls the Agent, within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act, and its respective partners, directors, officers, employees
and agents as follows:
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(i) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, related to or arising out
of the Reorganization (including the establishment of the
Charitable Foundation and the contribution of the Charitable
Foundation Shares thereto by the Company) or any action taken
by the Agent where acting as agent of the Company, the
Association and the MHC or otherwise as described in Section 2
hereof;
(ii) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, based upon or arising out
of any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any
amendment thereto), or the omission or alleged omission
therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Proxy Statement
or the Prospectus (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading;
(iii) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any governmental agency or
body, commenced or threatened, or of any claim whatsoever
described in clauses (i) or (ii) above, if such settlement is
effected with the written consent of the Company, the
Association or the MHC, which consent shall not be
unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as incurred
(including, subject to Section 6(c) hereof, the fees and
disbursements of counsel chosen by the Agent), reasonably
incurred in investigating, preparing or defending against any
litigation, or any investigation, proceeding or inquiry by any
governmental agency or body, commenced or threatened, or any
pending or threatened claim whatsoever described in clauses
(i) or (ii) above, to the extent that any such expense is not
paid under (i), (ii) or (iii) above;
provided, however, that the indemnification provided for in this paragraph (a)
shall not apply to any loss, liability, claim, damage or expense (i) to the
extent arising out of any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission of a material fact required to be
stated therein or necessary to make not misleading any statements contained in
the Prospectus (or any amendment or supplement thereto) made in reliance upon
and in conformity with the Agent Information or (ii) found in a final judgement
by a court of competent jurisdiction to have resulted primarily from bad faith,
willful misconduct or gross negligence of the Agent seeking indemnification
hereunder. Notwithstanding the foregoing, the indemnification provided for in
this paragraph (a) shall not apply to the Association to the extent that such
indemnification by the Association in the event that it is found in a final
judgment by a court of competent jurisdiction to constitute an impermissible
covered transaction under Section 23A of the Federal Reserve Act, as amended.
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(b) The Agent agrees to indemnify and hold harmless the Company, the
Association, the MHC, their directors and trustees, each of their officers who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or alleged untrue
statements of a material fact or omissions or alleged omissions of a material
fact, made in the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with the Agent Information.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
which it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of any such
action. In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to no more than one local counsel
in each separate jurisdiction in which any action or proceeding is commenced)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
(d) The Company, the Association and the MHC also agree that the Agent
shall not have any liability (whether direct or indirect, in contract or tort or
otherwise) to the Association, the Company, the MHC, its security holders or the
Association's or the Company's or the MHC's creditors relating to or arising out
of the engagement of the Agent pursuant to, or the performance by the Agent of
the services contemplated by, this Agreement, except to the extent that any
loss, claim, damage or liability is found in a final judgment by a court of
competent jurisdiction to have resulted primarily from the Agent's bad faith,
willful misconduct or gross negligence.
(e) In addition to, and without limiting, the provisions of Section
6(a)(iv) hereof, in the event that the Agent, any person, if any, who controls
the Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act or any of its partners, directors, officers, employees or agents is
requested or required to appear as a witness or otherwise gives testimony in any
action, proceeding, investigation or inquiry brought by or on behalf of or
against the Company, the Association, the MHC, the Agent or any of its
respective affiliates or any participant in the transactions contemplated hereby
in which the Agent or such person or agent is not named as a defendant or the
subject of an investigation or inquiry, the Company, the Association and the MHC
jointly and severally agree to reimburse the Agent for all reasonable and
necessary out-of-pocket expenses incurred by it in connection with preparing or
appearing as a witness or otherwise giving testimony and to compensate the Agent
in an amount to be mutually agreed upon.
SECTION 7. CONTRIBUTION.
In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in Section 6 hereof
is for any reason held to be unenforce able by the indemnified parties although
applicable in accordance with its terms, the Company, the Association, the MHC
and the Agent shall contribute to the aggregate losses, liabilities, claims,
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damages and expenses of the nature contemplated by said indemnity agreement
incurred by the Company, the Association or the MHC and the Agent, as incurred,
in such proportions (i) that the Agent is responsible for that portion
represented by the percentage that the maximum aggregate marketing fees
appearing on the cover page of the Prospectus bears to the maximum aggregate
gross proceeds appearing thereon and the Company, the Association and the MHC
are jointly and severally responsible for the balance or (ii) if, but only if,
the allocation provided for in clause (i) is for any reason held unenforceable,
in such proportion as is appropriate to reflect not only the relative benefits
to the Company, the Association and the MHC on the one hand and the Agent on the
other, as reflected in clause (i), but also the relative fault of the Company,
the Association and the MHC on the one hand and the Agent on the other, as well
as any other relevant equitable considerations; provided, however, that no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. For purposes of this Section 7,
each person, if any, who controls the Agent within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Agent, and each director of the Company, the Association and
the MHC, each officer of the Company who signed the Registration Statement and
each person, if any, who controls the Company, the Association or the MHC within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company, the Association and the
MHC. Notwithstanding anything to the contrary set forth herein, to the extent
permitted by applicable law, in no event shall the Agent be required to
contribute an aggregate amount in excess of the aggregate marketing fees to
which the Agent is entitled and actually paid pursuant to this Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers of the Company, the
Association or the MHC submitted pursuant hereto, shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
the Agent or any controlling person, or by or on behalf of the Company, and
shall survive delivery of the Securities.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Agent may terminate this Agreement, by notice to the Company,
at any time at or prior to Closing Time (i) if there has been, since the date of
this Agreement or since the respective dates as of which information is given in
the Registration Statement, any material adverse change in the financial
condition, results of operations or business of the Company, the Association or
the MHC, or of the Company, the Association and the MHC, taken as a whole,
whether or not arising in the ordinary course of business; (ii) if there has
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effects of which, in the judgment of the Agent, are
so material and adverse as to make it impracticable to market the Securities or
to enforce contracts, including subscriptions or orders, for the sale of the
Securities; (iii) if trading generally on either the Nasdaq Stock Market or the
New York Stock Exchange has been suspended, or minimum or maximum
32
<PAGE> 33
prices for trading have been fixed, or maximum ranges for prices for securities
have been required, by either of said Exchanges or by order of the Commission or
any other governmental authority, or if a banking moratorium has been declared
by either Federal or New York authorities; (iv) if any condition specified in
Section 5 shall not have been fulfilled when and as required to be fulfilled;
(v) if there shall have been such material adverse change in the condition or
prospects of the Company, the Association or the MHC or the prospective market
for the Company's securities as in the Agent's good faith opinion would make it
inadvisable to proceed with the offering, sale or delivery of the Securities;
(vi) if, in the Agent's good faith opinion, the price for the Securities
established by FinPro is not reasonable or equitable under then prevailing
market conditions; or (vii) if the Reorganization is not consummated prior to
[December 31], 1998.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except
that the provisions of Section 4 relating to reimbursement of expenses and the
provisions of Sections 6 and 7 hereof shall survive any termination of this
Agreement.
SECTION 10. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to the Agent shall be directed to the Agent
at Two World Trade Center, 104th Floor, New York, New York 10048, attention of
Catherine A. Lawton, Principal, with a copy to Robert C. Azarow, Esq., Thacher
Proffitt & Wood at Two World Trade Center, 38th Floor, New York, New York 10048;
notices to the Company, the Association and the MHC shall be directed to either
of them at 300 Mamaroneck Avenue, Mamaroneck, NY 10543, attention of Richard P.
McStravick, President and Chief Executive Officer, with a copy to Alan Schick,
Esq., Luse Lehman Gorman Pomerenk & Schick, 5335 Wisconsin Avenue, N.W. Suite
400, Washington, D.C. 20015.
SECTION 11. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
Agent, the Company, the Association and the MHC and their respective successors.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person, firm or corporation, other than the Agent, the
Company, the Association and the MHC and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein or
therein contained. This Agreement and all conditions and provisions hereof and
thereof are intended to be for the sole and exclusive benefit of the Agent, the
Company, the Association and the MHC and their respective successors, and said
controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT.
This Agreement represents the entire understanding of the parties
hereto with reference to the transactions contemplated hereby and supersedes any
and all other oral or written
33
<PAGE> 34
agreements heretofore made, except for the engagement letter, dated April 14,
1998, by and between the Agent and the Association, relating to the Agent's
providing conversion agent services and proxy solicitation services to the
Company, the Association and the MHC in connection with the Reorganization,
which engagement letter shall be governed solely by its terms. No waiver,
amendment or other modification of this Agreement shall be effective unless in
writing and signed by the parties hereto.
SECTION 13. GOVERNING LAW AND TIME.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in said State without regard to the conflicts of laws provisions
thereof. Specified times of day refer to Eastern time.
