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PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)(3)
Registration No. 333-30757
INDEPENDENCE COMMUNITY BANK CORP.
COMMON STOCK, $.01 PAR VALUE PER SHARE
INDEPENDENCE SAVINGS BANK 401(k) SAVINGS PLAN
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(1,233,450 SHARES AND PARTICIPATIONS THEREIN)
This Prospectus Supplement relates to the offer and sale to employees
of Independence Savings Bank (the "Bank" or the "Employer") who are
participants ("Participants") in the Independence Savings Bank 401(k) Savings
Plan in RSI Retirement Trust ("Profit Sharing Plan" or the "Plan") of up to
1,233,450 shares of Independence Community Bank Corp. (the "Company")common
stock, par value $.01 per share (the "Common Stock"), and participation
interests in the Profit Sharing Plan, as set forth herein.
In connection with the reorganization of the Bank and the mutual holding
company parent of the Bank (the "Mutual Holding Company") to the stock form of
organization pursuant to the Bank's and the Mutual Holding Company's Plan of
Conversion (the "Plan" or "Plan of Conversion"), the Company and the Bank have
amended the Profit Sharing Plan to provide, among other things that
Participants in the Profit Sharing Plan be able to direct the investment of the
vested portion of their account balances within the Profit Sharing Plan into an
investment fund consisting of Common Stock (the "Employer Stock Fund"). The
Profit Sharing Plan will permit Participants in the Profit Sharing Plan to
direct the trustee of the Profit Sharing Plan (the "Trustee") to purchase
Common Stock with amounts in the Profit Sharing Plan attributable to such
Participants. This Prospectus Supplement relates to the initial election of a
Participant to direct the purchase of Common Stock in the Conversion. This
Prospectus Supplement does not cover reoffers or resales of the Common Stock.
See "Restrictions on Resale."
The Prospectus dated December 31, 1997 of the Company (the
"Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Company, the Conversion, the Common
Stock and the financial condition, results of operations, and business of the
Bank. This Prospectus Supplement, which provides detailed information with
respect to the Profit Sharing Plan, should be read only in conjunction with the
Prospectus.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" AT PAGE 14 IN THE PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK,
THE NEW YORK STATE BANKING BOARD, THE NEW YORK STATE BANKING DEPARTMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY OTHER FEDERAL OR
STATE AGENCY OR STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, SUPERINTENDENT, BOARD, DEPARTMENT,CORPORATION
OR ANY STATE SECURITIES COMMISSIONERS OR OTHER AGENCY
PASSED UPON THE ACCURACY OF THIS PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND OR THE SAVINGS
ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR THE BANK. THE
COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL INVESTED.
The date of this Prospectus Supplement is December 31, 1997.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS PROSPECTUS
SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE BANK OR THE PROFIT
SHARING PLAN. THIS PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL
OR SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, THE
BANK OR THE PROFIT SHARING PLAN SINCE THE DATE HEREOF OR THAT THE INFORMATION
HEREIN CONTAINED OR INCORPORATED BY REFERENCE IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT SHOULD BE READ ONLY
IN CONJUNCTION WITH THE PROSPECTUS THAT IS ATTACHED HERETO AND SHOULD BE
RETAINED FOR FUTURE REFERENCE.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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The Offering.............................................................................................. 1
Securities Offered............................................................................... 1
Election to Purchase Common Stock in the Conversion.............................................. 1
Value of Participation Interests................................................................. 1
Method of Directing Transfer..................................................................... 1
Time for Directing Transfer...................................................................... 2
Irrevocability of Transfer Direction............................................................. 2
Direction to Purchase Common Stock After the Conversion.......................................... 2
Purchase Price of Common Stock................................................................... 2
Nature of Participant's Interest in the Common Stock............................................. 3
Voting and Tender Rights......................................................................... 3
Description of the Profit Sharing Plan.................................................................... 3
Introduction..................................................................................... 3
Eligibility and Participation.................................................................... 4
Contributions Under the Plan .................................................................... 5
Limitations on Contributions..................................................................... 6
Investment of Contributions...................................................................... 9
Vesting.......................................................................................... 11
Withdrawals and Distributions From the Sharing Plan.............................................. 11
Administration of the Profit Sharing Plan........................................................ 13
Reports to Profit Sharing Plan Participants...................................................... 13
Plan Administration.............................................................................. 13
Amendment and Termination........................................................................ 14
Merger, Consolidation or Transfer................................................................ 13
Federal Income Tax Consequences.................................................................. 14
ERISA and Other Qualifications................................................................... 17
Restrictions on Resale........................................................................... 16
SEC Reporting and Shortswing Profit Liability.................................................... 18
Experts................................................................................................... 18
Legal Opinions............................................................................................ 19
Index to Financial Statements and Supplemental Schedules.................................................. F-1
</TABLE>
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THE OFFERING
SECURITIES OFFERED
Up to 1,233,450 shares of Common Stock which may be acquired by the
Profit Sharing Plan for the accounts of employees participating in the Profit
Sharing Plan, as well as participation interests in the Profit Sharing Plan,
are offered hereby. Only employees of the Bank may participate in the Profit
Sharing Plan. Information with regard to the Profit Sharing Plan is contained
in this Prospectus Supplement and information with respect to the Company, the
Conversion and the financial condition, results of operations and business of
the Bank is contained in the attached Prospectus. The address of the principal
executive office of the Company is 195 Montague Street, Brooklyn, New York
11201. The Company's telephone number is (718) 722-5300. The address and
telephone number of the Bank's principal executive office are the same as the
Company's.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Conversion, the Profit Sharing Plan has been
amended to permit each Participant to direct that all or part of the funds which
represent his or her beneficial interest in the assets of the Profit Sharing
Plan may be transferred to an investment fund that will invest in Common Stock
(the "Employer Stock Fund") and will be used to purchase Common Stock in the
Conversion, and to purchase Common Stock in the open market. If there is not
enough Common Stock in the Conversion to fill all subscriptions, the Common
Stock will be apportioned and the Profit Sharing Plan may not be able to
purchase all of the Common Stock requested by Participants. In such event, the
amounts not used to purchase shares of Common Stock in the Conversion will be
returned to the other investment funds of the Profit Sharing Plan as directed by
the Participants' existing investment directions. The Profit Sharing Plan
permits this one-time election outside the specific election dates as discussed
below. The ability of a Participant to purchase Common Stock in the Conversion
pursuant to directions to transfer all or a portion of their beneficial assets
in the Profit Sharing Plan will be based upon the Participant's status as an
Eligible Account Holder and/or Supplemental Eligible Account Holder and/or the
availability of Common Stock. See "Description of the Profit Sharing Plan -
Investment of Contributions." The Trustee of the Profit Sharing Plan will follow
the Participants' directions to purchase Common Stock in the Conversion. Funds
not transferred to the Employer Stock Fund will remain in the other investment
funds of the Profit Sharing Plan as directed by the Participants.
VALUE OF PARTICIPATION INTERESTS
The assets of the Profit Sharing Plan were valued as of September 30,
1997 and each Participant was informed of the value of his or her beneficial
interest in the Profit Sharing Plan. The value represented the market value as
of September 30, 1997 of past contributions to the Profit Sharing Plan by the
Bank and the Participants and any earnings thereon, less previous withdrawals.
METHOD OF DIRECTING TRANSFER
Accompanying this Prospectus Supplement is a form to direct a transfer
among investment funds (the "Investment Form"). If a Participant wishes to
transfer all or part of his or her beneficial interest in the assets of the
Profit Sharing Plan to the purchase of
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Common Stock in the Conversion, he or she should indicate that decision
in Part 2 of the Investment Form. If a Participant does not wish to make such
an election, he or she does not need to take any action.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the
Employer Stock Fund to purchase Common Stock in the Conversion is January 16,
1998. The Investment Form should be returned to the Bank by no later than
12:00 p.m., Eastern Time, on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited in the Profit
Sharing Plan to his or her accounts to the Employer Stock Fund in order to fund
the purchase of Common Stock in the Conversion shall be irrevocable. Subsequent
to the Conversion, however, Participants will be able to direct transfers
within the Profit Sharing Plan, as explained below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant may direct that a certain
percentage of his or her interests in the trust fund established for the
Profit Sharing Plan (the "Trust Fund") be transferred to the Employer Stock
Fund and invested in Common Stock. Alternatively, a Participant may direct
that a certain percentage of his or her interest in the Employer Stock Fund be
transferred to the Trust Fund to be invested in accordance with the terms of
the Profit Sharing Plan. Participants will be permitted to direct that future
contributions made to the Profit Sharing Plan by or on their behalf be
invested in Common Stock. Following the initial election, the allocation of a
Participant's interest in the investment funds may be changed as allowed by
the Profit Sharing Plan. The initial election to invest a percentage of his
or her interest in the Employer Stock Fund shall not be counted as one of the
changes in investment direction that are otherwise permitted to be made by the
Profit Sharing Plan. Special restrictions apply to transfers directed by those
Participants who are officers, directors and principal stockholders of the
Company who are subject to the provisions of Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "1934 Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in the Conversion will be used by the Trustee to purchase Common
Stock through the exercise of subscription rights granted to participants as an
Eligible Account Holder or Supplemental Eligible Account Holder under the Plan
of Conversion. The price paid for such shares of Common Stock will be the same
price as is paid by all other persons who purchase Common
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Stock in the Conversion. The prices paid by the Trustee for shares of Common
Stock will not exceed "adequate consideration" as defined in Section 3(18) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the
Profit Sharing Plan. Each Participant has an allocable interest in the
investment funds of the Profit Sharing Plan but not in any particular assets of
the Profit Sharing Plan. Accordingly, a specific number of shares of Common
Stock will not be directly attributable to the account of any Participant.
Earnings, e.g. , gains and losses, are allocated to the Account of a
Participant based upon the particular investment designations of the
Participant. Therefore, earnings with respect to a Participant's Account
should not be affected by the investment designations (including investments in
Common Stock) of other Participants.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee will generally exercise voting and tender rights
attributable to all Common Stock held by the Trust as directed by Participants
with interests in the Employer Stock Fund. With respect to each matter as to
which holders of Common Stock have a right to vote, each Participant will be
allocated a number of voting instruction rights reflecting his or her
proportionate interest in the Employer Stock Fund. The number of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
and negative on each matter shall be proportionate to the number of voting
instruction rights exercised in the affirmative and negative, respectively. In
the event of a tender offer for Common Stock, the Plan provides that each
Participant will be allotted a number of tender instruction rights reflecting
his or her proportionate interest in the Employer Stock Fund. The percentage of
shares of Common Stock held in the Employer Stock Fund that will be tendered
will be the same as the percentage of the total number of tender instruction
rights that are exercised in favor of tendering. The remaining shares of Common
Stock held in the Employer Stock Fund will not be tendered. The Profit Sharing
Plan makes provision for Participants to exercise their voting instruction
rights and tender instruction rights on a confidential basis.
DESCRIPTION OF THE PROFIT SHARING PLAN
INTRODUCTION
The Profit Sharing Plan was established September 1, 1973, as the South
Brooklyn Savings Bank Incentive Savings Plan. Subsequent to such date, the
Profit Sharing Plan became known as the Independence Savings Bank Incentive
Savings Plan. Effective January 1, 1991, the Profit Sharing Plan was amended
and restated in its entirety as the Independence Savings Bank 401(k) Savings
Plan in RSI Retirement Trust. The Profit
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Sharing Plan is a qualified retirement plan which includes a cash or
deferred arrangement established in accordance with requirements under Section
401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the trust pursuant to which the assets of the Profit Sharing Plan
are held is intended to be a qualified trust under Section 501(a) of the Code.
The Bank intends that the Profit Sharing Plan, in operation, will
comply with the requirements under Section 401(a) and Section 401(k) of the
Code. The Bank will adopt any amendments to the Profit Sharing Plan that may
be necessary to ensure the qualified status of the Profit Sharing Plan under
the Code and applicable Treasury Regulations.
The Profit Sharing Plan is an "individual account plan" other than a
"money purchase pension plan" within the meaning of ERISA. As such, the Profit
Sharing Plan is subject to all of the provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Profit Sharing Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA, which by their terms do not apply to
an individual account plan (other than a money purchase plan). The Profit
Sharing Plan is not subject to Title IV (Plan Termination Insurance) of ERISA.
Neither the funding requirements contained in Part 3 of Title I of ERISA nor
the plan termination insurance provisions contained in Title IV of ERISA will
be extended to Participants (as defined below) or beneficiaries under the
Profit Sharing Plan.
Applicable federal law requires the Profit Sharing Plan to impose
substantial restrictions on the right of a Participant to withdraw amounts held
for his or her benefit under the Profit Sharing Plan prior to the Participant's
termination of employment with the Bank. A substantial federal tax penalty also
may be imposed on withdrawals made prior to the Participant's attainment of age
59 1/2, regardless of whether such a withdrawal occurs during his or her
employment with the Bank or after termination of employment.
The following statements are summaries of certain provisions of the
Profit Sharing Plan. They are not complete and are qualified in their entirety
by the full text of the Profit Sharing Plan which is filed as an exhibit to
the Registration Statement of which this Prospectus Supplement is a part and
which is incorporated by reference herein. Terms not otherwise defined herein
are otherwise defined in the Profit Sharing Plan. Copies of the Profit Sharing
Plan are available to all employees upon request to the Plan Administrator.
Each employee is urged to read carefully the full text of the Profit Sharing
Plan.
ELIGIBILITY AND PARTICIPATION
Certain employees of the Employer are eligible to participate in the
Profit Sharing Plan on the first day of any payroll period (the "Participation
Date") following completion of one year of service (at least 1,000 hours during
a twelve consecutive month period) with the Bank. Employees compensated on a
daily, commission fee or retainer basis, leased employees (within the meaning
of Section 414(n) of the Code) and employees covered by
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a collective bargaining agreement which does not expressly provide for
their coverage under the Profit Sharing Plan, are not eligible to participate
in the Profit Sharing Plan.
As of December 31, 1996, there were 654 employees eligible to
participate in the Profit Sharing Plan, and 523 employees had elected to
participate in the Profit Sharing Plan.
CONTRIBUTIONS UNDER THE PROFIT SHARING PLAN
401(k) CONTRIBUTIONS. Each Participant in the Profit Sharing Plan is
permitted to elect to reduce his or her Compensation (as defined below) pursuant
to a "Compensation Reduction Agreement" by an amount not less than 1% and not
more than 15% and have that amount contributed to the Profit Sharing Plan on his
or her behalf. These amounts are credited to the Participant's "Basic
Contribution Account." The Profit Sharing Plan defines "Compensation" as a
Participant's "Base Compensation" from the Employer for the year prior to any
reduction pursuant to a Compensation Reduction Agreement. Base Compensation
includes salary, Basic Contributions (the contributions of the Employer made in
connection with the Participant's Compensation Reduction Agreement), wages and
wage continuation payments to an employee who is absent due to illness or
disability of a short-term nature. Compensation does not include overtime,
commissions, expense allowances, severance pay, fees, bonuses, incentive
compensation, contributions other than Basic Contributions made by the Employer
to the Profit Sharing Plan, and contributions made by the Employer to any other
pension, insurance, welfare, or other employee benefit or deferred compensation
plan. The annual compensation of each Participant taken into account under the
Profit Sharing Plan is limited to $150,000 (adjusted for increases in the cost
of living as permitted by the Code; the limitation for 1997 is $160,000).
Generally, a Participant may elect to modify the amount contributed to the
Profit Sharing Plan under his or her Compensation Reduction Agreement not more
often than four times in any Plan Year by filing the applicable form to a Profit
Sharing Plan representative at least 10 days prior to the first day of the
payroll period for which the change is to become effective. However, special
restrictions apply to those Participants subject to Section 16 of the 1934 Act.
Basic Contributions are transferred by the Employer to the Trustee of the Plan.
Notwithstanding the preceding, a Participant who receives a hardship
distribution under the terms of the Profit Sharing Plan, may not be eligible to
make additional contributions under a Compensation Reduction Agreement for a
period of twelve months after the receipt of the hardship distribution.
AFTER-TAX CONTRIBUTIONS. Prior to January 1, 1991, the Profit Sharing
Plan allowed Participants to make after-tax contributions to the Profit Sharing
Plan. After-tax contributions are no longer allowed under the Profit Sharing
Plan. In addition, certain Participants who were former employees of Bay Ridge
Bancorp, Inc. and Bay Ridge Federal Savings Bank (collectively, "Bay Ridge")
were able to make after-tax contributions. All after-tax contributions
previously made (increased by earnings and decreased by any losses) are held in
a Participant's After-Tax Contribution Account.
EMPLOYER CONTRIBUTIONS. The Bank makes discretionary contributions to
the Profit Sharing Plan, subject to the limitations on the deductibility of
such contributions set forth in the Code. For Participants in the Profit
Sharing Plan for less than 24 months, the Bank may contribute for each Plan
Year 50% of the Participants' Basic Contributions up to a maximum of 6% of the
Participants' Basic Contributions. However, the maximum annual amount of
Matching Contributions for Participants who have been in the Profit Sharing
Plan
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for less than 24 months will not exceed $1,500. For Participants who have been
in the Profit Sharing Plan for 24 months or more, the Bank may contribute
for each Plan Year 100% of the Participants' Basic Contributions up to a
maximum of 6% of the Participants' Basic Contributions. However, the maximum
annual amount of Matching Contributions for Participants who have been in the
Profit Sharing Plan for 24 months or more will not exceed $3,000.
Such amounts are credited to the Participant's "Matching Contribution
Account." After the Conversion, at the discretion of the Bank, the Employer
contributions made with respect to Participants who are Bank employees will be
credited to the Participant's Account in the Company's Employee Stock Ownership
Plan ("ESOP") of which the Bank is a participating employer. At its discretion,
the Employer may make an additional contribution to the Profit Sharing Plan as
of the end of the Plan Year in an amount determined by the Employer for the
purpose of ensuring that the Profit Sharing Plan complies with Section 401(k) of
the Code ("Special Contribution"). Such amounts are credited to the
Participants' Basic Contribution Accounts. Special Contributions may be made
only to the accounts of non-highly compensated employees.
OTHER ACCOUNTS. Participants who were former employees of Bay Ridge may
have a Bay Ridge Discretionary Contribution Account under the Profit Sharing
Plan. Participants who were former employees of First Nationwide Bank, a
Federal Savings Bank ("First Nationwide") may have a First Nationwide Prior Plan
Account and a First Nationwide Profit Sharing Contribution Account under the
Profit Sharing Plan. These accounts are collectively referred to as Former
Employer Accounts.
LIMITATIONS ON CONTRIBUTIONS
LIMITATIONS ON ANNUAL ADDITIONS AND BENEFITS. Pursuant to the
requirements of the Code, the Profit Sharing Plan provides that the amount of
contributions and forfeitures allocated to each Participant's Basic
Contribution Account and Matching Contribution Account during any plan year may
not exceed the lesser of 25% of the Participant's Section 415 Compensation for
the Plan Year or $30,000 (adjusted for increases in the cost of living as
permitted by the Code). A Participant's Section 415 Compensation is a
Participant's Compensation, excluding any Employer contribution to the Profit
Sharing Plan or to any other plan of deferred compensation or any distributions
from a plan of deferred compensation. In addition, annual additions shall be
limited to the extent necessary to prevent the limitations set forth in the
Code for all of the qualified defined benefit plans and defined contribution
plans maintained by the Bank from being exceeded. To the extent that these
limitations would be exceeded by reason of excess annual additions with
respect to a Participant, such excess will be disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to
reduce the Employer's contributions for such Participant in the next Limitation
Year, and each succeeding Limitation Year if necessary; and
(ii) If an excess amount still exists, and the Participant is not
covered by the Profit Sharing Plan at the end of the Limitation Year, the
excess amount during the succeeding Limitation Year, shall be allocated to each
Participant then actively participating in the Profit Sharing Plan.
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LIMITATION ON 401(k) PLAN CONTRIBUTIONS. The annual amount of Deferred
Compensation under a Compensation Reduction Agreement of a Participant (when
aggregated with any elective deferrals of the Participant under a simplified
employee pension plan or a tax-deferred annuity) may not exceed $7,000 adjusted
for increases in the cost of living as permitted by the Code (the limitation
for 1997 is $9,500). Contributions in excess of this limitation ("excess
deferrals") will be included in the Participant's gross income for federal
income tax purposes in the year they are made. In addition, any such excess
deferral will again be subject to federal income tax when distributed by the
Profit Sharing Plan to the Participant, unless the excess deferral (together
with any income allocable thereto) is distributed to the Participant not later
than the first April 15th following the close of the taxable year in which
the excess deferral is made. Any income on the excess deferral that is
distributed not later than such date shall be treated, for federal income tax
purposes, as earned and received by the Participant in the taxable year in
which the excess deferral is made.
LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES.
Sections 401(k) and 401(m) of the Code limit the amount of Deferred
Compensation that may be made to the Profit Sharing Plan in any Plan Year on
behalf of Highly Compensated Employees (defined below) in relation to the
amount of Deferred Compensation made by or on behalf of all other employees
eligible to participate in the Profit Sharing Plan. Specifically, the actual
deferral percentage (i.e., the average of the ratios, calculated separately for
each eligible employee in each group, by dividing the amount of Deferred
Compensation credited to the Basic Contribution Account of such eligible
employee by such eligible employee's compensation for the Plan Year) of the
Highly Compensated Employees may not exceed the greater of (i) 125% of the
actual deferral percentage of all other eligible employees, or (ii) the lesser
of (x) 200% of the actual deferral percentage of all other eligible employees,
or (y) the actual deferral percentage of all other eligible employees plus two
percentage points. In addition, the actual contribution percentage for such
Plan Years (i.e., the average of the ratios calculated separately for each
eligible employee in each group, by dividing the amount of voluntary Employee
and Employer matching contribution credited to the Matching Contribution
Account and Special Contribution of such eligible employee by such eligible
employee's compensation for the Plan Year) of the Highly Compensated Employees
may not exceed the greater of (i) 125% of the actual contribution percentage of
all other eligible employees, or (ii) the lesser of (x) 200% of the actual
contribution percentage of all other eligible employees, or (y) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, for years beginning after December 31, 1996, a Highly
Compensated Employee includes any employee who, during the Plan Year or the
preceding Plan Year, (1) was at any time a 5% owner (i.e., owns directly or
indirectly more than 5% of the stock of the Employer, or stock possessing more
than 5% of the total combined voting power of all stock of the Employer), or
(2) for the preceding year (i) had compensation from the employer in excess of
$80,000, and (ii) if the employer elects the application of this clause for
such preceding year, was in the top-group of employees for such preceding year.
An
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employee is in the top-paid group of employees for any year if such employee
is in the group consisting of the top 20 percent of employees when ranked on
the basis of compensation paid during such year. Such amounts are adjusted
annually to reflect increases in the cost of living.
In order to prevent the disqualification of the Profit Sharing Plan,
any amount contributed by Highly Compensated Employees that exceeds the average
deferral limitation in any Plan Year ("excess contributions"), together with
any income allocable thereto, must be distributed to such Highly Compensated
Employees before the close of the following Plan Year. However, the Employer
will be subject to a 10% excise tax on any excess contributions unless such
excess contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
TOP-HEAVY PLAN REQUIREMENTS. If for any Plan Year the Profit Sharing
Plan is a Top-Heavy Plan (as defined below), then (i) the Bank may be required
to make certain minimum contributions to the Profit Sharing Plan on behalf of
non-key employees (as defined below), and (ii) certain additional restrictions
would apply with respect to the combination of annual additions to the Profit
Sharing Plan and projected annual benefits under any defined benefit plan
maintained by the Bank.
In general, the Profit Sharing Plan will be regarded as a "Top-Heavy
Plan" for any Plan Year if, as of the last day of the preceding Plan Year, the
aggregate balance of the Accounts of Participants who are Key Employees exceeds
60% of the aggregate balance of the Accounts of all Participants. Key Employees
generally include any employee who, at any time during the Plan Year or any of
the four preceding Plan Years, is (1) an officer of the Employer having annual
compensation in excess of 50% of the amount under Section 415(b)(1)(A) of the
Code ($90,000 for 1997), (2) one of the ten employees having annual compensation
greater than the under Section 415 (c)(1)(A) amount ($30,000 for 1997) and
owning, directly or indirectly, the largest interests in the Company, (3) a 5%
owner of the Company, (i.e., owns directly or indirectly more than 5% of the
stock of the Company, or stock possessing more than 5% of the total combined
voting power of all stock of the Company) or (4) a 1% owner of the Company
having annual compensation in excess of $150,000.
INVESTMENT OF CONTRIBUTIONS
GENERAL. All amounts credited to Participants' Accounts under the
Profit Sharing Plan are held in the Trust Fund which is administered by the
Trustee appointed by the Bank's Board of Directors.
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Prior to December 31, 1997, the Accounts of a Participant held
in the Trust have been invested by the Trustee at the direction of the
Participant in the following funds (collectively and including the Employer
Stock Fund, the "Funds"):
a. Core Equity Fund;
b. Emerging Growth Equity Fund;
c. Value Equity Fund;
d. Intermediate - Term Bond Fund;
e. Actively Managed Bond Fund;
f. International Equity Fund; and
g. Short-Term Investment Fund.
The Profit Sharing Plan, as amended effective August 21, 1997, now
provides that in addition to the Funds specified above, a Participant who is
employed by the Bank may direct the Trustee to invest all or a portion of his
Basic Contribution Account or Rollover Account in the Stock Fund. After the
Conversion, at the discretion of the Bank, the Employer contributions to the
Participant's Matching Contribution Account will be credited to the
Participant's Account in the Company's ESOP.
No more than once a calendar quarter, a Participant may elect (in
increments of 1%), to have both past and future contributions to the
Participant's Basic Contribution Account and Rollover Account invested either in
the Employer Stock Fund or among such other Funds. Participants may also elect
to have past contributions to their Matching Contribution Accounts invested in
either the Employer Stock Fund or among such other Funds. These elections will
be effective on the effective date of the Participant's written notice to the
plan administrator, provided such notice is filed with the administrator at
least 10 days before it is to become effective. Any amounts credited to a
Participant's Accounts for which investment directions are not given will be
invested in accordance with the terms of the Profit Sharing Plan.
A Participant who receives a loan from the Profit Sharing Plan has a
separate account established under the Profit Sharing Plan. The balance of a
Participant's loan account represents the unpaid principal and interest (if
any) of such participant's loan from the Profit Sharing Plan. Repayments of
principal and payments of interest on loans are invested by the Trustee as
directed by the Participant or, if no investment directions are given, in
accordance with the terms of the Plan.
The net gain (or loss) of the Funds from investments (including
interest payments, dividends, realized and unrealized gains and losses on
securities, and expenses paid from the Trust) will be determined at least
monthly during the Plan Year. For purposes of such allocations, all assets of
the Trust are valued at their fair market value.
-9-
<PAGE> 12
PREVIOUS FUNDS. Prior to December 31, 1997, contributions under the
Plan were invested in the seven Funds specified above. The annual percentage
return on these funds for the prior three years was:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
a. Core Equity Fund 21.53% 40.17% 1.31%
b. Emerging Growth Equity Fund 27.09 42.83 3.53
c. Value Equity Fund 25.90 33.96 (1.14)
d. Intermediate -Term Bond Fund 4.02 13.99 (2.54)
e. Actively Managed Bond Fund 3.15 17.70 (4.21)
f. International Equity Fund 10.86 12.46 *
g. Short-term Investment Fund 4.70 5.39 3.40
</TABLE>
------------
* The International Equity Fund was added as an investment option in
1995.
THE EMPLOYER STOCK FUND. The Employer Stock Fund will consist of
investments in Common Stock made on and after the effective date of the
Conversion. Each Participant's proportionate undivided beneficial interest in
the Employer Stock Fund is measured in units. Each day, a unit value will be
calculated by determining the market value of the shares of Common Stock
actually held and adding to that any cash held by the Trustee. This total will
be divided by the number of units outstanding to determine the unit value of the
Employer Stock Fund.
On the occasion of the payment of a cash dividend, the unit value will
be determined before the dividend is distributed. The Trustee will use the
dividend to purchase additional shares of the Common Stock. The total of the
Employer Stock Fund will increase, as will the value of each unit. The Board of
Directors of the Company may consider a policy of paying cash dividends on the
Common Stock in the future; however, no decision as to the amount or timing of
cash dividends, if any, has been made. The Trustee will, to the extent
practicable, use all amounts held by it in the Employer Stock Fund to purchase
shares of Common Stock of the Company. It is expected that all purchases will be
made at prevailing market prices. Under certain circumstances, the Trustee may
be required to limit the daily volume of shares purchased. Pending investment in
Common Stock, assets held in the Employer Stock Fund will be placed in bank
deposits and other short-term investments.
Any brokerage commissions, transfer fees and other expenses incurred
in the sale and purchase of Common Stock for the Employer Stock Fund will be
paid out of a cash account managed by the Trustee. Therefore, although
Participants' accounts will not be directly adjusted for such fees, the market
value of their accounts will be reduced.
As of the date of this Prospectus Supplement, none of the shares of
Common Stock have been issued or are outstanding and there is no established
market for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of the
Company and the Bank and market conditions for the Common Stock generally.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL
RISKS IN INVESTMENT IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE
RISK FACTORS, SEE "RISK FACTORS" ON PAGE 14 IN THE PROSPECTUS.
-10-
<PAGE> 13
VESTING
A Participant at all times has a fully vested nonforfeitable interest
in his Basic Contribution Account and the earnings thereon under the Profit
Sharing Plan. Generally, a Participant vests in his or her Matching
Contribution Account under the Plan according to the following schedule:
<TABLE>
<CAPTION>
Period of Service Vested Percentage
- --------------------------------------- -----------------------------------------
<S> <C>
less than 2 years 0%
2 years but less 3 years 50%
3 years or more 100%
</TABLE>
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT. A Participant may make
a withdrawal from each of his or her Accounts subject to the hardship
distribution rules under the Plan. These requirements are designed to ensure
that Participants have a true financial need before a withdrawal may be made.
A Participant may make a withdrawal from his or her Rollover
Contribution Account (distributions from a prior employer's tax qualified
defined contribution plan), from After-Tax Contributions, if any (allowable
after-tax contributions made prior to January 1, 1991), and from his or her
Matching Contributions Account (but only if the Participant is 100% vested and
has been a Participant in the Profit Sharing Plan for at least 60 months) or his
or her Basic Contribution Account after he turns 59 1/2. A Participant may also
make withdrawals of certain amounts contributed to the Profit Sharing Plan
prior to June 15, 1995. However, such withdrawals generally may not be made
more often then four times during any Plan Year.
DISTRIBUTION UPON RETIREMENT, DISABILITY OR TERMINATION OF EMPLOYMENT.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment as soon as administratively feasible after such termination of
employment if the vested value of the Participant's Account is $3,500 or less.
If the vested portion of the Participant's Account balance is greater than
$3,500, the Participant may receive a distribution (subject to the minimum
distribution rules) in a lump sum payment: (a) as soon as administratively
possible after termination, (b) as of any Valuation Date up to 13 months after
termination or (c) as of the date the Participant attains normal retirement
age. Alternatively, a Participant who terminates services as of his or her
retirement day may elect to receive benefits in the form of installments over a
period not to exceed 10 years. Benefit payments ordinarily shall be made not
later than 60 days following the end of the Plan Year in which occurs the
latest of the Participant's: (i) termination of employment; (ii) the attainment
of age 65 or (iii) the 10th anniversary of
-11-
<PAGE> 14
commencement of participation in the Plan; but in no event later than
the April 1 following the calendar year in which the Participant attains age 70
1/2; or the calendar year in which the employee retires. However, if the vested
portion of the Participant's Account balances exceeds $3,500, no distribution
shall be made from the Plan prior to the Participant's attaining age 65 unless
the Participant elects to receive to an earlier distribution.
DISTRIBUTION UPON DEATH. A Participant who dies before his or her
entire vested interest has been distributed shall have his or her benefits paid
to the surviving spouse in a lump sum as soon as administratively possible
following the date of his death. If however, the Participant elected prior to
his death to receive a deferred lump sum payment and had not yet received such
distribution, such Beneficiary shall receive a lump sum distribution as of the
earlier of the Valuation Date in the Participant's election or the last
Valuation Date which occurs within one (1) year of the Participant's death. If
the Participant elected to and began receiving a distribution in the form of
installments, such Beneficiary shall receive distributions over the remaining
period, at the times set forth in such election. With respect to an unmarried
Participant, and in the case of a married Participant with spousal consent to
the designation of another beneficiary, payment of benefits to the beneficiary
of a deceased Participant shall be made in the form of a lump-sum payment or in
the same manner described above as to a Participant with a surviving spouse.
NONALIENATION OF BENEFITS. Except with respect to federal income tax
withholdings and as provided with respect to a qualified domestic relations
order (as defined in the Code), benefits payable under the Profit Sharing Plan
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any
kind, either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the Profit Sharing Plan shall be void.
ADMINISTRATION OF THE PROFIT SHARING PLAN
The Trustee with respect to the Profit Sharing Plan is the named
fiduciary of the Profit Sharing Plan for purposes of Section 402 of ERISA.
The Trustee is appointed by the Board of Directors of the Bank to serve
at its pleasure. The current Trustee of the Profit Sharing Plan is the RSI
Retirement Trust. Marine Midland Bank has been appointed as Trustee to hold
funds invested in the Employer Stock Fund.
The Trustee receives, holds and invests the contributions to the
Profit Sharing Plan in trust and distributes them to Participants and
beneficiaries in accordance with the terms of the Profit Sharing Plan and the
directions of the Plan Administrator. The Trustee is responsible for investment
of the assets of the Trust.
-12-
<PAGE> 15
REPORTS TO PROFIT SHARING PLAN PARTICIPANTS
The Administrator (as defined below) will furnish to each Participant
a statement at least quarterly showing (i) the balance in the Participant's
Account as of the end of that period, (ii) the amount of contributions
allocated to such Participant's Account for that period, and (iii) the
adjustments to such Participant's Account to reflect earnings or losses,
distributions, loans disbursed, loan repayments and/or transfers between
investment funds.
PLAN ADMINISTRATION
Pursuant to the terms of the Profit Sharing Plan, the Profit Sharing
Plan is administered by one or more persons who are appointed by and who serve
at the pleasure of the Bank (the "Administrator").
Currently, the Administrator is Independence Savings Bank. The address
and telephone number of the Administrator is 195 Montague Street, Brooklyn, New
York 11201; (718) 722-5377. The Administrator is responsible for the
administration of the Profit Sharing Plan, interpretation of the provisions of
the Profit Sharing Plan, prescribing procedures for filing applications for
benefits, preparation and distribution of information explaining the Profit
Sharing Plan, maintenance of Profit Sharing Plan records, books of account and
all other data necessary for the proper administration of the Profit Sharing
Plan, and preparation and filing of all returns and reports relating to the
Profit Sharing Plan which are required to be filed with the U.S. Department of
Labor and the IRS, and for all disclosures required to be made to Participants,
Beneficiaries and others under Sections 104 and 105 of ERISA.
AMENDMENT AND TERMINATION
It is the current intention of the Bank to continue the Profit Sharing
Plan indefinitely. Nevertheless, the Bank may terminate the Profit Sharing Plan
at any time. If the Profit Sharing Plan is terminated in whole or in part, then
regardless of other provisions in the Profit Sharing Plan, each Participant
affected by such termination shall have a fully vested interest in his Account.
The Bank reserves the rights to make, from time to time, any amendment or
amendments to the Profit Sharing Plan which do not cause any part of the Trust
to be used for, or diverted to, any purpose other than the exclusive benefit of
Participants or their beneficiaries; provided, however, that the Bank may make
any amendment it determines necessary or desirable, with or without retroactive
effect, or comply with ERISA.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Profit Sharing Plan
with another plan, or the transfer of the Trust assets to another plan, the
Profit Sharing Plan requires that each Participant will (if either the Profit
Sharing Plan or the other plan were then
-13-
<PAGE> 16
terminated) receive a benefit immediately after the merger,
consolidation or transfer which is equal to or greater than the benefit he
would have been entitled to receive immediately before the merger,
consolidation or transfer (if the Profit Sharing Plan had then terminated).
FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following is only a brief summary of certain federal
income tax aspects of the Profit Sharing Plan which are of general application
under the Code and is not intended to be a complete or definitive description
of the federal income tax consequences of participating in or receiving
distributions from the Profit Sharing Plan. The summary is necessarily general
in nature and does not purport to be complete. Moreover, statutory provisions
are subject to change, as are their interpretations, and their applicable may
vary in individual circumstances. Finally, the consequences under applicable
state and local income tax laws may not be the same as under the federal income
tax laws. PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO
ANY DISTRIBUTION FROM THE PROFIT SHARING PLAN AND TRANSACTIONS INVOLVING THE
PROFIT SHARING PLAN.
The Profit Sharing Plan will be submitted to the IRS in a timely
manner for a determination that it is qualified under Section 401(a) and 401(k)
of the Code, and that the related Trust is exempt from tax under Section 501(a)
of the Code. A plan that is "qualified" under these sections of the Code is
afforded special tax treatment which include the following: (1) the sponsoring
employer is allowed an immediate tax deduction for the amount contributed to
the Profit Sharing Plan each year; (2) participants pay no current income tax
on amounts contributed by the employer on their behalf; and (3) earnings of the
plan are tax-exempt thereby permitting the tax-free accumulation of income and
gains on investments. The Profit Sharing Plan will be administered to comply in
operation with the requirements of the Code as of the applicable effective date
of any change in the law. The Bank expects to timely adopt any amendments to
the Profit Sharing Plan that may be necessary to maintain the qualified status
of the Profit Sharing Plan under the Code. Following such an amendment, the
Bank will submit the Profit Sharing Plan to the IRS for a determination that
the Profit Sharing Plan, as amended, continues to qualify under Sections 401(a)
and 501(a) of the Code and that it continues to satisfy the requirements for a
qualified cash or deferred arrangement under Section 401(k) of the Code. Should
the Profit Sharing Plan receive from the IRS an adverse determination letter
regarding its tax exempt status, all participants would generally recognize
income equal to their vested interest in the Profit Sharing Plan, the
participants would not be permitted to transfer amounts distributed from the
Profit Sharing Plan to an IRA or to another qualified retirement plan, and the
Bank may be denied certain deductions taken with respect to the Profit Sharing
Plan.
LUMP SUM DISTRIBUTION. A distribution from the Profit Sharing Plan to a
Participant or the beneficiary of a Participant will qualify as a Lump Sum
Distribution if it is made: (i) within one taxable year to the Participant or
beneficiary; (ii) on account of the Participant's
-14-
<PAGE> 17
death, disability or separation from service, or after the Participant
attains age 59 1/2; and (iii) consists of the balance to the credit of the
Participant under this Profit Sharing Plan and all other profit sharing plans,
if any, maintained by the Bank. The portion of any Lump Sum Distribution that
is required to be included in the Participant's or beneficiary's taxable income
for federal income tax purposes (the "total taxable amount") consists of the
entire amount of such Lump Sum Distribution less the amount of after-tax
contributions, if any, made by the Participant to any other profit sharing
plans maintained by the Bank which is included in such distribution.
