<PAGE>
PROSPECTUS
Up to 1,096,958 shares of common stock GREENE COUNTY BANCORP, INC.
425 Main Street
Catskill, New York 12414-1300
(518) 943-3700
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- --------------------------------------------------------------------------------
Greene County Savings Bank, a New York-chartered savings bank (the "Bank"),
is reorganizing from a mutual savings bank to the mutual holding company form of
organization (the "Reorganization"). As part of the Reorganization, the Bank
will convert to stock form, change its name to "The Bank of Greene County," and
become a wholly owned subsidiary of Greene County Bancorp, Inc., a Delaware
corporation (the "Company"). The Company will become the majority-owned
subsidiary of Greene County Bancorp, MHC, a New York-chartered mutual holding
company (the "Mutual Company"). Concurrently with the Reorganization, the
Company is offering for sale shares of its common stock, par value $.10 per
share (the "Common Stock"), to depositors (pursuant to subscription rights), the
Bank's tax-qualified employee benefit plans including its employee stock
ownership plan, and to employees, officers and trustees of the Bank. Any
unsubscribed shares of Common Stock 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
Reorganization and the Offering are being made pursuant to the terms of a plan
of reorganization which must be approved by the depositors of the Bank and by
federal and state banking regulators. The Reorganization will not go forward if
the Bank does not receive these approvals, or if the Company does not sell at
least a minimum number of the shares of Common Stock offered.
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TERMS OF OFFERING
An independent appraiser has estimated the pro forma market value of the
Company to be between $15.8 million and $21.4 million. Based on this estimate,
the Company will issue between 1,584,009 and 2,143,071 shares of Common Stock.
The Company is selling between 705,039 and 953,877 shares to depositors and the
public, and is issuing between 847,878 and 1,147,128 shares to the Mutual
Company. The Company may increase the shares issued in the Reorganization to up
to 2,464,532 shares and increase the shares sold in the Offering to up to
1,096,958 shares, subject to regulatory approvals. As part of the
Reorganization, 2.0% of the shares issued in the Reorganization (36,579 shares
at the mid-point of the estimated valuation range) along with $100,000 in cash,
are being issued to a Charitable Foundation. Consequently, following completion
of the Reorganization and the Offering, the Mutual Company will own 53.5% of the
outstanding Common Stock, stockholders who purchase Common Stock in the Offering
will own 44.5% of the outstanding Common Stock and the Charitable Foundation
will own 2.0% of the Common Stock. Based on these estimates, the Company is
making the following offering of shares of Common Stock:
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
o Price per share ............. $ 10.00 $ 10.00 $ 10.00 $ 10.00
o Number of shares ............ 705,039 829,458 953,877 1,096,958
o Reorganization expenses...... $ 560,000 $ 560,000 $ 560,000 $ 560,000
o Net proceeds ................ $ 6,493,090 $ 7,734,580 $ 8,978,770 $10,409,580
o Net proceeds per share....... $ 9.21 $ 9.32 $ 9.41 $ 9.49
</TABLE>
Please refer to Risk Factors beginning on page 13 of this Prospectus.
These securities are not deposits or accounts, are not insured or
guaranteed by the Federal Deposit Insurance Corporation (the "FDIC") or any
other government agency, and are subject to investment risk, including loss of
principal.
Neither the Securities and Exchange Commission (the "SEC"), the New York
State Banking Department (the "Department"), the FDIC, 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.
<PAGE>
Friedman, Billings, Ramsey & Co., Inc. 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 savings account at the Bank until the
completion or termination of the Reorganization. The Company has applied for
approval to list the Common Stock on the Nasdaq SmallCap Market under the symbol
"GRNB."
For information on how to subscribe, call the Stock Center at (518)
943-7515.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Prospectus dated November 12, 1998
<PAGE>
MAP
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE OFFERING..............................................1
SUMMARY AND OVERVIEW..................................................................4
SELECTED FINANCIAL INFORMATION.......................................................11
RISK FACTORS ........................................................................13
RECENT DEVELOPMENTS..................................................................19
GREENE COUNTY BANCORP, INC...........................................................22
GREENE COUNTY SAVINGS BANK...........................................................22
MARKET AREA..........................................................................23
REGULATORY CAPITAL COMPLIANCE........................................................23
USE OF PROCEEDS......................................................................24
DIVIDEND POLICY......................................................................25
MARKET FOR COMMON STOCK..............................................................25
CAPITALIZATION.......................................................................26
PRO FORMA DATA.......................................................................27
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT
FOUNDATION .....................................................................30
PARTICIPATION BY MANAGEMENT..........................................................31
THE REORGANIZATION AND OFFERING......................................................31
GREENE COUNTY SAVINGS BANK STATEMENTS OF INCOME......................................48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS .................................................................49
BUSINESS OF GREENE COUNTY BANCORP, INC...............................................60
BUSINESS OF THE BANK.................................................................61
FEDERAL AND STATE TAXATION...........................................................79
REGULATION ..........................................................................81
MANAGEMENT OF GREENE COUNTY BANCORP, INC.............................................90
MANAGEMENT OF THE BANK...............................................................91
RESTRICTIONS ON ACQUISITION OF THE COMPANY...........................................99
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY.........................................101
TRANSFER AGENT AND REGISTRAR........................................................101
LEGAL AND TAX MATTERS...............................................................102
EXPERTS.............................................................................102
ADDITIONAL INFORMATION..............................................................102
FINANCIAL STATEMENTS................................................................F-1
GLOSSARY............................................................................G-1
</TABLE>
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 13 of this Prospectus.
Please see the Glossary beginning on page G-1 for the meaning of capitalized
terms that are used in this Prospectus.
(i)
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE OFFERING
Q: What is the Mutual Company?
A: Greene County Bancorp, MHC (the "Mutual Company") is a New York-chartered
mutual corporation that is being established in connection with the mutual
holding company reorganization (the "Reorganization") of Greene County
Savings Bank (the "Bank"). The Mutual Company will be chartered under the
laws of the State of New York and will be regulated by the New York State
Banking Department (the "Department") and the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Mutual Company
will own 53.5% of the outstanding Common Stock of Greene County Bancorp,
Inc. (the "Company"), or 997,503 shares at the midpoint of the valuation
range established by the independent appraisal. The remaining 46.5% of the
Common Stock of the Company will be owned by persons who purchase Common
Stock in the Offering, and The Bank of Greene County Charitable Foundation
(the "Charitable Foundation").
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 Bank and the Charitable
Foundation, will be the minority stockholders (the "Minority Stockholders")
of the Bank, and will own 46.5% of its Common Stock upon completion of the
Offering. The 46.5% of the Common Stock owned by purchasers in the Offering
and the Charitable Foundation is referred to as the "Minority Ownership
Interest." The Mutual Company will own 53.5% of the Common Stock of the
Company, and will remain its majority stockholder as long as the Mutual
Company remains in existence.
Q: What is the purpose of the Reorganization and the Offering?
A: The primary purpose of the Reorganization and the Offering is to raise
additional equity capital to support the growth and expansion of the Bank.
The increased capital also will be used to expand the Bank'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 Bank. The Offering also will provide depositors with the
opportunity to become stockholders of the Company. The Bank also is
establishing the Charitable Foundation that will be dedicated exclusively
to supporting charitable causes and community development activities in its
market area.
Q: Why is the Bank conducting a minority stock offering instead of selling all
of its stock in the Offering?
A: At the present time, the Bank does not need all of the capital that would
be raised in a "standard" or "full" stock conversion, where all of a
converting institution's common stock is offered for sale. 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 Company will have the flexibility to raise additional
capital in the future by selling the unsold shares held by the Mutual
Company. Moreover, the Bank's Board of Trustees intends to maintain the
independence and community focus of the Bank. Because the Mutual Company
will control a majority of the Company's Common Stock, the Reorganization
will permit the Bank to achieve the benefits of being a stock company
without the loss of control by the Bank's Board of Trustees.
Q: How do I order the Common Stock?
A: You must complete and return the stock order form and certification form
(together, the "Order Form") to the Bank, together with your payment,
before 12:00 noon New York time on December 17, 1998. Please review the
Order Form and Stock Order Form Instructions when filling out the Order
Form and before sending any payment to the Bank.
1
<PAGE>
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 10,000
shares (or $100,000). In certain instances, your order may be grouped
together with orders by other persons who are associated with you (such as
your spouse, children or relatives living in your home or corporations,
partnerships 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 20,000 shares (or $200,000). 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 orders to purchase Common Stock will be filled on a priority
basis as follows:
o First, to persons who had one or more deposit accounts with the Bank
aggregating at least $100 on June 30, 1997.
o Second, up to 10% of the Minority Ownership Interest may be purchased
by the Bank's tax-qualified employee benefit plans, including the
Bank's ESOP (which is expected to purchase up to 8% of the Minority
Ownership Interest). In addition, participants in the Bank's Savings
and Profit Sharing Plan will be given the opportunity to subscribe for
shares of Common Stock through that plan.
o Third, to persons who had one or more deposit accounts with the Bank
aggregating at least $100 on September 30, 1998.
o Fourth, to employees, officers and trustees of the Bank.
Q: What will happen to my subscription funds if the Offering is not completed?
A: If the minimum number of shares to be sold in the Offering (705,039 shares)
is not sold by December 17, 1998, the Bank may: (i) terminate the Offering
and promptly refund all payments for Common Stock, including interest on
such payments at the Bank's passbook rate of 3.25%; or (ii) extend the
Offering for an additional 45 days (to January 29, 1999) or, if approved by
the Superintendent, for an additional period after such 45-day extension.
The Bank is not required to give purchasers notice of any extension unless
the expiration date is later than January 29, 1999, in which event
purchasers will be "resolicited" (i.e., given the right to increase,
decrease, confirm or rescind their orders). - Purchasers who fail to
respond to the resolicitation within 20 days will have their orders
rescinded and their subscription funds returned promptly.
Q: What happens if there are not enough shares to fill all orders?
A: If the Offering is oversubscribed, shares will be allocated based upon
a deposit formula set forth in the Plan of Reorganization. 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 category, the Company will allocate shares in
such a manner that will allow Eligible Account Holders to purchase at
least the lesser of 100 shares or the amount subscribed for. Likewise,
if insufficient shares of Common Stock are available in the third
category, the Company will allocate shares in such a manner that will
allow Supplemental Eligible Account Holders to purchase at least the
lesser of 100 shares or the amount of stock subscribed for. All orders
must be received by 12:00 noon, New York time on December 17, 1998.
2
<PAGE>
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 the Bank's community of Greene County, New York.
Q: May I transfer my subscription rights?
A: No. Transferring subscription rights or entering into an agreement or
understanding for the transfer of subscription rights is prohibited.
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 this entire
Prospectus, including the Risk Factors section on pages 13 to 18 of this
Prospectus.
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 Center
430 Main Street
Catskill, New York 12414-1303
P.O. Box 546
Catskill, New York 12414-0546
(518) 943-7515
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 Bank 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
New York Banking Department and/or the Federal Deposit Insurance Corporation.
3
<PAGE>
SUMMARY AND OVERVIEW
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 this
entire Prospectus carefully, including the financial statements and the notes to
the financial statements of the Bank. Certain financial information contained in
this Prospectus has been derived from the audited financial statements of the
Bank.
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 44.5% of the Company's Common Stock
is referred to as the "Offering". References to the "Bank" refer to Greene
County Savings Bank, which is changing its name to "The Bank of Greene County"
concurrently with the Reorganization and the Offering. References to the
"Company" refer to Greene County Bancorp, Inc., and references to the "Mutual
Company" refer to Greene County Bancorp, 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 this Prospectus.
The Company
Greene County Bancorp, Inc.
425 Main Street
Catskill, New York 12414-1317
(518) 943-3700
The Company is a Delaware corporation that was formed recently to become
the holding company of the Bank. Accordingly, the Company has no results of
operations. After the Reorganization, the Company will own all of the Bank's
common stock. Purchasers in the Offering will own 44.5% of the Company's Common
Stock, the Charitable Foundation will own 2.0% of the shares of the Company's
Common Stock, and the Mutual Company will own 53.5% of the shares of the
Company's Common Stock. Although these percentages may change in the future, the
Mutual Company must always own a majority of the Company's Common Stock.
The Bank
Greene County Savings Bank
425 Main Street
Catskill, New York 12414-1317
(518) 943-3700
The Bank was organized in 1889 as The Building and Loan Association of
Catskill, a New York-chartered savings and loan association. In 1974, the Bank
converted to a New York mutual savings bank under the name Greene County Savings
Bank. In conjunction with the Reorganization and the Offering, the Bank is
changing its name to The Bank of Greene County. At June 30, 1998, the Bank had
total assets of $140.3 million, total deposits of $122.3 million, and retained
earnings of $15.7 million. The Bank is a community- and customer-oriented bank
that operates from its main office and three branch locations in Catskill, West
Coxsackie, Cairo and Greenville, New York. Historically, the Bank's principal
business has been making home mortgage loans and offering various savings and
other deposit accounts to the public. At June 30, 1998, the Bank's loan
portfolio consisted of $64.7 million, or 79.7%, of loans secured by one- to
four-family residential mortgage loans, $9.4 million, or 11.6%, of consumer
loans, $4.5 million, or 5.6%, of commercial real estate loans and $1.3 million,
or 1.7%, of commercial business loans. The Bank also invests in investment
securities, mortgage-backed securities and asset-backed securities. At June 30,
1998, investment securities totaled $36.3 million, mortgage-backed securities
totaled $5.2 million, and asset-backed securities totaled $6.3 million. At June
30, 1998, such securities comprised 34.1% of total assets.
4
<PAGE>
The following are highlights of the Bank's operating strategy:
o Community Banking. Since its establishment in 1889, the Bank has been
committed to meeting the financial needs of the community in which it
operates and to providing quality service for its customers. This has
enabled the Bank to maintain a high level of core deposits, which
comprised 54.5% of total deposits at June 30, 1998. In addition, the
Bank intends to use the mutual holding company structure to maintain
the Bank as an independent community bank.
o Emphasis on Residential Real Estate Lending. Historically, the Bank
has emphasized one- to four-family residential lending, which is
generally considered to involve less risk than consumer and business
lending. At June 30, 1998, one- to four-family residential mortgage
loans comprised 79.7% of the loan portfolio, substantially all of
which were secured by real estate located in Greene County.
o Maintaining High Levels of Liquid Investments. To better position the
Bank to reinvest assets profitably in a rising interest rate
environment, the Bank invests a significant portion of its assets in
short-term U.S. Government and agency securities and other short-term
interest-earning assets. At June 30, 1998, 26.8% of the Bank's total
assets were U.S. Government and agency securities, municipal bonds due
in five years or less, federal funds sold, and cash due from banks.
o Maintaining Asset Quality. The Bank tries to maintain asset quality by
having conservative underwriting and investing standards. At June 30,
1998, the Bank's ratio of nonperforming assets to total assets was
0.72% (compared to the median ratio of the Bank's peer group of 0.34%)
and its ratio of non-performing loans to total loans was 1.09%
(compared to the median ratio of the Bank's peer group of 0.40%).
The Reorganization
The Reorganization involves a number of steps, including the following:
o The Bank will establish the Company and the Mutual Company, neither of
which will have any assets prior to the completion of the
Reorganization.
o The Bank 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.
o The Company will issue between 1,584,009 and 2,143,071 shares of
Common Stock in the Reorganization (or 2,464,532 shares at the
adjusted maximum). 53.5% of these shares (or between 847,878 and
1,147,128 shares, or 1,319,198 shares at the adjusted maximum) will be
issued to the Mutual Company; 44.5% (or between 705,039 and 953,877
shares, or 1,096,958 shares at the adjusted maximum) will be sold to
depositors and the public; and 2.0% of these shares (or between 31,092
and 42,066 shares, or 48,376 shares at the adjusted maximum) will be
issued to a newly formed Charitable Foundation.
o Interests that depositors had in the Bank will become interests in the
Mutual Company, which will own 53.5% of the shares of Common Stock of
the Company and indirectly of the Bank.
The Mutual Holding Company Structure
The mutual holding company structure differs in significant respects from a
stock holding company structure that is used in a "standard" mutual-to-stock
conversion. A savings bank that converts to the stock form using the mutual
holding company structure sells only a minority of its shares and raises less
proceeds than would be raised in a standard mutual- to-stock conversion in which
100% of the shares are sold to depositors and the public. If additional capital
is needed in the future, the unsold shares that are issued to the Mutual Company
may be offered for sale by the Company. See "Regulation--Holding Company
Regulation--Mutual Holding Company Regulation." In addition, because the Mutual
Company controls a majority of the Company's Common Stock, the structure will
permit the Bank to achieve
5
<PAGE>
the benefits of a stock company without a loss of control that often follows a
complete conversion from mutual to stock form.
In making business decisions, the Mutual Company's Board of Trustees will
consider a variety of constituencies, including the depositors and employees of
the Bank, and the community in which the Bank operates. As the majority
stockholder of the Company, the Mutual Company is also interested in the
continued success and profitability of the Bank and the Company. Consequently,
the Mutual Company will act in a manner that furthers the general interest of
all of its constituencies, including the interest of the stockholders of the
Company. The Mutual Company believes that the interests of the stockholders of
the Company, and those of the Mutual Company's other constituencies, are in many
circumstances the same, such as the increased profitability of the Company and
the Bank and continued service to the community in which the Bank operates.
The Stock Offering
The Company is offering for sale between 705,039 and 953,877 shares of its
Common Stock, for a price per share of $10.00. The Offering may be increased to
up to 1,096,958 shares. If the minimum number of shares to be sold in the
Offering (705,039 shares) is not sold by December 17, 1998, the Bank may: (i)
terminate the Offering and promptly refund all payments for Common Stock,
including interest on such payments at the Bank's passbook rate of 3.25%; or
(ii) extend the Offering for an additional 45 days (to January 29, 1999) or, if
approved by the Superintendent, for an additional period after such 45-day
extension. The Bank is not required to give purchasers notice of any extension
unless the expiration date is later than January 29, 1999, in which event
purchasers will be "resolicited" (i.e., given the right to increase, decrease,
confirm or rescind their orders). Purchasers who fail to respond to the
resolicitation within 20 days will have their orders rescinded and their
subscription funds returned promptly.
Stock Purchase Priorities
The Common Stock is being offered for sale in the following order of
priority in a Subscription Offering:
(i) the Bank's Eligible Account Holders (holders of deposit accounts
totaling $100 or more as of June 30, 1997);
(ii) the Bank's tax-qualified employee benefit plans, including the Bank's
ESOP (which is expected to purchase up to 8% of the Minority Ownership
Interest);
(iii) the Bank's Supplemental Eligible Account Holders (holders of deposit
accounts totaling $100 or more as of September 30, 1998); and
(iv) employees, officers and trustees of the Bank.
Any shares not subscribed for will be offered to certain members of the
general public in a community offering, with preference given first to natural
persons residing in Greene County, New York. The Company has engaged Friedman,
Billings, Ramsey & Co., Inc. to assist it on a best efforts basis in selling the
Common Stock in the Offering. See pages 33 to 38.
Stock Pricing and Number of Shares to be Issued
The Company's Board of Directors has set the purchase price per share of
Common Stock at $10.00, the price most commonly used in stock offerings
involving mutual-to-stock conversions of mutual savings institutions. The number
of shares of Common Stock issued in the Offering is based on the independent
valuation prepared by FinPro, Inc. ("FinPro"), an appraisal firm experienced in
appraisals of savings institutions. The independent valuation states that as of
October 7, 1998, the estimated pro forma market value of the Company ranged from
a minimum of $15.8 million to a maximum of $21.4 million, with a midpoint of
$18.6 million. Based on this valuation and the $10.00 per share price, the
number of shares of Common Stock that the Company will issue will range from
1,584,009 to 2,143,071 shares. The Company and the Bank have decided to offer
for sale 44.5% of such shares, or between 705,039 and 953,877 shares, to
depositors and the public. In addition, the Company will issue between 31,092
and 42,066 shares
6
<PAGE>
(together with $100,000 in cash) to the Charitable Foundation. The Board of
Trustees determined to sell 44.5% of the Common Stock to depositors and the
public in order to raise the maximum amount of proceeds while permitting the
Company to issue additional shares to the Charitable Foundation and additional
shares of Common Stock in the future pursuant to a stock award plan and stock
option plan that the Company intends to adopt after the Reorganization and the
Offering. The 53.5% of the shares of the Common Stock that are not sold in the
Offering or issued to the Charitable Foundation will be issued to the Mutual
Company. The establishment of the Charitable Foundation had the effect of
reducing the valuation of the Company. See "Comparison of Valuation and Pro
Forma Information without Foundation."
Changes in market and financial conditions and demand for the Common Stock
may cause the estimated valuation range to increase by up to 15%, to up to $24.6
million. If this occurs, the maximum number of shares that can be sold to
depositors and the public can increase to up to 1,096,958 shares, and the number
of shares to be issued to the Charitable Foundation can increase to 48,376. The
Company will not notify subscribers if the maximum number of shares to be sold
increases by 15% or less. The Company, however, will notify subscribers if the
estimated valuation range and the maximum number of shares to be sold is
increased by more than 15% or if the minimum of the estimated valuation range is
decreased. The independent valuation is not a recommendation as to the
advisability of purchasing shares, and you should not buy Common Stock based on
the independent valuation.
Payment for shares may be made by (i) cash (except by mail), check or money
order, or (ii) authorization of withdrawal from a deposit account maintained
with the Bank. Payments made by check or money order will be placed in a
segregated escrow account and will be paid interest at the Bank's passbook rate
from the date payment is received until the Offering is completed or terminated.
Deadline of the Offering
The offering to depositors will end at 12:00 noon, New York time, on
December 17, 1998. The community offering may end on or after December 17, 1998,
but in any event, no later than January 29, 1999, without regulatory approvals.
If the Reorganization and Offering are not completed by January 29, 1999, all
subscribers will be notified and will be given the opportunity to cancel or
modify their orders.
Benefits to Management from the Offering
The Company intends to implement for the benefit of the employees,
directors/trustees and officers of the Company and the Bank, 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 up to 190,528 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/trustees and officers would own 22% of the Minority
Ownership Interest, inclusive of ESOP shares but exclusive of other shares such
persons may have acquired individually.
ESOP. Full-time employees of the Bank 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 $588,900 at the minimum of the Offering Range and
$796,750 at the maximum of the Offering Range. A portion of the net proceeds of
the Offering will be used to fund the purchase of shares for the ESOP. For
further information, see "Executive Compensation--Employee Stock Ownership Plan
and Trust."
Stock Option Plan. The Stock Option Plan will provide for the grant of
options to purchase Common Stock equal to 10% of the Minority Ownership
Interest. The exercise price of each option will be equal to the closing price
of the Common Stock on the date the option is granted. No options will be
granted until after stockholders approve the Stock Option Plan. For further
information, see "Executive Compensation--Stock Option Plan." The Board of
Trustees has not yet determined how many options each individual officer,
director/trustee or employee will receive.
Stock Award Plan. The Stock Award Plan will provide for the award of shares
of Common Stock equal to up to 3% of the Minority Ownership Interest to
officers, employees and directors/trustees of the Bank, if the Stock Award Plan
is implemented within one year after the completion of the Offering. If the
Stock Award Plan is
7
<PAGE>
implemented 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. 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 $294,452 at
the minimum of the Offering Range and $398,377 at the maximum of the Offering
Range, assuming a value of $10.00 per share and assuming a 4% plan. For further
information, see "Executive Compensation--Stock Award Plan." The Board of
Trustees has not yet determined how many shares of Common Stock will be awarded
to officers, directors or employees of the Bank.
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. See pages 97 to 99.
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 that will be represented by these shares.
<TABLE>
<CAPTION>
Percentage of
Value of Outstanding
Shares Granted(1) Common Stock (3)
----------------- ----------------
<S> <C> <C>
Benefit Plan:
ESOP ............ ....... $ 692,830 3.72%
Stock Option Plan ....... -- (2) 4.65
Stock Award Plan ........ 346,410 1.86
----------- -----
$ 1,039,240 10.23%
----------- -----
----------- -----
</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 86,604 shares at the midpoint of
the Offering Range may be granted if the Stock Option Plan is approved by
stockholders.
(3) Assumes shares for the Stock Award Plan and Stock Option Plan are funded by
open-market repurchases, and not from authorized-but-unissued shares.
In addition, the Bank intends to enter into an employment agreement with J.
Bruce Whittaker, its President and Chief Executive Officer. The agreement
provides that if Mr. Whittaker resigns from the Bank upon certain events,
including a change in control of the Bank or the Company, then Mr. Whittaker
will be entitled to severance pay equal to three times the highest base salary
and highest bonus paid during the prior three years (or $375,000, based upon Mr.
Whittaker's current level of compensation). See "Executive Compensation -
Employment Agreement."
The Charitable Foundation
To further its commitment to the local community, the Bank intends to
establish the Charitable Foundation as part of the Reorganization. The Company
will contribute to the Charitable Foundation 2.0% of the shares of Common Stock
issued in the Reorganization plus $100,000 in cash. The Charitable Foundation
will be dedicated exclusively to supporting charitable causes and community
development activities in the Bank's market area. Due to the issuance of
additional shares of Common Stock to the Charitable Foundation, the ownership
and voting interests of all stockholders of the Company will be diluted by 2.0%.
The Company will incur an expense equal to the full amount of the contribution
to the Charitable Foundation, offset in part by a corresponding tax benefit,
during the quarter in which the contribution is made. Such expense will reduce
the Company's earnings. See "Risk Factors--The Expense and Dilutive Effect of
the Contribution of Shares and Cash to the Charitable Foundation," "Pro Forma
Data," and "The Reorganization and Offering--Establishment of the Charitable
Foundation." As a condition to issuing their non-objection to the
Reorganization, the FDIC and the Department have required the Charitable
Foundation to commit that all shares of Common Stock held by the Charitable
Foundation will be voted in the same ratio as all other shares of the Company's
Common Stock (other than shares held by the Mutual Company) on all proposals
considered by stockholders of the Company, subject to certain waivers of this
commitment.
8
<PAGE>
Use of the Proceeds Raised from the Sale of Common Stock
The Company will use the proceeds from the Offering as follows. The
percentages used are estimates:
o 50% will be used to buy all the capital stock of the Bank.
o 8% will be loaned to the ESOP to fund its purchase of Common Stock.
o 42% will be retained as a possible source of funds for the payment of
dividends to stockholders, the repurchase of Common Stock, and for
other general corporate purposes.
The proceeds to be received by the Bank will be available for general
corporate purposes, the opening of new branches, renovation of existing
facilities, branch or whole bank acquisitions, new loan originations, and the
purchase of investment and mortgage-backed securities.
See pages 24 and 25 for a fuller description of the use of proceeds.
Procedure for Purchasing Common Stock
To ensure proper identification of stock purchase priorities, Eligible
Account Holders and Supplemental Eligible Account Holders must list all deposit
accounts on their Order Form, giving all names on each deposit account and the
account numbers at the applicable date. The failure to provide accurate and
complete account information on the Order Form, including adding individuals
with a lower, or no, stock purchase priority as subscribers on an Order Form,
may eliminate your ability to purchase stock.
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. The Company will not
accept Order Forms if the certification appearing on the reverse side of the
Order Form is not executed. The Company is not required to deliver a Prospectus
and Order Form by any means other than the U.S. Postal Service.
See pages 38 to 40 for procedures for purchasing shares of Common Stock.
Dividends
The Company does not initially intend to pay a dividend, although it may
consider the payment of dividends in the future. Future decisions as to the
declaration of dividends by the Company will depend upon a number of factors
including investment opportunities available to the Company or the Bank and the
Company's financial condition and results of operations. See page 25.
Market for the Common Stock
The Company has applied to have the Common Stock quoted on the Nasdaq
SmallCap Market under the symbol "GRNB." Friedman, Billings, Ramsey & Co., Inc.
intends to make a market in the Common Stock, and the Company expects that
additional market makers will be identified. See "Market for Common Stock."
Important Risks in Purchasing and Owning the Company's Common Stock
Before deciding to purchase Common Stock in the Offering, please carefully
read the Risk Factors section on pages 13 to 18 of this Prospectus, in addition
to the other sections of this Prospectus.
9
<PAGE>
The shares of Common Stock offered hereby:
o Are not deposit accounts and are subject to investment risk;
o Are not insured or guaranteed by the FDIC, or any other government
agency; and
o Are not guaranteed by the Company, the Mutual Company, or the Bank.
The Common Stock is subject to investment risk, including the possible loss
of principal invested.
10
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected data presented below under the captions "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years in the two-year period ended June 30, 1998, are derived from the
audited financial statements of the Bank. The financial statements as of June
30, 1998 and 1997 and for each of the years in the two-year period ended June
30, 1998 are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30,
----------------------
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Selected Financial Condition Data:
Total assets ...................................... $140,253 $132,506
Loans receivable, net ............................. 80,260 75,648
Mortgage-backed securities (all available for sale) 5,189 5,221
Investment securities (all available for sale) .... 36,265 37,581
Asset-backed securities (all available for sale) .. 6,324 784
Deposits .......................................... 122,324 115,855
Total borrowings .................................. -- --
Retained earnings, substantially restricted ....... 15,730 14,406
</TABLE>
<TABLE>
<CAPTION>
Years Ended
June 30,
------------------
1998 1997
------ ------
(In Thousands)
<S> <C> <C>
Selected Operations Data:
Total interest income ............................ $9,503 $9,297
Total interest expense ........................... 4,967 4,780
------ ------
Net interest income ......................... 4,536 4,517
Provision for loan losses ........................ 120 125
------ ------
------ ------
Net interest income after provision for
loan losses ................................. 4,416 4,392
Total non-interest income ........................ 436 520
Total non-interest expense ....................... 3,149 2,773
------ ------
Income before taxes and extraordinary item 1,703 2,139
Income tax provision ............................. 553 692
------ ------
Net income ....................................... $1,150 $1,447
------ ------
------ ------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
At or for the Years Ended
June 30,
1998 1997
------ ------
<S> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (ratio of net income to average total assets) ......... 0.84% 1.09%
Return on average retained earnings (ratio of net income to average
retained earnings) ......................................................... 7.63 10.59
Ratio of operating expense to average total assets ............................. 2.31 2.08
Ratio of average interest-earning assets to average interest-bearing liabilities 109.58 109.16
Net interest rate spread (1) ................................................... 3.15 3.26
Net interest margin (2) ........................................................ 3.52 3.61
Efficiency ratio (3) ........................................................... 64.90 56.45
Asset Quality Ratios:
Non-performing assets to total assets at end of period ......................... 0.72 0.61
Non-performing loans to total loans at end of period ........................... 1.10 0.97
Allowance for loan losses to non-performing loans .............................. 82.17 90.04
Allowance for loan losses to loans receivable, net ............................. 0.91 0.96
Capital Ratios:
Retained earnings to total assets at end of period ............................. 11.22 10.87
Average retained earnings to average assets .................................... 11.05 10.27
Other Data:
Number of full-service offices ................................................. 4 3
</TABLE>
- -------------------------
(1) The difference between the weighted average yield on average
interest-earning assets and the weighted average cost of average
interest-bearing liabilities.
(2) Net interest income as a percentage of average interest-earning assets.
(3) The ratio of non-interest expense dividend by the sum of net interest
income and non-interest income.
12
<PAGE>
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.
Recent Market Volatility and Risk of Investment Loss
In recent months, stock markets in both the United States and worldwide
have been volatile. The securities of individual companies have, in many
instances, experienced significant fluctuations in price for reasons unrelated
to the specific company's financial condition, results of operations or business
prospects. In particular, the value of securities of financial institutions has
been adversely affected by weakening economics worldwide and exposure to highly
leveraged hedge funds, even though local community-based financial institutions
may have no credit exposure outside the United States or loans to hedge funds.
Therefore, an investor should understand that, in the short-term, the value of
an investment in the Common Stock is subject to fluctuation, including loss, due
to volatility in stock markets generally.
Reduced Return on Equity after the Reorganization and Potential Negative Effect
on Trading Price of Common Stock
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 Bank's equity as a
percentage of assets will significantly increase as a result of the net proceeds
received in the Offering. The Bank anticipates that it will take time to
prudently reinvest the capital raised in the Offering. Consequently, the
Company's return on equity in the period following the Reorganization is
expected to be less than the average return on equity for publicly traded
savings institutions and their holding companies and, during such time, the
Company's Common Stock may trade at a discount to the market. See "Selected
Financial Information" for numerical information regarding the Bank'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
Bank 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 financial institutions, and no
assurances can be given that this goal can be attained.
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
The Bank's financial condition and results of operations are significantly
affected by changes in interest rates. The Bank's results of operations depend
substantially on its net interest income, which is the difference between the
interest income earned on interest-earning assets and the interest expense paid
on interest-bearing liabilities. Based on certain repricing assumptions, the
Bank's interest-bearing liabilities repricing or maturing within one year
exceeded its interest-earning assets with similar characteristics by $10.5
million, or 7.78% of total interest-earning assets at June 30, 1998.
Accordingly, an increase in interest rates generally would result in a decrease
in the Bank's average interest rate spread and net interest income. The Bank has
sought to reduce the exposure of its net interest income to increases in market
interest rates by investing in readily marketable, liquid U.S. government and
agency securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Management of Interest Rate Risk."
Changes in interest rates also affect the value of the Bank's
interest-earning assets, and in particular the Bank's investments in securities.
Generally, the value of the Bank's securities investments, including
mortgage-backed securities and asset-backed securities, fluctuates inversely
with changes in interest rates. At June 30, 1998, the Bank's
13
<PAGE>
investment securities, mortgage-backed securities and asset- backed securities
totaled $36.3 million, $5.2 million, and $6.3 million, respectively, all of
which were classified as available for sale. Unrealized gains and losses on
securities available for sale are reported as a separate component of equity.
Decreases in the fair value of securities available for sale, therefore, could
have an adverse effect on stockholders' equity. See "Business of the
Bank--Securities Investment Activities."
The Bank is also subject to reinvestment risk relating to changes in
interest rates that can affect the average life of loans and mortgage-backed
securities. Decreases in interest rates can result in increased prepayments of
loans and mortgage-backed securities, as borrowers refinance to reduce borrowing
costs. Under these circumstances, the Bank is subject to reinvestment risk to
the extent that it is not able to reinvest such prepayments at interest rates
that are comparable to the rates on the maturing loans or securities.
The Expense and Dilutive Effect of the Contribution of Shares and Cash to the
Charitable Foundation
The Bank intends to establish the Charitable Foundation in connection with
the Reorganization. The Company will make a contribution to the Charitable
Foundation in the form of shares of Common Stock equal to 2.0% of shares
outstanding after the completion of the Offering, or 36,579 shares at the
midpoint of the Offering Range, and $100,000 in cash. Due to the issuance of
additional shares of Common Stock to the Charitable Foundation, persons
purchasing shares in the Offering will have their ownership and voting interests
in the Company diluted by 2.0%. The contribution of Common Stock to the
Charitable Foundation will be dilutive to the interests of stockholders and the
aggregate contribution will have an adverse impact on the reported earnings of
the Company in the fiscal year in which the Charitable Foundation is established
and the contribution is made. If the Charitable Foundation had been established
and the contribution made at June 30, 1998, and assuming the sale of the Common
Stock at the midpoint of the estimated valuation range, the Bank would have
reported net income of $870,000 rather than reporting net income of $1,150,000
for the year ended June 30, 1998. In addition, the establishment and funding of
a Charitable Foundation as part of a mutual holding company reorganization and
stock offering have only recently occurred. There can be no assurance that
challenges to the Charitable Foundation from regulators or others may not arise,
the resolution of which may result in delay in the consummation of the
Reorganization and the Offering. See "The Reorganization and
Offering--Establishment of the Charitable Foundation."
Minority Public Ownership and Provisions that May Discourage Attempts to Acquire
the Company
Voting Control of the Mutual Company. Under New York law, the Bank's Plan
of Reorganization from a Mutual Savings Bank to a Mutual Holding Company and
Stock Issuance Plan (the "Plan of Reorganization"), and the Company's governing
corporate instruments, at least 51% of the Company's voting shares must be owned
by the Mutual Company. The Mutual Company will be controlled by its board of
trustees, who will consist of persons who are members of the board of directors
of the Company and the Bank. The Mutual Company will elect all members of the
board of directors of the Company, and as a general matter, will control the
outcome of all matters presented to the stockholders of the Company for
resolution by vote, except for matters that require a vote greater than a
majority. The Mutual Company, acting through its board of trustees, will be able
to control the business and operations of the Company and the Bank and will be
able to prevent any challenge to the ownership or control of the Company by
stockholders other than the Mutual Company ("Minority Stockholders").
Accordingly, a change in control of the Company and the Bank cannot occur unless
the Mutual Company first converts to the stock form of organization. Although
New York law, applicable regulations and the Plan of Reorganization permit the
Mutual Company to convert from the mutual to the capital stock form of
organization, it is not anticipated that a conversion of the Mutual Company will
occur in the foreseeable future and there can be no assurance when, if ever,
such a conversion would occur.
Provisions in the Company's and the Bank's Governing Instruments. In
addition, certain provisions of the Company's Certificate of Incorporation and
Bylaws, particularly a provision limiting voting rights, as well as certain
federal and state regulations, assist the Company in maintaining its status as
an independent publicly owned corporation. These provisions provide for, among
other things, supermajority voting, staggered boards of directors, noncumulative
voting for directors, advance notice requirements for stockholder nominations to
the Board of Directors, discretion in
14
<PAGE>
the Board of Directors to consider non-financial aspects of an acquisition of
the Company, ability of the Board to expand the size of the Board and fill new
seats resulting from such expansion, limits on the calling of special meetings
of stockholders, and limits on the ability of Minority Stockholders to vote
Common Stock in excess of 5% of the issued and outstanding shares (inclusive of
shares issued to the Mutual Company). The regulations of the New York State
Banking Department (the "Department") prohibit, except with the prior approval
of the Superintendent of Banks of the State of New York (the "Superintendent"),
for a period of one year following the date of the Reorganization, offers to
acquire or the acquisition of beneficial ownership of more than 5% of the equity
securities of the Bank or the Company. The Bank's Restated Organization
Certificate also prohibits, for three years, the acquisition, directly or
indirectly, of the beneficial ownership of more than 10% of the Bank's or the
Company's equity securities.