SECTION 14. SEVERABILITY.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, the provision shall be interpreted to be only
so broad as is enforceable.
SECTION 15. HEADINGS.
Sections headings are not to be considered part of this Agreement, are
for convenience and reference only and are not to be deemed to be full or
accurate descriptions of the contents of any paragraph or subparagraph.
34
<PAGE> 35
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Agent, the Company, the Association and the MHC in accordance with
its terms.
Very truly yours,
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
By:__________________________________________________
Richard P. McStravick
President and Chief Executive Officer
SOUND FEDERAL BANCORP
By:__________________________________________________
Richard P. McStravick
President and Chief Executive Officer
SOUND FEDERAL, MHC
By:__________________________________________________
Richard P. McStravick
President and Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
SANDLER O'NEILL & PARTNERS, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By:__________________________________
Catherine A. Lawton
Vice President
35
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Certified Public Accountants
The Board of Directors
Sound Federal Savings and Loan Association:
We consent to the use of our report dated June 5, 1998 included herein
relating to the balance sheets of Sound Federal Savings and Loan Association as
of March 31, 1998 and 1997, and the related statements of income, changes in
equity, and cash flows for each of the years in the three-year period ended
March 31, 1998. We further consent to the use of our opinions included herein
regarding certain income tax consequences of the proposed reorganization and
offering and of the proposed charitable foundation.
We consent to the references to our firm under the headings "THE
REORGANIZATION AND OFFERING - Tax Effects of the Reorganization", "SOUND
FEDERAL SAVINGS AND LOAN ASSOCIATION STATEMENTS OF INCOME", "LEGAL AND TAX
MATTERS", and "EXPERTS" in the prospectus.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
July 31, 1998
<PAGE> 1
EXHIBIT 99.3
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
300 Mamaroneck Avenue
Mamaroneck, New York 10543
(914) 698-6400
------------------------------------
NOTICE OF SPECIAL MEETING OF MEMBERS
------------------------------------
Notice is hereby given that a Special Meeting of Members (the "Special
Meeting") of Sound Federal Savings and Loan Association (the "Association") will
be held at the main office of the Association, located at 300 Mamaroneck Avenue,
Mamaroneck, New York 10543, on ____________________, 1998 at _____ p.m., local
time. The purpose of this Special Meeting is to consider and vote upon:
1. A Plan of Reorganization from Mutual Savings Association to Mutual
Holding Company and Stock Issuance Plan providing for the reorganization
of the Association into the mutual holding company structure. As part of
the Plan the Association will convert to a federally chartered stock
savings association, which will be wholly-owned by Sound Federal Bancorp
(the "Company") a to be formed federal corporation. Pursuant to the
Plan, the Company will (i) issue 53% of its to-be-outstanding shares of
common stock to Sound Federal, MHC, a federal mutual holding company to
be formed pursuant to the Plan, (ii) offer for sale to certain
depositors and borrowers 45% of its to-be-outstanding shares of common
stock, and (iii) subject to the receipt of member approval, contribute
2% of its to-be-outstanding shares of Common Stock to the Sound Federal
Savings and Loan Association Charitable Foundation (the "Charitable
Foundation");
2. The establishment of a tax exempt foundation, which will be a Delaware
chartered non-stock corporation dedicated to the promotion of charitable
purposes within the Association's market area; and
such other business as may properly come before this Special Meeting or any
adjournment thereof. Management is not aware of any such other business.
The members who shall be entitled to notice of and to vote at the
Special Meeting and any adjournment thereof are depositors at the close of
business on August ___, 1998. In the event there are insufficient votes for
approval of the Plan at the time of the Special Meeting, the Special Meeting may
be adjourned from time to time in order to permit further solicitation of
proxies.
BY ORDER OF THE BOARD OF DIRECTORS
Richard P. McStravick
President and Chief Executive Officer
Mamaroneck, New York
August ___, 1998
- --------------------------------------------------------------------------------
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR APPROVAL OF THE PLAN AND THE ESTABLISHMENT
OF THE CHARITABLE FOUNDATION BY COMPLETING THE
ENCLOSED PROXY CARD AND RETURNING IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE.
YOUR VOTE IS VERY IMPORTANT
- --------------------------------------------------------------------------------
<PAGE> 2
SUMMARY OF PROPOSED REORGANIZATION
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information contained in the remainder of this
Proxy Statement and the accompanying Prospectus.
Under its present mutual form of organization, the Association has no
stockholders. Its deposit account holders and certain of its borrowers are
members of the Association and have voting rights in that capacity. In the
unlikely event of liquidation, the Association's deposit account holders would
have the sole right to receive any assets of the Association remaining after
payment of its liabilities (including the claims of all deposit account holders
to the withdrawal value of their deposits). Under the Plan of Reorganization to
be voted on at the Special Meeting, the Association would reorganize into the
mutual holding company structure. In the Reorganization, the Association would
be converted into a federally chartered savings association organized in stock
form and all of the Association's common stock would be issued concurrently to
the Company. The Company will issue 53% of its to-be outstanding shares of
Common Stock to the Mutual Holding Company and offer and sell 45% of its to-be
outstanding shares of Common Stock in a subscription offering (1) to depositors
with an account balance of $50 or more as of March 31, 1997 ("Eligible Account
Holders"), (2) to tax-qualified employee plans of the Association
("Tax-Qualified Employee Plans"), (3) to depositors of the Association with an
account balance of $50 or more as of June 30, 1998 ("Supplemental Eligible
Account Holders"), and (4) to depositors of the Association as of __________,
1998 other than Eligible Account Holders or Supplemental Eligible Account
Holders, and borrowers as of __________, 1998 ("Other Members"). Subject to the
receipt of stockholder approval of Proposal II, the Company will contribute 2%
of its to-be outstanding shares of Common Stock to the Charitable Foundation.
The shares of Common Stock that are not owned by the Mutual Holding Company are
referred to as the Minority Ownership Interest. Notwithstanding the foregoing,
to the extent there is an increase in the maximum of the Estimated Valuation
Range, which will result in an increase in the maximum of the Offering Range (as
defined in the Prospectus), Tax-Qualified Employee Plans shall be given a first
priority to purchase shares sold above the maximum of the Offering Range. It is
anticipated that the Association's Employee Stock Ownership Plan (the "ESOP")
will purchase shares of Common Stock equal to 8% of the Minority Ownership
Interest.
At any time following commencement of the Subscription Offering, to the
extent sufficient shares of Common Stock are not sold to the persons in the
foregoing categories, the Company may offer Common Stock in the Community
Offering to members of the general public to whom a Prospectus has been
delivered, with first preference to natural persons residing in Westchester
County, New York. All depositors who have membership and liquidation rights with
respect to the Association immediately prior to the completion of the
Reorganization will continue to have such rights solely with respect to the
Mutual Holding Company as long as they maintain deposit accounts in the
Association after the completion of the Reorganization.
THE REORGANIZATION WILL NOT AFFECT THE BALANCE, INTEREST RATE OR
FEDERAL INSURANCE PROTECTION OF ANY SAVINGS DEPOSIT, AND NO PERSON WILL BE
OBLIGATED TO PURCHASE ANY STOCK IN THE OFFERING.
Business Purposes Net Offering proceeds are expected to increase
for the Reorganization the capital of the Association, which will
and Offering support the expansion of its financial services
to the public. The conversion to stock form and
the use of a holding company structure are also
expected to enhance its ability to expand
through possible mergers and acquisitions
(although no such transactions are contemplated
at this time) and to diversify into other
financial services and will facilitate the
future access of the Company and the
Association to the capital markets.
Subscription and As part of the Reorganization, Common Stock is
Community Offering being offered for sale in the Subscription
Offering, in the priorities summarized below,
to the Association's (1) Eligible Account
Holders, (2) Tax-Qualified Employee Plans,
including the ESOP, (3) Supplemental Eligible
Account Holders and (4) Other Members. In
addition, should a Community Offering be
conducted, members of the general public may
purchase Common Stock to the extent shares are
available after satisfaction of subscriptions
in the Subscription Offering, with a preference
first to natural persons residing in
Westchester County, New York.
<PAGE> 3
Subscription Rights Each Eligible Account Holder has been given
of Eligible Account non-transferable rights to subscribe for an
Holders amount of shares equal to the greater of (i)
$150,000 of the Common Stock sold in the
Offering; or (ii) 15 times the product (rounded
down to the whole next number) obtained by
multiplying the total number of shares to be
issued by a fraction of which the numerator is
the amount of qualifying deposits of such
subscriber and the denominator is the total
qualifying deposits of all account holders in
this category on the qualifying date.