AVERAGING RULES. The Small Business Job Protection Act of 1996 repealed
five-year income averaging for lump sum distributions for taxable years
beginning after 1999. Ten-year averaging which was grandfathered for
individuals who attained the age of 50 before January 1, 1986 was retained. The
portion of the total taxable amount of a Lump Sum Distribution that is
attributable to participation after 1973 in this Profit Sharing Plan or in any
other profit sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However for distributions prior to the effective date, a Participant
who has completed at least five years of participation in this Profit Sharing
Plan before the taxable year in which the distribution is made, or a
beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's
participation in this Profit Sharing Plan or any other profit sharing plan
maintained by the Employer), may elect to have the ordinary income portion of
such Lump Sum Distribution taxed according to a special averaging rule
("five-year averaging"). The election of the special averaging rules
may apply only to one Lump Sum Distribution received on or after the
Participant turns 50 1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed
under the special averaging rule. Under a special grandfathering rule,
individuals who turned 50 by 1986 may elect to have their Lump Sum Distribution
taxed under either the five-year averaging rule or under the prior law ten-year
averaging rule. Such individuals also may elect to have that portion of the
Lump Sum Distribution attributable to the participant's pre-1974 participation
in the Profit Sharing Plan taxed at a flat 20% rate as gain from the sale of a
capital asset.
COMMON STOCK INCLUDED IN LUMP SUM DISTRIBUTION. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be
reduced by the amount of any net unrealized appreciation with respect to such
Common Stock, i.e., the excess of the value of such Common Stock at the time of
the distribution over its cost of the Profit Sharing Plan. The tax basis of
such Common Stock, to the Participant or beneficiary for purposes of computing
gain or loss on its subsequent sale will be the value of the Common Stock at
the time of distribution less the amount of net unrealized appreciation. Any
gain on a subsequent sale or other taxable disposition of such Common Stock, to
the extent of the amount of net unrealized appreciation at the time of
distribution, will be considered long-term capital gain regardless of the
holding period of such Common Stock. Any gain on a subsequent sale or other
taxable disposition of the Common Stock in excess of the amount
-15-
<PAGE> 18
of net unrealized appreciation at the time of distribution will be
considered either short-term capital gain or long-term capital gain depending
upon the length of the holding period of the Common Stock. The recipient of a
distribution may elect to include the amount of any net unrealized appreciation
in the total taxable amount of such distribution to the extent allowed by the
regulations to be issued by the IRS.
DISTRIBUTION: ROLLOVERS AND DIRECT TRANSFERS TO ANOTHER QUALIFIED PLAN
OR TO AN IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Profit Sharing Plan may be rolled over to
another qualified retirement plan or to an Individual Retirement Account
("IRA") without regard to whether the distribution is a Lump Sum Distribution
or a Partial Distribution. Effective January 1, 1993, Participants have the
right to elect to have the Trustee transfer all or any portion of an "eligible
rollover distribution" directly to another plan qualified under Section 401(a)
of the Code or to an IRA. If the Participant does not elect to have an
"eligible rollover distribution" transferred directly to another qualified plan
or to an IRA, the distribution will be subject to a mandatory federal
withholding tax equal to 20% of the taxable distribution. The principal types
of distributions which do not constitute eligible rollover distributions are
(i) an annuity type distribution made over the life expectancy of the
Participant (or Participant and another) or for a period of 10 years or more,
(ii) a minimum distribution required by Section 409 (a) (9) of the Code, or
(iii) the portion of any distribution not includable in gross income, except
that unrealized appreciation in employee securities can be included in an
eligible rollover distribution. The tax law change described above did not
modify the special tax treatment of Lump Sum Distributions, that are not rolled
over or transferred i.e., forward averaging, capital gains tax treatment and
the nonrecognition of net unrealized appreciation, discussed earlier.
ERISA AND OTHER QUALIFICATION
As noted above, the Profit Sharing Plan is subject to certain
provisions of ERISA and will be submitted to the IRS for a determination that
it is qualified under Section 401(a) of the Code.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX
ASPECTS OF THE PROFIT SHARING PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE
CODE AND IS NOT INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE
FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS
FROM THE PROFIT SHARING PLAN. ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT
A TAX ADVISOR CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF
PARTICIPATING IN AND RECEIVING DISTRIBUTIONS FROM THE PROFIT SHARING PLAN.
RESTRICTIONS ON RESALE
Any person receiving shares of Common Stock under the Profit Sharing
Plan who is an "affiliate" of the Company as the term "affiliate" is used in
Rules 144 and 405 under the
-16-
<PAGE> 19
Securities Act of 1933, as amended (the "Securities Act"), (e.g., directors,
officers and substantial stockholders of the Company) may reoffer or resell such
shares only pursuant to a registration statement filed under the Securities Act
assuming the availability thereof, pursuant to Rule 144 or some other exemption
of the registration requirements of the Securities Act. Any person who may be an
"affiliate" of the Company may wish to consult with counsel before transferring
any Common Stock owned by him. In addition, Participants are advised to consult
with counsel as to the applicability of Section 16 of the 1934 Act which may
restrict the sale of Common Stock when acquired under the Profit Sharing Plan,
or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Company at the
time of resale will be free to resell any shares of Common Stock allocated to
them under the Profit Sharing Plan, either publicly or privately, without regard
to the Registration and Prospectus delivery requirements of the Securities Act
or compliance with the restrictions and conditions contained in the exemptive
rules thereunder. An "affiliate" of the Company is someone who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control, with the Company. Normally, a director, principal
officer or major stockholder of a corporation may be deemed to be an "affiliate"
of that corporation. A person who may be deemed an "affiliate" of the Company at
the time of a proposed resale will be permitted to make public resales of the
Company's Common Stock only pursuant to a "reoffer" Prospectus or in accordance
with the restrictions and conditions contained in Rule 144 under the Securities
Act or some other exemption from registration, and will not be permitted to use
this Prospectus in connection with any such resale. In general, the amount of
the Company's Common Stock which any such affiliate may publicly resell pursuant
to Rule 144 in any three-month period may not exceed the greater of one percent
of the Company's Common Stock then outstanding or the average weekly trading
volume reported on the Nasdaq National Market during the four calendar weeks
prior to the sale. Such sales may be made only through brokers without
solicitation and only at a time when the Company is current in filing the
reports required of it under the 1934 Act.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the 1934 Act imposes reports and liability requirements
on officers, directors and persons beneficially owning more than ten percent of
public companies such as the Company. Section 16(a) of the 1934 Act requires
the filing of reports of beneficial ownership. Within ten days of becoming a
person subject to the reporting requirements of Section 16(a), a Form 3
reporting initial beneficial ownership must be filed with the Securities and
Exchange Commission ("SEC"). Certain changes in beneficial ownership, such as
purchases, sales, gifts and participation in savings and retirement plans must
be reported periodically, either on a Form 4 within ten days after the end of
the month in which a change occurs, or annually on a Form 5 within 45 days
after the close of the Company's fiscal year. Participation in the Employer
Stock Fund of the Profit Sharing Plan by officers, directors and persons
beneficially owning more than ten percent of the Common Stock of the Company
must be reported to the SEC annually on a Form 5 by such individuals.
-17-
<PAGE> 20
In addition to the reporting requirements described above, Section
16(b) of the 1934 Act provides for the recovery by the Company of profits
realized by any officer, director or any person beneficially owning more than
ten percent of the Company's Common Stock ("Section 16(b) Persons") resulting
from the purchase and sale or sale and purchase of the Company's Common Stock
within any six-month period.
The SEC has adopted rules that provide exemption from the profit
recovery provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Profit Sharing Plan,
provided certain requirements are met.
EXPERTS
The financial statements of the Profit Sharing Plan as of December 31,
1996 and 1995 and for the years then ended have been included herein in
reliance upon the report of Ernst & Young LLP, independent certified public
accountant, appearing elsewhere wherein, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon
by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D. C., which firm acted
as special counsel for the Company and the Bank in connection with the
Conversion.
-18-
<PAGE> 21
Financial Statements
and Supplemental Schedules
Independence Savings Bank
401(k) Savings Plan in RSI Retirement Trust
Years ended December 31, 1996 and 1995
with Report of Independent Auditors
<PAGE> 22
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
FINANCIAL STATEMENTS AND
SUPPLEMENTAL SCHEDULES
YEARS ENDED DECEMBER 31, 1996 AND 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Financial Statements
Statements of Net Assets Available for Plan Benefits.................................. F-3
Statements of Changes in Net Assets Available for Plan Benefits....................... F-4
Notes to Financial Statements......................................................... F-5
Supplemental Schedules
Schedule of Investments............................................................... S-1
Schedule of Reportable Transactions................................................... S-2
</TABLE>
Note: A schedule of party-in-interest transactions has not been presented
because there were no party-in-interest transactions which are prohibited by the
Employee Retirement Income Security Act of 1974, Section 406, and for which
there is not a statutory or an administrative exemption.
F-1
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Independence Savings Bank
We have audited the accompanying statements of net assets available for
plan benefits of the Independence Savings Bank 401(k) Savings Plan in RSI
Retirement Trust (the "Plan") as of December 31, 1996 and 1995, and the related
statements of changes in net assets available for plan benefits for the years
then ended. These financial statements are the responsibility of the Plan's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial status of the Plan at December 31, 1996
and 1995, and the changes in its financial status for the years then ended, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplemental schedules
of investments as of December 31, 1996, and reportable transactions for the year
then ended, are presented for purposes of complying with the Department of
Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974 and are not a required part of the basic
financial statements. The supplemental schedules have been subjected to the
auditing procedures applied in our audits of the financial statements and, in
our opinion, are fairly stated in all material respects in relation to the
financial statements taken as a whole.
July 31, 1997
F-2
<PAGE> 24
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
Loans to participants............................................ $ 873,570 $ 821,325
Investments at fair value........................................ 11,470,937 8,911,188
Net assets available for plan benefits........................... $12,344,507 $9,732,513
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 25
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1996 1995
------------ -----------
<S> <C> <C>
ADDITIONS
Contributions by:
Participating employees........................................ $ 961,327 $ 648,855
Employer....................................................... 521,202 435,022
Interest on loans................................................ 68,227 51,743
Transfers from former trustee.................................... 2,248,519 --
Net realized and unrealized appreciation in fair value of 1,206,437 1,231,108
investments....................................................
DEDUCTIONS
Distributions and withdrawals.................................... 2,393,718 693,928
----------- ----------
Net increase..................................................... 2,611,994 1,672,800
Net assets available for plan benefits at:
Beginning of year.............................................. 9,732,513 8,059,713
----------- ----------
End of year.................................................... $ 12,344,507 $ 9,732,513
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 26
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF THE PLAN
The following description of the Independence Savings Bank 401(k) Savings
Plan in RSI Retirement Trust (the "Plan") is presented for general information
purposes only. Participants should refer to the Plan document for more complete
information.
General
The Plan is a defined contribution plan sponsored by Independence Savings
Bank (the "Bank"). Employees of the Bank are eligible for participation after
one year of service during which they have rendered 1,000 hours of service. The
Plan is subject to the provisions of the Employee Retirement Income Security Act
of 1974 ("ERISA"). The Plan was amended to comply with the provisions of ERISA
effective October 1, 1976. The Plan has also been amended to conform with the
current provisions of the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"), the Deficit Reduction Act of 1984, the Retirement Equity Act of 1984,
and the Tax Reform Act of 1986.
Trust Funds
The Plan is administered by a committee (the "Committee") appointed by the
Board of Directors (the "Board") of the Bank. The Board has appointed the
trustees of the Retirement Systems Group, Inc. as Trustee (the "Trustee") of the
Plan's assets. Under the terms of the trust agreement between the Trustee and
the Plan, the Trustee manages trust funds on behalf of the Plan. The Trustee has
been granted discretionary authority concerning purchases and sales of
investments in the trust funds.
Contributions
Participants may make basic contributions of up to 6% pre-tax of their
annual salary. The Bank will match 50% of these contributions up to a maximum of
$1,500 annually during the first two years of Plan participation, and 100%
thereafter up to a maximum of $3,000 annually. Participants may also contribute
a supplemental pre-tax amount of 9% of their annual salary to the Plan. Total
pre-tax contributions may not exceed 15% of the Participant's annual salary to a
maximum of $9,500 and $9,240 in 1996 and 1995, respectively. The supplemental
contributions are not matched by the Bank.
A Participant may elect to direct the contributions to any of the Plan's
investment funds in multiples of whole percentage points in accordance with any
of the seven investment options. Under the trust agreement with the Trustee, a
Participant may change investment direction once in any calendar quarter,
providing that such election has been filed at least ten days in advance.
Transfers are limited to once in any calendar quarter, providing that such
election has been filed at least ten days in advance.
Participants' contributions and all earnings from investment activities
allocable thereto are always fully vested. The Participant's interest in Bank
contributions and forfeitures credited to the Participant's account, plus any
earnings, appreciation or additions allocable thereto, will vest 50% upon
completion of two years of service and 100% upon completion of three years of
service.
A Participant whose participation in the Plan terminates before he is fully
vested, for any reason other than retirement, disability or death, shall forfeit
any portion of this interest in the Plan which is not vested. Under the trust
agreement with the Trustee, forfeitures are treated as matching contributions
and applied to reduce the amount of subsequent matching contributions required
to be made by the Bank. For the years ended December 31, 1996 and 1995,
cumulative forfeitures were $802 and $6,002 respectively.
F-5
<PAGE> 27
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fund Descriptions
The following is a description of the funds in which the Plan's assets are
invested under the agreement with the Trustee:
Core Equity Fund: This fund is a stock fund that invests in a broadly
diversified group of large, high quality, competitively strong companies that,
in the view of the investment manager, exhibit sustainable growth in earnings
and dividends. It offers investors the potential for long-term capital
appreciation, with income as a secondary goal.
Emerging Growth Equity Fund: This fund is a stock fund that seeks capital
appreciation by investing primarily in smaller, relatively new companies that,
in the view of the investment manager, have higher than average potential for
earnings growth.
Value Equity Fund: This fund is a growth and income stock fund that seeks
capital appreciation over the longer term. It invests in financially strong
companies with medium to large market capitalizations. These companies are
currently out of favor with investors but have had good earnings growth records
in the past and offer prospects for significant earnings and dividend growth. In
the view of the investment manager, these stocks are currently undervalued and
selling below their potential value.
International Equity Fund: This fund seeks to achieve a total return in
excess of the Lipper International Mutual Funds Average, measured over a period
of three to five years. It invests primarily in equity securities of Non-United
States companies and at least 65% of its assets will be invested in equity
securities companies in at least three countries (other than the United States).
It may also invest in securities of Non-United States governments and their
agencies (no more than 25% of the funds total assets) and may also invest in
securities of United States companies which derive, or are expected to derive, a
substantial portion of their revenues from operations outside the United States.
Investments in such United States companies will normally be less than 10% of
the funds total assets.
Intermediate-Term Bond Fund: This fund invests in high quality fixed
income securities that mature within ten years, or have expected average lives
of ten years or less. At least 65% of the investments in this fund are in United
States Government or United States Government Agency issues which have the
highest credit rating. At the time of purchase, at least 75% of the holdings
must have a quality rating of "AA" or better, with a minimum quality rating of
"A" for other holdings. This investment fund's goal is to achieve income and
price appreciation.
Actively Managed Bond Fund: This fund invests in high quality fixed-income
securities (bonds and other debt securities), with maturities of 30 years. The
fund's investment managers frequently adjust the maturity structure of the
portfolio to respond to perceived changes in the relative attractiveness of the
fixed-income market. At the time of purchase, at least 75% of the investments in
this fund must have a quality rating of "AA" or better, with a minimum quality
rating of "A" for other holdings, and at least 65% of the investments in this
fund are in United States Government or United States Government Agency issues.
The fund seeks to achieve both income and price appreciation.
Short-term Investment Fund: This fund invests in high quality, cash
equivalent type of securities normally maturing in one year or less. While the
fund may invest in United States Government instruments with maturities of up to
two years, the maximum average maturity of the fund's holding will not exceed
one year. This investment fund offers substantial liquidity and capital
preservation.
Loan Fund: The Loan Fund consists of Loans to Participants (see Loans to
Participants).
F-6
<PAGE> 28
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Withdrawal of Funds
After Termination of Employment
When a Participant terminates employment, the Participant or the
Participant's beneficiaries may elect to have the benefits distributed in a lump
sum at the next valuation date, in a lump sum at some other valuation date
within 13 months of termination or in equal annual installments over a period
not to exceed ten years.
In-Service Withdrawals
In-service withdrawals of pre-tax Participant contributions may be made
only in the event of hardship or if the Participant has attained age 59 1/2.
Hardship withdrawals are subject to regulations of the Internal Revenue Service.
Post-tax Participant contributions may be withdrawn as of any valuation
date after giving at least ten days' written notice, but only twice every Plan
year.
Bank contributions and earnings thereon, and earnings on Participant
contributions that are not pre-tax deferrals may be withdrawn as of any
valuation date, subject to certain restrictions.
Loans to Participants
All active employees who are Participants in the Plan are eligible to
borrow against their vested account balance three times within a 12-month
period.
The Participant shall complete a loan application and a promissory note
provided by the Committee. The promissory note and other loan documentation
shall provide that the outstanding loan balance shall be secured by the
Participant's vested account balance. The minimum loan shall be $1,000 except
for residential loans, for which the minimum shall be $5,000. The maximum loan
shall not exceed 50% of the Participant's vested account balance, subject to a
maximum outstanding loan balance of $50,000. The $50,000 limit is reduced by the
Participant's highest outstanding loan balance during the prior 12 months.
The period of repayment shall be determined by the Committee, except that
it may not exceed five years, unless the loan is used to acquire the principal
residence of the Participant, in which case the loan term may not exceed 15
years. The interest on a loan shall be the commercial bank prime rate as set
forth in The Wall Street Journal on the first business day of the month in which
the loan is requested. Such rate shall remain in effect until maturity or
termination of the loan.
Plan Termination
While the Bank has not expressed any intent to terminate the Plan, it may
do so at any time, subject to the provisions set forth in ERISA. In the event of
termination of the Plan, all amounts credited to Participants' accounts become
fully vested and distributable as in the same manner as if the Participant's
service had been terminated.
Plan Amendments
On June 26, 1995 a definitive agreement (the "Agreement") was executed
which outlined the principal elements of a proposed acquisition by Independence
Community Bank Corp. ("ICBC"), the holding company of the Bank, of Bay Ridge
Bancorp Inc. ("BRB"), the holding company for Bay Ridge Federal Savings Bank
("BRFSB"). The acquisition was consummated on January 3, 1996.
Under the terms of the Agreement, employees of BRB and BRFSB who are
employed by ICBC or the Bank are entitled to full credit for each year of
service with BRFSB for purposes of determining eligibility for
F-7
<PAGE> 29
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
participation and vesting, but not benefit accruals, in ICBC's or the Bank's
employee benefit plans, subject to applicable break-in-service rules.
Notwithstanding the above, each person employed by BRB or BRFSB prior to
acquisition who became an employee of ICBC or the Bank immediately following the
acquisition (each a "New Employee") was entitled, as an employee of ICBC or the
Bank, to participate in such employee benefit plans as are in effect generally
for employees of ICBC or the Bank and its subsidiaries from time to time (the
"ICBC Plans") if such New Employee shall be eligible or selected for
participation therein. New Employees are eligible to participate on the same
basis as similarly situated employees of ICBC or the Bank. All such
participation shall be subject to the terms of the ICBC Plans as may be in
effect from time to time. As a result of the acquisition, total assets
consisting of $2,248,519 in cash were transferred from the BRFSB 401(k) plan to
the Plan's Short-term Investment Fund during the 1996 Plan year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared on an accrual
basis.
Investment Valuation -- Trustee's Funds
The Trustee's valuation of the shares owned by the Plan is based upon
quoted redemption prices on the last business day of the year.
In the absence of an ascertainable market value, investments are valued at
their fair value as determined by the officers of the Trustee using methods and
procedures reviewed and approved by the officers of the Trustee.
Securities transactions are recorded on a trade date basis. Realized gain
and loss from securities transactions are recorded on a specific cost basis.
Dividend income is recognized on the ex-dividend date or when the dividend
information is known; interest income, including, where applicable, amortization
of discount and premium on investments and zero coupon bonds, is recognized on
the accrual basis.
Risk and Uncertainties
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.
3. PLAN INVESTMENTS
The fair value of individual investments that represent 5% or more of the
Plan's net assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Core Equity Fund.................................... $3,496,458 $2,388,715
Emerging Growth Fund................................ 1,098,291 590,164
Short-Term Investment Fund.......................... 4,865,294 4,430,232
Actively Managed Bond Fund.......................... 746,079 702,582
Value Equity Fund................................... 725,623 436,611
Loans to Participants............................... 873,570 821,325
</TABLE>
F-8
<PAGE> 30
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. ADMINISTRATIVE EXPENSES
Administrative expenses are paid directly by the Bank and are not included
in the accompanying financial statements.
5. TAX STATUS
The Plan has received a favorable determination letter dated May 18, 1995
from the Internal Revenue Service stating that the Plan qualifies under 401(a)
of the Internal Revenue Code (the "IRC") and that the related Trust is exempt
from federal income taxes under the provisions of Section 501(a) of the IRC. The
Plan has been subsequently amended, and management of the Plan expects these
amendments will allow the Plan to remain qualified and the related Trust to
maintain its tax-exempt status.
6. FUND ACTIVITY
Fund activity for the year ended December 31, 1996
<TABLE>
<CAPTION>
ACTIVELY
CORE EMERGING VALUE INTERNATIONAL SHORT-TERM INTERMEDIATE- MANAGED
LOANS EQUITY GROWTH EQUITY EQUITY FUND INVESTMENT TERM BOND BOND TOTAL
-------- ---------- ---------- -------- ------------- ---------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1995.......... $821,325 $2,388,715 $ 590,164 $436,611 $ 27,204 $4,430,232 $ 335,680 $ 702,582 $ 9,732,513
Additions:
Employee
contributions... -- 266,386 131,590 89,770 32,048 299,418 53,476 88,639 961,327
Employer
contributions... -- 142,803 63,170 44,299 8,872 189,683 25,810 46,565 521,202
Interest on
loans........... -- 19,527 5,529 5,237 2,340 26,556 3,146 5,892 68,227
Net realized gains
and unrealized
appreciation in
fair value of
investments..... -- 588,130 187,279 138,034 4,507 247,217 17,725 23,545 1,206,437
-------- ---------- ---------- -------- -------- ---------- -------- --------- -----------
Total additions..... -- 1,016,846 387,568 277,340 47,767 762,874 100,157 164,641 2,757,193
Distributions:
Payments to
participants.... -- (195,712) (56,424) (59,351) (28,517) (1,901,768) (49,001) (102,945) (2,393,718)
-------- ---------- ---------- -------- -------- ---------- -------- --------- -----------
Total
distributions..... -- (195,712) (56,424) (59,351) (28,517) (1,901,768) (49,001) (102,945) (2,393,718)
Transfers:
Transfers from
former
trustee......... -- -- -- -- -- 2,248,519 -- -- 2,248,519
Transfers between
funds........... 52,245 286,609 176,983 71,023 43,316 (674,563) 62,586 (18,199) --
-------- ---------- ---------- -------- -------- ---------- -------- --------- -----------
Total transfers..... 52,245 286,609 176,983 71,023 43,316 1,573,956 62,586 (18,199) 2,248,519
-------- ---------- ---------- -------- -------- ---------- -------- --------- -----------
Balances at December
31, 1996.......... $873,570 $3,496,458 $1,098,291 $725,623 $ 89,770 $4,865,294 $ 449,422 $ 746,079 $12,344,507
======== ========= ========= ======== ========== ========= ========== ========= ==========
</TABLE>
F-9
<PAGE> 31
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fund activity for the year ended December 31, 1995
<TABLE>
<CAPTION>
ACTIVELY
CORE EMERGING VALUE INTERNATIONAL SHORT-TERM INTERMEDIATE- MANAGED
LOANS EQUITY GROWTH EQUITY EQUITY FUND INVESTMENT TERM BOND BOND TOTAL
-------- ---------- -------- -------- ------------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1994............. $731,798 $1,494,529 $303,013 $259,821 $ -- $4,321,176 $ 313,271 $ 636,105 $8,059,713
Additions:
Employee
contributions...... -- 174,006 62,940 55,853 3,507 261,578 30,063 60,908 648,855
Employer
contributions...... -- 112,755 36,281 33,052 1,504 188,506 20,783 42,141 435,022
Interest on loans.... -- 15,178 2,839 2,692 209 24,256 2,150 4,419 51,743
Net realized gains
and unrealized
appreciation in
fair value of
investments........ -- 609,541 151,685 101,602 1,333 226,060 39,441 101,446 1,231,108
-------- ---------- -------- -------- ------- ---------- -------- -------- ----------
Total additions........ -- 911,480 253,745 193,199 6,553 700,400 92,437 208,914 2,366,728
Distributions:
Payments to
participants....... -- (73,000) (17,171) (13,610) -- (413,823) (57,477) (118,847) (693,928)
-------- ---------- -------- -------- ------- ---------- -------- -------- ----------
Total distributions.... -- (73,000) (17,171) (13,610) -- (413,823) (57,477) (118,847) (693,928)
Transfers between
funds................ 89,527 55,706 50,577 (2,799) 20,651 (177,521) (12,551) (23,590) --
-------- ---------- -------- -------- ------- ---------- -------- -------- ----------
Balances at December
31, 1995............. $821,325 $2,388,715 $590,164 $436,611 $27,204 $4,430,232 $ 335,680 $ 702,582 $9,732,513
======== ========== ======== ======== ======= ========== ======== ======== ==========
</TABLE>
7. SUBSEQUENT EVENTS
On April 18, 1997, the Board of Directors of the Bank and of ICBC
unanimously adopted a plan to convert ICBC from a New York State chartered
mutual holding company to a New York State chartered stock institution which
shall concurrently merge with the Bank and reorganize the Bank into the stock
holding company form of organization (the "Conversion").
Pursuant to the Conversion, the Bank will issue all of its capital stock to
a new holding company, which will offer and sell shares of its common stock. In
addition, the Bank and ICBC will have amended the Plan to provide that
participants of the Plan be able to direct the Trustee of the Plan to purchase
common stock attributed to the Conversion with amounts in the Plan attributable
to such participants.
The registration statement pertaining to the Conversion was filed with the
Securities and Exchange Commission on July 3, 1997.
F-10
<PAGE> 32
SUPPLEMENTAL SCHEDULES
<PAGE> 33
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES COST FAIR VALUE
------- ---------- -----------
<S> <C> <C> <C>
Core Equity Fund........................................ 57,898 $2,162,597 $ 3,496,458
Emerging Growth Fund.................................... 16,247 715,437 1,098,291
Value Equity Fund....................................... 16,548 494,764 725,623
International Equity Fund............................... 1,958 86,257 89,770
Short-Term Investment Fund.............................. 237,563 4,226,587 4,865,294
Intermediate-Term Bond Fund............................. 14,981 379,238 449,422
Actively Managed Bond Fund.............................. 23,491 587,294 746,079
Loans to participants maturing less than five years..... -- -- 819,303
Loans to participants maturing greater than five years.. -- -- 54,267
---------- -----------
Total investments............................. $8,652,174 $12,344,507
========== ===========
</TABLE>
S-1
<PAGE> 34
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
REPORTABLE TRANSACTIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TOTAL NUMBER TOTAL
NUMBER OF PURCHASE OF SELLING
SECURITY OR PARTY INVOLVED DESCRIPTION OF ASSETS PURCHASES PRICE SALES PRICE
- ----------------------------------- -------------------------- --------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Category (i) -- A single
transaction in excess of 5% of
the current value of plan assets: Short-term Investment Fund 1 $1,589,055 1 $ 758,270
1 659,460 -- --
Category (ii) -- A series of
transactions with or in
conjunction with the same person
involving property other than
securities, which amount in the
aggregate to more than 5% of the
current value of plan assets: N/A
Category (iii) -- A series of
transactions with respect to
securities of the same issue
which amount in the aggregate to
more than 5% of the current value
of total plan assets: Short-term Investment Fund 86 698,157 129 2,016,355
Core Equity Fund 98 873,407 -- --
Category (iv) -- Any transaction
with respect to securities with
or in conjunction with a person
if a prior subsequent single
transaction has occurred with
respect to securities with or in
conjunction with that same person
in an amount in excess of 5% of
the current value of plan assets: N/A
</TABLE>
S-2
<PAGE> 35
INDEPENDENCE SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
INVESTMENT FORM
---------------------
Name of Plan Participant: ___________________________
Social Security Number: ___________________________
1. INSTRUCTIONS. In connection with the proposed reorganization
of Independence Savings Bank and its parent mutual holding company (the
"Conversion"), the Independence Savings Bank 401(k) Savings Plan in RSI
Retirement Trust ("Profit Sharing Plan") has been amended to permit
participants to direct their current account balances for their Basic
Contribution Accounts, Matching Contribution Accounts, After-Tax Contribution
Account, Former Employer Accounts and Rollover Account into a new fund: the
Employer Stock Fund. The percentage of a participant's account transferred at
the direction of the participant into the Employer Stock Fund will be used to
purchase shares of common stock of Independence Community Bank Corp. (the
"Common Stock").
To direct a transfer of all or part of the funds credited to your
Accounts to the Employer Stock Fund, you should complete and file this form with
the Human Resources Department, no later than January 16, 1998. A representative
for the Plan Administrator will retain a copy of this form and return a copy to
you. If you need any assistance in completing this form, please contact Rosemary
A. Traina. If you do not complete and return this form to the Plan
Administrator by January 16, 1998, the funds credited to your accounts under the
Plan will continue to be invested in accordance with your prior investment
direction, or in accordance with the terms of the Plan if no investment
direction has been provided.
2. INVESTMENT DIRECTIONS. I hereby authorize the Plan
Administrator to direct the Trustee to sell the units currently credited to my
Basic Contribution Accounts, Matching Contribution Accounts, After-Tax
Contribution Account, Former Employer Accounts and Rollover Account and to
purchase units in the Employer Stock Fund. Transfers of units from existing
investment accounts must be in multiples of 1% or whole percentages. Purchases
of units in the Employer Stock Fund will always be 100%.
<TABLE>
<CAPTION>
================================================================================
SELL UNITS FROM Purchase Units in Employer Stock Fund
<S> <C>
--------------------------------------------------------------------------------
Sell ____% of A -- Core Equity ____%
--------------------------------------------------------------------------------
Sell ____% of B -- Emerging Growth Equity ____%
--------------------------------------------------------------------------------
Sell ____% of C -- Value Equity ____%
--------------------------------------------------------------------------------
Sell ____% of D -- Intermediate Term Bond ____%
--------------------------------------------------------------------------------
Sell ____% of E -- Actively Managed Bond ____%
--------------------------------------------------------------------------------
Sell ____% of F -- International Equity ____%
--------------------------------------------------------------------------------
Sell ____% of G -- Short Term ____%
================================================================================
</TABLE>
3. PURCHASER INFORMATION. The ability of participants in the
Profit Sharing Plan to purchase Common Stock in the Conversion and to direct
their current balances into the Employer Stock Fund is based upon the
participant's status as an Eligible Account Holder and/or Supplemental Eligible
Account Holder. To the extent your order cannot be filled with Common Stock
purchased in the Conversion, the amount not used to purchase Common Stock will
be returned to the other investment funds of the Profit Sharing Plan pursuant to
your existing investment directions. Please indicate your status.
a. [] Eligible Account Holder-Check here if you were a
depositor with $100.00 or more on deposit with
Independence Savings Bank as of March 31, 1996.
b. [] Supplemental Eligible Account Holder-Check here if you
were a depositor with $100.00 or more on deposit with
Independence Savings Bank as of September 30, 1997, but
are not an Eligible Account Holder.
4. ACKNOWLEDGEMENT OF PARTICIPANT. I understand that this
Investment Form shall be subject to all of the terms and conditions of the
Profit Sharing Plan. I acknowledge that I have received a copy of the
Prospectus and the Prospectus Supplement.
- ----------------------------------- ----------
Signature of Participant Date
- -------------------------------------------------------------------------------
ACKNOWLEDGEMENT OF RECEIPT BY ADMINISTRATOR. This Investment Form was received
by the Plan Administrator and will become effective on the date noted below.
- ----------------------------------- ----------
By: Date
<PAGE> 36
PROSPECTUS
INDEPENDENCE COMMUNITY BANK CORP. LOGO
(PROPOSED HOLDING COMPANY FOR INDEPENDENCE SAVINGS BANK)
UP TO 61,226,852 SHARES OF COMMON STOCK
Independence Community Bank Corp. (the "Company"), a Delaware corporation,
is offering up to 61,226,852 shares of its common stock, par value $.01 per
share (the "Common Stock"), in connection with the reorganization of
Independence Savings Bank (the "Bank") and the mutual holding company parent of
the Bank (the "Mutual Holding Company") to the stock form of organization
pursuant to the Bank's and the Mutual Holding Company's Plan of Conversion (the
"Plan" or "Plan of Conversion"). The simultaneous conversion of the Mutual
Holding Company to stock form, the cancellation of the shares owned by the
Mutual Holding Company in the Bank, the issuance of the Bank's common stock to
the Company and the offer and sale of the Common Stock by the Company are
collectively referred to herein as "Conversion." Under certain circumstances,
the Company may increase the amount of Common Stock offered hereby to up to
70,410,880 shares. (See Footnote 4 to the table below.)
(continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" AT PAGE 14.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK, THE
NEW YORK STATE BANKING BOARD, THE NEW YORK STATE BANKING DEPARTMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, OR ANY OTHER FEDERAL OR STATE AGENCY OR STATE
SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, SUPERINTENDENT, BOARD,
DEPARTMENT, CORPORATION OR ANY STATE SECURITIES COMMISSIONER OR OTHER AGENCY
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND OR THE SAVINGS
ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR THE BANK. THE
COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
=================================================================================================================
ESTIMATED
UNDERWRITING
FEES AND ESTIMATED
SUBSCRIPTION CONVERSION NET
PRICE(1) EXPENSES(2) PROCEEDS(3)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share............................................. $10.00 $0.28 $9.72
- -----------------------------------------------------------------------------------------------------------------
Midpoint Per Share............................................ $10.00 $0.26 $9.74
- -----------------------------------------------------------------------------------------------------------------
Maximum Per Share............................................. $10.00 $0.25 $9.75
- -----------------------------------------------------------------------------------------------------------------
Maximum Per Share, as adjusted................................ $10.00 $0.23 $9.77
- -----------------------------------------------------------------------------------------------------------------
Total Minimum(1).............................................. $452,546,300 $12,689,598 $439,856,702
- -----------------------------------------------------------------------------------------------------------------
Total Midpoint(1)............................................. $532,407,410 $13,883,522 $518,523,888
- -----------------------------------------------------------------------------------------------------------------
Total Maximum(1).............................................. $612,268,520 $15,077,446 $597,191,074
- -----------------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted(4)................................. $704,108,800 $16,450,458 $687,658,342
=================================================================================================================
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") dated as of June 20, 1997, as most recently
updated as of October 29, 1997, which states that the estimated pro forma
market value of the Common Stock being offered for sale in the Conversion
ranged from $452.5 million to $612.3 million with a midpoint of $532.4
million based upon the assumption, among others, that the Company will make
a contribution to the Independence Community Foundation of an amount of
Common Stock equal to 8% of the Common Stock sold in the Conversion (the
"Valuation Range"). The independent appraisal of RP Financial is based upon
estimates and projections that are subject to change and the valuation must
not be construed as a recommendation as to the advisability of purchasing
the Common Stock nor an assurance that a purchaser of Common Stock will
thereafter be able to sell the Common Stock at prices within the Valuation
Range. Based on the Valuation Range, the Boards of Directors of the Bank and
the Company established an estimated price range of the Common Stock being
offered for sale in the Conversion within the Valuation Range of $452.5
million to $612.3 million (the "Estimated Price Range") or between
45,254,630 and 61,226,852 shares of Common Stock issued at the $10.00 per
share price (the "Purchase Price") to be paid for each share of Common Stock
subscribed or purchased in the Offerings as hereinafter defined. See "The
Conversion -- Stock Pricing and Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company to be incurred
in connection with the Conversion, including estimated fixed expenses of
approximately $6.0 million and marketing fees to be paid to Sandler O'Neill
and Partners, L.P. ("Sandler O'Neill" or the "Agent") in connection with the
Offerings, which fees are estimated to be between $6.7 million and $9.1
million based on the minimum and the maximum of the Estimated Price Range,
respectively. See "The Conversion -- Marketing Arrangements." The actual
fees and expenses may vary from the estimates. Such fees paid to Sandler
O'Neill may be deemed to be underwriting fees. See "Pro Forma Data."
(3) Actual net proceeds may vary substantially from estimated amounts depending
on the number of shares sold in the Offerings and other factors. Gives
effect to the purchase of shares of Common Stock by the Employee Stock
Ownership Plan (the "ESOP"), which initially will be deducted from the
Company's stockholders' equity. For the effects of such purchases, see
"Capitalization," "Use of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation of
subscribers or any right of cancellation, due to regulatory considerations
or changes in market or general financial and economic conditions. See "Pro
Forma Data" and "The Conversion -- Stock Pricing and Number of Shares to be
Issued." For a discussion of the distribution and allocation of the
additional shares, if any, see "The Conversion -- The
Offerings -- Subscription Offering," "-- Community Offering" and
"-- Limitations on Common Stock Purchases."
------------------------
Sandler O'Neill & Partners, L.P.
The date of this Prospectus is December 31, 1997.
<PAGE> 37
Non-transferable rights to subscribe for the Common Stock in a subscription
offering (the "Subscription Offering") have been granted in the following order
of priority to: (1) the Bank's Eligible Account Holders (defined as holders of
deposit accounts totaling $100 or more as of March 31, 1996); (2) the Company's
ESOP, which intends to subscribe for up to 8% of the Common Stock issued in
connection with the Conversion (excluding any shares contributed to the
Foundation (as hereinafter defined); and (3) the Bank's Supplemental Eligible
Account Holders (defined as holders of deposit accounts totaling $100 or more as
of September 30, 1997). Subscription rights are non-transferable. PERSONS FOUND
TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE SUBJECT TO FORFEITURE OF SUCH
RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE NEW YORK
STATE BANKING DEPARTMENT ("DEPARTMENT"). Certificates representing shares of
Common Stock purchased in the Subscription Offering must be registered in the
name of the Eligible Account Holder or Supplemental Eligible Account Holder, as
the case may be. Joint stock registration will be allowed only if the qualifying
deposit account is so registered. Upon completion of the Subscription Offering,
and subject to the other limitations described herein, the Company will offer
any shares of Common Stock not subscribed for in the Subscription Offering for
sale in a community offering (the "Community Offering"). It is anticipated that
shares of Common Stock not subscribed for in the Subscription Offering and
Community Offering, if any, will be offered by the Company in a syndicated
community offering through a syndicate of registered broker-dealers to be formed
(the "Syndicated Community Offering") (the Subscription Offering, Community
Offering and any Syndicated Community Offering are referred to collectively as
the "Offerings").