Dividend Waivers by the Mutual Company
It has been the policy of many mutual holding companies to waive the
receipt of dividends declared by its subsidiary. In connection with its approval
of the Reorganization, however, the Federal Reserve Board is expected to impose
certain conditions on the waiver by the Mutual Company of dividends paid on the
Common Stock. In particular, it is expected that the Mutual Company will be
required to obtain prior Federal Reserve Board approval before it may waive any
dividends. As of the date hereof, management does not believe that the Federal
Reserve Board has given its approval to any waiver of dividends by any mutual
holding company that has requested its approval. The cumulative amount of waived
dividends, if any, must be maintained in a restricted capital account that would
be added to any liquidation account of the Bank, and would not be available for
distribution to Minority Stockholders. The Plan of Reorganization also provides
that if the Mutual Company converts to stock form in the future, any waived
dividends would reduce the percentage of the converted company's shares of
Common Stock issued to Minority Stockholders in connection with any such
transaction. See "Regulation--Holding Company Regulation--Dividend Waivers by
the Mutual Company." It is not currently intended that the Mutual Company will
waive dividends declared by the Company.
Lending Risks Associated with Consumer, Commercial Business Lending and
Commercial Real Estate
At June 30, 1998, the Bank's consumer loans totaled $9.4 million, or 11.6%
of total loans, commercial business loans totaled $1.3 million, or 1.7% of total
loans, and commercial real estate loans totaled $4.5 million, or 5.6% of total
loans. Consumer, commercial business and commercial real estate loans are
generally considered to involve a greater risk of loss than residential mortgage
loans.
Strong Competition within the Bank's Market Area
Competition in the banking and financial services industry is intense. The
Bank competes with commercial banks, savings institutions, mortgage banking
firms, credit unions, finance companies, mutual funds, insurance companies, and
brokerage and investment banking firms operating locally and elsewhere. Many of
these competitors have substantially greater resources and lending limits than
the Bank and may offer certain services that the Bank does not or cannot
provide. Trends toward the consolidation of the financial services industry, and
the removal of restrictions on interstate branching and bank powers may make it
more difficult for smaller institutions such as the Bank to compete effectively
with large national and regional banking institutions. The Bank's profitability
depends upon its continued ability to successfully compete in its market area.
Intent to Remain Independent
The Bank operates as an independent community bank and intends to continue
to do so following the Reorganization. The Bank and the Company will be
controlled by the Mutual Company, and control of the Mutual Company may not be
sold to a third party. Accordingly, persons should not subscribe for shares of
Common Stock with an expectation that a sale of control of the Bank or the
Company is imminent. In the sale of control of a public company, an acquiror
often will pay a significant premium over the then trading price of such public
company's common stock. See "Business of the Bank."
15
<PAGE>
Regulatory Oversight and Legislation
The Bank is subject to extensive regulation, supervision and examination by
the Department and by the FDIC. The Bank is also a member of the Federal Home
Loan Bank System and is subject to certain limited regulations promulgated by
the Federal Home Loan Bank of New York. As bank holding companies, the Company
and the Mutual Company also will be subject to regulation and oversight by the
Federal Reserve Board. Such regulation and supervision govern the activities in
which an institution and its holding company may engage and are intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have extensive discretion in connection with their supervisory and
enforcement activities that are intended to strengthen the financial condition
of the banking industry, including the imposition of restrictions on the
operation of an institution, the classification of assets and the adequacy of an
institution's allowance for loan losses. Any change in such regulation and
oversight whether in the form of regulatory policy, regulations, or legislation,
could have a material impact on the Bank, the Company and the Mutual Company.
See "Regulation."
Uncertainty as to Future Growth Opportunities
In an effort to fully deploy the capital raised in the Offering and to
increase loan and deposit growth, the Bank may seek to acquire other financial
institutions or branches in its market area. The Bank's ability to grow through
selective acquisitions of other financial institutions or branches of such
institutions will depend on successfully identifying, acquiring and integrating
such institutions or branches. The Company and the Bank cannot assure
prospective purchasers of Common Stock that they will be able to generate
internal growth or identify attractive acquisition candidates, make acquisitions
on favorable terms or successfully integrate any acquired institutions or
branches into the Bank. The Bank currently has no specific plans, arrangements
or understandings regarding any such expansions or acquisitions, nor has
management established criteria to identify potential candidates for
acquisition.
Absence of Active, Liquid Trading Market for Common Stock
The Company, as a newly organized company, has never issued capital stock
and, consequently, there is no established market for the Common Stock at this
time. The Company has applied to have its Common Stock quoted on the Nasdaq
SmallCap Market under the symbol "GRNB." However, listing on the Nasdaq SmallCap
Market requires the presence of a minimum number of registered and active market
makers and a minimum number of record holders. If only the minimum of the
Offering Range (705,039 shares) are sold, the Common Stock will not qualify for
inclusion on the Nasdaq SmallCap Market, and the shares of Common Stock will
instead be traded on the over-the-counter market with quotations available on
the OTC "Bulletin Board" System (assuming the shares qualify under its listing
conditions).
Friedman, Billings, Ramsey & Co., Inc. intends to make a market in the
Common Stock but is under no obligation to do so, and the Company expects that
additional market makers will be identified. A public trading market having the
desirable characteristics of depth, liquidity and orderliness depends upon the
existence of willing buyers and sellers at any given time, the presence of which
is dependent upon the individual decisions of buyers and sellers over which
neither the Company nor any market maker has control. Accordingly, there can be
no assurance that an active and liquid trading market for the Common Stock will
develop or that, if developed, will continue, nor is there any assurance that
purchasers of the Common Stock will be able to sell their shares at or above the
purchase price. In the event a liquid market for the Common Stock does not
develop or market makers for the Common Stock discontinue their activities, such
occurrences may have an adverse impact on liquidity of the Common Stock and the
market value of the Common Stock.
Irrevocability of Orders; Potential Delay in Completion of Offering
Orders submitted in the Offering are irrevocable. Funds submitted in
connection with any purchase of Common Stock in the Offering will be held by the
Company until the completion or termination of the Reorganization, including any
extension of the expiration date. Because completion of the Reorganization will
be subject to an update of the independent appraisal prepared by FinPro, among
other factors, there may be one or more delays in the completion of the
Reorganization. Subscribers will have no access to subscription funds and/or
shares of Common Stock until the Reorganization is completed or terminated.
16
<PAGE>
Increased Compensation Expenses Associated with the ESOP and Stock Award Plan
The Bank 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 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 Bank--Executive Compensation--Employee Stock Ownership Plan
and Trust" and "--Executive Compensation--Stock Award Plan."
Dilutive Effect of Stock Award Plan and Stock Option Plan
If the Reorganization and the 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/trustees of the Bank 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 $.20 as a result of the implementation of the Stock
Award Plan. The issuance of authorized-but-unissued shares of Common Stock to
fund the Stock Award Plan in an amount equal to 4% of the Minority Ownership
Interest would dilute the voting interests of existing stockholders by
approximately 1.9%. The issuance of authorized-but- unissued shares of Common
Stock pursuant to the Stock Option Plan in an amount equal to 10% of the
Minority Ownership Interest would dilute the voting interests of existing
stockholders by approximately 4.8%. See "Pro Forma Data" and "Management of the
Bank--Executive Compensation."
Year 2000 Compliance
Like many financial institutions, the Bank 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 Bank's
loan portfolio primarily consists of loans secured by real estate. Consequently,
the Bank does not believe that its lending operations depend on borrowers'
compliance with the year 2000 issue. However, the Bank relies on independent
third parties to provide data processing services associated with its deposit
and loan activities. Moreover, in the event the Bank's significant suppliers do
not successfully and timely achieve Year 2000 compliance, the Bank's business or
operations could be adversely affected. The Bank 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 the end of the first calendar
quarter in 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capability of the Bank's Data Processing to
Accommodate the Year 2000."
Role of the Financial Advisor/Best Efforts Offering
The Bank and the Company have engaged Friedman, Billings, Ramsey & Co.,
Inc. as their financial and marketing advisor, and this firm has agreed to use
its best efforts to solicit subscriptions and purchase orders for Common Stock
in the Offering. The financial advisor has not prepared any report or opinion
constituting a recommendation or advice to the Bank or the Company, nor has it
prepared an opinion as to the fairness of the purchase price or the terms of the
Offering. Friedman, Billings, Ramsey & Co., Inc. has not verified the accuracy
or completeness of the information contained in this Prospectus. See "The
Reorganization and Offering--Plan of Distribution and Selling Commissions."
17
<PAGE>
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Bank has received an opinion of FinPro that, pursuant to FinPro's
valuation, subscription rights granted to Eligible Account Holders and
Supplemental Eligible Account Holders have no value. However, such valuation is
not binding on the IRS. If the subscription rights granted to Eligible Account
Holders and Supplemental Eligible Account Holders are deemed to have an
ascertainable value, receipt of such rights could result in taxable gain to
those Eligible Account Holders and Supplemental Eligible Account Holders who
receive and/or exercise the subscription rights in an amount equal to such
value. Additionally, the Bank could recognize a gain for tax purposes on such
distribution. Whether subscription rights are considered to have ascertainable
value is an inherently factual determination. See "The Reorganization and
Offering -- Federal and State Tax Consequences of the Reorganization".
18
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth certain financial and other information of
the Bank for the periods and as of the dates indicated. The financial data as of
June 30, 1998 have been derived in part from the audited financial statements of
the Bank and notes thereto presented elsewhere in this Prospectus. The financial
data as of September 30, 1998 and 1997 and for the three-month periods then
ended have been derived in part from unaudited financial statements of the Bank
which, in the opinion of the 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 September 30,
1998 are not necessarily indicative of the results of operations that may be
expected for the year ending June 30, 1999.
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------ --------
(In Thousands)
<S> <C> <C>
Selected Financial Condition Data:
Total assets ...................................... $141,763 $140,253
Loans receivable, net ............................. 82,742 80,260
Mortgage-backed securities (all available for sale) 4,651 5,189
Investment securities (all available for sale) .... 37,410 36,265
Asset-backed securities (all available for sale) .. 7,121 6,324
Deposits .......................................... 123,821 122,324
Total borrowings .................................. -- --
Retained earnings, substantially restricted ....... 16,305 15,730
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
1998 1997
------ ------
(In Thousands)
<S> <C> <C>
Selected Operations Data:
Total interest income .................... $2,472 $2,400
Total interest expense ................... 1,299 1,232
----- -----
Net interest income ................. 1,173 1,168
Provision for loan losses ................ 45 15
----- -----
----- -----
Net interest income after provision for
loan losses ......................... 1,128 1,153
Total non-interest income ................ 81 75
Total non-interest expense ............... 807 695
----- -----
----- -----
Income before taxes and extraordinary item 402 533
Income tax provision ..................... 153 192
----- -----
Net income ............................... $ 249 $ 341
----- -----
----- -----
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
At or for the Three Months Ended
September 30,
1998 1997
------ ------
<S> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios(1):
Return on average assets (ratio of net income to average total assets) 0.72% 1.04%
Return on average retained earnings (ratio of net income to average
retained earnings) ................................................ 6.20 9.36
Ratio of operating expense to average total assets .................... 2.28 2.08
Ratio of average interest-earning assets to average
interest-bearing liabilities ...................................... 110.16 109.37
Net interest rate spread (2) .......................................... 3.18 3.35
Net interest margin (3) ............................................... 3.58 3.72
Efficiency ratio (4) .................................................. 65.88 55.91
Asset Quality Ratios:
Non-performing assets to total assets at end of period ................ 0.44 0.71
Non-performing loans to total loans at end of period .................. 0.61 1.12
Allowance for loan losses to non-performing loans ..................... 132.36 81.03
Allowance for loan losses to loans receivable, net .................... 0.80 0.90
Capital Ratios:
Retained earnings to total assets at end of period .................... 11.50 11.22
Average retained earnings to average assets ........................... 11.30 10.87
Other Data:
Number of full-service offices ........................................ 4 3
</TABLE>
- -------------------------
(1) Where applicable, ratios for the three-month periods were annualized and
computed based on the monthly average balances.
(2) The difference between the weighted average yield on average
interest-earning assets and the weighted average cost of average
interest-bearing liabilities.
(3) Net interest income as a percentage of average interest-earning assets.
(4) The ratio of non-interest expense dividend by the sum of net interest
income and non-interest income.
Comparison of Financial Condition at September 30, 1998 and June 30, 1998
Assets. Total assets increased to $141.8 million at September 30, 1998 from
$140.3 million at June 30, 1998, an increase of $1.5 million, or 1.1%. This
increase resulted primarily from a $2.5 million, or 3.1%, increase in loans
receivable, net, as well as increases of $1.1 million, or 3.2%, in investment
securities and $797,000, or 12.6%, in asset-backed securities. The growth in
total assets reflected the Bank's strategy of investing in fixed-rate
residential mortgage loans, as well as increased demand for such loans in the
current low interest rate environment. Asset growth was funded by deposits,
which increased by $1.5 million, or 1.2%, as well as principal paydowns of
mortgage-backed securities, which decreased by $538,000, or 10.4%, at September
30, 1998 as compared to June 30, 1998.
Liabilities. Total deposits increased by $1.5 million, or 1.2%, to $123.8
million at September 30, 1998 compared to $122.3 million at June 30, 1998. The
growth in total deposits reflected an increase of $306,000, or 0.6%, in
certificate accounts and an increase of $1.2 million, or 1.8%, in passbook and
other accounts. At September 30, 1998, the Bank had no borrowings outstanding.
Retained Earnings. Total retained earnings increased by $575,000, or 3.7%,
to $16.3 million at September 30, 1998 from $15.7 million at June 30, 1998. The
increase in total retained earnings resulted from after tax net income of
20
<PAGE>
$249,000 for the three months ended September 30, 1998 as well as an increase of
$326,000 in net unrealized gain on securities available for sale.
Comparison of Operating Results for the Three Months Ended September 30, 1998
and 1997
General. Net income for the three months ended September 30, 1998 was
$249,000, a decrease of $92,000, or 27.0%, from net income of $341,000 for the
three months ended September 30, 1997. The decrease in net income was due
primarily to an increase of $112,000, or 16.1%, in non-interest expense and an
increase of $30,000, or 200.0% in the provision for loan losses to $45,000 for
the three months ended September 30, 1998, compared to $15,000 for the three
months ended September 30, 1997.
Interest Income. Interest income increased by $72,000, or 3.0%, to $2.5
million for the three months ended September 30, 1998 from $2.4 million for the
three months ended September 30, 1997. The increase was due primarily to a
$62,000, or 3.9%, increase in interest income received on loans and a $29,000,
or 4.2%, increase in interest and dividends on investment securities for the
three months ended September 30, 1998 as compared to the three months ended
September 30, 1997. The increase in interest from loans was attributable to a
$3.8 million, or 5.1%, increase in the average balance of loans receivable,
partially offset by a ten basis point decrease in the average yield on loans
receivable to 8.42% for the three months ended September 30, 1998 from 8.52% for
the three months ended September 30, 1997. The growth in the average balance of
loans receivable reflected demand for the Bank's fixed-rate one- to four-family
real estate loans in the current low market interest rate environment. The
increase in interest and dividends from investment securities reflected a $3.5
million, or 8.4%, increase in the average balance of investment securities,
which more than offset a decrease in the yield on such investment securities to
6.38% for the three months ended September 30, 1998 from 6.64% for the three
months ended September 30, 1997. The increase in the average balance of
investment securities reflected the deployment of liquidity pending investments
in higher-yielding mortgage loans.
Interest Expense. Interest expense increased by $65,000, or 5.3%, to $1.3
million for the three months ended September 30, 1998 from $1.2 million for the
three months ended September 30, 1997. The increase in interest expense
reflected an increase of $85,000, or 11.8%, in interest expense on certificate
accounts, as the average balance of such accounts increased by $3.5 million, or
7.0%, to $53.5 million for the three months ended September 30, 1998 from $50.0
million for the three months ended September 30, 1997, and the average rate paid
on such accounts increased 25 basis points to 6.03% for the three months ended
September 30, 1998. The increase in the average balance of certificate accounts
reflected investor demand for such accounts given the higher rates paid by the
Bank on such accounts as compared to the rates paid on savings deposits.
Provision for Loan Losses. The Bank's provision for loan losses increased
to $45,000 for the three months ended September 30, 1998 compared to $15,000 for
the three months ended September 30, 1997. The higher provision was due, in
part, to the continued growth in the loan portfolio and management's ongoing
assessment of the inherent risk in the portfolio. Management regularly reviews
the Bank's loan portfolio and makes provisions for loan losses to maintain the
adequacy of the allowance. At September 30, 1998, the allowance for loan losses
as a percentage of total nonperforming loans was 132.36%, compared to 81.03% at
September 30, 1997.
Noninterest Income. Noninterest income increased by $6,000, or 8.0%, for
the three months ended September 30, 1998 as compared to the three months ended
September 30, 1997.
Noninterest Expense. Noninterest expense increased by $112,000, or 16.1%,
to $807,000 for the three months ended September 30, 1998 from $695,000 for the
three months ended September 30, 1997. The increase reflected an increase of
$44,000, or 11.7%, in employee compensation and benefits, an increase of
$36,000, or 101.5%, in occupancy expense, an increase of $6,000, or 29.0%, in
advertising expense, and an increase of $11,000, or 90.8% in office supplies.
Much of the foregoing increases was attributed to the Bank's new branch office
in Greenville, New York, which opened in December 1997.
21
<PAGE>
Income Taxes. Income tax expense was $153,000 for the three months ended
September 30, 1998 compared to $192,000 for the three months ended September 30,
1997. The effective tax rate increased to 38.0% for the three months ended
September 30, 1998 from 36.0% for the three months ended September 30, 1997.
GREENE COUNTY BANCORP, INC.
The Company was organized for the purpose of acquiring all of the capital
stock of the Bank upon completion of the Reorganization and the Offering. The
Company has applied to the Federal Reserve Board to become a bank holding
company and, upon completion of the Reorganization, will be subject to
regulation by the Federal Reserve Board. See "The Reorganization and
Offering--Description of and Reasons for the Reorganization" and
"Regulation--Holding Company Regulation." Upon completion of the Reorganization,
the Company will have no significant assets other than the shares of the Bank's
common stock and an amount equal to 50% of the net proceeds of the Offering,
including the loan to the ESOP, and will have no significant liabilities. The
Company intends to use a portion of the net proceeds that it retains to loan to
the ESOP funds to enable the ESOP to purchase up to 8% of the Minority Ownership
Interest. See "Use of Proceeds." The management of the Company is set forth
under "Management of the Company." Initially, the Company will neither own nor
lease any property, but will instead use the premises, equipment and furniture
of the Bank. At the present time, the Company does not intend to employ any
persons other than certain officers who are currently officers of the Bank and
will utilize the support staff of the Bank from time to time. Additional
employees will be hired as appropriate to the extent the Company expands its
business in the future.
Management believes that the holding company structure will provide the
Company additional flexibility to diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of, or mergers
with, other financial institutions and financial services related companies.
There are no current arrangements, understandings or agreements regarding any
such opportunities. However, subsequent to the Reorganization, the Company will
be in a position, subject to regulatory limitations and the Company's financial
position, to take advantage of any such acquisition and expansion opportunities
that may arise. The initial activities of the Company are anticipated to be
funded by the proceeds to be retained by the Company, income thereon and through
dividends from the Bank.
The Company's executive office is located at the main office of the Bank,
at 425 Main Street, Catskill, New York 12414-1317. The Company's telephone
number is (518) 943-3700.
GREENE COUNTY SAVINGS BANK
The Bank was organized in 1889 as The Building and Loan Association of
Catskill, a New York-chartered savings and loan association. In 1974, the Bank
converted to a New York mutual savings bank under the name Greene County Savings
Bank. In conjunction with the Reorganization and the Offering, the Bank is
changing its name to The Bank of Greene County. The Bank's deposits are insured
by the Bank Insurance Fund ("BIF"), as administered by the FDIC, up to the
maximum amount permitted by law. The Bank is a community-oriented financial
institution engaged primarily in the business of accepting deposits from
customers through its main office and three full service branch offices, and
using those deposits, together with funds generated from operations and
borrowings, to make one- to four- family residential and commercial real estate
loans, commercial business loans and consumer loans, and to invest in investment
securities, mortgage-backed securities and asset-backed securities.
At June 30, 1998, the Bank had total assets of $140.3 million, total
deposits of $122.3 million and retained earnings of $15.7 million. At June 30,
1998, $70.4 million, or 86.7% of the Bank's loans were secured by real estate
and $64.7 million, or 79.7%, of the Bank's loans were secured by one- to
four-family residential real estate. Commercial real estate loans totaled $4.5
million, or 5.6%, of the Bank's total loans at June 30, 1998. Consumer loans
totaled $9.4 million, or 11.6% of the Bank's total loans, at June 30, 1998. The
Bank also originates commercial business loans, which totaled $1.3 million, or
1.7% of total loans. The Bank's investment securities, mortgage-backed
securities and asset-backed securities portfolios totaled $36.3 million, $5.2
million and $6.3 million, respectively, at June 30, 1998.
The Bank's main office is located at 425 Main Street, Catskill, New York
12414-1317. The Bank's telephone number is (518) 943-3700.
22
<PAGE>
MARKET AREA
The Bank is a community bank that offers a variety of financial products
and services. The Bank's primary lending area is in Greene County, New York.
Likewise, most of the Bank's deposit customers reside in Greene County, New
York. The Bank's market area is characterized as rural.
REGULATORY CAPITAL COMPLIANCE
At June 30, 1998, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the
FDIC capital standards as of June 30, 1998, on a historical and pro forma basis
assuming that the indicated number of shares were sold as of such date and the
Bank received 50% of the net proceeds. For purposes of the table below, the
amount expected to be borrowed by the ESOP and the cost of the shares expected
to be acquired by the Stock Award Plan are deducted from pro forma regulatory
capital. The Federal Reserve Board has adopted capital adequacy guidelines for
bank holding companies (on a consolidated basis) substantially similar to the
FDIC capital requirements for the Bank. On a pro forma consolidated basis after
the Reorganization and Offering, the Company's pro forma stockholders' equity
will exceed these requirements. See "Regulation--Holding Company Regulation."
<TABLE>
<CAPTION>
Pro Forma at June 30, 1998, Based upon the Sale at $10.00 per share of
----------------------------------------------------------------------
Historical at 705,039 829,458 953,877 1,096,958
June 30, 1998 Shares Shares Shares Shares(1)
-------------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital ...................... $15,730 11.22% $18,042 12.66% $18,508 12.94% $18,974 13.22% $19,511 13.55%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Leverage capital:
Capital level(3) ......... $15,488 11.09% $17,800 12.53% $18,266 12.82% $18,732 13.10% $19,269 13.43%
Requirement(4) ........... 5,588 4.00 5,680 4.00 5,699 4.00 5,718 4.00 5,739 4.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess .......... $ 9,900 7.09% $12,120 8.53% $12,567 8.82% $13,014 9.10% $13,530 9.43%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Risk-based capital:
Tier 1 capital level(3)(5) $15,488 20.32% $17,800 23.00% $18,266 23.53% $18,732 24.06% $19,269 24.67%
Requirement .............. 3,049 4.00 3,095 4.00 3,105 4.00 3,114 4.00 3,125 4.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess .......... $12,439 16.32% $14,705 19.00% $15,161 19.53% $15,618 20.06% $16,144 20.67%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total capital level(3)(5) ......... $16,216 21.27% $18,528 23.94% $18,994 24.47% $19,460 25.00% $19,997 25.60%
Requirement ..................... 6,098 8.00 6,191 8.00 6,209 8.00 6,228 8.00 6,249 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess .......................... $10,118 13.27% $12,337 15.94% $12,785 16.47% $13,232 17.00% $13,748 17.60%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
</TABLE>
- --------------------------
(1) As adjusted to give effect to an increase in the number of shares that
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market conditions or general financial and economic conditions
following the commencement of the Offering.
(2) Leverage capital levels are shown as a percentage of average assets.
Risk-based capital levels are calculated on the basis of a percentage of
risk-weighted assets.
(3) Pro forma capital levels assume: funding by the Bank of the Stock Award
Plan to enable the plan to acquire in the open market a number of shares
equal to 4% of the Minority Ownership Interest; the purchase by the ESOP of
8% of the Minority Ownership Interest; and the capitalization of the Mutual
Company by the Bank with $1,000. See "Management of the Bank--Executive
Compensation" for a discussion of the Stock Award Plan and ESOP.
(4) The current leverage capital requirement is 3% of total adjusted assets for
banks that receive the highest supervisory rating for safety and soundness
and that are not experiencing or anticipating significant growth. The
current leverage capital ratio applicable to all other banks is 4% to 5%.
See "Regulation--Regulatory Capital Requirements.
(5) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the average risk-weighting of the Bank's risk-weighted assets as
of June 30, 1998.
23
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common
Stock cannot be determined until the Offering is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $6.5 million and $9.0 million (or $10.4 million if the Estimated
Valuation Range is increased by 15%). See "Pro Forma Data" and "The
Reorganization and Offering--Stock Pricing and Number of Shares to Be Issued" as
to the assumptions used to arrive at such amounts. The Company will be unable to
utilize any of the net proceeds of the Offering until the consummation of the
Reorganization.
The Company will contribute 50% of the net proceeds of the
Offering to the Bank, or $3.2 million to $5.2 million at the minimum and
adjusted maximum of the Estimated Valuation Range, respectively. Such portion of
net proceeds received by the Bank from the Company will be used by the Bank for
general corporate purposes, including investments in short- and medium-term
investment grade debt securities, in mortgage- and asset-backed securities, and
to increase the origination of mortgage, consumer and commercial business loans.
The Bank may also use such funds to expand operations through acquisitions of
other financial institutions, branch offices or other financial services
companies, although the Bank and the Company have no current arrangements,
understandings or agreements regarding any such transactions. To the extent that
the stock-based benefit programs that the Company intends to adopt subsequent to
the Offering are not funded with authorized-but-unissued shares of Common Stock,
the Company or the Bank may use net proceeds from the Offering to fund the
purchase of stock to be awarded under such stock benefit programs. See "Risk
Factors--Dilutive Effect of Stock Award Plan and Stock Option Plan" and
"Management of the Bank--Executive Compensation--Stock Option Plan" and "--Stock
Award Plan."
The Company intends to use a portion of the net proceeds it
retains to make a loan directly to the ESOP to enable the ESOP to purchase
Common Stock equal to 8% of the Minority Ownership Interest. Based upon the sale
of 705,039 shares or 953,877 shares at the minimum and maximum of the Estimated
Valuation Range, respectively, the amount of the loan to the ESOP would be
$588,900 or $796,750, respectively (or $916,000 if the Estimated Valuation Range
is increased by 15%). See "Management of the Bank--Executive
Compensation--Employee Stock Ownership Plan and Trust." The remaining net
proceeds retained by the Company will initially be invested in U.S. government
and agency securities, short- and medium-term debt obligations, mortgage-backed
securities and other marketable securities.
The net proceeds retained by the Company may also be used to
support the future expansion of operations through the acquisition of financial
institutions or their assets, including those located within the Bank's market
area, or diversification into other banking related businesses. However, the
Company and the Bank have no current arrangements, understandings or agreements
regarding any such transactions. Upon completion of the Reorganization, the
Company will be a bank holding company, and will be permitted to engage only in
those activities that are permissible for bank holding companies under the Bank
Holding Company Act, as administered by the Federal Reserve Board. See
"Regulation -- Holding Company Regulation" for a description of certain
regulations applicable to the Company.
Upon completion of the Reorganization, the board of directors
of the Company will have the authority to adopt stock repurchase plans, subject
to statutory and regulatory requirements. Pursuant to New York regulations, and
without the prior approval of the Department, the Company may not repurchase any
Common Stock in the first year after the Reorganization, and during each of the
next two following years, may not repurchase more than 5% of its shares
outstanding. In addition, the FDIC prohibits an insured savings bank that has
converted from the mutual to stock form of ownership from repurchasing its
capital stock within one year following the date of completion of its stock
offering, except that stock repurchases of no greater than 5% of a bank's
outstanding capital stock may be repurchased during this one-year period where
compelling and valid business reasons are established to the satisfaction of the
FDIC. Based upon facts and circumstances following completion of the
Reorganization and subject to applicable regulatory requirements, the board of
directors may determine to repurchase stock in the future. Such facts and
circumstances may include but not be limited to: (i) market and economic factors
such as the price at which the stock is trading in the market, the volume of
trading, the attractiveness of other investment alternatives in terms of the
rate of return and risk involved in the investment, the ability to increase the
book value and/or earnings per share of the remaining outstanding shares, and
the opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans;
24
<PAGE>
and (iii) any other circumstances in which repurchases would be in the best
interests of the Company and its stockholders. In the event the Company
determines to repurchase stock, such repurchases may be made at market prices
which may be in excess of the $10.00 per share purchase price in the Offering
(the "Subscription Price"). Any stock repurchases will be subject to the
determination of the Company's board of directors that both the Company and the
Bank will be capitalized in excess of all applicable regulatory requirements
after any repurchases and that such capital will be adequate, taking into
account, among other things, the level of non-performing and other risk assets,
the Company's and the Bank's current and projected results of operations and
asset/liability structure, the economic environment, tax and other
considerations.
DIVIDEND POLICY
The Company has no present plans to pay dividends 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, after taking into account the
Company's consolidated financial condition, capital levels, general business
practices and other factors.
Under Delaware law, the Company is permitted to pay cash
dividends, provided that the amount of cash dividends paid may not exceed that
amount by which the net assets of the Company (the amount by which total assets
exceed total liabilities) exceeds its statutory capital, or if there is no such
excess, the net profits for the current and/or immediately preceding fiscal
year. The Company's source for the payment of cash dividends may in the future
depend on the receipt of cash dividends from the Bank. The Bank will not be
permitted to pay dividends on its Common Stock or repurchase shares of its
Common Stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. The liquidation account is expected
initially to total $15.7 million. See "The Reorganization and
Offering--Liquidation Rights." Under New York Banking Law, dividends paid by the
Bank may be declared and paid only out of the net profits of the Bank. The
approval of the Superintendent is required if the total of all dividends
declared in any calendar year will exceed net profits for that year plus the
retained net profits of the preceding two years, less any required transfer to
surplus or a fund for the retirement of any preferred stock. In addition, no
dividends may be declared, credited or paid if the effect thereof would cause
the Bank's capital to be reduced below the amount required by the Superintendent
or the FDIC. See "Regulation." Subsequent to the Offering, the availability of
the Bank's funds for the payment of dividends may be limited by the liquidation
account. See "The Reorganization and Offering--Liquidation Rights." Dividends in
excess of the Bank's current and accumulated earnings could result in the
realization by the Bank of taxable income. Management of the Bank has no current
plans to pay dividends in excess of the Bank's current and accumulated earnings.
See "Federal and State Taxation--Federal Taxation."
MARKET FOR COMMON STOCK
The Company was recently formed and has never issued capital
stock. The Bank, as a mutual institution, has never issued capital stock. The
Company has applied to have its Common Stock quoted on the Nasdaq SmallCap
Market under the symbol "GRNB". However, listing on the Nasdaq SmallCap Market
requires the presence of a minimum number of registered and active market
makers, and a minimum number of record holders. If only the minimum of the
Offering Range (705,039 shares) are sold, the Common Stock will not qualify for
inclusion on the Nasdaq SmallCap Market, and the shares of Common Stock will
instead be traded on the over-the-counter market with quotations available on
the OTC "Bulletin Board" System.
Friedman, Billings, Ramsey & Co., Inc. intends to make a
market in the Common Stock but is under no obligation to do so. The Company
expects that additional market makers will be identified. If the Company is
unable, for any reason, to list the Common Stock on the Nasdaq SmallCap Market,
or to continue to be eligible for listing, the Common Stock will be listed on
the over-the-counter market with quotations available on the OTC Bulletin Board
(assuming the shares qualify under its listing conditions).
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. The absence of an active and liquid trading market may make it
difficult to sell the Common Stock and may have an adverse effect on the price
of the Common Stock. Purchasers should consider the potentially illiquid and
long-term nature of their investment in the Common Stock.
25
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of
the Bank at June 30, 1998, and the pro forma consolidated capitalization of the
Company after giving effect to the Offering and the Reorganization, including
the issuance of shares to the Charitable Foundation, based upon the sale of the
number of shares indicated in the table and the other assumptions set forth
under "Pro Forma Data."
<TABLE>
<CAPTION>
Company Pro Forma Based upon the Sale at $10.00 Per Share of
---------------------------------------------------------------
1,096,958
705,039 829,458 953,877 Shares
Bank Shares Shares Shares (Adjusted
Historical (Minimum) (Midpoint) (Maximum) Maximum)(1)
---------- -------- ---------- --------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits(2) .......................................... $122,324 $122,324 $122,324 $122,324 $122,324
Other borrowings ..................................... -- -- -- --
-------- -------- -------- -------- --------
Total deposits and other borrowed funds .............. $122,324 $122,324 $122,324 $122,324 $122,324
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Stockholders' equity:
Common Stock, $.10 par value, 4,000,000 shares
authorized; shares to be issued as reflected(3) $ -- $ 162 $ 190 $ 219 $ 251
Additional paid-in capital(4) ..................... -- 6,228 7,445 8,660 10,059
Retained earnings(5) .............................. 15,488 15,487 15,487 15,487 15,487
Less:
After tax cost of Charitable Foundation(6) ........ -- 247 280 313 350
Plus:
Expenses of contribution to Charitable Foundation -- 411 466 521
584
Net unrealized gain on securities available
for sale, net of taxes ........................ 242 242 242 242 242
Less:
Common Stock acquired by the ESOP(7) .............. -- 589 693 797 916
Common Stock acquired by the Stock Award Plan (8) . -- 294 346 398 458
-------- -------- -------- -------- --------
Total stockholders' equity ........................... $ 15,730 $ 21,400 $ 22,511 $ 23,621 $ 24,899
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ----------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the Offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock, which would reduce pro forma deposits by the amount of such
withdrawals.
(3) Includes shares to be issued to depositors and the public in the Offering,
as indicated herein, and 878,970, 1,034,082, 1,189,194 and 1,376,574 shares
to be issued to the Mutual Company and the Charitable Foundation at the
minimum, midpoint, maximum and adjusted maximum of the Estimated Valuation
Range, respectively.
(4) Reflects the sale of shares in the Offering. No effect has been given to
the issuance of additional shares of Common Stock pursuant to the Stock
Option Plan to be adopted by the Company and presented for approval of
stockholders following the Offering. The Stock Option Plan would provide
for the grant of stock options to purchase a number of shares of Common
Stock equal to 10% of the Minority Ownership Interest. See "Management of
the Bank--Executive Compensation--Stock Option Plan."
(5) The retained earnings of the Bank will be substantially restricted after
the Offering. See "The Reorganization and Offering--Liquidation Rights."
Assumes that the Mutual Company will be capitalized by the Bank with
$1,000.
(6) Represents the tax effect of the contribution to the Charitable Foundation
based on a 40% tax rate. The realization of the deferred tax benefit is
limited annually to 10% of the Company's annual taxable income, subject to
the ability of the Company to carry forward any unused portion of the
deduction for five years following the year in which the contribution is
made.
(7) Assumes that 8% of the Minority Ownership Interest will be purchased by the
ESOP and that the funds used to acquire the ESOP shares will be borrowed
from the Company. The Common Stock acquired by the ESOP is reflected as a
reduction of stockholders' equity. See "Management of the Bank--Executive
Compensation--Employee Stock Ownership Plan and Trust."
(8) Assumes that, subsequent to the Offering, an amount equal to 4% of the
Minority Ownership Interest is purchased by the Stock Award Plan through
open market purchases. In the event the Stock Award Plan is implemented
more than one year after the Reorganization, an amount equal to 5% of the
Minority Ownership Interest may be implemented. The actual purchase price
per share may be more or less than $10.00. The Common Stock to be purchased
by the restricted stock plan is reflected as a reduction to stockholders'
equity. See "Risk Factors--Dilutive Effect of Stock Award Plan and Stock
Option Plan," footnote 3 to the table under "Pro Forma Data," and
"Management of the Bank--Executive Compensation--Stock Award Plan."
26
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock
cannot be determined until the Offering is completed. However, net proceeds are
currently estimated to be between $6.5 million and $9.0 million (or up to $10.5
million) based upon the following assumptions: (i) Friedman, Billings, Ramsey &
Co., Inc. will receive a fixed fee of $110,000; (ii) the Charitable Foundation
will be funded with a total contribution equal to 2.0% of the shares of Common
Stock issued in the Reorganization and $100,000 in cash; (iii) Reorganization
expenses, excluding the fees payable to Friedman, Billings, Ramsey & Co., Inc.,
will be approximately $450,000; and (iv) the Mutual Company will be capitalized
by the Bank with $1,000. Actual expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the year
ended June 30, 1998 has been calculated as if the Common Stock had been sold at
the beginning of the period and the net proceeds had been invested at 5.41% (the
one year U.S. Treasury bill rate as of June 30, 1998). The tables do not reflect
the effect of withdrawals from deposit accounts for the purchase of Common
Stock. The pro forma after-tax yield for the Company and the Bank is assumed to
be 3.25% for the year ended June 30, 1998 (based on an assumed tax rate of 40%).