Subscription Rights The Association's Tax-Qualified Employee Plans
of Tax-Qualified have been given non-transferable rights to
Employee Plans subscribe for up to 10% of the Minority
Ownership Interest after satisfaction of
subscriptions of Eligible Account Holders.
Notwithstanding the foregoing, to the extent
there is an increase in the maximum of the
Estimated Valuation Range that results in an
increase in the maximum of the Offering Range
(as defined in the Prospectus), Tax-Qualified
Employee Plans shall be given a first priority
to purchase shares sold above the maximum of
the Offering Range. It is anticipated that the
ESOP will purchase shares of Common Stock equal
to 8% of the Minority Ownership Interest.
Subscription Rights After satisfaction of subscriptions of Eligible
of Supplemental Account Holders and Tax-Qualified Employee
Eligible Account Plans, each Supplemental Eligible Account
Holders Holder (other than directors and officers of
the Association and their associates) has been
given non-transferable rights to subscribe for
an amount of shares equal to the greater of (i)
$150,000 of the Common Stock sold in the
Offering; or (ii) 15 times the product (rounded
down to the whole next number) obtained by
multiplying the total number of shares to be
issued by a fraction of which the numerator is
the amount of qualifying deposits of such
subscriber and the denominator is the total
qualifying deposits of all account holders in
this category on the qualifying date. The
subscription rights of each Supplemental
Eligible Account Holder shall be reduced to the
extent of such person's subscription rights as
an Eligible Account Holder.
Subscription Rights Each Other Member has been given
of Other Members non-transferable rights to subscribe for an
amount of shares equal to $150,000 of the
Common Stock sold in the Offering; after
satisfaction of the subscriptions of the
Association's Eligible Account Holders,
Tax-Qualified Employee Plans and Supplemental
Eligible Account Holders.
Purchase No person or entity, together with associates,
Limitations and persons acting in concert, may purchase
more than $300,000 of the Common Stock offered
in the Offering. The Boards of Directors of the
Company and the Association may, in their sole
discretion, increase the maximum purchase
limitation to up to 9.99% of the shares sold,
provided that orders for shares exceeding 5%
shall not exceed, in the aggregate, 10% of the
shares offered in the Subscription Offering.
Should the Association increase the maximum
purchase limitation above 5% of the Common
Stock offered, persons who previously
subscribed for the maximum number of shares
will be given the opportunity to subscribe for
additional shares. The aggregate purchases of
directors and executive officers and their
associates may not exceed 30% of the total
number of shares offered in the Offering. These
purchase limitations do not apply to the
Association's Tax-Qualified Employee Plans.
Expiration Date of All subscriptions for Common Stock must be
Subscription and received by _____ _.m., local time on _______,
Community Offerings 1998.
How to Subscribe For information on how to subscribe for Common
for Shares Stock being offered in the Offering, please
read the Prospectus and the Stock Order Form
and instructions accompanying this Proxy
Statement. Subscriptions will not become
effective until the Plan of Reorganization has
been approved by the Association's members and
all of the Common Stock offered in the Offering
2
<PAGE> 4
has been subscribed for or sold in the Offering
or through such other means as may be approved
by the OTS.
Price of Common All sales of Common Stock in the Offering will
Stock be made at $10.00 per share. See "The
Reorganization and Offering--Procedure for
Purchasing Shares" in the Prospectus.
Tax Consequences The Association has received an opinion from
its special counsel, Luse Lehman Gorman
Pomerenk & Schick, P.C., stating that the
Reorganization is a nontaxable reorganization
under Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended (the "Code").
The Association also has received an opinion
from KPMG Peat Marwick LLP stating that the
Offering will not be a taxable transaction for
New York income tax purposes.
Required Vote Approval of the Plan of Reorganization will
require the affirmative vote of a majority of
all votes eligible to be cast at the Special
Meeting.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE ASSOCIATION RECOMMENDS THAT YOU VOTE TO
APPROVE THE PLAN OF REORGANIZATION.
The Association is currently organized in mutual rather than stock form,
meaning that it has no stockholders and no authority under its federal mutual
charter to issue capital stock. The Association's Board of Directors has adopted
the Plan of Reorganization providing for the Reorganization. The sale of Common
Stock of the Company, which will be formed to become the holding company of the
Association, will substantially increase the Association's net worth. The
Company will exchange a portion of the net proceeds from the sale of the Common
Stock for the common stock of the Association to be issued upon Reorganization.
The Company expects to retain the balance of the net proceeds (up to 50%), as
its initial capitalization and the Company intends to lend funds to the Employee
Stock Ownership Plan, a tax-qualified employee stock benefit plan of the
Association, to fund its purchase of Common Stock. This increased capital will
support the expansion of the Association's financial services to the public. The
Board of Directors of the Association also believes that the conversion to stock
form and the use of a holding company structure will enhance the Association's
ability to expand through possible mergers and acquisitions (although no such
transactions are contemplated at this time) and will facilitate its future
access to the capital markets.
The Board of Directors of the Association believes that the
Reorganization will further benefit the Association by enabling it to attract
and retain key personnel through prudent use of stock-related incentive
compensation and benefit plans. See "Management of the Association--Benefit
Plans" in the accompanying Prospectus.
Voting in favor of the Plan of Reorganization will not obligate any
person to purchase Common Stock.
THE OTS HAS APPROVED THE PLAN OF REORGANIZATION SUBJECT TO THE
APPROVAL OF THE ASSOCIATION'S MEMBERS AND THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. HOWEVER, SUCH APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN OF REORGANIZATION BY THE OTS.
SUMMARY OF PROPOSED CHARITABLE FOUNDATION
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information contained in the remainder of this
Proxy Statement and the accompanying Prospectus.
As a reflection of the Association's long-standing commitment to the
local community, the Company intends to establish the Charitable Foundation upon
the completion of the Reorganization, subject to member approval. The Charitable
Foundation will be incorporated in the State of Delaware. The Charitable
Foundation will be funded with
3
<PAGE> 5
a contribution consisting of shares of Common Stock equal to 2% of the shares
outstanding at the conclusion of the Reorganization.
STRUCTURAL PURPOSE OF THE CHARITABLE FOUNDATION. The purpose of the
Charitable Foundation is to provide funding to support charitable purposes
within the communities in which the Association operates. The Association has
long emphasized community lending and community development activities and
currently has a satisfactory rating under the Community Reinvestment Act
("CRA"). The Charitable Foundation is being formed as a complement to the
Association's existing community activities, not as a replacement for such
activities. The Charitable Foundation may be able to support community
charitable activities even in periods when the Association or the Company would
not be in a position to do so.
The Charitable Foundation will be a private foundation under the Code.
As a tax-exempt private foundation, the Charitable Foundation will be required
to distribute annually in grants or donations at least 5% of its net investment
assets. The Charitable Foundation will be dedicated to the promotion of
charitable purposes within the communities in which the Association operates,
including, but not limited to, providing grants or donations to support housing
assistance, not-for-profit medical facilities, community groups and other types
of organizations or projects. While the Charitable Foundation is authorized to
engage directly in charitable activities, in order to limit overhead costs, it
is currently anticipated that the Charitable Foundation's primary activity will
consist of making grants to other charitable organizations.
FUNDING OF THE CHARITABLE FOUNDATION. The Charitable Foundation will be
initially funded with shares of Common Stock equal to 2% of the shares
outstanding at the conclusion of the Reorganization. Future contributions to the
Charitable Foundation may be made either in cash or Common Stock. The amount of
such future contributions, if any, will be determined based on, among other
factors, an assessment of the Company's then current financial condition,
operations and prospects and of the need for charitable donations in the
Company's market area. Any such additional contributions will reduce earnings
and may have a material impact on the Company's earnings for such quarter and
for the year. The Company does not anticipate making any contributions to the
Charitable Foundation that will not be tax deductible.
TAX CONSIDERATIONS. The Company has been advised that an organization
created for the above purposes will qualify as a 501(c)(3) exempt organization
under the Code, and will be classified as a private foundation rather than a
public charity. A private foundation typically receives its support from one
person or one corporation whereas a public charity receives its support from the
public. The Charitable Foundation will submit a request to the IRS to be
recognized as an exempt organization after approval of the Charitable Foundation
by the Association's members at the Special Meeting. So long as the Charitable
Foundation files its application for tax-exempt status within 15 months from the
date of its organization, and provided the IRS approves the application, the
effective date of the Charitable Foundation's status as a Section 501(c)(3)
organization will be the date of its organization.
REGULATORY CONDITIONS IMPOSED ON THE CHARITABLE FOUNDATION.