Except for the ESOP, no Eligible Account Holder or Supplemental Eligible
Account Holder may, in their respective capacities as such, purchase in the
Subscription Offering more than $500,000 of Common Stock; no person, together
with associates and persons acting in concert with such person, may purchase in
the Community Offering and Syndicated Community Offering more than $500,000 of
Common Stock; and no person, together with associates of and persons acting in
concert with such person, may purchase in the aggregate more than the overall
maximum purchase limitation of 1.0% of the total number of shares of Common
Stock sold in the Conversion; provided, however, such overall purchase
limitation may be increased and the amount that may be subscribed for may be
increased at the sole discretion of the Bank and the Company without further
approval of subscribers or the Bank's depositors. The minimum purchase is 25
shares. See "The Conversion -- The Offerings -- Subscription Offering,"
"-- Community Offering" and "-- Limitations on Common Stock Purchases."
The Bank and the Company have engaged Sandler O'Neill to consult with and
advise the Company and the Bank in the Offerings and Sandler O'Neill has agreed
to assist the Company and the Bank with the solicitation of subscriptions and
purchase orders for shares of Common Stock in the Offerings. Sandler O'Neill is
not obligated to take or purchase any shares of Common Stock in the Offerings.
The Bank and the Company will pay a fee to Sandler O'Neill which will be based
on the aggregate Purchase Price of the Common Stock sold in the Offerings. The
Company and the Bank have agreed to indemnify Sandler O'Neill against certain
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). See "The Conversion -- Marketing Arrangements."
Pursuant to the Plan, the Bank intends to establish the Independence
Community Foundation, a private charitable foundation (the "Foundation"), in
connection with the Conversion. The Plan provides that the Bank and the Company
will create the Foundation and fund it with shares of Common Stock contributed
by the Company from authorized but unissued shares in an amount equal to 8.0% of
the number of shares of Common Stock sold in the Offerings. The Foundation is
intended to complement the Bank's existing community reinvestment activities and
will be dedicated to the promotion of charitable purposes including, among other
things, health, education and welfare programs, community development
activities, cultural efforts, not-for-profit groups and other charitable
purposes within the communities served by the Bank. For a discussion of the
Foundation and its effects on the Conversion, see "Risk Factors -- Effects of
the Establishment of the Foundation," "Pro Forma Data," "Comparison of Valuation
and Pro Forma Information with No Foundation" and "The
Conversion -- Establishment of the Foundation."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT 3:00 P.M., EASTERN TIME, ON
JANUARY 29, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY THE BANK AND THE
COMPANY, WITH APPROVAL OF THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK
("SUPERINTENDENT") AND THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"),
IF NECESSARY. THE COMMUNITY OFFERING AND/OR ANY SYNDICATED COMMUNITY OFFERING
MUST BE COMPLETED WITHIN 45 DAYS AFTER THE CLOSE OF THE SUBSCRIPTION OFFERING,
UNLESS EXTENDED BY THE BANK AND THE COMPANY WITH THE APPROVAL OF THE
SUPERINTENDENT AND THE FDIC, IF NECESSARY. Orders submitted are irrevocable
until the completion of the Conversion; provided that, if the Conversion is not
completed within the 45-day period referred to above, unless such period has
been extended with the consent of the Superintendent and the FDIC, if necessary,
all subscribers will have their funds returned promptly with interest, and all
withdrawal authorizations will be cancelled. The completion of the Subscription
Offering is subject to potential delay and subscribers will have no access to
funds used to subscribe for shares of Common Stock, regardless of any such
delay. In addition, orders for Common Stock submitted by subscribers in the
Subscription Offering or purchasers in the Community Offering which aggregate
$50,000 or more must be paid by official bank or certified check, a check issued
by a NASD-registered broker-dealer or by a withdrawal authorization from a
deposit account at the Bank. See "The Conversion -- The
Offerings -- Subscription Offering."
The consummation of the Conversion is subject to the approval of depositors
of the Bank having deposit accounts totaling $100 or more as of September 30,
1997 ("Voting Depositors").
The Company has received approval from the Nasdaq Stock Market, conditioned
on the consummation of the Conversion, to have its Common Stock quoted on the
Nasdaq National Market under the symbol "ICBC." Prior to this offering there has
not been a public market for the Common Stock, and there can be no assurance
that an active and liquid trading market for the Common Stock will develop, or
that resales of the Common Stock can be made at or above the Purchase Price. To
the extent an active and liquid trading market does not develop, the liquidity
and market value of the Common Stock may be adversely affected. See "Risk
Factors -- Absence of Market for Common Stock" and "Market for the Common
Stock."
ii
<PAGE> 38
[MAP]
iii
<PAGE> 39
SUMMARY OVERVIEW
The following summary of the Conversion and the Offerings is qualified in
its entirety by the more detailed information appearing elsewhere in this
Prospectus.
Risk Factors............... See "Risk Factors" for a discussion of certain
factors that should be considered by prospective
investors.
The Bank................... Independence Savings Bank is a New York-chartered
savings bank.
The Company................ Independence Community Bank Corp. is a Delaware
corporation organized in June 1997 to become the
savings and loan holding company of the Bank. To
date, the Company has not engaged in any business.
The Conversion............. The Board of Directors of the Bank and the Board of
Trustees of the Mutual Holding Company have adopted
a Plan of Conversion. The Company is offering
shares of its Common Stock in the Offerings in
connection with the reorganization of the Bank and
the Mutual Holding Company to the stock form of
organization.
The Independence Community
Foundation............... The Plan of Conversion provides for the
establishment of a charitable foundation in
connection with the Conversion. The Foundation,
which will be incorporated under Delaware law as a
nonstock corporation, will be funded immediately
upon completion of the Conversion with a
contribution of Common Stock by the Company in an
amount equal to 8% of the Common Stock sold in the
Conversion. See "The Conversion -- Establishment of
the Foundation."
Terms of the Offerings..... The shares of Common Stock to be sold in connection
with the Conversion are being offered at the
Purchase Price of $10.00 per share in the
Subscription Offering pursuant to subscription
rights in the following order of priority: (i)
Eligible Account Holders; (ii) the Company's ESOP;
and (iii) Supplemental Eligible Account Holders.
Upon completion of the Subscription Offering, any
shares of Common Stock not subscribed for in the
Subscription Offering will be offered in the
Community Offering at $10.00 per share to certain
members of the general public to whom a copy of
this Prospectus is delivered. Subscription rights
will expire if not exercised by 3:00 p.m., Eastern
Time, January 29, 1998 unless extended by the Bank
and the Company. See "The Conversion -- The
Offerings -- Subscription Offering" and "-- The
Offerings -- Community Offering."
Exercise of Subscription
Rights..................... Persons desiring to subscribe for shares must do so
prior to the Expiration Date by delivering to the
Bank a properly executed stock order and
certification form together with full payment. The
stock order form and payment must be physically
received by the Bank at the above referenced time
and date. Risk of delivery is on the prospective
investor. Once tendered, subscription orders cannot
be revoked or modified without the consent of the
Bank. See "The Conversion -- Procedure for
Purchasing Shares in the Offerings."
Payment for Shares......... Payment for subscriptions may be made: (i) in cash
(if delivered in person); (ii) by check or money
order; or (iii) by authorization of withdrawal from
deposit accounts maintained at the Bank. Orders for
Common Stock submitted by subscribers in the
Subscription Offering or by purchasers in the
Community Offering which aggregate $50,000 or
1
<PAGE> 40
more must be paid by official bank or certified
check, a check issued by a National Association of
Securities Dealers, Inc. ("NASD") registered
broker-dealer or by withdrawal authorization from a
deposit account at the Bank. See "The
Conversion -- Procedure for Purchasing Shares in
the Offerings."
Nontransferability of
Subscription Rights........ The subscription rights of Eligible Account Holders
and Supplemental Eligible Account Holders are
nontransferable. Certificates representing shares
of Common Stock purchased in the Subscription
Offering must be registered in the name of the
Eligible Account Holder or the Supplemental
Eligible Account Holder, as the case may be. Joint
stock registration will be allowed only if the
qualifying deposit account is so registered. See
"The Conversion -- Restrictions on Transfer of
Subscription Rights and Shares."
Purchase Limitations....... No Eligible Account Holder or Supplemental Eligible
Account Holder may purchase in the Subscription
Offering more than $500,000 of Common Stock. No
person, together with associates or persons acting
in concert with such person, may purchase in the
Community Offering and the Syndicated Community
Offering more than $500,000 of Common Stock. Except
for the ESOP, no person, together with associates
or persons acting in concert with such person, may
purchase in the aggregate more than 1% of the
Common Stock sold. The minimum purchase is 25
shares of Common Stock.
Securities Offered and
Purchase Price............. The Company is offering between 45,254,630 and
61,226,852 shares of Common Stock at a Purchase
Price of $10.00 per share. The maximum number of
shares offered may be increased under certain
circumstances to up to 70,410,880 shares of Common
Stock. See "The Conversion -- Stock Pricing and
Number of Shares to be Issued."
Appraisal.................. The Purchase Price per share has been fixed at
$10.00. The total number of shares to be issued in
the Conversion is based upon an independent
appraisal prepared by RP Financial, dated as of
June 20, 1997, as most recently updated as of
October 29, 1997, which states that the estimated
pro forma market value of the Common Stock issued
in the Offerings ranged from $452.5 million to
$612.3 million. The final aggregate value will be
determined at the time of closing of the Offerings
and is subject to change due to changing market
conditions and other factors. See "The
Conversion -- Stock Pricing and Number of Shares to
be Issued."
Use of Proceeds............ The Company will use 50% of the net proceeds of the
Offering to purchase all the common stock of the
Bank to be issued in the Conversion. A portion of
net proceeds retained by the Company will be used
for general activities, including a loan by the
Company to the ESOP to enable the ESOP to purchase
up to 8% of the Common Stock sold in the
Conversion. The Company intends to initially invest
the remaining net proceeds primarily in investment
securities, mortgage-backed and mortgage-related
securities and equity securities. The Bank intends
to utilize net proceeds for general business
purposes. See "Use of Proceeds."
Dividend Policy............ Upon Conversion, the Board of Directors of the
Company will have the authority to declare
dividends on the Common Stock, subject to statu-
2
<PAGE> 41
tory and regulatory requirements. In the future,
the Board of Directors of the Company may consider
a policy of paying cash dividends on the Common
Stock. However, no decision has been made with
respect to such dividends, if any. See "Dividend
Policy."
Benefits of the Conversion
to Management.............. The Company's directors and executive officers will
receive certain additional benefits as a result of
the Conversion. See "Management -- Change in
Control Agreements," "-- Benefits -- Employee Stock
Ownership Plan," "-- Stock Option Plan" and
"-- Recognition Plan."
Voting Control of Officers
and Directors.............. Directors and executive officers of the Bank and
the Company expect to purchase approximately 1.0%
or 0.8% of shares of Common Stock to be issued,
based upon the minimum and the maximum of the
Estimated Price Range, respectively. Assuming the
implementation of the ESOP, the Stock Option Plan
and the Management Recognition and Retention Plan
("Recognition Plan"), directors, executive officers
and employees have the potential to control the
voting of approximately 20.9% or 20.7% of the then
outstanding shares of Common Stock at the minimum
and the maximum of the Estimated Price Range,
respectively. Additionally, the Foundation will
hold Common Stock in an amount equal to 8% of the
Common Stock sold in the Conversion. If the FDIC
and the Department grant waivers of a condition
imposed on the Foundation which requires the Common
Stock held by the Foundation to be voted in the
same ratio as all other shares of Common Stock,
such shares of Common Stock may be voted as
directed by the Board of Directors of the
Foundation, a majority of which will also be
directors or officers of the Company and the Bank.
See "The Conversion -- Establishment of the
Charitable Foundation,"
"Management -- Subscriptions by Executive Officers
and Directors," and "Restrictions on Acquisition of
the Company and the Bank -- Restrictions in the
Company's Certificate of Incorporation and Bylaws."
Expiration Date for the
Subscription Offering.... The expiration date of the Subscription Offering is
3:00 p.m., Eastern Time, on January 29, 1998 unless
extended by the Bank and the Company. See "The
Conversion -- The Offering -- Subscription
Offering."
Market for Stock........... The Company has received conditional approval to
have its Common Stock quoted on the Nasdaq National
Market under the symbol "ICBC." See "Market for the
Common Stock."
No Board Recommendation.... The Company's and the Bank's Boards of Directors
make no recommendation to depositors or other
potential investors regarding suitability of
investment in the Common Stock. An investment in
the Common Stock must be made pursuant to each
investor's evaluation of his or her best interests.
Stock Conversion Center.... If you have any questions regarding the Conversion,
call the Stock Conversion Center at (718) 246-6800.
3
<PAGE> 42
SUMMARY
This summary is qualified in its entirety by the more detailed information
regarding the Bank and the Company and the Consolidated Financial Statements of
the Bank appearing elsewhere in this Prospectus. This Prospectus contains
certain forward looking statements consisting of estimates with respect to the
financial condition, results of operations and business of the Company and the
Bank. Prospective investors are cautioned that such forward looking statements
are not guarantees of future performance and are subject to various factors
which could cause actual results to differ materially from these estimates.
These factors include changes in general economic and market conditions, and the
development of an interest rate environment that adversely affects the interest
rate spread or other income anticipated from the Company's and the Bank's
operations and investments. See "Risk Factors" for a discussion of other factors
that might cause actual results to differ from such estimates.
INDEPENDENCE COMMUNITY BANK CORP.
Independence Community Bank Corp. is a Delaware corporation organized by
the Bank in June 1997 for the purpose of holding all of the capital stock of the
Bank and in order to facilitate the Conversion. The Company will purchase all of
the common stock of the Bank to be issued upon Conversion in exchange for 50% of
the net Conversion proceeds, with the remaining net proceeds to be retained by
the Company for general business purposes, including making a loan to the ESOP.
Upon completion of the Conversion, the only significant assets of the Company
will be all of the outstanding common stock of the Bank, the note evidencing the
Company's loan to the ESOP and the portion of the net proceeds from the
Offerings retained by the Company. The business of the Company will initially
consist of the business of the Bank. See "Business" and "Regulation -- The
Company."
INDEPENDENCE SAVINGS BANK
Independence Savings Bank is a New York-chartered savings bank that was
originally chartered as a mutual savings bank in 1850. In April 1992, the Bank
reorganized into the mutual holding company form of organization pursuant to
which the Bank became a wholly-owned stock savings bank subsidiary of the Mutual
Holding Company. The reorganization into the mutual holding company form of
organization was effected in order to acquire The Long Island City Financial
Corporation. At August 31, 1997, the Bank had total assets of $3.79 billion,
total liabilities of $3.47 billion, including $3.37 billion of deposits, and
total equity of $324.8 million. The Bank reported net income of $11.0 million
and $11.8 million during the five months ended August 31, 1997 and 1996,
respectively, and net income of $17.2 million, $36.0 million and $34.9 million
during the years ended March 31, 1997, 1996 and 1995, respectively. The Bank is
subject to regulation by the Department, as its chartering authority, and by the
FDIC as its primary federal banking regulator and as insurer of the Bank's
deposits up to applicable limits.
Headquartered in Brooklyn, New York, the Bank maintains 34 full service
offices located within the greater New York City metropolitan area of which 28
are located in the boroughs of Brooklyn and Queens with the remaining offices
located in Manhattan, the Bronx, Staten Island and Nassau County, New York. The
Bank's customer base, like the urban neighborhoods which it serves, is racially
and ethnically diverse and is comprised mostly of middle-income households and,
to a lesser degree, low to moderate income households. The Bank has sought to
set itself apart from its many competitors by tailoring its products and
services to meet the needs of its customers, by emphasizing customer service and
convenience and by being actively involved in community affairs in the
neighborhoods and communities which it serves. For example, as part of the
Bank's competitive strategy to attract loyal deposit customers, the Bank has
historically been a low service fee provider of a variety of savings and
checking account products. In furtherance of its commitment to the communities
which it serves, Bank employees at all levels are encouraged and afforded the
opportunity to participate in community outreach programs. Perhaps most
indicative of the Bank's commitment to strengthen its bond with customers and
the communities it serves is the decision to form and fund the Independence
Community Foundation. The Bank believes that this commitment to customer and
community service has permitted it to build strong customer identification and
loyalty which is essential to the Bank's ability to compete effectively.
4
<PAGE> 43
In recent years, the Bank has pursued a plan of controlled growth as part
of its strategy to achieve long-term financial strength. Because the
neighborhoods and communities served by the Bank are fully developed and
experiencing little population growth and are highly competitive banking
markets, the Bank's ability to grow has been largely dependent on the
acquisition of other financial institutions or branch offices of financial
institutions located within the strategic geographic areas which the Bank has
made a commitment to serve throughout its history. The Bank also has sought to
increase the amount and stability of its net interest income and noninterest
income while maintaining a high level of asset quality. In pursuit of these
goals, the Bank has adopted a business strategy which emphasizes residential
lending and the offering of traditional retail deposit products and services
which meet the needs of its customers.
Highlights of the Bank's strategy include the following:
- Emphasis on Controlled Growth. In recent years the Bank has sought to
increase its assets and expand its operations. These efforts have included the
acquisition of Bay Ridge Bancorp, Inc. and its wholly owned subsidiary, Bay
Ridge Federal Savings Bank (collectively "Bay Ridge"), in January 1996 with
aggregate assets of approximately $558.6 million, deposits of $445.2 million and
six branch offices located in the borough of Brooklyn. In addition, the Bank has
completed several branch purchase transactions, including the March 1996
acquisition of five branch offices located in Brooklyn and Staten Island
involving the assumption of $615.6 million of deposit liabilities. These efforts
have contributed to the growth in the Bank's assets, which increased by 58.6%
from $2.39 billion at March 31, 1993 to $3.79 billion at August 31, 1997. The
net proceeds from the Offerings will enhance significantly the capital base of
the Company and the Bank and will thereby support further growth and expansion
of operations consistent with the Bank's business strategies.
- Emphasis on Residential Lending. Management believes that the Bank is
more likely to achieve its goals of long-term financial strength and
profitability by continuing to emphasize residential loan products and services.
Given the concentration of multi-family housing units in the New York City
metropolitan area, the Bank's primary lending emphasis is the origination of
loans secured by first liens on multi-family (five or more units) residential
properties, which consist primarily of mortgage loans secured by apartment
buildings. Such loans totaled $1.49 billion or 54.7% of the total loan portfolio
at August 31, 1997. The Bank also emphasizes originations of single-family
(one-to-four units) residential mortgage loans, which totaled $552.4 million or
20.3% of the total portfolio at August 31, 1997, and cooperative apartment loans
to individuals (loans secured by shares in a cooperative housing corporation),
which totaled $392.8 million or 14.4% of the total loan portfolio at August 31,
1997.
- Maintain Asset Quality. Management believes that high asset quality is a
key to long-term financial success and, as a result, the investments which are
emphasized by the Bank are intended to maintain a high level of asset quality
and moderate credit risk. At August 31, 1997, the Bank's non-performing assets
amounted to $26.3 million, or 0.69%, of total assets. At August 31, 1997, the
Bank's allowance for loan losses amounted to $31.1 million or 119.8% of the
Bank's non-performing loans.
- Stable Source of Liquidity. The Bank purchases short to medium-term
investment securities and mortgage-backed and mortgage-related securities
combining what management believes to be appropriate liquidity, yield and credit
quality in its effort primarily to achieve a managed and predictable source of
liquidity to meet loan demand, and, to a lesser degree, a stable source of
interest income. These portfolios, which totaled $721.1 million at August 31,
1997, are comprised primarily of obligations of the U.S. Government and federal
agencies totaling $536.1 million and mortgage-backed and mortgage-related
securities totaling $167.3 million.
- Emphasis on Retail Deposits and Customer Service. The Bank's liability
strategy emphasizes retail deposits obtained through its branch offices, rather
than institutional or wholesale deposits. This strategy is facilitated by the
Bank's extensive branch network, which has enabled the Bank to emphasize more
stable savings accounts, negotiable order of withdrawal ("NOW") accounts, money
market accounts and non-interest-bearing checking accounts, which in the
aggregate amounted to $1.58 billion or 46.9% of the Bank's total deposits at
August 31, 1997. The Bank also emphasizes customer service and being a low
service fee provider of various deposit and other products.
5
<PAGE> 44
THE CONVERSION
On April 18, 1997, the Board of Directors of the Bank and the Board of
Trustees of the Mutual Holding Company adopted the Plan (and subsequently
amended it on November 5, 1997 and November 21, 1997) and in June 1997 the Bank
incorporated the Company under Delaware law for the purpose of holding all of
the capital stock of the Bank and in order to facilitate the Conversion.
Pursuant to the Plan, the Mutual Holding Company will convert to the stock form
of organization and simultaneously will merge with and into the Bank and all of
the outstanding shares of Bank common stock held by the Mutual Holding Company
will be cancelled. Pursuant to the Plan, the Company is offering shares of
Common Stock in the Offerings as part of the Conversion. Upon consummation of
the Offerings, the Company will purchase from the Bank all of the Bank's common
stock and the Bank will become a wholly owned subsidiary of the Company
operating under the name "Independence Savings Bank."
The increased capital resulting from the Offerings will support the future
expansion of the retail banking operations of the Bank and the Company, through
acquisitions or otherwise, as well as possible diversification into other
businesses. Although there are no current arrangements, understandings or
agreements regarding such opportunities, the Bank and the Company will be in a
position after the Conversion, subject to regulatory limitations and their
financial position, to take advantage of additional opportunities for such
expansion that may arise in the future. Furthermore, the additional capital
resulting from the Conversion will facilitate the Bank's ability to sustain its
continued growth and development over the long-term while maintaining its status
as a community-based, independent financial institution serving Brooklyn, Queens
and the greater New York City metropolitan area.
In accordance with Department and FDIC regulations, consummation of the
Conversion is conditioned upon the approval of the Plan by the Superintendent
and the non-objection of the FDIC, as well as (i) the approval of the holders of
at least 75% in amount of deposit liabilities of Voting Depositors represented
in person or by proxy at a special meeting of Voting Depositors called for the
purpose of submitting the Plan for approval (the "Special Meeting"), and (ii)
the approval of at least a majority of the total votes eligible to be cast by
Voting Depositors at the Special Meeting.
THE OFFERINGS
Pursuant to the Plan and in connection with the Conversion, the Company is
offering up to 61,226,852 shares of Common Stock in the Offerings. Common Stock
is first being offered in the Subscription Offering with nontransferable
subscription rights being granted, in the following order of priority, to (i)
Eligible Account Holders; (ii) the ESOP; and (iii) Supplemental Eligible Account
Holders. Subscription rights will expire if not exercised by 3:00 p.m., Eastern
Time, on January 29, 1998, unless extended.
Subscription rights are non-transferable. Persons found to be transferring
subscription rights will be subject to forfeiture of such rights and possible
further sanctions and penalties imposed by the Department. Certificates
representing shares of Common Stock purchased in the Subscription Offering must
be registered in the name of the Eligible Account Holder or Supplemental
Eligible Account Holder, as the case may be. Joint stock registration will be
allowed only if the qualifying deposit account is so registered.
Upon completion of the Subscription Offering and subject to other
limitations described herein, any shares of Common Stock not subscribed for in
the Subscription Offering will be offered by the Company in the Community
Offering to certain members of the general public to whom a copy of this
Prospectus is delivered, with preference given to natural persons residing in
counties in which the Bank maintains branch offices. It is anticipated that
shares not subscribed for in the Subscription and Community Offerings will be
offered to certain members of the general public in a Syndicated Community
Offering. The Bank and the Company reserve the absolute right to reject or
accept any orders in the Community Offering or the Syndicated Community
Offering, in whole or in part, either at the time of receipt of an order or as
soon as practicable following the Expiration Date.
The Bank and the Company have retained Sandler O'Neill as their advisor in
connection with the Offerings and to assist in soliciting subscriptions in the
Offerings. Neither Sandler O'Neill nor any registered
6
<PAGE> 45
broker-dealer shall have any obligation to take or purchase any shares of the
Common Stock in the Subscription Offering, Community Offering or Syndicated
Community Offering. However, Sandler O'Neill has agreed to use its best efforts
in the sale of shares of the Syndicated Community Offering. See "The
Conversion -- The Offerings -- Subscription Offering," "-- Community Offering,"
"-- Syndicated Community Offering" and "-- Marketing Arrangements."
PURCHASE LIMITATIONS
With the exception of the ESOP, which intends to purchase up to an
aggregate of 8.0% of the number of shares of Common Stock to be issued in the
Offerings, no Eligible Account Holder or Supplemental Eligible Account Holder
may purchase in their capacity as such in the Subscription Offering more than
$500,000 of Common Stock; no person, individually or together with associates
and persons acting in concert, may purchase in each of the Community Offering
and any Syndicated Community Offering more than $500,000 of Common Stock; and no
person, individually or together with associates of or persons acting in concert
with such person, may purchase in the Offerings more than 1% of the total number
of shares of Common Stock sold in the Conversion (452,546 shares and 612,268
shares at the minimum and maximum of the Estimated Price Range, respectively).
At any time during the Offerings, and without further approval by the Voting
Depositors or a resolicitation of subscribers, the Bank and the Company may in
their sole discretion increase any of the individual or aggregate purchase
limitations to a percentage which does not exceed 5.0% of the Common Stock
issued in the Conversion. The overall purchase limitation may not be decreased
below 1% of the Offerings. Under certain circumstances, certain subscribers may
be resolicited in the event of such an increase. The minimum purchase is 25
shares. See "The Conversion -- Limitations on Common Stock Purchases." In the
event of an oversubscription, shares will be allocated in accordance with the
Plan, as described under "The Conversion -- The Offerings -- Subscription
Offering," "-- Community Offering," and "-- Syndicated Community Offering."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
New York State Banking Board ("Banking Board") regulations require the
aggregate Purchase Price of the Common Stock to be issued in the Conversion to
be consistent with an independent appraisal of the estimated pro forma market
value of the Common Stock. RP Financial's pro forma appraisal of the Common
Stock was $532.4 million at the midpoint of the Valuation Range as most recently
appraised as of October 29, 1997. In accordance with Banking Board regulations,
the minimum and maximum of the Valuation Range were set at 15% below and above
the midpoint, respectively, resulting in an offering of $452.5 million to $612.3
million. The full text of the appraisal report of RP Financial describes the
procedures followed, the assumptions made, limitations on the review undertaken
and matters considered. The appraisal report has been filed as an exhibit to the
Registration Statement and the Application for Conversion of which this
Prospectus is a part, and is available in the manner set forth under "Additional
Information." THIS APPRAISAL OF THE COMMON STOCK IS NOT INTENDED AND SHOULD NOT
BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING SUCH STOCK. 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
COMMON STOCK IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT
PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION
OF THE PRO FORMA MARKET VALUE THEREOF.
All shares of Common Stock will be sold at the Purchase Price of $10.00 per
share, which was established by the Boards of Directors of the Bank and the
Company. The actual number of shares to be issued in the Offerings will be
determined by the Bank and the Company based upon the final updated valuation of
the estimated pro forma market value of the Common Stock at the completion of
the Offerings. The number of shares of Common Stock to be sold is expected to
range from a minimum of 45,254,630 shares to a maximum of 61,226,852 shares.
Subject to approval of the Department and non-objection of the FDIC, the
Valuation Range may be increased or decreased to reflect market and economic
conditions prior to the completion of the Offerings, and under such
circumstances the Bank and the Company may increase or decrease the number of
7
<PAGE> 46
shares of Common Stock. No resolicitation of subscribers will be made and
subscribers will not be permitted to modify or cancel their subscriptions unless
(i) the gross proceeds from the sale of the Common Stock are less than the
minimum or more than 15% above the maximum of the current Valuation Range or
(ii) the Offerings are extended beyond 45 days after the expiration of the
Subscription Offering unless extended by the Bank and the Company with the
approval of the Superintendent and the FDIC, if necessary. See "Pro Forma Data,"
"Risk Factors -- Possible Dilutive Effect of Issuance of Additional Shares" and
"The Conversion -- Stock Pricing and Number of Shares to be Issued."
In connection with the Conversion, the Company and the Bank intend to
establish the Foundation, with the Company contributing an amount of shares
equal to 8% of the total number of shares of Common Stock sold in the Conversion
immediately following completion of the Conversion. The establishment of the
Foundation was taken into account in determining the estimated pro forma market
value of the Common Stock. In the event the Conversion did not include the
Foundation, RP Financial has estimated that the amount of Common Stock offered
would be $610.0 million at the midpoint of the Estimated Price Range rather than
$532.4 million. See "Risk Factors -- Effects of the Establishment of the
Foundation -- Comparison of Valuation and Other Factors Assuming the Foundation
is Not Established as Part of the Conversion" and "Comparison of Valuation and
Pro Forma Information with No Foundation."
BENEFITS OF CONVERSION TO DIRECTORS AND OFFICERS
STOCK OPTION PLAN AND RECOGNITION PLAN. The Company intends to adopt
certain stock benefit plans for the benefit of directors, officers and employees
of the Company and the Bank and to submit such plans to stockholders for
approval at an annual or special meeting of stockholders of the Company to be
held at least six months following the consummation of the Conversion. The
proposed benefit plans are as follows: (i) a stock option plan ("Stock Option
Plan"), pursuant to which a number of authorized but unissued shares of Common
Stock equal to 10.0% of the Conversion Stock to be sold in the Offerings
(6,122,685 shares at the maximum of the Estimated Price Range) will be reserved
for issuance pursuant to stock options and stock appreciation rights to
directors, officers and employees; and (ii) a Recognition Plan (the "Recognition
Plan"), which will, following the receipt of stockholder approval, purchase a
number of shares of Common Stock, with funds contributed by the Company, either
from the Company or in the open market equal to 4.0% of the Conversion Stock to
be sold in the Offerings (2,449,074 shares at the maximum of the Estimated Price
Range) for distribution to directors, officers and employees, which shares will
be distributed at no cost to the recipients. Regulations of the Banking Board
permit individual members of management to receive up to 25% of the shares
granted pursuant to any stock option or non-tax qualified stock benefit plan and
directors who are not employees to receive up to 5% of such stock (or stock
options) individually and up to 30% in the aggregate under any such plan. In the
event that the Recognition Plan purchases shares of Common Stock in the open
market with funds contributed by the Company, the cost of such shares initially
will be deducted from the Company's stockholders' equity, but the number of
outstanding shares of Common Stock will not increase and stockholders
accordingly will not experience dilution of their ownership interest. In the
event that the Recognition Plan purchases shares of Common Stock from the
Company with funds contributed by the Company, total stockholders' equity would
neither increase nor decrease, but under such circumstances stockholders would
experience dilution of their ownership interests by approximately 3.8% and per
share stockholders' equity and per share net earnings would decrease as a result
of an increase in the number of outstanding shares of Common Stock. In either
case, the Company will incur operating expense and increases in stockholders'
equity as the shares held by the Recognition Plan are granted and issued in
accordance with the terms thereof. For a presentation of the effects of
anticipated purchases of Common Stock by the Recognition Plan, see "Pro Forma
Data."
Upon receipt of stockholder approval of the Stock Option Plan, the Company
anticipates granting stock options for shares of Common Stock to directors,
executive officers and other key personnel. The Stock Option Plan and the
Recognition Plan will be administered by a committee of two or more non-employee
members of the Board of Directors of the Company who are "disinterested" within
the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
("Exchange Act"). It is anticipated that grants will be made by such committee
primarily based on performance, although the committee will be able to consider
other factors
8
<PAGE> 47
determined to be relevant in its sole discretion. A total of 70% of the shares
of Common Stock to be reserved for issuance pursuant to the Stock Option Plan
will be available for the grant of stock options to executive officers and key
employees of the Bank. In addition, pursuant to the Stock Option Plan, 30% of
the shares of Common Stock to be reserved for issuance pursuant to the Stock
Option Plan will be available for the grant of compensatory stock options to
outside directors of the Company. It is currently expected that upon stockholder
approval each non-employee director would receive an option for the same number
of shares which would amount to options aggregating 1,836,805 shares for the 11
non-employee directors assuming 6,122,685 shares are reserved for issuance under
the Stock Option Plan. All of the stock options will be granted at no cost to
the recipients, although the recipients will be required to pay the applicable
exercise price at the time of exercise in order to receive the underlying shares
of Common Stock. Following receipt of stockholder approval of the Recognition
Plan, the Company intends to award shares of Common Stock pursuant to such plan
to certain directors, officers and employees. It is expected that 70% of the
shares of Common Stock to be held by the Recognition Plan would be available for
awards to officers and key employees of the Bank. In addition, 30% of the shares
held by the Recognition Plan would be available for grant of awards to
non-employee directors. It is currently expected that upon stockholder approval,
the 11 non-employee directors would receive identical awards which would amount
in the aggregate to 734,722 shares assuming 2,449,074 shares are held by the
Recognition Plan. No specific award or option determinations have been made with
respect to executive officers. See "Management -- Benefits" and "Risk
Factors -- Possible Dilutive Effect of Issuance of Additional Shares."
ESOP. In addition, the ESOP intends to purchase 8.0% of the Common Stock
to be sold in the Offerings (4,898,148 shares or $49.0 million of Common Stock
at the maximum of the Estimated Price Range) with a loan funded by the Company.
See "Use of Proceeds." In the event that there are insufficient shares available
to fill the ESOP's order due to an oversubscription by Eligible Account Holders,
the ESOP may purchase such shares in the open market, if permitted. See
"Management -- Benefits" and "Risk Factors -- Possible Dilutive Effect of
Issuance of Additional Shares."
CHANGE IN CONTROL AGREEMENTS. In connection with the Conversion, the
Company and the Bank intend to enter into Change in Control Agreements with the
current President and Chief Executive Officer and five other senior executive
officers of the Company and the Bank. Such agreements provide for severance
payments if their respective employment is terminated in connection with a
change in control of the Company or the Bank. The Bank expects to enter into
similar agreements with 12 other officers of the Bank. See "Management -- Change
in Control Agreements."
INDEPENDENCE COMMUNITY FOUNDATION
In furtherance of the Bank's commitment to the communities that it serves,
the Plan of Conversion provides for the establishment of a private charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will create the Independence Community Foundation, which will be
incorporated under Delaware law as a nonstock corporation, and will fund the
Foundation with shares of Common Stock contributed by the Company, as further
described below. The Company and the Bank believe that the funding of the
Foundation with Common Stock of the Company is a means of establishing a common
bond between the Bank and the communities that it serves and thereby enable such
communities to share in the potential growth and success of the Company over the
long term. By further enhancing the Bank's visibility and reputation in the
communities that it serves, the Bank believes that the Foundation will enhance
the long-term value of the Bank's community banking franchise. See "The
Conversion -- Establishment of the Foundation -- Structure of the Foundation."
The authority for the affairs of the Foundation will be vested in the Board
of Directors of the Foundation, which will be comprised of members of the
Company's Board of Directors and certain other individuals chosen in light of
their commitment and service to charitable and community purposes. The directors
of the Foundation will be responsible for establishing the policies of the
Foundation with respect to grants or donations by the Foundation, consistent
with the purposes for which the Foundation was established, and will also be
responsible for directing the activities of the Foundation, including matters
related to ownership of the Common Stock held by the Foundation. However, the
establishment of the Foundation is subject to certain
9
<PAGE> 48
conditions, including, among others, a requirement that the Common Stock of the
Company held by the Foundation be voted in the same ratio as all other shares of
the Company's Common Stock on all proposals considered by stockholders of the
Company. See "The Conversion -- Establishment of the Foundation -- Regulatory
Conditions Imposed on the Foundation."
The Company proposes to fund the Foundation by contributing to the
Foundation immediately following the Conversion a number of shares of authorized
but unissued shares of Common Stock equal to 8.0% of the Common Stock sold in
the Offerings, or 3,620,370 and 4,898,148 shares at the minimum and maximum of
the Estimated Price Range, respectively. Such contribution, once made, will not
be recoverable by the Company or the Bank. Assuming the sale of shares at the
maximum of the Estimated Price Range and the issuance of shares to the
Foundation, the Company will have 66,125,000 shares issued and outstanding, of
which the Foundation will own 4,898,148 shares, or 7.4%. DUE TO THE ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK TO THE FOUNDATION, PERSONS PURCHASING SHARES
IN THE CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING INTERESTS IN THE COMPANY
DILUTED BY 7.4%. SEE "PRO FORMA DATA."
As a result of the establishment of the Foundation, the Company will
recognize an expense of the full amount of the contribution, offset in part by a
corresponding tax benefit, during the quarter in which the contribution is made,
which is expected to be the fourth quarter of fiscal 1998. Such expense will
reduce earnings and have a material impact on the Company's earnings for such
quarter and for the year. Assuming a contribution of $49.0 million in Common
Stock in fiscal 1998, based on the maximum of the Estimated Price Range and
assuming a marginal tax rate of 47%, the Company estimates a net tax effected
expense of $26.0 million. In addition, the Bank does not anticipate making
future charitable contributions to the Foundation during the first five years
following the initial contribution to the Foundation. For further discussion of
the Foundation and its impact on purchasers in the Conversion, see "Risk
Factors -- Effects of the Establishment of the Foundation," "Pro Forma Data" and
"The Conversion -- Establishment of the Foundation."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act, no
Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery of the Prospectus in accordance with Rule
15c2-8. Order forms will only be distributed with a Prospectus. Material related
to the Conversion will only be available through the Conversion Center.
The Company and the Bank are not obligated to accept for processing orders
not submitted on original order forms. Order forms unaccompanied by an executed
certification form will not be accepted. Payment by check, money order, cash or
debit authorization to an existing account at the Bank must accompany the order
form. Orders for Common Stock submitted by subscribers in the Subscription
Offering or by purchasers in the Community Offering which aggregate $50,000 or
more must be paid for by official bank or certified check, a check issued by a
NASD-registered broker-dealer or by withdrawal authorization from a deposit
account at the Bank. Orders must be physically received by the Bank prior to
3:00 p.m., Eastern Time, January 29, 1998.
In order to ensure that Eligible Account Holders and Supplemental Eligible
Account Holders are properly identified as to their stock purchase priorities,
depositors as of the close of business on the Eligibility Record Date (March 31,
1996) or the Supplemental Eligibility Record Date (September 30, 1997), must
list all accounts on the stock order form giving all names on each account and
the account numbers. See "The Conversion -- Procedure for Purchasing Shares in
the Offerings."