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock, as adjusted to give effect to the purchase of shares by the ESOP. No
effect has been given in the pro forma stockholders' equity calculations for the
assumed earnings on the net proceeds. As discussed under "Use of Proceeds," the
Company will retain 50% of the net proceeds from the Offering.
The following pro forma information may not be representative
of the financial effects of the foregoing transactions at the dates on which
such transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company, is not intended to represent the fair market value of the Common Stock,
and may be greater than amounts that would be available for distribution to
stockholders in the event of liquidation.
27
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30, 1998
1,096,958
705,039 829,458 953,877 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 per Share
$10.00 per Share $10.00 per Share $10.00 per Share (Adjusted
(Minimum) (Midpoint) (Maximum) Maximum)(7)
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds ................................................. $ 7,050 $ 8,295 $ 9,539 $ 10,970
Plus: Value issued to Charitable Foundation ............... 311 366 421 484
----------- ----------- ----------- -----------
Pro forma market capitalization ................................ $ 7,361 $ 8,661 $ 9,960 $ 11,454
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Gross proceeds ............................................. 7,050 8,295 9,539 10,970
Less: Capital to Mutual Company ............................ 1 1 1 1
Less: Cash contribution to Charitable Foundation ........... 100 100 100 100
Expenses .......................................... 560 560 560 560
----------- ----------- ----------- -----------
Estimated net proceeds ..................................... 6,389 7,634 8,878 10,309
Less: Common Stock purchased by ESOP ....................... 589 693 797 916
Common Stock purchased by Stock Award Plan ........ 294 346 398 458
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted ........................ $ 5,506 $ 6,595 $ 7,683 $ 8,935
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income(1):
Historical ............................................ 1,150 1,150 1,150 1,150
Pro forma income on net proceeds, as adjusted ......... 179 214 249 290
Pro forma ESOP adjustment (2) ......................... 35 42 48 55
Pro forma Stock Award Plan adjustment (3) ............. 35 42 48 55
----------- ----------- ----------- -----------
Pro forma net income (1) ................................... $ 1,259 $ 1,280 $ 1,303 $ 1,330
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per share net income (1):
Historical ............................................ $ 0.75 $ 0.64 $ 0.56 $ 0.48
Pro forma income on net proceeds, as adjusted .............. 0.12 0.12 0.12 0.12
Pro forma ESOP adjustment (2) .............................. (0.02) (0.02) (0.02) (0.02)
Pro forma Stock Award Plan adjustment (3) .................. (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- -----------
Pro forma net income per share (1) ......................... $ 0.83 $ 0.72 $ 0.64 $ 0.56
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares used in calculating pro forma net
income per share ........................................ 1,531,008 1,801,185 2,071,363 2,382,068
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Stockholders' equity:
Historical ............................................ 15,730 15,730 15,730 15,730
Estimated net proceeds ................................ 6,389 7,634 8,878 10,309
Plus: Value issued to Charitable Foundation ................ 411 466 521 584
Less: After tax cost of Charitable Foundation .............. (247) (280) (313) (350)
Less: Common Stock acquired by ESOP (2) .................. (589) (693) (797) (916)
Less: Common Stock acquired by Stock Award Plan(3) ....... (294) (346) (398) (458)
----------- ----------- ----------- -----------
Pro forma stockholders' equity (3)(4)(5) ................... $ 21,400 $ 22,511 $ 23,621 $ 24,899
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Stockholders' equity per share (6):
Historical ............................................ 9.93 8.44 7.34 6.38
Estimated net proceeds ..................................... 4.03 4.10 4.14 4.18
Capitalization of the Mutual Company
Plus: Shares issued to Charitable Foundation ............. 0.26 0.25 0.24 0.24
Less: Contributions to Charitable Foundation ............. (0.16) (0.15) (0.15) (0.14)
Plus: Tax benefit of contribution to Charitable Foundation
Less: Common Stock acquired by ESOP (2) .................. (0.37) (0.37) (0.37) (0.37)
Common Stock acquired by Stock Award Plan (3) ... (0.19) (0.19) (0.19) (0.19)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share (3)(4)(5) ......... $ 13.50 $ 12.08 $ 11.01 $ 10.10
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares used in calculating pro forma
stockholders' equity per share .......................... 1,584,009 1,863,540 2,143,071 2,464,532
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Offering price to pro forma net income per share ........... 12.05x 13.89x 15.63x 17.86x
Offering price as a percentage of pro forma stockholders'
equity per share (6) ......................... 74.07% 82.78% 90.83% 99.01%
</TABLE>
-----------------------------------------
(Footnotes on following page)
(Footnotes from prior page)
28
<PAGE>
(1) Does not give effect to the non-recurring expense that will be recognized
in 1998 as a result of the establishment of the Charitable Foundation. The
Company will recognize an after-tax expense for the amount of the
contribution to the Charitable Foundation which is expected to be $247,000,
$280,000, $313,000 and $350,000 at the minimum, midpoint, maximum and
adjusted maximum of the Estimated Valuation Range, respectively. Assuming
the contribution to the Charitable Foundation was incurred during the year
ended June 30, 1998, pro forma net income per share would be $0.67, $0.56,
$0.49 and $0.41 at the minimum, midpoint, maximum and adjusted maximum,
respectively. Per share net income data is based on 1,531,008, 1,801,185,
2,071,363 and 2,382,068 shares outstanding, which represents shares issued
in the Reorganization, shares contributed to the Charitable Foundation and
shares to be allocated or distributed under the ESOP and Stock Award Plan
for the period presented.
(2) It is assumed that 8% of the Minority Ownership Interest will be purchased
by the ESOP. The funds used to acquire such shares are assumed to have been
borrowed by the ESOP from the Company. The amount to be borrowed is
reflected as a reduction of stockholders' equity. The Bank intends to make
annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Bank's total annual
payment of the ESOP debt is based upon ten equal annual installments of
principal, with an assumed interest rate at 8.5%. The pro forma net income
assumes: (i) that the Bank's contribution to the ESOP is equivalent to the
debt service requirement for the year ended June 30, 1998, and was made at
the end of the period; (ii) that 5,889, 6,928, 7,968 and 9,163 shares at
the minimum, midpoint, maximum and adjusted maximum of the Estimated
Valuation Range, respectively, were committed to be released during the
year ended June 30, 1998, at an average fair value of $10.00 per share in
accordance with Statement of Position ("SOP") 93-6; and (iii) only the ESOP
shares committed to be released were considered outstanding for purposes of
the net income per share calculations. See "Management of the
Bank--Executive Compensation--Employee Stock Ownership Plan and Trust."
(3) Gives effect to the restricted stock plan expected to be adopted by the
Company following the Offering. This plan intends to acquire a number of
shares of Common Stock equal to 4% of the Minority Ownership Interest, or
29,445, 34,641, 39,838 and 45,813 shares of Common Stock at the minimum,
midpoint, maximum and adjusted maximum of the Estimated Valuation Range,
respectively, either through open market purchases, if permissible, or from
authorized-but-unissued shares of Common Stock or treasury stock of the
Company, if any. Funds used by the restricted stock plan to purchase the
shares will be contributed to the plan by the Bank. In calculating the pro
forma effect of the restricted stock plan, it is assumed that the shares
were acquired by the restricted stock plan at the beginning of the period
presented in open market purchases at the Subscription Price and that 20%
of the amount contributed was an amortized expense during such period. The
issuance of authorized-but-unissued shares of Common Stock to the Stock
Award Plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.9% and pro forma net
income per share would be $0.81, $0.70, $0.62 and $0.55 at the minimum,
midpoint, maximum and adjusted maximum of the Estimated Valuation Range,
respectively, and pro forma stockholders' equity per share would be $13.26,
$11.86, $10.82 and $9.92 at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, respectively. There can be no
assurance that the actual purchase price of the shares granted under the
restricted stock plan will be equal to the Subscription Price. See
"Management of the Bank--Executive Compensation--Total Award Plan."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the
Company following the Offering. Under the Stock Option Plan, an amount
equal to 10% of the Minority Ownership Interest, or 73,613, 86,604, 99,594
and 114,533 shares at the minimum, midpoint, maximum and adjusted maximum
of the Estimated Valuation Range, respectively, will be reserved for future
issuance upon the exercise of options to be granted under the Stock Option
Plan. The issuance of Common Stock pursuant to the exercise of options
under the Stock Option Plan will result in the dilution of existing
stockholders' interests. Assuming all options were exercised at the end of
the period at an exercise price of $10.00 per share, the pro forma net
income per share would be $0.78, $0.68, $0.60 and $0.53, respectively, and
the pro forma stockholders' equity per share would be $13.35, $11.99,
$10.98 and $10.10, respectively. See "Management of the Bank--Executive
Compensation--Stock Option Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Offering. See "Dividend Policy," "The Reorganization
and Offering--Liquidation Rights" and "Regulation--New York Bank
Regulation."
(6) Stockholders' equity per share data is based upon 1,584,009, 1,863,540,
2,143,071 and 2,464,532 shares outstanding representing shares issued in
the Reorganization, shares purchased by the ESOP and the restricted stock
plan, and shares contributed to the Charitable Foundation.
(7) As adjusted to give effect to an increase in the number of shares that
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the Offering.
29
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT FOUNDATION
In the event that the Charitable Foundation was not
established as part of the Reorganization, FinPro has estimated that the pro
forma aggregate market capitalization of the Company would be approximately $8.6
million at the midpoint, which is approximately $35,000 less than the pro forma
aggregate market capitalization of the Company if the Charitable Foundation is
included, and would result in an approximately $331,000 decrease in the amount
of Common Stock offered for sale in the Reorganization. The pro forma price to
book ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Company
without the Charitable Foundation. Further, assuming the midpoint of the
Estimated Valuation Range, pro forma stockholders' equity per share and pro
forma net income per share would be substantially the same at $12.08 and $11.98,
respectively, and $0.72 and $0.71, respectively, with or without the Charitable
Foundation. The pro forma price to book ratio and the pro forma price to
earnings ratio are substantially the same with and without the Charitable
Foundation at the midpoint at 82.78% and 83.47%, respectively, and 13.89x and
14.08x, respectively. 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 appraisal prepared at that time would be based on the
facts and circumstances existing at that time, including, among other things,
market and economic conditions.
For comparative purposes only, set forth below are certain
pricing ratios and financial data and ratios, at the minimum, midpoint, maximum
and adjusted maximum of the Estimated Valuation Range, assuming the
Reorganization was completed at June 30, 1998. The valuation amounts referred to
in the table below relate to the value of the shares sold to the depositors and
the public, excluding shares issued to the Mutual Company.
<TABLE>
<CAPTION>
Minimum Midpoint Maximum Adjusted Maximum
--------------------- --------------------- --------------------- ---------------------
With Without With Without With Without With Without
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount ................ $ 7,050 $ 7,332 $ 8,295 $ 8,626 $ 9,539 $ 9,920 $ 10,970 $ 11,408
Pro forma market capitalization .......... 7,361 7,332 8,661 8,626 9,960 9,920 11,454 11,408
Total assets ............................. 145,924 146,145 147,035 147,284 148,145 148,422 149,423 149,732
Total liabilities ........................ 124,523 124,523 124,523 124,523 124,523 124,523 124,523 124,523
Pro forma stockholders' equity ........... 21,400 21,621 22,511 22,760 23,621 23,898 24,899 25,208
Pro forma net income ..................... 1,259 1,271 1,280 1,296 1,303 1,319 1,330 1,348
Pro forma stockholders' equity per share . 13.50 13.39 12.08 11.98 11.01 10.94 10.10 10.04
Pro forma net income per share ........... 0.83 0.82 0.72 0.71 0.64 0.63 0.56 0.56
Pro forma pricing ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share....................... 74.07% 74.68% 82.78% 83.47% 90.83% 91.41% 99.01% 99.60%
Offering price to pro forma
net income per share (1) .............. 12.05 12.20 13.89 14.08 15.63 15.87 17.86 17.86
Pro forma market capitalization
to assets ............................. 10.85 11.05 12.68 12.90 14.47 14.72 16.50 16.78
Pro forma financial ratios:
Return on assets ......................... 0.86 0.87 0.87 0.88 0.88 0.89 0.89 0.90
Return on equity ......................... 5.88 5.88 5.69 5.69 5.52 5.52 5.34 5.35
Equity to assets ......................... 14.67 14.79 15.31 15.45 15.94 16.10 16.66 16.84
</TABLE>
(1) If the contribution to the Charitable Foundation had been incurred during
the year ended June 30, 1998, pro forma net income per share would have
been $0.67, $0.56, $0.49 and $0.41, and the offering price to pro forma net
income per share would have been 14.95x, 17.70x, 20.45x, and 24.22x at the
minimum, midpoint, maximum and adjusted maximum, respectively.
30
<PAGE>
PARTICIPATION BY MANAGEMENT
The following table sets forth information regarding intended
Common Stock purchases by each of the trustees and executive officers of the
Bank and their associates, and by all trustees and executive officers as a
group. In the event the individual maximum purchase limitation is increased,
persons subscribing for the maximum amount may increase their purchase order.
This table excludes shares to be purchased by the ESOP, as well as any Stock
Award Plan awards or Stock Option Plan grants that may be made no earlier than
six months after the completion of the Offering. See "Management of the
Bank--Executive Compensation--Stock Award Plan" and "--Stock Option Plan." The
trustees and officers of the Bank have indicated their intention to purchase in
the Offering an aggregate of $1,092,000 of Common Stock, equal to 15.4%, 13.2%,
11.4%, and 10.0% of the number of shares to be sold in the Offering, at the
minimum, midpoint, maximum and adjusted maximum of the Estimated Valuation
Range, respectively.
<TABLE>
<CAPTION>
Aggregate Number Percent of
Purchase of Shares Sold at
Name Position Price(1) Shares(1) Midpoint
- ---- -------- --------- --------- --------------
<S> <C> <C> <C> <C>
Walter H. Ingalls Chairman of the Board $ 10,000 1,000 0.12%
J. Bruce Whittaker President, Chief Executive 100,000 10,000 1.21
Officer and Director
Bruce P. Egger Vice President and Secretary 20,000 2,000 0.24
Edmund L. Smith, Jr. Vice President and Treasurer 40,000 4,000 0.48
Daniel T. Sager Vice President--Lending 5,000 500 0.06
Richard J. Buck Trustee 50,000 5,000 0.60
Anthony Camera, Jr. Trustee 50,000 5,000 0.60
David H. Jenkins, DVM Trustee 100,000 10,000 1.21
Raphael Klein Trustee 200,000 20,000 2.42
Dennis R. O'Grady Trustee 200,000 20,000 2.42
Paul Slutzky Trustee 117,000 11,700 1.41
Martin C. Smith Trustee 200,000 20,000 2.42
---------- ------- -----
All trustees and executive officers
as a group (12 persons) $1,092,000 109,200 13.17%
---------- ------- -----
---------- ------- -----
</TABLE>
- ---------------------
(1) Includes purchases by associates.
THE REORGANIZATION AND OFFERING
The Superintendent has approved the Plan of Reorganization and
the Offering of the Common Stock subject to the approval of the Bank's
depositors and the satisfaction of certain conditions imposed by the
Superintendent. However, such approval does not constitute a recommendation or
endorsement of the Offering or the Plan of Reorganization by the Superintendent.
Description of and Reasons for the Reorganization
The Board of Trustees unanimously adopted the Plan of
Reorganization and the Superintendent has approved the Plan of Reorganization.
Pursuant to the Plan of Reorganization, the Bank will reorganize into a
"two-tier" mutual holding company structure. The two-tier structure has two
levels of holding companies--a "mid-tier" stock holding company and a "top-tier"
mutual holding company. Under the terms of the Plan of Reorganization: (i) the
Bank will form the Company as a Delaware corporation; (ii) the Bank will form
the Mutual Company as a New York mutual holding company; (iii) the Bank will
reorganize into a capital stock form of organization and issue its common stock
to the Mutual Company; (iv) the Mutual Company will contribute the common stock
of the Bank to the Company; and (v) the Company will issue shares of Common
Stock to the public and the Mutual Company. The number of shares of Common Stock
sold to depositors and the public pursuant to this Prospectus will be equal to
44.5% of the shares issued in the Offering, and the number of shares issued to
the Mutual Company will be equal to 53.5% of the shares issued in the Offering.
In addition, the Company will issue 2.0% of the shares to be outstanding to a
newly established
31
<PAGE>
Charitable Foundation. The two-tier mutual holding company structure is most
easily understood by considering the following schematic:
The Mutual Company Public
(a New York mutual Stockholders
holding company) (including the
Charitable
Foundation)
53.5% of 46.5% of
the the
Common Common
Stock Stock
The Company (a Delaware corporation)
100% of the
Common Stock
The Bank
(a New York stock savings bank)
In adopting the Plan of Reorganization, the Board of Trustees
determined that the Reorganization is in the best interest of the Bank. The
primary purpose of the Reorganization is to establish a structure that will
enable the Bank to compete and expand more effectively in the financial services
marketplace, and that will enable the Bank's depositors, employees, management
and trustees to obtain an equity ownership interest in the Bank. The new
structure will permit the Company to issue capital stock, which is a source of
capital not available to a mutual savings bank. Since the Company is not
offering all of its Common Stock for sale to depositors and the public in the
Offering (but is issuing a majority of its stock to the Mutual Company), the
Reorganization will result in less capital raised in comparison to a standard
mutual-to-stock conversion. The Reorganization, however, will also offer the
Bank the opportunity to raise additional capital since the stock held by the
Mutual Company will be available for sale in the future in the event the Mutual
Company converts to the capital stock form of organization or the Company
undertakes an incremental stock offering. See "Regulation-Holding Company
Regulation-Mutual Company Regulation." The Reorganization will also give the
Company greater flexibility to structure and finance the expansion of its
operations, including the potential acquisition of other financial institutions,
and to diversify into other financial services. The holding company form of
organization is expected to provide additional flexibility to diversify the
Bank's business activities through existing or newly formed subsidiaries, or
through acquisitions of or mergers with other financial institutions, as well as
other companies. Although management has 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 Bank to better manage its
capital by offering it broader investment opportunities through the holding
company structure, and by enabling the Company to distribute capital to
stockholders in the form of dividends. Because only a minority of the Common
Stock will be offered for sale in the Offering, the Bank's current mutual form
of ownership and its ability to remain an independent bank and to provide
community-oriented financial services will be preserved through the mutual
holding company structure.
The Board of Trustees believes that these advantages outweigh
the potential disadvantages of the mutual holding company structure, which may
include: (i) the inability of stockholders other than the Mutual Company to
obtain majority ownership of the Company and the Bank, which may result in the
perpetuation of the management and board of directors of the Bank 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 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
32
<PAGE>
Company will be owned by the Mutual Company, which is a mutual institution that
will be controlled by the existing Board of Trustees of the Bank. While this
structure will better permit management to focus on the Company's and the Bank's
long-term business strategy for growth and capital redeployment without
short-term pressure from stockholders, it will also serve to perpetuate the
existing management and trustees of the Bank. The Mutual 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 that must be approved by more
than a majority of stockholders of the Company. No assurance can be given that
the Company will not take action adverse to the interests of the Minority
Stockholders. For example, the Company could revise the dividend policy or
defeat a candidate for the board of directors of the Bank or other proposals put
forth by the Minority Stockholders.
The Reorganization does not preclude the conversion of the
Mutual Company from the mutual to stock form of organization which would be
effected through a merger of the Mutual Company into the Company or the Bank and
the concurrent sale of the shares held by the Mutual Company in a subscription
offering. A conversion of the Mutual Company from the mutual to stock form of
organization is not anticipated for the foreseeable future.
Following the completion of the Reorganization, all depositors
who had liquidation rights with respect to the Bank as of the effective date of
the Reorganization will continue to have such rights solely with respect to the
Mutual Company so long as they continue to hold deposit accounts with the Bank.
In addition, all persons who become depositors of the Bank subsequent to the
Reorganization will have such liquidation rights with respect to the Mutual
Company. Borrowers currently do not have ownership or voting rights in the Bank
and will not receive ownership or voting rights with respect to the Mutual
Company.
All insured deposit accounts of the Bank will continue to be
federally insured by the FDIC and the BIF up to the legal maximum limit in the
same manner as deposit accounts existing in the Bank immediately prior to the
Reorganization. Upon completion of the Reorganization, the Bank may exercise any
and all powers, rights and privileges of, and shall be subject to all
limitations applicable to, capital stock savings banks under New York law. As
long as the Mutual Company is in existence, the Mutual Company will be required
to own at least 51% of the voting stock of the Company, and the Company will own
100% of the voting stock of the Bank. The Bank and the Company may issue any
amount of non-voting stock or debt to persons other than the Mutual Company.
The Offering
The Company is offering shares of Common Stock to persons
other than the Mutual Company. An offering of between 705,039 and 953,877 shares
of the Common Stock (subject to adjustment to up to 1,096,958) pursuant to this
Prospectus will be conducted concurrently with the Reorganization. The shares of
Common Stock that will be sold in the Offering will constitute no more than
44.5% of the shares that will be outstanding after the Offering. Following the
Reorganization and the Offering, the Company also may issue additional Common
Stock to persons other than the Mutual Company, without prior approval of the
holders of the Common Stock.
The shares of Common Stock are being offered for sale at a
fixed Subscription Price of $10.00 per share in the subscription offering
pursuant to subscription rights (the "Subscription Offering") in the following
order of priority to: (i) holders of deposit accounts with a balance of $100 or
more on June 30, 1997 ("Eligible Account Holders"); (ii) the Bank's
tax-qualified employee plans, including the ESOP; (iii) depositors whose
accounts in the Bank totaled $100 or more on September 30, 1998 ("Supplemental
Eligible Account Holders"); and (iv) employees, officers and trustees of the
Bank. Concurrently, and subject to the prior rights of holders of subscription
rights, any shares of Common Stock not subscribed for in the Subscription
Offering are being offered in the Community Offering at $10.00 per share to
certain members of the general public, with a preference first given to natural
persons residing in Greene County, New York (the "Community Offering").
Subscription rights will expire if not exercised by 12:00 noon, New York time,
on December 17, 1998 unless extended by the Bank and the Company.
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Stock Pricing and Number of Shares to be Issued
The Plan of Reorganization and federal and state regulations
require that the aggregate purchase price of the Common Stock sold in the
Offering must be based on the appraised pro forma market value of the Common
Stock, as determined by an independent valuation (the "Independent Valuation").
The Bank has retained FinPro to make such valuation and FinPro will receive a
fee of $25,000 for its services. The Bank and the Company have agreed to
indemnify FinPro and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as appraiser, except where FinPro's liability
results from its negligence or bad faith.
The Independent Valuation was prepared by FinPro in reliance
upon the information contained in this Prospectus, including the Financial
Statements. FinPro also considered the following factors, among others: the
present and projected operating results and financial condition of the Bank and
the economic and demographic conditions in the Bank's existing market area;
certain historical, financial and other information relating to the Bank; a
comparative evaluation of the operating and financial statistics of the Bank
with those of other publicly traded subsidiaries of mutual holding companies;
the aggregate size of the Offering; the impact of the Reorganization on the
Bank's stockholders' equity and earnings potential; the proposed dividend policy
of the Company; and the trading market for securities of comparable institutions
and general conditions in the market for such securities.
The Independent Valuation states that as of October 7, 1998,
the estimated pro forma market value of the Common Stock ranged from a minimum
of $15.8 million to a maximum of $21.4 million, with a midpoint of $18.6 million
(the "Estimated Valuation Range"). The board determined to offer the shares in
the Offering at the Subscription Price of $10.00 per share, the price most
commonly used in stock offerings involving mutual-to-stock conversions. Based on
the Estimated Valuation Range and the Subscription Price of $10.00 per share,
the number of shares of Common Stock that the Company will issue will range from
1,584,009 shares to 2,143,071 shares, with a midpoint of 1,863,540 shares. The
board determined to offer 44.5% of such shares, or between 705,039 shares and
953,877 shares with a midpoint of 829,458 shares (the "Offering Range"), to
depositors and the public pursuant to this Prospectus. In addition, up to 42,066
shares are being issued to the Charitable Foundation as part of the
Reorganization, which will result in Minority Stockholders owning 46.5% of the
shares of the Common Stock outstanding at the conclusion of the Reorganization.
The 53.5% of the shares of the Company's Common Stock that are not sold in the
Offering or contributed to the Charitable Foundation will be issued to the
Mutual Company.
The board reviewed the Independent Valuation and, in
particular, considered (i) the Bank's financial condition and results of
operations for the year ended June 30, 1998, (ii) financial comparisons of the
Bank in relation to other financial institutions primarily including other
publicly traded subsidiaries of mutual holding companies, and (iii) stock market
conditions generally and in particular for financial institutions, all of which
are set forth in the Independent Valuation. The board also reviewed the
methodology and the assumptions used by FinPro in preparing the Independent
Valuation. The Estimated Valuation Range may be amended with the approval of the
Superintendent and the FDIC (if required) if necessitated by subsequent
developments in the financial condition of the Bank or market conditions
generally.
Following commencement of the Subscription Offering, the
maximum of the Estimated Valuation Range may be increased by up to 15%, to up to
$24.6 million, which will result in a corresponding increase in the maximum of
the Offering Range to up to 1,096,958 shares to reflect changes in market and
financial conditions, without the resolicitation of subscribers (in which event
up to 48,376 shares may be issued to the Charitable Foundation). The minimum of
the Estimated Valuation Range and the minimum of the Offering Range may not be
decreased without a resolicitation of subscribers. The Subscription Price of
$10.00 per share will remain fixed. See "--Limitations upon Purchases of Common
Stock" as to the method of distribution and allocation of additional shares that
may be issued in the event of an increase in the Offering Range to fill unfilled
orders in the Subscription and Community Offerings.
The Independent Valuation, however, is not intended, and must
not be construed, as a recommendation of any kind as to the advisability of
purchasing shares. FinPro did not independently verify the Financial Statements
and other information provided by the Bank, nor did FinPro value independently
the assets or
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liabilities of the Bank. The Independent Valuation considers the Bank as a going
concern and should not be considered as an indication of the liquidation value
of the Bank. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons purchasing
shares in the Offering will thereafter be able to sell such shares at prices at
or above the Subscription Price.
The Independent Valuation will be updated at the time of the
completion of the Offering. If the update to the Independent Valuation at the
conclusion of the Offering results in an increase in the maximum of the
Estimated Valuation Range to more than $24.6 million and a corresponding
increase in the Offering Range to more than 1,096,958 shares, or a decrease in
the minimum of the Estimated Valuation Range to less than $15.8 million and a
corresponding decrease in the Offering Range to fewer than 705,039 shares, then
the Company, after consulting with the Superintendent and the FDIC, may
terminate the Plan of Reorganization and return all funds promptly, with
interest on payments made by check, certified or teller's check, bank draft or
money order, extend or hold a new Subscription Offering, Community Offering, or
both, establish a new Offering Range, commence a resolicitation of subscribers
or take such other actions as permitted by the Superintendent and the FDIC in
order to complete the Reorganization and the Offering. In the event that a
resolicitation is commenced, unless an affirmative response is received within
20 days, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the
Superintendent and the FDIC for periods of up to 90 days not to extend beyond 24
months following approval of the Plan of Reorganization by the Superintendent.
If the minimum number of shares to be sold in the Offering (705,039 shares) is
not sold by December 17, 1998, the Bank may: (i) terminate the Offering and
promptly refund all payments for Common Stock, including interest on such
payments, at the Bank's passbook rate of 3.25%; or (ii) extend the Offering for
an additional 45 days or, if approved by the Superintendent, for an additional
period after such 45-day extension.
An increase in the Independent Valuation and the number of
shares to be issued in the Offering would decrease both a subscriber's ownership
interest and the Company's pro forma earnings and stockholders' equity on a per
share basis while increasing pro forma earnings and stockholders' equity on an
aggregate basis. A decrease in the Independent Valuation and the number of
shares to be issued in the Offering would increase both a subscriber's ownership
interest and the Company's pro forma earnings and stockholders' equity on a per
share basis while decreasing pro forma net income and stockholders' equity on an
aggregate basis. For a presentation of the effects of such changes, see "Pro
Forma Data."
Copies of the appraisal report of FinPro and the detailed
memorandum of the appraiser setting forth the method and assumptions for such
appraisal are available for inspection at each office of the Bank and the other
locations specified under "Additional Information."
No sale of shares of Common Stock may be consummated unless,
prior to such consummation, FinPro confirms to the Bank and the Superintendent
that, to the best of its knowledge, nothing of a material nature has occurred
that, taking into account all relevant factors, would cause FinPro to conclude
that the Independent Valuation is incompatible with its estimate of the pro
forma market value of the Common Stock of the Company at the conclusion of the
Offering. Any change that would result in an aggregate purchase price that is
below the minimum or above the adjusted maximum of the Estimated Valuation Range
would be subject to the Superintendent's approval. If such confirmation is not
received, the Bank may extend the Offering, reopen or commence a new offering,
establish a new Estimated Valuation Range and commence a resolicitation of all
purchasers with the approval of the Superintendent or take such other actions as
permitted by the Superintendent in order to complete the Offering.
Purchase Priorities and Method of Offering Shares
The Bank shall have the right, in its sole discretion, to
determine whether prospective purchasers are "residents," "associates," or
"acting in concert" as defined by the Plan of Reorganization and in interpreting
any and all other provisions of the Plan of Reorganization. All such
determinations are in the sole discretion of the Bank, and may be based on
whatever evidence the Bank chooses to use in making any such determination.
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Subject to the preceding paragraph and the limitations set
forth in the "--Limitations upon Purchases of Common Stock" section, the
priorities for the purchase of shares are as follows:
Priority 1: Eligible Account Holders. Each Eligible Account
Holder will be given the opportunity to purchase up to 10,000 shares, or
$100,000, of Common Stock; provided that the Company may, in its sole discretion
and without further notice to or solicitation of subscribers or other
prospective purchasers, increase such maximum purchase limitation to up to 5% of
the maximum number of shares issued in the Offering, subject to the overall
purchase limitation set forth in the section herein titled "Limitations upon
Purchases of Common Stock." If there are insufficient shares available to
satisfy all subscriptions of Eligible Account Holders, shares will be allocated
to Eligible Account Holders so as to permit each subscribing Eligible Account
Holder to purchase a number of shares sufficient to make his total allocation
equal to at least the lesser of 100 shares or the number of shares subscribed
for. Thereafter, unallocated shares will be allocated pro rata to remaining
subscribing Eligible Account Holders whose subscriptions remain unfilled in the
same proportion that each subscriber's aggregate deposit account balances as of
the Eligibility Record Date ("Qualifying Deposits") bears to the total amount of
Qualifying Deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled. Subscription rights to purchase Common Stock
received by executive officers and trustees of the Bank, including associates of
executive officers and trustees, based on their increased deposits in the Bank
in the one year preceding the Eligibility Record Date, shall be subordinated to
the subscription rights of other Eligible Account Holders. To ensure proper
allocation of stock, each Eligible Account Holder must list on his or her
subscription order form all deposit accounts in which he or she had an ownership
interest as of the Eligibility Record Date.
Priority 2: Tax-Qualified Employee Plans. The Tax-Qualified
Employee Plans, including the ESOP and the Bank's Employees' Savings and Profit
Sharing Plan and Trust, shall be given the opportunity to purchase in the
aggregate up to 10% of the Minority Ownership Interest. The ESOP intends to
purchase up to 8% of the Minority Ownership Interest. In the event of an
oversubscription in the Offering, subscriptions for shares by the Tax-Qualified
Employee Plans may be satisfied, in whole or in part, through open market
purchases by the Tax-Qualified Employee Plans subsequent to the closing of the
Offering.
Priority 3: Supplemental Eligible Account Holders. To the
extent there are sufficient shares remaining after satisfaction of subscriptions
by Eligible Account Holders and the Tax-Qualified Employee Plans, each
Supplemental Eligible Account Holder will have the opportunity to purchase up to
10,000 shares, or $100,000, of Common Stock; provided that the Company may, in
its sole discretion and without further notice to or solicitation of subscribers
or other prospective purchasers, increase such maximum purchase limitation to up
to 5% of the maximum number of shares issued in the Offering, subject to the
overall purchase limitations set forth in the section herein titled "Limitations
upon Purchases of Common Stock." In the event Supplemental Eligible Account
Holders subscribe for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders and the Tax-Qualified Employee Plans,
exceed available shares, the shares of Common Stock will be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each
subscribing Supplemental Eligible Account Holder to purchase a number of shares
sufficient to make their total allocation equal to at least the lesser of 100
shares or the number of shares subscribed for. Thereafter, unallocated shares
will be allocated to each subscribing Supplemental Eligible Account Holder whose
subscription remains unfilled in the same proportion that such subscriber's
aggregate deposit account balances as of the Supplemental Eligibility Record
Date ("Supplemental Qualifying Deposits") bear to the total amount of
Supplemental Qualifying Deposits of all subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled.
Priority 4: Employees, Officers and Trustees. To the extent
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders, the Tax-Qualified Employee Plans, and Supplemental
Eligible Account Holders, employees, officers and trustees of the Bank will
receive, without cost to them, nontransferable subscription rights to subscribe
for up to 10,000 shares, or $100,000, of the Common Stock; provided, that the
Company may, in its sole discretion and without further notice to or
solicitation of subscribers or other prospective purchasers, increase such
purchase limitation to 5% of the maximum number of shares issued in the
Offering, subject to the overall purchase limitations set forth in the section
herein titled "Limitations upon Purchases of Stock." If sufficient shares are
not available in this priority, shares will be allocated among trustees,
officers and employees on a pro rata basis based on the size of each person's
order.
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Community Offering
Any shares of Common Stock not subscribed for in the
Subscription Offering will be offered for sale in a Community Offering. This
will involve an offering of all unsubscribed shares directly to the general
public. The Community Offering, if any, shall be for a period of not more than
45 days unless extended by the Company and the Bank, and will commence
concurrently with, during or promptly after the Subscription Offering. The
Common Stock will be offered and sold in the Community Offering, in accordance
with FDIC and Department regulations, so as to achieve the widest distribution
of the Common Stock. No person, by himself or herself, or with an associate or
group of persons acting in concert, may subscribe for or purchase more than
10,000 shares of Common Stock offered in the Community Offering. Further, the
Company may limit total orders in the Community Offering so as to assure that
the number of shares available for the Syndicated Community Offering may be up
to a specified percentage of the number of shares of Common Stock. Finally, the
Company may reserve shares offered in the Community Offering for sales to
institutional investors.
In the event of an oversubscription for shares in the
Community Offering, shares will be allocated (to the extent shares remain
available) first to natural persons residing in Greene County, New York (the
"Community").
The terms "residence," "reside," "resided" or "residing" as
used herein with respect to any person shall mean any person who occupied a
dwelling within the Bank's Community, has an intent to remain within the
Community for a period of time, and manifests the genuineness of that intent by
establishing an ongoing physical presence within the Community together with an
indication that such presence within the Community is something other than
merely transitory in nature. The Bank may use deposit or loan records or such
other evidence provided to it to make a determination as to whether a person is
a resident. In all cases, however, such a determination shall be in the sole
discretion of the Bank.
The Bank and the Company, in their sole discretion, may reject
orders, in whole or in part, received from any person in the Community Offering.
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 in a Syndicated Community
Offering, subject to terms, conditions and procedures as may be determined by
the Bank and the Company in a manner that is intended to achieve the widest
distribution of the Common Stock, subject to the rights of the Company to accept
or reject in whole or in part any order in the Syndicated Community Offering. It
is expected that the Syndicated Community Offering, if any, will begin 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 the Community Offering, if any, the
boards of directors of the Company and the Bank will seek to make other
arrangements for the sale of the remaining shares. Such other arrangements will
be subject to the approval of the Department and the FDIC and to compliance with
applicable state and federal securities laws.
Restrictions on Sale of Stock by Trustees and Officers
All shares of the Common Stock purchased by trustees and
officers of the Bank in the Offering will be subject to the restriction that
such shares 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
37
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insider trading and other transfer restrictions under the federal securities
laws. See "Regulation--Federal Securities Laws."
Each certificate for 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 Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Prior to the completion of the Offering, no depositor may
transfer or enter into an agreement or understanding to transfer the legal or
beneficial ownership of the shares of Common Stock to be purchased by such
person in the Offering. Each depositor who submits an order form will be
required to certify that the purchase of Common Stock by such person is solely
for the purchaser's own account and there is no agreement or understanding
regarding the sale or transfer of such shares. The Bank intends to pursue any
and all legal and equitable remedies in the event it becomes aware of any such
agreement or understanding, and will not honor orders reasonably believed by the
Bank to involve such an agreement or understanding.
Procedure for Purchasing Shares of Common Stock
To ensure that each purchaser receives a Prospectus at least
48 hours before the Expiration Date, Prospectuses may not be mailed any later
than five days prior to such date or be hand delivered any later than two days
prior to such date. Order Forms may only be distributed with a Prospectus.
Expiration Date. The Offering will terminate at 12:00 noon,
New York time on December 17, 1998, unless extended by the Bank for up to an
additional 45 days (to January 29, 1999) or, if approved by the Superintendent,
for an additional period after such 45-day extension (as so extended, the
"Expiration Date"). The Bank is not required to give purchasers notice of any
extension unless the Expiration Date is later than January 29, 1999, in which
event purchasers will be "resolicited" (i.e., given the right to increase,
decrease, confirm, or rescind their orders). Purchasers who fail to respond to
the resolicitation within 20 days will have their orders rescinded and their
subscription funds returned promptly. If the minimum number of shares sold in
the Offering (705,039 shares) is not sold by the Expiration Date, the Bank may
terminate the Offering and promptly refund all orders for Common Stock. A
reduction in the number of shares below the minimum of the Estimated Valuation
Range will not require the approval of depositors or an amendment to the
Independent Valuation. If the number of shares is reduced below the minimum of
the Estimated Valuation Range, purchasers will be given an opportunity to
increase, decrease, or rescind their orders.