Establishment of the Charitable Foundation is subject to the following
conditions imposed by the OTS: (i) the Charitable Foundation will be subject to
examination by the OTS, at the Charitable Foundation's own expense; (ii) the
Charitable Foundation must comply with supervisory directives imposed by the
OTS; (iii) the Charitable Foundation will provide annual reports to the OTS
describing grants made and grant recipients; (iv) the Charitable Foundation will
operate in accordance with written policies adopted by the board of directors,
including a conflict of interest policy; (v) unless required by another
condition imposed by the OTS, the Charitable Foundation will not engage in
self-dealing and will comply with all laws necessary to maintain its tax-exempt
status; and (vi) any shares of Common Stock of the Company held by the
Charitable Foundation must be voted in the same ratio as all other shares of the
Company's Common Stock on all proposals considered by stockholders of the
Company.
REQUIRED VOTE. Approval of the Charitable Foundation will require the
affirmative vote of a majority of all votes eligible to be cast at the Special
Meeting.
4
<PAGE> 6
RECOMMENDATION OF THE BOARD OF DIRECTORS
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR THE CHARITABLE FOUNDATION.
DIRECTORS AND OFFICERS OF THE ASSOCIATION
Set forth below are the names, ages and present occupations of the
Associations directors and executive officers.
<TABLE>
<CAPTION>
AGE AT CURRENT TERM
NAME MARCH 31, 1998 POSITION DIRECTOR SINCE EXPIRES
- ------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Bruno J. Gioffre 63 Chairman of the Board 1975 1999
Richard P. McStravick 49 President, Chief 1996 1999
Executive Officer
and
Director
Joseph Dinolfo 64 Director 1985 2001
Donald H. Heithaus 63 Director 1978 2000
Robert P. Joyce 69 Director 1980 2001
Joseph A. Lanza 51 Director 1998 2000
Arthur C. Phillips, Jr. 74 Director 1976 2001
James Staudt 45 Director 1987 1999
Stephen P. Milliot 50 Treasurer
William H. Morel 65 Senior Vice President
and Secretary
</TABLE>
The business experience for the past five years for each of the
Association's directors and officers is as follows:
BRUNO J. GIOFFRE is the Chairman of the Board of Directors and has been
so since December 1997. Mr. Gioffre is also general counsel to the Association.
Mr. Gioffre is a counsel to the law firm Gioffre & Gioffre, Professional
Corporation and the Senior Justice for the Town of Rye, New York.
RICHARD P. MCSTRAVICK is President and Chief Executive Officer of the
Association. Mr. McStravick has been employed by the Association in various
capacities since 1977. Mr. McStravick was appointed to the Board of Directors in
1996.
JOSEPH DINOLFO is the President of the Dinolfo Wilson Agency, Inc. and
insurance agency located in Mamaroneck, New York.
DONALD H. HEITHAUS is the President and Chief Executive Officer of the
Happiness Laundry Service, Inc. in Mamaroneck, New York.
ROBERT P. JOYCE is retired. Prior to his retirement, Mr. Joyce was the
President of Joyce Marketing Corporation.
JOSEPH A. LANZA is the Mayor of the Village of Mamaroneck. Mr. Lanza is
the President of Lanza Electric, a private electrical contractor.
JAMES STAUDT is an attorney practicing with the firm of McCullough,
Goldberger & Staudt.
5
<PAGE> 7
ARTHUR C. PHILLIPS, JR. is the Pension and Welfare Funds Manager for the
Industry and Local 338 Pension and Welfare Fund.
STEPHEN P. MILLIOT has been the Treasurer and Chief Financial Officer
since 1996. Prior to that time, Mr. Milliot was the Association's internal
auditor.
WILLIAM H. MOREL is the Association's Senior Vice President, Chief
Lending Officer and Corporate Secretary. He has been employed by the Association
is various capacities since 1969.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Association has fixed __________, 1998 as
the voting record date ("Voting Record Date") for the determination of members
entitled to notice of the Special Meeting. All Association depositors are
members of the Association under its current charter. All Association members of
record as of the close of business on the Voting Record Date will be entitled to
vote at the Special Meeting or any adjournment thereof.
Each depositor (including IRA and Keogh account beneficiaries) will be
entitled at the Special Meeting to cast one vote for each $100, or fraction
thereof, of the aggregate withdrawal value of all of such depositor's accounts
in the Association as of the Voting Record Date, up to a maximum of 1,000 votes.
Joint accounts shall be entitled to no more than 1,000 votes, and any owner may
cast all the votes unless notified in writing. In general, accounts held in
different ownership capacities will be treated as separate memberships for
purposes of applying the 1,000 vote limitation. For example, if two persons hold
a $100,000 account in their joint names and each of the persons also holds a
separate account for $100,000 in his own name, each person would be entitled to
1,000 votes for each separate account and they would together be entitled to
cast 1,000 votes on the basis of the joint account. Where no proxies are
received from IRA and Keogh account beneficiaries, after due notification, the
Association, as trustee of these accounts, is entitled to vote these accounts in
favor of the Plan of Conversion and the establishment of the Charitable
Foundation.
Approval of both the Plan of Reorganization and the establishment of the
Charitable Foundation requires the affirmative vote of a majority of the total
outstanding votes of the Association's members eligible to be cast at the
Special Meeting. As of ____________, 1998, the Association had ______ members
who were entitled to cast a total of ______ votes at the Special Meeting.
Association members may vote at the Special Meeting or any adjournment
thereof in person or by proxy. Any member giving a proxy will have the right to
revoke the proxy at any time before it is voted by giving written notice to the
Secretary of the Association, provided that such written notice is received by
the Secretary prior to the Special Meeting or any adjournment thereof, or upon
request if the member is present and chooses to vote in person.
All properly executed proxies received by the Board of Directors of the
Association will be voted in accordance with the instructions indicated thereon
by the members giving such proxies. IF NO INSTRUCTIONS ARE GIVEN, SUCH PROXIES
WILL BE VOTED IN FAVOR OF THE PLAN OF REORGANIZATION AND IN FAVOR OF
ESTABLISHING THE CHARITABLE FOUNDATION. If any other matters are properly
presented at the Special Meeting and may properly be voted on, the proxies
solicited hereby will be voted on such matters in accordance with the best
judgment of the proxy holders named thereon. Management is not aware of any
other business to be presented at the Special Meeting.
If a proxy is not executed and is returned or the member does not vote
in person, the Association is prohibited by OTS regulations from using a
previously executed proxy to vote for the Reorganization and establishing the
Charitable Foundation. AS A RESULT, FAILURE TO VOTE MAY HAVE THE SAME EFFECT AS
A VOTE AGAINST THE PLAN OF REORGANIZATION AND THE ESTABLISHMENT OF THE
CHARITABLE FOUNDATION.
To the extent necessary to permit approval of the Plan of
Reorganization, proxies may be solicited by officers, directors or regular
employees of the Association, in person, by telephone or through other forms of
communication and, if necessary, the Special Meeting may be adjourned to a later
date. Such persons will be reimbursed by the
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Association for their expenses incurred in connection with such solicitation.
The Association will bear all costs of this solicitation. The proxies solicited
hereby will be used only at the Special Meeting and at any adjournment thereof.
PRINCIPAL EFFECTS OF REORGANIZATION
DEPOSITORS. The Reorganization will not change the amount, interest
rate, withdrawal rights or federal insurance protection of deposit accounts, or
affect deposit accounts in any way other than with respect to voting and
liquidation rights as discussed below.
BORROWERS. The rights and obligations of borrowers under their loan
agreements with the Association will remain unchanged by the Reorganization. The
principal amount, interest rate and maturity date of loans will remain as they
were contractually fixed prior to the Reorganization.
VOTING RIGHTS OF MEMBERS. Currently in the Association's mutual form,
members have voting rights and may vote for the election of directors. Following
the Reorganization, members will cease to have voting rights in the Association,
but will have voting rights in the Mutual Holding Company. All voting rights in
the Association will be vested in the Company as the Association's sole
shareholder. Voting rights in the Company will be vested exclusively in its
shareholders, with one vote for each share of Common Stock. The Mutual Holding
Company will at all times own a majority of the Common Stock.
THE ASSOCIATION. Under federal law, the stock savings bank resulting
from the Reorganization will be deemed to be a continuation of the mutual
savings bank rather than a new entity and will continue to have all of the
rights, privileges, properties, assets and liabilities of the Association prior
to the Reorganization. The Reorganization will enable the Association to issue
capital stock, but will not change the general objectives, purposes or types of
business currently conducted by the Association, and no assets of the
Association will be distributed in order to effect the Reorganization, other
than to pay the expenses incident thereto. After the Reorganization, the
Association will remain subject to examination and regulation by the OTS and
will continue to be a member of the Federal Home Loan Bank System. The
Reorganization will not cause any change in the executive officers or directors
of the Association.