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock are estimated to be between
$439.9 million and $597.2 million ($687.7 million assuming an increase in the
Valuation Range by 15%). See "Pro Forma Data." The Company plans to use 50% of
the net proceeds from the Offerings to purchase all the outstanding common stock
of the Bank to be issued in the Conversion and retain the remainder of the net
proceeds. The Company intends to use a portion of the net proceeds retained by
it to make a loan directly to the ESOP to enable the
10
<PAGE> 49
ESOP to purchase 8.0% of the Common Stock sold in the Offerings. The amount of
the loan is expected to be between $36.2 million and $49.0 million at the
minimum and maximum of the Valuation Range, respectively. It is anticipated that
the loan to the ESOP will have a term of not less than 20 years and a fixed
interest rate at the Bank's prime rate as of the date of the loan. See
"Management -- Benefits -- Employee Stock Ownership Plan." The Company intends
initially to invest the net proceeds not used to fund the ESOP loan in
investment securities and mortgage-backed and mortgage-related securities. Funds
received by the Bank from the Company's purchase of its common stock will be
used for general purposes, including investment in investment securities,
mortgage-backed and mortgage-related securities and loans. The net proceeds from
the Offerings will be available to the Company and the Bank to support the
future expansion of retail banking operations or diversification into other
businesses, through acquisition or otherwise, including the potential
acquisition of other financial institutions and/or branch offices. There are no
current material plans, arrangements, understandings or agreements regarding
such diversification or acquisitions. Subject to applicable limitations and
then-existing circumstances, such funds also may be used by the Company in the
future to repurchase shares of Common Stock. See "The Conversion -- Certain
Restrictions on Purchases or Transfer of Shares after the Conversion" and "Use
of Proceeds."
DIVIDEND POLICY
Following consummation of the Conversion, the Board of Directors of the
Company may consider a policy of paying cash dividends on the Common Stock.
However, no decision has been made as to the amount or timing of such dividends,
if any. See "Dividend Policy."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.
11
<PAGE> 50
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
The following selected historical consolidated financial data at and for
the five years ended March 31, 1997 is derived in part from the audited
consolidated financial statements of the Bank. The historical consolidated
financial data at and for the five months ended August 31, 1997 and 1996 is
derived from unaudited consolidated financial statements. The unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, which management of the Bank considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the five months ended August 31, 1997 are not
necessarily indicative of the results that may be expected for any other interim
period or the entire fiscal year ending March 31, 1998. The selected historical
consolidated financial data set forth below should be read in conjunction with,
and is qualified in its entirety by, the historical consolidated financial
statements of the Bank, including the related notes, included elsewhere herein.
<TABLE>
<CAPTION>
AT MARCH 31,
AT AUGUST 31, --------------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.................... $ 3,794,207 $3,733,316 $3,869,782 $2,619,935 $2,549,180 $2,392,351
Cash and cash equivalents....... 185,529 374,636 103,192 110,394 37,667 66,366
Investment securities held to
maturity...................... -- -- 39,995 29,427 355,886 372,088
Mortgage-backed and mortgage-
related securities held to
maturity...................... -- -- 120,702 305,545 376,704 423,506
Mortgage-backed and mortgage-
related securities available
for sale...................... 167,339 190,979 395,321 -- -- --
Investment securities available
for sale...................... 553,774 357,487 683,828 61,818 -- --
Loans receivable, net........... 2,677,406 2,503,089 2,322,808 2,020,262 1,693,994 1,461,931
Intangible assets(1)............ 60,935 60,499 80,268 1,023 1,728 2,592
Deposit accounts................ 3,371,956 3,325,558 3,396,890 2,236,422 2,207,441 2,163,761
FHLB advances................... 14,550 14,550 56,045 67,462 60,489 3,375
Other borrowings................ 2,559 2,682 1,250 1,286 1,100 1,600
Total equity.................... 324,769 309,114 289,819 259,197 220,690 178,445
</TABLE>
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED
AUGUST 31, FOR THE YEAR ENDED MARCH 31,
------------------- ----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income.................. $111,795 $108,525 $255,303 $213,100 $191,539 $179,697 $180,698
Interest expense................. 59,835 58,919 140,187 110,619 80,562 75,633 86,297
-------- -------- -------- -------- -------- -------- --------
Net interest income.............. 51,960 49,606 115,116 102,481 110,977 104,064 94,401
Provision for loan losses........ 4,577 1,560 7,960 3,679 3,592 5,014 4,462
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses...... 47,383 48,046 107,156 98,802 107,385 99,050 89,939
Net gain (loss) on sales of loans
and securities................. 13 (282) (3,347) 12,222 (3,952) 849 283
Other non-interest income........ 3,689 3,493 6,256 7,860 6,416 6,873 5,103
Amortization of intangible
assets......................... 3,678 3,901 8,278 1,842 905 864 859
Other non-interest expenses(2)... 31,220 26,301 73,875 50,288 46,713 41,176 37,256
-------- -------- -------- -------- -------- -------- --------
Income before income taxes....... 16,187 21,055 27,912 66,754 62,231 64,732 57,210
Income taxes..................... 5,206 9,234 10,732 30,782 27,327 25,808 26,319
-------- -------- -------- -------- -------- -------- --------
Cumulative effect of change in
accounting principle(3)........ -- -- -- -- -- 3,321 --
-------- -------- -------- -------- -------- -------- --------
Net income....................... $ 10,981 $ 11,821 $ 17,180 $ 35,972 $ 34,904 $ 42,245 $ 30,891
======== ======== ======== ======== ======== ======== ========
</TABLE>
12
<PAGE> 51
<TABLE>
<CAPTION>
AT OR FOR THE
FIVE MONTHS
ENDED AUGUST 31, AT OR FOR THE YEAR ENDED MARCH 31,
----------------- ------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:(4)
Return on assets(2).......................... 0.69% 0.77% 0.46% 1.27% 1.37% 1.71% 1.36%
Return on equity(2).......................... 8.28 9.58 5.69 13.13 14.81 21.80 19.23
Interest-earning assets to interest-bearing
liabilities................................ 108.88 106.09 105.80 109.28 110.55 107.97 106.89
Interest rate spread(5)...................... 3.09 3.15 3.09 3.39 4.18 4.13 4.00
Net interest margin(5)....................... 3.45 3.39 3.32 3.77 4.52 4.38 4.27
Noninterest expenses, exclusive of
amortization of intangible assets, to total
assets(2).................................. 1.96 1.72 1.99 1.77 1.83 1.67 1.64
Efficiency ratio(6).......................... 56.10 49.53 53.82 45.58 39.79 37.12 37.44
ASSET QUALITY RATIOS:
Non-performing loans as a percent of total
loans at end of period..................... 0.96% 1.50% 1.07% 1.51% 1.04% 1.23% 1.47%
Non-performing assets to total assets at end
of period(7)............................... 0.69 1.04 0.74 0.94 0.88 0.90 1.10
Allowance for loan losses to non-performing
loans at end of period..................... 119.75 56.09 99.76 57.81 55.73 41.68 29.57
Allowance for loan losses to total loans at
end of period.............................. 1.14 0.84 1.06 0.87 0.58 0.51 0.43
CAPITAL AND OTHER RATIOS:(4)
Equity to assets at end of period............ 8.56% 8.14% 8.28% 7.49% 9.89% 8.66% 7.46%
Leverage capital............................. 6.91 6.26 6.83 6.13 9.54 8.52 7.31
Tangible equity to risk-weighted assets at
end of period.............................. 10.13 9.80 10.05 9.82 13.76 13.85 12.57
Total capital to risk-weighted assets at end
of period.................................. 11.35 10.74 11.15 10.82 14.43 14.41 13.05
Number of Full Service Offices................. 33(8) 33 32 33 21 20 20
</TABLE>
- ---------------
(1) Represents the excess of cost over fair value of net assets acquired which
consists of goodwill and other intangibles which amounted to $22.9 million
and $38.0 million, respectively, at August 31, 1997 and $23.7 million and
$36.8 million, respectively, at March 31, 1997. The reduction from March 31,
1996 to March 31, 1997 reflected, in addition to the amortization of such
intangible assets, certain adjustments relating to the acquisition in 1996
of Bay Ridge as well as the acquisition of five branch offices located in
Brooklyn and Staten Island (the "1996 Branch Acquisition"). The goodwill
resulting from the Bay Ridge acquisition decreased during fiscal 1997 due
primarily to the repayment of the Bay Ridge ESOP loan and the receipt of tax
refunds. The intangible related to the 1996 Branch Acquisition was affected
by the sale of the deposits related to one of the offices acquired,
resulting in a $5.3 million decrease in the remaining premium related to
this branch office. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Recent Acquisitions."
(2) At and for the year ended March 31, 1997, reflects the effects of a special
one-time assessment imposed on institutions which had deposits insured by
the Savings Association Insurance Fund ("SAIF"). The Bank, as a result of
the various acquisitions it has completed, is deemed to have SAIF deposits.
As a consequence, during fiscal 1997, it paid $8.6 million in satisfaction
of the special assessment. Had this amount not been paid, for the year ended
March 31, 1997, the Bank's returns on assets and equity would have been
0.61% and 7.44%, respectively, and the Bank's ratio of noninterest expenses,
exclusive of amortization of intangible assets, to total assets would have
been 1.76%.
(3) Reflects adoption of Statement of Financial Accounting Standards ("SFAS")
No. 109.
(4) With the exception of end of period ratios and the efficiency ratio, all
ratios are based on average daily balances during the respective periods and
are annualized where appropriate.
(5) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(6) Reflects adjusted operating expenses (net of amortization of intangibles and
the special SAIF assessment) as a percent of the aggregate of net interest
income and adjusted non-interest income (excluding gains and losses on the
sales of loans and securities).
(7) Non-performing assets consist of non-accrual loans, loans past due 90 days
or more as to interest or principal repayment and accruing and other real
estate acquired through foreclosure or by deed-in-lieu thereof.
(8) In December 1997, the Bank opened an additional branch office.
13
<PAGE> 52
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be carefully considered by investors in deciding whether
to purchase the Common Stock offered hereby.
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION; UNCERTAINTY AS TO
FUTURE GROWTH OPPORTUNITIES
At August 31, 1997, the Bank's ratio of equity to assets was 8.56%. The
Company's equity position will be significantly increased as a result of the
Conversion. On a pro forma basis as of August 31, 1997, assuming the sale of
Common Stock at the maximum and 15% above the maximum of the Valuation Range,
the Company's ratio of equity to assets would be 20.1% and 21.6%. The Company's
ability to leverage this capital will be significantly affected by industry
competition for loans and deposits. The Company currently anticipates that it
will take time to prudently deploy such capital. As a result, the Company's
return on equity initially is expected to be below the industry average after
the Conversion.
In an effort to fully deploy post-Conversion capital, in addition to
attempting to increase its loans and deposits through internal growth, the
Company may seek to expand its operations through acquisitions, particularly
through acquisitions of other financial institutions or branch offices and
deposits in the Bank's market area. The Company's ability to grow through
selective acquisitions will be dependent on successfully identifying, acquiring
and integrating such acquisition candidates. There can be no assurance the
Company will be able to generate internal growth or to identify attractive
acquisition candidates, acquire such candidates on favorable terms or
successfully integrate them into the Company. In addition, given the premiums
being paid, and the competitive environment for acquisitions in the recent past,
no assurance can be given that any such acquisitions by the Company may not, at
least initially, be dilutive to earnings. Neither the Company nor the Bank has
any specific plans, arrangements or understandings regarding any such expansions
or acquisitions at this time.
MARKET AREA AND CUSTOMER SERVICE PHILOSOPHY
The Bank maintains its headquarters in Brooklyn, New York and has had
long-standing and extensive ties to the borough of Brooklyn since the Bank's
organization in 1850. The Bank's retail banking presence is concentrated in
Brooklyn and Queens, where 28 of its 34 branch offices are located and which
held more than 75% of the Bank's total deposits at August 31, 1997. The boroughs
of Brooklyn and Queens are racially and ethnically diverse and include
significant numbers of recent immigrants to the United States and low to
moderate income residents. The median household income for Brooklyn is below
median household incomes nationally, as well as for the State of New York, while
the median household income for Queens is slightly higher than national and New
York State median income levels. In addition, the unemployment rates in the
markets served by the Bank traditionally are higher than the surrounding suburbs
and, in recent periods, the boroughs of Brooklyn and Queens have had, with the
exception of the Bronx, the highest unemployment rates in New York City.
An integral part of the Bank's business and competitive strategy has been
to be a low-cost service provider in order to build a loyal and stable customer
base and to provide the banking services needed by the communities and
neighborhoods served by the Bank. Subsequent to the Conversion, the Bank intends
to maintain its headquarters in Brooklyn and to continue its strategy of
providing low-cost products and services to its customers in the boroughs of
Brooklyn and Queens as well as Manhattan, the Bronx, Staten Island and Nassau
County, New York. The Bank's commitment to maintain customer and community
service in its existing markets may result in the Bank incurring certain
increased operating costs which, in turn, may reduce profitability.
POTENTIAL INCREASED COMPENSATION EXPENSE AFTER THE CONVERSION
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 93-6 entitled "Employers' Accounting for
Employee Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 requires an employer to
record compensation expense in an amount equal to the fair value of shares
committed to be released to employees from an employee stock ownership plan
instead of an amount
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equal to the cost basis of such shares. If the shares of Common Stock appreciate
in value over time, SOP 93-6 will result in increased compensation expense with
respect to the ESOP as compared with prior guidance which required the
recognition of compensation expense based on the cost of shares acquired by the
ESOP. It is impossible to determine at this time the extent of such impact on
future net income. See "Pro Forma Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Impact of
Accounting Pronouncements." In addition, after consummation of the Conversion,
the Company intends to implement, subject to stockholder approval (which
approval cannot be obtained earlier than six months subsequent to the
Conversion), the Recognition Plan. Upon implementation, the award of shares of
Common Stock from the Recognition Plan will result in significant additional
compensation expense. See "Pro Forma Data" and
"Management -- Benefits -- Recognition Plan."
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES
The operating results of the Bank are substantially dependent on its net
interest income, which is the difference between the interest income earned on
its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. Like most savings institutions, the Bank's
earnings are affected by changes in market interest rates and other economic
factors beyond its control. If an institution's interest-earning assets have
longer effective maturities than its interest-bearing liabilities, the yield on
the institution's interest-earning assets generally will adjust more slowly than
the cost of its interest-bearing liabilities and, as a result, the institution's
net interest income generally would be adversely affected by material and
prolonged increases in interest rates and positively affected by comparable
declines in interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset and Liability
Management." At August 31, 1997, the Bank's interest-bearing liabilities which
were estimated to mature or reprice within one year and three years exceeded the
Bank's interest-earning assets with the same characteristics by $2.0 billion and
$767.5 million, respectively, or 51.9% and 20.2%, respectively, of the Bank's
total assets.
In addition to affecting interest income and expense, changes in interest
rates also can affect the value of the Bank's interest-earning assets, which are
comprised of fixed- and adjustable-rate instruments, and the ability to realize
gains from the sale of such assets. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. At August 31,
1997, all of the Bank's $553.8 million of investment securities ($535.5 million
of which had fixed-rates of interest) and all $167.3 million of its
mortgage-backed and mortgage-related securities ($162.1 million of which had
fixed-rates of interest) were classified as available for sale and the Bank had
$8.3 million of net unrealized gains with respect to such investment and
mortgage-backed and mortgage-related securities, which were included as a
separate component in the Bank's total equity, net of tax, as of such date.
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. Decreases in interest rates generally result in
increased prepayments of loans and mortgage-backed securities as borrowers
refinance to reduce borrowing costs, which may subject the Bank to reinvestment
risk to the extent that it is not able to reinvest such prepayments at rates
which are comparable to the rates on the maturing loans or securities. The
Bank's loan sale and servicing activity may also be adversely affected by a
declining interest rate environment to the extent such environment results in
increased loan prepayment activity of serviced loans. In this regard, at August
31, 1997, the Bank was servicing $297.2 million of loans for others.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Asset and Liability Management" and "Regulation -- The
Bank -- Capital Requirements."
IRREVOCABILITY OF ORDERS; POTENTIAL DELAY IN COMPLETION OF OFFERINGS
Orders submitted in the Subscription Offering and any Community Offering or
any Syndicated Community Offering are irrevocable. Funds submitted in connection
with any purchase of Common Stock in the Offerings will be held by the Company
until the completion or termination of the Conversion, including any extension
of the Expiration Date. Because, among other factors, completion of the
Conversion will be subject to an update of the independent appraisal prepared by
RP Financial, there may be one or more delays
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in the completion of the Conversion. Subscribers will have no access to
subscription funds and/or shares of Common Stock until the Conversion is
completed or terminated.
RISKS RELATED TO MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING
ACTIVITIES
In order to meet the needs of the various communities it serves, the Bank
has emphasized for many years the origination of multi-family residential loans.
In addition, the Bank also originates, to a lesser degree, commercial real
estate loans. At August 31, 1997, multi-family residential loans totaled $1.49
billion or 54.7% of total loans and commercial real estate loans totaled $163.5
million or 6.0% of total loans. In addition, at such date, the Bank had
commitments to fund multi-family residential and commercial and other real
estate loans totaling $59.8 million.
Multi-family residential and commercial real estate lending generally is
considered to involve a higher degree of risk than single-family residential
lending due to a variety of factors, including generally larger loan balances,
the dependency on successful operation of the project for repayment, and loan
terms which often do not require full amortization of the loan over its term
and, instead, provide for a balloon payment at stated maturity. There can be no
assurance that the Bank's multi-family residential and commercial real estate
lending activities will not be adversely affected by these and the other risks
related to such activities. At August 31, 1997, of the $26.0 million of the
Bank's non-performing loans, $19.9 million related to non-performing
multi-family residential and commercial real estate loans.
One consequence of the Bank's continued emphasis on and increased
investment in multi-family and commercial real estate loans has been that the
Bank has increased its allowance for loan losses. The Bank's allowance increased
from $20.5 million at March 31, 1996 to $31.1 million at August 31, 1997. Such
growth has occurred through provisions for loan losses which reduce the
Company's net income. As a result, the Bank's continuing involvement in
multi-family and commercial real estate lending may result in additional or
increased provisions for loan losses which would adversely affect the Company's
net income.
CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S GOVERNING INSTRUMENTS AND DELAWARE
LAW. Certain provisions of the Company's Certificate of Incorporation and
Bylaws, as well as certain provisions in Delaware law, will assist the Company
in maintaining its status as an independent publicly-owned corporation.
Provisions in the Company's Certificate of Incorporation and Bylaws provide,
among other things, (i) that the Board of Directors of the Company shall be
divided into three classes; (ii) that special meetings of stockholders may only
be called by the Board of Directors of the Company; (iii) that stockholders
generally must provide the Company advance notice of stockholder proposals and
nominations for director and provide certain specified related information; (iv)
noncumulative voting for the election of directors; (v) that no person may
acquire more than 10% of the issued and outstanding shares of any class of
equity security of the Company; (vi) the authority to issue shares of authorized
but unissued Common Stock and preferred stock and to establish the terms of any
one or more series of Preferred Stock, including voting rights (which may be
waived by the Board of Directors under certain circumstances) and (vii)
supermajority voting requirements with respect to certain business transactions
involving the Company. Provisions under Delaware law applicable to the Company
provide, among other things, that the Company may not engage in a business
combination with an "interested shareholder" (generally a holder of 15% of a
corporation's voting stock) during the three-year period after the interested
shareholder became such except under certain specified circumstances. In
addition, Department regulations prohibit, for a period of one year following
the date of Conversion, offers to acquire or the acquisition of beneficial
ownership of more than 10% of the outstanding voting stock of the Company. The
above provisions may discourage potential proxy contests and other potential
takeover attempts, particularly those which have not been negotiated with the
Board of Directors, and thus generally may serve to perpetuate current
management. See "Restrictions on Acquisition of the Company and the Bank."
VOTING POWER OF DIRECTORS AND EXECUTIVE OFFICERS. Directors and executive
officers of the Company expect to hold approximately 0.9% of the shares of
Common Stock outstanding upon consummation of the Conversion based upon the
midpoint of the Estimated Price Range. Executive officers of the Company, as
well
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as other eligible employees of the Company, also will hold shares of Common
Stock which are allocated to the accounts established for them pursuant to the
ESOP. The ESOP intends to purchase 8.0% of the Common Stock to be issued in the
Offerings (4,898,148 shares based on the maximum of the Estimated Price Range).
Under the terms of the ESOP, shares of Common Stock which have not yet been
allocated to the accounts of employee participants in the ESOP will be voted by
the trustees of the ESOP in the same ratio on any matter as to those allocated
shares for which instructions are given to the trustees. In addition, the
Foundation will be funded with a contribution by the Company equal to 8.0% of
the Common Stock sold in the Conversion, which may, subject to receipt of
waivers from the FDIC and the Superintendent of the voting restriction imposed
on such Common Stock, be voted as determined by the directors of the Foundation,
the substantial majority of whom initially will also be directors and executive
officers of the Company and the Bank. Management's potential voting control
could, together with additional stockholder support, defeat stockholder
proposals requiring 80% approval of stockholders. As a result, this potential
voting control may preclude takeover attempts that certain stockholders deem to
be in their best interest and may tend to perpetuate existing management. See
"Restrictions on Acquisition of the Company and the Bank -- Restrictions in the
Company's Certificate of Incorporation and Bylaws" and "The
Conversion -- Establishment of the Foundation."
In addition, and subject to stockholder approval following the consummation
of the Conversion, the Company expects to acquire Common Stock on behalf of the
Recognition Plan, a non-tax qualified restricted stock plan, in an amount equal
to 4.0% of the Common Stock sold in the Offerings (2,449,074 shares based on the
maximum of the Estimated Price Range). Under the terms of the Recognition Plan,
the trustees of such plan, who will also be directors of the Company, will have
discretionary authority to vote all shares held by such plan. Subject to
stockholder approval, the Company also intends to reserve for future issuance
pursuant to a Stock Option Plan a number of authorized shares of Common Stock
equal to an aggregate of 10% of the Common Stock issued in the Offerings
(6,122,685 shares, based on the maximum of the Estimated Price Range). See
"Management -- Benefits."
Management's potential voting power could, together with additional
stockholder support, preclude or make more difficult takeover attempts which do
not have the support of the Company's Board of Directors and may tend to
perpetuate existing management.
CHANGE IN CONTROL AGREEMENTS. The Bank and the Company expect to enter
into Change in Control Agreements with the current President and Chief Executive
Officer of the Company and the Bank and five other senior executive officers of
the Company and the Bank, which agreements provide for severance payments if
their respective employment is terminated in connection with a change in control
of the Company and/or the Bank. The Bank also expects to enter into agreements
similar to the Change in Control Agreements with 12 other officers of the Bank.
See "Restrictions on Acquisition of the Company and the Bank" and
"Management -- Change in Control Agreements."
EFFECTS OF THE ESTABLISHMENT OF THE FOUNDATION
Pursuant to the Plan, the Company intends to voluntarily establish a
charitable foundation in connection with the Conversion. The Plan provides that
the Bank and the Company will establish the Foundation, which will be
incorporated under Delaware law as a nonstock corporation and will be funded
with shares of Common Stock contributed by the Company. The contribution of
Common Stock to the Foundation will be dilutive to the interests of stockholders
and will have an adverse impact on the reported earnings of the Company in
fiscal 1998, the year in which the Foundation will be or is expected to be
established.
DILUTION OF STOCKHOLDERS' OWNERSHIP AND VOTING INTERESTS. The Company
proposes to fund the Foundation with Common Stock of the Company in an amount
equal to 8.0% of the Common Stock sold in the Conversion. At the minimum,
midpoint and maximum of the Estimated Price Range, the contribution to the
Foundation would equal 3,620,370, 4,259,259 and 4,898,148 shares of Common
Stock, with a value of $36.2 million, $42.6 million and $49.0 million,
respectively, based on the Purchase Price. Assuming the sale of Common Stock at
the maximum of the Estimated Price Range, upon completion of the Conversion and
establishment of the Foundation, the Company will have 66,125,000 shares issued
and outstanding of which
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the Foundation will own 4,898,148 shares of Common Stock, or 7.4%. As a result,
persons purchasing shares of Common Stock in the Conversion will have their
ownership and voting interests in the Company diluted by 7.4%. See "Pro Forma
Data."
IMPACT ON EARNINGS. The contribution of Common Stock to the Foundation
will have an adverse impact on the Company's earnings in the year in which the
contribution is made. The Company will recognize the full expense in the amount
of the contribution of Common Stock to the Foundation in the quarter in which it
occurs, which is expected to be the fourth quarter of fiscal 1998. The amount of
the contribution will range from $36.2 million to $49.0 million, based on the
minimum and maximum of the Estimated Price Range, respectively. The contribution
expense will be partially offset by the tax benefit related to the expense. The
Company and the Bank have been advised by their independent tax advisors that
the contribution to the Foundation will be tax deductible, subject to an annual
limitation based on 10% of the Company's annual taxable income. Assuming a
contribution of $49.0 million in Common Stock (based on the maximum of the
Estimated Price Range), the Company estimates a net tax effected expense of
$26.0 million (based on a 47% marginal tax rate). If the Foundation had been
established at March 31, 1997, the Bank would have reported a net loss of $8.8
million, rather than reporting net income of $17.2 million for the year ended
March 31, 1997. Management cannot predict earnings for fiscal 1998, but expects
that the establishment and funding of the Foundation will have an adverse impact
on the Company's earnings for such year. However, in light of the expected
contribution to the Foundation, the Bank does not expect in the future to make
other than nominal charitable contributions within the communities it serves. In
addition, the Company and the Bank do not currently anticipate making additional
contributions to the Foundation within the first five fiscal years following the
initial contribution.
TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent tax advisor that an organization created for the above-described
purposes would qualify as a Section 501(c)(3) exempt organization under the
Internal Revenue Code of 1986, as amended (the "Code"), and would be classified
as a private foundation. The Foundation will submit a request to the Internal
Revenue Service ("IRS") to be recognized as an exempt organization. The Company
and the Bank have received an opinion of their independent tax advisor that the
Foundation would qualify as a Section 501(c)(3) exempt organization under the
Code, except that such opinion does not consider the impact of the condition
required by regulatory authorities that Common Stock issued to the Foundation be
voted in the same ratio as all other shares of the Company's Common Stock on all
proposals considered by stockholders of the Company. See "The
Conversion -- Establishment of the Foundation -- Regulatory Conditions Imposed
on the Foundation." The independent tax advisor's opinion further provides that
the Company's contribution of its own stock to the Foundation should not
constitute an act of self-dealing, and that the Company would be entitled to a
deduction in the amount of the fair market value of the stock at the time of the
contribution less the nominal par value the Foundation is required to pay the
Company for such stock, subject to an annual limitation based on 10% of the
Company's annual taxable income. The Company, however, would be able to carry
forward any unused portion of the deduction for five years following the
contribution. Thus, while the Company would have received a tax benefit of
approximately $23.0 million in fiscal 1997 (based upon the sale of stock at the
maximum of the Estimated Price Range, a contribution of $49.0 million of Common
Stock and the Bank's pre-tax income for fiscal 1997), the Company is permitted
under the Code to carry over the excess contribution in the five following
years. Assuming the sale of Common Stock at the maximum of the Estimated Price
Range, the Company estimates that for federal income tax purposes, a substantial
portion 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
advisor that the Company will be entitled to the deduction of the charitable
contribution, there can be no assurances that the IRS will recognize the
Foundation as a Section 501(c)(3) exempt organization or that the deduction will
be permitted. In such event, the Company's tax benefit related to the Foundation
would have to be fully expensed, resulting in further reduction in earnings in
the year in which the IRS makes such a determination.
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. The establishment of the Foundation was
taken into account by RP Financial in determining the estimated pro forma market
value of the Common Stock. The aggregate price of the shares of
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Common Stock being offered in the Subscription and Community Offerings is based
upon the independent appraisal conducted by RP Financial of the estimated pro
forma market value of the Common Stock. The pro forma aggregate price of the
Common Stock being offered for sale in the Conversion is currently estimated to
be between $452.5 million and $612.3 million, with a midpoint of $532.4 million.
The pro forma price to book ratio and the pro forma price to earnings ratio, at
and for the five months ended August 31, 1997, are 71.9% and 14.9x,
respectively, at the midpoint of the Estimated Price Range. In the event that
the Conversion did not include the Foundation, RP Financial has estimated that
the estimated pro forma market value of the Common Stock would be $610.0 million
at the midpoint based on a pro forma price to book ratio and a pro forma price
to earnings ratio that are approximately the same as the independent appraisal
at 72.1% and 14.9x, respectively. The amount of Common Stock that would be
offered in the Conversion at the midpoint of the Estimated Price Range is
approximately $77.6 million less than the estimated amount of Common Stock that
would be offered in the Conversion without the Foundation based on the estimate
provided by RP Financial. 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 with No
Foundation." This estimate by RP Financial was prepared solely for purposes of
providing Voting Depositors and subscribers with information with which to make
an informed decision on the Conversion.
The decrease in the amount of Common Stock being offered as a result of the
contribution of Common Stock to the Foundation will not have a significant
effect on the Company or the Bank's capital position. The Bank's regulatory
capital is in excess of its regulatory capital requirements and will further
exceed such requirements following the Conversion. The Bank's pro forma leverage
and total risk-based capital ratios at August 31, 1997 (assuming the Offerings
are completed at the midpoint of the Estimated Price Range) would be 11.9% and
19.4%, respectively. On a consolidated basis, the Company's pro forma
stockholders' equity would be $799.5 million, or approximately 18.7% of pro
forma consolidated assets, assuming the sale of shares at the midpoint of the
Estimated Price Range. Pro forma stockholders' equity per share and pro forma
net earnings per share would be $13.64 and $.28, respectively, at and for the
five months ended August 31, 1997 and $13.91 and $0.53, respectively, at and for
the year ended March 31, 1997. If the Foundation was not being established in
the Conversion, based on the RP Financial estimate, the Company's pro forma
stockholders' equity at August 31, 1997 would be approximately $846.6 million,
or approximately 19.6% of pro forma consolidated assets at the midpoint of the
Estimated Price Range, and pro forma stockholders' equity per share and pro
forma net earnings per share would be substantially similar with the Foundation
as without the establishment of the Foundation. See "Comparison of Valuation and
Pro Forma Information with No Foundation."
POTENTIAL ANTI-TAKEOVER EFFECT. Upon completion of the Conversion, the
Foundation will own 7.4% of the total shares of the Common Stock outstanding.
Such shares will be owned solely by the Foundation; however, pursuant to a
condition required by regulatory authorities, it is anticipated that the shares
of Common Stock held by the Foundation will be voted in the same ratio as all
other shares of the Common Stock on all proposals considered by the stockholders
of the Company. As such, the Company does not believe the Superintendent will
have an anti-takeover effect on the Company. However, in the event that the FDIC
and the Superintendent were to waive this voting restriction for the reasons
described herein as provided in the condition, the Foundation's Board of
Directors would exercise sole voting power over such shares and would no longer
be subject to the restriction. See "The Conversion -- Establishment of the
Foundation -- Regulatory Conditions Imposed on the Foundation." As a majority of
the Foundation's Board of Directors will be comprised of members of the Board of
Directors and executive officers of the Company and the Bank, in the event the
FDIC and the Superintendent waived the voting restriction, management of the
Company and the Bank may benefit to the extent that the Board of Directors of
the Foundation determines to vote the shares of Common Stock held by the
Foundation in favor of proposals supported by the Company and the Bank.
Furthermore, in such an event, when the Foundation's shares are combined with
shares purchased directly by officers and directors of the Company, shares
expected to be held by the Recognition Plan, and shares held by the ESOP trust,
the aggregate of such shares will exceed 20% of the outstanding Common Stock,
which could enable management to defeat stockholder proposals requiring 80%
approval. Consequently, such potential
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voting control might preclude takeover attempts that certain stockholders deem
to be in their best interest, and might tend to perpetuate management. However,
since the ESOP shares are allocated to all eligible employees of the Bank, and
any unallocated shares will be voted by the trustees in the same proportions as
allocated shares are voted, and because the Recognition Plan must first be
approved by stockholders no sooner than six months following completion of the
Conversion, and awards under such proposed plans may be granted to employees
other than executive officers and directors, management of the Company does not
expect to have voting control of all shares covered by the ESOP and other
stock-based benefit plans. See "-- Certain Anti-Takeover Provisions -- Voting
Power of Directors and Executive Officers." Moreover, as the Foundation sells
its shares of Common Stock over time, its ownership interest and voting power in
the Company is expected to decrease.
POTENTIAL CHALLENGES. To date, there has been limited precedent with
respect to the establishment and funding of a charitable foundation as part of a
conversion of a mutual savings institution to stock form. As such, the
Foundation and the Superintendent's approval and the FDIC's non-objection to the
Conversion may be subject to potential challenges notwithstanding that the
Boards of Directors of the Bank and the Company have carefully considered the
various factors involved in the establishment of the Foundation in reaching
their determination to establish the Foundation as part of the Conversion. See
"The Conversion -- Establishment of the Foundation -- Purpose of the
Foundation." If challenges were to be instituted seeking to require the Bank and
the Company to eliminate establishment of the Foundation in connection with the
Conversion, no assurances can be made that the resolution of such challenges
would not result in a delay in the consummation of the Conversion or that any
objecting persons would not be ultimately successful in obtaining such removal
or other relief against the Bank and the Company. In addition, if the Bank and
the Company are forced to eliminate the Foundation, the Company may be required
to resolicit subscribers in the Offerings.
WEAKNESS IN THE LOCAL ECONOMY
During the late 1980s and the early 1990s, the New York City metropolitan
area experienced reduced employment as a result of layoffs in the financial
services industry, corporate relocations and the general decline of the local,
regional and national economies. Additionally, during that period the area
experienced a general weakening of real estate values and a decline in
residential construction. As a result, loan delinquencies increased and the
underlying values of properties securing non-performing loans made by lending
institutions generally declined resulting in substantial losses to some
institutions. Although the economy of the Bank's primary market area has, to a
certain extent, stabilized and local residential real estate values have
stabilized and begun to improve, commercial real estate values have only
recently begun to stabilize and generally remain below the values experienced in
the late 1980s. At August 31, 1997, substantially all of the Bank's real estate
secured loans were secured by properties located in the New York City
metropolitan area. See "Business -- Market Area and Competition."
There can be no assurances, however, that conditions in the local economy,
national economy, or real estate market in general will not deteriorate and
adversely affect the financial condition and results of operations of the Bank.
Based on information available to management at this time, management believes
the current allowance for possible loan losses is adequate. Although management
of the Bank believes that the current allowance for loan losses is adequate in
light of current economic conditions many factors may require additions to the
allowance for loan losses in future periods above those reasonably anticipated.
Future adjustments to the allowance also may be necessary if economic or other
conditions differ substantially from those underlying the assumptions used in
making such estimates. In addition, the Bank's plan to continue to increase the
amount of its loan originations can be expected to increase the overall level of
credit risk inherent in the Bank's loan portfolio. The greater risk associated
with increased loan originations may require the Bank to increase its provisions
for loan losses and to maintain an allowance for loan losses as a percentage of
total loans that is in excess of the allowance currently maintained by the Bank.
Such provisions are charged against income; thus increases would adversely
affect the Company's consolidated net income during the period in which such
provision is taken.
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POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES
Various possible and planned issuances of Common Stock could dilute the
interests of prospective stockholders of the Company following consummation of
the Conversion, as noted below.
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 70,410,880 shares of Common Stock at
the Purchase Price for an aggregate price of up to $704.1 million. An increase
in the number of shares will decrease net income per share and stockholders'
equity per share on a pro forma basis and will increase the Company's
consolidated stockholders' equity and net income. See "Capitalization" and "Pro
Forma Data."
The ESOP intends to purchase 8.0% of the Common Stock to be issued in the
Offerings. In the event that there are insufficient shares available to fill the
ESOP's order due to an oversubscription by Eligible Account Holders, the ESOP
may purchase such shares in the open market. See "Management -- Benefits --
Employee Stock Ownership Plan" and "The Conversion -- The
Offerings -- Subscription Offering."
If the Recognition Plan is approved by stockholders at an annual or special
meeting of the Company's stockholders held at least six months following the
consummation of the Conversion, the Recognition Plan intends to acquire an
amount of Common Stock equal to 4.0% of the shares of Common Stock sold in the
Offerings. Such shares of Common Stock may be acquired in the open market with
funds provided by the Company, if permissible, or from authorized but unissued
shares of Common Stock. The shares granted under the Recognition Plan will be
awarded at no cost to the recipients. In the event that additional shares of
Common Stock are issued to the Recognition Plan, stockholders would experience
dilution of their ownership interests by approximately 3.8% and per share
stockholders' equity and per share net income would decrease as a result of an
increase in the number of outstanding shares of Common Stock. See "Pro Forma
Data" and "Management -- Benefits -- Recognition Plan."
If the Company's Stock Option Plan is approved by stockholders at an annual
or special meeting of stockholders held more than six months after the
consummation of the Conversion, the Company will reserve for future issuance
pursuant to such plan a number of authorized shares of Common Stock equal to an
aggregate of 10% of the Common Stock sold in the Offerings (6,122,685 shares,
based on the maximum of the Estimated Price Range). See "Pro Forma Data" and
"Management -- Benefits -- Stock Option Plan."
REGULATORY OVERSIGHT AND LEGISLATION
The Bank is subject to extensive regulation, supervision and examination by
the Department, as its chartering authority and by the FDIC as its primary
federal regulator and insurer of its deposits up to applicable limits. The Bank
is a member of the Federal Home Loan Bank ("FHLB") System and is subject to
certain limited regulations promulgated by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board" or "FRB"). As the holding company of the
Bank, the Company also will be subject to regulation and oversight by the Office
of Thrift Supervision ("OTS"). Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
banking and thrift industries, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight, whether by the Department, the FDIC, the OTS or
Congress, could have a material impact on the Company, the Bank and their
respective operations. See "Regulation."
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIF Act")
was enacted into law. Among other things, the DIF Act authorized the FDIC to
impose a special one-time assessment on each depository institution with
SAIF-assessable deposits so that the SAIF may achieve its designated reserve
ratio. As a result of the various acquisitions completed by the Bank, it was
deemed to have SAIF-insured deposits
21
<PAGE> 60
and was subject to the special assessment. The Bank's assessment was $8.6
million on a pre-tax basis. In addition, the DIF Act provides for the merger of
the Bank Insurance Fund ("BIF") and the SAIF on January 1, 1999, but only if no
insured depository institution is a savings association on that date.
Various legislative proposals have been made in the past and there is
currently legislation that has been introduced in Congress that would (i) apply
the restrictions on activities applicable to "multiple savings and loan holding
companies" and bank holding companies to "unitary savings and loan holding
companies" and (ii) eliminate the savings association charter and require
savings associations to become banks and simultaneously abolish the OTS and its
supervisory role over savings and loan holding companies. The Bank and the
Company cannot predict which, if any, of the foregoing or other similar
proposals, if any, will ultimately be enacted or what the specific effect on the
Bank and the Company would be.
LEGISLATION LIMITING DEDUCTION OF BAD DEBT RESERVES
Under Section 593 of the Code, thrift institutions such as the Bank, which
met certain definitional tests primarily relating to their assets and the nature
of their business, were permitted to establish a tax reserve for bad debts and
to make annual additions thereto, which additions could, within specified
limitations, be deducted in arriving at their taxable income. The Bank's
deduction with respect to "qualifying loans," which are generally loans secured
by certain interests in real property, prior to January 1, 1996 was computed
using an amount based on the Bank's actual loss experience (the "experience
method"), or a percentage equal to 8.0% of the Bank's taxable income (the
"percentage of taxable income method"), computed without regard to this
deduction and with additional modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. See "Taxation -- Federal
Taxation -- Bad Debt Reserves."