Use of Order Forms. In order to purchase the Common Stock,
each purchaser must complete an Order Form, except for certain persons
purchasing in the Syndicated Community Offering as more fully described below.
Any person receiving an Order Form who desires to purchase Common Stock may do
so by delivering (by mail or in person) to the Bank a properly executed and
completed Order Form, together with full payment for the shares purchased. The
Order Form must be received prior to 12:00 noon, New York time on December 17,
1998. Once tendered, an Order Form cannot be modified or revoked without the
consent of the Bank. Persons ordering shares are required to represent that they
are purchasing such shares for their own account. The interpretation by the Bank
of the terms and conditions of the Plan of Reorganization and of the
acceptability of the Order Forms will be final. The Bank is not required to
accept copies of Order Forms.
The Order Form includes a certification in which subscribers
acknowledge (i) that the Common Stock is not a deposit or savings account that
is federally insured or otherwise guaranteed by the Bank, the Company or the
federal government and (ii) that the subscribers received a copy of this
Prospectus describing the nature of the Common Stock and the risks involved in
an investment in the Common Stock, including the "Risk Factors" described in
this Prospectus.
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The certification is required by federal regulation and is intended to ensure
that subscribers are aware of the Risk Factors before making an investment
decision. However, signing the Order Form and certification will not result in
investors waiving their rights under the Securities Act of 1933.
Payment for Shares. Payment for all shares will be required to
accompany all completed Order Forms for the purchase to be valid. Payment for
shares may be made by (i) cash, check or money order, or (ii) authorization of
withdrawal from a deposit account maintained with the Bank. Third party checks
may not be accepted as payment for a subscriber's order. Appropriate means by
which such withdrawals may be authorized are provided on the Order Forms. Once
such a withdrawal amount has been authorized, a hold will be placed on such
funds, making them unavailable to the depositor until the Offering has been
completed or terminated. In the case of payments authorized to be made through
withdrawal from deposit accounts, all funds authorized for withdrawal will
continue to earn interest at the contract rate until the Offering is completed
or terminated. Interest penalties for early withdrawal applicable to certificate
of deposit accounts will not apply to withdrawals authorized for the purchase of
shares; however, if a withdrawal results in a certificate of deposit account
with a balance less than the applicable minimum balance requirement, the
certificate of deposit shall be canceled at the time of withdrawal without
penalty, and the remaining balance will earn interest at the Bank's passbook
rate subsequent to the withdrawal. Payments made by check or money order will be
placed in a segregated escrow account and will be paid interest at the Bank's
passbook rate of 3.25% (calculated using the simple interest method), from the
date payment is received until the Offering is completed or terminated. Such
interest will be paid by check, on all funds held, including funds accepted as
payment for shares of Common Stock, promptly following completion or termination
of the Offering. An executed Order Form, once received by the Bank, may not be
modified, amended or rescinded without the consent of the Bank, unless the
Offering is not completed by January 29, 1999, in which event purchasers may be
given the opportunity to increase, decrease, confirm or rescind their orders for
a specified period of time.
Depending on market conditions, the Common Stock may be
offered for sale to the general public on a best efforts basis in a Syndicated
Community Offering by a selling group of broker-dealers to be managed by
Friedman, Billings, Ramsey & Co., Inc. In its discretion, Friedman, Billings,
Ramsey & Co., Inc. will instruct selected broker-dealers as to the number of
shares to be allocated to each selected broker-dealer. Only upon allocation of
shares to selected broker-dealers may they take orders from their customers.
Investors who desire to purchase shares in the Community Offering directly
through a selected broker-dealer, which may include Friedman, Billings, Ramsey &
Co., Inc., will be advised that the members of the selling group are required
either: (a) upon receipt of an executed Order Form or direction to execute an
Order Form on behalf of an investor, to forward the appropriate purchase price
to the Bank for deposit in a segregated account on or before 12:00 noon,
prevailing time, of the business day next following such receipt or execution;
or (b) upon receipt of confirmation by such member of the selling group of an
investor's interest in purchasing shares, and following a mailing of an
acknowledgment by such member to such investor on the business day next
following receipt of confirmation, to debit the account of such investor on the
fifth business day next following receipt of confirmation and to forward the
appropriate purchase price to the Bank for deposit in the segregated account on
or before 12:00 noon, prevailing time, of the business day next following such
debiting. Payment for any shares purchased pursuant to alternative (a) above
must be made by check in full payment of the purchase price. Payment for shares
purchased pursuant to alternative (b) above may be made by wire transfer to the
Bank.
A depositor interested in using his or her IRA funds to
purchase Common Stock must do so through a self-directed IRA. Since the Bank
does not offer such accounts, it will allow a depositor to make a trustee-
to-trustee transfer of the IRA funds to a trustee offering a self-directed IRA
program with the agreement that such funds will be used to purchase the Common
Stock in the Offering. There will be no early withdrawal or IRS penalties for
such transfers. The new trustee would hold the Common Stock in a self-directed
account in the same manner as the Bank now holds the depositor's IRA funds. An
annual administrative fee may be payable to the new trustee. Depositors
interested in using funds in a Bank IRA to purchase Common Stock should contact
the Stock Center as soon as possible so that the necessary forms may be
forwarded for execution prior to the Expiration Date.
If the ESOP purchases shares of the Common Stock, such plan
will not be required to pay for such shares until consummation of the Offering.
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Delivery of Stock Certificates. Certificates representing
Common Stock issued in the Offering will be mailed by the Bank to the persons
entitled thereto at the registered address noted on the order form, as soon as
practicable following consummation of the Offering. Any certificates returned as
undeliverable will be held by the Bank until claimed by persons legally entitled
thereto or otherwise disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of stock which they ordered.
Plan of Distribution and Selling Commissions
To assist in the marketing of the Common Stock, the Bank has
retained Friedman, Billings, Ramsey & Co., Inc., a broker-dealer registered with
the National Association of Securities Dealers, Inc. ("NASD"). Friedman,
Billings, Ramsey & Co., Inc. will assist the Bank in the Offering as follows:
(i) in training and educating the Bank's employees regarding the mechanics and
regulatory requirements of the Offering; (ii) in conducting informational
meetings for employees, customers and the general public; (iii) in coordinating
the selling efforts in the Bank's local communities; and (iv) in soliciting
orders for Common Stock. For these services, Friedman, Billings, Ramsey & Co.,
Inc. will receive a fixed fee of $110,000. If there is a Syndicated Community
Offering, the fixed fee will be a negotiated percentage of the value of the
Common Stock sold by Friedman, Billings, Ramsey & Co., Inc. and other NASD
member firms under selected broker-dealer agreements.
The Bank also will reimburse Friedman, Billings, Ramsey & Co.,
Inc. for its reasonable out-of-pocket expenses associated with its marketing
effort, up to a maximum of $40,000 (including legal fees and expenses ). The
Bank has made an advance payment of $12,500 to Friedman, Billings, Ramsey & Co.,
Inc. If the Plan of Reorganization is terminated by the Bank, if the Offering is
not completed by January 29, 1999, or if Friedman, Billings, Ramsey & Co., Inc.
terminates its agreement with the Bank in accordance with the provisions of the
agreement, Friedman, Billings, Ramsey & Co., Inc. will only receive
reimbursement of its reasonable out-of-pocket expenses. The Bank will indemnify
Friedman, Billings, Ramsey & Co., Inc. against liabilities and expenses
(including legal fees) incurred in connection with certain claims or litigation
arising out of or based upon untrue statements or omissions contained in the
offering material for the Common Stock, including liabilities under the
Securities Act of 1933.
Trustees and executive officers of the Bank may participate in
the solicitation of offers to purchase Common Stock. Other trained employees of
the Bank may participate in the Offering in ministerial capacities, providing
clerical work in effecting a sales transaction or answering questions of a
ministerial nature. Other questions of prospective purchasers will be directed
to executive officers or registered representatives. The Bank will rely on Rule
3a4-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
so as to permit officers, trustees, and employees to participate in the sale of
the Common Stock. No officer, trustee, or employee of the Bank will be
compensated for his participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock.
A Stock Center will be established at a location adjacent to
the Bank's main office. Employees will inform prospective purchasers to direct
their questions to the Stock Center and will provide such persons with the
telephone number of the Stock Center.
Limitations upon Purchases of Common Stock
The following additional limitations have been imposed upon
purchases of shares of Common Stock. Defined terms used in this section and not
otherwise defined in this Prospectus shall have the meaning set forth in the
Plan of Reorganization.
A. The aggregate amount of outstanding Common Stock of the
Company owned or controlled by persons other than Mutual
Company at the close of the Offering shall not exceed 49% of
the Company's total outstanding Common Stock.
40
<PAGE>
B. No person or group of persons acting in concert, together
with their associates, may purchase more than 20,000 shares,
or $200,000, of Common Stock in the Offering, except that:
(i) the Company may, in its sole discretion and without
further notice to or solicitation of subscribers or other
prospective purchasers, increase such maximum purchase
limitation to up to 5% of the number of shares sold in the
Offering; (ii) Tax-Qualified Employee Plans may purchase up
to 10% of the shares sold in the Offering; and (iii) for
purposes of this paragraph, shares to be held by any
Tax-Qualified Employee Plan and attributable to a person
shall not be aggregated with other shares purchased directly
by or otherwise attributable to such person.
C. The aggregate amount of Common Stock acquired in the
Offering by all management persons and their associates,
exclusive of any stock acquired by such persons in the
secondary market, shall not exceed 25% of the outstanding
shares of Common Stock of the Company held by persons other
than the Mutual Company at the close of the Offering. In
calculating the number of shares held by management persons
and their associates under this paragraph, shares held by
any Tax-Qualified Employee Benefit Plan or any
Non-Tax-Qualified Employee Benefit Plan of the Bank that are
attributable to such persons shall not be counted.
D. Notwithstanding any other provision of the Plan of
Reorganization, 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.
E. 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 the Plan of Reorganization.
F. The Company will make reasonable efforts to comply with the
securities laws of all states in the United States in which
persons entitled to subscribe for Common Stock pursuant to
the Plan of Reorganization reside. However, the Company and
the Bank are not required to offer Common Stock to any
person who resides in a foreign country.
41
<PAGE>
Establishment of the Charitable Foundation
General. In furtherance of the Bank's commitment to the communities
that it serves, the Bank intends to establish a Charitable Foundation in
connection with the Reorganization. The Plan of Reorganization provides that the
Bank and the Company may establish the Charitable Foundation, which will be
incorporated under Delaware law as a non-stock corporation and will be funded
with cash and shares of Common Stock contributed by the Company. The Bank will
contribute to the Charitable Foundation 2.0% of the shares of Common Stock to be
issued in the Reorganization or 31,092, 36,579, 42,066 and 48,376 shares,
respectively, at the minimum, midpoint, maximum and adjusted maximum of the
Offering Range and $100,000 in cash. The contribution of Common Stock to the
Charitable Foundation will be dilutive to the interests of stockholders and will
have an adverse impact on the reported earnings of the Company in the year in
which the Charitable Foundation is established.
Purpose of the Charitable Foundation. The purpose of the Charitable
Foundation is to provide funding to support charitable causes and community
development activities. Historically, the Bank has emphasized community lending
and development activities within the communities that it services, and the
Charitable Foundation is being formed as a complement to the Bank's existing
community activities. Management believes the establishment of a Charitable
Foundation is consistent with the Bank's commitment to community service.
Funding of the Charitable Foundation with Common Stock of the Company also may
be a means of enabling the communities served by the Bank to share in the growth
and success of the Company. The Charitable Foundation will also enable the
Company and the Bank to develop a unified charitable donation strategy and will
centralize the responsibility for administration and allocation of corporate
charitable funds. Charitable foundations have been formed by other financial
institutions for this purpose, among others. The contribution to the Charitable
Foundation will not take the place of the Bank'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 consist of persons who are existing directors and officers of the
Company. Subsequent to the Reorganization, other individuals may be appointed to
the Board, including individuals not affiliated with the Bank or the Company.
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 divided into
three classes with each class appointed for three-year terms. 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 Internal Revenue Code of 1986 (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 its board of directors which will be responsible for establishing the
policies of the Charitable Foundation with respect to grants or donations
consistent with the purpose 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 also will be responsible
for directing the activities and managing the assets of the Charitable
Foundation. However, as a condition to issuing their non-objection to the
Reorganization, the FDIC and the Department have required the Charitable
Foundation to commit that all shares of Common Stock held by the Charitable
Foundation will be voted in the same ratio as all other shares of the Company's
Common Stock (other than shares held by the Mutual Company) on all proposals
considered by stockholders of the Company; provided, however, that, consistent
with such condition, the FDIC and the Department would waive this voting
restriction under certain circumstances (and subject to certain additional
conditions) if compliance with the voting restriction would: (i) cause a
violation of Delaware law; (ii) cause the Charitable Foundation to lose its
tax-exempt status, or cause the Internal Revenue Service (the "IRS") to deny the
Charitable Foundation's
42
<PAGE>
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 FDIC and the Department 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 FDIC and the Department that
compliance with the voting requirement would have the effect described in
clauses (i), (ii) or (iii) above. Under those circumstances, the FDIC and the
Department would grant waivers of the voting restriction upon submission of such
legal opinion(s) by the Company or the Charitable Foundation that are
satisfactory to the FDIC and the Department. In the event that the FDIC and the
Department were to waive the voting requirement, the directors would direct the
voting of the Common Stock held by the Charitable Foundation.
The Charitable Foundation's place of business will be located at the
Bank's administrative offices and initially the Charitable Foundation is
expected to have no employees but will utilize the members of the staff of the
Company or the Bank. The board of directors of the Charitable Foundation will
appoint such officers as may be necessary to manage the operation of the
Charitable Foundation. In this regard, it is expected that the Bank will be
required to provide the FDIC with a commitment that, to the extent applicable,
the Bank will comply with the affiliate restrictions set forth in Sections 23A
and 23B of the Federal Reserve Act with respect to any transactions between the
Bank and the 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. One of the conditions
imposed on the gift of Common Stock by the Company is that the amount of Common
Stock that may be sold by the Charitable Foundation in any one year shall not
exceed 5% of the average market value of the assets held by the Charitable
Foundation, except where the board of directors of the Charitable Foundation
determines that the failure to sell an amount of Common Stock greater than such
amount would result in a longer-term reduction of the value of the Charitable
Foundation's assets and as such would jeopardize the Charitable Foundation's
capacity to carry out its charitable purposes. Upon completion of the
Reorganization and the contribution of shares to the Charitable Foundation, the
Company would have 1,584,009, 1,863,540 and 2,143,071 shares issued and
outstanding at the minimum, midpoint and maximum of the Estimated Valuation
Range. Because the Company will have an increased number of shares outstanding,
the voting and ownership interests of stockholders in the Company's Common Stock
would be diluted by 2.0%, as compared to their interests in the Company if the
Charitable Foundation was not established. For additional discussion of the
dilutive effect, see "Pro Forma Data."
Impact on Earnings. The contribution of cash and Common Stock to the
Charitable Foundation will have an adverse impact on the Company's and the
Bank's earnings in the year in which the contribution is made. The Company will
recognize the full expense in the amount of the contribution of cash and Common
Stock to the Charitable Foundation in the quarter in which it occurs, which is
expected to be the quarter ending December 31, 1998. The aggregate amount of the
contribution will range from $410,920 to $520,660, based on the minimum and
maximum of the Estimated Valuation Range, respectively (or up to $583,760 at the
adjusted maximum of the Estimated Valuation Range). The number of shares to be
contributed to the Charitable Foundation will range from 31,092 to 42,066, and
the amount of cash to be contributed will be fixed at $100,000. The contribution
expense will be partially offset by the tax benefit related to the expense. The
Company and the Bank have been advised by their independent tax advisors that
the contribution to the Charitable Foundation will be tax deductible, subject to
an annual limitation based on 10% of the Company's annual taxable income.
Assuming an aggregate contribution of $520,660 (based on the maximum of the
Estimated Valuation Range), the Company estimates a net tax-effected expense of
$312,400 (based upon a 40% tax rate). Management cannot predict earnings for the
fiscal year ending June 30, 1999, but expects that the establishment and funding
of the Charitable Foundation will have an adverse impact on the Company's
earnings for the year. In addition to the contribution to the Charitable
Foundation, the Bank or the Mutual Company may continue making grants and
contributions to the community that would not be permitted for the Charitable
Foundation.
Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
would qualify as a Section 501(c)(3) exempt organization under the Code, and
would be classified as a private charitable foundation. The Charitable
Foundation will submit a request to the IRS to be recognized as an exempt
organization. The Company and the Bank have received an opinion of their
independent
43
<PAGE>
tax advisors that the Charitable Foundation would qualify as a Section 501(c)(3)
exempt organization under the Code, except that such opinion does not consider
the impact of the condition to be agreed to by the Charitable Foundation that
Common Stock issued to the Charitable Foundation be voted in the same ratio as
all other shares of the Company's Common Stock (other than shares held by the
Mutual Company) on all proposals considered by stockholders of the Company.
Consistent with this condition, in the event that the Company or the Charitable
Foundation receives an opinion of their legal counsel that compliance with the
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, the FDIC and the Superintendent
would waive such voting restriction upon submission of a legal opinion by the
Company or the Charitable Foundation that is satisfactory to them. The
independent tax advisors' opinion further provides that there is substantial
authority for the position that the Company's contribution of its own stock to
the Charitable Foundation would not constitute an act of self-dealing, and that
the Company would be entitled to a deduction in the amount of the fair market
value of the stock at the time of the contribution less the nominal par value
that the Charitable Foundation is required to pay to the Company for such stock,
subject to an annual limitation based on 10% of the Company's annual taxable
income. The Company, however, would be able to carry forward any unused portion
of the deduction for five years following the contribution. Assuming the sale of
Common Stock at the adjusted maximum of the Estimated Valuation Range, the
Company estimates that all of the deduction should be deductible over the
six-year period. Although the Company and the Bank have received an opinion of
their independent tax advisors that the Company will be entitled to the
deduction 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 the deduction will be permitted. In such event, the
Company's tax benefit related to the Charitable Foundation would have to be
fully expensed, resulting in a further reduction in earnings in the year in
which the IRS makes such a determination.
As a private Charitable Foundation, earnings and gains, if any, from
the sale of Common Stock or other assets are generally exempt from federal and
state corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private Charitable Foundation will generally
be subject to a federal excise tax of 2.0%. 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 charitable 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. The Charitable Foundation will also be required to file an annual report
with the Charities Bureau of the Office of the Attorney General of the State of
New York.
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 of the Company. 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 of the Company. The pro forma aggregate
price of the Common Stock being offered for sale in the Reorganization is
currently estimated to be between $7.1 million and $9.5 million, with a midpoint
of $8.3 million. The pro forma price to book ratio and the pro forma price to
earnings ratio, at and for the year ended June 30, 1998, are 82.78% and 13.89x,
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 $10.0 million at the midpoint based on
a pro forma price to book ratio and a pro forma price to earnings ratio of
83.47% and 14.08x, respectively. The amount of Common Stock being offered for
sale in the Offering at the midpoint of the Estimated Valuation Range is 36,579
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, certain account holders of the Bank who subscribe to
purchase Common Stock in the Subscription Offering would receive fewer shares
depending on the size of a depositor's stock order and the amount of his or her
qualifying deposits in the Bank and the overall level of subscriptions. See
"Comparison of Valuation and Pro Forma Information without Foundation." This
estimate by FinPro
44
<PAGE>
was prepared solely for purposes of providing subscribers with information with
which to make an informed decision on the Reorganization.
The decrease in the amount of Common Stock being offered as a result of
the contribution of Common Stock to the Charitable Foundation will not have a
significant effect on the Company or the Bank's capital position. The Bank's
regulatory capital is significantly in excess of its regulatory capital
requirements and will further exceed such requirements following the
Reorganization. The Bank's leverage and risk-based capital ratios at June 30,
1998 were 11.09% and 20.32%, respectively. Assuming the sale of shares at the
midpoint of the Estimated Valuation Range, the Bank's pro forma leverage and
risk-based capital ratios at June 30, 1998 would be 12.82% and 23.53%,
respectively. On a consolidated basis, the Company's pro forma stockholders'
equity would be $22.5 million, or approximately 15.3% of pro forma consolidated
assets, assuming the sale of shares at the midpoint of the Offering Range. Pro
forma stockholders' equity per share and pro forma net income per share would be
$12.08 and $0.72, 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 $22.8 million, or
approximately 15.5% of pro forma consolidated assets at the midpoint of the
Estimated Valuation Range, and pro forma stockholder's equity per share and pro
forma net income per share would be substantially similar with or without the
Charitable Foundation. See "Comparison of Valuation and Pro Forma Information
without Foundation."
Regulatory Conditions Imposed on the Charitable Foundation.
Establishment of the Charitable Foundation is subject to certain conditions
agreed to by the Charitable Foundation in writing as a condition to receiving
the FDIC's non-objection to and Superintendent's approval of the Reorganization,
including the following: (i) the Charitable Foundation will be subject to
examination by the FDIC and the Department; (ii) the Charitable Foundation must
comply with supervisory directives imposed by the FDIC and the Department; (iii)
the Charitable Foundation will operate in accordance with written policies
adopted by the board of directors, including a conflict of interest policy; and
(iv) any shares of Common Stock held by the Charitable Foundation must be voted
in the same ratio as all other outstanding shares of Common Stock (other than
shares held by the Mutual Company) on all proposals considered by stockholders
of the Company; provided, however, that, consistent with the condition, the FDIC
and the Department would waive this voting restriction under certain
circumstances (and subject to additional conditions) if compliance with the
voting restriction would: (a) cause a violation of the law of the State of
Delaware; (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. In order to obtain a
waiver, the Charitable Foundation's legal counsel would be required to render an
opinion satisfactory to the FDIC and the Department. There can be no assurances
that a legal opinion addressing these issues could be rendered, or if rendered,
that the FDIC and the Department would grant unconditional waivers 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.
Potential Challenges. The establishment and funding of a Charitable
Foundation as part of a conversion of a mutual savings institution to stock form
has only recently occurred. As such, the Charitable Foundation, and the
Superintendent's approval of the Reorganization and the FDIC's nonobjection to
the Reorganization, may be subject to potential challenges notwithstanding that
the board of directors of the Company and the board of trustees of the Bank have
considered the various factors involved in the establishment of the Charitable
Foundation in reaching their determination to establish the Charitable
Foundation as part of the Reorganization. If challenges were to be instituted
seeking to prevent the Bank from establishing the Charitable Foundation in
connection with the Reorganization, 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 removal or other relief against the Company or the
Bank. Additionally, if the Company and the Bank are forced to eliminate the
Charitable Foundation, the Company may be required to resolicit subscribers in
the Offering.
45
<PAGE>
Liquidation Rights
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor would have a claim to receive his or her pro
rata share of any assets of the Bank remaining after payment of claims of all
creditors (including the claims of all depositors to the withdrawal value of
their accounts). To the extent there are remaining assets, a depositor may have
a claim to receive a pro rata share of the remaining assets in the same
proportion as the value of such depositor's deposit accounts to the total value
of all deposit accounts in the Bank at the time of liquidation, subject to the
right of the State of New York to garnish such assets. After the Reorganization,
each depositor, in the event of a complete liquidation, would have a claim as a
creditor of the Bank. However, except as described below, this claim would be
solely in the amount of the balance in the deposit account plus accrued
interest. A depositor would not have an interest in the value or assets of the
Bank above that amount.
The Plan of Reorganization provides for the establishment, upon the
completion of the Reorganization, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders in
an amount equal to the surplus and reserves of the Bank as of the date of its
latest balance sheet contained in the final Prospectus used in connection with
the Reorganization. Each Eligible Account Holder and Supplemental Eligible
Account Holder, who continues to maintain a deposit account at the Bank, would,
on a complete liquidation of the Bank, have a claim to an interest in the
liquidation account after payment of all creditors but prior to any payment to
the stockholders of the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, with a balance of $100 or more held in the
Bank on June 30, 1997 and September 30, 1998, respectively ("Deposit Account").
Each Eligible Account Holder and Supplemental Eligible Account Holder will have
a claim to 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 each such
Deposit Account on June 30, 1997 and September 30, 1998, respectively, bore to
the balance of all Deposit Accounts in the Bank on such date.
If, however, on the last day of any fiscal year of the Bank commencing
after the Eligibility Record Date or Supplemental Eligibility Record Date, as
the case may be, the deposit balance in any Deposit Account of an Eligible
Account Holder or Supplemental Eligible Account Holder is less than either (i)
the amount of qualifying deposits of such Eligible Account Holder or
Supplemental Eligible Account Holder on the Eligibility Record Date or
Supplemental Eligibility Record Date, as the case may be, or (ii) the deposit
balance in such Deposit Account at the close of business on the last day of any
previous fiscal year of the Bank commencing after the Eligibility Record Date or
the Supplemental Eligibility Record Date, then such Eligible Account Holder's or
Supplemental Eligible Account Holder's account balance would be reduced in an
amount equal to the reduction in such deposit balance, and such account balance
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 deposit balances of any Eligible Account Holder or Supplemental
Eligible Account Holder. Any assets remaining after the above liquidation rights
of Eligible Account Holders and Subsequent Eligible Account Holders are
satisfied would be distributed to the stockholders of the Bank.
Neither the Bank nor the Company shall be required to set aside funds
for the purpose of establishing the liquidation account, and the creation and
maintenance of the account will not operate to restrict the use or application
of any of the net worth accounts of the Bank, except that neither the Bank nor
the Company shall declare or pay a cash dividend on, or repurchase any of, its
capital stock if the effect would cause its net worth to be reduced below the
amount required for the liquidation account.
Federal and State Tax Consequences of the Reorganization
The Bank 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 certain factual
representations made by the Bank, 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
Bank has received an opinion of FinPro which, based on certain assumptions,
concludes that the subscription rights to be received by Eligible Account
Holders and Supplemental Eligible Account
46
<PAGE>
Holders and employees, officers and trustees 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. The opinion of Luse
Lehman Gorman Pomerenk & Schick, P.C., provides substantially as follows:
1. The change in form from a mutual savings bank (the "Mutual Bank") to
a stock savings bank (the "Stock Bank") will qualify as a
reorganization under Section 368(a)(1)(F) of the Code, and no gain or
loss will be recognized by the Bank in either its mutual form or stock
form by reason of the Reorganization.
2. No gain or loss will be recognized by the Mutual Bank upon the
transfer of the Mutual Bank's assets to the Stock Bank solely in
exchange for shares of Stock Bank stock and the assumption by the Stock
Bank of the liabilities of the Mutual Bank.
3. No gain or loss will be recognized by Stock Bank upon the receipt of
the assets of the Mutual Bank in exchange for shares of Stock Bank
common stock.
4. Stock Bank's holding period in the assets received from the Mutual
Bank will include the period during which such assets were held by the
Mutual Bank.
5. Stock Bank's basis in the assets of the Mutual Bank will be the same
as the basis of such assets in the hands of the Mutual Bank immediately
prior to the Reorganization.
6. The Stock Bank will succeed to and take into account the Mutual Bank
earnings and profits or deficit in earnings and profits, as of the date
of the Reorganization.
7. The Stock Bank depositors will recognize no gain or loss solely by
reason of the Reorganization.
8. The Mutual Company and Minority Stockholders will recognize no gain
or loss upon the transfer of Stock Bank stock and cash, respectively,
to the Company in exchange for Common Stock.
9. The Company will recognize no gain or loss upon its receipt of Stock
Bank stock and cash from the Mutual Company and Minority Stockholders,
respectively, in exchange for Common Stock.
10. The basis of the Common Stock to Minority Stockholders will be the
Subscription Price and a shareholder's holding period for Common Stock
acquired through the exercise of subscription rights will begin on the
date the rights are exercised.
The opinion of Luse Lehman Gorman Pomerenk & Schick, P.C., unlike a
letter ruling issued by the IRS, is not binding on the IRS and the conclusions
expressed therein may be challenged at a future date. The IRS 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 Bank does
not plan to apply for a letter ruling concerning the Reorganization.
The Bank has received an opinion from PricewaterhouseCoopers LLP to the
effect that, for New York State tax purposes, the New York State franchise tax
and the New York State personal income tax consequences of the Reorganization
are consistent with those described in the federal tax opinion letter. Both
taxes adopt federal definitions of taxable income, and contain no express
modification that would treat the subject transaction differently for state
purposes. Accordingly, there is complete conformity between the federal income
tax results of the Reorganization and the corresponding New York State tax
treatment.
47
<PAGE>
GREENE COUNTY SAVINGS BANK
STATEMENTS OF INCOME
The following Statements of Income of the Bank for each of the years in
the two-year period ended June 30, 1998 have been audited by
PricewaterhouseCoopers, LLP, independent certified public accountants, whose
report thereon appears elsewhere in this Prospectus. These statements should be
read in conjunction with the Financial Statements and Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Years Ended June 30,
1998 1997
----------- ------
<S> <C> <C>
Interest income:
Interest on loans................................................... $ 6,367,282 $ 6,175,215
Interest and dividends on investments:
U.S. Treasury..................................................... 985,130 962,932
U.S. Government agencies.......................................... 856,073 687,250
State and political subdivisions.................................. 341,222 362,490
Corporation debt securities....................................... 405,225 456,676
Mortgage-backed securities........................................ 110,488 69,863
Other securities.................................................. 17,724 23,441
Federal funds sold.................................................. 393,310 536,826
Other interest income............................................... 26,902 22,815
------------- -------------
Total interest income............................................. 9,503,356 9,297,316
------------- -------------
Interest expense:
Interest on deposits................................................ 4,967,487 4,779,678
Net interest income............................................. 4,535,869 4,517,638
------------- -------------
Less: provision for loan losses........................................ 120,000 125,000
------------- -------------
Net interest income after provision for loan losses 4,415,869 4,392,638
Noninterest income:
Service charges on deposit accounts................................. 251,188 230,442
Other operating income.............................................. 185,479 289,968
------------- -------------
Total other income................................................ 436,667 520,410
------------- -------------
Noninterest expense:
Salaries and employee benefits...................................... 1,571,650 1,491,651
Occupancy expense, net.............................................. 208,381 157,190
Equipment and furniture expense..................................... 185,476 163,845
Other............................................................... 1,183,752 960,563
------------- -------------
Total other expenses.............................................. 3,149,259 2,773,249
------------- -------------
Income before provision for taxes............................... 1,703,277 2,139,799
Provision for income taxes :
Current............................................................. 565,609 720,287
Deferred............................................................ (12,248) (28,625)
------------- -------------
Total provision for income taxes.................................. 553,361 691,662
------------- -------------
Net income...................................................... $ 1,149,916 $ 1,448,137
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements contained elsewhere herein.
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has been formed for the purpose of issuing the Common Stock
and owning all of the capital stock of the Bank 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 Bank'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, as well as commercial
real estate, consumer and commercial business loans. The Bank also invests a
significant portion of its assets in investment securities and mortgage- and
asset-backed securities, all of which are classified as available for sale. The
Bank's net income depends primarily upon its net interest income, which is the
difference between interest income earned on interest-earning assets, such as
loans and investments, and the interest expense paid on deposits. The Bank's net
income is also affected to a lesser degree by noninterest income, such as
banking service charges and fees. The Bank's net income is also affected by,
among other things, provisions for loan losses and noninterest expenses. The
Bank's principal operating expenses, aside from interest expense, consist of
salaries and employee benefits, occupancy and equipment, data-processing
expense, deposit insurance costs and other expenses such as professional fees
and insurance premiums. The Bank's net income also is 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 Bank will derive additional interest
income from such sources.
The Bank's equity position (as well as its regulatory capital) will
significantly increase as a result of the net proceeds received in the Offering,
and management anticipates that it will take time to prudently deploy such
capital. Although earnings are expected to increase as a result of the
investment of the net proceeds, until the Bank has leveraged the capital in the
Offering by increasing its interest-earning assets (and its interest-bearing
liabilities) and thereby reducing its equity as a percentage of assets, its
return on average equity is expected to be below historical levels and the
industry average. Moreover, the Company's earnings will be adversely affected in
the fiscal year in which the funding of the Charitable Foundation occurs.
Operating Strategy
In guiding the Bank's operations, management has implemented various
strategies designed to maintain and improve profitability consistent with safety
and soundness. These strategies include: (i) operating a community bank 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)
maintaining asset quality. It is anticipated, subject to market conditions, that
the strategies presently in place will be continued following completion of the
Reorganization.
Community Banking. The Bank was established in 1889 and has been
operating continuously since that time. Throughout its history, the Bank 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. This
has enabled the Bank to maintain a high level of core deposits, which comprised
54.5% of total deposits at June 30, 1998, and generally represent, lower-cost
funds than certificate accounts. Management believes that the Bank 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 Bank's ability to provide these services is
enhanced by the stability of senior management which has an average tenure with
the Bank of over 20 years and banking experience averaging 25 years. In
addition, the Bank intends to use the mutual holding company structure to
maintain its position as an independent community bank, and to establish the
Charitable Foundation as a means of furthering the Bank's commitment to the
communities in which it conducts business.
49
<PAGE>
Emphasis on Residential Real Estate Lending. Historically, the Bank has
emphasized the origination and retention in portfolio of fixed-rate one- to
four-family residential loans within Greene County. As of June 30, 1998, 85.5%
of the loan portfolio consisted of one- to four-family residential mortgage
loans and home equity loans; 92.5% of the loan portfolio consisted of loans
secured by real estate, substantially all of which was located in Greene County.
During the year ended June 30, 1998, the Bank originated $15.8 million of one-
to four-family mortgage loans, 95.3% of which were originated with fixed rates.
At June 30, 1998, 71.1% of the Bank's one- to four-family residential real
estate loans were fixed rate.
Maintaining High Levels of Liquid Investments. To position the Bank 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 Bank maintains a significant portion of its assets in
short-term U.S. Government and agency securities and other interest earning
assets (including federal funds sold, corporate debt securities and municipal
bonds issued by political subdivisions of New York State). At June 30, 1998,
U.S. Government and agency securities and municipal bonds due in five years or
less totalled $25.9 million, and federal funds sold and cash and due from banks
totalled $8.3 million, or, collectively, 24.4% of the Bank's total assets. See
"Risk Factors--Potential Effects of Changes in Interest Rates and the Current
Interest Rate Environment," "--Management of Interest Rate Risk" and "Business
of the Bank-- Securities Investment Activities."
Maintaining Asset Quality. The Bank'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. The Bank also invests in
investment securities, consisting primarily of U.S. Government securities,
federal agency obligations and mortgage-backed securities issued by Freddie Mac
and Fannie Mae and, to a lesser extent, private issuers. The Bank also purchases
other investment securities, such as municipal bonds and corporate debt
securities, which are generally rated A or higher by at least one nationally
recognized rating agency or receive a rating of A of higher as a result of a
guarantee by insurance companies. At June 30, 1998, the Bank's ratio of
nonperforming assets to total assets was 0.72%. At June 30, 1998, the Bank's
ratio of allowance for loan losses to non-performing loans was 82.17%.
Management of Interest Rate Risk
While the Bank's loan portfolio, consisting primarily of mortgage loans
secured by residential real property located in its market area, is subject to
risks associated with the local economy, the Bank's most significant form of
market risk is interest rate risk because the Bank's assets and liabilities are
sensitive to changes in interest rates. The Bank's assets consist primarily of
residential mortgage loans which have longer maturities than the Bank's
liabilities, which consist primarily of deposits. The Bank does not engage in
any hedging transactions, such as interest rate swaps and caps. The Bank's
interest rate risk management program focuses primarily on evaluating and
managing the composition of the Bank'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.
A principal part of the Bank's business strategy is to manage interest
rate risk and to minimize the Bank's exposure to changes in market interest
rates. In recent years, the Bank has followed the following strategies to manage
interest rate risk: (i) investing in short-term U.S. Government securities and
federal agency obligations; (ii) maintaining a high level of liquid
interest-earning assets such as short-term federal funds sold ; (iii)
maintaining a high concentration of less interest-rate sensitive and
lower-costing "core deposits"; (iv) originating consumer installment loans that
have up to 5 year terms but that have significantly shorter average lives due to
early prepayments; and (v) where possible, matching the funding requirements for
fixed-rate residential mortgages with lower-costing core deposit accounts. By
investing in short-term, liquid securities and originating consumer installment
loans with shorter-average durations, the Bank 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. Thus, these strategies may result in lower levels of interest
income than would be obtained by investing in longer-term fixed-rate loans. See
"Business of the Bank--Securities Investment Activities."
50
<PAGE>
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is deemed to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At June 30, 1998, the Bank's cumulative one-year gap position,
the difference between the amount of interest-earning assets maturing or
repricing within one year and interest-bearing liabilities maturing or repricing
within one year, was a negative 7.78%. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A gap is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position generally would not be in as favorable a position,
compared to an institution with a positive gap, to invest in higher yielding
assets. The resulting yield on the institution's assets generally would increase
at a slower rate than the increase in its cost of interest-bearing liabilities.
Conversely, during a period of falling interest rates, an institution with a
negative gap would tend to experience a repricing of its assets at a slower rate
than its interest-bearing liabilities which, consequently, would generally
result in its net interest income growing at a faster rate than an institution
with a positive gap position.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1998, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "GAP Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
June 30, 1998, on the basis of contractual maturities, anticipated prepayments
and scheduled rate adjustments within a three month period and subsequent
selected time intervals. The loan amounts in the table reflect principal
balances expected to be redeployed and/or repriced as a result of contractual
amortization and anticipated prepayments of adjustable-rate and fixed-rate
loans, and as a result of contractual rate adjustments on adjustable-rate loans.