TAX CONSEQUENCES. The Association intends to proceed with the
Reorganization on the basis of an opinion from Luse Lehman Gorman Pomerenk &
Schick, P.C., Washington, D.C., as to certain tax matters that are material to
the Reorganization. The opinion is based, among other things, on certain
representations made by the Association. See the section of the Prospectus
entitled "The Reorganization and Offering--Federal and State Tax Consequences of
the Reorganization" which is incorporated herein by reference.
With respect to New York taxation, the Association has received an
opinion from KPMG Peat Marwick LLP to the effect that, assuming the
Reorganization does not result in any federal taxable income, gain or loss to
the Association in its mutual or stock form, the Company, the account holders,
borrowers, officers, directors and employees and Tax-Qualified Employee Plans of
the Association, the Offering should not result in any New York income tax
liability to such entities or persons.
APPROVAL, INTERPRETATION, AMENDMENT AND TERMINATION
Under the Plan of Reorganization, the letter from the OTS giving
approval thereto, and applicable regulations, consummation of the Reorganization
is subject to the satisfaction of the following conditions: (a) approval of the
Plan of Reorganization by members of the Association casting at least a majority
of the votes eligible to be cast at the Special Meeting; (b) sale of all of the
Common Stock to be offered in the Offering; and (c) receipt of favorable rulings
or opinions of counsel as to the federal and New York tax consequences of the
Reorganization.
The Plan of Reorganization may be substantively amended by the Boards of
Directors of the Association and the Company with the concurrence of the OTS. If
the Plan of Reorganization is amended, proxies which have been received prior to
such amendment will not be resolicited unless otherwise required by the OTS.
Also, as required by the federal regulations, the Plan of Reorganization
provides that the transactions contemplated thereby may be
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terminated by the Board of Directors of the Association alone at any time prior
to the Special Meeting and may be terminated by the Board of Directors of the
Association at any time thereafter with the concurrence of the OTS,
notwithstanding approval of the Plan of Reorganization by the members of the
Association at the Special Meeting. All interpretations by the Association and
the Company of the Plan of Reorganization and of the Stock Order Forms and
related materials for the Offering will be final, except as regards or affects
the OTS.
APPROVAL OF THE CHARITABLE FOUNDATION
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Association's commitment to the
communities that it serves, the Board of Directors has determined to establish
the Charitable Foundation, which will be incorporated under Delaware law as a
non-stock corporation. The Charitable Foundation will be funded with a
contribution of 2% of the shares of Common Stock to be issued and outstanding
following the Reorganization (4.4% of the Minority Ownership Interest) or
100,030, 117,800, 135,335 and 155,790 shares of Common Stock at the minimum,
midpoint, maximum and adjusted maximum of the Offering. As a result of the
Association's contribution of those shares to the Charitable Foundation rather
than selling the shares as part of the Offering, the Offering will result in the
sale of 99,450, 117,000, 134,500 and 154,733 fewer shares than would otherwise
be contemplated in the Offering at the minimum, midpoint, maximum and adjusted
maximum of the Offering Range, respectively. This will result in the receipt of
$995,000, $1,170,000, $1,345,000 and $1,547,330 less proceeds at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range. See "Comparison of
Valuation and Pro Forma Information Without Charitable Foundation". By further
enhancing the Association's visibility and reputation in the communities that it
serves, the Board believes that the Charitable Foundation will enhance the
long-term value of the Association's community banking franchise. The Charitable
Foundation will be dedicated exclusively to charitable purposes within the
communities served by the Association, including community development
activities. Neither the Association nor the Company intends to make any further
contributions to the Charitable Foundation within the next five years.
PURPOSE OF THE CHARITABLE FOUNDATION. The purpose of the Charitable
Foundation is to provide funding to support charitable and not-for-profit causes
and community development activities. The Charitable Foundation is being formed
as a complement to the Association's existing community activities, not as a
replacement for such services. While the Association intends to continue to
emphasize community lending and community development activities following the
Reorganization, such activities are not the Association's sole corporate
purpose. The Charitable Foundation, conversely, will be completely dedicated to
community activities and the promotion of charitable and not- for-profit causes,
and may be able to support such activities in ways that are not currently
available to the Association. The Charitable Foundation will enhance the
Association's current activities under the Community Reinvestment Act. In this
regard, the Board of Directors of the Association believes the establishment of
the Charitable Foundation is consistent with the Association's commitment to
community service. The Board further believes that the funding of the Charitable
Foundation with Common Stock is a means of enabling the communities served by
the Association to share in the growth and success of the Company long after
completion of the Reorganization. The Charitable Foundation will accomplish that
goal by providing for continued ties between the Charitable Foundation and the
Association, thereby forming a partnership with the Association's community.
Charitable foundations have been formed by other financial institutions for this
purpose, among others. The Association, however, does not expect the
contribution to the Charitable Foundation to take the place of the Association's
traditional community lending activities.
STRUCTURE OF THE CHARITABLE FOUNDATION. The Charitable Foundation will
be incorporated under Delaware law as a non-stock corporation. Pursuant to the
Charitable Foundation's Bylaws, the Charitable Foundation's initial board of
directors will be comprised of two members of the Company's and the
Association's Board of Directors and one person who is unaffiliated with the
Association. Bruno J. Gioffre, the Association's Chairman of the Board and
Richard P. McStravick, the Association's President and Chief Executive Officer
will serve on the Charitable Foundation's board of directors. Messrs Gioffre and
McStravick intend to purchase 30,000 shares and 25,000 shares, or 1.13% and
0.94%, respectively, of the shares sold at the midpoint of the offering. At the
midpoint of the offering the aggregate number of shares owned by the Charitable
Foundation, and its directors and officers will total 172, 682, or 6.5% of the
Minority Ownership Interest. In addition, the Board of Directors is in the
process of selecting a person to serve on the Charitable
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Foundation's board of directors who is unaffiliated with the Association but who
has business and community ties within the Association's market area, and who
has experience serving on local charities or other non-profit organizations.
Other individuals may be selected as board members (there is no present
intention to expand the board of directors of the Charitable Foundation). A
nominating committee of the Charitable Foundation's Board will nominate
individuals eligible for election to the Board of Directors. The members of the
Charitable Foundation, who are comprised of its Board members, will elect the
directors at the annual meeting of the Charitable Foundation from those
nominated by the nominating committee. Only persons serving as directors of the
Charitable Foundation qualify as members of the Charitable Foundation, with
voting authority. Directors will be elected annually. The certificate of
incorporation of the Charitable Foundation provides that the corporation is
organized exclusively for charitable purposes, including community development,
as set forth in Section 501(c)(3) of the Code. The Charitable Foundation's
certificate of incorporation further provides that no part of the net earnings
of the Charitable Foundation will inure to the benefit of, or be distributable
to its directors, officers or members.
The authority for the affairs of the Charitable Foundation will be
vested in the Board of Directors of the Charitable Foundation. The Directors of
the Charitable Foundation will be responsible for establishing the policies of
the Charitable Foundation with respect to grants or donations by the Charitable
Foundation, consistent with the purposes for which the Charitable Foundation was
established. Although no formal policy governing Charitable Foundation grants
exists at this time, the Charitable Foundation's Board of Directors will adopt
such a policy upon establishment of the Charitable Foundation. As directors of a
nonprofit corporation, directors of the Charitable Foundation will at all times
be bound by their fiduciary duty to advance the Charitable Foundation's
charitable goals, to protect the assets of the Charitable Foundation and to act
in a manner consistent with the charitable purpose for which the Charitable
Foundation is established. The Directors of the Charitable Foundation will also
be responsible for directing the activities of the Charitable Foundation,
including the management of the Common Stock of the Company held by the
Charitable Foundation. However, it is expected that as a condition to receiving
OTS approval of the Reorganization, that the Charitable Foundation will be
required to commit to the OTS that all shares of Common Stock held by the
Charitable Foundation will be voted in the same ratio as all other shares of
Common Stock on all proposals considered by stockholders of the Company;
provided, however, that, consistent with such expected condition, the OTS would
waive this voting restriction under certain circumstances if compliance with the
voting restriction would: (i) cause a violation of the law of the State of
Delaware and the OTS determines that federal law would not preempt the
application of the laws of Delaware to the Charitable Foundation; (ii) cause the
Charitable Foundation to lose its tax-exempt status, or cause the Internal
Revenue Service to deny the Charitable Foundation's request for a determination
that it is an exempt organization or otherwise have a material and adverse tax
consequence on the Charitable Foundation; or (iii) cause the Charitable
Foundation to be subject to an excise tax under Section 4941 of the Code. In
order for the OTS to waive such voting restriction, the Company's or the
Charitable Foundation's legal counsel would be required to render an opinion
satisfactory to the OTS that compliance with the voting requirement would have
the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS would grant a waiver of the voting restriction upon
submission of such legal opinion(s) by the Company or the Charitable Foundation
that are satisfactory to the OTS. In the event that the OTS were to waive the
voting requirement, the directors would direct the voting of the Common Stock
held by the Charitable Foundation.