The Small Business Job Protection Act of 1996 provided for the repeal of
Section 593 of the Code. As a result, the Bank is permitted to deduct only
actual bad debts as they occur and cannot utilize the percentage of taxable
income method to make additions to its bad debt reserves in the future to reduce
its effective tax rate. In addition, the Bank is required to recapture for tax
purposes (i.e., take into income) over a six year period the excess of the
balance of its bad debt reserves as of December 31, 1995 over the balance of
such reserves as of December 31, 1987. The Bank's excess amounted to $3.6
million (for which deferred taxes have been provided). However, under the
legislation, such recapture requirements would be suspended for each of two
successive taxable years beginning January 1, 1996, in which the Bank originates
a minimum amount of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding 1996.
HIGHLY COMPETITIVE INDUSTRY AND GEOGRAPHIC AREA
The Bank faces significant competition both in making loans and in
attracting deposits. The New York City metropolitan area has a significant
concentration of financial institutions, many of which are branches of
significantly larger institutions which have greater financial resources than
the Bank. In addition, the boroughs of Brooklyn and Queens, in which the Bank
maintains its primary market presence, have experienced relatively stagnant
population growth in recent periods. Such stagnant population growth also has
been a factor in the increasing competition among financial institutions
operating in the Bank's market area. It is also reflected in the low deposit
growth experienced in the Bank's existing branch offices, with the Bank's
deposit growth being primarily the result of acquisitions. The Bank's
competition for loans comes principally from commercial banks, savings banks,
savings and loan associations, credit unions, mortgage banking companies and
insurance 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
short-term money market funds, other corporate and government securities funds
and from other financial institutions such as brokerage firms and insurance
companies. In addition, the Bank may face additional competition from commercial
banks headquartered outside of the State of New York as a result of the
enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, which became
22
<PAGE> 61
fully effective on June 1, 1997 and which generally allows banks and bank
holding companies headquartered outside of New York to enter the Bank's market
through acquisition, merger or de novo branching.
ABSENCE OF MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital stock
and, consequently, there is no established market for its Common Stock at this
time. The Company has received approval to have its Common Stock quoted on the
Nasdaq National Market under the symbol "ICBC" conditioned on the consummation
of the Conversion. A public trading market having the desirable characteristics
of depth, liquidity and orderliness depends upon the existence of willing buyers
and sellers at any given time, the presence of which is dependent upon the
individual decisions of buyers and sellers over which neither the Company nor
any market maker has control. Accordingly, there can be no assurance that an
active and liquid trading market for the Common Stock will develop or that, if
developed, will continue, nor is there any assurance that purchasers of the
Common Stock will be able to sell their shares at or above the Purchase Price.
In the event a liquid market for the Common Stock does not develop or market
makers for the Common Stock discontinue their activities, such occurrences may
have an adverse impact on the liquidity of the Common Stock and the market value
of the Common Stock.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank and the Company have received a letter from RP Financial advising
them of its belief that subscription rights granted to Eligible Account Holders
and Supplemental Eligible Account Holders have no value. This letter 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 likely would be taxable only to
those Eligible Account Holders and Supplemental Eligible Account Holders who
exercise the subscription rights (either as capital gain or ordinary income) in
an amount equal to such value. Whether subscription rights are considered to
have ascertainable value is an inherently factual determination. See "The
Conversion -- Effects of the Conversion" and "-- Tax Aspects."
ROLE OF THE MARKETING ADVISOR
The Bank and the Company have retained Sandler O'Neill as advisor and
Sandler O'Neill has agreed to use its best efforts to assist the Bank and the
Company in its solicitation of subscriptions and purchase orders for Common
Stock in the Offerings. Sandler O'Neill is not obligated to take or purchase any
shares of Common Stock in the Offerings. Sandler O'Neill has not prepared any
report or opinion constituting recommendations or advice to the Bank. In
addition, Sandler O'Neill has expressed no opinion as to the prices at which
Common Stock to be issued in the Offerings may trade. Furthermore, Sandler
O'Neill has not verified the accuracy or completeness of the information
contained in the Prospectus. See "The Conversion -- Marketing Arrangements."
INDEPENDENCE COMMUNITY BANK CORP.
The Company was organized in June 1997 at the direction of the Board of
Directors of the Bank for the purpose of holding all of the capital stock of the
Bank and in order to facilitate the Conversion. The Company has applied for the
approval of the OTS to become a savings and loan holding company and as such
will be subject to regulation by the OTS. After completion of the Conversion the
Company will conduct business initially as a unitary savings and loan holding
company. See "Regulation -- The Company." Upon consummation of the Conversion,
the Company will have no significant assets other than all of the outstanding
shares of common stock of the Bank, the portion of the net proceeds from the
Offerings retained by the Company and the Company's loan to the ESOP, and the
Company will have no significant liabilities. See "Use of Proceeds." Initially,
the management of the Company and the Bank will be substantially identical and
the Company will neither own nor lease any property, but will instead use the
premises, equipment and furniture of the Bank. At
23
<PAGE> 62
the present time, the Company does not intend to employ any persons other than
officers who are also officers of the Bank, and the Company 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 or changes its business in the
future.
Management believes that the holding company structure will provide the
Company and the Bank with additional flexibility to diversify its business
activities through existing or newly-formed subsidiaries (which subsidiaries
could be financial institutions), or through acquisitions of other entities,
including potentially other financial institutions and financial services
related companies. Although there are no current arrangements, understandings or
agreements regarding any such opportunities or transactions, the Company will be
in a position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any such acquisition and
expansion opportunities that may arise. The initial activities of the Company
are anticipated to be funded by the proceeds to be retained by the Company and
earnings thereon, as well as dividends from the Bank. See "Dividend Policy."
The Company's principal executive office is located at the executive office
of the Bank at 195 Montague Street, Brooklyn, New York 11201 and its telephone
number is (718) 722-5300.
INDEPENDENCE SAVINGS BANK
The Bank is a New York-chartered savings bank which conducts business
through 34 full service offices located in the boroughs of Brooklyn, Queens,
Manhattan, the Bronx, and Staten Island as well as Nassau County, New York. At
August 31, 1997, the Bank had $3.79 billion of assets, $3.47 billion of
liabilities, including $3.37 billion of deposits, and $324.8 million of total
equity. The Bank was reorganized into a stock savings bank in April 1992 in
connection with the formation of the Mutual Holding Company.
The Bank has been in operation since 1850, originally serving the borough
of Brooklyn and later expanding its operations into the boroughs of Queens,
Manhattan, the Bronx and Staten Island as well as Nassau County. The Bank's
customer base, like the urban neighborhoods which it serves, is racially and
ethnically diverse and is comprised of mostly middle-income households and to a
lesser degree, low to moderate income households. The Bank is, and intends to
continue to be, a community-oriented savings institution whose businesses
primarily consist of accepting deposits from customers and investing those funds
primarily in residential loans, including those secured by multi-family
residential properties, cooperative apartment shares and single-family
residential properties. The increased capital resulting from the Offerings will
facilitate the Bank's ability to sustain its continued growth and development
over the long term while maintaining its status as a community-based,
independent financial institution serving Brooklyn, Queens and the greater New
York City metropolitan area.
The Bank has sought to set itself apart from its many competitors by
tailoring its products and services to meet the needs of its customers by
emphasizing customer service and convenience and by being actively involved in
community affairs in the neighborhoods and communities it serves. For example,
as part of the Bank's competitive strategy to attract loyal deposit customers,
the Bank has historically been a low service fee provider of a variety of
savings and checking account products. In furtherance of its commitment to the
communities which it serves, Bank employees at all levels are encouraged and
afforded the opportunity to participate in community outreach programs. Perhaps
most indicative of the Bank's commitment to strengthen its bond with customers
and the communities it serves is the decision to form and fund the Foundation.
The Bank believes that this commitment to customer and community service has
permitted it to build strong customer identification and loyalty which is
essential to the Bank's ability to compete effectively.
At August 31, 1997, the net loan portfolio amounted to $2.68 billion or
70.6% of the Bank's total assets. In addition, the Bank invests in investment
and mortgage-backed and mortgage-related securities consisting primarily of U.S.
Treasury notes and bills, mortgage-backed securities and collateralized mortgage
obligations ("CMOs") issued by government sponsored enterprises. At August 31,
1997, the Bank's investment and
24
<PAGE> 63
mortgage-backed and mortgage-related securities portfolios (all of which are
classified available for sale) totaled $721.1 million or 19.0% of total assets.
The Bank is subject to examination and comprehensive regulation by the
Department, which is the Bank's chartering authority and regulator, and by the
FDIC, as its primary federal regulator and as the administrator of the BIF and
the SAIF which insure the Bank's deposits up to applicable limits. The Bank also
is subject to certain reserve requirements established by the Federal Reserve
Board and is a member of the FHLB of New York, which is one of the 12 regional
banks comprising the FHLB System. See "Regulation -- The Bank."
The Bank's executive offices are located at 195 Montague Street, Brooklyn,
New York 11201 and its telephone number is (718) 722-5300.
25
<PAGE> 64
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock are estimated to be between
$439.9 million and $597.2 million ($687.7 million assuming an increase in the
Estimated Price Range by 15%). See "Pro Forma Data" as to the assumptions used
to arrive at such amounts.
The Company plans to use 50% of the net proceeds from the Offerings to
purchase all the outstanding common stock of the Bank issued in the Conversion
and retain the remainder of the net proceeds. The net proceeds retained by the
Company will be initially used to invest primarily in investment securities and
mortgage-backed and mortgage-related securities. The Company intends to use a
portion of the net proceeds to make a loan directly to the ESOP to enable the
ESOP to purchase 8.0% of the Common Stock sold in the Offerings. Based upon the
issuance of 45,254,630 shares and 61,226,852 shares at the minimum and maximum
of the Estimated Price Range, respectively, the loan to the ESOP would be $36.2
million and $49.0 million, respectively. It is anticipated that the loan to the
ESOP will have a term of not less than 20 years and a fixed interest rate at the
Bank's prime rate as of the date of the loan. See
"Management -- Benefits -- Employee Stock Ownership Plan." The net proceeds from
the Offerings also may be used by the Company and the Bank to support future
expansion of retail banking operations or diversification into other businesses,
through acquisitions or otherwise, including the potential acquisition of other
financial institutions and/or branch offices. There are no current plans,
arrangements, understandings or agreements regarding such diversification or
acquisitions.
Subject to applicable regulatory limitations and then-existing
circumstances, the net proceeds also may be used by the Company to repurchase
shares of Common Stock, although the Company currently has no plans of effecting
any such transactions following consummation of the Conversion. Pursuant to
Department regulations, the Company may not repurchase any Common Stock in the
first year after Conversion and, during each of the next two following years,
may only repurchase up to 5% of its outstanding capital stock during each 12
month period. In addition, the FDIC prohibits an institution which has converted
from mutual to stock form of ownership from repurchasing its capital stock
within one year following the date of its conversion to stock form, except that
stock repurchases of no greater than 5% of a bank's outstanding capital stock
may be repurchased during this one-year period where compelling and valid
business reasons are established to the satisfaction of the FDIC. Based upon
facts and circumstances following the Conversion and subject to applicable
regulatory requirements, the Board of Directors may determine to repurchase
shares of Common Stock in the future. Such facts and circumstances may include
but are not limited to: (i) market and economic factors such as the price at
which the Common Stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the
opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Company and its 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 Purchase Price. To the extent that the Company repurchases stock at market
prices in excess of the Purchase Price, such repurchases may have a dilutive
effect upon the interests of existing stockholders. Any stock repurchases will
be subject to the determination of the Board of Directors that the Bank will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases and that such capital will be adequate, taking into account, among
other things, the level of nonperforming and other risk assets, the Company's
and the Bank's current and projected results of operations and asset/liability
structure, the economic environment, tax and other considerations. See "The
Conversion -- Certain Restrictions on Purchase or Transfer of Shares after the
Conversion." The portion of the net proceeds contributed to the Bank will be
used for general corporate purposes, including investment in loans and
investment and mortgage-backed securities.
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<PAGE> 65
DIVIDEND POLICY
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to declare dividends on the Common Stock, subject to
statutory and regulatory requirements. Following consummation of the Conversion,
the Board of Directors of the Company may consider a policy of paying cash
dividends on the Common Stock. However, no decision has been made as to the
amount or timing of such dividends. Declarations of dividends by the Board of
Directors will depend upon a number of factors, including the amount of net
proceeds from the Offerings retained by the Company, investment opportunities
available to the Company or the Bank, capital requirements, regulatory
limitations, the Company's and the Bank's financial condition and results of
operations, tax considerations, and general economic conditions. Consequently,
there can be no assurance that dividends will in fact be paid on the Common
Stock or that, if paid, such dividends will not be reduced or eliminated in
future periods. Special cash dividends, stock dividends or returns of capital
may be paid in addition to, or in lieu of, regular cash dividends (however, the
Company and the Bank have committed to the FDIC that they will take no action
with respect to any return of capital during the one-year period following
consummation of the Conversion).
Dividends from the Company will depend, in part, upon receipt of dividends
from the Bank, because the Company initially will have no source of income other
than dividends from the Bank and earnings from the investment of the net
Conversion proceeds retained by the Company.
Any payment of dividends by the Bank to the Company which would be deemed
to be a distribution from the Bank's bad debt reserves for federal income tax
purposes would require a payment of taxes at the then-current tax rate by the
Bank on the amount of earnings deemed to be removed from the reserves for such
distribution. The Bank has no current intention of making any distribution that
would create such a federal tax liability either before or after the Conversion.
See "Taxation." Under the New York State Banking Law ("New York Banking Law"),
dividends may be declared and paid only out of the net profits of the Bank. The
approval of the Department 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 Department or the FDIC. As of
August 31, 1997, the Bank had $67.8 million available for the payment of
dividends without prior approval of the Department. Subsequent to the
Conversion, the availability of the Bank's funds for the payment of dividends
may be limited by the liquidation account. See "The Conversion -- Liquidation
Rights." In addition, no dividends can be declared by the Bank without the prior
notice to and the non-objection of the OTS.
Unlike the Bank, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders,
although the source of such dividends will be, in part, dependent upon dividends
from the Bank in addition to the net proceeds retained by the Company and
earnings thereon. The Company is subject, however, to the requirements of
Delaware law which generally limit dividends to an amount equal to the excess of
the net assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.
MARKET FOR COMMON STOCK
The Company has never issued capital stock (other than 100 shares issued to
the Bank, which will be cancelled upon consummation of the Conversion).
Consequently, there is no established market for the Common Stock at this time.
The Company has received conditional approval to have its Common Stock quoted on
the Nasdaq National Market under the symbol "ICBC" subject to completion of the
Conversion and compliance with certain conditions including the presence of at
least three registered and active market makers. Although under no obligation to
do so, Sandler O'Neill has informed the Company that it intends, upon the
completion of the Conversion, to make a market in the Common Stock by
maintaining bid and ask quotations and trading in the Common Stock so long as
the volume of trading activity and certain other market making considerations
justify it doing so. The Company will seek to encourage and assist at least two
27
<PAGE> 66
other market makers to make a market in the common stock in order to fulfill the
requirement of having three market makers in order to have the Common Stock
quoted on the Nasdaq National Market. Making a market involves maintaining bid
and ask quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. In addition, the development of a liquid
public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Company, the Bank or any
market maker. Accordingly, there can be no assurance that an active and liquid
trading market for the Common Stock will develop or that, if developed, it will
continue. The absence of an active and liquid trading market for the Common
Stock could affect the price and liquidity of the Common Stock. Furthermore,
there can be no assurance that persons purchasing shares of Common Stock will be
able to sell them at or above the Purchase Price.
REGULATORY CAPITAL REQUIREMENTS
Under FDIC regulations, depository institutions such as the Bank are
required to maintain a minimum ratio of qualifying total capital to total assets
and off-balance sheet instruments, as adjusted to reflect their relative credit
risks, of 8.0%. At least one-half of total capital is to be comprised of common
equity, retained earnings, non-cumulative perpetual preferred stock and a
limited amount of cumulative perpetual preferred stock, less goodwill ("Tier I
capital"). The remainder of total capital may consist of a limited amount of
subordinated debt, other preferred stock, certain other instruments and a
limited amount of general reserves for loan losses ("Tier II capital").
The FDIC also has established an additional capital adequacy guideline
referred to as the Tier I leverage capital ratio, which measures the ratio of
Tier I capital to total assets less goodwill. Although the highest rated
depository institutions are required to maintain a minimum Tier I leverage
capital ratio of 3.0%, most depository institutions are required to maintain
Tier I leverage capital ratios of 4.0% to 5.0% or more. The actual required
ratio is based on the FDIC's assessment of the individual depository
institution's asset quality, earnings performance, interest-rate risk and
liquidity. Although the FDIC has not advised the Bank of a specific Tier I
leverage capital ratio requirement, management of the Bank believes that for
purposes of complying with applicable federal regulations, the required Tier I
leverage capital ratio for the Bank is 3.0%, based upon published regulatory
criteria for establishing such minimum. There can be no assurance that the Bank
will not be required by the FDIC to maintain a higher Tier I leverage capital
ratio. As a consequence, for purposes of the table below, the Bank has assumed a
4.0% Tier I leverage capital requirement. See "Regulation -- The Bank -- Capital
Requirements."
At August 31, 1997, the Bank exceeded all of the regulatory capital
requirements applicable to it. Set forth below is a summary of the Bank's
compliance with the applicable capital standards as of August 31, 1997 on a
historical basis and on a pro forma basis assuming that the indicated number of
shares were sold by the Company as of such date and receipt by the Bank of 50%
of net Conversion proceeds. Proceeds have been assumed to be initially invested
in interest-earning assets which have a 20% risk-weighting. For purposes of the
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<PAGE> 67
table below, the amount expected to be borrowed by the ESOP and the cost of the
shares expected to be acquired by the Recognition Plan are deducted from pro
forma capital.
<TABLE>
<CAPTION>
PRO FORMA AT AUGUST 31, 1997 BASED ON
--------------------------------------------------------------------------------
45,254,630 53,240,741 61,226,852
SHARES SHARES SHARES
HISTORICAL AT (MINIMUM (MID-POINT (MAXIMUM
AUGUST 31, 1997 OF RANGE) OF RANGE) OF RANGE)(1)
------------------------ ------------------------ ------------------------ ------------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF ASSETS(2) AMOUNT OF ASSETS(2) AMOUNT OF ASSETS(2) AMOUNT OF ASSETS(2)
-------- ------------ -------- ------------ -------- ------------ -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital(3).... $324,769 8.56% $507,499 12.65% $540,252 13.33% $573,006 14.00%
======== ===== ======== ===== ======== ===== ======== =====
Tier I risk-based
level:(4)(5)..... $258,319 10.13% $441,049 17.01% $473,802 18.22% $506,556 19.42%
Requirement...... 101,980 4.00 103,732 4.00 104,045 4.00 104,358 4.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess........... $156,339 6.13% $337,317 13.01% $369,757 14.22% $402,198 15.42%
======== ===== ======== ===== ======== ===== ======== =====
Total risk-based
level:(1)(4)(5)... $289,434 11.35% $472,164 18.21% $504,917 19.41% $537,671 20.61%
Requirement...... 203,961 8.00 207,464 8.00 208,090 8.00 208,717 8.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess........... $ 85,473 3.35% $264,700 10.21% $296,827 11.41% $328,954 12.61%
======== ===== ======== ===== ======== ===== ======== =====
Tier I leverage
level:(4)(5)(6)... $258,319 6.91% $441,049 11.15% $473,802 11.86% $506,556 12.55%
Requirement...... 149,520 4.00 158,278 4.00 159,844 4.00 161,409 4.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess........... $108,799 2.91% $282,771 7.15% $313,959 7.86% $345,147 8.55%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(1) In the event of an oversubscription for shares of Common Stock, the Company
and the Bank may increase the total number of shares offered in the
Conversion by up to 15%. Assuming a full increase in the number of shares,
the Bank's Tier I risk-based, total risk-based and Tier I leverage capital
ratios would be 20.8%, 22.0% and 13.3%, respectively, at the maximum of the
Estimated Price Range, as adjusted. See generally, "Capitalization" and "Pro
Forma Data."
(2) Adjusted or risk-weighted assets, as appropriate.
(3) The difference between capital under generally accepted accounting
principles ("GAAP") and regulatory capital is an adjustment to decrease
regulatory capital by the amount of the net unrealized gain, if any, on
available-for-sale securities recognized for GAAP purposes, as well as
adjustments related to core intangibles arising from the deposit
acquisitions of the Bank and the goodwill resulting from the Bay Ridge
acquisition. Regulatory total risk-based capital reflects these adjustments
plus the inclusion of the allowance for loan losses.
(4) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the shares of Common Stock sold at the minimum, midpoint and
maximum of the Estimated Price Range. These levels also assume funding by
the Bank of the Recognition Plan equal to 4% of the Common Stock sold and
repayment of the Company's loan to the ESOP. See "Management -- Benefits"
for a discussion of the Recognition Plan and ESOP. With respect to the
Recognition Plan, such amounts are assumed to be $18.1 million, $21.3
million and $24.5 million, at the minimum, midpoint and maximum of the
Estimated Price Range, respectively. With respect to the ESOP loan, such
amounts are assumed to be $36.2 million, $42.6 million and $49.0 million at
the minimum, midpoint and maximum of the Estimated Price Range.
(5) The pro forma Tier 1 risk-based, total risk-based and Tier 1 leverage
capital amounts reflect the $92,000 of net assets to be acquired by the Bank
upon the merger of the Mutual Holding Company with and into the Bank.
(6) The current leverage capital requirement for savings banks is 3% of total
adjusted assets for savings banks that receive the highest supervisory
rating for safety and soundness and that are not experiencing or
anticipating significant growth. The current leverage capital ratio
applicable to all other savings banks is 4% to 5%. The Company will not be
subject to regulatory capital requirements.
29
<PAGE> 68
CAPITALIZATION
The following table presents the historical consolidated capitalization of
the Bank at August 31, 1997, and the pro forma consolidated capitalization of
the Company after giving effect to the Conversion and Reorganization, based upon
the sale of the number of shares shown below and the other assumptions set forth
under "Pro Forma Data."
<TABLE>
<CAPTION>
THE COMPANY -- PRO FORMA
BASED UPON SALE AT $10.00 PER SHARE
-----------------------------------------------------------
45,254,630 53,240,741 61,226,852 70,410,880
THE SHARES SHARES SHARES SHARES(1)
BANK-HISTORICAL (MINIMUM OF (MIDPOINT OF (MAXIMUM OF (15% ABOVE
CAPITALIZATION RANGE) RANGE) RANGE) MAXIMUM OF RANGE)
--------------- ----------- -------------- ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2).................... $ 3,371,956 $3,371,956 $3,371,956 $3,371,956 $ 3,371,956
Borrowings..................... 17,109 17,109 17,109 17,109 17,109
---------- ---------- ---------- ---------- ----------
Total deposits and
borrowings................... $ 3,389,065 $3,389,065 $3,389,065 $3,389,065 $ 3,389,065
========== ========== ========== ========== ==========
Stockholders' equity:
Preferred Stock, $.01 par
value, 25,000,000 shares
authorized; none to be
issued.................... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value,
125,000,000 shares
authorized; shares issued
or to be issued as
reflected(3).............. -- 489 575 661 760
Additional paid-in
capital(3)(4)............. 52,670 475,571 560,541 645,512 743,227
Retained earnings(4)(5)...... 267,057 319,820 319,820 319,820 319,820
Net unrealized gain on
marketable securities..... 5,042 5,042 5,042 5,042 5,042
Less:
Expense of contribution to
Foundation, net(6)........ -- (19,188) (22,574) (25,960) (29,854)
Common Stock to be acquired
by the ESOP(7)............ -- (36,204) (42,593) (48,981) (56,329)
Common Stock to be acquired
by the Recognition
Plan(8)................... -- (18,102) (21,296) (24,491) (28,164)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity..... $ 324,769 $ 727,428 $ 799,515 $ 871,603 $ 954,502
========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to 15% to
reflect changes in market or financial conditions following the commencement
of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offerings. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of the shares of Common Stock to be sold in the
Offerings and the issuance of Common Stock to the Foundation at $10.00 per
share. No effect has been given to the issuance of additional shares of
Common Stock pursuant to the proposed Stock Option Plan. See "Pro Forma
Data" and "Management -- Benefits -- Stock Option Plan." Additional paid-in
capital has been adjusted to reflect the issuance of additional shares of
Common Stock to the Foundation at the Purchase Price.
(4) The pro forma retained earnings reflects the $92,000 of net assets to be
acquired by the Company and the Bank upon the merger of the Mutual Holding
Company with and into the Bank. The pro forma additional paid-in capital
also reflects the addition of the Bank's historical additional paid-in
capital.
(5) The retained earnings of the Bank will be substantially restricted after the
Conversion by virtue of the liquidation account to be established in
connection with the Conversion. See "The Conversion --
(footnotes continued on following page)
30
<PAGE> 69
-------------------
Liquidation Rights." In addition, certain distributions from the Bank's
retained earnings may be treated as being from its accumulated bad debt
reserve for tax purposes, which would cause the Bank to have additional
taxable income. See "Taxation."
(6) Net of the tax effect of the contribution of Common Stock based upon a 47%
marginal 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 8.0% of the Common Stock sold in the Offerings will be
purchased by the ESOP, which is reflected as a reduction of stockholders'
equity. The ESOP shares will be purchased with funds loaned to the ESOP by
the Company. See "Pro Forma Data" and "Management -- Benefits -- Employee
Stock Ownership Plan."
(8) The Company intends to adopt the Recognition Plan and to submit such plan to
stockholders at an annual or special meeting of stockholders held at least
six months following the consummation of the Conversion. If the plan is
approved by stockholders, the Company intends to contribute sufficient funds
to the trust created under the Recognition Plan to enable the trust to
purchase a number of shares of Common Stock equal to 4.0% of the Common
Stock sold in the Offerings. Assumes that stockholder approval has been
obtained and that the shares have been purchased in the open market at the
Purchase Price. However, in the event the Company issues authorized but
unissued shares of Common Stock to the Recognition Plan in the amount of
4.0% of the Common Stock sold in the Offerings, the voting interests of
existing stockholders would be diluted by approximately 3.8%. The shares are
reflected as a reduction of stockholders' equity. See "Pro Forma Data" and
"Management -- Benefits -- Recognition Plan."
31
<PAGE> 70
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $439.9 million and $597.2 million (or $687.7
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) all shares of Common Stock will be sold in the
Subscription Offering; (ii) no fees will be paid to Sandler O'Neill on shares,
purchased by (x) the ESOP and any other employee benefit plan of the Company or
the Bank, (y) officers, directors, employees and members of their immediate
families or (z) the Foundation; (iii) Sandler O'Neill will receive a fee equal
to 1.625% of the aggregate Purchase Price for sales in the Subscription Offering
(excluding the sale of shares to the ESOP, employee benefit plans, officers,
directors and their immediate families and the Foundation); (iv) the Company
will contribute to the Foundation, from authorized but unissued shares, an
amount of Common Stock equal to 8% of the Common Stock sold in the Conversion;
and (v) total expenses, including the marketing fees paid to Sandler O'Neill,
will be between $12.7 million and $15.1 million (or $16.5 million in the event
the Estimated Price Range is increased by 15%). Actual expenses may vary from
those estimated.
Pro forma consolidated net income and stockholders' equity of the Company
have been calculated for the five months ended August 31, 1997 and for the year
ended March 31, 1997 as if the Common Stock to be issued in the Offerings had
been sold at the beginning of the respective periods and the net proceeds had
been invested at 5.56% and 6.00%, which represent the yields on one-year U.S.
Government securities at August 31, 1997 and March 31, 1997, respectively
(which, in light of changes in interest rates in recent periods, are deemed by
the Company and the Bank to more accurately reflect pro forma reinvestment rates
than the arithmetic average method). The effect of withdrawals from deposit
accounts for the purchase of Conversion Stock has not been reflected. A marginal
tax rate of 47% has been assumed for each of the periods, resulting in an
after-tax yield of 2.95% for the five months ended August 31, 1997 and 3.18% for
the year ended March 31, 1997. 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 shares
purchased by the ESOP and the effect of the issuance of shares to the
Foundation. See Note 3 to the tables below. 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 intends to make a
loan to fund the purchase of 8.0% of the Common Stock by the ESOP and retain 50%
of the net proceeds from the Offerings.
No effect has been given in the tables to the issuance of additional shares
of Common Stock pursuant to the proposed Stock Option Plan. See
"Management -- Benefits -- Stock Option Plan." The table below gives effect to
the Recognition Plan, which is expected to be adopted by the Company following
the Conversion and presented (together with the Stock Option Plan) to
stockholders for approval at an annual or special meeting of stockholders to be
held at least six months following the consummation of the Conversion. If the
Recognition Plan is approved by stockholders, the Recognition Plan intends to
acquire an amount of Common Stock equal to 4.0% of the shares of Common Stock
issued in the Offerings, either through open market purchases or from authorized
but unissued shares of Common Stock. The table below assumes that stockholder
approval has been obtained, as to which there can be no assurance, and that the
shares acquired by the Recognition Plan are purchased in the open market at the
Purchase Price. No effect has been given to (i) the Company's results of
operations after the Conversion, (ii) the market price of the Common Stock after
the Conversion, or (iii) a less than 4.0% purchase by the Recognition Plan. In
addition, no effect has been given in the tables to the effect on book value of
the liquidation account to be established for the benefit of Eligible Account
Holders or in the event of liquidation of the Bank, to the tax effect of the bad
debt reserve and other factors.
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 stockholders' equity represents the difference
between the stated amount of assets and liabilities of the Company computed in
accordance with GAAP. The pro forma stockholders' equity is not intended to
represent the fair market value of the Common Stock and may be different than
amounts that would be available for distribution to stockholders in the event of
liquidation.
32
<PAGE> 71
THE FOLLOWING TABLES GIVE EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED
SHARES OF THE COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY WITH THE
COMPLETION OF THE CONVERSION. THE VALUATION RANGE, AS SET FORTH HEREIN AND IN
THE TABLES BELOW, TAKES INTO ACCOUNT THE IMPACT OF THE ISSUANCE OF SHARES TO THE
FOUNDATION.
<TABLE>
<CAPTION>
AT OR FOR THE FIVE MONTHS ENDED AUGUST 31, 1997
------------------------------------------------------------
70,410,880
45,254,630 53,240,741 61,226,852 SHARES SOLD
SHARES SOLD SHARES SOLD SHARES SOLD AT $10.00
AT $10.00 AT $10.00 AT $10.00 PER SHARE
PER SHARE PER SHARE PER SHARE (15% ABOVE
(MINIMUM OF (MIDPOINT (MAXIMUM OF MAXIMUM OF
RANGE) OF RANGE) RANGE) RANGE)(9)
----------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.................................... $ 452,546 $532,407 $ 612,269 $ 704,109
Plus: Shares acquired by Foundation (equal to 8%
of the shares sold in the Conversion)........... 36,204 42,593 48,981 56,329
-------- -------- -------- --------
Pro forma market capitalization................. $ 488,750 $575,000 $ 661,250 $ 760,438
======== ======== ======== ========
Gross proceeds.................................... $ 452,546 $532,407 $ 612,269 $ 704,109
Less: Offering expenses and commissions........... 12,690 13,884 15,077 16,450
-------- -------- -------- --------
Estimated net proceeds.......................... 439,856 518,523 597,192 687,659
Less: Shares purchased by the ESOP................ (36,204) (42,593) (48,981) (56,329)
Shares purchased by the Recognition Plan..... (18,102) (21,296) (24,491) (28,164)
-------- -------- -------- --------
Total estimated net proceeds, as adjusted(1)...... $ 385,550 $454,634 $ 523,720 $ 603,166
======== ======== ======== ========
Net income(2):
Historical...................................... $ 10,981 $ 10,981 $ 10,981 $ 10,981
Pro forma income on net proceeds................ 4,734 5,582 6,430 7,406
Pro forma ESOP adjustment(3).................... (400) (470) (541) (622)
Pro forma Recognition Plan adjustment(4)........ (799) (941) (1,082) (1,244)
-------- -------- -------- --------
Pro forma net income............................ $ 14,516 $ 15,152 $ 15,788 $ 16,521
======== ======== ======== ========
Net income per share(2)(5):
Historical...................................... $ .24 $ .21 $ .18 $ .16
Pro forma income on net proceeds................ .10 .10 .10 .11
Pro forma ESOP adjustment(3).................... (.01) (.01) (.01) (.01)
Pro forma Recognition Plan adjustment(4)........ (.02) (.02) (.02) (.02)
-------- -------- -------- --------
Pro forma net income per share(4)(6)............ $ .31 $ .28 $ .25 $ .24
======== ======== ======== ========
Offering price to pro forma net income per
share(5)........................................ 13.44x 14.88x 16.67x 17.36x
======== ======== ======== ========
Stockholders' equity:
Historical(7)................................... $ 324,861 $324,861 $ 324,861 $ 324,861
Estimated net proceeds.......................... 439,856 518,523 597,192 687,659
Plus: Shares issued to Foundation............... 36,204 42,593 48,981 56,329
Less: Contribution to Foundation................ (36,204) (42,593) (48,981) (56,329)
Plus: Tax benefit of the contribution to
Foundation.................................... 17,016 20,019 23,021 26,474
Less: Common Stock acquired by the ESOP(3)...... (36,204) (42,593) (48,981) (56,329)
Common Stock to be acquired by the
Recognition Plan(4)..................... (18,102) (21,296) (24,491) (28,164)
-------- -------- -------- --------
Pro forma stockholders' equity(4)(6)(8)......... $ 727,427 $799,514 $ 871,602 $ 954,501
======== ======== ======== ========
Stockholders' equity per share(5):
Historical(7)................................... $ 6.65 $ 5.65 $ 4.91 $ 4.27
Estimated net proceeds.......................... 9.00 9.02 9.03 9.04
Plus: Shares issued to Foundation............... .74 .74 .74 .74
Less: Contribution to Foundation................ (.74) (.74) (.74) (.74)
Plus: Tax benefit of contribution to
Foundation................................ .35 .35 .35 .35
Less: Common Stock acquired by the ESOP(3)...... (.74) (.74) (.74) (.74)
Common Stock to be acquired by the
Recognition Plan(4)..................... (.37) (.37) (.37) (.37)
-------- -------- -------- --------
Pro forma stockholders' equity per
share(4)(6)(8)................................ $ 14.89 $ 13.91 $ 13.18 $ 12.55
======== ======== ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share(5)............... 67.16% 71.89% 75.87% 79.68%
======== ======== ======== ========
Offering price as a percentage of pro forma
tangible stockholders' equity per share(5)...... 73.31% 77.82% 81.57% 85.11%
======== ======== ======== ========
</TABLE>
(footnotes on following pages)
33
<PAGE> 72
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31, 1997
------------------------------------------------------------
70,410,880
45,254,630 53,240,741 61,226,852 SHARES SOLD
SHARES SOLD SHARES SOLD SHARES SOLD AT $10.00
AT $10.00 AT $10.00 AT $10.00 PER SHARE
PER SHARE PER SHARE PER SHARE (15% ABOVE
(MINIMUM OF (MIDPOINT (MAXIMUM OF MAXIMUM OF
RANGE) OF RANGE) RANGE) RANGE)(9)
----------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.................................... $ 452,546 $532,407 $ 612,269 $ 704,109
Plus: Shares acquired by Foundation (equal to 8%
of the shares issued in the Conversion)......... 36,204 42,593 48,981 56,329
-------- -------- -------- --------
Pro forma market capitalization................. $ 488,750 $575,000 $ 661,250 $ 760,438
======== ======== ======== ========
Gross proceeds.................................... $ 452,546 $532,407 $ 612,269 $ 704,109
Less: Offering expenses and commissions........... 12,690 13,884 15,077 16,450
-------- -------- -------- --------
Estimated net proceeds.......................... 439,856 518,523 597,192 687,659
Less: Shares purchased by the ESOP................ (36,204) (42,593) (48,981) (56,329)
Shares purchased by the Recognition Plan..... (18,102) (21,296) (23,491) (28,164)
-------- -------- -------- --------
Total estimated net proceeds, as adjusted(1)...... $ 385,550 $454,634 $ 523,720 $ 603,166
======== ======== ======== ========
Net income(2):
Historical...................................... $ 17,180 $ 17,180 $ 17,180 $ 17,180
Pro forma income on net proceeds................ 12,261 14,457 16,654 19,181
Pro forma ESOP adjustment(3).................... (959) (1,129) (1,298) (1,493)
Pro forma Recognition Plan adjustment(4)........ (1,919) (2,257) (2,596) (2,985)
-------- -------- -------- --------
Pro forma net income............................ $ 26,563 $ 28,251 $ 29,940 $ 31,883
======== ======== ======== ========
Net income per share(2)(5):
Historical...................................... $ .38 $ .32 $ .28 $ .24
Pro forma income on net proceeds................ .27 .27 .27 .27
Pro forma ESOP adjustment(3).................... (.02) (.02) (.02) (.02)
Pro forma Recognition Plan adjustment(4)........ (.04) (.04) (.04) (.04)
-------- -------- -------- --------
Pro forma net income per share(4)(6)............ $ .59 $ .53 $ .49 $ .45
======== ======== ======== ========
Offering price to pro forma net income per
share(5)........................................ 16.95x 18.87x 20.41x 22.22x
======== ======== ======== ========
Stockholders' equity:
Historical(7)................................... $ 309,207 $309,207 $ 309,207 $ 309,207
Estimated net proceeds.......................... 439,856 518,523 597,192 687,659
Plus: Shares issued to Foundation............... 36,204 42,593 48,981 56,329
Less: Contribution to Foundation................ (36,204) (42,593) (48,981) (56,329)
Plus: Tax benefit of the contribution to
Foundation................................ 17,016 20,019 23,021 26,474
Less: Common Stock acquired by the ESOP(3)...... (36,204) (42,593) (48,981) (56,329)
Common Stock to be acquired by the
Recognition Plan(4)..................... (18,102) (21,296) (24,491) (28,164)
-------- -------- -------- --------
Pro forma stockholders' equity(4)(6)(8)......... $ 711,772 $783,859 $ 855,947 $ 938,846
======== ======== ======== ========
Stockholders' equity per share:
Historical(7)................................... $ 6.33 $ 5.38 $ 4.68 $ 4.07
Estimated net proceeds.......................... 9.00 9.02 9.03 9.04
Plus: Shares issued to Foundation............... 0.74 0.74 0.74 0.74
Less: Contribution to Foundation................ (0.74) (0.74) (0.74) (0.74)
Plus: Tax benefit of contribution to
Foundation.................................... 0.35 0.35 0.35 0.35
Less: Common Stock acquired by the ESOP(3)...... (0.74) (0.74) (0.74) (0.74)
Common Stock to be acquired by the
Recognition Plan(4)..................... (0.37) (0.37) (0.37) (0.37)
-------- -------- -------- --------
Pro forma stockholders' equity per
share(4)(6)(8)................................ $ 14.57 $ 13.64 $ 12.95 $ 12.35
======== ======== ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share(5)............... 68.63% 73.31% 77.22% 80.97%
======== ======== ======== ========
Offering price as a percentage of pro forma
tangible stockholders' equity per share(5)...... 75.02% 79.43% 83.06% 86.58%
======== ======== ======== ========
</TABLE>
(footnotes on following pages)
34
<PAGE> 73
- ---------------
(1) Estimated net proceeds, as adjusted, consist of the estimated net proceeds
from the Offerings minus (i) the proceeds attributable to the purchase by
the ESOP and (ii) the value of the shares to be purchased by the Recognition
Plan, subject to stockholder approval, after the Conversion at an assumed
purchase price of $10.00 per share.