The annual prepayment rate for real estate-related assets are based on the
particulars of coupon maturity of the real estate-related assets. See "Business
of the Bank--Lending Activities," "--Securities Investment Activities" and
"--Sources of Funds."
51
<PAGE>
<TABLE>
<CAPTION>
Amounts Maturing or Repricing at June 30, 1998
------------------------------------------------------------------------------
Up to 90 3 Months to 6 Months to 1 to 2 2 to 3 3 to 5
Days 6 Months 1 Year Years Years Years
---- -------- ------ ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (1)
Loans receivable (2) ........................ $ 7,105 $ 8,092 $ 14,138 $ 7,577 $ 6,588 $ 11,170
Investment securities ....................... 5,009 2,636 5,228 9,508 8,212 11,469
Federal funds sold .......................... 5,796 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total interest-earning assets ............. $ 17,910 $ 10,728 $ 19,366 $ 17,085 $ 14,800 $ 22,639
Interest-bearing liabilities:
Savings deposits ............................ $ 1,671 $ 1,671 $ 3,341 $ 6,682 $ 6,682 $ 13,365
NOW deposits ................................ 309 309 619 1,237 1,237 2,474
MMDA accounts ............................... 2,129 2,129 2,907 3,111 3,111 6,222
Certificate accounts ........................ 11,764 10,429 20,857 7,033 3,619 1,900
Borrowings .................................. -- -- -- -- -- --
Escrow deposits ............................. 84 84 169 337 337 675
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ........ $ 15,957 $ 14,622 $ 27,893 $ 18,400 $ 14,987 $ 24,638
Interest sensitivity gap ....................... 1,953 (3,894) (8,527) (1,315) (187) (1,999)
Cumulative interest sensitivity gap ............ 1,953 (1,941) (10,468) (11,783) (11,970) (13,969)
Cumulative interest sensitivity gap as a
percentage of total assets .................. 1.39% (1.38%) (7.46%) (8.40%) (8.53%) (9.96%)
Cumulative interest sensitivity gap as a
percentage of total interest-earning assets 1.45% (1.44%) (7.78%) (8.76%) (8.90%) (10.38%)
Cumulative interest-earning
assets as a percentage of cumulative
interest-bearing liabilities ............... 112.24% 93.65% 82.10% 84.67% 86.97% 88.01%
</TABLE>
<TABLE>
<CAPTION>
Amounts Maturing or
Repricing at
June 30, 1998
--------------------
Over 5
Years Total
----- -----
<S> <C> <C>
Interest-earning assets: (1)
Loans receivable (2) ........................ $ 26,317 $ 80,988
Investment securities ....................... 5,716 47,778
Federal funds sold .......................... -- 5,796
-------- --------
Total interest-earning assets ............. $ 32,034 $134,562
Interest-bearing liabilities:
Savings deposits ............................ -- $ 33,412
NOW deposits ................................ -- 6,186
MMDA accounts ............................... -- 19,609
Certificate accounts ........................ -- 55,602
Borrowings .................................. -- --
Escrow deposits ............................. -- 1,687
-------- --------
Total interest-bearing liabilities ........ $ -- $116,497
Interest sensitivity gap ....................... 32,034
Cumulative interest sensitivity gap ............ 18,065
Cumulative interest sensitivity gap as a
percentage of total assets .................. 12.88%
Cumulative interest sensitivity gap as a
percentage of total interest-earning assets 13.43%
Cumulative interest-earning
assets as a percentage of cumulative
interest-bearing liabilities ............... 115.51%
</TABLE>
- ---------------------------------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) Calculated net of deferred loan fees, loan discounts and loans in process.
52
<PAGE>
Certain shortcomings are inherent in the method of analysis presented
in the GAP Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets such as adjustable-rate loans, have features
that restrict changes in interest rates both on a short-term basis and over the
life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
Average Balance Sheet. The following tables set forth certain
information relating to the Bank at June 30, 1998 and for the years ended June
30, 1998 and 1997. For the periods indicated, the total dollar amount of
interest income from average interest-earning assets and the resultant yields,
as well as the interest expense on average interest-bearing liabilities, is
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are average monthly balances. Non-accruing loans have been
excluded from the yield calculations in these tables.
<TABLE>
<CAPTION>
At June 30, 1998
-------------------------------
Actual
Balance Yield/Rate
-------------- ------------
(In Thousands)
<S> <C> <C>
Interest-earning assets:
Loans receivable, net (1)................................ $ 80,260 7.93 %
Investment securities.................................... 47,078 5.80
Federal funds............................................ 5,796 5.75
FHLB stock............................................... 700 --
----------------- --------------
Total interest-earning assets (1) $ 133,834 7.10 %
----------------- --------------
----------------- --------------
Interest-bearing liabilities:
Savings deposits......................................... $ 52,560 3.45 %
Demand and NOW deposits.................................. 14,162 1.31
Certificate accounts..................................... 55,602 5.23
Borrowings............................................... -- --
----------------- --------------
Total interest-bearing liabilities $ 122,324 4.06 %
----------------- --------------
----------------- --------------
</TABLE>
- --------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
53
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------
--------------------------------------- -------------------------------------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
----------- ---------- ---------- ----------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1) ............. $ 77,873 $ 6,367 8.18 % $ 74,47 $6,175 8.29 %
Investment securities (2) ............. 44,280 2,743 6.19 41,166 2,585 6.28
Federal funds ......................... 6,713 392 5.85 9,569 537 5.61
FHLB stock ............................ 58 -- -- -- -- --
-------- -------- ------ -------- ------ ---------
Total interest-earning assets ....... $128,924 $ 9,502 7.37 % 125,212 $9,297 7.43 %
-------- -------- ------ -------- ------ ---------
-------- -------- ------ -------- ------ ---------
Interest-bearing liabilities:
Savings deposits ...................... $ 51,791 $ 1,812 3.50 $ 53,860 $1,886 3.50 %
Demand and NOW deposits ............... 12,472 186 1.50 11,260 152 1.35
Certificate accounts .................. 53,389 2,970 5.56 49,589 2,742 5.53
Borrowings ............................ -- -- -- -- -- --
-------- -------- ------ -------- ------ ---------
Total interest-bearing liabilities .. $117,653 $ 4,968 4.22% $114,709 $4,780 4.17%
-------- -------- ------ -------- ------ ---------
-------- -------- ------ -------- ------ ---------
Net interest income ...................... $ 4,534 $4,517
-------- -------- ------ -------- ------ ---------
-------- -------- ------ -------- ------ ---------
Net interest rate spread ................. 3.15 % 3.26%
-------- ------ -------- ---------
-------- ------ -------- ---------
Net earning assets ....................... $ 11,272 $ 10,503
-------- --------
-------- --------
Net yield on average interest-
earning assets ........................ 3.52% 3.61%
-------- ------
-------- ------
Average interest-earning assets to
average interest-bearing liabilities .. 109.58% 109.16 %
-------- ------
-------- ------
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves. (2) Includes mortgage-backed securities and asset-backed
securities.
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
Increase/(Decrease) Total Increase/(Decrease) Total
Due to Increase/ Due to Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------- ---------- ------ ----- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net .............. $ 391 $(199) $ 192 $ 140 $ 9 $ 149
Investment securities (1) .......... 28 (9) (20) 184 125 309
Equity securities .................. (5) (1) (6) 16 (1) 15
----- ----- ----- ----- ----- -----
Total interest-earning assets .... 415 (209) 206 340 133 473
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Savings deposits ................... (43) (31) (74) 168 -- 168
Demand and NOW deposits ............ 196 (162) 34 (3) 141 138
Certificate accounts ............... 201 27 228 38 3 41
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities 354 (166) 188 203 144 347
----- ----- ----- ----- ----- -----
Net interest income .................. $ 61 $ (43) $ 18 $ 137 $ (11) $ 126
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
(1) Includes mortgage-backed securities and asset-backed securities.
54
<PAGE>
Comparison of Financial Condition at June 30, 1998 and June 30, 1997
Assets. Total assets increased to $140.3 million at June 30, 1998 from
$132.5 million at June 30, 1997, an increase of $7.8 million, or 5.9%. This
growth in total assets reflected an increase in loans receivable, net, which
increased by 6.2% to $80.3 million at June 30, 1998 from $75.6 million at June
30, 1997, as well as an increase in investment securities of $4.8 million, or
11.1%, to $47.8 million at June 30, 1998 from $43.0 million at June 30, 1997.
The increase in total assets also reflected an increase in premises and
equipment of $900,000, to $2.6 million at June 30, 1998 from $1.7 million at
June 30, 1997 due to the completion and opening of the Bank's new branch office
in Greenville, New York in December 1997. The growth in total assets was funded
by deposits, which increased by $6.4 million, or 5.5%, to $122.3 million at June
30, 1998 from $115.9 million at June 30, 1997.
Net loans receivable increased to $80.3 million at June 30, 1998 from
$75.6 million at June 30, 1997. In the year ended June 30, 1998, one- to
four-family residential mortgage loans increased by $3.7 million, or 6.1%, home
equity loans increased $674,000, or 16.6%, consumer loans increased $414,000, or
11.0%, and commercial business loans increased $304,000, or 29.5%. The increases
in loans in these categories more than offset a decrease of $822,000, or 15.4%,
in commercial real estate loans, and reflected the economic strength and loan
demand in the Bank's primary lending area as well as consumer demand for the
Bank's fixed-rate mortgage loan products in the current low market interest rate
environment.
The Bank's investment securities portfolio increased by $4.8 million,
or 11.2%, to $47.8 million at June 30, 1998 from $43.0 million at June 30, 1997.
The Bank joined the FHLB in 1998. At June 30, 1998, the Bank held $700,000 of
FHLB stock.
Liabilities. Total deposits increased by $6.4 million, or 5.5%, to
$122.3 million at June 30, 1998 from $115.9 million at June 30, 1997. The growth
in deposits reflected in part deposit inflows resulting from the expansion of
the Bank's branch network with the opening of the new branch office in
Greenville in December 1997. The Bank's certificate accounts increased to $55.6
million at June 30, 1998 from $51.2 million at June 30, 1997, while
noncertificate accounts increased to $66.7 million at June 30, 1998 from $64.7
million at June 30, 1997. The increase in certificates of deposit was
attributable primarily to the Greenville branch opening as well as the migration
of some funds from savings and other demand accounts to higher-yielding
certificate accounts in the lower interest rate environment. While the Bank has
access to borrowings, at June 30, 1998 there were no borrowings outstanding.
Retained Earnings. Total retained earnings increased by $1.3 million,
or 9.0%, to $15.7 million at June 30, 1998 from $14.4 million at June 30, 1997.
The increase in total retained earnings resulted from after tax net income of
$1.1 million in the year ended June 30, 1998 as well as an increase of $174,000
in net unrealized gain on securities available for sale. As market interest
rates decreased in the year ended June 30, 1998, the market value of the Bank's
securities was positively affected.
Comparison of Operating Results for the Years Ended June 30, 1998 and June 30,
1997
General. The earnings of the Bank depend primarily on its level of net
interest income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of residential and commercial real
estate loans, consumer loans and securities available for sale, and the interest
paid on interest-bearing liabilities, consisting primarily of deposits. Net
interest income is a function of the Bank's interest rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities, as well as a function of the
average balance of interest-earning assets as compared to interest-bearing
liabilities. The Bank's earnings also are affected by its fees and service
charges and gains on sale of loans and securities, as well as its level of
operating and other expenses, including salaries and employee benefits,
occupancy and equipment costs, data processing expense, marketing and
advertising costs, and federal deposit insurance premiums.
Net income for the year ended June 30, 1998 was $1.1 million, a
decrease of $298,000, or 20.6%, from net income of $1.4 million for the year
ended June 30, 1997. The decrease in net income was due primarily to a decrease
55
<PAGE>
of $85,000, or 16.3%, in noninterest income and an increase of $376,000, or
13.6%, in noninterest expense. These items were partially offset by a decrease
of $138,000 in tax expense for the year ended June 30, 1998.
Interest Income. Interest income increased by $206,000, or 2.2%, to
$9.5 million for the year ended June 30, 1998 from $9.3 million for the year
ended June 30, 1997. The increase was primarily due to a $192,000, or 3.1%,
increase in interest income paid on loans and a $158,000, or 6.1%, increase in
interest and dividends on investments for the year ended June 30, 1998 as
compared to the year ended June 30, 1997. The increase in interest from loans
was attributable to a $3.4 million, or 4.6%, increase in the average balance of
loans receivable, partially offset by a 11 basis point decrease in the average
yield on loans receivable to 8.18% for the year ended June 30, 1998 from 8.29%
for the year ended June 30, 1997. The continued origination and portfolio growth
of the Bank's one- to four-family residential mortgage loans was responsible for
the substantial majority of the increase in loans receivable, reflecting growth
in the Bank's primary market area as well as demand for the Bank's fixed-rate
one- to four-family real estate loan product in the current low market interest
rate environment. The increase in interest and dividends from investments was
due to a $3.1 million, or 8.0%, increase in the average balance of investment
securities to $44.3 million for the year ended June 30, 1998 as compared to
$41.2 million for the year ended June 30, 1997. This increase more than offset a
9 basis point decrease in the average yield on investment securities to 6.19%
from 6.28%. The increase in the average balance of investment securities
reflected the temporary deployment of liquidity pending investment in
higher-yielding mortgage loans, as well as management's desire to take advantage
of the shorter weighted average lives of U.S. Treasury securities and the
relatively high yield available from such securities as compared to longer
maturity securities given the relatively flat yield curve that prevailed during
the period.
Interest Expense. Interest expense increased by $188,000, or 3.9%, to
$5.0 million for the year ended June 30, 1998 from $4.8 million for the year
ended June 30, 1997. The increase was due to a $2.9 million, or 2.6%, increase
in the average balance of interest-bearing liabilities as well as a 5 basis
point increase in the average rate paid on such liabilities for the year ended
June 30, 1998 as compared to the year ended June 30, 1997. In particular, the
increase in interest expense resulted from an increase in interest expense on
certificate accounts, which rose to $3.0 million for the year ended June 30,
1998 as compared to $2.7 million for the year ended June 30, 1997. This increase
was due to an increase of $3.8 million, or 7.7%, in the average balance of such
certificate accounts to $53.4 million for the year ended June 30, 1998 from
$49.6 million for the year ended June 30, 1997. The increase in the average
balance of such certificate accounts reflected the Bank's new branch opening in
Greenville, New York in December 1997. The increase in interest expense
attributable to certificate accounts was partially offset by a $74,000, or 3.9%,
decrease in interest expense on savings deposits, reflecting a $2.1 million, or
3.8%, decrease in the average balance of savings deposits for the year ended
June 30, 1998 as compared to the year ended June 30, 1997. The average cost of
such deposits remained unchanged at 3.50%.
Provision for Loan Losses. The Bank establishes provisions for loan
losses, which are charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed appropriate to absorb future charge-offs
and loans deemed uncollectible. In determining the appropriate level of the
allowance for loan losses, management considers past and anticipated loss
experience, collateral values, current and anticipated economic conditions
volume and type of lending activities and the levels of non-performing and other
classified loans. The allowance is based on estimates and the ultimate losses
may vary from such estimates. Management of the Bank assesses the allowance for
loan losses on a quarterly basis and makes provisions for loan losses in order
to maintain the adequacy of the allowance.
The Bank's provision for loan losses decreased to $120,000 for the year
ended June 30, 1998 from $125,000 for the year ended June 30, 1997. The higher
provision for the year ended June 30, 1997 was due, in part, to exposure
associated with loans made by the Bank to Bennett Funding Company, an equipment
lease finance company, which subsequently declared bankruptcy. At June 30, 1998,
the $104,000 remaining balance of Bennett Funding Company lease receivables had
been fully reserved.
Noninterest Income. Noninterest income consists primarily of fee income
for bank services and gains on the sale of loans and securities. Noninterest
income decreased by $85,000, or 16.3%, for the year ended June 30, 1998 as
compared to the year ended June 30, 1997. The decrease was due primarily to a
decrease in other operating income to $185,000 for the year ended June 30, 1998
from $290,000 for the year ended June 30, 1997. The decrease in these items
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<PAGE>
was partially offset by an increase of $21,000, or 9.1%, in services charges on
deposit accounts reflecting the increased average balances of such deposit
accounts for the year ended June 30, 1998 as compared to the year ended June 30,
1997.
Noninterest Expense. Noninterest expense increased by $376,000, or
13.6%, to $3.1 million for the year ended June 30, 1998 compared to $2.8 million
for the year ended June 30, 1997. The increase was due to an $80,000, or 5.4%,
increase in salaries and employee benefits, an increase of $51,000, or 32.5%, in
net occupancy expense and an increase of $22,000, or 13.2%, in equipment and
furniture expense. Each of these increases was attributable in part to the
Bank's opening of a new full service office in Greenville, New York in December
1997, which necessitated the hiring of an additional five full time equivalent
employees, as well as depreciation of building, furniture and equipment of the
new branch office. The increase in net occupancy expense also reflects expenses
related to the Bank's continued upgrading of its technology, communications and
information systems. In addition, other noninterest expense increased by
$223,000, or 23.2%, for the year ended June 30, 1998, reflecting a $25,000, or
30.5%, increase in advertising expenses, a $25,000, or 33.3%, increase in office
supply expenses, a $15,000, or 62.5%, increase in mortgage recording fees, and a
$36,000, or 12.2%, increase in servicing costs, relating in part to the Bank's
larger total loan portfolio.
Income Taxes. Income tax expense was $553,361 for the year ended June
30, 1998 compared to $691,662 for the year ended June 30, 1997. The effective
tax rate increased to 32.5% for the year ended June 30, 1998 from 32.3% for the
year ended June 30, 1997.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from
principal and interest payments on loans, mortgage-backed securities and debt
securities, with two lines of credit available as needed. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit outflows, mortgage prepayments, and borrowings are greatly influenced by
general interest rates, economic conditions and competition.
The Bank's primary investing activities are the origination of
residential one- to four-family and commercial real estate loans, other consumer
and commercial business loans, and the purchase of mortgage-backed securities
and debt securities. During the years ended June 30, 1998 and 1997, the Bank's
loan originations totaled $25.0 million and $20.7 million, respectively.
Purchases of mortgage-backed securities and debt securities totaled $16.7
million and $10.9 million for the years ended June 30, 1998 and 1997,
respectively. These activities were funded primarily by deposit growth and
principal payments on loans, mortgage-backed securities and debt and equity
securities. Loan sales did not provide an additional source of liquidity during
the years ended June 30, 1998 and 1997 as the Bank generally originates loans
for retention in its portfolio.
The Bank experienced a net increase in total deposits of $6.5 million
and $1.7 million for the years ended June 30, 1998 and 1997, respectively.
Deposit flows are affected by the level of interest rates, the interest rates
and products offered by local competitors, and other factors.
The Bank monitors its liquidity position on a daily basis. Excess
short-term liquidity is usually invested in overnight federal funds sold. In the
event the Bank requires funds beyond its ability to generate them internally,
additional sources of funds are available through the use of short-term FHLB
advances and two credit facilities made available to the Bank by other financial
institutions. There have been no borrowings outstanding during any of the
periods presented.
Loan commitments totaled $2.4 million at June 30, 1998 and were
comprised of $309,000 in commitments to originate adjustable rate loans and $2.1
million in commitments to originate fixed rate loans. The Bank anticipates that
it will have sufficient funds available to meet current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
June 30, 1998 totaled $43.1 million. Based upon the Bank's experience and its
current pricing strategy, management believes that a significant portion of such
deposits will remain with the Bank.
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<PAGE>
At June 30, 1998, the Bank exceeded all of its regulatory capital
requirements. See "Regulatory Capital Compliance" and "Regulation--Regulatory
Capital Requirements."
The Bank's most liquid assets are cash and interest-bearing demand
accounts. The levels of these assets are dependent on the Bank's operating,
financing, lending and investing activities during any given period. At June 30,
1998, cash and interest-bearing demand account totaled $2.5 million, or 1.8% of
total assets. Also at June 30, 1998, U.S. Government and agency securities and
municipal bonds due in less than one year totalled $7.7 million, or 5.5% of
total assets, and the Bank's portfolio of such securities due in less than five
years totalled $25.6 million, or 18.3% of total assets.
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 earnings per share ("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
Bank's earnings per share disclosures which will be made from the date of
completion of the Reorganization and the 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 Bank
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 Recognition Plan will be recognized as expense on a
straight-line basis over the 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 shares of loans with servicing
retained, securitizations, repurchase agreements, securities lending, loan
participations and in-substance defeasances of debt. SFAS No. 125 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
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<PAGE>
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 Bank's financial statements.
FASB Statements on Reporting Comprehensive Income. In June 1997, the
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 of 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 am amount
representing total comprehensive income for the period. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and accordingly,
will be adopted by the Bank in the fiscal year beginning July 1, 1998.
Management does not anticipate that the adoption of this standard will
significantly affect the Bank's financial reporting.
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. SFAS No. 131 is effective
for reporting by public companies in fiscal years beginning after December 15,
1997 and, accordingly, would be adopted by the Bank upon completion of the
Reorganization and Offering. SFAS No. 131 is not expected to have a significant
impact on the Bank'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. SFAS No. 132 does not change the recognition or measurement
requirements for postretirement benefits. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997 and, accordingly, will be adopted by the
Bank in the fiscal year beginning July 1, 1998. Management does not anticipate
that this standard will significantly affect the Bank'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. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition 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 of adopting SFAS No.
133. The Bank has not yet determined whether it will reclassify securities
between categories. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999 and, accordingly, will be adopted by the
Bank in the fiscal year beginning on July 1, 1999. The Bank has not engaged in
derivatives and hedging activities covered by the new standard, and does not
expect to begin such activities. Accordingly, SFAS No. 133 is not expected to
have a material impact on the Bank's consolidated financial statements.
Capability of the Bank's Data Processing to Accommodate the Year 2000
Like many financial institutions, the Bank relies upon computers for
the daily conduct of its business and for data processing. 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 Bank uses an
outside data processing servicer. Management has developed a formal written plan
to resolve any concern about the year 2000 issue and the Bank is in the process
of testing its computer applications and hardware to ensure that they will be
able to read the year 2000. Testing of mission-critical systems has been
completed, and overall testing is expected to be completed by the end of the
first calendar quarter in 1999. While the Bank's year 2000 committee has
discussed contingency plans, such plans
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<PAGE>
have not yet been formalized, pending the completion of testing. It is expected
that contingency plans will also be completed by the end of the first calendar
quarter in 1999.
The Bank has contacted each of its data processing vendors to ensure
that they will be able to provide service in light of the year 2000 issue. Such
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 Bank has
contracted. Management will continue to monitor this issue and report to the
Board of Trustees on a quarterly basis until full compliance is obtained from
all vendors. In considering the year 2000 readiness of the Bank's major
borrowers, management first determined that no borrower currently has been
extended credit exceeding 10% of the Bank's capital. Management has also
informally contacted the Bank's larger borrowers, and has been assured that date
sensitivity is not an issue with such borrowers.
Finally, management has evaluated the date sensitivity of the Bank's
non-information technology, such as utilities and its components (including
elevators, heating/air conditioning systems, alarms and video equipment). These
utilities and components are either not computer-driven or are expected to
function normally after year 2000.
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. Management has budgeted $110,000 for
updating its hardware and software systems to ensure compliance. Other than this
budgeted expenditure, management does not expect additional material costs to be
incurred in connection with the year 2000 issue.
The costs of the project are based on management's best estimates,
which were derived using 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 computer codes and similar uncertainties. In
addition, there can be no guarantee that the systems of other companies on which
the Bank's systems rely will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with the Bank's
systems, would not have a material adverse effect on the Bank.
BUSINESS OF GREENE COUNTY BANCORP, INC.
General
In July 1998, the Board of Trustees of the Bank adopted the Plan of
Reorganization. Pursuant to the Plan of Reorganization, the Bank organized the
Company. The Bank will be a wholly-owned subsidiary of the Company, the majority
of whose shares will be held by the Mutual Company. See "Greene County Bancorp,
Inc." and "Regulation--Holding Company Regulation."
The Company is currently not an operating company. Following the
Reorganization, in addition to directing, planning and coordinating the business
activities of the Bank, the Company will initially invest net proceeds it
retains primarily in short- and medium-term debt securities and marketable
equity securities. The Company also intends to fund the loan to the ESOP to
enable the ESOP to purchase 8% of the Minority Ownership Interest. In the
future, the Company may acquire or organize other operating subsidiaries,
including other financial institutions and financial services companies. See
"Use of Proceeds." Presently, there are no agreements or understandings for an
expansion of the Company's operations. Initially, the Company will neither own
nor lease any property from any third party, but will instead use the premises,
equipment and furniture of the Bank. At the present time, the Company does not
intend to employ any persons other than certain officers of the Bank, who will
not be separately provided cash compensation by the Company. The Company may
utilize support staff of the Bank from time to time, if needed. Additional
employees will be hired as appropriate to the extent the Company expands its
business in the future.
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BUSINESS OF THE BANK
General
The Bank's principal business consists of attracting retail deposits
from the general public in the areas surrounding its branches and investing
those deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans, commercial real
estate loans, home equity loans, consumer loans and commercial business loans.
In addition, the Bank invests a significant portion of its assets in investment
securities and mortgage- and asset-backed securities. The Bank's revenues are
derived principally from the interest on its mortgage, consumer and commercial
loans and securities, loan origination and servicing fees and service charges
and fees collected on its deposit accounts. The Bank's primary sources of funds
are deposits, and principal and interest payments on loans and investment and
mortgage- and asset-backed securities. In recent years the Bank has not had any
borrowings.
Market Area
The Bank has been, and intends to continue to be, a community-oriented
bank offering a variety of financial services to meet the needs of the
communities it serves. The Bank currently operates four full service banking
offices in Greene County, New York. The Bank's primary deposit gathering area is
currently concentrated around the areas within Greene County where its full
service banking offices are located, namely the towns of Catskill, Greenville,
Cairo and Coxsackie. The Bank's primary lending area also has historically been
concentrated in Greene County, New York.
As of the 1990 census, the County population was 44,700 persons. As of
the 1990 census, Greene County had the fourth largest percentage of population
growth in New York state in the ten year period ended in 1990. Greene County is
primarily rural and the major industry consists of tourism associated with the
several ski facilities and festivals located in the Catskill mountains. The
County has no concentrations of manufacturing industry. Greene County is
contiguous to the Albany-Schenectady-Troy metropolitan statistical area. The
close proximity of Greene County to the city of Albany has made it a "bedroom"
community for persons working in the Albany capital area. Greene County and the
Coxsackie Correctional Facilities are the largest employers in the County. Other
large employers include the Hunter Mountain and Ski Windham resort areas, the
Catskill, Cairo-Durham, Greenville and Coxsackie-Athens Central School Districts
and Stiefel Labs, Inc.
Competition
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's market area has a high density of financial
institutions, many of which are branches of significantly larger institutions
that have greater financial resources than the Bank, and all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, mortgage banking companies, credit unions, insurance companies and
other financial service companies. Its most direct competition for deposits has
historically come from commercial banks, savings banks, savings and loan
associations and credit unions. The Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
Lending Activities
General. The principal lending activity of the Bank is the origination,
for retention in its portfolio, of fixed-rate and adjustable-rate mortgage loans
collateralized by one- to four-family residential real estate located within its
primary market area. To a lesser extent, the Bank also originates commercial
real estate loans, home equity loans, consumer loans and commercial business
loans.
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In an effort to manage the interest rate risk associated with its
predominantly fixed-rate loan portfolio, the Bank maintains high levels of
liquidity, and, where possible, matches the funding of fixed-rate residential
mortgages with lower-costing core savings accounts. In addition, in originating
residential fixed-rate loans, the Bank has been successful in marketing and
originating such loans with 15 year terms. Currently, the substantial majority
of residential fixed-rate loans are being originated with 15 years terms.
Finally, the Bank has attempted to market to its customers shorter term maturity
features, such as fixed-rate residential mortgage loans with "bi-weekly"
mortgage payments, where the borrower makes the equivalent of an extra monthly
payment per year by paying half the monthly mortgage payment every two weeks.
The accelerated principal amortization schedules of these loans have helped
ameliorate the interest rate risk that is inherent in a community based bank's
residential lending portfolio. The accelerated repayment schedule results in
significant savings to the borrower and allows for a more rapid increase in home
equity.
Loan Portfolio Composition. Set forth below is selected information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for losses) as of the dates indicated.
<TABLE>
June 30,
------------------------------------------
1998 1997
------------------ -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ................. $ 64,705 79.69% $61,008 79.66%
Commercial .......................... 4,521 5.57 5,343 6.98
Construction and land ............... 798 .98 497 .65
Multi-family ........................ 388 .48 388 .51
-------- ------ -------- --------
Total real estate loans ........... 70,412 86.72 67,236 87.80
-------- ------ -------- --------
Consumer Loans:
Installment (1) ..................... 4,172 5.14 3,758 4.90
Home equity ......................... 4,727 5.82 4,053 5.29
Passbook ............................ 544 .67 507 .66
-------- ------ -------- --------
Total consumer loans .............. 9,443 11.63 8,318 10.85
Commercial Business Loans .............. 1,336 1 .65 1,032 1.35
-------- ------ -------- --------
Total consumer and commercial
business loans .................. 10,779 13.28 9,350 12.20
-------- ------ -------- --------
Total gross loans ................. 81,191 100.00% 76,586 100.00%
-------- ------ -------- --------
-------- ------ -------- --------
Less:
Deferred fees and discounts ......... (203) (216)
Allowance for losses ................ (728) (723)
-------- --------
Total loans receivable, net ....... $ 80,260 $75,647
-------- --------
-------- --------
</TABLE>
- --------------------------------------------
(1) Includes direct automobile loans (on both new and used automobiles) and
personal loans.
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The following table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1998 1997
------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate Loans:
One- to four-family ......... $ 46,028 56.69% $ 36,581 47.78%
Commercial .................. 1,436 1.77 1,744 2.28
Construction and land ....... 760 .94 497 .64
Multi-family ................ 157 .19 135 .18
-------- ------ -------- ------
Total real estate loans ... 48,381 59.59 38,957 50.88
-------- ------ -------- ------
Consumer Loans:
Installment (1) ............. 4,172 5.14 3,758 4.91
Home equity ................. 4,727 5.82 4,053 5.29
Passbook .................... 544 .67 507 .66
Commercial Business Loans ..... 1,336 1.65 1,032 1.35
-------- ------ -------- ------
Total fixed-rate loans ...... 59,160 72.87 48,307 63.09
-------- ------ -------- ------
Adjustable-Rate Loans:
Real estate loans:
One- to four-family ......... 18,677 23.00 24,429 31.90
Multi-family ................ 231 .28 251 .31
Commercial real estate ...... 3,085 3.80 3,599 4.70
Construction and land ....... 38 .05 -- --
-------- ------ -------- ------
Total adjustable rate loans 22,031 27.13 28,279 36.91
-------- ------ -------- ------
Total loans ............... 81,191 100.00% 76,586 100.00%
-------- ------ -------- ------
-------- ------ -------- ------
Less:
Deferred fees and discounts ... (203) (216)
Allowance for loan losses ..... (728) (723)
-------- --------
Total loans receivable, net . $ 80,260 $ 75,647
-------- --------
-------- --------
</TABLE>
- --------------------------------------------
(1) Includes direct automobile loans (on both new and used automobiles) and
personal loans.
One- to Four-Family Residential Loans. The Bank's primary lending
activity is the origination, for retention in the Bank's portfolio, of one- to
four-family residential mortgage loans secured by property located in the Bank'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. However, the Bank will originate one- to four-family
residential mortgage loans with loan-to-value ratios of up to 95%, with private
mortgage insurance required (except for qualifying first-time home buyers, for
whom the Bank will originate loans with 90% loan-to-value ratios without private
mortgage insurance). Generally, residential mortgage loans are originated for
terms of up to 25 years, though in recent years the Bank has been successful in
marketing and originating the substantial majority of such loans with 15-year
terms. One- to four-family fixed-rate loans are offered with both a monthly and
bi-weekly payment feature. The Bank generally requires fire and casualty
insurance, the establishment of a mortgage escrow account for the payment of
real
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estate taxes, hazard and flood insurance, as well as title insurance on all
properties securing real estate loans made by the Bank.
The Bank currently offers one- to four-family residential mortgage
loans with fixed and adjustable interest rates. Originations of fixed-rate loans
versus adjustable-rate loans are monitored on an ongoing basis and are affected
significantly by the level of market interest rates, customer preference, the
Bank's interest rate gap position, and loan products offered by the Bank's
competitors. Particularly, in a relatively low interest rate environment,
borrowers may prefer fixed-rate loans to adjustable-rate loans. Single family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The average length of time that the Bank's single family
residential mortgage loans remain outstanding varies significantly depending
upon trends in market interest rates and other factors.
The Bank's adjustable-rate mortgage ("ARM") loans currently provide for
maximum rate adjustments of 150 basis points per year and 600 basis points over
the term of the loan. The Bank offers ARM loans with initial interest rates that
are below market, referred to as "teaser rates." However, in underwriting such
loans, borrowers are qualified at the full index rate. The Bank's ARM loans
adjust every year. After origination, the interest rate on such ARM loans is
reset based upon a contractual spread or margin above the average yield on
one-year United States Treasury securities, adjusted to a constant maturity (the
"U.S. Treasury Constant Maturity Index"), as published weekly by the Federal
Reserve Board.
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 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 June 30, 1998,
23.0% of the Bank's loan portfolio consisted of one- to four-family residential
loans with adjustable interest rates.
The Bank originates construction/permanent loans to homeowners for the
purpose of construction of primary and secondary residences. The Bank issues a
commitment and has one closing which encompasses both the construction phase and
permanent financing. The construction phase is a maximum term of six months and
the interest charged is the rate as stated in the commitment, with loan-to-value
ratios of up to 80% (or up to 95% with private mortgage insurance), of the
completed project. The Bank generally does not originate loans secured by raw
land.
Construction lending generally involves a greater degree of risk than
other one- to four-family mortgage lending. The repayment of the construction
loan is, to a great degree, dependent upon the successful and timely completion
of the construction of the subject property. Construction delays may further
impair the borrower's ability to repay the loan.
The Bank's residential mortgage loan originations are generally
obtained from the Bank's loan representatives operating in its branch offices
through their contacts with existing or past loan customers, depositors of the
Bank, referrals from attorneys and accountants who refer loan applications from
the general public, and local realtors.
All one- to four-family residential mortgage loans originated by the
Bank include "due-on-sale" clauses, which give the Bank 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 June 30, 1998, $64.7 million, or 79.7% of the Bank's loan portfolio,
consisted of one- to four-family residential mortgage loans. Approximately
$666,000 of such loans (representing 16 loans) were included in nonperforming
loans as of that date. See "Delinquencies and Classified Assets-Loans Past Due
and Nonperforming Assets."
64
<PAGE>
Commercial Real Estate and Multifamily Loans. At June 30, 1998, $4.5
million, or 5.6%, of the total loan portfolio consisted of commercial real
estate loans. Commercial real estate loans are secured by office buildings,
mixed-use properties and other commercial properties. The Bank originates fixed-
and adjustable-rate commercial mortgage loans with maximum terms of up to 20
years. The maximum loan-to-value ratio of commercial real estate loans is
generally 75%. At June 30, 1998, the largest commercial mortgage loan had a
principal balance of $445,000 and was secured by a medical arts building.
In underwriting commercial real estate loans, the Bank reviews the
expected net operating income generated by the real estate to ensure that it is
generally at least 110% 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. The Bank's policy is to
require personal guarantees from all commercial real estate 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 Bank management to
monitor and evaluate.
The Bank originates a limited number of multi-family loans, which
totalled $338,000, or 0.48% of the Bank's total loans at June 30, 1998.
Multi-family loans are generally secured by apartment buildings and condominiums
located in the Bank's primary market area. The Bank's underwriting practices and
the risks associated with multi-family loans do not differ substantially from
that of commercial real estate loans.
Consumer Loans. The Bank's consumer loans consist of direct loans on
new and used automobiles, personal loans (either secured or unsecured), home
equity loans, and other consumer loans (consisting of passbook loans, unsecured
home improvement loans and recreational vehicle loans). At June 30, 1998,
consumer loans totaled $9.4 million, or 11.6% of the total loan portfolio.
Consumer loans (other than home equity loans) are originated at fixed rates with
terms to maturity of one to five years.
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 Bank 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 Bank'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 Bank underwrites its
consumer loans internally, which the Bank believes limits its exposure to credit
risks associated with loans underwritten or purchased from brokers and other
external sources.
The Bank offers fixed-rate home equity loans that are secured by the
borrower's residence. Home equity loans are generally underwritten with terms
not to exceed 15 years and under the same criteria that the Bank uses to
underwrite one- to four-family fixed rate loans. Home equity loans may be
underwritten with terms not to exceed 15 years and with a loan to value ratio of
80% when combined with the principal balance of the existing mortgage loan. The
maximum amount of a home equity loan may not exceed $50,000 unless approved by
the Board of Trustees. The Bank appraises the property securing the loan at the
time of the loan application (but not thereafter) in order to determine the
value of
65
<PAGE>
the property securing the home equity loans. At June 30, 1998, the outstanding
balance of home equity loans totaled $4.7 million, or 5.8% of the Bank's total
loan portfolio.