In addition, a person who is a director, officer or employee of the
Association, or who has the power to direct its management or policies, or
otherwise owes a fiduciary duty to the Association, the Company, or the Mutual
Holding Company and who also serves as an officer, director or employee of the
Charitable Foundation will be subject to the OTS' conflicts of interest
regulations.
The Charitable Foundation's place of business will be located at the
Association's main office and initially the Charitable Foundation is expected to
have no employees but will utilize the members of the staff of the Company. The
Board of Directors of the Charitable Foundation will appoint such officers as
may be necessary to manage the operations of the Charitable Foundation. In this
regard, it is expected that the Association will be required to provide the OTS
with a commitment that, to the extent applicable, the Association 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 Association and the
Charitable Foundation.
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The Company and the Association determined to fund the Charitable
Foundation with Common Stock rather than cash because Common Stock will provide
the Charitable Foundation with a potentially larger endowment if the Common
Stock appreciates in value. The contribution of Common Stock to the Charitable
Foundation may reduce the amount of cash that the Company would have to
contribute to the Charitable Foundation in future years in order to maintain a
level amount of charitable grants and donations.
The Charitable Foundation will receive working capital from any
dividends that may be paid on the Common Stock from loans collateralized by the
Common Stock subject to applicable federal and state laws or from the proceeds
of the sale of any of the Common Stock in the open market from time to time. As
a private Charitable Foundation under Section 501(c)(3) of the Code, the
Charitable 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.
DILUTION OF SHAREHOLDERS' INTERESTS. Shares of Common Stock contributed
to the Charitable Foundation are in addition to the shares to be issued and sold
to depositors, members and the public. Consequently, persons purchasing shares
of common stock in the Offering will have their ownership and voting interests
in the Company diluted by approximately 2%. See "Pro Forma Data" in the
accompanying Prospectus.
IMPACT ON EARNINGS. The contribution of Common Stock to the Charitable
Foundation will have an adverse impact on the Company's earnings in the year in
which the contribution is made. The Company will recognize expense in the full
amount of the contribution of common stock to the Charitable Foundation in the
quarter in which the contribution occurs, which is expected to be the quarter
ending December 31, 1998. The contribution expense will be partially offset by
related tax benefits. We have been advised that the contribution to the
Charitable Foundation will be tax deductible, subject to an annual limitation
based on 10% of the Company's annual taxable income. The Association estimates
that, at the midpoint of the offering range, the contribution of shares will
result in a reduction in net income of approximately $700,000. If the Charitable
Foundation had been established at March 31, 1998, the Association would have
reported net income of $2.2 million compared to net income of $2.9 million
actually reported for the year then ended. The Association and the Company do
not currently anticipate making additional contributions to the Charitable
Foundation within the first five years following the initial contribution.
TAX CONSIDERATIONS. The Association has been advised that an
organization created and operated for the above charitable purposes would
general qualify as a Section 501(c)(3) exempt organization under the Code, and
further that such an organization would likely be classified as a private
foundation. This opinion presumes that the Charitable Foundation will submit a
timely request to the IRS to be recognized as an exempt organization. As long as
the Charitable Foundation files its application for recognition of tax-exempt
status within 15 months from the date of its organization, and provided the IRS
approves the application, the effective date of the Charitable Foundation's
status as a Section 501(c)(3) organization will be the date of its organization.
The Association's tax advisor, however, has not rendered any advice on the
condition to the contribution to be agreed to by the Charitable Foundation which
requires that all shares of Common Stock of the Company held by the Charitable
Foundation must be voted in the same ratio as all other outstanding shares of
Common Stock on all proposals considered by stockholders of the Company.
Consistent with the expected condition, in the event that the Company or the
Charitable Foundation receives an opinion of its legal counsel that compliance
with this voting restriction would have the effect of causing the Charitable
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Charitable Foundation, or subject the Charitable
Foundation to an excise tax under Section 4941 of the Code, it is expected that
the OTS would waive such voting restriction upon submission of a legal
opinion(s) by the Company or the Charitable Foundation satisfactory to the OTS.
See "--Regulatory Conditions Imposed on the Charitable Foundation" in the
accompanying Prospectus.
Under the Code, the Company is generally allowed a deduction for
charitable contributions made to qualifying donees within the taxable year of up
to 10% of its taxable income (with certain modifications) for such year.
Charitable contributions made by the Company in excess of the annual deductible
amount will be deductible over each of the five succeeding taxable years,
subject to certain limitations. The Board of Directors believes that the
Reorganization presents a unique opportunity to establish and fund a Charitable
Foundation given the substantial amount of additional capital being raised in
the Offering. In making such a determination, the Board of Directors considered
the impact on earnings
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of the contribution of Common Stock to the Charitable Foundation. Based on such
consideration, the Company and the Association believe that the contribution to
the Charitable Foundation in excess of the 10% annual deduction limitation is
justified given the Association's capital position and its earnings, the
substantial additional capital being raised in the Offering and the potential
benefits of the Charitable Foundation to the communities served by the
Association. In this regard, and assuming the sale of the Common Stock at the
midpoint of the Estimated Valuation Range, the Company would have pro forma
stockholders' equity of $54.6 million or 19.68% of pro forma consolidated assets
and the Association's pro forma tangible, core and total risk-based capital
ratios would be 15.65%, 15.65% and 42.85%, respectively. See "Pro Forma
Data--Historical and Pro Forma Regulatory Capital Compliance," and
"Capitalization" in the accompanying Prospectus. Thus, the amount of the
contribution will not adversely impact the Association's financial condition and
management believes that the amount of the charitable contribution is reasonable
given the Association's pro forma capital positions. As such, management
believes that the contribution does not raise safety and soundness concerns.
The Association has received an opinion of its tax advisors that the
Company's contribution of its own stock to the Charitable Foundation would not
constitute an act of self-dealing, and that the Company will be entitled to a
deduction in the amount of the fair market value of the stock at the time of the
contribution, subject to the annual deduction limitation described above. The
Company, however, would be able to carry forward any unused portion of the
deduction for five years following the contribution, subject to certain
limitations. The Association's tax advisor, however, has not rendered advice as
to fair market value for purposes of determining the amount of the tax
deduction. If the Charitable Foundation had been established in the year ended
December 31, 1997, the Company would have received a current federal tax
benefit of approximately $150,000 (based on the Association's taxable income
reported in its 1997 calendar year tax return and considering the annual
limitation on deductibility) of charitable contributions. The Association is
permitted under the Code to carry over the excess contribution over the
five-year period following the contribution to the Charitable Foundation. The
Association estimates that all of the contribution should be deductible over the
six-year period. Neither the Company nor the Association expect to make any
further contributions to the Charitable Foundation within the first five years
following the initial contribution. After that time, the Association and the
Company may consider future contributions to the Charitable Foundation. Any such
decisions would be based on an assessment of, among other factors, our financial
condition, the interests of stockholders of the Company, and the financial
condition and operations of the Charitable Foundation.
Although the Association has received an opinion that the Company will
be entitled to a deduction for the charitable contribution, there can be no
assurances that the IRS will recognize the Charitable Foundation as a Section
501(c)(3) exempt organization or that a deduction for the charitable
contribution will be allowed. In such event, the contribution to the
Charitable Foundation would be expensed without partial offset for any tax
benefit, resulting in a reduction in earnings in the year in which the IRS makes
such a determination.
The Charitable Foundation will be required to make an annual filing with
the IRS within four and one-half months after the close of the Charitable
Foundation's fiscal year to maintain its tax-exempt status. The Charitable
Foundation will be required to publish a notice that the annual information
return will be available for public inspection for a period of 180 days after
the date of such public notice. The information return for a private foundation
must include, among other things, an itemized list of all grants made or
approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Charitable Foundation's managers and a concise
statement of the purpose of each grant.