(2) Does not give effect to the non-recurring expense that will be recognized in
fiscal 1998 as a result of the establishment of the Foundation. The Company
will recognize an after-tax expense for the amount of the contribution to
the Foundation which is expected to be $19.2 million, $22.6 million, $26.0
million and $29.9 million at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Price Range, respectively. Assuming the
contribution to the Foundation had been expensed during the five months
ended August 31, 1997, pro forma net loss per share would be $(0.10),
$(0.14), $(0.17) and $(0.19) at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Price Range, respectively. Per share net income
for the five months ended August 31, 1997 is based on 45,292,342,
53,285,108, 61,277,874 and 70,469,555 shares outstanding which represents
the shares sold in the Offerings, shares contributed to the Foundation and
shares to be allocated or distributed under the ESOP and Recognition Plan
for the five month period. Assuming the contribution to the Foundation was
expensed during the year ended March 31, 1997, pro forma net income per
share would be $0.16, $0.11, $0.06 and $0.03 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively. Per share net income data for the year ended March 31, 1997 is
based on 45,345,139, 53,347,222, 61,349,306 and 70,551,701 shares
outstanding which represents shares sold in the Offerings, shares
contributed to the Foundation and shares to be allocated or distributed
under the ESOP and Recognition Plan for each of the periods presented.
(3) It is assumed that 8.0% of the shares of Common Stock sold in the Offerings
(excluding any shares issued to the Foundation), will be purchased by the
ESOP with funds loaned by the Company. The Company and the Bank intend to
make annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The pro forma net income
assumes (i) that the loan to the ESOP is payable over 20 years, with the
ESOP shares having an average fair value of $10.00 per share in accordance
with SOP 93-6, entitled "Employers' Accounting for Employee Stock Ownership
Plans," of the AICPA, and (ii) the effective tax rate was 47% for each of
the periods. See "Management -- Benefits -- Employee Stock Ownership Plan."
(4) It is assumed that the Recognition Plan will purchase, following stockholder
approval of such plan, a number of shares of Common Stock equal to 4.0% of
the shares of Common Stock sold in the Offerings (excluding any shares
issued to the Foundation) for issuance to directors, officers and employees.
Funds used by the Recognition Plan to purchase the shares initially will be
contributed to the Recognition Plan by the Company. It is further assumed
that the shares were acquired by the Recognition Plan at the beginning of
the period presented in open market purchases at the Purchase Price and that
8.33% and 20.00% of the amount contributed was an amortized expense during
the five months ended August 31, 1997 and the year ended March 31, 1997. The
issuance of authorized but unissued shares of Common Stock pursuant to the
Recognition Plan in the amount of 4.0% of the Common Stock issued in the
Offerings would dilute the voting interests of existing stockholders by
approximately 3.8% and under such circumstances (i) pro forma net income per
share for the five months ended August 31, 1997 would be $0.31, $0.28, $0.25
and $0.23 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively, and stockholders' equity per share
would be $14.72, $13.77, $13.08 and $12.47 at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Price Range, respectively, and
(ii) pro forma net income per share for the year ended March 31, 1997 would
be $0.57, $0.52, $0.48 and $0.44, at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively, and
stockholders' equity per share at March 31, 1997 would be $14.41, $13.51,
$12.85 and $12.27 at the minimum, midpoint, maximum and 15% above the
maximum of such range, respectively. There can be no assurance that the
actual purchase price of shares purchased by or issued to the Recognition
Plan will be equal to the Purchase Price. See "Management -- Benefits --
Recognition Plan."
(footnotes continued on following page)
35
<PAGE> 74
- ---------------
(5) The per share calculations are determined by adding the number of shares
assumed to be issued in the Conversion as well as contributed to the
Foundation and, in accordance with SOP 93-6, subtracting 99.0% and 97.5% of
the ESOP shares which have not been committed for release during the five
months ended August 31, 1997 and the year ended March 31, 1997,
respectively. Only ESOP shares committed to be released have been considered
outstanding for purposes of the net income per share calculations. Thus, it
is assumed at August 31, 1997 that 45,292,342, 53,285,108, 61,277,874 and
70,469,555 shares of Common Stock are outstanding at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, and at March 31, 1997 that 45,345,139, 53,347,222, 61,349,306
and 70,551,701 shares of Common Stock are outstanding at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively. Assuming the uncommitted ESOP shares were not subtracted from
the number of shares of Common Stock outstanding at August 31, 1997, the
offering price as a multiple of pro forma net income per share would be
14.0x, 15.81x, 17.45x and 19.18x at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively and at March
31, 1997, the offering price as a multiple of pro forma net income per share
would be 18.40x, 20.35x, 22.09x and 23.85x at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Price Range, respectively.
(6) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan, which will be adopted by the
Company following the Conversion and presented for approval by stockholders
at an annual or special meeting of stockholders of the Company held at least
six months following the consummation of the Conversion. If the Stock Option
Plan is approved by stockholders, an amount equal to 10% of the Common Stock
issued in the Offerings, or 4,525,463, 5,324,074, 6,122,685 and 7,041,088
shares at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively, will be reserved for future issuance
upon the exercise of options to be granted under the 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 stockholder approval of the Stock Option Plan, that all these
options were exercised at the beginning of the period at an exercise price
of $10.00 per share and that the shares to fund the Recognition Plan are
acquired through open market purchases at the Purchase Price, (i) pro forma
net income per share for the five months ended August 31, 1997 would be
$0.30, $0.27, $0.24 and $0.22 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively and pro forma
stockholders' equity per share at August 31, 1997 would be $14.46, $13.57,
$12.91 and $12.33 at the minimum, midpoint, maximum and 15% above the
maximum of such range, respectively, and (ii) pro forma net income per share
for the year ended March 31, 1997 would be $0.55, $0.51, $0.47 and $0.44 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively, and stockholders' equity per share at March 31,
1997 would be $14.17, $13.32, $12.69 and $12.14 at the minimum, midpoint,
maximum and 15% above the maximum of such range, respectively. See
"Management -- Benefits -- Stock Option Plan."
(7) Includes $92,000 at August 31, 1997 and $93,000 at March 31, 1997 of net
assets of the Mutual Holding Company to be acquired by the Company and the
Bank upon consummation of the Conversion.
(8) The retained earnings of the Bank will be substantially restricted after the
Conversion by virtue of the liquidation account to be established in
connection with the Conversion. See "Dividend Policy" and "The
Conversion -- Liquidation Rights." In addition, certain distributions from
the Bank's retained earnings may be treated as being from its accumulated
bad debt reserve for tax purposes, which would cause the Bank to have
additional taxable income. See "Taxation -- Federal Taxation." Pro forma
stockholders' equity and pro forma stockholders' equity per share do not
give effect to the liquidation account or the bad debt reserves established
by the Bank for federal income tax purposes in the event of a liquidation of
the Bank.
(9) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% to
reflect changes in market and financial conditions following the
commencement of the Offerings.
36
<PAGE> 75
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of the
Conversion, RP Financial has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $610.0 million at the
midpoint, which is approximately $35.0 million greater than the pro forma
aggregate
market capitalization of the Company if the Foundation is included, and would
result in an increase of approximately $77.6 million in the amount of Common
Stock offered for sale in the Conversion. The pro forma price to book ratio and
pro forma price to earnings ratio would be the same under both the current
appraisal and the estimate of the value of the company without the Foundation.
Further, assuming the midpoint of the Estimated Price Range, pro forma
stockholders' equity per share and pro forma earnings per share would be
substantially the same at $13.91 and $13.88, respectively, and $0.28 and $0.28,
respectively, with the Foundation or without the Foundation. The pro forma price
to book ratio and the pro forma price to earnings ratio are substantially the
same with and without the Foundation at the midpoint at 71.9% and 72.1%,
respectively, and 14.9x and 14.9x, respectively. There is no assurance that in
the event the Foundation was not formed that the appraisal prepared at the time
would have concluded that the pro forma market value of the Company would be the
same as that estimated herein. Any appraisals prepared at that time would be
based on the facts and circumstances existing at that time, including, among
other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Price Range, assuming the Conversion was completed at
August 31, 1997.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM
------------------------- ------------------------- -------------------------
WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Estimated offering amount............... $ 452,546 $ 518,500 $ 532,407 $ 610,000 $ 612,269 $ 701,500
Pro forma market capitalization......... 488,750 518,500 575,000 610,000 661,250 701,500
Total assets............................ 4,196,878 4,236,916 4,268,965 4,316,068 4,341,053 4,395,221
Total liabilities....................... 3,469,451 3,469,451 3,469,451 3,469,451 3,469,451 3,469,451
Pro forma stockholders' equity.......... 727,427 767,465 799,514 846,617 871,602 925,770
Pro forma consolidated net earnings..... 14,516 15,041 15,152 15,770 15,788 16,500
Pro forma stockholders' equity per
share................................. 14.89 14.81 13.91 13.88 13.18 13.20
Pro forma consolidated net earnings per
share................................. .31 .31 .28 .28 .25 .25
Pro forma pricing ratios:
Offering prices as a percentage of pro
forma stockholders' equity per
share............................... 67.16% 67.52% 71.89% 72.05% 75.87% 75.76%
Offering price to pro forma net
earnings per share.................. 13.44x(1) 13.44x 14.88x(1) 14.88x 16.67x(1) 16.67x
Pro forma market capitalization to
assets.............................. 11.65% 12.24% 13.47% 14.13% 15.23% 15.96%
Pro forma financial ratios:
Return on assets...................... 0.83%(2) 0.85% 0.85%(2) 0.88% 0.87%(2) 0.90%
Return on stockholders' equity........ 4.79%(3) 4.70% 4.55%(3) 4.47% 4.35%(3) 4.28%
Stockholders' equity to assets........ 17.33% 18.11% 18.73% 19.62% 20.08% 21.06%
<CAPTION>
AT THE MAXIMUM,
AS ADJUSTED
-------------------------
WITH NO
FOUNDATION FOUNDATION
---------- ----------
<S> <C> <C>
Estimated offering amount............... $ 704,109 $ 806,725
Pro forma market capitalization......... 760,437 806,725
Total assets............................ 4,423,952 4,486,245
Total liabilities....................... 3,469,451 3,469,451
Pro forma stockholders' equity.......... 954,501 1,016,794
Pro forma consolidated net earnings..... 16,521 17,339
Pro forma stockholders' equity per
share................................. 12.55 12.61
Pro forma consolidated net earnings per
share................................. .24 .23
Pro forma pricing ratios:
Offering prices as a percentage of pro
forma stockholders' equity per
share............................... 79.68% 79.30%
Offering price to pro forma net
earnings per share.................. 17.36x(1) 18.12x
Pro forma market capitalization to
assets.............................. 17.19% 17.98%
Pro forma financial ratios:
Return on assets...................... 0.90%(2) 0.93%
Return on stockholders' equity........ 4.15%(3) 4.09%
Stockholders' equity to assets........ 21.58% 22.66%
</TABLE>
- ---------------
(1) If the contribution to the Foundation had been expensed during the five
months ended August 31, 1997, the offering price to pro forma net earnings
per share would have been (96.9)x, (71.8)x, (60.2)x and (52.9)x at the
minimum, midpoint, maximum and maximum, as adjusted, respectively.
(2) If the contribution to the Foundation had been expensed during the five
months ended August 31, 1997, return on assets would have been (0.27)%,
(0.42)%, (0.56)% and (0.72)% at the minimum, midpoint, maximum and maximum,
as adjusted, respectively.
(3) If the contribution to the Foundation had been expensed during the five
months ended August 31, 1997, return on stockholders' equity would have been
(1.54)%, (2.23)%, (2.80)% and (3.35)% at the minimum, midpoint, maximum and
maximum, as adjusted, respectively.
37
<PAGE> 76
INDEPENDENCE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Set forth below are the consolidated statements of income of the Bank and
its subsidiaries for the periods indicated. The consolidated financial
statements of the Bank as of March 31, 1997, 1996 and 1995 and for the years
then ended were audited by Ernst & Young LLP, independent certified public
accountants. The consolidated statements of operations of the Bank for the five
months ended August 31, 1997 and 1996 were not audited by independent public
accountants but in the opinion of management reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
results of operations for those periods. Operating results for the five months
ended August 31, 1997 are not necessarily indicative of the results that may be
expected for any other interim period or the entire year ending March 31, 1998.
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS FOR THE YEAR ENDED
ENDED AUGUST 31, MARCH 31,
--------------------- ----------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Mortgage loans on real estate..... $ 70,910 $ 67,180 $161,638 $140,435 $128,008
Other loans....................... 15,898 15,091 36,189 36,162 31,726
Securities........................ 16,363 9,494 22,356 11,635 8,644
Mortgage-backed and
mortgage-related securities.... 5,258 14,239 28,856 17,779 20,204
Other............................. 3,366 2,521 6,264 7,089 2,957
-------- -------- -------- -------- --------
Total interest income..... 111,795 108,525 255,303 213,100 191,539
-------- -------- -------- -------- --------
Interest expense:
Deposits.......................... 59,334 58,291 138,840 106,379 76,443
Borrowings........................ 501 628 1,347 4,240 4,119
-------- -------- -------- -------- --------
Total interest expense.... 59,835 58,919 140,187 110,619 80,562
-------- -------- -------- -------- --------
Net interest income....... 51,960 49,606 115,116 102,481 110,977
Provision for loan losses........... 4,577 1,560 7,960 3,679 3,592
-------- -------- -------- -------- --------
Net interest income after
provision for loan
losses.................. 47,383 48,046 107,156 98,802 107,385
-------- -------- -------- -------- --------
Non-interest income:
Net gain (loss) on sale of loans
and securities................. 13 (282) (3,347) 12,222 (3,952)
Service fees...................... 2,909 2,406 5,708 4,086 4,103
Other............................. 780 1,087 548 3,774 2,313
-------- -------- -------- -------- --------
Total non-interest
income.................. 3,702 3,211 2,909 20,082 2,464
-------- -------- -------- -------- --------
Non-interest expense:
Compensation and employee
benefits....................... 12,424 11,566 26,879 22,311 20,155
Occupancy costs................... 5,075 4,456 10,981 7,656 5,948
Data processing services.......... 4,688 2,122 7,020 3,117 3,091
Advertising....................... 1,583 1,125 3,625 3,229 2,175
FDIC insurance premiums........... 519 1,587 2,199 2,558 5,057
SAIF assessment................... -- -- 8,553 -- --
Amortization of intangibles....... 3,678 3,901 8,278 1,842 905
Other............................. 6,931 5,445 14,618 11,417 10,287
-------- -------- -------- -------- --------
Total non-interest
expense................. 34,898 30,202 82,153 52,130 47,618
-------- -------- -------- -------- --------
Income before provision for income
taxes............................. 16,187 21,055 27,912 66,754 62,231
Provision for income taxes.......... 5,206 9,234 10,732 30,782 27,327
-------- -------- -------- -------- --------
Net income.......................... $ 10,981 $ 11,821 $ 17,180 $ 35,972 $ 34,904
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements appearing elsewhere herein.
38
<PAGE> 77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Bank's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans, mortgage-backed and mortgage-related
securities and investment securities, and interest expense on interest-bearing
liabilities, which principally consist of deposits and borrowings. Net interest
income is determined by an institution's interest rate spread (i.e., the
difference between the yields earned on its interest-earning assets and the
rates paid on its interest-bearing liabilities) and the relative amount of
interest-earning assets and interest-bearing liabilities.
The Bank's results of operations also are affected by the provision for
loan losses, resulting from management's assessment of the adequacy of the
allowance for loan losses, the level of its non-interest income, including
service fees and related income, gains and losses from the sales of loans and
securities, the level of its non-interest expense, including compensation and
employee benefits, occupancy expense and FDIC insurance premiums, data
processing services and income tax expense.
The Bank is a community-oriented savings bank which emphasizes customer
service and convenience. As part of this strategy, the Bank offers products and
services designed to meet the needs of its customers. The Bank generally has
sought to achieve long-term financial strength and stability by increasing the
amount and stability of its net interest income and non-interest income and by
maintaining a high level of asset quality. In pursuit of these goals, the Bank
has adopted a business strategy emphasizing controlled growth, residential
lending, retail deposit products and customer service while maintaining asset
quality and stable liquidity.
BUSINESS STRATEGY
CONTROLLED GROWTH. In recent years, the Bank has sought to increase its
assets and expand its operations. The Bank purchased Bay Ridge in January 1996
as well as five branch offices located in Brooklyn and Staten Island in March
1996 from a savings institution which was withdrawing from the market area (the
"1996 Branch Acquisition"). In addition, in earlier periods, the Bank also
completed several other acquisitions. These transactions have contributed to the
growth in the Bank's assets, which increased by $1.40 billion or 58.6% from
$2.39 billion at March 31, 1993 to $3.79 billion at August 31, 1997. The net
proceeds from the Offerings will significantly enhance the capital base of the
Company and the Bank and therefore support further growth and expansion of the
Bank's operations consistent with its business strategy.
EMPHASIS ON RESIDENTIAL LENDING. Management believes that the Bank is more
likely to achieve its goals of long-term financial strength and profitability by
continuing to emphasize residential loan products and services. Given the
concentration of multi-family housing units in the New York City metropolitan
area, the Bank's primary lending emphasis is on the origination of loans secured
by first liens on multi-family residential properties, which consist primarily
of mortgage loans secured by apartment buildings. Multi-family loans totaled
$1.49 billion or 54.7% of the total loan portfolio at August 31, 1997. The Bank
also emphasizes single-family (one-to-four units) residential mortgage loans,
which totaled $552.4 million or 20.3% of the total loan portfolio at August 31,
1997, and cooperative apartment loans (loans secured by an individual's shares
in a cooperative housing corporation), which loans totaled $392.8 million or
14.4% of the total loan portfolio at August 31, 1997.
MAINTAIN ASSET QUALITY. Management believes that high asset quality is a
key to long-term financial success. Accordingly, the Bank has sought to maintain
a high level of asset quality and moderate credit risk by using underwriting
standards which management believes are conservative and by generally limiting
its origination of mortgage loans to its market area. Total non-performing
assets have remained relatively stable even as the Bank's assets have grown
significantly. The Bank's ratio of non-performing assets to total assets at
August 31, 1997 was 0.69% and its allowance for loan losses to non-performing
loans was 119.8%.
39
<PAGE> 78
STABLE SOURCE OF LIQUIDITY. The Bank purchases short to medium-term
investment securities and mortgage-backed and mortgage-related securities
combining what management believes to be appropriate liquidity, yield and credit
quality in order to primarily achieve a managed and predictable source of
liquidity to meet loan demand and, to a lesser extent, a stable source of
interest income. These portfolios, which totaled in the aggregate $721.1 million
at August 31, 1997, are comprised primarily of obligations of the U.S.
Government and federal agencies totaling $536.1 million (of which $513.8 million
consists of U.S. Treasury notes and bills) and mortgage-backed and
mortgage-related securities totaling $167.3 million (of which $96.6 million
consists of mortgage-backed securities and $70.7 million of CMOs). In accordance
with the Bank's policy, investments purchased by the Bank generally must be
rated at least "investment grade" upon purchase.
EMPHASIS ON RETAIL DEPOSITS AND CUSTOMER SERVICE. The Bank, as a
traditional community-based savings bank, is largely dependent upon its base of
competitively priced core deposits to provide a stable source of funding. The
Bank has retained many loyal customers over the years through a combination of
quality service, low service fees on various deposit and other products,
customer convenience, an experienced staff and a commitment to the communities
which it serves. Lower costing deposits totaled $1.58 billion or 46.9% of the
Bank's total deposits at August 31, 1997. In addition, the Bank does not accept
brokered deposits as a source of funds and has no plans to do so in the future.
RECENT ACQUISITIONS
The Bank significantly increased its asset size during fiscal 1996 through
two acquisitions. In January 1996, the Bank completed the acquisition of Bay
Ridge, acquiring $558.6 million of assets and six branch offices located in
Brooklyn with total deposits of $445.2 million. As a result of such acquisition,
the Bank recorded goodwill totaling $26.1 million, as adjusted, which is being
amortized on a straight-line basis over a 14 year period. The amount of goodwill
related to the Bay Ridge acquisition was adjusted downward during fiscal 1997 by
$4.8 million primarily as the result of the receipt of proceeds from the
repayment of the Bay Ridge ESOP loan and the receipt of tax refunds, offset in
part by an additional accrual related to a Bay Ridge qualified retirement plan.
As of August 31, 1997, the Bank had $22.9 million of goodwill remaining related
to this acquisition.
In March 1996, the Bank completed the 1996 Branch Acquisition, providing
the Bank with three additional branch offices in Brooklyn and two branch offices
in Staten Island. In connection with the transaction, the Bank assumed
approximately $615.6 million of deposits and other liabilities and recorded
$49.5 million of intangible assets. In consideration for the assumption of
deposits and other liabilities, the Bank received approximately $557.9 million
in cash and branch offices and other fixed assets valued at approximately $8.1
million. In September 1996, the Bank discontinued operations at one of the
branch offices acquired in the 1996 Branch Acquisition and sold deposits
totaling $51.4 million for a premium of $3.6 million. The remaining premium paid
by the Bank which related to this branch office amounted to $5.3 million at the
time of disposition and was deducted from the $49.5 million of intangible assets
recorded in the acquisition. In addition, the Bank recognized a loss of $1.7
million on the sale of this branch office, which was reflected in other income
for fiscal 1997. The intangible related to the 1996 Branch Acquisition, as
adjusted, which totaled $34.2 million at August 31, 1997, is being amortized on
a straight line basis over seven years.
In April 1997, the Bank continued its growth by completing another branch
acquisition. As a result, the Bank assumed $70.0 million of deposits, receiving
$64.9 million in cash, an additional branch office in Queens and other fixed
assets with an aggregate value of approximately $886,000. In connection with
such acquisition, the Bank recorded an intangible asset in the amount of $4.0
million which is being amortized on a straight line basis over seven years. At
August 31, 1997, the remaining intangible resulting from the deposit acquisition
amounted to $3.8 million.
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets increased by $60.9 million, or 1.6%, from $3.73
billion at March 31, 1997 to $3.79 billion at August 31, 1997. The major
component of the increase consisted of a $174.3 million increase in the net loan
portfolio, of which $127.5 million was accounted for by increases in
multi-family residential and
40
<PAGE> 79
commercial real estate loans. In addition, the restructuring of the Bank's
investment securities and mortgage-backed and mortgage-related securities
portfolio which began in March 1997 was completed with the investment of the
proceeds of the sales undertaken in March. As a result, the Bank's investment
securities increased from $357.5 million at March 31, 1997 to $553.8 million at
August 31, 1997. Such increase was accompanied by a $189.1 million decrease in
cash and cash equivalents and a $107.2 million decrease in accounts receivable
as the funds received or to be received from such sales were reinvested in
investment securities, primarily U.S. Treasury notes and bills. Total assets
decreased by $136.5 million, or 3.5%, from $3.87 billion at March 31, 1996 to
$3.73 billion at March 31, 1997. Investment securities and mortgage-backed and
mortgage-related securities decreased substantially due to sales of $652.3
million of such securities during fiscal 1997. Such sales related primarily to
the Bank's decision to restructure its investments and mortgage-backed and
mortgage-related securities portfolios to improve the yield thereon and to
reduce interest rate risk. The proceeds of the sales, which were undertaken in
large part in March 1997 and which resulted in a net loss of $3.9 million, were
primarily invested in short-term investments. Offsetting in part the decline in
the investment and mortgage-backed and mortgage-related securities portfolios
was a $180.3 million increase in the net loan portfolio, the majority of which
was accounted for by a $157.1 million increase in multi-family residential
loans. The growth in the Company's assets was funded primarily by a $46.4
million increase in deposits resulting in large part from the branch
acquisitions completed in April 1997. See "-- Recent Acquisitions."
CASH, CERTIFICATES OF DEPOSIT, COMMERCIAL PAPER AND FEDERAL FUNDS SOLD
(COLLECTIVELY "CASH AND CASH EQUIVALENTS"). Cash and cash equivalents decreased
from $374.6 million at March 31, 1997 to $185.5 million at August 31, 1997
reflecting primarily the investment in April of a substantial portion of the
remaining proceeds received from the sales of investment and mortgage-backed and
mortgage-related securities effected in March 1997. During fiscal 1997, cash and
cash equivalents increased by $271.4 million, or 263.0%, to $374.6 million at
March 31, 1997 from $103.2 million at March 31, 1996. Such increase in cash and
cash equivalents was due in large part to the proceeds from the sale of
investment and mortgage-backed and mortgage-related securities in March 1997, a
substantial portion of which was not re-invested until April 1997. Of the $374.6
million of cash and cash equivalents at March 31, 1997, approximately $270.0
million were proceeds from the sale of securities settled on or prior to such
date. In addition, at March 31, 1997, the Bank had an account receivable
totaling $107.6 million relating to securities transactions executed in
connection with the restructuring which had not settled as of such date.
Substantially all of these funds were invested in early April 1997 primarily in
U.S. Treasury notes and bills with maturities of two years or less.
INVESTMENT SECURITIES AND MORTGAGE-BACKED AND MORTGAGE-RELATED
SECURITIES. The aggregate investment securities and mortgage-backed and
mortgage-related securities portfolios increased from $548.5 million at March
31, 1997 to $721.1 million at August 31, 1997 reflecting the investment of the
proceeds from the sales effected in connection with the restructuring of these
portfolios as described herein. The Bank's investment securities and
mortgage-backed and mortgage-related securities portfolios declined by $691.4
million from an aggregate of $1.24 billion at March 31, 1996 to an aggregate of
$548.5 million at March 31, 1997. This decline was primarily the result of the
Bank's determination to restructure these portfolios in order to improve the
overall yield and reduce the exposure to interest rate risk. In connection with
this restructuring, the Bank sold approximately $397.3 million of its investment
securities and mortgage-backed and mortgage-related securities (including CMOs)
in March 1997. The Bank reinvested substantially all of the proceeds of the
sales in U.S. Treasury notes and bills, most of which have maturities of two
years or less. The weighted average yield, on a fully taxable basis, on the
securities purchased was approximately 60 basis points higher than the weighted
average yield on the securities sold.
As of August 31, 1997 and March 31, 1997, the Bank's investment securities
totaled $553.8 million and $357.5 million, respectively, all of which were
classified as available for sale. At March 31, 1996, the Bank's investment
securities totaled $723.8 million of which $683.8 million were classified as
available for sale. The Bank was required in fiscal 1995 to classify its
investment and mortgage-backed and mortgage-related securities portfolios as
either held to maturity or available for sale in accordance with the provisions
of SFAS No. 115. See "-- Impact of Accounting Pronouncements."
41
<PAGE> 80
The Bank's mortgage-backed and mortgage-related securities, a substantial
portion of which at August 31, 1997 consisted of CMOs secured by mortgage-backed
securities issued by the Fannie Mae ("FNMA") or Freddie Mac ("FHLMC"), decreased
from $516.0 million at March 31, 1996 to $191.0 million at March 31, 1997
primarily as a result of the restructuring, and decreased further to $167.3
million (all of which were classified as available for sale) at August 31, 1997.
The reduction from March 31, 1997 to August 31, 1997 reflected repayments and
prepayments. The bulk of the mortgage-backed and mortgage-related securities
sold during fiscal 1997 consisted of CMOs, a portion of which was acquired in
the acquisition of Bay Ridge in fiscal 1996 and which did not conform to the
Bank's investment policy. At August 31, 1997, CMOs totaled $70.7 million, most
of which are secured by mortgage-backed securities issued by the FNMA or the
FHLMC.
At August 31, 1997, the Bank had a $8.3 million net unrealized gain on
available-for-sale investment and mortgage-backed and mortgage-related
securities in accordance with SFAS No. 115. See "Business -- Investment
Activities."
LOANS RECEIVABLE, NET. Loans receivable, net, increased by $174.3 million
or 7.0% from March 31, 1997 to August 31, 1997 and increased by $180.3 million,
or 7.8%, from March 31, 1996 to March 31, 1997 due to the continued emphasis by
the Bank on the origination of multi-family residential mortgage loans. Such
loans increased 23.1% from $1.21 billion at March 31, 1996 to $1.49 billion at
August 31, 1997. See "Business -- Lending Activities."
NON-PERFORMING ASSETS. The Bank's non-performing assets, which consist of
non-accrual loans, loans past due 90 days or more as to interest or principal
and accruing and other real estate owned acquired through foreclosure or
deed-in-lieu thereof decreased by $1.4 million or 4.9% to $26.3 million at
August 31, 1997 from $27.6 million at March 31, 1997 and decreased $8.9 million
or 24.3% from $36.5 million at March 31, 1996 to $27.6 million at March 31,
1997. The decrease in non-performing assets from March 31, 1997 to August 31,
1997 was primarily due to the repayment in full of two non-accrual commercial
real estate loans aggregating $6.7 million. As a result, non-accrual commercial
real estate loans declined to $6.0 million at August 31, 1997. However,
offsetting such decrease was a $5.5 million increase to $14.0 million in loans
contractually past due maturity but which are continuing to pay in accordance
with their original repayment schedule. The Bank's non-performing assets
decreased during fiscal 1997 primarily due to the return to performing status of
a $5.0 million non-accrual loan as well as the sale or satisfaction of an
aggregate of $2.3 million of loans acquired in the Bay Ridge acquisition and
charge-offs totaling $1.6 million. Such decrease was partially offset by a $2.0
million increase to $8.4 million in loans past due as to maturity but continuing
to make payments on a basis consistent with the contractual terms of the loan.
At August 31, 1997, the Bank's non-performing assets amounted to 0.69% of total
assets and consisted of $10.1 million of non-accrual loans ($479,000 of which
were multi-family residential loans and $6.0 million of which were commercial
and other real estate loans), $1.9 million of loans past due 90 days or more as
to interest and accruing, $14.0 million of loans past due 90 days or more as to
principal and accruing ($9.6 million of which were multi-family loans and $3.8
million of which were commercial and other real estate loans) and $279,000 of
other real estate owned. See "Business -- Asset Quality."
ALLOWANCE FOR LOAN LOSSES. The Bank's allowance for loan losses amounted
to $31.1 million at August 31, 1997 as compared to $27.0 million at March 31,
1997 and $20.5 million at March 31, 1996. It is management's policy to maintain
an allowance for estimated losses on loans based upon an assessment of prior
loss experience, the volume and type of lending conducted by the Bank, industry
standards, past due loans (as to either interest or principal), general economic
conditions and other factors related to the collectibility of the loan
portfolio. The Bank's allowance increased during the five months ended August
31, 1997 as well as in fiscal 1997 primarily due to a $4.6 million and an $8.0
million provision for loan losses made in the five month period and in fiscal
1997, respectively. The Bank increased its provision for loan losses in the five
months ended August 31, 1997 and in fiscal 1997 as a result of, among other
factors, the increased investment in multi-family residential loans (all of
which are secured by properties in the New York City metropolitan area), the
increased number of larger multi-family and individual cooperative apartment
loans and the increased number of loans which exhibit risk characteristics which
were determined to require closer oversight (including the amount of loans which
were 90 days or more past due as to principal). At August 31, 1997, the
42
<PAGE> 81
Bank's allowance for loan losses amounted to 119.8% of total non-performing
loans as compared to 99.8% and 57.8% of total non-performing loans at March 31,
1997 and 1996, respectively. The Bank utilizes these percentages as only one of
the factors in assessing the adequacy of the allowance for loan losses at
various points in time. See "Business -- Asset Quality."
INTANGIBLE ASSETS. The Bank's intangible assets consist of goodwill and
other intangibles resulting primarily from the Bay Ridge acquisition and the
1996 Branch Acquisition. At August 31, 1997, intangibles totaled $60.9 million
and consisted primarily of $22.9 million related to the acquisition of Bay Ridge
and $34.2 million primarily related to the 1996 Branch Acquisition. The Bank's
intangible assets increased by $436,000 to $60.9 million at August 31, 1997 from
$60.5 million at March 31, 1997 as a result of the completion of a branch
purchase in April 1997. The intangible related to the 1996 Branch Acquisition
was reduced during fiscal 1997 by $5.3 million due to the transfer in September
1996 to another institution of $51.4 million of deposits related to one of the
branch offices acquired. Amortization expense related to intangible assets
amounted to $3.7 million and $8.3 million during the five months ended August
31, 1997 and fiscal 1997, respectively. Amortization of such intangibles will
continue to reduce net income until such intangible assets are fully amortized.
See "-- Recent Acquisitions."
DEPOSITS. Deposits increased $46.4 million or 1.4% to $3.37 billion at
August 31, 1997 from $3.33 billion at March 31, 1997 primarily as a result of
the assumption of $70.0 million of deposits in the branch purchase completed in
April 1997 combined with interest credited of $46.9 million, offset partially by
$70.7 million of deposit outflows. The deposit outflows reflect
disintermediation as a result of the continued strong performance of the
equities markets during the five month period. Deposits decreased by $71.3
million, or 2.1%, to $3.33 billion at March 31, 1997 from $3.40 billion at March
31, 1996 reflecting deposit withdrawals and transfers totaling $210.2 million.
This decrease was primarily attributable to the outflow or transfer of $145.1
million of deposits (primarily certificates of deposit) acquired in the 1996
Branch Acquisition and $16.7 million of deposits acquired in the Bay Ridge
acquisition. A significant percentage of the higher priced deposits assumed in
the 1996 Branch Acquisition were not reinvested in new certificates of deposit
at the Bank.
BORROWINGS. The Bank has historically used borrowing only to a limited
extent although it may increase such use in the future. The Bank's borrowings
consist primarily of advances from the FHLB of New York. At August 31, 1997,
FHLB advances totaled $14.6 million, the same as at March 31, 1997. FHLB
advances and other borrowings decreased by $40.1 million, or 69.9%, to $17.2
million at March 31, 1997 from $57.3 million at March 31, 1996. The Bank prepaid
a large portion of its FHLB advances in April 1996, which prepayments did not
result in any prepayment penalties.
EQUITY. At August 31, 1997, total equity equaled $324.8 million, compared
to $309.1 million and $289.8 million at March 31, 1997 and 1996, respectively.
This $15.7 million or 5.1% increase was primarily the result of net income of
$11.0 million for the five months ended August 31, 1997 combined with a $4.7
million increase in the unrealized gain on securities available for sale, net of
tax. The $19.3 million or 6.7% increase in total equity from March 31, 1996 to
March 31, 1997 was primarily the result of net income of $17.2 million for the
year ended March 31, 1997 combined with an increase in the Bank's unrealized
gain on marketable securities from a $1.7 million net unrealized loss, net of
tax, at March 31, 1996 to a $368,000 net unrealized gain, net of tax, at March
31, 1997 primarily as a result of the previously described securities
restructuring.
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The table on the following page sets forth, for the periods indicated,
information regarding (i) the total dollar amount of interest income of the Bank
from interest-earning assets and the resultant average yields; (ii) the total
dollar amount of interest expense on interest-bearing liabilities and the
resultant average rate; (iii) net interest income; (iv) interest rate spread;
and (v) net interest margin. Information is based on average daily balances
during the indicated periods and is annualized where appropriate.
43
<PAGE> 82
<TABLE>
<CAPTION>
YEAR ENDED
FOR THE FIVE MONTHS ENDED AUGUST 31, MARCH 31,
----------------------------------------------------------------- ----------
AT AUGUST 31, 1997 1996 1997
1997 ------------------------------- ------------------------------- ----------
------------- AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE
------------- ---------- -------- ------- ---------- -------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1):
Mortgage loans............. 8.09% $2,132,133 $ 70,910 7.98% $1,958,295 $ 67,180 8.23% $2,007,670
Other loans:
Cooperative apartment
loans.................. 7.24 369,926 11,210 7.27 359,564 11,235 7.50 361,011
Consumer and commercial
business loans(2)...... 8.57 120,673 4,688 9.32 106,542 3,856 8.69 108,608
---------- -------- ---------- -------- ----------
Total loans............ 7.99 2,622,732 86,808 7.94 2,424,401 82,271 8.14 2,477,289
Mortgage-backed and mortgage-
related securities........... 7.45 176,522 5,258 7.15 549,270 14,239 6.22 475,967
Investment securities......... 6.24 659,213 16,363 5.96 430,163 9,494 5.30 395,677
Other interest-earning
assets(3).................... 5.42 160,717 3,366 5.03 106,740 2,521 5.67 114,490
---------- -------- ---------- -------- ----------
Total interest-earning
assets..................... 7.58 3,619,184 111,795 7.41 3,510,574 108,525 7.42 3,463,423
----- -------- ---- - -------- ---- -
Non-interest-earning assets... 181,023 129,235 244,567
---------- ---------- ----------
Total assets................. $3,800,207 $3,639,809 $3,707,990
========== ========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4)......... 2.78 $ 499,702 $ 5,528 2.66 $ 454,239 $ 4,917 2.60 $ 469,833
Savings deposits........... 2.88 1,023,211 12,266 2.88 1,096,046 13,479 2.95 1,055,807
Certificates of deposit.... 5.61 1,783,996 41,540 5.59 1,739,196 39,895 5.51 1,729,185
---------- -------- ---------- -------- ----------
Total deposits......... 4.34 3,306,909 59,334 4.31 3,289,481 58,291 4.25 3,254,825
---------- -------- ---------- -------- ----------
Total borrowings............. 7.37 17,167 501 7.00 19,482 628 7.74 18,581
---------- -------- ---------- -------- ----------
Total interest-bearing
liabilities........... 4.36 3,324,076 59,835 4.32 3,308,963 58,919 4.27 3,273,406
----- -------- ---- - -------- ---- -
Non-interest-bearing
liabilities(5)............... 159,818 36,456 132,807
---------- ---------- ----------
Total liabilities...... 3,483,894 3,345,419 3,406,213
Total equity.................. 316,313 294,390 301,777
---------- ---------- ----------
Total liabilities and
equity................ $3,800,207 $3,639,809 $3,707,990
========== ========== ==========
Net interest-earning assets... $ 295,108 $ 201,611 $ 190,017
========== ========== ==========
Net interest income/interest
rate spread.................. 3.22% $ 51,960 3.09% $ 49,606 3.15%
===== ======== ===== ======== =====
Net interest margin........... 3.45% 3.39%
===== =====
Ratio of average
interest-earning assets to
average interest-bearing
liabilities.................. 1.09x 1.09x 1.06x
===== ===== =====
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------------
1997 1996 1995
------------------ ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- ------- ---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1):
Mortgage loans............. $161,638 8.05% $1,648,009 $140,435 8.52% $1,447,776 $128,008 8.84%
Other loans:
Cooperative apartment
loans.................. 26,687 7.39 352,440 26,389 7.49 314,665 23,185 7.37
Consumer and commercial
business loans(2)...... 9,502 8.75 108,661 9,773 8.99 113,748 8,541 7.51
-------- ---------- -------- ---------- --------
Total loans............ 197,827 7.99 2,109,110 176,597 8.37 1,876,189 159,734 8.51
Mortgage-backed and mortgage-
related securities........... 28,856 6.06 286,317 17,779 6.21 335,128 20,204 6.03
Investment securities......... 22,356 5.65 204,862 11,635 5.68 196,928 8,644 4.39
Other interest-earning
assets(3).................... 6,264 5.47 120,791 7,089 5.87 49,094 2,957 6.02
-------- ---------- -------- ---------- --------
Total interest-earning
assets..................... 255,303 7.37 2,721,080 213,100 7.83 2,457,339 191,539 7.79
-------- ---- - -------- ---- - -------- ---- -
Non-interest-earning assets... 118,944 88,518
---------- ----------
Total assets................. $2,840,024 $2,545,857
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4)......... $ 12,459 2.65 $ 350,395 $ 9,362 2.67 $ 329,451 $ 7,776 2.36
Savings deposits........... 30,728 2.91 834,374 25,097 3.01 957,017 27,985 2.92
Certificates of deposit.... 95,653 5.53 1,235,755 71,920 5.82 877,252 40,682 4.64
-------- ---------- -------- ---------- --------
Total deposits......... 138,840 4.27 2,420,524 106,379 4.39 2,163,720 76,443 3.53
-------- ---------- -------- ---------- --------
Total borrowings............. 1,347 7.25 69,402 4,240 6.11 70,176 4,119 5.87
-------- ---------- -------- ---------- --------
Total interest-bearing
liabilities........... 140,187 4.28 2,489,926 110,619 4.44 2,233,896 80,562 3.61
-------- ---- - -------- ---- - -------- ---- -
Non-interest-bearing
liabilities(5)............... 76,075 76,230
---------- ----------
Total liabilities...... 2,566,001 2,310,126
Total equity.................. 274,023 235,731
---------- ----------
Total liabilities and
equity................ $2,840,024 $2,545,857
========== ==========
Net interest-earning assets... $ 231,154 $ 223,443
========== ==========
Net interest income/interest
rate spread.................. $115,116 3.09% $102.481 3.39% $110,977 4.18%
======== ===== ======== ===== ======== =====
Net interest margin........... 3.32% 3.77% 4.52%
===== ===== =====
Ratio of average
interest-earning assets to
average interest-bearing
liabilities.................. 1.06x 1.09x 1.10x
===== ===== =====
</TABLE>
- ---------------
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Includes home equity lines of credit and improvement loans, student loans,
automobile loans, passbook loans, credit card loans, personal loans and
commercial business loans.