Commercial Business Loans. The Bank also originates commercial business
loans up to 10 years at fixed rates. The Bank attributes growth in this
portfolio to its ability to offer borrowers senior management attention as well
as timely and local decision-making on commercial loan applications. The
decision to grant a commercial business loan depends primarily on the
creditworthiness and cash flow of the borrower (and any guarantors) and
secondarily on the value of and ability to liquidate the collateral which
consists of receivables, inventory and equipment. The Bank generally requires
annual financial statements and tax returns from its commercial business
borrowers and personal guarantees from the commercial business borrowers. The
Bank also generally requires an appraisal of any real estate that secures the
loan. At June 30, 1998, the Bank had $1.3 million of commercial business loans
which represented 1.7% of the total loan portfolio. On such date, the average
balance of the Bank's commercial business loans was approximately $25,000. The
largest commercial business lending relationship had a balance of $255,000 and
represented a loan to a local fire protection district secured by a fire truck.
At June 30, 1998, the Bank's commercial loan portfolio included seven loans
secured by fire trucks.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral based, with loan amounts based
on predetermined loan to collateral values, and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the event
of borrower default. Although commercial business loans may be collateralized by
equipment or other business assets, the liquidation of collateral in the event
of a borrower default is often an insufficient source of repayment because
equipment and other business assets may be obsolete or of limited use, among
other things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment.
Loan Maturity Schedule. The following table sets forth certain
information as of June 30, 1998 regarding the amount of loans maturing or
repricing in the Bank's portfolio. Adjustable-rate loans are included in the
period in which interest rates are next scheduled to adjust rather than the
period in which they contractually mature, and fixed-rate loans are included in
the period in which the final contractual repayment is due.
The following table illustrates the future maturities of such loans at
June 30, 1998.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
Within through through through through Beyond
1 Year 3 Years 5 Years 10 years 20 years 20 Years Total
------ ------- ------- -------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to four- family $18,706 $ 278 $ 651 $ 8,375 $28,473 $ 8,222 $64,705
Home equity 40 345 1,173 1,921 1,248 -- 4,727
Multi-family 231 -- -- 128 29 -- 388
Commercial 3,359 49 82 444 587 -- 4,521
Construction and land loans -- -- -- -- 358 440 798
------- ------- ------- ------- ------- ------- --------
Total real estate loans $22,336 $ 672 $ 1,906 $10,868 $30,695 $ 8,662 $75,139
------- ------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- ------- --------
Consumer loans 802 2,022 1,765 83 44 -- 4,716
Commercial business loans 143 210 439 544 -- -- 1,336
------- ------- ------- ------- ------- ------- --------
Total loan portfolio $ 23,281 $ 2,904 $ 4,110 $11,495 $30,739 $ 8,662 $81,191
------- ------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- ------- --------
</TABLE>
The total amount of the above loans due after June 30, 1999 which have
predetermined interest rates is $57,910, while the total amount of loans due
after such dates which have adjustable interest rates is $0.
66
<PAGE>
The following table sets forth the loan origination and repayment
activities of the Bank for the periods indicated. The Bank did not purchase or
sell any loans during the periods presented.
<TABLE>
<CAPTION>
Years Ended June 30,
1998 1997
------- -----
(In Thousands)
<S> <C> <C>
Originations by Type:
Adjustable rate:
One- to four-family ............................................... $ 742 $ 1,856
Commercial real estate ............................................ 45 --
-------- ---------
Total adjustable rate ......................................... 787 1,856
-------- ---------
Fixed rate:
One- to four-family ............................................... 15,030 9,535
Commercial real estate ............................................ 150 586
Construction and land ............................................. 2,930 2,605
Home equity ....................................................... 2,064 1,996
Installment ....................................................... 3,194 3,785
Commercial business ............................................... 350 568
Passbook .......................................................... 492 373
-------- ---------
Total fixed-rate .............................................. 24,210 19,448
-------- ---------
Total loans originated ........................................ $24,997 $21,304
-------- ---------
Repayments:
One- to four-family ............................................... 12,075 9,268
Commercial real estate ............................................ 1,017 5
Construction and land ............................................. 2,629 3,101
Home equity ....................................................... 1,390 1,670
Installment ....................................................... 2,780 3,208
Commercial business ............................................... 46 362
Passbook .......................................................... 455 506
-------- ---------
Total principal repayments ...................................... 20,392 18,120
-------- ---------
Net increase (decrease) ........................................... $ 4,605 $ 3,184
-------- ---------
-------- ---------
</TABLE>
Loan Approval Procedures and Authority. The Board of Trustees
establishes the lending policies and loan approval limits of the Bank. Loan
officers generally have the authority to originate mortgage loans, consumer
loans and commercial business loans up to amounts established for each lending
officer. All residential loans over $200,000, however, must be approved by the
Executive Committee or the full Board of Trustees.
The Board annually approves independent appraisers used by the Bank.
For larger loans, the Bank may require an environmental site assessment to be
performed by an independent professional for all non-residential mortgage loans.
It is the Bank policy to require hazard insurance on all mortgage loans.
Loan Origination Fees and Other Income. In addition to interest earned
on loans, the Bank receives loan origination fees. Such fees and costs vary with
the volume and type of loans and commitments made and purchased, principal
repayments, and competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.
In addition to loan origination fees, the Bank also receives other
income that consists primarily of deposit transaction account service charges
and late charges. The Bank also collects fees for originating savings bank life
insurance on an agency basis and for referring student loan borrowers to Sallie
Mae. Finally, the Bank installs,
67
<PAGE>
maintains and services merchant bankcard equipment for local retailers and is
paid a percentage of the transactions processed by such equipment.
Loans-to-One Borrower. Savings banks are subject to the same
loans-to-one borrower limits as those applicable to national banks, which under
current regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired net worth on an unsecured basis, and an additional amount equal to
10% of unimpaired net worth if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
The Bank's policy provides that loans to one borrower (or related borrowers)
should not exceed 10% of the Bank's capital and reserves.
At June 30, 1998, the largest aggregate amount loaned by the Bank to
one borrower consisted of $507,000, which consisted of a commercial real estate
loan of $444,650 and a commercial business loan of $62,356. The loans comprising
the lending relationship were performing in accordance with their terms.
Delinquencies and Classified Assets
Collection Procedures. A computer generated late notice is sent and a
2% late charge is assessed when a payment is 15 days late. A second notice will
be incorporated in the next month's billing notice, approximately 21 days after
the first due payment. Accounts thirty days or more past due will be reviewed by
the collection manager and receive individual attention as required, including
collection letters and telephone calls. Accounts that have a history of
consistent late or delinquent payments will be monitored closely by the
collection manager to avoid further deterioration. Accounts two or more payments
past due are reported to the Board of Trustees for consideration of foreclosure
action. With respect to consumer loans, a late notice is sent and a late charge
is assessed after 10 days (or, in the case of home equity loans, 15 days) after
payment is due. A second notice is sent after 15 days (in the case of home
equity loans, 25 days) thereafter. Loans 30 days or more past due are reviewed
by the collection manager for individual attention, including collection letters
and telephone calls. Accounts three or more payments past due are reported to
the Board of Trustees and are subject to legal action and repossession of
collateral.
Loans Past Due and Non-performing Assets. Loans are reviewed on a
regular basis. Management determines that a loan is impaired when it is probable
that at least a portion of the loan will not be collected due to an irreversible
deterioration in the financial condition of the borrower or the value of the
underlying collateral. When a loan is determined to be impaired, the measurement
of the loan is based on present value of estimated future cash flows, except
that all collateral-dependent loans are measured for impairment on the fair
value of the collateral. Management places loans on nonaccrual status once the
loans have become over 90 days delinquent. Nonaccrual is defined as a loan in
which collectibility is questionable and therefore interest on the loan will no
longer be recognized on an accrual basis. Instead, such interest is recognized
on a cash basis until such time as the borrower has brought the loan to
nondelinquent status. At June 30, 1998, the Bank had non-performing loans of
$884,000, and a ratio of non-performing loans to total loans of 1.10%.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the value of the property is less than the loan, less any related specific
loan loss provisions, the difference is charged against the allowance for loan
losses. Any subsequent write-down of REO is charged against earnings. At June
30, 1998, the Bank's REO totalled $124,000, and its ratio of non-preforming
assets to total assets was 0.72%.
68
<PAGE>
The following table sets forth delinquencies in the Bank's loan
portfolio at June 30, 1998. When a loan is delinquent 90 days or more, the Bank
fully reverses all accrued interest thereon and ceases to accrue interest
thereafter. For all the dates indicated, the Bank did not have any material
restructured loans within the meaning of SFAS 114.
<TABLE>
<CAPTION>
60-89 Days 90 Days and Over
------------------------------ -------------------------------
Percent Percent
of Loan of Loan
Number Amount Category Number Amount Category
------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family ................. 8 $ 387 75.88% 16 $ 666 75.34%
Multi-family ........................ 1 123 24.12 -- -- --
Commercial .......................... -- -- -- 2 91 10.29
Construction and land loans ......... -- -- -- -- -- --
Consumer ............................... -- -- -- 4 20 2.27
Commercial business .................... -- -- -- 3 107 12.10
------ ------ ------ ----- ------ -------
Total loan delinquencies .......... 9 $ 510 100.00% 25 $ 884 100.00%
------ ------ ------ ----- ------ -------
------ ------ ------ ----- ------ -------
</TABLE>
<TABLE>
<CAPTION>
Total Delinquent Loans
------------------------------------
Percent
of Loan
Number Amount Category
------ ------ --------
<S> <C> <C> <C>
Real Estate:
One- to four-family ................. 24 $1,053 75.54%
Multi-family ........................ 1 123 8.82
Commercial .......................... 2 91 6.53
Construction and land loans ......... -- -- --
Consumer ............................... 4 20 1.43
Commercial business .................... 3 107 7.68
---- ------ -------
Total loan delinquencies .......... 34 $1,394 100.00%
---- ------ -------
---- ------ -------
</TABLE>
69
<PAGE>
Nonaccrual Loans and Nonperforming Assets. The following table sets
forth information regarding nonaccrual loans and other non-performing assets.
The Bank had no accruing loans delinquent more than 90 days at June 30, 1998 or
1997.
<TABLE>
<CAPTION>
June 30,
------------------
1998 1997
------------------
(Dollars in Thousands)
<S> <C> <C>
Nonaccruing loans:
One- to four-family ............................... $ 666 $ 293
Commercial real estate ............................ 91 296
Consumer .......................................... 20 5
Commercial business ............................... 107 139
------ -------
Total ........................................... 884 733
------ -------
Foreclosed assets:
One- to four-family ............................... -- 32
Multi-family ...................................... -- 38
Nonfarm, nonresidential properties ................ 124 --
Total ........................................... $ 124 $ 70
------ -------
------ -------
Total non-performing assets .......................... $1,008 $ 803
------ -------
------ -------
Total as a percentage of total assets ................ 0.72% 0.61%
</TABLE>
During the year ended June 30, 1998, gross interest income of $40,000
would have been recorded on nonaccruing loans under their original terms if the
loans had been current throughout the period. No interest income was recorded on
nonaccruing loans or on accruing loans more than 90 days delinquent during the
year ended June 30, 1998.
Classification of Assets. Consistent with regulatory guidelines, the
Bank provides for the classification of loans and other assets considered to be
of lesser quality. Such ratings coincide with the "Substandard", "Doubtful" and
"Loss" classifications used by federal regulators in their examination of
financial institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligors and/or the collateral pledged. Substandard assets include those
characterized by the distinct possibility that the insured financial institution
will sustain some loss if the deficiencies are not corrected. Assets classified
as Doubtful have all the weaknesses inherent in assets classified Substandard
with the added characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts, 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 and/or charge-off is not warranted.
Assets that do not currently expose the insured financial institution to
sufficient risk to warrant classification in one of the aforementioned
categories but otherwise possess weaknesses are designated "Special Mention."
When the Bank classifies problem assets as either Substandard or
Doubtful, it establishes general valuation allowances or "loss reserves" in an
amount deemed prudent by management. General allowances represent loss
allowances that 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 the Bank classifies problem assets
as "Loss," it is required either to establish a specific allowance for losses
equal to 100% of the amount of assets so classified, or to charge-off such
amount. The Bank's determination as to the classification of its assets and the
amount of its valuation allowance is subject to review by its regulatory
agencies, which can order the establishment of additional general or specific
loss allowances. The Bank reviews its portfolio monthly to determine whether any
assets require classification in accordance with applicable regulations.
70
<PAGE>
On the basis of management's review of its assets, at June 30, 1998,
the Bank had classified a total of $113,000 of loans as follows:
<TABLE>
<CAPTION>
At June 30, 1998
(In Thousands)
<S> <C>
Special mention....................... $ --
Substandard........................... 113
Doubtful assets....................... --
Loss assets........................... --
-------------
Total classified loans $ 113
-------------
-------------
General loss allowance $ 511
-------------
-------------
Specific loss allowance $ 104
-------------
-------------
Charge-offs........................... $ 126
-------------
-------------
</TABLE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio, the composition of the loan portfolio, specific
impaired loans and current economic conditions. Such evaluation, which includes
a review of all loans on which full collectibility may not be reasonably
assured, considers among other matters, the estimated net realizable value or
the fair value of the underlying collateral, economic conditions, historical
loan loss experience and other factors that warrant recognition in providing for
an adequate loan loss allowance. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses and valuation of REO. Such agencies may require the
Bank to recognize additions to the allowance based on their judgment about
information available to them at the time of their examination. The allowance
for loan losses is increased by a provision for loan losses (which results in a
charge to noninterest expense) and is reduced by net charge-offs. The Bank's
provision for loan losses is described in "Management's Discussion and Analysis
of Financial Condition and Results of Operations." At June 30, 1998, the total
allowance was $728,000, which amounted to 0.91% of total loans and 82.17% of
nonperforming loans. Management will continue to monitor and modify the level of
the allowance for loan losses in order to maintain it at a level which
management considers adequate to provide for potential loan losses. For the
years ended June 30, 1998 and 1997, the Bank had charge-offs of $126,000 and
$11,000, respectively, against this allowance.
71
<PAGE>
Analysis of the Allowance For Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
1998 1997
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of period ...................... $723 $ 597
------ ------
Charge-offs:
One- to four-family .............................. 18 --
Commercial real estate ........................... 70 --
Consumer ......................................... 28 11
Commercial business .............................. 10 --
------ -------
Total charge-offs ............................ 126 11
------ -------
Recoveries:
One- to four-family .............................. -- 12
Consumer ......................................... 11 --
------ -------
Total recoveries ............................. 11 12
------ -------
Net charge-offs ..................................... 115 (1)
Additions charged to operations ..................... 120 125
------ -------
Balance at end of period ............................ $728 $723
------ -------
------ -------
Ratio of net charge-offs during the period to
average loans outstanding during the period ...... 0.15% 0.01%
------ -------
------ -------
Ratio of net charge-offs during the period to
average non-performing assets .................... 12.74% 0.15%
------ -------
------ -------
</TABLE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the allowance for loan losses by loan category for the periods
indicated. The allowance is allocated to each loan category based on historical
loss experience and economic conditions. The unallocated portions of the
allowance represent general reserves for unused lines of credit and inherent
risk associated with increased volume in lending transactions.
72
<PAGE>
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts 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>
One- to four-family..................... $ 318 $ 64,705 79.7% $ 293 $ 60,981 79.6%
Multi-family............................ 1 388 0.5 1 195 0.3
Commercial real estate.................. 78 4,521 5.6 88 5,343 7.0
Construction and land .................. 2 798 1.0 1 497 0.6
Consumer................................ 59 4,064 5.0 52 3,619 4.7
Commercial business..................... 62 1,336 1.6 45 1,032 1.3
Home equity loans....................... 14 4,727 5.8 12 4,053 5.3
Passbook loans.......................... 5 544 0.7 5 507 0.7
Specific................................ 104 108 0.1 205 359 0.5
Unallocated............................. 85 21
--------- --------- ------- -------- -------- ------
Total allowance for loan losses $ 728 $ 81,191 100.0% $ 723 $ 76,586 100.0%
--------- --------- ------- -------- -------- ------
--------- --------- ------- -------- -------- ------
</TABLE>
Securities Investment Activities
Given the Bank's substantial portfolio of fixed-rate residential
mortgage loans, the Bank maintains high balances of liquid investments for the
purpose of reducing interest rate risk. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Management of
Interest Rate Risk". The securities investment policy is established by the
Board of Trustees. This policy dictates that investment decisions will be made
based on the safety of the investment, liquidity requirements, potential
returns, cash flow targets, and desired risk parameters. In pursuing these
objectives, management considers the ability of an investment to provide
earnings consistent with factors of quality, maturity, marketability and risk
diversification.
The Bank's current policies generally limit securities investments to
U.S. Government and agency securities, federal funds sold, municipal bonds,
corporate debt obligations and mutual funds. The two mutual funds in which the
Bank invests have portfolios comprised primarily of adjustable-rate
mortgage-backed securities and were purchased by the Bank to provide
interest-earning liquid funds and an adjustable interest rate. In addition, the
Bank's policy permits investments in mortgage-backed securities, including
securities issued and guaranteed by Fannie Mae, Freddie Mac, and GNMA, and
collateralized mortgage obligations ("CMOs"). The Bank's current securities
investment strategy utilizes a risk management approach of diversified investing
among three categories: short-, intermediate- and long-term. The emphasis of
this approach is to increase overall investment securities yields while managing
interest rate risk. The Bank will only invest in securities rated A or higher by
at least one nationally recognized rating agency (or securities attaining such
rating as a result of guarantees by insurance companies), with the exception of
occasional investments in smaller non-rated local bonds. The Bank does not
engage in any hedging transactions, such as interest rate swaps or caps.
At June 30, 1998, the Bank had $47.8 million in investment securities,
or 34.1% of total assets. SFAS No. 115 requires the Bank to designate its
securities as held to maturity, available for sale or trading, depending on the
Bank's ability and intent regarding its investments. As of June 30, 1998, the
entire investment securities portfolio was classified as available for sale. At
June 30, 1998, the Bank's mortgage-backed securities portfolio totaled $5.2
million, or 3.7% of total assets and the Bank's asset-backed securities
portfolio totalled $6.3 million, or 4.5% of total assets.
73
<PAGE>
Book Value of Investment Securities. The following table sets forth
certain information regarding the investment securities and other interest
earning assets as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1998 1997
------------------ -------------------
Book % of Book % of
Value Total Value Total
----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment securities available for sale:
U.S. government securities ...................... $12,969 27.4% $18,532 43.2%
Federal agency obligations ...................... 8,569 18.1 7,145 16.7
Corporate debt securities ....................... 3,736 7.8 3,079 7.3
Municipal bonds ................................. 7,390 15.6 6,312 14.7
Equity securities ............................... 81 0.2 100 0.2
Mortgage-backed securities ...................... 5,196 11.0 5,221 12.2
Asset-backed securities ......................... 6,305 13.2 784 1.8
Mutual funds .................................... 2,353 5.0 1,644 3.8
Other ........................................... 75 0.2 75 0.1
Subtotal .................................... 46,674 98.5% 42,892 100.0%
FHLB stock ......................................... 700 1.5 -- --
Total investment securities and FHLB stock ...... $47,374 100.0% $42,892 100.0%
------ ------ ------ -----
------ ------ ------ -----
</TABLE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, book value, market value and weighted average yields for
the Bank's investment portfolio at June 30, 1998.
<TABLE>
<CAPTION>
At June 30, 1998
-----------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total
1 Year Year Years 10 Years Securities
Book Book Book Book Book Market
Value Value Value Value Value Value
--------- ------ ------- -------- ---------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities ...... $ 5,731 $ 6,643 $ 595 $ -- $ 12,969 $13,190
Federal agency obligations ...... 1,001 7,568 -- -- 8,569 8,620
Mortgage-backed securities ...... 270 3,452 343 1,131 5,196 5,189
Asset-backed securities ......... -- 1,203 2,083 3,019 6,305 6,324
Corporate debt securities ....... 100 2,400 1,236 -- 3,736 3,799
Municipal bonds ................. 955 3,679 2,756 -- 7,390 7,479
Equity securities ............... 81 -- -- -- 81 81
Mutual funds .................... 2,353 -- -- -- 2,353 2,321
FHLB stock ...................... 700 -- -- -- 700 700
Other ........................... 75 -- -- -- 75 75
------- ------- ------- ---------- ------- ------------
Total securities ................ $11,266 $24,945 $ 7,013 $ 4,150 $47,374 $47,778
------- ------- ------- ---------- ------- ------------
------- ------- ------- ---------- ------- ------------
Weighted average yield .......... 6.36% 6.23% 5.65% 6.25% 6.12% --
------- ------- ------- ---------- ------- ------------
------- ------- ------- ---------- ------- ------------
</TABLE>
Mortgage-Backed Securities. The Bank purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower the Bank's credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae, and GNMA; and (iii) increase
liquidity. At June 30, 1998, mortgage-backed securities (including CMOs) totaled
$5.2 million or 3.7% of total assets, all of which were classified as available
for sale. At June 30, 1998, all of the mortgage-backed securities were fixed
rate. The mortgage-backed securities portfolio had coupon rates ranging from
5.25% to 7.15%, a weighted average yield of 6.13% and a weighted average life
(including pre-payment assumptions) of 1.85 years at June 30, 1998. The
estimated market value of the Bank's mortgage-backed securities at June 30, 1998
was $5.2 million, which was $7,000 less than cost.
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 mortgages. Mortgage-backed securities typically
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represent a participation interest in a pool of single-family or multi-family
mortgages, although the Bank focuses its investments on mortgage-backed
securities backed by single-family mortgages. The issuers of such securities
(generally U.S. Government agencies and government sponsored enterprises,
including Fannie Mae, Freddie Mac and GNMA) pool and resell the participation
interests in the form of securities to investors, such as the Bank, and
guarantee the payment of principal and interest to these investors.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees and credit
enhancements. In addition, mortgage-backed securities are usually more liquid
than individual mortgage loans and may be used to collateralize certain
liabilities and obligations of the Bank.
Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby altering the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are prepaid. In addition, the
market value of such securities may be adversely affected by changes in interest
rates.
Management reviews prepayment estimates periodically to ensure that
prepayment assumptions are reasonable considering the underlying collateral for
the securities at issue and current interest rates and to determine the yield
and estimated maturity of the Bank's mortgage-backed securities portfolio. Of
the Bank's $5.2 million mortgage-backed securities portfolio at June 30, 1998,
$3.7 million with a weighted average yield of 6.20% had contractual maturities
within five years, $343,000 with a weighted average yield of 5.25% had
contractual maturities of five to ten years and the remaining $1.1 million with
a weighted average yield of 6.20% had contractual maturities more than 10 years.
However, the actual maturity of a security may be less than its stated maturity
due to prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages depend on many factors, the difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the
rate of prepayments. During periods of declining mortgage interest rates,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because, to the extent that the Bank's securities
prepay faster than anticipated, the Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate of return.
Conversely, in a rising interest rate environment prepayments may decline,
thereby extending the estimated life of the security and depriving the Bank of
the ability to reinvest cash flows at the increased rates of interest.
At June 30, 1998, the Bank's portfolio of asset-backed securities
totalled $6.3 million, or 4.5% of total assets, all of which were classified as
available for sale. At June 30, 1998, all of the asset-backed securities were
fixed rate. The portfolio had coupon rates ranging form 5.25% to 7.00%, a
weighted average yield of 6.37% and a weighted average life (including
prepayment assumptions) of 1.75 years at June 30, 1998. The estimated market
value of the Bank's asset-backed securities portfolio at June 30, 1998 was $6.3
million, which was $19,000 greater than cost at such date.
Asset-backed securities are a type of debt security collateralized by
various loans and assets including: automobile loans, equipment leases, credit
card receivables, home equity and improvement loans, manufactured housing,
student loans and other consumer loans. In the case of the Bank, its
asset-backed securities are collateralized by automobile loans and
second-mortgage loans.
Issuance of asset-backed securities begins with creation of a special
purpose bankruptcy-remote trust to hold collateral on behalf of investors and to
administer the distribution of cash flows. The business of a bankruptcy-remote
asset-backed securities trust is restricted to the purchase of loans and
issuance of debt collateralized by those loans. Because consumer loans are
amortizing, alternate principal cash flow structures can be created and tranched
in a very similar manner as CMOs. There are several typical structures available
to investors in the asset-backed securities market: excess spread,
senior/subordinated, reserve funds and surety bond guaranteed. Excess spread is
the first line of protection for most asset-backed securities and is the
difference between interest cash flow from the underlying loans and the combined
investor coupon, servicing fee, charge-offs and trust costs. Senior/subordinated
structures are internal credit support designating one portion of the
transaction as junior to the remaining portion. Obligations to the senior class
are honored prior to junior class obligations in the event of a cash flow
shortfall from the collateral. A reserve fund
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<PAGE>
is, in effect, part of the subordinated piece retained, in a declining balance,
by the trust so that a portion of the junior class may be rated investment
grade. Surety bond or guarantee structures are guarantees by third party
AAA-rated monoline insurance companies. Insurers generally guarantee (or wrap)
the principal and interest payments of 100% of a transaction, not just the
subordinated class.
Asset-backed securitizations provide the Bank with a broad selection of
fixed-income alternatives, most with higher credit ratings and less downgrade
risk than corporate bonds and more stable cash flows than mortgage related
securities. Prepayments and structure risk of asset-backed securities are less
of a concern than CMO securities due to the shorter maturities of the underlying
collateral promoting greater stability of payments.
Of the Bank's $6.3 million portfolio of asset-backed securities at June
30, 1998, $1.2 million with a weighted average yield of 5.70% had contractual
maturities within 5 years, $2.1 million with a weighted average yield of 6.20%
had contractual maturities of 5 to 10 years, and the remaining $3.7 million with
a weighted average yield of 6.72% had contractual maturities of more than 10
years.
Sources of Funds
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of securities, and proceeds from maturing securities and
cash flows from operations are the primary sources of the Bank's funds for use
in lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings, NOW
accounts, non-interest bearing checking accounts and money market accounts, and
certificates of deposit. The Bank also offers IRAs.
At June 30, 1998, deposits totaled $122.3 million. At June 30, 1998,
the Bank had a total of $55.6 million in certificates of deposit, of which $43.1
million had maturities of one year or less. Although the Bank has a significant
portion of its deposits in shorter-term certificates of deposit, management
monitors activity on these accounts and, based on historical experience and the
Bank's current pricing strategy, believes it will retain a large portion of such
accounts upon maturity.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Deposits are obtained predominantly from the areas in which the
Bank's branch offices are located. The Bank relies primarily on competitive
pricing of its deposit products and customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. The Bank
uses traditional means of advertising its deposit products, including radio,
television, and print media and it generally does not solicit deposits from
outside its market area. While certificates of deposit in excess of $100,000 are
accepted by the Bank, they are not subject to preferential rates. The Bank does
not actively solicit such deposits as they are more difficult to retain than
core deposits. Historically, the Bank has not used brokers to obtain deposits.
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<PAGE>
The following table sets forth the deposit activities of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
Years Ended
June 30,
1998 1997
------------- -------------
(Dollars in Thousands)
<S> <C> <C>
Opening balance.................................... $ 115,855 $ 114,187
Deposits........................................... 228,799 200,355
Withdrawals........................................ 227,002 203,188
Interest credited.................................. 4,672 4,501
Ending balance..................................... 122,324 115,855
Net increase ...................................... 6,469 1,668
Percent increase .................................. 5.58% 1.47%
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of June 30, 1998.
<TABLE>
<CAPTION>
Over
3 Months 4 to 12 Over
or Less Months 12 Months Total
---------- ----------- -------------- ---------------
(In Thousands)
<S> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $ 10,828 $ 27,014 $ 11,088 $ 48,930
Certificates of deposit of $100,000 or more 936 4,272 1,464 6,672
---------- ----------- -------------- ---------------
Total certificates of deposit $ 11,764 $ 31,286 $ 12,552 $ 55,602
---------- ----------- -------------- ---------------
---------- ----------- -------------- ---------------
</TABLE>
The following tables set forth information, by various rate categories,
regarding the balance of deposits by types of deposit for the periods indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1998 1997
------------------------- ----------------------
Amount Percent Amount Percent
(Dollars in Thousands)
Transactions and Savings Deposits:
<S> <C> <C> <C> <C>
Demand accounts............................. $ 7,514 6.14% $ 6,345 5.48%
Savings accounts............................ 33,412 27.31 32,480 28.04
NOW accounts................................ 6,187 5.06 5,341 4.61
Money market accounts....................... 19,609 16.03 20,439 17.64
------ ----- ------ -----
Total Non-Certificates......................... 66,722 54.54% 64,605 55.77%
------ ----- ------ -----
----- -----
Certificates:
0.00-3.99%.................................. 612 0.50 490 0.42
4.00-5.99%.................................. 46,733 38.20 41,974 36.23
6.00-7.99%.................................. 8,257 6.76 8,786 7.58
8.00% and over.............................. -- -- -- --
------ ----- ------ -----
Total Certificates............................. 55,602 45.46 51,250 44.23
------ ----- ------ -----
Total Deposits................................. $ 122,324 100.00% $ 115,855 100.00%
------- ------ ------- ------
------- ------ ------- ------
</TABLE>
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<PAGE>
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit accounts at June 30, 1998.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00% or Percent
3.99% 5.99% greater Total of Total
----- ----- ------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts maturing in quarter ending:
30-Sep-98.................................. $ 612 $11,152 $ -- $11,764 21.16%
31-Dec-98.................................. -- 11,518 463 11,981 21.55
31-Mar-99.................................. -- 9,055 1,944 10,999 19.78
30-Jun-99.................................. -- 7,101 1,204 8,305 14.94
30-Sep-99.................................. -- 2,074 395 2,469 4.44
31-Dec-99.................................. -- 2,169 229 2,398 4.31
31-Mar-00.................................. -- 1,137 408 1,545 2.78
30-Jun-00.................................. -- 781 367 1,148 2.06
30-Sep-00.................................. -- 716 152 868 1.56
31-Dec-00.................................. -- 685 397 1,082 1.95
31-Mar-01.................................. -- 104 498 602 1.08
30-Jun-01.................................. -- 224 316 540 0.97
Thereafter................................. -- 17 1,884 1,901 3.42
----------- ------- ------- ------- -----
Total...................................... $ 612 $46,733 $ 8,257 $55,602 100.00%
----------- ------- ------- ------- -----
----------- ------- ------- ------- -----
Percent of total........................... 1.0% 84.1% 14.9%
----------- ------- -------
----------- ------- -------
</TABLE>
Borrowed Funds. In the event that the Bank requires funds beyond its
ability to generate them in internally, additional sources of funds are
available through the use of short-term FHLB advances and two credit facilities
made available to the Bank by other financial institutions. At June 30, 1998,
the Bank had no borrowed funds.
Properties
The Bank currently conducts its business through four full-service
banking offices. The following table sets forth the Bank's offices as of June
30, 1998. The Bank's current facilities are considered by management to be
adequate for the needs of the Bank in the foreseeable future.
<TABLE>
<CAPTION>
Location Leased Original Date of Net Book Value
or Year Lease of Property or
Owned Leased or Expiration Leasehold
Acquired Improvements at
June 30, 1998
(In Thousands)
- ------------------------- ------ --------- ---------- --------------
<S> <C> <C> <C> <C>
Main Office: (1)
Main & Church Streets Owned 1963 -- $ 209
Catskill, New York 12414
Full Service Branches:
Route 385 Owned 1974 -- 87
West Coxsackie, NY 12051
Main Street Owned 1988 -- 261
Cairo, NY 12413
Route 32 Owned 1997 -- 973
Greenville, NY 12083
Operations Dept.:
429 Main Street Leased 1990 May 31, 2000 --
Catskill, NY 12414
</TABLE>
- -----------------------------------
(1) Includes adjacent parking lot.
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<PAGE>
Legal Proceedings
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition or operations of the Bank.
Personnel
As of June 30, 1998, the Bank had 53 full-time employees and three
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good. See "Management of the Bank - Executive Compensation" for a description of
certain compensation and benefit programs offered to the Bank's employees.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Mutual Company, the Company and the Bank will be subject
to federal income taxation in the same general manner as other corporations,
with some exceptions discussed below. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
the Bank.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its consolidated federal
income tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of June 30, 1998, was approximately
$379,000.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions.
At June 30, 1998, the Bank's total federal pre-1988 reserve was
approximately $379,000. This reserve reflects the cumulative effects of federal
tax deductions by the Bank for which no Federal income tax provision has been
made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable
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<PAGE>
years beginning after August 5, 1997. At June 30, 1998, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. Following completion of the Reorganization and
Offering, it is expected that the Mutual Company will own less than 80% of the
outstanding Common Stock of the Company. As such, the Mutual Company will not be
permitted to file a consolidated federal income tax return with the Company and
the Bank. The corporate dividends-received deduction is 80% in the case of
dividends received from corporations with which a corporate recipient does not
file a consolidated return, and corporations which own less than 20% of the
stock of a corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf.
State Taxation
New York State Taxation - General. The Company and the Bank will report
income on a combined calendar year basis to New York State. The New York State
franchise tax on banking 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) $250. Entire net
income is based on federal taxable income, subject to certain modifications.
Alternative entire net income is equal to entire net income without certain
modifications. The Mutual Company will file a separate New York State franchise
tax return.
Bad Debt Reserves. The Bank is allowed to utilize the reserve method of
accounting for New York State franchise tax purposes and is required to maintain
two reserve accounts-the Reserve for Losses on Nonqualifying Loans (the "NY NQL
Reserve") and the Reserve for Losses on Qualifying Real Property Loans (the "NY
QRPL Reserve"). The addition to the NY NQL Reserve must be computed under the
"experience method". The addition to the NY QRPL Reserve may be computed under
either the experience method or the "percentage of taxable income method" (the
"PTI method"). The deduction under the PTI method is equal to 32% of entire net
income (before the deduction for the bad debt reserve addition), which must
first be allocated to the NY NQL Reserve. The balance, if any, is the allowable
addition to the NY QRPL reserve, subject to a limitation based upon 6% of
Qualifying Real Property Loans ("QRPL"). As of December 31, 1997, the Bank's NY
QRPL Reserve was subject to this limitation.
The Bank will not be subject to the six-year recapture of the excess
federal bad debt reserve at December 31, 1995.
Recapture of New York State Bad Debt Reserves. If the Bank ceases to
qualify as a "thrift institution" (as defined in the New York State tax law), or
fails to hold at least 60% of its assets in "Qualifying Assets", it will no
longer be entitled to use the reserve method and must recapture into entire net
income a portion of its NY QRPL Reserve. The amount subject to recapture is
generally equal to the excess of the NY QRPL Reserve over the federal QRPL
Reserve as of December 31, 1995. The amount of the Bank's NY QRPL Reserve
subject to recapture is approximately $1.8 million. Since it is the Banks'
intention to continue to qualify as a thrift institution and to meet the 60%
Qualifying Asset test, a deferred tax liability has not been established for the
$162,000 New York State tax that would result from such failure.
Net Operating Loss Deductions. For New York State franchise tax
purposes, the Bank is not entitled to carry back or forward net operating losses
("NOLs") incurred in taxable years ending before January 1, 2001. NOLs incurred
in taxable years beginning on or after January 1, 2001 can be carried forward to
the succeeding 20 taxable years. No carryback of NOLs will be permitted.
Corporate Dividends-Received Deduction. Similar to the federal rules,
the Company and the Bank will file a combined New York State franchise tax
report and intercompany dividends will be eliminated. However, the Mutual
Company will not own the requisite percentage (generally 80% or more) of the
common stock of the Company necessary to file on a combined basis with the
Company. As long as the Mutual Company owns more than 50% of the common
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<PAGE>
stock of the Company, it will be eligible for a 60% dividends-received
deduction. The Mutual Company will not be entitled to any dividends-received
deduction if it owns 50% or less of the common stock of the Company.
Delaware State Taxes. As a Delaware holding company not earning income
in Delaware, the Company will be exempt from Delaware corporate income tax, but
will be required to file an annual report with, and pay an annual franchise tax
to, the State of Delaware.
REGULATION
General
The Bank is a New York-chartered mutual savings bank and its deposit
accounts are insured up to applicable limits by the FDIC through the BIF. The
Bank is subject to extensive regulation by the Department, as its chartering
agency; and by the FDIC, as its deposit insurer. The Bank is required to file
reports with, and is periodically examined by, the FDIC and the Superintendent
concerning its activities and financial condition and must obtain regulatory
approvals prior to entering into certain transactions, including, but not
limited to, mergers with or acquisitions of other banking institutions. The Bank
is a member of the FHLB of New York and is subject to certain regulations by the
Federal Home Loan Bank System. Both the Company and the Mutual Company, as bank
holding companies, will be subject to regulation by the Federal Reserve Board
and will be required to file reports with the Federal Reserve Board. Any change
in such regulations, whether by the Department, the FDIC, or the Federal Reserve
Board could have a material adverse impact on the Bank, the Company, or the
Mutual Company.
Certain of the regulatory requirements applicable to the Bank, the
Company and the Mutual Company are referred to below or elsewhere herein.
New York Bank Regulation
The exercise by an FDIC-insured savings bank of the lending and
investment powers under the New York State Banking Law is limited by FDIC
regulations and other federal law and regulations. In particular, the applicable
provisions of New York State Banking Law and regulations governing the
investment authority and activities of an FDIC insured state-chartered savings
bank have been substantially limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued
pursuant thereto.