Under current tax laws, the Charitable Foundation cannot own more than
2% of the Company's voting common stock without incurring a significant excise
tax on its "excess business holdings." For these purposes, "excess business
holdings" include, among other things, any interest in a corporation which, when
aggregated with the interests of "disqualified persons" exceeds 20% of the
interests in such corporation. A "disqualified person" includes (1) a
substantial contributor (i.e., a contributor of more than 2% of the total
contributions to the Charitable Foundation); (2) a foundation manager, or (3) a
person who owns more than 20% of a corporation, partnership, trust or
unincorporated enterprise which is also a substantial contributor. Since the
Mutual Holding Company owns more than 20% of the Company and the Company is a
substantial contributor to the Charitable Foundation, the Company and the Mutual
Holding Company are disqualified persons. As such, the Mutual Holding Company's
interest in the Company will be
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aggregated with that interests of the Charitable Foundation to determine if the
Charitable Foundation has excess business holdings. The limitation on excess
business holdings, however, is subject to a de minimus rule that the Charitable
Foundation's ownership of 2% or less of the voting stock and 2% or less of the
value of all outstanding shares in such corporation will be disregarded and will
not subject the Charitable Foundation to an excise tax. In the event the Company
undertakes a stock repurchase program or engages in any other activity that
would reduce the number of shares outstanding, the Charitable Foundation would
have to sell a sufficient number of shares in order to maintain ownership of 2%
or less of the outstanding Common Stock.
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE CHARITABLE
FOUNDATION IS NOT ESTABLISHED AS PART OF THE REORGANIZATION. The establishment
of the Charitable Foundation was taken into account by FinPro in determining the
estimated pro forma market value of the Common Stock. The aggregate price of the
shares of Common Stock being offered in the Offering is based upon the
independent appraisal conducted by FinPro of the estimated pro forma market
value of the Common Stock. The pro forma aggregate price of the Common Stock
being offered for sale in the Offering is currently estimated to be between
$22.5 million and $30.5 million, with a midpoint of $26.5 million. The pro
forma price to book ratio and the pro forma price to earnings ratio, at and for
the year ended March 31, 1998, are 107.87% and 16.67x, respectively, at the
midpoint of the Estimated Valuation Range. In the event that the Reorganization
did not include the Charitable Foundation, FinPro has estimated that the
estimated pro forma market value of the Common Stock being offered for sale in
the Offering would be $27.7 million at the midpoint, with a pro forma price to
book ratio and a pro forma price to earnings ratio of 111.23% and 17.54x,
respectively. The amount of Common Stock being offered for sale in the Offering
at the midpoint of the Estimated Valuation Range is approximately $1.2 million
less than the estimated amount of Common Stock that would be sold in the
Offering without the Charitable Foundation based on the estimate provided by
FinPro. Accordingly, persons who subscribe to purchase Common Stock in the
Offering would receive fewer shares depending on the size of a subscriber's
stock order and the amount of his or her qualifying deposits in the Association
and the overall level of subscriptions. See "Comparison of Valuation and Pro
Forma Information Without Charitable Foundation" in the accompanying Prospectus.
This estimate by FinPro was prepared solely for purposes of providing
subscribers with information with which to make an informed decision on the
Reorganization and Offering.
The decrease in the amount of Common Stock being offered for sale as a
result of the contribution of Common Stock to the Charitable Foundation will not
have a significant effect on the Company or the Association's capital position.
The Association's regulatory capital is significantly in excess of its
regulatory capital requirements and will further exceed such requirements
following the Reorganization. The Association's leverage (core) and risk-based
capital ratios at March 31, 1998 were 12.5% and 34.9%, respectively. Assuming
the sale of shares at the midpoint of the Estimated Valuation Range, the Bank's
pro forma core and risk-based capital ratios at March 31, 1998 would be 15.65%
and 42.85%, respectively. On a consolidated basis, the Company's pro forma
stockholders' equity would be $54.6 million, or approximately 19.68% of pro
forma consolidated assets, assuming the sale of shares at the midpoint of the
Estimated Price Range. Pro forma stockholders' equity per share and pro forma
net income per share would be $9.27 and $0.60, respectively. If the
Charitable Foundation was not being established in the Reorganization, based on
the FinPro estimate, the Company's pro forma stockholders' equity would be
approximately $55.3 million, or approximately 19.88% of pro forma consolidated
assets at the midpoint of the estimated value, and pro forma stockholders'
equity per share and pro forma net income per share would be higher with the
Charitable Foundation as without the establishment of the Charitable Foundation.
See "Comparison of Valuation and Pro Forma Information Without Charitable
Foundation" in the accompanying Prospectus.
REGULATORY CONDITIONS IMPOSED ON THE CHARITABLE FOUNDATION.
Establishment of the Charitable Foundation is expected to be subject to the
following conditions being agreed to by the Charitable Foundation in writing as
a condition to receiving OTS approval of the Reorganization and Offering: (i)
the Charitable Foundation will be subject to examination by the OTS; (ii) the
Charitable Foundation must comply with supervisory directives imposed by the
OTS; (iii) the Charitable Foundation will operate in accordance with written
policies adopted by its board of directors, including a conflict of interest
policy; (iv) any shares of Common Stock held by the Charitable Foundation must
be voted in the same ratio as all other outstanding shares of Common Stock on
all proposals considered by stockholders of the Company; provided, however,
that, consistent with the condition, the OTS may 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
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Delaware and the OTS determines that federal law would not preempt the
application of the laws of Delaware to the Charitable Foundation; (b) would
cause the Charitable Foundation to lose its tax-exempt status or otherwise have
a material and adverse tax consequence on the Charitable Foundation; or (c)
would cause the Charitable Foundation to be subject to an excise tax under
Section 4941 of the Code; and (v) any shares of Common Stock subsequently
purchased by the Charitable Foundation will be aggregated with any shares
repurchased by the Company or the Association for purposes of calculating the
number of shares which may be repurchased during the three-year period
subsequent to the Reorganization. In order for the OTS to waive such voting
restriction, the Company's or the Charitable Foundation's legal counsel would be
required to render an opinion satisfactory to the OTS. While there is no current
intention for the Company or the Charitable Foundation to seek a waiver from the
OTS from such restrictions, there can be no assurances that a legal opinion
addressing these issues could be rendered, or if rendered, that the OTS would
grant an unconditional waiver of the voting restriction. In no event would the
voting restriction survive the sale of shares of the Common Stock held by the
Charitable Foundation.
Various OTS regulations may be deemed to apply to the Charitable
Foundation including regulations regarding (i) transactions with affiliates,
(ii) conflicts of interest, (iii) capital distributions and (iv) repurchases of
capital stock within the three-year period subsequent to a mutual-to-stock
conversion. Because only two of the eight directors of the Company and the
Association are expected to serve as directors of the Charitable Foundation, the
Company and the Association do not believe that the Charitable Foundation should
be deemed an affiliate of the Association. The Company and the Association
anticipate that the Charitable Foundation's affairs will be conducted in a
manner consistent with the OTS' conflict of interest regulations. The
Association has provided information to the OTS demonstrating that the initial
contribution of common stock to the Charitable Foundation would be within the
amount which the Association would be permitted to make as a capital
distribution assuming such contribution is deemed to have been made by the
Association.
POTENTIAL CHALLENGES. To date, there has been limited precedent with
respect to the establishment and funding of a foundation as part of the
reorganization of a mutual savings institution to stock form. In addition,
establishment and funding of the Charitable Foundation will require the OTS to
grant the Association and the Company waivers from its mutual-to-stock
conversion regulations and mutual holding company regulations. As such, the
Charitable Foundation and the OTS's non-objection to the Reorganization may be
subject to potential challenges with respect to, among other things, the
Company's and the Association's ability to establish the Charitable Foundation,
notwithstanding that the Board of Directors have carefully considered the
various factors involved in the establishment of the Charitable Foundation in
reaching its determination to establish the Charitable Foundation as part of the
Reorganization, and/or with respect to the OTS' authority to grant the waivers
necessary to establish the Charitable Foundation. If challenges were to be
instituted seeking management to terminate the establishment of the Charitable
Foundation no assurances could be made that the resolution of such challenges
would not result in a delay in the consummation of the Reorganization or that
any objecting persons would not be ultimately successful in obtaining such
relief.
APPROVAL OF MEMBERS. Establishment of the Charitable Foundation is
subject to the approval of a majority of the total outstanding votes of
the Association's members eligible to be cast at the Special Meeting. The
Charitable Foundation will be considered as a separate matter from approval of
the Plan. If the members approve the Plan, but not the establishment of the
Charitable Foundation, the Association intends to complete the Reorganization
without establishing of the Charitable Foundation. Failure to approve the
Charitable Foundation may materially increase the pro forma market value of the
Common Stock being offered for sale in the Offering because the Estimated
Valuation Range takes into account the proposed contribution to the Charitable
Foundation. If the pro forma market value of the Company without the Charitable
Foundation is either greater than $67.7 million or less than $50.1 million, or
if the OTS otherwise requires a resolicitation of subscribers, the Association
will establish a new Estimated Valuation Range and resolicit subscribers (i.e.,
subscribers will be permitted to continue their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscription funds will be promptly
refunded with interest). Any change in the Estimated Valuation Range must be
approved by the OTS. See "--Stock Pricing and Number of Shares to be Issued" in
the accompanying Prospectus. Further, if the Mutual Holding Company were to
undertake a Conversion Transaction, and in connection with such a transaction
additional shares of stock of the Company or its successor were contributed to
the Charitable Foundation, such contribution of additional shares of Common
Stock to the Charitable Foundation would be voted on as a separate matters and
would
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<PAGE> 15
require the approval of: (i) a majority of the total outstanding vote of the
members of the Mutual Holding Company eligible to be cast; and (ii) a majority
vote of the total outstanding shares of Common Stock held by stockholders other
than the Mutual Holding Company and the Charitable Foundation. A Conversion
Transaction must receive the affirmative vote of a majority of: (i) all shares
of Common Stock outstanding; (ii) shares of Common Stock held by Minority
Stockholders; and (iii) votes eligible to be cast by the Mutual Holding
Company's members.