(3) Includes federal funds sold, interest-earning bank deposits, FHLB stock,
overnight commercial paper and certificates of deposit.
(4) Includes NOW and money market accounts.
(5) Includes escrow accounts for the payment of taxes.
44
<PAGE> 83
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
net interest income of the Bank. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate) and (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). The combined
effect of changes in both rate and volume has been allocated proportionately to
the change due to rate and the change due to volume.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
AUGUST 31, 1997 COMPARED TO
FIVE MONTHS ENDED AUGUST 31, FISCAL 1997 COMPARED TO FISCAL 1996 COMPARED TO FISCAL
1996 FISCAL 1996 1995
------------------------------- ------------------------------ -------------------------------
INCREASE INCREASE INCREASE
(DECREASE) DUE TO TOTAL NET (DECREASE) DUE TO TOTAL NET (DECREASE) DUE TO TOTAL NET
------------------ INCREASE ----------------- INCREASE ------------------ INCREASE
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
------- -------- ---------- ------- ------- ---------- -------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans......... $(6,344) $ 10,074 $ 3,730 $(8,088) $29,291 $ 21,203 $ (4,766) $17,193 $ 12,427
Other loans:
Cooperative apartment
loans.............. (814) 789 (25) (349) 647 298 383 2,821 3,204
Consumer and
commercial business
loans(1)........... 294 538 832 (266) (5) (271) 1,627 (395) 1,232
------- -------- ------ ------- ------- ------- -------- ------- -------
Total loans
receivable....... (6,864) 11,401 4,537 (8,703) 29,933 21,230 (2,756) 19,619 16,863
Mortgage-backed and
mortgage-related
securities............... 6,750 (15,731) (8,981) (439) 11,516 11,077 589 (3,014) (2,425)
Investment securities...... 1,302 5,567 6,869 (61) 10,782 10,721 2,631 360 2,991
Other interest-earning
assets................... (963) 1,808 845 (467) (358) (825) (76) 4,208 4,132
------- -------- ------ ------- ------- ------- -------- ------- -------
Total net change in income
on interest-earning
assets................... 225 3,045 3,270 (9,670) 51,873 42,203 388 21,173 21,561
Interest-bearing
liabilities:
Deposits:
Demand deposits........ 115 496 611 (70) 3,167 3,097 1,069 517 1,586
Savings deposits....... (319) (894) (1,213) (856) 6,487 5,631 828 (3,716) (2,888)
Certificates of
deposit.............. 593 1,052 1,645 (3,739) 27,472 23,733 11,983 19,255 31,238
------- -------- ------ ------- ------- ------- -------- ------- -------
Total deposits..... 389 654 1,043 (4,665) 37,126 32,461 13,880 16,056 29,936
Borrowings................. (57) (70) (127) 673 (3,566) (2,893) 166 (45) 121
------- -------- ------ ------- ------- ------- -------- ------- -------
Total net change in expense
on interest-bearing
liabilities.............. 332 584 916 (3,992) 33,560 29,568 14,046 16,011 30,057
------- -------- ------ ------- ------- ------- -------- ------- -------
Net change in net interest
income................... $ (107) $ 2,461 $ 2,354 $(5,678) $18,313 $ 12,635 $(13,658) $ 5,162 $ (8,496)
======= ======== ====== ======= ======= ======= ======== ======= =======
</TABLE>
- ---------------
(1) Includes home equity lines of credit and loans, student loans, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FIVE MONTHS ENDED AUGUST 31, 1997
AND 1996 AND THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
GENERAL. The Bank reported net income of $11.0 million and $11.8 million
for the five months ended August 31, 1997 and 1996, respectively, and $17.2
million, $36.0 million and $34.9 million for the years ended March 31, 1997,
1996 and 1995, respectively. The $840,000 or 7.1% decrease in net income during
the five months ended August 31, 1997 compared to the same period in the prior
year was primarily due to a $4.7 million increase in non-interest expenses
combined with a $3.0 million increase in the provision for loan losses partially
offset by a $491,000 increase in non-interest income, a $2.4 million increase in
net interest income and a $4.0 million decrease in the provision for income
taxes. The primary component of the increase in non- interest expense was a $2.6
million increase in data processing services relating primarily to expenses
incurred in connection with the conversion of the Bank's data processing
systems. The increase in the provision for loan losses in the 1997 period
compared to the five months ended August 31, 1996 reflected the Bank's
45
<PAGE> 84
determination to increase its allowance for loan losses in view of, among other
things, increased emphasis on originating multi-family residential loans, the
increased number of larger multi-family residential and individual cooperative
apartment loans as well as the increased amount of loans contractually past due
90 days or more as to principal (but which continue to pay in accordance with
their terms), the substantial majority of which consisted of multi-family
residential and commercial real estate loans. Net income declined by $18.8
million from fiscal 1996 to fiscal 1997 due primarily to the recognition in
fiscal 1996 of a $12.2 million net gain on the sale of securities and loans as
compared to a net loss on the sale of securities and loans totaling $3.3 million
in fiscal 1997. The Bank sold $16.8 million of investment securities in fiscal
1996, recording a gain of $12.1 million. Net income was also affected by the
$6.4 million increase in amortization of intangibles, reflecting a full year of
amortization of the intangible assets acquired from Bay Ridge and in the 1996
Branch Acquisition. The decrease in net income in fiscal 1997 was also the
result, in part, of the increase in the Bank's provision for loan losses from
$3.7 million for the year ended March 31, 1996 to $8.0 million for the year
ended March 31, 1997 as the Bank increased its allowance for loan losses
primarily in light of its increased investment in multi-family residential
loans, the increased number of larger multi-family residential loans and
individual cooperative apartment loans and an increase in the number of loans
which exhibit risk characteristics which management determined would require
closer oversight. See "Business -- Asset Quality." Net income was also adversely
affected by the $8.6 million special SAIF assessment. See "-- Non-interest
Expenses." Net income for fiscal 1997 was favorably affected by a reduction in
the provision for income taxes due to a reduction in the Bank's effective tax
rate for the fiscal year. The slight increase in net income from fiscal 1995 to
fiscal 1996 reflected the effect of the aforementioned gain on sale of
securities and loans in fiscal 1996 offset in part by a decrease in net interest
income combined with increased non-interest expenses.
NET INTEREST INCOME. Net interest income is determined by interest rate
spread (i.e., the difference between the yields earned on its interest-earning
assets and the rates paid on its interest-bearing liabilities) and the relative
amounts of interest-earning assets and interest-bearing liabilities. The Bank's
interest rate spread was 3.09% and 3.15% for the five months ended August 31,
1997 and 1996, respectively, and was 3.09% for fiscal 1997 as compared to 3.39%
and 4.18% for fiscal years 1996 and 1995, respectively. The Bank's net interest
margin was 3.45% and 3.39% for the five months ended August 31, 1997 and 1996,
respectively, and was 3.32%, 3.77% and 4.52% for the years ended March 31, 1997,
1996 and 1995, respectively. Net interest income increased by $2.4 million or
4.7% to $52.0 million for the five months ended August 31, 1997 as compared to
the same period in the prior year. The increase was primarily due to a $3.3
million increase in interest income offset partially by a $916,000 increase in
interest expense. The increase in net interest income reflected the continued
growth in the Bank's interest-earning assets, in particular, loans, and the
improved yield on its investment securities. Net interest income increased by
$12.6 million or 12.3% to $115.1 million in fiscal 1997 primarily due to a
significant increase in the Bank's average interest-earning assets as a result
of the Bay Ridge acquisition and the re-investment of the cash received in the
1996 Branch Acquisition completed during the fourth quarter of fiscal 1996. The
Bank's net interest income declined in fiscal 1996 by $8.5 million or 7.7%
compared to fiscal 1995 due primarily to a decline in the interest rate spread
from 4.18% for fiscal 1995 to 3.39% for fiscal 1996. The decrease in the spread
reflected in large part the effects of increased rates paid on deposits with no
corresponding increase in the yields earned on interest-earning assets.
Interest income increased by $3.3 million to $111.8 million for the five
months ended August 31, 1997 as compared to the same period in 1996 primarily
due to an increase in the average balance of the Bank's interest-earning assets,
offset slightly by a decline in the weighted average yield earned thereon from
7.42% for the 1996 period to 7.41% for the 1997 period. The composition of the
Bank's interest income for the five months ended August 31, 1997 reflected the
changes in the Bank's asset structure effected during fiscal 1997. Interest
income earned on mortgage-backed and mortgage-related securities declined by
$9.0 million primarily as a result of the decline in the average balance of such
assets from $549.3 million during the 1996 period to $176.5 million for the 1997
period. However, offsetting such decline were $6.9 million and $3.7 million
increases in interest earned during the five months ended August 31, 1997 on
investment securities and mortgage loans, respectively, reflecting the asset
restructuring effected in fiscal 1997 as well as the Bank's continued emphasis
on multi-family residential lending. Interest income increased by $42.2 million
from fiscal 1996 to fiscal 1997 reflecting the increase in the average balance
of the Bank's interest-earning assets as a result of the completion of the Bay
Ridge acquisition and the 1996 Branch Acquisition. The average balance
46
<PAGE> 85
of the loan portfolio increased by $368.2 million both as a result of the
acquisition of loans from Bay Ridge as well as the Bank's investment of a
portion of the funds received in the 1996 Branch Acquisition in new loans.
Offsetting in part the effects of the increase in the average balance of loans
was the 38 basis point decline in the average yield earned on the loan portfolio
reflecting in part the repricing downward of adjustable-rate loans as well as
general market conditions which resulted in loans with lower yields at the time
of origination. Investment of cash received in the 1996 Branch Acquisition as
well as investment securities and mortgage-backed and mortgage-related
securities acquired from Bay Ridge were responsible for the significant increase
in the aggregate average balance of investment securities and mortgage-backed
and mortgage-related securities which increased from $491.2 million in fiscal
1996 to $871.6 million in fiscal 1997. Partially offsetting the increase in the
average balances of these portfolios were declines in the average yield earned
from 5.99% to 5.87%. Interest income also increased for the year ended March 31,
1996 as compared to the prior fiscal year, although at a more modest level, due
primarily to growth in the Bank's interest-earning assets, primarily loans.
Average interest-earning assets increased by $263.7 million or 10.7% during
fiscal 1996 primarily as a result of the Bay Ridge acquisition and the 1996
Branch Acquisition completed in the fourth quarter of fiscal 1996. Also
contributing to the increase, but to a significantly lesser degree, was a four
basis point increase in the average yield earned on the Bank's interest-earning
assets.
Interest expense increased modestly by 1.6% from $58.9 million for the five
months ended August 31, 1996 to $59.8 million for the five months ended August
31, 1997 with the increase due to a $1.0 million increase in interest paid on
deposits offset partially by a $127,000 decrease in borrowing costs. The Bank's
average balance of deposits remained relatively stable during the period,
increasing slightly to $3.31 billion for the 1997 period from $3.29 billion for
the 1996 period. Interest expense increased by $29.6 million or 26.7% to $140.2
million from fiscal 1996 to fiscal 1997 reflecting a 34.5% increase in the
average balance of deposits, particularly certificates of deposit, as a result
of the Bay Ridge acquisition and the 1996 Branch Acquisition. The growth in the
average balance of deposits was offset in part by the decline in average rates
paid thereon from 4.39% to 4.27%. In particular, the average rate paid on
certificates of deposit decreased 29 basis points to 5.53% for fiscal 1997. Such
decline reflected in part both the effect of deposit outflows as certain higher
costing deposits were not reinvested with the Bank, as well as the transfer to
another institution of $51.4 million of deposits. Interest expense increased
from fiscal 1995 to fiscal 1996 by $30.1 million to $110.7 million or 37.3% due
to the growth in the average balance of deposits from $2.16 billion to $2.42
billion and an increase in the average rate paid thereon from 3.53% to 4.39%. As
in fiscal 1997, the bulk of the growth in interest-bearing liabilities occurred
in certificates of deposit, the average cost of which increased from 4.64% in
fiscal 1995 to 5.82% in fiscal 1996. The increase in the average rate reflected
both the effects of the higher interest rate environment existing in fiscal 1996
as well as to the 1996 Branch Acquisition.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased
by $3.0 million or 193.4% from $1.6 million for the five months ended August 31,
1996 to $4.6 million for the five months ended August 31, 1997. The increase in
the provision primarily reflected the Bank's determination in fiscal 1997 to
increase its allowance for loan losses as described previously. The provision
for loan losses increased by $4.3 million to $8.0 million in fiscal 1997. At
August 31, 1997, the allowance for loan losses represented 1.1% of total loans
and 119.8% of total non-performing loans as compared to 1.1% and 99.8%,
respectively, at March 31, 1997 and 0.9% and 57.8%, respectively, at March 31,
1996. In management's judgment it was prudent to increase the allowance for loan
losses based upon, among other factors, the Bank's continuing emphasis on
multi-family residential loans secured by properties located in the New York
City metropolitan area, the increased number of larger multi-family residential
loans and individual cooperative apartment loans and an increased amount of
loans which exhibit risk characteristics which require increased management
oversight (including loans contractually past due maturity). See "Business --
Asset Quality." For the year ended March 31, 1996, the provision amounted to
$3.7 million as compared to $3.6 million for the prior fiscal year. At March 31,
1996 and March 31, 1995, the Bank's allowance for loan losses as a percentage of
total non-performing loans remained relatively constant at 57.8% and 55.7%,
respectively.
NON-INTEREST INCOME. Non-interest income increased $491,000 or 15.3% from
$3.2 million for the five months ended August 31, 1996 to $3.7 million for the
same period in 1997. The increase reflected a $503,000 increase in service fees
on deposit accounts and other depositor and borrower services and a $13,000 gain
received on the sale of loans and securities during the 1997 period as compared
to a $282,000 loss incurred in
47
<PAGE> 86
such sales during the 1996 period offset in part by a $307,000 decrease in other
non-interest income. The increase in service fees reflects primarily the
increased volume of deposits resulting from the 1996 Branch Acquisition combined
with increased fees. Non-interest income decreased by $17.2 million or 85.5% to
$2.9 million from fiscal 1996 to fiscal 1997. The decline reflected in large
part the $12.2 million net gain in fiscal 1996 on the sale of loans and
investment securities and mortgage-backed and mortgage-related securities as
compared to a $3.3 million net loss incurred in fiscal 1997. The net gain was
primarily due to a $12.1 million gain on the sale of $16.8 million of investment
securities which were sold in fiscal 1996 in anticipation of the requirement to
fund the SAIF special assessment (discussed below) while the net loss incurred
in fiscal 1997 resulted from a $3.9 million net loss on the sale of $652.3
million of investment securities and mortgage-backed and mortgage-related
securities primarily as part of the Bank's asset restructuring. The loss on loan
and securities sales was partially offset by an increase in service fees on
deposit accounts and other depositor and borrower services provided by the Bank
from $4.1 million to $5.7 million. From fiscal 1995 to fiscal 1996, the Bank's
non-interest income increased substantially due to the previously mentioned net
gain on sale of investment securities realized in fiscal 1996. In addition,
during fiscal 1995 the Bank incurred a $4.0 million loss primarily as the result
of loan sales. During the third quarter of fiscal 1995, the Bank securitized and
sold $120.0 million of multi-family loans to the FNMA in order to provide
additional liquidity to support its on-going lending activity. The Bank incurred
a loss of $2.7 million on the sale, partially offset by the recognition of $1.5
million of deferred loan origination fees related to these loans. In addition,
during fiscal 1995 the Bank sold approximately $11.6 million of long-term,
fixed-rate loans to the FHLMC, incurring a loss of $883,000. Other non-interest
income, ranged from $548,000 for the year ended March 31, 1997 to $3.8 million
for the year ended March 31, 1996 to $2.3 million for the year ended March 31,
1995. The decline from fiscal 1996 to fiscal 1997 reflected primarily the $1.7
million loss incurred on the transfer of deposits related to a branch office
acquired in the 1996 Branch Acquisition. See "-- Recent Acquisitions."
NON-INTEREST EXPENSES. Non-interest expenses increased $4.7 million or
15.5% to $34.9 million for the five months ended August 31, 1997 from $30.2
million for the same period in 1996. Such increase was primarily due to
increased data processing fees ($2.6 million), primarily due to costs incurred
in connection with the Bank's conversion of its data processing systems,
increased compensation and employee benefits expense ($858,000) reflecting the
increase in the Bank's work force resulting from the Bay Ridge acquisition and
the 1996 Branch Acquisition, increased other non-interest expense ($1.5 million)
primarily due to expanded branch operations resulting from the purchase
transactions completed in fiscal 1996 and increased occupancy expense ($619,000)
due to the Bank's expanded branch operations resulting primarily from the Bay
Ridge acquisition and the 1996 Branch Acquisition. Such increases were partially
offset by a $1.1 million decrease in FDIC insurance premiums reflecting the
lower premium rate assessed during the 1997 period. Non-interest expenses
increased substantially by $30.0 million or 57.6% to $82.2 million from fiscal
1996 to fiscal 1997. This increase was primarily due to the effects of the Bay
Ridge acquisition and the 1996 Branch Acquisition (including amortization of
intangible assets ($6.4 million)), the imposition of the special SAIF assessment
($8.6 million) on that portion of the Bank's deposits deemed to be SAIF-insured
deposits and increased data processing fees ($3.9 million) due, in part, to a
data processing systems conversion. As a result of the two acquisitions in 1996,
the Bank added ten offices to its branch network and increased its work force by
approximately 20%. By comparison, the increase in non-interest expenses from
fiscal 1995 to fiscal 1996 was significantly less, only increasing by $4.5
million or 9.5% to $52.1 million in fiscal 1996. The increase during fiscal 1996
over fiscal 1995 was accounted for in large part by increases in compensation
and employee benefits and occupancy costs. It is expected that non-interest
expenses will increase due to the increased costs involved in operating as a
public company as well as to the expenses related to the various proposed stock
benefit plans. See "Management -- Benefits."
Compensation and employee benefits expense increased by $858,000 or 7.4% to
$12.4 million during the five months ended August 31, 1997 as compared to the
same period in 1996. In addition, compensation and employee benefits expense
increased by $4.6 million or 20.5% to $26.9 million in fiscal 1997 from $22.3
million in fiscal 1996. The increases in the five months ended August 31, 1997
and in fiscal 1997 reflected in large part the effects of the Bay Ridge
acquisition and the 1996 Branch Acquisition, resulting in an increase of
approximately 20% in the number of employees. The $2.2 million or 10.7% increase
in compensation and
48
<PAGE> 87
employee benefit expense experienced between fiscal 1996 and 1995 primarily
reflected normal increases in compensation and employee benefit costs.
Occupancy costs increased $619,000 to $5.1 million for the five months
ended August 31, 1997 from $4.5 million for the same period in 1996 due to both
the expanded branch network resulting from the acquisitions effected in fiscal
1996 combined with the Bank's on-going branch renovation and improvement
program. However, occupancy costs increased by $3.3 million or 43.4% to $11.0
million in fiscal 1997 from fiscal 1996 due to the addition of ten additional
branch offices as a result of the Bay Ridge acquisition and the 1996 Branch
Acquisition. The increased cost also reflected expenses incurred in connection
with an on-going branch renovation and improvement program. Occupancy costs
totaled $7.7 million for fiscal 1996, a $1.7 million or 28.7% increase from
fiscal 1995, due primarily to the Bank's on going branch renovation program.
Data processing service expenses increased by $2.6 million or 120.9% to
$4.7 million during the five months ended August 31, 1997 as compared to the
five months ended August 31, 1996. The increase reflected primarily expenses
being incurred in connection with the conversion of the Bank's data processing
systems. Such expenses amounted to $2.8 million during the five months ended
August 31, 1997. The Bank expects to incur additional costs in connection with
the first phase of the conversion of the Bank's data processing systems which is
expected to be completed in fiscal 1998 as well as the final phase which is not
expected to be completed until fiscal 1999. Data processing service expenses
also increased during fiscal 1997, increasing 125.2% from $3.1 million for the
year ended March 31, 1996 to $7.0 million for the year ended March 31, 1997. The
primary reason for the increase was the determination by the Bank to convert its
data processing systems. As a consequence, the Bank expensed $2.5 million during
fiscal 1997 in connection with such conversion. In addition, such expense was
affected by the significant increase in the number of customer accounts at the
Bank as a result of the Bay Ridge acquisition and the 1996 Branch Acquisition.
Between fiscal 1996 and fiscal 1995, data processing service expenses remained
relatively stable, only increasing $26,000 or 0.8% to $3.1 million during the
year ended March 31, 1996. In connection with the data processing systems
conversion, the Bank is in the process of planning the program changes necessary
in order to be ready for the year 2000.
The Bank's advertising expenses amounted to $1.6 million and $1.1 million
for the five months ended August 31, 1997 and 1996, respectively, and to $3.6
million, $3.2 million and $2.2 million for the years ended March 31, 1997, 1996
and 1995, respectively. The increase in the five months ended August 31, 1997
and in fiscal years 1997 and 1996 reflected the Bank's determination to increase
its market presence through, in part, increased advertising in print media and
radio.
FDIC insurance premiums declined in the five months ended August 31, 1997
and in fiscal years 1997 and 1996 from the level experienced in fiscal 1995 even
though the level of insurable deposits increased substantially during fiscal
years 1996 and 1997. Such expenses decreased from $5.1 million during fiscal
1995 to $2.2 million in fiscal 1997. For the five months ended August 31, 1997,
such expenses amounted to $519,000 as compared to $1.6 million for the same
period in the prior year. The decreases reflect the reduction in the rate paid
to the FDIC for deposit insurance premiums combined with a refund from the FDIC
in fiscal 1997 totaling $961,000 related to the recapitalization of the SAIF.
See "Regulation -- The Bank -- FDIC Insurance Premiums."
As a result of certain of its past acquisitions, the Bank is deemed to have
SAIF-insured deposits. During fiscal 1997, the FDIC imposed a one-time special
assessment in order to recapitalize the SAIF fund which, for BIF-insured
institutions like the Bank which also have deposits deemed to be SAIF-insured,
amounted to 65.7 basis points on the balance of SAIF deposits as of March 31,
1995. As a result, the Bank was assessed $8.6 million. The level of deposit
insurance expense for the Bank is and will remain higher than that of an insured
institution with a comparable amount of BIF only insured deposits due to the
significant amount of the Bank's deposits deemed to be SAIF-insured. The Bank's
deposits deemed SAIF-insured are assessed at a rate of 6.3 basis points compared
to 1.3 basis points for the Bank's BIF-insured deposits. At August 31, 1997 and
at March 31, 1997, $1.61 billion of the Bank's deposits were deemed to be SAIF
insured.
During the five months ended August 31, 1997, the amortization of
intangibles declined by $223,000 or 5.7% from the same period in 1996. The
amortization of intangibles increased by $6.4 million to $8.3 million in fiscal
1997 from fiscal 1996 reflecting a full year of amortization of the intangibles
recorded in the Bay Ridge acquisition and the 1996 Branch Acquisition compared
to amortization expense related to such
49
<PAGE> 88
intangibles only during the fourth quarter of fiscal 1996. Amortization expense
amounted to $1.8 million in fiscal 1996. Amortization of intangibles amounted to
$905,000 in fiscal 1995 and related to intangibles recorded in connection with
branch acquisitions completed in prior years.
Other non-interest expenses, including miscellaneous items such as
equipment expenses, office supplies, postage, telephone expenses, maintenance
and security services contracts and professional fees, increased $1.5 million or
27.3% to $6.9 million for the five months ended August 31, 1996 to the same
period in 1997 and by $3.2 million or 28.0% to $14.6 million in fiscal 1997 as
compared to fiscal 1996 primarily as a result of the significantly expanded
branch operations resulting from the purchase transactions completed in 1996.
Such expenses increased at a much more modest rate from fiscal 1995 to fiscal
1996, only increasing $1.1 million or 11.0% to $11.4 million in fiscal 1996.
INCOME TAXES. Income tax expense amounted to $5.2 million and $9.2 million
for the five months ended August 31, 1997 and 1996, respectively, and $10.7
million, $30.8 million and $27.3 million during fiscal 1997, 1996 and 1995,
respectively. The decrease experienced from fiscal 1996 to fiscal 1997 and in
the five months ended August 31, 1997 as compared to the five months ended
August 31, 1996 reflected in part the decrease in the Bank's income before
income taxes. In addition, the Bank's effective tax rate was substantially
reduced due to the establishment of a real estate investment trust, Independence
Community Realty Corp. ("ICRC" or the "REIT"), during fiscal 1997. See
"Business -- Subsidiaries." The Bank's effective tax rates for the five months
ended August 31, 1997 and for fiscal 1997, 1996 and 1995 were 32.2%, 38.4%,
46.1% and 43.9%, respectively.
As of August 31, 1997, the Bank had a net deferred tax asset of $16.6
million. No valuation allowance was deemed necessary with respect to such asset.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap" provides an
indication of the extent to which an institution's interest rate spread will be
affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and 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 would be in a worse position to invest
in higher yielding assets which, consequently, may result in the cost of its
interest-bearing liabilities increasing at a rate faster than its yield on
interest-earning assets than if it had a positive gap. During a period of
falling interest rates, an institution with a negative gap would tend to have
its interest-bearing liabilities repricing downward at a faster rate than its
interest-earning assets as compared to an institution with a positive gap which,
consequently, may tend to positively affect the growth of its net interest
income.
The Bank's asset and liability management strategy is established by the
Asset/Liability Committee of the Bank and reviewed by the Bank's Board of
Directors periodically. The Asset/Liability Committee meets monthly. Currently,
the Bank manages the imbalance between its interest-earning assets and
interest-bearing liabilities within shorter maturities to ensure that such
relationships are within acceptable ranges given the Bank's business strategies
and objectives and its analysis of market and economic conditions.
The Bank's strategies to manage interest rate risk include (i) increasing
the interest sensitivity of its mortgage loan portfolio through the use of
adjustable-rate loans or relatively short-term (five to ten years) balloon
loans, (ii) selling most newly originated fixed-rate, single-family residential
mortgage loans with original terms to maturity of more than 15 years, (iii)
originating relatively short-term or adjustable-rate consumer and commercial
business loans, (iv) maintaining a high level of investment securities and
mortgage-backed and mortgage-related securities with maturities or estimated
average lives of less than five years, (v) promoting stable savings, demand and
other transaction accounts and (vi) maintaining a strong capital position.
50
<PAGE> 89
The following table summarizes the anticipated maturities or repricing of
the Bank's interest-earning assets and interest-bearing liabilities as of August
31, 1997, based on the information and assumptions set forth in the notes below.
<TABLE>
<CAPTION>
MORE THAN
WITHIN THREE TO MORE THAN THREE YEARS
THREE TWELVE ONE YEAR TO TO FIVE OVER FIVE
MONTHS MONTHS THREE YEARS YEARS YEARS TOTAL
----------- ----------- ----------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable:
Single-family residential
loans........................ $ 23,490 $ 101,598 $ 195,934 $ 79,079 $114,287 $ 514,388
Multi-family residential....... 83,971 216,609 575,556 489,914 121,353 1,487,403
Commercial real estate and
mortgage loans............... 21,298 27,376 65,658 44,663 11,208 170,203
Other loans:
Cooperative apartment
loans...................... 20,568 74,513 190,231 69,415 38,072 392,799
Consumer and commercial
business loans(2).......... 74,230 5,772 17,376 20,690 5,762 123,830
Mortgage-backed and
mortgage-related securities...... 16,251 39,534 72,531 26,418 12,605 167,339
Investment securities.............. 2,012 82,338 438,481 13,365 1,332 537,528
Equity securities.................. 16,246 -- -- -- -- 16,246
Other interest-earning assets...... 102,351 -- -- -- -- 102,351
----------- ----------- ---------- --------- --------- ----------
Total...................... $ 360,417 $ 547,740 $1,555,767 $ 743,544 $304,619 $3,512,087
=========== =========== ========== ========= ========= ==========
Interest-bearing liabilities:
Deposits(3):
NOW accounts................... $ 277,003 $ -- $ -- $ -- $ -- $ 277,003
Savings accounts............... 1,017,793 -- -- -- -- 1,017,793
Money market deposit
accounts..................... 216,543 -- -- -- -- 216,543
Certificates of deposit........ 457,497 908,972 350,975 72,284 486 1,790,214
Other borrowings................. -- -- 2,690 8,019 6,400 17,109
----------- ----------- ---------- --------- --------- ----------
Total...................... $ 1,968,836 $ 908,972 $ 353,665 $ 80,303 $ 6,886 $3,318,662
=========== =========== ========== ========= ========= ==========
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities..... $(1,608,419) $ (361,232) $1,202,102 $ 663,241 $297,733 $ 193,425
=========== =========== ========== ========= ========= ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities..... $(1,608,419) $(1,969,651) $ (767,549) $(104,308) $193,425
=========== =========== ========== ========= =========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets.......... (42.39)% (51.91)% (20.23)% (2.75)% 5.10%
=========== =========== ========== ========= =========
</TABLE>
- ---------------
(1) Adjustable-rate loans are included in the period in which interest rates are
next scheduled to adjust rather than in the period in which they are due,
and fixed-rate loans are included in the periods in which they are scheduled
to be repaid, based on scheduled amortization, in each case as adjusted to
take into account estimated prepayments based on certain assumptions.
(2) Includes student loans, home equity lines of credit and improvement loans,
automobile loans, passbook loans, personal loans, credit card loans and
commercial business loans.
(3) Does not include non-interest-bearing deposit accounts.
Management believes that the assumptions utilized by it to evaluate the
vulnerability of the Bank's operations to changes in interest rates approximate
actual experience and considers them reasonable; however, the interest rate
sensitivity of the Bank's assets and liabilities in the above table could vary
substantially if different assumptions were used or actual experience differs
from the historical experience on which they are based.
Certain shortcomings are inherent in the method of analysis presented in
the table above. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in
51
<PAGE> 90
different degrees to changes in market interest rates. Also, the interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates both on a
short-term basis and over the life of the asset. Further, in the event of
changes in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their adjustable-rate loans may decrease in
the event of an interest rate increase.
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. An
alternative methodology is to estimate the change in the Bank's net portfolio
value ("NPV") over a range of interest rate scenarios. NPV is the present value
of expected cash flows from assets, liabilities, and off-balance sheet
contracts. The NPV ratio, under any interest rate scenario, is defined as the
NPV in that scenario divided by the market value of assets in the same scenario.
The model assumes estimated loan prepayment rates and reinvestment rates similar
to the assumptions utilized for the gap table set forth above. The following
sets forth the Bank's NPV as of August 31, 1997.
<TABLE>
<CAPTION>
NPV AS % OF
PORTFOLIO
NET PORTFOLIO VALUE VALUE OF ASSETS
------------------------------------ --------------------
CHANGE (IN BASIS POINTS) % NPV CHANGE IN
IN INTEREST RATES AMOUNT $ CHANGE CHANGE RATIO NPV RATIO
-------------------------- -------- --------- ------- ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400...................... $226,086 $(125,941) (35.78)% 6.54% (2.63)%
+300...................... 263,893 (88,134) (25.04) 7.42 (1.75)
+200...................... 299,757 (52,270) (14.85) 8.20 (0.97)
+100...................... 325,983 (26,044) (7.40) 8.70 (0.47)
0..................... 352,027 -- 0.00 9.17 0.00
-100...................... 370,228 18,201 5.17 9.42 0.25
-200...................... 393,822 41,795 11.87 9.80 0.63
-300...................... 456,909 104,882 29.79 11.09 1.92
-400...................... 545,942 193,915 55.09 12.92 3.75
</TABLE>
As in the case with the gap table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV table presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV table provides an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.
REGULATORY CAPITAL REQUIREMENTS
The following table sets forth the Bank's compliance with applicable
regulatory capital requirements at August 31, 1997.
<TABLE>
<CAPTION>
REQUIRED ACTUAL EXCESS
-------------------- -------------------- --------------------
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier I leverage capital
ratio(1)...................... 4.0% $149,520 6.9% $258,319 2.9% $108,799
Risk-based capital ratios:
Tier I........................ 4.0 101,980 10.1 258,319 6.1 156,339
Total......................... 8.0 203,961 11.4 289,434 3.4 85,473
</TABLE>
- ---------------
(1) Reflects the 4.0% requirement to be met in order for an institution to be
"adequately capitalized" under applicable laws and regulations.
For additional information about the Bank's regulatory capital, see
"Regulatory Capital" and "Regulation -- The Bank -- Capital Requirements."
52
<PAGE> 91
LIQUIDITY AND COMMITMENTS
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits, the amortization, prepayment and maturity of
outstanding loans, mortgage-backed and mortgage-related securities, the maturity
of investment securities and other short-term investments and funds provided
from operations. While scheduled payments from the amortization of loans,
mortgage-backed and mortgage-related securities and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. In addition, the Bank
invests excess funds in federal funds sold and other short-term interest-earning
assets which provide liquidity to meet lending requirements. The Bank has been
able to generate sufficient cash through its deposits and has only utilized
borrowings, consisting primarily of advances from the FHLB of New York, to a
limited degree as a source of funds during the past five years. Such advances
have ranged from $67.5 million at March 31, 1995 to $14.6 million at August 31,
1997. In addition, the net proceeds of the Offerings will initially enhance the
Company's liquidity.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds sold or U.S. Treasury securities. On a longer term basis,
the Bank maintains a strategy of investing in various lending products as
described in greater detail under "Business -- Lending Activities." The Bank
uses its sources of funds primarily to meet its ongoing commitments, to pay
maturing certificates of deposit and savings withdrawals, fund loan commitments
and maintain a portfolio of mortgage-backed and mortgage-related securities and
investment securities. At August 31, 1997, there were outstanding commitments
and unused lines of credit by the Bank to originate or acquire mortgage loans
and other loans aggregating $75.1 million and $21.8 million, respectively,
consisting primarily of fixed-and adjustable-rate residential loans and
fixed-rate commercial real estate loans that are expected to close during the
twelve-months ended August 31, 1998. Certificates of deposit scheduled to mature
in one year or less at August 31, 1997, totaled $1.37 billion. Based on
historical experience, management believes that a significant portion of
maturing deposits will remain with the Bank. The Bank anticipates that it will
continue to have sufficient funds, together with borrowings, to meet its current
commitments.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars,
without considering changes in relative purchasing power over time due to
inflation. Unlike most industrial companies, virtually all of the Bank's assets
and liabilities are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
does the effect of inflation.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." The statement
generally requires all creditors to account for impaired loans, except those
loans that are accounted for at fair value or at the lower of cost or fair
value, at the present value of the expected future cash flows discounted at the
loan's effective interest rate. In October 1994, the FASB issued SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan Income Recognition and
Disclosures." This statement amended SFAS No. 114 to allow a creditor to use
existing methods for recognizing interest income on an impaired loan. SFAS No.
118 did not change the provisions in SFAS No. 114 that require a creditor to
measure impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or at the market price of the
loan, or the fair value of the collateral if the loan is collateral dependent.
SFAS No. 114 and SFAS No. 118 were effective for fiscal years beginning after
December 15, 1994. The Bank adopted SFAS No. 114, as amended, on April 1, 1995
which did not have a material effect on the Bank's financial statements.
In May 1993, the FASB issued SFAS No. 115, which requires debt and equity
securities to be classified in one of three categories and to be accounted for
as follows: debt securities which the company has the positive intent and
ability to hold to maturity are classified as "securities held to maturity" and
reported at
53
<PAGE> 92
amortized cost; debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as "trading
securities" and reported at fair value with unrealized gains and losses included
in earnings; and debt and equity securities not classified as either held to
maturity or trading securities are classified as "securities available for sale"
and reported at fair value with unrealized gains and losses, net of related tax
effect, excluded from earnings and reported as a separate component of
shareholders' equity. The Bank adopted SFAS No. 115 as of April 1, 1994. The
cumulative effect of the adoption of SFAS No. 115 was increase in total equity
of $2.7 million as of April 1, 1994. However, on November 15, 1995, the FASB
issued a guide to implementation of SFAS No. 115 which permitted institutions,
on a one time basis, to reclassify securities from one category to another
(i.e., from held to maturity to available for sale) until December 31, 1995.
Management of the Bank changed the classification of $169.1 million of the
Bank's securities in accordance with this pronouncement, resulting in an
unrealized loss of $3.5 million.