The Bank derives its lending, investment and other authority primarily
from the applicable provisions of New York State Banking Law and the regulations
of the Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in common stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending powers
are not subject to percentage of assets limitations, although there are limits
applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance with
and reliance upon the specific investment authority set forth in the New York
State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of investment securities as compared
to the types of investments permissible under such specific investment
authority. However, in the event a savings bank elects to utilize the "prudent
person" standard, it will be unable to avail itself of the other provisions of
the New York State Banking Law and regulations which set forth specific
investment authority. The Bank has not elected to conduct its investment
81
<PAGE>
activities under the "prudent person" standard. A savings bank may also exercise
trust powers upon approval of the Department.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Board. Investment by a savings bank in the stock,
capital notes and debentures of its service corporations is limited to 3% of the
bank's assets, and such investments, together with the bank's loans to its
service corporations, may not exceed 10% of the savings bank's assets.
Furthermore, New York banking regulations impose requirements on loans which a
bank may make to its executive officers and directors and to certain
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire board of trustees
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an
order to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Superintendent or the Department against the Bank or any of
its trustees or officers.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Superintendent an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
In late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semi-annual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category.
As a result of legislation passed in 1996, relating to the
recapitalization of the Savings Association Insurance Fund ("SAIF"), from 1997
through 1999, FDIC-insured institutions will pay an insurance premium of
approximately 1.3 basis points of their BIF-assessable deposits. Based upon
assessable deposits at June 30, 1998, the Bank would expect to pay $3,600 in
insurance premiums per quarter during 1998.
Regulatory Capital Requirements
The FDIC has adopted risk-based capital guidelines to which the Bank is
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. The Bank is required to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
such regulatory capital to regulatory risk-weighted assets is referred to as the
Bank's "risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified off-
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balance sheet items to four risk-weighted categories ranging from 0% to 100%,
with higher levels of capital being required for the categories perceived as
representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The
first tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Savings banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels.
Standards for Safety and Soundness
The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted additions to the Guidelines which require institutions to examine asset
quality and earnings standards. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by federal
law. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
Limitations on Dividends and Other Capital Distributions
The FDIC has the authority to use its enforcement powers to prohibit a
savings bank from paying dividends if, in its opinion, the payment of dividends
would constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. New York law restricts the
Bank from declaring a dividend which would reduce its capital below (i) the
amount required to be maintained by state and federal law and regulations, or
(ii) the amount of the Bank's liquidation account established in connection with
the Reorganization. The liquidation account is expected initially to total $15.7
million. New York law also prescribes that dividends declared by a stock savings
bank in any calendar year shall not exceed the total of its net profits for that
year combined with its retained net profits of the preceding two years, plus any
required transfer to surplus or for the retirement of any preferred stock,
unless approved by the Superintendent.
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Prompt Corrective Action
The federal banking agencies have promulgated regulations to implement
the system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
Activities and Investments of Insured State-Chartered Banks Acting as Principal
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things, (i) acquiring or retaining a majority interest in a
subsidiary; (ii) investing as a limited partner in a partnership the sole
purpose of which is the direct or indirect investment in the acquisition,
rehabilitation, or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's total
assets; (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees', and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions; and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
Federal law and FDIC regulations permit certain exceptions to the
foregoing limitation. For example, certain state-chartered banks, such as the
Bank, may continue to invest in common or preferred stock listed on a National
Securities Exchange or the National Market System of NASDAQ, and in the shares
of an investment company registered under the Investment Company Act of 1940, as
amended. As of June 30, 1998, the Bank had no securities pursuant to this
exception.
Transactions with Affiliates
Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also
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establishes specific collateral requirements for loans or extensions of credit
to, or guarantees, acceptances on letters of credit issued on behalf of an
affiliate. Section 23B requires that covered transactions and a broad list of
other specified transactions be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings
bank with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and stockholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal stockholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.
Holding Company Regulation
Federal Bank Holding Company Regulation. Upon consummation of the
Reorganization, the Company, as the sole shareholder of the Bank, and the Mutual
Company, as indirect controlling shareholder of the Bank, will become bank
holding companies. Bank holding companies are subject to comprehensive
regulation and regular examinations by the Federal Reserve Board under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and the regulations of the
Federal Reserve Board. The Federal Reserve Board also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
After consummation of the Reorganization and Offering, the Company will
be subject to capital adequacy guidelines for bank holding companies (on a
consolidated basis) which are substantially similar to those of the FDIC for the
Bank. On a pro forma consolidated basis after the Reorganization and Offering,
the Company's pro forma stockholders' equity will exceed these requirements.
Under Federal Reserve Board policy, a bank holding company must serve
as a source of strength for its subsidiary bank. Under this policy the Federal
Reserve Board may require, and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain Federal Reserve
Board approval before: (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the Federal Reserve Board includes, among other things, operating a savings
association, mortgage company, finance company, credit card company or factoring
company; performing certain data processing operations; providing certain
investment
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and financial advice; underwriting and acting as an insurance agent for certain
types of credit-related insurance; leasing property on a full-payout,
non-operating basis; selling money orders, travelers' checks and United States
Savings Bonds; real estate and personal property appraising; providing tax
planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers.
Interstate Banking and Branching. Federal law allows the Federal
Reserve Board to approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of the bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Federal Reserve Board is prohibited from approving an application if
the applicant (and its depository institution affiliates) controls or would
control more than 10% of the insured deposits in the United States or 30% or
more of the deposits in the target bank's home state or in any state in which
the target bank maintains a branch. Individual states continue to have authority
to limit the percentage of total insured deposits in the state which may be held
or controlled by a bank or bank holding company to the extent such limitation
does not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% state-wide concentration limit referred
to above.
Additionally, beginning on June 1, 1997, the federal banking agencies
were authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks "opted out" by adopting a law which applies equally to
all out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.
In response to Riegle-Neal, the State of New York enacted laws allowing
interstate mergers and branching on a reciprocal basis.
Federal law authorizes the FDIC to approve interstate branching de novo
by national and state banks, respectively, only in states which specifically
allow for such branching. The appropriate federal banking agencies are required
to prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and Federal Reserve Board have adopted such regulations. These
regulations include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve. Should the FDIC determination that a
bank interstate branch is not reasonably helping to meet the credit needs of the
communities serviced by an interstate branch, the FDIC is authorized to close
the interstate branch or not permit the bank to open a new branch in the state
in which the bank previously opened an interstate branch.
Dividends. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank holding company should pay cash
dividends only to the extent that the holding company's net income for the past
year is sufficient to cover both the cash dividends and a rate of earning
retention that is consistent with the holding company's capital needs, asset
quality and overall financial condition. The Federal Reserve Board also
indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the Federal Reserve Board, the
Federal Reserve Board may prohibit a bank holding company from paying any
dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
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New York State Bank Holding Company Regulation. In addition to the
federal bank holding company regulations, a bank holding company organized or
doing business in New York State also may be subject to regulation under the New
York State Banking Law. The term "bank holding company," for the purposes of the
New York State Banking Law, is defined generally to include any person, company
or trust that directly or indirectly either controls the election of a majority
of the directors or owns, controls or holds with power to vote more than 10% of
the voting stock of a bank holding company or, if the Company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions. In general, a bank holding company
controlling, directly or indirectly, only one banking institution will not be
deemed to be a bank holding company for the purposes of the New York State
Banking Law. Under New York State Banking Law, the prior approval of the Banking
Board is required before: (1) any action is taken that causes any company to
become a bank holding company; (2) any action is taken that causes any banking
institution to become or be merged or consolidated with a subsidiary of a bank
holding company; (3) any bank holding company acquires direct or indirect
ownership or control of more than 5% of the voting stock of a banking
institution; (4) any bank holding company or subsidiary thereof acquires all or
substantially all of the assets of a banking institution; or (5) any action is
taken that causes any bank holding company to merge or consolidate with another
bank holding company. Additionally, certain restrictions apply to New York State
bank holding companies regarding the acquisition of banking institutions which
have been chartered five years or less and are located in smaller communities.
Officers, directors and employees of New York State bank holding companies are
subject to limitations regarding their affiliation with securities underwriting
or brokerage firms and other bank holding companies and limitations regarding
loans obtained from its subsidiaries. Although the Company will not be a bank
holding company for purposes of New York State law upon the Effective Date of
the Reorganization, any future acquisition of ownership, control, or the power
to vote 10% or more of the voting stock of another bank or bank holding company
would cause it to become such.
Mutual Holding Company Regulation. Under New York law, the Mutual
Company may exercise all powers and privileges of a New York chartered mutual
savings bank, except for the power of accepting deposits. As a bank holding
company, the Mutual Company is also authorized to exercise all powers and engage
in all activities permitted to a bank holding company under the BHCA.
Dividend Waivers by the Mutual Holding Company. It has been the policy
of many mutual holding companies to waive the receipt of dividends declared by
any savings institution subsidiary. In connection with its approval of the
Reorganization, however, it is expected that the Federal Reserve Board will
impose certain conditions on the waiver by the Mutual Company of dividends paid
on the Common Stock. In particular, the Mutual Company is expected to be
required to obtain prior Federal Reserve Board approval before it may waive any
dividends. As of the date hereof, management does not believe that the Federal
Reserve Board has given its approval to any waiver of dividends by any mutual
holding company that has requested its approval.
The terms of the Federal Reserve Board approval of the Reorganization
are also expected to require that the amount of any waived dividends will not be
available for payment to Minority Stockholders and be excluded from capital for
purposes of calculating dividends payable to Minority Stockholders. Moreover,
the cumulative amount of waived dividends must be maintained in a restricted
capital account which would be added to any liquidation account of the Bank, and
would not be available for distribution to Minority Stockholders. The restricted
capital account and liquidation account amounts would not be reflected in the
Bank's financial statements or the notes thereto, but would be considered as a
notational or memorandum account of the Bank, and would be maintained in
accordance with the rules, regulations and policy of the Office of Thrift
Supervision except that such rules would be administered by the Federal Reserve
Board, and any other rules and regulations adopted by the Federal Reserve Board.
The Plan of Reorganization also provides that if the Mutual Company converts to
stock form in the future, any waived dividends would reduce the percentage of
the converted company's shares of Common Stock issued to Minority Stockholders
in connection with any such transaction. See "Conversion of the Mutual Company
to Stock Form."
Management does not believe that the Mutual Company will initially
waive dividends declared by the Company. If the Mutual Company decides that it
is in its best interest to waive a particular dividend to be paid by the
Company, and the Federal Reserve Board approves such waiver, then the Company
would pay such dividend only to Minority Stockholders, and the amount of the
dividend waived by the Mutual Company would be treated in the manner
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described above. The Mutual Company's decision as to whether or not to waive a
particular dividend, if such waiver is approved by the Federal Reserve Board,
will depend on a number of factors, including the Mutual Company's capital
needs, the investment alternatives available to the Mutual Company as compared
to those available to the Company, and regulatory approvals. There can be no
assurance (i) that after the Reorganization the Mutual Company will waive
dividends paid by the Company, (ii) that the Federal Reserve Board will approve
any dividend waivers by the Mutual Company or (iii) of the terms that may be
imposed by the Federal Reserve Board on any dividend waiver.
Conversion of the Mutual Company to Stock Form. New York law,
regulations of the Department and the Plan of Reorganization permit the Mutual
Company to convert from the mutual to the capital stock form of organization (a
"Conversion Transaction"). There can be no assurance when, if ever, a Conversion
Transaction will occur, and the board of trustees has no current intention or
plan to undertake a Conversion Transaction. In a Conversion Transaction, the
Mutual Company would merge with and into the Bank or the Company, with the Bank
or the Company as the resulting entity, and certain depositors of the Bank would
receive the right to subscribe for additional shares of the resulting entity. In
a Conversion Transaction, each share of Common Stock outstanding immediately
prior to the completion of the Conversion Transaction held by persons other than
the Mutual Company would be automatically converted into and become the right to
receive a number of shares of Common Stock of the resulting entity determined
pursuant to an exchange ratio that ensures that after the Conversion
Transaction, subject to the Dividend Waiver and MHC Assets Adjustment described
below (if required by the applicable federal banking regulators) and any
adjustment to reflect the receipt of cash in lieu of fractional shares, the
percentage of the to-be outstanding shares of the resulting entity issued to
Minority Stockholders in exchange for their Common Stock would be equal to the
percentage of the outstanding shares of Common Stock held by Minority
Stockholders immediately prior to the Conversion Transaction. The total number
of shares held by Minority Stockholders after the Conversion Transaction also
would be affected by any purchases by such persons in the offering that would be
conducted as part of the Conversion Transaction.
As set forth in the Plan of Reorganization, the Dividend Waiver and MHC
Assets Adjustment would adjust the percentage of the to-be outstanding shares of
the resulting entity issued in exchange for minority shares to reflect (i) the
aggregate amount of dividends waived by the Mutual Company and (ii) assets,
other than Common Stock, held by the Mutual Company. Pursuant to the Dividend
Waiver and MHC Assets Adjustment, the percentage of the to-be outstanding shares
of the resulting entity issued to Minority Stockholders in exchange for their
minority shares (the "Adjusted Minority Ownership Percentage") is equal to the
percentage of the outstanding shares of Common Stock held by Minority
Stockholders multiplied by the Dividend Waiver Fraction. The Dividend Waiver
Fraction is equal to the product of (a) a fraction, of which the numerator is
equal to the Company's stockholders' equity at the time of the Conversion
Transaction less the aggregate amount of dividends waived by the Mutual Company,
and the denominator is equal to the Company's stockholders' equity at the time
of the Conversion Transaction, and (b) a fraction, of which the numerator is
equal to the appraised pro forma market value of the resulting entity in the
Conversion Transaction minus the value of the Mutual Company's assets other than
Common Stock and the denominator is equal to the appraised pro forma market
value of the resulting entity in the Conversion Transaction.
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Federal Securities Law
The Common Stock of the Company to be issued in the Offering will be
registered with the SEC under the Exchange Act prior to completion of the
Reorganization and the Offering. the Company will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
The Company Common Stock held by persons who are affiliates
(generally officers, directors and principal stockholders) of the Company may
not be resold without registration or unless sold in accordance with certain
resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in
the public market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain noninterest-bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking
accounts). At June 30, 1998, the Bank was in compliance with these reserve
requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as amended (the "CRA"), as
implemented by FDIC regulations, a savings bank has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
CRA. The CRA requires the FDIC, in connection with its examination of a
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation
of certain applications by such institution. The CRA requires the FDIC to
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. The Bank's latest CRA rating was
"outstanding."
New York State Regulation. The Bank is also subject to provisions of
the New York State Banking Law which impose continuing and affirmative
obligations upon banking institutions organized in New York State to serve
the credit needs of its local community ("NYCRA") which are substantially
similar to those imposed by the CRA. Pursuant to the NYCRA, a bank must file
an annual NYCRA report and copies of all federal CRA reports with the Banking
Department. The NYCRA requires the Banking Department to make an annual
written assessment of a bank's compliance with the NYCRA, utilizing a
four-tiered rating system, and make such assessment available to the public.
The NYCRA also requires the Superintendent to consider a bank's NYCRA rating
when reviewing a bank's application to engage in certain transactions,
including mergers, asset purchases and the establishment of branch offices or
automated teller machines, and provides that such assessment may serve as a
basis for the denial of any such application.
The Bank's NYCRA rating as of its latest examination was
"outstanding."
Federal Home Loan Bank System
The Bank is a member of the FHLB of New York, which is one of 12
regional FHLBs, that administers the home financing credit function of
savings institutions. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes loans to members (i.e., advances) in accordance with policies and
procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home
financing.
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As a member, the Bank is required to purchase and maintain stock in
the FHLB of New York. At June 30, 1998, the Bank had $700,000 of FHLB stock.
The dividend yield from FHLB stock was 7.45% at June 30, 1998. No assurance
can be given that such dividends will continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
MANAGEMENT OF GREENE COUNTY BANCORP, INC.
Directors of the Company
The Board of Directors of the Company consists of nine members, each
of whom is currently serving as a trustee of the Bank. Directors of the
Company will serve three-year staggered terms so that approximately one-third
of the directors will be elected at each annual meeting of stockholders. The
class of directors whose term of office expires at the first annual meeting
of stockholders following completion of the Reorganization consists of
directors Whittaker, O'Grady and Smith. The class of directors whose term
expires at the second annual meeting of stockholders following completion of
the Reorganization consists of directors Buck, Klein and Camera. The class of
directors whose term of office expires at the third annual meeting of
stockholders following the completion of the Reorganization consists of
directors Ingalls, Slutzky and Jenkins. The biographical information
regarding these individuals is set forth under "Management of the
Bank-Biographical Information."
Executive Officers of the Company
The following individuals are executive officers of the Company and
hold the offices set forth below opposite their names. The biographical
information for each executive officer is set forth under "Management of the
Bank--Biographical Information."
<TABLE>
<CAPTION>
Name Age* Position
- ---- --- --------
<S> <C> <C>
J. Bruce Whittaker 55 President and Chief Executive Officer
Bruce P. Egger 49 Vice President and Secretary
Edmund L. Smith, Jr. 55 Vice President and Treasurer
Daniel T. Sager 44 Vice President
</TABLE>
- --------------
*As of June 30, 1998
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected or until death,
resignation, retirement or removal by the board.
Since the formation of the Company, none of the executive officers
has received remuneration from the Company. It is not anticipated that the
executive officers of the Company will initially receive any remuneration in
his or her capacity as an executive officer. For information concerning
compensation of executive officers of the Bank, see "Management of the Bank."
Indemnification and Limitation of Liability
The Certificate of Incorporation of the Company provides that a
director or officer of the Company shall be indemnified by the Company to the
fullest extent authorized by the Delaware General Corporation Law ("DGCL")
against all expenses, liability and loss reasonably incurred or suffered by
such person in connection with his or her activities as a director or officer
or as a director or officer of another company, if the director or officer
held such
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position at the request of the Company. Delaware law requires that such
director, officer, employee or agent, in order to be indemnified, must have
acted in good faith and in a manner reasonably believed to be not opposed to
the best interests of the Company and, with respect to any criminal action or
proceeding, either had reasonable cause to believe such conduct was lawful or
did not have reasonable cause to believe his or her conduct was unlawful.
In addition, the Certificate of Incorporation and Delaware law also
provide that the Company may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Company or another
corporation, partnership, joint venture, trust or other enterprise against
any expense, liability or loss, whether or not the Company has the power to
indemnify such person against such expense, liability or loss under the DGCL.
The Company intends to obtain such insurance.
The Certificate of Incorporation also provides that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law (which relates to
unlawful dividends or stock purchases or redemptions), or (iv) for any
transaction from which the director derived an improper personal benefit.
MANAGEMENT OF THE BANK
Directors of the Bank
Upon completion of the Reorganization, the initial directors of the
Bank will consist of those persons who currently serve on the Board of
Trustees of the Bank. The directors of the Bank will have three year terms
which will be staggered to provide for the election of approximately
one-third of the board members each year. Directors of the Bank will be
elected by the Company as sole stockholder of the Bank. The proposed
directors of the Bank are as follows:
<TABLE>
<CAPTION>
Director Age * Occupation Director Since Term Expires
- ----------------- --- ---------- -------------- ------------
<S> <C> <C> <C> <C>
Walter H. Ingalls 67 Retired Lumber Company President 1966 2001
J. Bruce Whittaker 55 President and Chief Executive Officer, 1987 1999
Greene County Savings Bank
Richard J. Buck 73 Retired Partner, Insurance Agency 1970 2000
Raphael Klein 71 Retired Movie Theater Owner 1986 2000
Paul Slutzky 50 General Manager-Construction Company 1992 2001
Anthony Camera, Jr. 72 Retired President and Chief Executive 1986 2000
Officer, Mutual Insurance Company
David H. Jenkins, DVM 44 Veterinarian/Owner-Catskill Animal Hospital 1996 2001
Dennis R. O'Grady 58 Pharmacist/Co-Owner-Mikhitarian Pharmacy 1981 1999
Martin C. Smith 53 Employee-Main Bros. Oil Co., Inc. 1993 1999
</TABLE>
- --------------
*As of June 30, 1998
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Executive Officers of the Bank
The following table sets forth certain information (as of June 30,
1998) regarding the executive officers of the Bank, all of whom currently
serve in their indicated position as executive officers of the Bank.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
J. Bruce Whittaker 55 President and Chief Executive Officer
Bruce P. Egger 49 Vice President and Secretary
Edmund L. Smith, Jr. 55 Vice President and Treasurer
Daniel T. Sager 44 Vice President-Lending
</TABLE>
The executive officers of the Bank will be elected annually and will
hold office until the next annual meeting of the board of directors of the
Bank held immediately after the annual meeting of stockholders of the Bank,
and until their successors are elected and qualified, or until death,
resignation, retirement or removal by the board of directors.
Biographical Information
Trustees of the Bank
J. Bruce Whittaker is President and Chief Executive Officer of the
Bank, and has served in that position since 1987. Mr. Whittaker has
been affiliated with the Bank in various capacities since 1972. Mr.
Whittaker was appointed to the Board of Trustees in 1987.
Walter H. Ingalls is the Chairman of the Board. Mr. Ingalls is retired.
Prior to his retirement, Mr. Ingalls was the President of the GNH
Lumber Co., a lumber company located in Norton Hill, New York.
Richard J. Buck is retired. Prior to his retirement, he was a partner
with Grossman Agency, a general insurance agency in Catskill, New York.
Raphael Klein is retired. Prior to his retirement, he was the co-owner
of Klein Theaters, a movie theater chain in Hudson, New York.
Paul Slutzky is the General Manager of I. & O. A. Slutzky Constr. Co.,
a construction company located in Hunter, New York.
Anthony Camera, Jr. is retired. Prior to his retirement, he was
President of Commercial Mutual Insurance Co., an insurance company in
Catskill, New York.
David H. Jenkins, DVM is a veterinarian and the owner of Catskill
Animal Hospital, Catskill, New York.
Dennis R. O'Grady is a pharmacist and the co-owner of Mikhitarian
Pharmacy located in Catskill, New York.
Martin C. Smith is currently employed by Main Bros. Oil Co., Inc., and
is the former owner of R.E. Smith Fuel Company, which was purchased by
Main Bros. Oil Co., Inc., located in Albany, New York.
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<PAGE>
Executive Officers of the Bank Who Are Not Trustees
Bruce P. Egger has served as Vice President and Secretary of the Bank
since 1987 and has been affiliated with the Bank in various capacities
since 1977. Prior to that time, Mr. Egger worked in the retail trade.
Edmund L. Smith, Jr., has served as Vice President and Treasurer of the
Bank since 1988 and has been affiliated with the Bank in various
capacities since 1975. Prior to that time, Mr. Smith was the bursar of
Columbia-Greene Community College.
Daniel T. Sager has served as Vice President-Lending of the Bank since
1995 and has been affiliated with the Bank in various capacities since
1987. Prior to that time, Mr. Sager was employed as branch manager for
a commercial bank.
Meetings and Committees of the Bank's Board
The Board of Trustees of the Bank meets monthly and may have
additional special meetings as may be called by the Chairman or as otherwise
provided by law. During the year ended June 30, 1998, the board held 13
meetings. No trustee attended fewer than 75% in the aggregate of the total
number of meetings of the board or board committees on which such trustee
served during the period. The Board of Trustees of the Bank has the following
standing committees: Audit Committee, Personnel Committee, Appraisal and Loan
Committee, Re-Inspection Committee and Executive Committee.
Board of Directors and Committees of the Company after the Reorganization
Following the Reorganization, the board of directors of the Company
is expected to meet monthly, or more often as may be necessary. The board of
directors initially is expected to have a standing executive committee and an
audit committee. The board of directors may, by resolution, designate one or
more additional committees.
The executive committee initially will consist of the following six
directors of the Company: Messrs. Buck, Ingalls, Klein, Slutzky, Whittaker
and Smith. The executive committee is expected to meet as necessary when the
board is not in session to exercise general control and supervision in all
matters pertaining to the interests of the Company, subject at all times to
the direction of the board of directors. The executive committee may also
serve as the nominating committee for the purpose of identifying, evaluating
and recommending potential candidates for election to the board.
The audit committee initially will consist of the following four
directors of the Company: Messrs. Ingalls, Camera, Jenkins and O'Grady. The
audit committee is expected to meet at least quarterly to examine and approve
the audit report prepared by the independent auditors of the Bank, to review
and recommend the independent auditors to be engaged by the Company, to
review the internal audit function and internal accounting controls of the
Company, and to review and approve audit policies.
Compensation of Directors
Directors of the Bank will receive an annual retainer of $6,000 and
a fee of $500 per meeting for attendance at Board and Committee meetings.
Directors of the Bank and the Company who are also employees of the Bank and
the Company are not eligible to receive Board fees. Initially, no separate
compensation will be paid to directors for service on the Board of Directors
or Board committees of the Company.
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Executive Compensation
Summary Compensation Table. The following table sets forth for the
year ended June 30, 1998, certain information as to the total remuneration
paid by the Bank to the Chief Executive Officer of the Bank. No other
executive officer of the Bank during the year ended June 30, 1998 received
total annual compensation in excess of $100,000.
<TABLE>
<CAPTION>
Annual Compensation (1) Long-Term Compensation
----------------------------------- -------------------------------------------------
Awards Payouts
----------------------- -------
Other
Annual Restricted Options/ All Other
Compensation Stock SARS LTIP Compensation
Name and Principal Position Salary Bonus (2) Awards(3) (#)(4) Payouts (5)
- --------------------------- -------- ------------ ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Bruce Whittaker $120,000 $2,300 -- -- -- -- $3,600
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 years ended June 30, 1997 and 1996, as
the Bank was not a public company during such periods.
(2) The Bank also provides each qualifying employee, including Mr.
Whittaker, life insurance equal to twice the employee's salary. The
aggregate value of this benefit to Mr. Whittaker did not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported
for such officer.
(3) Does not include awards pursuant to the Stock Award Plan, as such
awards were not earned, vested or granted in fiscal 1998. For a
discussion of the terms of the Stock Award Plan that are intended to be
adopted by the Company, see "--Stock Award Plan."
(4) No stock options or SARs were earned or granted in fiscal 1998. For a
discussion of the Stock Option Plan that is intended to be adopted by
the Company, see "Stock Option Plan."
(5) Consists of the Bank's contribution to the Bank's 401(k) Plan on behalf
of Mr. Whittaker.
Report of Independent Compensation Consultant. Pursuant to
regulations of the Department applicable to the Reorganization, the Bank must
obtain the opinion of an independent compensation consultant as to whether or
not the total compensation for the executive officers and trustees/directors
of the Bank, viewed as a whole and on an individual basis, is reasonable and
proper in comparison to the compensation provided to executive officers and
directors of similar publicly-traded financial institutions. The Bank has
obtained an opinion from William M. Mercer, Incorporated, Rochester, New
York, which indicates that, based upon published professional survey data of
similarly situated publicly-traded financial institutions operating in the
relevant markets as of October 1, 1998 with respect to the total cash
compensation (base salary and annual incentive) for executive officers and
total compensation for trustees of the Bank, such compensation, viewed as a
whole and on an individual basis, is reasonable and proper in comparison to
the compensation provided to similarly situated publicly-traded financial
institutions, and that, with respect to the amount of shares of Common Stock
expected to be reserved under the ESOP, the Stock Award Plan and Stock Option
Plan as a whole, such amounts reserved for granting are reasonable in
comparison to similar publicly-traded financial institutions.
Compensation of Officers and Directors through Benefit Plans. The
Bank's current tax-qualified employee pension benefit plans consist of a
defined benefit pension plan and a defined contribution plan with a salary
deferral feature under 401(k) of the Internal Revenue Code. As a result of
the Reorganization, the Company and the Bank will be able to compensate
employees with stock-based compensation pursuant to the ESOP, the Stock Award
Plan and the Stock Option Plan described below.
Employment Agreement. The Bank intends to enter into an employment
agreement with its President and Chief Executive Officer, J. Bruce Whittaker.
The agreement will have a term of 36 months. On each anniversary date, the
agreement may be extended for an additional twelve months, so that the
remaining term will be 36 months. If the agreement is not renewed, the
agreement will expire 36 months following the anniversary date. Under the
agreement, the current Base Salary for Mr. Whittaker (as defined in the
agreement) is $125,000. The Base Salary may be increased
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<PAGE>
but not decreased. In addition to the Base Salary, the agreement provides
for, among other things, participation in retirement plans and other employee
and fringe benefits applicable to executive personnel. In addition to the
above, the Bank will provide Mr. Whittaker and his dependents with continuing
health care coverage upon Mr. Whittaker's retirement or other termination of
employment after attainment of age 55 with 25 years of service, in
substantially the same amount as provided to Mr. Whittaker and his dependents
prior to the termination of his employment. Such coverage, which will survive
the termination or expiration of the agreement, will cease upon Mr.
Whittaker's attainment of age 65. The agreement provides for termination by
the Bank for cause at any time. In the event the Bank terminates the
executive's employment for reasons other than disability, retirement, or for
cause, or in the event of the executive's resignation from the Bank (such
resignation to occur within the period or periods set forth in the employment
agreement) upon (i) failure to re-elect the executive to his current offices,
(ii) a material change in the executive's functions, duties or
responsibilities, or relocation of his principal place of employment by more
than 30 miles, (iii) liquidation or dissolution of the Bank or the Company,
(iv) a breach of the agreement by the Bank, or (v) following a change in
control of the Bank or the Company, the executive, or in the event of death,
his beneficiary, would be entitled to severance pay in an amount equal to
three times the highest Base Salary and the highest bonus paid during any of
the last three years. Mr. Whittaker would receive an aggregate of $375,000
pursuant to his employment agreement upon a change in control of the Bank or
the Company, based upon his current level of compensation. The Bank would
also continue the executive's life, dental and disability coverage for 36
months from the date of termination, and would continue his health coverage
until Mr. Whittaker attains age 65 (as discussed above). In the event the
payments to the executive would include an "excess parachute payment" as
defined by Code Section 280G (relating to payments made in connection with a
change in control), the payments would be reduced in order to avoid having an
excess parachute payment.
Under the agreement, the executive's employment may be terminated
upon his retirement in accordance with any retirement policy established on
behalf of the executive and with his consent. Upon the executive's
retirement, he will be entitled to all benefits available to him under any
retirement or other benefit plan maintained by the Bank. In the event of the
executive's disability for a period of six months, the Bank may terminate the
agreement provided that the Bank will be obligated to pay him his Base Salary
for the remaining term of the agreement or one year, whichever is longer,
reduced by any benefits paid to the executive pursuant to any disability
insurance policy or similar arrangement maintained by the Bank. In the event
of the executive's death, the Bank will pay his Base Salary to his named
beneficiaries for one year following his death, and will also continue
medical, dental, and other benefits to his family for one year. The
employment agreement provides that, following his termination of employment,
the executive will not compete with the Bank for a period of one year.
Defined Contribution Plan. Effective September 1, 1995, the Bank
adopted the Financial Institutions Thrift Plan (the "Prior Plan"). In
connection with the Reorganization, effective October 1, 1998, the Bank
withdrew from the Prior Plan and adopted The Bank of Greene County Employees'
Savings & Profit Sharing Plan and Trust (the "Plan") in order to permit the
investment of Plan assets in Common Stock. Employees are eligible to join the
Plan on the first of the month following completion of one year of continuous
employment (during which 1,000 hours are completed). The first year
eligibility period runs from the date of hire to the anniversary of such
date. If an employee does not satisfy the eligibility requirements during
such period then the next eligibility period shall be the calendar year.
Employees are eligible to contribute, on a pre-tax basis, up to 15% of their
eligible salary, in increments of 1%. The Bank shall make a matching
contribution equal to 50% of a member's contributions on up to 6% of a
member's compensation. In addition, the Bank may make an additional
discretionary contribution allocated among members' accounts on the basis of
compensation. All employee contributions and earnings thereon under the Plan
are at all times fully 100% vested. A member vests in employer matching and
discretionary contributions at the rate of 20% per year beginning in the
second year of employment and continuing until the member is 100% vested
after six years of employment. Employees are entitled to borrow, within tax
law limits, from amounts allocated to their accounts.
Plan benefits will be paid to each member in a lump sum or in equal
payments over a fixed period upon termination, disability or death. In
addition, the Plan permits employees to withdraw salary reduction
contributions prior to age 59-1/2 or termination in the event the employee
suffers a financial hardship. In certain circumstances, the Plan permits
employees to withdraw the Bank's matching contributions to their accounts.
The Plan permits employees to direct the investment of their own accounts
into various investment options.
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<PAGE>
At December 31, 1997, the market value of the Prior Plan trust fund
was approximately $899,856. The total contribution (i.e, both the employee
and Bank contributions) to the Prior Plan for the Prior Plan year ended
December 31, 1997, was approximately $109,654.
Defined Benefit Pension Plan. The Bank maintains the Financial
Institutions Retirement Fund, which is a qualified, tax-exempt defined
benefit plan ("Retirement Plan"). All employees age 21 or older who have
worked at the Bank for a period of one year in which they have 1,000 or more
hours of service are eligible for membership in the Plan. Once eligible, an
employee must have been credited with 1,000 or more hours of service with the
Bank during the year in order to accrue benefits under the Retirement Plan.
The Bank annually contributes an amount to the Retirement Plan necessary to
satisfy the actuarially determined minimum funding requirements in accordance
with the Employee Retirement Income Security Act ("ERISA").
The regular form of all retirement benefits (i.e., normal, early or
disability) is a life annuity with a guaranteed term of 10 years. For a
married participant, the normal form of benefit is a 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. An optional form of benefit may be selected instead
of the normal form of benefits. These optional forms include various annuity
forms as well as a lump sum payment after age 55. Benefits payable upon death
may be made in a lump sum, installments over 10 years, or a lifetime annuity.
The normal retirement benefit payable at or after age 65, is an
amount equal to 1.5% multiplied by years of benefit service (not to exceed
30) times average compensation based on the average of the five years
providing the highest average. A reduced benefit is payable upon retirement
at age 55 at or after completion of five years of service. A member is fully
vested in his account upon completion of 5 or more years of employment or
upon attaining normal retirement age.
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
average salary and benefit service classifications specified below.
<TABLE>
<CAPTION>
Highest Five-Year Years of Service and Benefit Payable at Retirement(1)
Average -----------------------------------------------------
Compensation 15 20 25 30
----------------- -- -- -- --
<S> <C> <C> <C> <C>
$50,000 $11,250 $15,000 $18,750 $22,500
$75,000 16,875 22,500 28,125 33,750
$100,000 22,500 30,000 37,500 45,000
$125,000 28,125 37,500 46,875 56,250
$150,000 33,750 45,000 56,250 67,500
</TABLE>
- --------------
(1) No additional credit is received for years of service in excess of 30;
however, increases in compensation after 30 years will generally cause
an increase in benefits.
As of June 30, 1998, Mr. J. Bruce Whittaker had 26 years of credited
service (i.e., benefit service), under the Retirement Plan.
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<PAGE>
Employee Stock Ownership Plan and Trust. The Bank intends to
implement an employee stock ownership plan ("ESOP") in connection with the
Reorganization. Employees with at least one year of employment with the Bank
and who have attained age 21 are eligible to participate. As part of the
Reorganization, the ESOP intends to borrow funds from the Company and use
those funds to purchase a number of shares equal to up to 8% 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 Bank's
discretionary contributions to the ESOP over a period of up to ten years. It
is anticipated that the interest rate for the loan will be a floating rate
equal to the Prime Rate published in the Wall Street Journal at the time of
the Offering. 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
account 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. For this purpose, compensation is defined as wages reported on
federal income tax form W-2 but not in excess of Code Section 401(a)(17)
limit. Participants in the ESOP will receive credit for service prior to the
effective date of the ESOP. A participant is 100% vested in his benefits
after five years or upon normal retirement (as defined in the ESOP), early
retirement, disability or death of the participant. A participant who
terminates employment for reasons other than death, retirement, or disability
prior to five years of credited service will forfeit his benefits under the
ESOP. Benefits will be payable in the form of Common Stock and/or cash upon
death, retirement, early retirement, disability or separation from service.
Alternatively, a participant may request that the benefits be paid entirely
in the form of Common Stock or entirely in cash. The Bank's contributions to
the ESOP are discretionary, subject to the loan terms and tax law limits,
and, therefore, benefits payable under the ESOP cannot be estimated. Pursuant
to Statement of Position 93-6, (Employers' Accounting for Employee Stock
Ownership Plans), the Bank is required to record compensation expense in an
amount equal to the fair market value of the shares released from the
suspense account.
In connection with the establishment of the ESOP, the Bank will
establish a committee of nonemployee directors to administer the ESOP. The
Bank will either appoint its non-employee directors or an independent
financial institution to serve as trustee of 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.
Stock Option Plan. At a meeting of the Company's stockholders to be
held no earlier than six months after the completion of the Reorganization,
the board of directors intends to submit for shareholder approval a Stock
Option Plan for directors and officers of the Bank and of the Company. If
approved by the stockholders, 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. Ten percent of the Minority Ownership Interest would amount to 73,694
shares, 86,603 shares, 99,594 shares and 114,533 shares at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range, respectively.
If the plan is approved within one year of the completion of the
Reorganization, no options would be granted under the Stock Option Plan until
the date on which shareholder approval is received.
The exercise price of the options granted under the Stock Option
Plan will be 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 Offering, options will become exercisable at a rate of 20%
at the end of each twelve (12) months of service with the Bank 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 Offering, awards would be 100% vested upon normal retirement
or a change in control of the Bank or the Company. Under FDIC and Department
rules, if the Stock Option Plan is adopted within the first 12 months after
completion of the Offering, 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
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<PAGE>
directors as a group can receive no more than 30% of the awards under the
plan in the aggregate. No determination has been made as to the specific
terms of the plan or as to awards thereunder.
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 could be "incentive" stock options
designed to result in beneficial tax treatment to the employee but no tax
deduction to the Company. Non-qualified stock options could 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 terminated his employment or service as an employee or director,
the options would terminate during certain specified periods. The Stock
Option Plan will terminate ten years following its adoption, unless earlier
terminated by the Company.