LIQUIDATION RIGHTS
In the unlikely event of a voluntary liquidation, dissolution or
winding-up of the Association in its present mutual form prior to the
Reorganization, holders of deposit accounts in the Association would be
entitled, pro rata to the value of their accounts, to distribution of any assets
of the Association remaining after the claims of such depositors (to the extent
of their deposit balances) and all other creditors are satisfied. Following the
Reorganization, the holders of the Common Stock would be entitled to any assets
remaining upon a liquidation, dissolution or winding-up of the Association and,
except through their liquidation interests in the Mutual Holding Company,
discussed below, holders of deposit accounts in the Association would have no
interest in any such assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding-up or the Mutual Holding Company following consummation of the
Reorganization, holders of deposit accounts in the Association would be
entitled, pro rate to the value of their accounts, to distribution of any assets
of the Mutual Holding Company remaining after the claims of all creditors of the
Mutual Holding Company are satisfied. The Mutual Holding Company will establish,
upon the completion of the Reorganization, a special "liquidation account" for
the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders in an amount equal to the net worth of the Mutual Holding Company as of
that date. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he or she were to continue to maintain his or her deposit account at
the Association, would be entitled, on a complete liquidation of the Mutual
Holding Company after the Reorganization, to an interest in the liquidation
account. Each Eligible Account Holder and Supplemental Eligible Account Holder
would have an initial interest in such liquidation account for each deposit
account, including regular accounts, transaction accounts such as NOW accounts,
money market deposit accounts, and certificates of deposit, with a balance of
$50 or more held in the Association on March 31, 1997 (with respect to an
Eligible Account Holder) and June 30, 1998 (with respect to a Supplemental
Eligible Account Holder) ("Qualifying Deposit"). Each Eligible Account Holder
and Supplemental Eligible Account Holder will have a pro rata interest in the
total liquidation account for each of his or her deposit accounts based on the
proportion that the balance of such person's Qualifying Deposits on the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
bore to the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the Association. For
deposit accounts in existence at both dates separate subaccounts shall be
determined on the basis of the Qualifying Deposits in such deposit accounts on
each such record date.
If, however, on any annual closing date of the Association, commencing
March 31, 1999, the amount in any deposit account is less than the amount in
such deposit account on March 31, 1997 (with respect to an Eligible Account
Holder) and June 30, 1998 (with respect to a Supplemental Eligible Account
Holder) or any other annual closing date, then the interest in the liquidation
account relating to such deposit account would be reduced from time to time by
the proportion of any such reduction, and such interest will cease to exist if
such deposit account is closed. In addition, no interest in the liquidation
account would ever be increased despite any subsequent increase in the related
deposit account. Stockholders of the Association will have no liquidation or
other rights with respect to the Mutual Holding Company in their capacities as
such.
There currently are no plans to liquidate the Association or the Mutual
Holding Company in the future.
JUDICIAL REVIEW
Section 5(i)(2)(B) of the Home Owners' Loan Act, as amended, 12 U.S.C.
Section1464(i)(2)(B) and Section 563b.8(u) of the Rules and Regulations
promulgated thereunder (12 C.F.R. Section 563b.8(u)) provide: (i) that persons
aggrieved by a final action of the OTS which approves, with or without
conditions, or disapproves a plan of reorganization, may obtain review of such
final action only by filing a written petition in the United States Court of
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<PAGE> 16
Appeals for the circuit in which the principal office or residence of such
person is located, or in the United States Court of Appeals for the District of
Columbia, requesting that the final action of the OTS be modified, terminated or
set aside, and (ii) that such petition must be filed within 30 days after
publication of notice of such final action in the Federal Register, or 30 days
after the date of mailing of the notice and proxy statement for the meeting of
the converting institution's members at which the conversion is to be voted on,
whichever is later. The notice of the Special Meeting of the Bank's members to
vote on the Plan of Reorganization described herein is included at the beginning
of this Proxy Statement. The statute and regulation referred to above should be
consulted for further information.
ADDITIONAL INFORMATION
The information contained in the accompanying Prospectus, including a
more detailed description of the Plan of Reorganization, financial statements of
the Association and a description of the capitalization and business of the
Association and the Company, including the Association's directors and executive
officers and their compensation, the anticipated use of the net proceeds from
the sale of the Common Stock, the establishment of the Charitable Foundation and
a description of the Common Stock, is intended to help you evaluate the
Reorganization and is incorporated herein by this reference.
YOUR VOTE IS VERY IMPORTANT TO US. PLEASE TAKE A MOMENT NOW TO
COMPLETE AND RETURN YOUR PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. YOU
MAY STILL ATTEND THE SPECIAL MEETING AND VOTE IN PERSON EVEN THOUGH YOU HAVE
VOTED YOUR PROXY. FAILURE TO SUBMIT A PROXY WILL HAVE THE SAME EFFECT AS VOTING
AGAINST THE REORGANIZATION AND THE ESTABLISHMENT OF THE CHARITABLE FOUNDATION.
If you have any questions, please call our Stock Conversion Center at
(914) _______.
IMPORTANT: YOU MAY BE ENTITLED TO VOTE IN MORE THAN ONE CAPACITY.
PLEASE SIGN, DATE AND PROMPTLY RETURN EACH PROXY CARD YOU RECEIVE.
-------------------
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
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<PAGE> 17
REVOCABLE PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SOUND FEDERAL SAVINGS AND LOAN ASSOCIATION
FOR A SPECIAL MEETING OF MEMBERS
TO BE HELD ON ___________, 1998
The undersigned member of Sound Federal Savings and Loan Association
(the "Association"), hereby appoints the full Board of Directors, with full
powers of substitution, as attorneys-in-fact and agents for and in the name of
the undersigned, to vote such votes as the undersigned may be entitled to vote
at the Special Meeting of Members of the Association, to be held at the main
office of the Association, located at ___________________________________ on
_________________, at ______ .m., local time, and at any and all adjournments
thereof. They are authorized to cast all votes to which the undersigned is
entitled as follows:
<TABLE>
<S><C>
FOR AGAINST
--- -------
1. A Plan of Reorganization from Mutual Savings Association to Mutual Holding [ ] [ ]
Company and Stock Issuance Plan providing for the reorganization of the
Association into the mutual holding company structure. As part of the Plan
the Association will convert to a federally chartered stock savings
association, which will be wholly-owned by Sound Federal Bancorp (the
"Company") a to be formed federal corporation. Pursuant to the Plan, the
Company will (i) issue 53% of its to-be-outstanding shares of common stock to
Sound Federal, MHC, a federal mutual holding company to be formed pursuant to
the Plan, (ii) offer for sale to certain depositors and borrowers 45% of its
to-be-outstanding shares of common stock, and (iii) subject to the receipt of
member approval, contribute 2% of its to-be-outstanding shares of Common
Stock to the Sound Federal Savings and Loan Association Charitable
Foundation;
FOR AGAINST
--- -------
[ ] [ ]
2. The establishment of a tax exempt foundation, which will be a Delaware
chartered non-stock corporation dedicated to the promotion of charitable
purposes within the Association's market area; and
3. Such other matters as may properly come before the Special
Meeting.
NOTE: The Board of Directors is not aware of
any other matter that may come before the
Special Meeting of Members.
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THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF
ANY OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED BY A MAJORITY OF THE BOARD OF DIRECTORS IN THEIR BEST
JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 18
Votes will be cast in accordance with the Proxy. Should the undersigned
be present and elect to vote at the Special Meeting or at any adjournment
thereof and after notification to the Secretary of the Association at said
Meeting of the member's decision to terminate this Proxy, then the power of said
attorney-in-fact or agents shall be deemed terminated and of no further force
and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting of
Members and a Proxy Statement dated _____________, 1998, prior to the execution
of this Proxy.
---------------------------------
Date
---------------------------------
Signature
NOTE: Only one signature is required
in the case of a joint account.
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PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN
THE ENCLOSED ENVELOPE.
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