Stock Award Plan. At a meeting of the Company's stockholders to be
held no earlier than six months after the completion of the Reorganization,
the board of directors also intends to submit the Stock Award Plan for
shareholder approval. The Stock Award Plan will provide the Bank's directors
and officers an ownership interest in the Company in a manner designed to
encourage them to continue their service with the Bank. The Bank will
contribute funds to the restricted stock plan from time to time to enable it
to acquire an aggregate amount of Common Stock equal to up to 3% of the
shares of the Minority Ownership Interest if the restricted stock plan is
adopted within one year of completion of the Offering, or up to 5% of the
Minority Ownership Interest if the restricted stock plan is adopted more than
a year after completion of the Offering. Five percent of the Minority
Ownership Interest would amount to 36,847 shares, 43,301 shares, 49,797
shares or 57,266 shares at the minimum, midpoint, maximum or adjusted maximum
of the Offering Range, respectively. In the event that additional authorized
but unissued shares would be acquired by the Stock Award Plan after the
Offering, the interests of existing stockholders would be diluted. The
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 will be made until the date the Stock Award Plan is approved
by the Company's stockholders.
Awards under the Stock Award Plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned
by the director or officer. If the Stock Award Plan is adopted within one
year following completion of the Offering, 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 twelve (12) months of service with the
Bank after the date of grant of the award. 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 completion of the Reorganization, awards would be
100% vested upon normal retirement or a change in control of the Bank 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
FDIC and Department rules, if the Stock Award Plan is adopted within the
first 12 months after completion of the Reorganization and Offering, shares
of Common Stock granted under the restricted stock plan may not exceed 3% of
the Minority Ownership Interest, 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. No
determination has been made as to the specific terms of the plan or as to
awards thereunder. The Stock Award Plan would be administered by a committee
of non-employee members of the Company's board of directors. The Stock Award
Plan will terminate fifteen years following its adoption, unless earlier
terminated by the Company.
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 ss. 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 completion of the Reorganization and the Offering,
dividends and other earnings will accrue and be payable to the award
recipient when the shares vest. If the Stock Award Plan is adopted within one
year following completion of the Reorganization and the Offering, 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 Stock Award Plan grants. If the Stock
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<PAGE>
Award Plan is adopted more than one year following completion of the
Reorganization and Offering, dividends declared on unvested shares will be
distributed to the participant when paid, and the participant will be
entitled to vote the unvested shares.
Indebtedness of Management
Under New York Banking law, the Bank, as a mutual institution,
cannot make a loan to a trustee or a person who is an "executive officer" for
regulatory purposes, except for loans made to executive officers that are
secured by a first mortgage on a primary residence or by a deposit account at
the Bank. Any such loans that are outstanding have been made in the ordinary
course of business on the same terms and conditions as the Bank would make to
any other customer and do not involve more than a normal risk of
collectibility or present other unfavorable features. Following the
Reorganization, the Bank will not be subject to this restriction in
connection with loans to directors and executive officers.
The Bank also is subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act which limit the amount of credit and other transactions
between a bank 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.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
The Mutual Holding Company Structure. Under New York law, the Plan
of Reorganization, and the Company's governing corporate instruments, at
least 51% of the Company's voting shares must be owned by the Mutual Company.
The Mutual Company will be controlled by its board of trustees, who will
consist of all persons (except for one) who also are members of the board of
directors of the Company and the Bank. The Mutual Company will be able to
elect all members of the board of directors of the Company, and as a general
matter, will be able to control the outcome of all matters presented to the
stockholders of the Company for resolution by vote, except for matters that
require a vote greater than a majority. The Mutual Company, acting through
its board of trustees, will be able to control the business and operations of
the Company and the Bank, and will be able to prevent any challenge to the
ownership or control of the Company by Minority Stockholders. Accordingly, a
change in control of the Company and the Bank cannot occur unless the Mutual
Company first converts to the stock form of organization. Although New York
law, applicable regulations and the Plan of Reorganization permit the Mutual
Company to convert from the mutual to the capital stock form of organization,
it is not anticipated that a conversion of the Mutual Company will occur in
the foreseeable future.
In addition to the anti-takeover aspects of the Mutual Company
structure, the following is a general summary of certain provisions of the
Company's Certificate of Incorporation and bylaws and certain other
regulatory provisions that will restrict the ability of stockholders to
influence management policies, and that may be deemed to have an
"anti-takeover" effect. The following description of certain of these
provisions is necessarily general and, with respect to provisions contained
in the Company's Certificate of Incorporation and bylaws and the Bank's
proposed stock charter and bylaws, reference should be made in each case to
the document in question, each of which is part of the Bank's application to
the Superintendent and the Company's Registration Statement filed with the
SEC. See "Additional Information." The following discussion does not reflect
the powers and provisions of the Bank's charter.
Provisions of the Company's Certificate of Incorporation and Bylaws
Restrictions on Call of Special Meetings. The Certificate of
Incorporation provides that a special meeting of stockholders may be called
by the Chairman of the Board of the Company or pursuant to a resolution
adopted by a majority of the board of directors. Stockholders are not
authorized to call a special meeting of stockholders.
99
<PAGE>
Absence of Cumulative Voting. The Certificate of Incorporation
provides that there shall be no cumulative voting rights in the election of
directors.
Limitation on Voting Rights. The Certificate of Incorporation
provides that (i) no person shall directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 5% of any class of equity
security of the Company, inclusive of shares of such class held by the Mutual
Company (provided that such limitation shall not apply to the Mutual Company
or any tax-qualified employee stock benefit plans maintained by the Company);
and that (ii) shares beneficially owned in violation of the stock ownership
restriction described above shall not be entitled to vote and shall not be
voted by any person or counted as voting stock in connection with any matter
submitted to a vote of stockholders. For these purposes, a person (including
management) who has obtained the right to vote shares of the Common Stock
pursuant to revocable proxies shall not be deemed to be the "beneficial
owner" of those shares if that person is not otherwise deemed to be a
beneficial owner of those shares.
Amendments to Certificate of Incorporation and Bylaws. Amendments to
the Certificate of Incorporation must be approved by the Company's board of
directors and also by a majority of the outstanding shares of the Company's
voting stock; provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to the call of special stockholder meetings, cumulative
voting, limitation on voting rights and director liability).
The bylaws may be amended by the affirmative vote of the total
number of directors of the Company or the affirmative vote of at least 80% of
the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Federal Reserve Board Regulations
The Change in Bank Control Act and the BHCA, together with the
Federal Reserve Board regulations under those acts, require that the consent
of the Federal Reserve Board be obtained prior to any person or company
acquiring "control" of a bank holding company. Control is conclusively
presumed to exist if an individual or company acquires more than 25% of any
class of voting stock of the bank holding company. Control is rebuttably
presumed to exist if the person acquires more than 10% of any class of voting
stock of a bank holding company if either (i) the holding company has
registered securities under Section 12 of the Exchange Act or (ii) no other
person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure to
rebut the rebuttable control presumption. Since the Company's Common Stock
will be registered under Section 12 of the Exchange Act, any acquisition of
10% or more of the Company's Common Stock will give rise to a rebuttable
presumption that the acquiror of such stock controls the Company, requiring
the acquiror, prior to acquiring such stock, to rebut the presumption of
control to the satisfaction of the Federal Reserve Board or obtain Federal
Reserve Board approval for the acquisition of control. Restrictions
applicable to the operations of bank holding companies may deter companies
from seeking to obtain control of the Company. See "Regulation."
New York Banking Law
In addition to federal law, the New York State Banking Law generally
requires prior approval of the New York State Banking Board before any action
is taken that causes any entity or person to acquire direct or indirect
control of a banking institution that is organized in New York State. Control
is presumed to exist if any company or person directly or indirectly owns,
controls or holds with power to vote 10% or more of the voting stock of a
banking institution or of any company or person that owns, controls or holds
with power to vote 10% or more of the voting stock of a banking institution.
100
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 4,000,000 shares of Common Stock
having a par value of $.10 per share. The Company currently expects to issue
between 1,584,009 and 2,143,071 shares, with an adjusted maximum of 2,464,532
shares, of Common Stock and no shares of preferred stock in the Reorganization.
Each share of the Common Stock will have the same relative rights as, and will
be identical in all respects with, each other share of the Common Stock. Upon
payment of the purchase price for the Common Stock, in accordance with the Plan
of Reorganization, all such stock will be duly authorized, fully paid, validly
issued, and non-assessable.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the
FDIC.
Common Stock
Voting Rights. Under Delaware law, 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,
except as discussed in "Restrictions on Acquisition of the Company--Provisions
of the Company's Certificate of Incorporation and Bylaws--Limitation on Voting
Rights." There will be no right to cumulate votes in the election of directors.
If the Company issues preferred stock, subsequent to the Reorganization, holders
of the preferred stock may also possess voting rights.
Dividends. Upon consummation of the Reorganization, the Company's only
asset will be investments made with the net proceeds of the Offering, the ESOP
loan and the Bank's common stock. The payment of dividends by the Company is
subject to limitations that are imposed by law and applicable regulation. The
Company's source for the payment of cash dividends may in the future depend on
the receipt of dividends from the Bank. See "Dividend Policy." The holders of
Common Stock will be entitled to receive and share equally in such dividends as
may be declared by the board of directors of the Company out of funds legally
available therefor. If the Company issues preferred stock, the holders thereof
may have a priority over the holders of the Common Stock with respect to
dividends.
Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive -- after payment or provision for payment of all debts and liabilities
of the Company (including all deposits in the Bank and accrued interest thereon)
and after distribution of the liquidation account established upon completion of
the Offering for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who continue their deposit accounts at the Bank - all
assets of the Company available for distribution, in cash or in kind. See "The
Reorganization and Offering--Liquidation Rights." If preferred stock is issued
subsequent to the Offering, the holders thereof may have a priority over the
holders of Common Stock in the event of liquidation or dissolution.
No Preemptive Rights. Holders of the Common Stock will not be entitled
to preemptive rights with respect to any shares that may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Company of the full purchase price therefor, each share of the Common Stock will
be fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc., Denver, Colorado, will act
as the transfer agent and registrar for the Common Stock.
101
<PAGE>
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax
consequences of the Reorganization will be passed upon for the Bank and the
Company by the firm of Luse Lehman Gorman Pomerenk & Schick, P.C., Washington,
D.C., special counsel to the Company and the Bank. The New York income tax
consequences of the Reorganization will be passed upon for the Company and the
Bank by PricewaterhouseCoopers, LLP. The federal income tax consequences of
certain matters relating to the establishment of the Charitable Foundation will
be passed upon for the Company and the Bank by PricewaterhouseCoopers, LLP.
Certain legal matters will be passed upon for Friedman Billings, Ramsey & Co,
Inc. by Patton Boggs, LLC, Washington, D.C.
EXPERTS
The financial statements of Greene County Savings Bank as of June 30,
1998 and for each of the years in the two-year period ended June 30, 1998 have
been included herein and in the registration statement in reliance upon the
report of PricewaterhouseCoopers, LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as "Experts" in
accounting and auditing.
FinPro has consented to the publication herein of the summary of its
report to the Bank and the Company setting forth its belief as to the estimated
pro forma market value of the Common Stock upon completion of the Reorganization
and its valuation with respect to Subscription Rights.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, NW, Washington, D.C. 20549, and copies of such material can be
obtained from the SEC at prescribed rates. The SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The address of this web
site is http://www.sec.gov. The statements contained herein as to the contents
of any contract or other document filed as an exhibit to the registration
statement are, of necessity, brief descriptions thereof and are not necessarily
complete but do contain all material information regarding such documents; each
such statement is qualified by reference to such contract or document.
The Bank has filed an Application with the Department with respect to
the Reorganization. Pursuant to the rules and regulations of the Department,
this Prospectus omits certain information contained in that Application. The
Application may be examined at the office of the Department, 2 Rector Street,
New York, New York, and at the Bank's main office at 425 Main Street, Catskill,
New York, 12414-1300.
In connection with the Offering, the Company will register the Common
Stock with the SEC under Section 12(g) of the Exchange Act; and, upon such
registration, the Company and the holders of its Common Stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other requirements
of the Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Reorganization.
A copy of the Certificate of Incorporation and bylaws of the Company,
as well as the Plan of Reorganization, are available without charge from the
Bank by contacting the Secretary, 425 Main Street, Catskill, New York, 12414-
1300; (518) 943-3700. Copies of the Independent Valuation are available for
inspection at each of the Bank's offices.
offices.
102
<PAGE>
GREENE COUNTY SAVINGS BANK
FINANCIAL STATEMENTS
(and Report of Independent Accountants)
For the Years Ended June 30, 1998 and 1997
<PAGE>
Report of Independent Accountants
To the Board of Trustees
Greene County Savings Bank
In our opinion, the accompanying statement of financial condition and the
related statements of income and changes in net worth and cash flows present
fairly, in all material respects, the financial position of Greene County
Savings Bank at June 30, 1998, and the results of their operations and their
cash flows for each of the two years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Albany, New York
August 7, 1998
F-1
<PAGE>
Greene County Savings Bank
Statement of Financial Condition
June 30, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and due from banks $ 2,476,032
Federal funds sold 5,796,051
-----------------
Total cash and cash equivalents 8,272,083
Investment securities, at fair value 47,778,335
Loans 81,191,211
Less: allowance for possible loan losses (728,478)
Unearned origination fees and costs, net (202,771)
-----------------
Net loans receivable 80,259,962
Premises and equipment 2,584,281
Accrued interest receivable 1,091,120
Prepaid expenses and other assets 143,600
Other real estate 123,548
-----------------
Total assets $ 140,252,929
-----------------
-----------------
LIABILITIES AND NET WORTH
Deposits:
Savings certificates, $100,000 and over $ 6,672,000
Other savings certificates 48,930,036
Regular and day-to-day 32,950,825
Money market accounts 19,609,467
Checking accounts 7,514,136
NOW accounts 6,186,521
Christmas Club 460,774
-----------------
122,323,759
Accrued interest and other liabilities 509,314
Accrued income taxes 2,101
Tax escrow funds 1,687,530
-----------------
Total liabilities 124,522,704
Net worth:
Surplus 2,706,456
Undivided profits 12,781,369
Unrealized gain on securities available for sale,
net of applicable deferred income taxes 242,400
-----------------
Total net worth 15,730,225
-----------------
Total liabilities and net worth $ 140,252,929
-----------------
-----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
Greene County Savings Bank
Statements of Income
For the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Interest income:
Interest on loans $ 6,367,282 $ 6,175,215
Interest and dividends on investments:
US Treasury 985,130 962,932
US Government agencies 856,073 687,256
State and political subdivisions 341,222 362,490
Corporation debt securities 405,225 456,678
Mortgage-backed securities 110,488 69,863
Other securities 17,724 23,441
Federal funds sold 393,310 536,826
Other interest income 26,902 22,615
------------------ -----------------
9,503,356 9,297,316
------------------ -----------------
Interest expense:
Interest on deposits 4,967,487 4,779,678
------------------ -----------------
Net interest income 4,535,869 4,517,638
------------------ -----------------
Less: provision for loan losses 120,000 125,000
------------------ -----------------
Net interest income after provision for loan losses 4,415,869 4,392,638
Non-interest income:
Service charges on deposit accounts 251,188 230,442
Other operating income 185,479 289,968
------------------ -----------------
Total other income 436,667 520,410
------------------ -----------------
Non-interest expenses:
Salaries and employee benefits 1,571,650 1,491,651
Occupancy expense, net 208,381 157,190
Equipment and furniture expense 185,476 163,845
Other 1,183,752 960,563
------------------ -----------------
Total other expenses 3,149,259 2,773,249
------------------ -----------------
Income before provision for taxes 1,703,277 2,139,799
Provision for income taxes
Current 565,609 720,287
Deferred (12,248) (28,625)
------------------ -----------------
Total provision for income taxes 553,361 691,662
------------------ -----------------
Net income $ 1,149,916 $ 1,448,137
------------------ -----------------
------------------ -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
Greene County Savings Bank
Statements of Changes in Net Worth
For the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Unrealized
Gain (loss)
on Securities
Available-
For-sale, net Total
Undivided of Deferred Net
Profits Surplus Income Taxes Worth
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balances at June 30, 1996 $ 10,183,316 $ 2,706,456 $ (7,200) $ 12,882,572
Net income for year ended
June 30, 1997 1,448,137 1,448,137
Change in unrealized gain on
securities available for sale, net of
applicable deferred income taxes 75,200 75,200
------------- ------------- -------------- --------------
Balance at June 30, 1997 11,631,453 2,706,456 68,000 14,405,909
------------- ------------- -------------- --------------
Net income for year ended
June 30, 1998 1,149,916 1,149,916
Change in unrealized gain on
securities available for sale, net of
applicable deferred income taxes 174,400 174,400
------------- ------------- -------------- --------------
Balance at June 30, 1998 $ 12,781,369 $ 2,706,456 $ 242,400 $ 15,730,225
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
Greene County Savings Bank
Statements of Cash Flows
For the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income $ 1,149,916 $ 1,448,137
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 147,128 110,400
Net accretion of security premiums and discounts (161,533) (167,837)
Provision for loan losses 120,000 125,000
Loss on sale of other real estate 2,793 12,009
Provision (credit) for deferred income taxes (12,248) (28,625)
Net change in unearned loan fees and costs (12,848) (57,951)
Net (increase) decrease in accrued interest receivable (48,580) 257,062
Net (increase) decrease in prepaids and other assets 11,571 443,512
Net (decrease) increase in other liabilities (235,666) 47,460
----------------- ------------------
Net cash provided by operating activities 960,533 2,189,167
----------------- ------------------
Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities 7,686,731 7,500,000
Purchases of securities available-for-sale (12,651,981) (10,888,898)
Principal payments on securities available-for-sale 2,423,055 744,667
Principal payments on mortgage-backed securities
available-for-sale 1,923,198 1,338,993
Purchases of mortgage-backed securities available-for-sale (4,024,423) -
Proceeds from maturities of mortgage-backed securities
available-for-sale 325,809 -
Proceeds from sale of other real estate 179,699 68,378
Net increase in loans receivable (4,971,125) (2,730,620)
Purchases of premises and equipment (1,060,217) (409,778)
----------------- ------------------
Net cash used by investing activities (10,169,254) (4,377,258)
----------------- ------------------
Cash flows from financing activities
Net increase in deposits 6,468,829 1,668,328
Net increase (decrease) in escrow payments 123,905 (25,143)
----------------- ------------------
Net cash provided by financing activities 6,592,734 1,643,185
----------------- ------------------
Net decrease in cash and cash equivalents (2,615,987) (544,906)
Cash and cash equivalents at beginning of period 10,888,070 11,432,976
----------------- ------------------
Cash and cash equivalents at end of period $ 8,272,083 $ 10,888,070
----------------- ------------------
----------------- ------------------
Cash paid during the period for:
Interest $ 4,967,903 $ 4,779,770
----------------- ------------------
Income taxes $ 833,551 $ 738,257
----------------- ------------------
Non-cash investing activity:
Foreclosed loans transferred to other real estate $ 252,007 $ 70,457
----------------- ------------------
Net change in unrealized gain on available-for-sale
securities $ 174,400 $ 75,200
----------------- ------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Nature of operations:
Greene County Savings Bank (the "Bank" or "Company"), a New York
State-charted mutual savings bank, has four full service offices
located in its market area consisting of Greene County, New York. The
Bank is primarily engaged in the business of attracting deposits from
the general public in the Bank's market area, and investing such
deposits, together with other sources of funds, in loans and investment
securities.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and cash equivalents:
Cash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits (with original maturity of three months or
less) and federal funds sold. Generally, federal funds are sold for
one-day periods. The carrying amounts reported in the balance sheet for
cash and cash equivalents approximate those assets' fair values.
Investment securities:
The Company has classified its investments in debt and equity
securities as available-for-sale. Available-for-sale securities are
reported at fair value, with net unrealized gains and losses reflected
as a separate component of net worth, net of applicable income taxes.
None of the Company's investment securities have been classified as
trading or held-to-maturity securities.
Realized gains or losses on investment security transactions are based
on the specific identification method and are reported under other
income. Fair values of investment securities are based on quoted market
prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
instruments. Premiums and discounts are amortized and accreted,
respectively, using methods that approximate the effective yield method
over the remaining contractual maturity, adjusted for anticipated
prepayments.
Loans:
Fair values for variable rate loans that reprice frequently, with no
significant credit risk, are based on carrying values. Fair values for
fixed rate loans are estimated using discounted cash flows and interest
rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The carrying amount of accrued interest
approximates fair value.
Interest on loans is accrued and credited to income based upon the
principal amount outstanding. Unearned discount on installment loans is
recognized as income over the term of the loan, principally using a
method that approximates the effective yield method. Nonrefundable loan
fees and related direct costs are deferred and amortized over the life
of the loan as an adjustment to loan yield using the effective interest
method.
F-6
<PAGE>
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Allowance for possible loan losses:
The allowance for loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is
increased by a provision for loan losses, charged to expense, and
reduced by net charge-offs. The level of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic
conditions. The Bank considers residential mortgages, home equity loans
and installment loans to customers small, homogeneous loans which are
evaluated for impairment collectively based on historical loss
experience. Commercial mortgage and business loans are considered
impaired if it is probable that the Bank will not be able to collect
scheduled payments of principal and interest when due, according to the
contractual terms of the loan agreement. The measurement of impaired
loans is generally based on the present value of estimated future cash
flows, except that all collateral dependent loans are measured for
impairment based on the fair value of the collateral. No loans were
deemed impaired during the fiscal years ended June 30, 1998 and 1997.
Income recognition on impaired and non-accrual loans:
The Bank places a loan, including impaired loans, on nonaccrual status
when it is specifically determined to be impaired or when principal and
interest is delinquent for 90 days or more. Any unpaid interest
previously accrued on these loans is reversed from income. When a loan
is specifically determined to be impaired, collection of interest and
principal are generally applied as a reduction to principal
outstanding. Interest income on all other nonaccrual loans is
recognized on a cash basis.
Premises and equipment:
Premises and equipment is stated at cost. Depreciation is computed
using principally the straight-line method over the estimated useful
lives of the related assets. Maintenance and repairs are charged to
expense when incurred. Gains and losses from sales or other
dispositions of depreciable property are included in current
operations.
Other real estate:
Properties acquired through foreclosure, or by deed in lieu of
foreclosure, are carried at the lower of cost (fair value at the date
of foreclosure) or fair value less estimated disposal costs.
Deposits:
Fair values disclosed for demand and savings deposits are equal to the
carrying amounts at the reporting date. The carrying amounts for
variable rate money market and certificates of deposit approximate fair
values at the reporting date. Fair values for fixed rate certificates
of deposit are estimated using discounted cash flows and interest rates
currently being offered on similar certificates. The carrying value of
accrued interest approximates fair value.
Restrictions on retained earnings:
Retained earnings of the Bank are subject to certain restrictions under
New York State Banking regulations. As required under these
regulations, if the net worth of the Bank is less than ten percent of
the amount due depositors at the close of any accounting period, five
percent of net earnings, before dividends paid to depositors and losses
on sale of assets, for such period is credited to appropriated retained
earnings.
F-7
<PAGE>
Greene County Savings Bank
Notes to Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued
Restrictions on retained earnings, continued:
Unappropriated retained earnings represent accumulated undistributed
net earnings of the Bank which have not been allocated to appropriated
equity and are not restricted as to use under New York State banking
regulations.
Income taxes:
Provisions for income taxes are based on taxes currently payable or
refundable and deferred income taxes on temporary differences between
the tax basis of assets and liabilities and their reported amounts in
the financial statements. Deferred tax assets and liabilities are
reported in the financial statements at currently enacted income tax
rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled.
2. Investment Securities
Securities available-for-sale at June 30, 1998 consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 12,969,356 $ 221,625 $ 1,216 $ 13,189,765
U.S. Government agencies 8,569,188 59,086 7,793 8,620,481
State and political subdivisions 7,389,943 101,296 11,652 7,479,587
Mortgage-backed securities 5,196,204 8,442 15,586 5,189,060
Asset-backed securities 6,304,752 20,227 1,296 6,323,683
Corporate debt securities 3,735,833 64,429 1,466 3,798,796
Equity securities and other 81,454 81,454
Foreign obligations 75,000 75,000
Federal Home Loan Bank stock 700,000 700,000
Mutual funds 2,352,605 32,096 2,320,509
-------------- ------------- ------------ ---------------
$ 47,374,335 $ 475,105 $ 71,105 $ 47,778,335
-------------- ------------- ------------ ---------------
-------------- ------------- ------------ ---------------
</TABLE>
The amortized cost and estimated fair value of debt securities at June
30, 1998, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities, because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
----------------- -----------------
<S> <C> <C>
Amounts maturing in:
One year or less $ 7,787,368 $ 7,828,078
After one year through five years 20,290,540 20,563,884
After five years through ten years 4,586,412 4,696,667
Mortgage-backed securities 5,196,204 5,189,060
Asset-backed securities 6,304,752 6,323,683
----------------- -----------------
$ 44,165,276 $ 44,601,372
----------------- -----------------
----------------- -----------------
</TABLE>
F-8
<PAGE>
Greene County Savings Bank
Notes to Financial Statements, Continued
2. Investment Securities, Continued
The Bank participates in a securities lending program with the
custodian of substantially all Bank securities. Under the terms of the
agreement, the custodian acts as an agent for the Bank and loans
available securities to borrowers. At June 30, 1998, $4,985,000 of
securities were on loan under this program.
3. Loans
Major classifications of loans at June 30, 1998 are summarized as
follows
<TABLE>
<S> <C>
Real estate mortgages:
Residential $ 64,705,332
Commercial 5,706,421
Home equity loans 4,727,206
Commercial loans 1,336,229
Installment loans to individuals 4,171,688
Passbook loans to individuals 544,335
----------------
$ 81,191,211
----------------
----------------
</TABLE>
At June 30, 1998, loans to officers and trustees were not significant.
Changes in the allowance for possible loan losses for the periods ended
June 30 were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance, beginning of year $ 723,019 $ 596,924
Provision charged to expense 120,000 125,000
Loans charged off (126,224) (11,002)
Recoveries 11,683 12,097
----------------- ----------------
$ 728,478 $ 723,019
----------------- ----------------
----------------- ----------------
</TABLE>
At June 30, 1998, the Bank's impaired loans for which specific valuation
allowances were recorded were not significant.
4. Premises and Equipment
A summary of premises and equipment at June 30, 1998 is as follows:
<TABLE>
<S> <C>
Land 409,702
Buildings and improvements 2,156,500
Furniture and equipment 1,859,570
----------------
4,425,772
Less: accumulated depreciation (1,841,491)
----------------
$ 2,584,281
----------------
----------------
</TABLE>
F-9
<PAGE>
Greene County Savings Bank
Notes to Financial Statements, Continued
5. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
Federal income tax $ 471,448 $ 573,013
State income tax 94,161 147,274
------------------ ----------------
Total current 565,609 720,287
Deferred income tax (12,248) (28,625)
------------------ ----------------
Total income tax expense $ 553,361 $ 691,662
------------------ ----------------
------------------ ----------------
</TABLE>
The Bank's effective tax rate differs from the federal statutory rate
as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Tax based on federal statutory rate 34% 34%
State income taxes, net of federal benefit 3.7 4.5
Tax exempt income (5.7) (5.9)
Other, net .5 (.3)
----------- ----------
Total income tax expense 32.5% 32.3%
----------- ----------
----------- ----------
</TABLE>
The components of the deferred tax assets and liabilities at June 30 were
as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 184,414 $ 145,257
Nonaccruing interest 34,739 17,583
Loan origination fee adjustments 24,281
----------- -----------
Total deferred tax assets $ 219,153 $ 187,121
----------- -----------
----------- -----------
Deferred tax liabilities:
Depreciation 160,069 133,104
Investments 219,403 97,590
----------- -----------
Total deferred tax liabilities $ 379,472 $ 230,694
----------- -----------
----------- -----------
</TABLE>
F-10
<PAGE>
Greene County Savings Bank
Notes to Financial Statements, Continued
6. Commitments and Contingent Liabilities
Financial Instruments with off-balance sheet risk and concentrations of
credit:
The Bank enters into financial agreements in the normal course of
business that have off-balance sheet risk. These agreements include
commitments to extend credit and involve, to varying degrees, elements
of credit risk in excess of the amount recognized on the statement of
financial condition.
The Bank uses the same credit policies in making commitments as it does
for on-balance sheet instruments.
Contract amounts of financial instruments that represent credit risk at
June 30, 1998 are as follows:
<TABLE>
<S> <C>
Commercial lines of credit $ 235,000
Commitments to extend credit 2,154,300
---------------
$ 2,389,300
---------------
---------------
</TABLE>
Commitments to extend credit and commercial lines of credit are
agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire
without being fully drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis.
The amount of collateral, if any, required by the Bank upon the
extension of credit is based on management's credit evaluation of the
customer. Commitments to extend credit are primarily secured by a first
lien on real estate. Collateral on extensions of commercial lines of
credit varies but may include accounts receivable, inventory, property,
plant and equipment, and income producing commercial property.
7. Employee Benefit Plans
Substantially all Bank employees who have completed one year of service
and attained the age of 21 are covered by a noncontributory,
multi-employer, defined benefit pension plan. Under the plan,
retirement benefits are primarily a function of both years of service
and level of compensation. The Bank recognized pension expense in the
amount of $102,000 and $151,000 in 1998 and 1997, respectively.
The Bank also participated in a multi-employer, defined contribution
plan covering substantially all employees who have completed one year
of service. The plan includes Section 401(k) and Thrift provisions as
defined under the Internal Revenue Code. The provisions permit
employees to contribute up to 15% of their total compensation on a
pre-tax basis. The Bank matches 50% of the first 6% of employee
contributions. Company contributions associated with the plan amounted
to $56,000 and $36,000 in 1998 and 1997, respectively.
F-11
<PAGE>
Greene County Savings Bank
Notes to Financial Statements, Continued
8. Lines-of-Credit
At June 30, 1998, the Bank had available two lines-of-credit from other
financial institutions for $2,000,000 and $1,000,000. These credit
lines are collateralized by investment securities and carry interest
based on the federal funds rate or other published rates. At June 30,
1998, there was no outstanding balances on these credit lines.
9. Concentrations of Credit Risk
The Bank grants residential, consumer and commercial loans to customers
primarily located in Greene County, New York. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the employment and
other economic factors of the County.
10. Fair Value of Financial Instruments
The Company determines fair values based on quoted market values, where
available, or on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument.
Statement of Financial Accounting Standard No. 107, "Disclosures About
Fair Value of Financial Instruments," excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. The methods to
determine fair value for each financial instrument are listed in Note
1. The carrying amounts and estimated fair values of financial
instruments as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------
Carrying Fair
(in thousands) Amount Value
--------------- ---------------
<S> <C> <C>
Cash and short-term investments $ 8,272 $ 8,272
Investment securities $ 47,374 $ 47,778
Net loans $ 80,260 $ 81,453
Deposits $ 122,324 $ 122,427
</TABLE>
F-12
<PAGE>
Greene County Savings Bank
Notes to Financial Statements, Continued
11. Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of June 30, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital Under Prompt
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total capital
(to risk weighted $ 16,216,000 21% $ 6,098,000 8% $ 7,622,000 10%
assets)
Tier I Capital
(to risk weighted $ 15,488,000 20% $ 3,049,000 4% $ 4,574,000 6%
assets)
Tier I capital
(to average assets) $ 15,488,000 11% $ 5,588,000 4% $ 6,985,000 5%
</TABLE>
12. Subsequent Event
On July 1, 1998, the Board of Trustees of the Bank adopted a Plan of
Conversion to convert from a state-chartered mutual savings bank to a
state-chartered stock savings bank with the concurrent formation of a
holding company. The holding company will be organized for the purpose
of acquiring and holding all of the outstanding capital stock of the
Bank to be issued in the conversion. The Conversion is expected to be
accomplished through the adoption of a new state stock charter and
bylaws for the Bank and the sale of the holding company's stock in an
underwritten public offering.
F-13
<PAGE>
Greene County Savings Bank
Notes to Financial Statements, Continued
12. Subsequent Event, Continued
At the time of the Conversion, the Bank will establish a liquidation
account in an amount equal to its capital as of the date of the latest
statement of financial condition appearing in the final prospectus. The
liquidation account will be maintained for the benefit of eligible
account holders who continue to maintain their accounts at the Bank
after the Conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases
will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each
eligible account holder will be entitled to receive a distribution from
the liquidation account in an amount proportionate to the current
adjusted qualifying balances for account then held.
Subsequent to the Conversion, the Bank may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the
effect thereof would cause stockholders' equity to be reduced below
applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory
requirements.
The registration statement on Form SB-2 is expected to be filed by the
proposed holding company of the Bank with the Securities and Exchange
Commission in the fall of 1998, at which point it will become effective
in accordance with Section 8(a) of the Securities Act of 1933.
F-14
<PAGE>
GLOSSARY
ARM Adjustable rate mortgage loan
Associate The term "Associate" of a person is defined to mean
(i) any corporation or organization (other
than the Bank 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
Bank in which such a person has a
substantial beneficial interest or 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 Bank or its
subsidiaries or the Company
ATM Automated Teller Machine
Bank Greene County Savings Bank
BHCA Bank Holding Company Act of 1956, as amended
BIF Bank Insurance Fund administered by the FDIC
Charitable Foundation The Bank of Greene County Charitable Foundation to
be established by Greene County Bancorp, Inc. to
which the Bank and the Company will contribute cash
and shares of Common Stock
CMO Collateralized mortgage obligations
Code The Internal Revenue Code of 1986, as amended
Community Offering Offering for sale to members of the general
public of any shares of Common Stock not subscribed
for in the Subscription Offering, with preference
given first to natural persons residing in Greene
County, New York
Common Stock Common Stock, par value of $.10 per share, offered
by the Company in connection with the Reorganization
Company Greene County Bancorp, Inc., the parent holding
company for The Bank of Greene County and issuer of
the shares of Common Stock in the Offering
Department The New York State Banking Department
DGCL Delaware General Corporation Law
Eligible Account Holders Holders of deposit accounts with Greene County
Savings Bank with account balances of at least $100
as of the close of business on June 30, 1997
G-1
<PAGE>
ERISA Employee Retirement Income Security Act of 1974, as
amended
ESOP The Employee Stock Ownership Plan and Trust
Estimated Valuation Range Estimated pro forma market value of the Common Stock
ranging from $15.8 million to $21.4 million. The
Estimated Valuation Range may be increased to $24.6
million without a resolicitation of subscribers
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date 12:00 noon, New York Time, on December 17, 1998
FASB Financial Accounting Standards Board
Federal Reserve Board Board of Governors of the Federal Reserve System
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended
FHLB Federal Home Loan Bank of New York
FinPro FinPro, Inc., an independent valuation appraisal
firm
FNMA Federal National Mortgage Association
GNMA Government National Mortgage Association
Guidelines Interagency Guidelines Prescribing Standards of
Safety and Soundness
Independent Valuation The appraisal of the pro forma market value of the
Company's Common Stock as determined by FinPro, Inc.
as of October 7, 1998
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Minority Stockholders Stockholders of the Company other than the Mutual
Company
MMDA Money Market Demand Account
Mutual Company Greene County Bancorp, MHC, a New
York-chartered mutual corporation, which
will own, and which by law must own, at least 51% of
the shares of Common Stock of the Company
NASD National Association of Securities Dealers, Inc.
Nasdaq System National Association of Securities Dealers Automated
Quotation System
NOW account Negotiable Order of Withdrawal Account
Offering The offer and sale of Common Stock to depositors and
the public pursuant to this Prospectus
G-2
<PAGE>
Offering Range The offer and sale by the Company of between 705,039
and 953,877 shares (subject to adjustment to up to
1,096,958 shares) of Common Stock pursuant to this
Prospectus
Order Form The stock order form for ordering stock accompanied
by a certification concerning certain matters
Plan of Reorganization The Greene County Savings Bank Plan of
Reorganization from a Mutual Savings Bank to a
Mutual Holding Company and Stock Issuance Plan
Reorganization The reorganization of the Bank from the mutual to
the stock form of organization, the organization of
the Company, the issuance of all of the Bank's
common stock to the Company, the issuance of a
majority of Company Common Stock to the Mutual
Company, and the offer and sale of the Minority
Shares to depositors and the public pursuant to this
Prospectus
REO Real estate owned
SEC Securities and Exchange Commission
Special Meeting Special Meeting of depositors of the Bank called for
the purpose of approving the Plan of Reorganization
Subscription Offering The Offering of Common Stock pursuant to
non-transferable subscription rights, in
order of priority, to Eligible Account Holders,
the ESOP, and Supplemental Eligible Account Holders
Subscription Price The $10.00 purchase price per share for the Common
Stock in the Offering
Supplemental Eligible Depositors of the Bank, who are not eligible account
Account Holders holders, with account balances of at least $100 as
of the close of business on September 30, 1998
Superintendent The Superintendent of Banks of the State of New York
Voting Record Date The close of business on October 31, 1998, the date
for determining depositors entitled to vote at the
Special Meeting
G-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company or the Bank. This Prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any security other than the
shares of Common Stock offered hereby to any person in any jurisdiction in which
such offer or solicitation is not authorized, or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale hereunder shall, under any circumstances, create any
implication that information herein is correct as of any time subsequent to the
date hereof.
Greene County Bancorp, Inc.
(Proposed Holding Company for
Greene County Savings Bank)
Up to 1,096,958 Shares
Common Stock
($.10 par value per share)
----------
PROSPECTUS
----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
November 12, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until December 15, 1998 or 25 days after the commencement of the Offering, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