In November 1993, the AICPA issued SOP 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," which is effective for years beginning after
December 15, 1993. SOP 93-6 requires the application of its guidance for shares
acquired by ESOPs after December 31, 1992 but not yet committed to be released
as of the beginning of the year SOP 93-6 is adopted. SOP 93-6 changes the
measure of compensation expense recorded by employers for leveraged ESOPs from
the cost of ESOP shares to the fair value of ESOP shares. The Company has
adopted an ESOP in connection with the Conversion, which is expected to purchase
8% of the Common Stock sold in the Conversion. Under SOP 93-6, the Company will
recognize compensation cost equal to the fair value of the ESOP shares during
the periods in which they become committed to be released. To the extent that
the fair value of the Company's ESOP shares differ from the cost of such shares,
this differential will be charged or credited to equity. Employers with
internally leveraged ESOPs such as the Company will not report the loan
receivable from the ESOP as an asset and will not report the ESOP debt from the
employer as a liability. However, the effects of SOP 93-6 on future operating
results cannot be determined at this time.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used for long-lived assets and certain identifiable intangibles
to be disposed of. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity expects
to hold and use should be based on the fair value of the asset. This statement
does not apply to financial instruments, long-term customer relationships of a
financial institution (for example, core deposit intangibles), mortgage and
other servicing rights, deferred policy acquisition costs, or deferred tax
assets. The Bank adopted SFAS No. 121 on April 1, 1996. The adoption of SFAS No.
121 did not have a material impact on the financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to measure compensation cost
of such plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net income and, if
presented, earnings per share, as if this statement had been adopted. The
accounting requirements of this statement are effective for transactions entered
into during fiscal years that begin after December 15, 1995; however, companies
are required to disclose information for awards granted in their first fiscal
year beginning after December 15, 1994. The Company has determined to continue
to use the intrinsic value based methodology provided by APB Opinion No. 25.
In June 1996, the FASB released SFAS No. 125, "Accounting for Transfers and
Extinguishment of Liabilities." SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. SFAS No. 125 requires a consistent application of a financial-
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an
54
<PAGE> 93
entity is required to recognize the financial and servicing assets it controls
and the liabilities it has incurred and to derecognize financial assets when
control has been surrendered in accordance with criteria provided in SFAS No.
125. SFAS No. 125 applies to transfers and extinguishments occurring after
December 31, 1996. The adoption of SFAS No. 125 did not have a material impact
on the financial condition or operations of the Bank.
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share."
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, Earnings Per Share,
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the numerator and
denominator of the diluted EPS computation. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
Opinion No. 15. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements. Specifically, the Statement requires all entities to provide
the capital structure disclosures previously required by APB Opinion No. 15.
Companies that were exempt from the provisions of APB Opinion No. 15 will now
need to make those disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management is in the process of determining
the impact, if any, this statement will have on the Bank.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires disclosures for
each segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader geographic
regions as permitted under current standards. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 with earlier application
permitted.
55
<PAGE> 94
BUSINESS
GENERAL
The Bank's principal business is gathering deposits from customers within
its market area and investing those deposits, primarily in multi-family
residential mortgage loans, single-family residential loans (including
cooperative apartment loans), commercial real estate mortgage loans, consumer
loans and mortgage-backed and mortgage-related securities and investment
securities. The Bank's revenues are derived principally from interest on its
loan and securities portfolios while its primary sources of funds are deposits,
loan amortization and prepayments and maturities of mortgage-backed and
mortgage-related and investment securities. The Bank offers a variety of loan
and deposit products to its customers. The Bank also makes available other
financial instruments, such as annuity products and mutual funds, through
arrangements with a third party.
MARKET AREA AND COMPETITION
The Bank has been, and intends to continue to be, a community-oriented
financial institution providing financial services and loans for housing within
its market area. The Bank oversees its 34 branch office network through its
headquarters in the Brooklyn Heights section of Brooklyn. The Bank operates 18
branch offices in the borough of Brooklyn and another 10 in the borough of
Queens with the remainder spread among Manhattan, the Bronx, Staten Island and
Nassau County. The Bank gathers deposits primarily from the communities and
neighborhoods in close proximity to its branches. Although the Bank lends
throughout the New York City metropolitan area, the substantial majority of its
real estate loans are secured by properties located in the boroughs of Brooklyn
and Queens and, to a lesser extent, Manhattan. The Bank's customer base, like
the urban neighborhoods which it serves, is racially and ethnically diverse and
is comprised of mostly middle-income households and to a lesser degree, low to
moderate income households. The Bank has sought to set itself apart from its
many competitors by tailoring its products and services to meet the needs of its
customers, by emphasizing customer service and convenience and by being actively
involved in community affairs in the neighborhoods and communities which it
serves. As part of the Bank's competitive strategy to attract loyal deposit
customers, the Bank has historically been a low service fee provider of a
variety of savings and checking account products. The Bank believes that its
commitment to customer and community service has permitted it to build strong
customer identification and loyalty which is essential to the Bank's ability to
compete effectively.
In the past several years, the New York City metropolitan area has
benefited from the resurgence and growth in employment and profitability
experienced by national securities and investment banking firms, many of which
are domiciled in Manhattan, as well as the growth and profitability of other
financial service companies, such as money center banks. The strength of the
national economy and of the United States equities markets has contributed
significantly to the recent growth and increased profitability of Wall Street
securities and investment banking firms. Historically, the metropolitan area has
also benefited from being the corporate headquarters of many large industrial
and commercial companies which have, in turn, attracted many smaller companies,
particularly within the service industry. The metropolitan area also offers well
developed transportation and communication systems and a highly skilled and
educated work force. In spite of its size and diversity, the New York City
metropolitan area economy is affected by the level of business activity and
profitability within the securities and financial services industries. During
the late 1980s and early 1990s, the securities and financial services industries
experienced a significant decline in business activity and profitability which,
when combined with a period of weakness in the national economy, resulted in
higher levels of unemployment in the New York City metropolitan area. These
conditions and other factors contributed to an overall decline in the value of
commercial and residential real estate. While real estate values have
substantially recovered, no assurance can be given that such conditions could
not reoccur.
The Bank faces significant competition both in making loans and in
attracting deposits. There are a significant number of financial institutions
located within the Bank's market area, many of which have greater financial
resources than the Bank. The Bank's competition for loans comes principally from
commercial banks, savings banks, savings associations and mortgage-banking
companies. Management anticipates that competition for both multi-family
residential mortgage loans and single-family residential loans will continue to
increase in the future. Accordingly, no assurance can be given that the Bank
will be able to maintain the volume of originations of such loans at current
levels. The Bank's most direct competition for deposits has
56
<PAGE> 95
historically come from savings associations, savings banks, commercial banks and
credit unions. The Bank faces additional competition for deposits from
short-term money market funds and other corporate and government securities
funds, direct purchases of government securities, and from other financial
institutions such as brokerage firms and insurance companies. Competition may
also increase as a result of the elimination of restrictions on interstate
operations of financial institutions.
LENDING ACTIVITIES
GENERAL. At August 31, 1997, the Bank's net loan portfolio totaled $2.68
billion, which represented 70.6% of the Bank's $3.79 billion of total assets.
The single largest category of loans in the Bank's portfolio is multi-family
residential mortgage loans, which are secured primarily by apartment buildings
and which totaled $1.49 billion or 54.7% of the total loan portfolio at August
31, 1997. The second and third largest categories are single-family residential
mortgage loans and cooperative apartment loans which totaled $552.4 million or
20.3% and $392.8 million or 14.4%, respectively, of the total loan portfolio at
such date. These three categories accounted for 89.4% of the Bank's total loan
portfolio at August 31, 1997. The remainder of the Bank's loan portfolio was
comprised primarily of $163.5 million of commercial and other real estate loans,
$43.7 million of student loans, $32.2 million of commercial business loans and
$17.5 million of home equity loans and lines of credit.
The types of loans that the Bank may originate are subject to federal and
state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans and the supply of money
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, the monetary
policy of the federal government, including the Federal Reserve Board,
legislative tax policies and governmental budgetary matters.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------------------------------------------------------
AT AUGUST 31, 1997 1997 1996 1995 1994
-------------------- -------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family
residential.... $ 552,426 20.3% $ 552,745 21.8% $ 534,539 22.7% $ 376,047 18.4% $ 308,960 18.0%
Multi-family
residential(1)... 1,487,403 54.7 1,365,124 53.7 1,208,039 51.3 1,076,969 52.7 896,605 52.3
Commercial and
other real
estate......... 163,533 6.0 158,336 6.2 162,799 6.9 119,890 5.9 95,172 5.6
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total mortgage
loans........ 2,203,362 81.0 2,076,205 81.7 1,905,377 80.9 1,572,906 77.0 1,300,737 75.9
Other loans:
Cooperative
apartment
loans.......... 392,799 14.4 348,029 13.7 340,507 14.4 360,434 17.7 288,381 16.8
Student loans.... 43,728 1.6 45,262 1.8 45,947 2.0 47,823 2.3 47,609 2.8
Home equity loans
and lines...... 17,500 0.7 19,545 0.8 23,458 1.0 27,232 1.3 31,875 1.9
Consumer and
other loans.... 30,403 1.1 27,005 1.1 20,611 0.9 18,151 0.9 28,100 1.6
Commercial
business
loans.......... 32,199 1.2 25,249 1.0 18,003 0.8 16,866 0.8 17,694 1.0
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total other
loans........ 516,629 19.0 465,090 18.3 448,526 19.1 470,506 23.0 413,659 24.1
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans
receivable... 2,719,991 100.0% 2,541,295 100.0% 2,353,903 100.0% 2,043,412 100.0% 1,714,396 100.0%
===== ===== ===== ===== =====
Less:
Discount on loans
purchased and
deferred
fees........... 11,470 11,182 10,567 11,301 11,632
Allowance for
loan losses.... 31,115 27,024 20,528 11,849 8,770
---------- ---------- ---------- ---------- ----------
Loans receivable,
net.............. $2,677,406 $2,503,089 $2,322,808 $2,020,262 $1,693,994
========== ========== ========== ========== ==========
<CAPTION>
AT MARCH 31,
1993
--------------------
PERCENT
OF
AMOUNT TOTAL
---------- -------
<S> <C> <C>
Mortgage loans:
Single-family
residential.... $ 315,219 21.3%
Multi-family
residential(1)... 651,488 44.1
Commercial and
other real
estate......... 82,033 5.6
---------- -----
Total mortgage
loans........ 1,048,740 71.0
Other loans:
Cooperative
apartment
loans.......... 296,600 20.1
Student loans.... 47,853 3.2
Home equity loans
and lines...... 36,276 2.5
Consumer and
other loans.... 30,953 2.1
Commercial
business
loans.......... 16,900 1.1
---------- -----
Total other
loans........ 428,582 29.0
---------- -----
Total loans
receivable... 1,477,322 100.0%
=====
Less:
Discount on loans
purchased and
deferred
fees........... 8,976
Allowance for
loan losses.... 6,415
----------
Loans receivable,
net.............. $1,461,931
==========
</TABLE>
- ---------------
(1) Includes at August 31, 1997 and March 31, 1997, $326.4 million and $294.9
million, respectively, of loans secured by mixed-use (combined residential
and commercial use) properties.
57
<PAGE> 96
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of the Bank's loans at August 31,
1997, as well as the dollar amount of such loans which are scheduled to mature
after one year which have fixed or adjustable interest rates. Demand loans,
loans having no schedule of repayments and no stated maturity and overdraft
loans are reported as due in one year or less.
<TABLE>
<CAPTION>
PRINCIPAL REPAYMENTS CONTRACTUALLY DUE
IN YEAR(S) ENDED AUGUST 31,
TOTAL AT --------------------------------------------------------------------------
AUGUST 31, 2002- 2008- THERE-
1997 1998 1999 2000 2001 2007 2013 AFTER
---------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential(1)....... $ 514,388 $ 3,612 $ 611 $ 1,361 $ 1,678 $ 98,445 $121,404 $287,277
Multi-family residential........... 1,487,403 90,782 118,442 165,713 353,040 727,082 32,233 111
Commercial and other real estate... 163,533 20,557 22,803 18,589 15,529 76,737 3,572 5,746
Other loans:
Cooperative apartment loans........ 392,799 260 28 235 411 38,208 40,529 313,128
Consumer and commercial business
loans(2)......................... 123,830 81,023 5,488 7,237 6,689 23,059 334 --
---------- -------- -------- -------- -------- -------- -------- --------
Total(3)..................... $2,681,953 $196,234 $147,372 $193,135 $377,347 $963,531 $198,072 $606,262
========== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Does not include $38.0 million of single-family residential loans serviced
by others.
(2) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
(3) Of the $2.49 billion of loan principal repayments contractually due after
August 31, 1998, $1.77 billion have fixed rates of interest and $719.0
million have adjustable rates of interest.
LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. The Bank originates
both adjustable-rate mortgage loans and fixed-rate mortgage loans, the volume of
which is dependent upon customer demand and market rates of interest. The Bank
generally retains all adjustable-rate loans for its portfolio. In the past, the
Bank generally did not purchase whole mortgage loans or loan participations.
However, during the fourth quarter of fiscal 1996 the Bank entered into an
agreement with a local mortgage-banking firm to purchase conventional (loans not
fully or partially guaranteed by the Federal Housing Administration ("FHA") or
the Department of Veterans' Affairs ("VA")), single-family residential mortgage
loans and cooperative apartment loans originated by such mortgage banking firm
on the Bank's behalf. During the five months ended August 31, 1997, the Bank
purchased $11.2 million and $10.0 million, respectively, of conventional
single-family residential mortgage loans and cooperative loans from such
mortgage banker while during fiscal 1997, the Bank purchased $19.1 million and
$11.7 million, respectively, of conventional single-family residential mortgage
loans and cooperative apartment loans therefrom. See "-- Single-Family
Residential and Cooperative Apartment Lending." In addition, as a result of the
acquisition of Bay Ridge during fiscal 1996, the Bank acquired $274.1 million of
loans. In anticipation of the acquisition of such loans from Bay Ridge and in
order to maintain liquidity in light of the need to fund the Bay Ridge
acquisition, the Bank reduced the amount of its loan originations during fiscal
1996.
The Bank generally sells (with servicing retained by the Bank) newly
originated fixed-rate, single-family residential mortgage loans with contractual
terms of more than 15 years in the secondary market to the FNMA and the FHLMC.
It has also, on occasion, sold cooperative apartment loans and multi-family
residential mortgage loans. During fiscal 1997, the Bank sold $67.7 million of
cooperative apartment loans with servicing retained. During fiscal 1995, the
Bank sold $120.0 million of multi-family residential mortgage loans to the FNMA
with servicing retained by the Bank. As a credit enhancement, the Bank provided
limited recourse for the loans sold to the FNMA, pledging $7.8 million of U.S.
Treasury bills as collateral for potential losses incurred by the purchasers.
The sales of cooperative apartment loans in fiscal 1997 and of multi-family
residential mortgage loans in fiscal 1995 were undertaken by the Bank in order
to provide additional liquidity to support the Bank's on-going lending efforts.
The Bank generally retains fixed-rate residential mortgage loans with
contractual terms of 15 years or less and adjustable-rate loans. As of August
31, 1997, the Bank was
58
<PAGE> 97
servicing $297.2 million of loans for others. The Bank is generally paid a fee
equal to .25% to .375% of the outstanding principal balance for servicing loans
sold.
In connection with the Superintendent's approval of the Plan and the
Application for Conversion, the Bank has undertaken to make a good faith effort,
consistent with safe and sound banking practices, to provide housing related
financing to borrowers and/or projects located in the Bronx and in upper
Manhattan totaling $22.0 million and $16.0 million, respectively, over the two
year period commencing January 1, 1998, of which $14.0 million and $9.0 million,
respectively, are to consist of loans secured by properties in low and moderate
income ("LMI") census tracts, loans to LMI borrowers, loans to community
development projects or qualified investments (subject to certain limitations).
The commitment can be satisfied by originations, purchases or refinancing of
permanent or construction loans for housing related projects or by community
development loans or other "qualified investments" as defined in federal
regulations promulgating the Community Reinvestment Act ("CRA"). The Bank will
use its good faith efforts to achieve at least one-third of the lending
commitments during the year ended December 31, 1998. In addition, the Bank
agreed to expand its CRA assessment area to include Manhattan, the Bronx and
Nassau County in their entireties. The time frame for compliance with the
commitment is contingent upon the financial capability of the Bank, prevailing
market and economic conditions and compliance with safe and sound banking
practices. In addition, in December 1997 the Bank entered into an agreement (the
"ICP Agreement") with Inner City Press/Community on the Move, a local community
group ("ICP"), pursuant to which it agreed to use its best efforts to lend in
the Bronx and in upper Manhattan at least $27.0 million and $20.0 million,
respectively, over the two year period commencing January 1, 1998, of which at
least $18.0 million and $16.0 million, respectively, are to consist of loans
secured by properties in low and moderate income census tracts. For purposes of
the ICP Agreement, "lend" means loans, community development loans or qualified
investments as defined in federal regulations implementing the CRA. In addition,
the Bank will be required to use its best efforts to lend in certain specified
LMI areas of Brooklyn an aggregate of at least $15.0 million in the two year
period commencing January 1, 1998. In addition, during this two year period, the
Bank agreed to open two automatic teller machines ("ATM") in LMI census tracts
in the Bronx and/or upper Manhattan or a new branch office within certain
specified areas of the Bronx or upper Manhattan. In connection with the FDIC's
determination to issue a notice of an intent not to object to the Plan of
Conversion, the Bank agreed, subject to principles of safety and soundness, to
meet certain lending requirements substantially identical to those set forth in
the ICP Agreement. Management does not believe that compliance with the
foregoing commitments will have a material effect on the results of operations
or financial condition of the Bank.
59
<PAGE> 98
ACTIVITY IN LOANS. The following table shows the activity in the Bank's
loans during the periods indicated.
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS
ENDED AUGUST 31, YEAR ENDED MARCH 31,
------------------------- ----------------------------------------
1997 1996 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans held at beginning
of period.................. $2,541,295 $2,353,903 $2,353,903 $2,043,412 $1,714,396
Originations of loans:
Single-family
residential............. 26,144 71,634 106,688 31,296 201,877
Multi-family residential... 195,287 136,989 225,906 144,560 359,343
Commercial and other real
estate.................. 12,720 11,148 49,924 18,055 33,426
Other:
Cooperative apartment
loans................. 57,589 70,907 115,685 23,862 116,588
Consumer and commercial
business loans(1)..... 19,970 13,621 43,009 41,195 52,791
---------- ---------- ---------- ---------- ----------
Total
originations..... 311,710 304,299 541,212 258,968 764,025
Purchases of loans:
Single-family
residential............. 11,186 9,835 19,097 171,608 --
Multi-family residential... -- -- -- 31,126 --
Commercial and other real
estate.................. -- -- -- 67,084 --
Other loans:
Cooperative apartment
loans................. 9,998 8,298 11,724 2,317 --
Consumer and commercial
business loans(1)..... -- -- -- 3,864 --
---------- ---------- ---------- ---------- ----------
Total purchases.... 21,184 18,133 30,821 275,999(2) --
---------- ---------- ---------- ---------- ----------
Total originations
and purchases.... 332,894 322,432 572,033 534,967 764,025
Loans sold:
Single-family
residential............. 4,301 1,217 4,066 5,693 11,565
Multi-family residential... -- -- -- -- 119,971
Commercial and other real
estate.................. -- -- 1,494(3) -- --
Other loans:
Cooperative apartment
loans................. 234 41 67,658 1,123 82
Consumer and commercial
business loans(1)..... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total sold......... 4,535 1,258 73,218 6,816 131,618
Repayments(4)................ 149,663 124,701 311,423 217,660 303,391
---------- ---------- ---------- ---------- ----------
Net loan activity............ 185,366 196,473 187,392 310,491 329,016
---------- ---------- ---------- ---------- ----------
Total loans held at end of
period..................... $2,719,991 $2,550,376 $2,541,295 $2,353,903 $2,043,412
========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
(2) Includes $274.1 million of loans acquired in connection with the acquisition
of Bay Ridge in January 1996 and $1.9 million of loans acquired in the 1996
Branch Acquisition.
(3) Reflects sale of certain non-performing loans acquired in the Bay Ridge
acquisition.
(4) Includes loans charged off or transferred to other real estate owned.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. The Bank
originates multi-family (five or more units) residential mortgage loans which
are secured primarily by apartment buildings, cooperative apartment buildings
and mixed-use (combined residential and commercial) properties located in the
Bank's market area. At August 31, 1997, the Bank had multi-family residential
mortgage loans totaling $1.49 billion in its portfolio, comprising 54.7% of the
total loan portfolio. Historically, the Bank has been an
60
<PAGE> 99
active multi-family residential mortgage lender and this portion of the Bank's
loan portfolio has grown (through origination and by purchase) during the last
several years, reflecting the Bank's emphasis on such lending. The Bank intends
to continue to emphasize multi-family residential mortgage lending within its
market area. The main competitors for loans in this market tend to be other
local banks and savings institutions as well as insurance companies.
Multi-family residential mortgage loans in the Bank's portfolio generally range
in amount from $500,000 to $3.0 million and have an average size of
approximately $900,000. The Bank's multi-family residential mortgage loans are
comprised primarily of middle-income housing located in the boroughs of Brooklyn
and Queens and, to a lesser extent, Manhattan.
When approving new multi-family residential mortgage loans, the Bank
follows a set of underwriting standards which it believes are conservative, and
which generally permit a maximum loan-to-value ratio of 75% based on an
appraisal performed by one of the Bank's in-house, licensed and certified
appraisers, and sufficient cash flow from the underlying property to adequately
service the debt. A minimum debt service ratio of 1.3 generally is required on
multi-family residential mortgage loans. The Bank also considers the financial
resources of the borrower, the borrower's experience in owning or managing
similar properties, the market value of the property and the Bank's lending
experience with the borrower. The Bank's current lending policy requires that
loans in excess of $300,000 be approved by two non-officer directors of the
Mortgage and Real Estate Committee of the Board of Directors.
The Bank's multi-family residential mortgage loans include loans secured by
cooperative apartment buildings. In underwriting these loans, the Bank applies
the normal underwriting criteria used with other multi-family properties. In
addition, the Bank generally will not make a loan on a cooperative apartment
building unless at least 65% of the total units in the building are
owner-occupied. At August 31, 1997, the Bank had $345.5 million of loans secured
by cooperative apartment buildings.
The Bank's typical multi-family residential mortgage loan is originated
with a term to maturity of 5 or 10 years (with principal due in full at such
time). These loans have a fixed-rate of interest and may be extended by the
borrower, upon payment of an additional fee, for five additional years at an
interest rate based on the 5-year FHLB of New York advance rate plus a margin,
which may not be below the initial interest rate of the loan. The Bank recently
has been offering loans which have fixed-rates for the first five years then
adjust at the end of the fifth year and again at the end of the seventh or
eighth year to pre-set rates established at the time of origination. Under the
terms of the Bank's multi-family residential mortgage loans, the principal
balance generally is amortized at the rate of 1% per year. Prepayment penalties
are generally assessed on these loans.
In addition to multi-family residential mortgage loans, the Bank originates
commercial real estate loans which, at August 31, 1997, amounted to $163.5
million or 6.0% of total loans. This portfolio is comprised primarily of loans
secured by commercial and industrial properties, nursing homes, funeral homes,
churches and synagogues, schools and small shopping centers located within the
Bank's market area. The Bank's commercial real estate loans generally range in
amount from $50,000 to $1.5 million, and have an average size of approximately
$600,000. The Bank originates commercial real estate loans following similar
underwriting standards as applied to multi-family residential mortgage loans. In
addition, the Bank reviews rent or lease income, rent rolls, business receipts,
the borrower's credit history and business experience, and comparable values
when underwriting commercial real estate loans.
Loans secured by apartment buildings and other multi-family residential and
commercial properties generally are larger and considered to involve a greater
degree of risk than single-family residential mortgage loans. Payments on loans
secured by multi-family residential and commercial properties are often
dependent on the successful operation or management of the properties and are
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Bank seeks to minimize these risks through its underwriting
policies, which generally limit origination of such loans to the Bank's market
area and require such loans to be qualified on, among other things, the basis of
the property's income and debt service ratio. Such loans account for 25.0% of
total non-performing loans at August 31, 1997. See "Risk Factors -- Risks
Related to Multi-family Residential and Commercial Lending Activities" and
"-- Asset Quality."
SINGLE-FAMILY RESIDENTIAL AND COOPERATIVE APARTMENT LENDING. The Bank
offers residential first mortgage loans secured primarily by owner-occupied,
single-family (one-to-four units) residences. The Bank
61
<PAGE> 100
also originates loans to individuals secured by shares of individual cooperative
apartments. At August 31, 1997, $552.4 million or 20.3% and $392.8 million or
14.4% of the Bank's total loan portfolio consisted of single-family residential
mortgage loans and cooperative apartment loans, respectively. The substantial
majority of these loans are secured by properties located in the boroughs of
Brooklyn, Queens and Manhattan. The Bank offers conforming and non-conforming
fixed-rate and adjustable-rate loans with maturities of up to 30 years and a
maximum loan amount generally not exceeding $500,000. At August 31, 1997,
adjustable-rate loans represented $642.7 million of the aggregate total of
single-family residential mortgage loans and cooperative apartment loans. In an
effort to enhance its ability to originate greater volumes of loans without
increasing its staff, during the fourth quarter of fiscal 1996, the Bank entered
into agreements with a mortgage-banking firm and with a mortgage broker with
respect to the origination of single-family residential mortgage loans and
cooperative apartment loans for the Bank. Under the terms of the agreement with
the mortgage banker, the mortgage banker originates and sells loans to the Bank
while the broker originates loans on the Bank's behalf using the Bank's loan
documents. In both cases, the loans are originated and underwritten in
accordance with the Bank's underwriting policies, and the Bank retains approval
authority with respect to loans it considers for its portfolio. The mortgage
banker and the broker receive a fee upon the purchase or funding of the loan, as
the case may be. During the five months ended August 31, 1997 the Bank purchased
$11.2 million and $19.1 million of single-family residential and cooperative
apartments loans, respectively, and during fiscal 1997, $10.0 million and $11.7
million, respectively, from the mortgage-banking firm. During the five months
ended August 31, 1997, single-family residential mortgage loans and cooperative
apartment loans totaling $6.6 million and $17.6 million, respectively were
originated by the Bank under the terms of the brokerage agreement while for
fiscal 1997, these amounts were $34.4 million and $62.4 million, respectively.
The substantial majority of the cooperative apartment loans purchased or
originated under these arrangements relate to properties located in Manhattan.
The Bank's residential loan originations are generally obtained from
existing or past loan customers, depositors of the Bank, members of the local
community and referrals from attorneys, realtors and independent mortgage
brokers who refer members of the communities located in the Bank's market area.
The Bank also conducts extensive print and radio advertising, the majority of
which is for its mortgage products. The Bank is a participating seller/servicer
with the FNMA and the FHLMC, and generally underwrites its fixed-rate
single-family residential mortgage loans to conform with standards required by
these agencies. Included in single-family residential loans is a modest amount
of loans partially or fully guaranteed by the FHA or the VA.
The Bank is an active lender in the cooperative apartment loan market.
Although the collateral for cooperative apartment loans consists of shares in a
cooperative housing corporation (a corporation whose primary asset is the
underlying real estate), cooperative apartment loans generally are treated as
single-family residential mortgage loans. At August 31, 1997, such loans
amounted to $392.8 million or 14.4% of the Bank's total portfolio. Although the
Bank's cooperative apartment loans have in the past related to properties
located in the boroughs of Manhattan, Brooklyn and Queens, in recent periods
substantially all of such loans have related to properties located in Manhattan,
with a significant number of such loans having original loan balances in excess
of $300,000.
The Bank's single-family residential mortgage loans and cooperative
apartment loans include adjustable-rate loans ("ARMs") and fixed-rate loans. The
Bank currently offers a variety of ARMs, all of which have a 30-year term to
maturity, certain of which can convert to fixed-rate loans. The Bank's ARMs
currently include loans which adjust every one, two or three years as well as
loans with an established rate for the initial five or seven years and which
adjust every three years thereafter. The interest rate on the Bank's ARMs
fluctuates based upon a spread above the average yield on United States Treasury
securities, adjusted to a constant maturity which corresponds to the adjustment
period of the loan (the "U.S. Treasury constant maturity index") as published
weekly by the Federal Reserve Board. In addition, ARMs generally are subject to
limitations on interest rate increases of 2% per adjustment period and an
interest rate cap during the life of the loan established at the time of
origination. For the five months ended August 31, 1997 and the year ended March
31, 1997, the Bank originated or purchased $87.8 million and $149.0 million,
respectively, of ARMs.
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<PAGE> 101
The retention of ARMs in the Bank's loan portfolio helps reduce the Bank's
exposure to increases in interest rates. However, ARMs generally pose credit
risks different from the risks inherent in fixed-rate loans, primarily because
as interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for defaults. At the same time, the marketability of
the underlying property may be adversely affected. In order to minimize risks,
ARM borrowers are qualified at the rate which would be in effect after the first
interest rate adjustment, if that rate is higher than the initial rate. The Bank
has not in the past, nor does it currently, originate negative amortization
ARMs.
The Bank's fixed-rate, single-family residential mortgage loans and
cooperative apartment loans have terms of up to 30 years. Interest rates charged
on fixed-rate loans are competitively priced based on market conditions. The
Bank generally originates fixed-rate loans with terms and in amounts conforming
to the maximum guidelines of the FNMA and the FHLMC, currently $214,600 for
one-family houses and $412,450 for four-family houses. For the five months ended
August 31, 1997 and the year ended March 31, 1997, the Bank originated or
purchased an aggregate of $17.1 million and $34.3 million, respectively, of
fixed-rate, single-family residential mortgage and cooperative apartment loans.
The Bank generally sells its newly originated fixed-rate, single-family
residential mortgage loans with contractual terms of more than 15 years in the
secondary market to agencies such as the FNMA and the FHLMC. The Bank generally
retains the servicing rights on all such loans sold. For the five months ended
August 31, 1997 and the year ended March 31, 1997, the Bank sold single-family
residential mortgage loans totaling $4.3 million and $4.1 million, respectively.
Under the Bank's underwriting guidelines, ARMs can be originated with
loan-to-value ratios of up to 80%. Fixed-rate cooperative apartment loans can be
originated with loan-to-value ratios of up to 75% while fixed-rate,
single-family residential mortgage loans can be originated with loan-to-value
ratios of up to 90%, provided, however, that private mortgage insurance is
required for loans with loan-to-value ratios in excess of 80%.
In order to provide financing for low and moderate income home buyers, the
Bank participates in residential mortgage programs and products sponsored by,
among others, the State of New York Mortgage Authority, the Community
Preservation Corporation, Neighborhood Housing Services and the New York City
Co-op Pilot Program. Various programs sponsored by these groups provide low and
moderate income households with fixed-rate mortgage loans which are generally
below prevailing fixed-rate mortgages and which allow below market down
payments.
Substantially all of the Bank's mortgage loans include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event that the borrower transfers ownership of the
property without the Bank's consent. It is the Bank's policy to enforce
due-on-sale provisions within the applicable regulations and guidelines imposed
by New York law.
CONSUMER LENDING ACTIVITIES. The Bank offers a variety of consumer loans
including student loans, home equity loans and lines of credit, automobile
loans, passbook loans and credit card loans in order to provide a full range of
financial services to its customers. Such loans are obtained primarily through
existing and walk-in customers and direct advertising. At August 31, 1997, $91.6
million or 3.4% of the Bank's total loan portfolio was comprised of consumer
loans.
The largest component of the Bank's consumer loan portfolio is student
loans. The Bank has been and continues to be an active originator of student
loans. Substantially, all of these loans are originated under the auspices of
the New York State Higher Education Services Corporation ("NYSHESC"). Under the
terms of these loans, no repayment is due until the student's graduation, with
98% of the principal guaranteed by the NYSHESC. The terms and rates of these
loans are established by the NYSHESC. At August 31, 1997, such loans amounted to
$43.7 million or 1.6% of the total loan portfolio.
The second largest component of the Bank's consumer loan portfolio is home
equity loans and lines which consist primarily of home equity lines of credit.
Home equity lines of credit are a form of revolving credit and are secured by
the underlying equity in the borrower's primary or secondary residence. The
Bank's home equity lines of credit have interest rates that adjust or float
based on the Wall Street Journal Prime, loan-to-
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value ratios of 75% or less, and are generally for amounts of less than $100,000
but can be as high as $300,000. Interest only payments are made during the first
five years with repayment of principal and interest required during the final 15
years. The Bank also offers fixed-rate, fixed-term home improvement loans, which
are also secured by the underlying equity in the borrower's primary or secondary
residence. At August 31, 1997, home equity lines and loans amounted to $17.5
million, or 0.7% of the Bank's total loan portfolio and the Bank had $3.6
million of unused commitments pursuant to such equity lines of credit.
At August 31, 1997, the remaining $30.4 million of the Bank's consumer loan
portfolio, which amounted to 1.1% of the Bank's total loan portfolio, was
comprised primarily of loans secured by new and used automobiles, passbook loans
and credit card loans (the Bank offers VISA cards on an issuer basis). At August
31, 1997, the Bank had $14.9 million of automobile loans, most of which financed
the purchase of new automobiles. The terms of automobile loans cannot exceed 60
months with a maximum loan amount of the lesser of $50,000 or 80% of the value
of the automobile. The Bank generally does not participate in indirect
automobile lending and substantially all of such loans are financed directly
with the Bank. Passbook loans, which are loans secured by the borrower's
deposits in the Bank, totaled $10.3 million at August 31, 1997, while credit
card loans amounted to $1.9 million at such date.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans but generally involve more credit risk than
residential mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral. These risks are not as prevalent in
the case of the Bank's consumer loan portfolio, however, because a high
percentage of the portfolio is comprised of home equity loans and lines of
credit which are secured by real estate and underwritten in a manner such that
they result in a lending risk which is similar to single-family residential
mortgage loans.
COMMERCIAL BUSINESS LENDING ACTIVITIES. The Bank makes commercial business
loans directly to businesses located in its market area. The Bank targets small
and medium sized businesses with the bulk of the loans being less than $750,000.
Applications for commercial business loans are obtained primarily from existing
customers, branch referrals and direct inquiry. As of August 31, 1997,
commercial business loans totaled $32.2 million, or 1.2%, of the Bank's total
loan portfolio.
Commercial business loans originated by the Bank generally have terms of
five years or less and adjustable interest rates tied to the Wall Street Journal
Prime plus a margin. Such loans are generally secured by real estate,
receivables or inventory and are backed by the personal guarantees of the
principals of the borrower. Commercial business loans generally have shorter
terms to maturity and provide higher yields than residential mortgage loans.
Although commercial business loans generally are considered to involve greater
credit risk than certain other types of loans, management intends to continue to
offer commercial business loans to small and medium sized businesses in its
market area. Furthermore, the Bank intends to expand moderately its commercial
business lending program. In furtherance of such strategy, the Bank recently
increased advertising and direct mail solicitations with respect to commercial
business loans and is in the process of increasing the number of commercial
business loan officers.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Board of Directors
establishes lending authorities for individual officers as to its various types
of loan products. For multi-family residential mortgage loans, commercial real
estate loans, single-family residential mortgage loans and cooperative apartment
loans, the Executive Vice President and Mortgage Officer and a Vice President
have the authority to approve loans in amounts up to $300,000. Any mortgage loan
or cooperative apartment loan in excess of $300,000, however, must also be
approved by the President and at least two members of the Mortgage and Real
Estate Committee of the Board of Directors, which consists of various directors,
the composition of which is changed periodically. Consumer loans and commercial
business loans of less than $50,000 can be approved by an individual loan
officer, while loans between $50,000 and $300,000 must be approved by a Vice
President and an Executive Vice President. Any commercial business loans in
excess of $300,000 must also be approved by at least two members of the
Commercial Loan Committee of the Board of Directors, which consists of various
directors, the composition of which is changed periodically.
The Bank's policy limits the amount of credit related to mortgage loans and
cooperative share loans that can be extended to any one borrower to 15% of the
Bank's net worth. In addition, the Bank's policy limits the
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amount of commercial business loans that can be extended to any one borrower to
the greatest of $2.0 million, 5% of the Bank's net worth or 10% of total
commercial business loans. With certain limited exceptions, a New York
state-chartered savings bank may not make loans or extend credit for commercial,
corporate or business purposes (including lease financing) to a single borrower,
the aggregate amount of which would be in excess of 15% of the bank's net worth
if the loan is unsecured, or 25% of net worth if the loan is secured.
For all single-family residential mortgage loans and cooperative apartment
loans originated by the Bank, upon receipt of a completed loan application from
a prospective borrower, a credit report is ordered, income, assets and certain
other information are verified by an independent credit agency, and if
necessary, additional financial information is required to be submitted by the
borrower. An appraisal of the real estate is required, which is performed by an
independent appraiser except with respect to multi-family residential and
commercial real estate loans for which the appraisals are conducted by licensed
and certified in-house appraisers. In addition, appraisals conducted by
independent appraisers are also reviewed by the Bank's in-house licensed and
certified appraisers. It is the Bank's policy to require appropriate insurance
protection, including title and hazard insurance, on all mortgage loans prior to
closing. Other than cooperative apartment loans, borrowers generally are
required to advance funds for certain items such as real estate taxes, flood
insurance and private mortgage insurance, when applicable.
LOAN ORIGINATION AND LOAN FEES. In addition to interest earned on loans,
the Bank receives loan origination fees or "points" for many of the loans it
originates. Loan points are a percentage of the principal amount of the mortgage
loan and are charged to the borrower in connection with the origination of the
loan. The Bank currently offers a number of residential loan products on which
no points are charged.
In accordance with SFAS No. 91, which addresses the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as
interest income over the contractual life of the related loans as an adjustment
to the yield of such loans. At August 31, 1997, the Bank had $10.0 million of
such deferred loan fees.
ASSET QUALITY
With the exception of guaranteed student loans and FHA or VA loans, the
Bank, commencing in fiscal 1997, generally places loans on non-accrual status
when they are more than 90 days past due as to interest. Loans may be placed on
non-accrual status earlier if management believes that collection of interest is
doubtful. For periods prior to fiscal 1997, the Bank continued to accrue
interest on loans more than 90 days past due if, in management's judgment, the
full collection of interest was probable. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned until sold.
Pursuant to SOP 92-3, such assets are carried at the lower of fair value minus
estimated costs to sell the property, or cost (generally the balance of the loan
on the property at the date of acquisition). After the date of acquisition, all
costs incurred in maintaining the property are expensed and costs incurred for
the improvement or development of such property are capitalized up to the extent
of their net realizable value.
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DELINQUENT LOANS. The following table sets forth delinquencies in the
Bank's loan portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT AUGUST 31, 1997 AT MARCH 31, 1997
---------------------------------------------- ----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
--------------------- --------------------- --------------------- ---------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential... 17 $ 417 40 $ 2,772 13 $ 535 56 $ 3,311
Multi-family residential.... 1 13 2 479 -- -- 3 1,918
Commercial and other
mortgage loans............ -- -- 6 4,535 -- -- 5 9,209
Other loans:
Cooperative apartment
loans..................... 2 50 12 363 4 196 13 427
Consumer and commercial
business loans(1)......... 165 510 353 1,656 225 1,004 300 1,757
--- ------ --- ------- --- ------ --- -------
Total..................... 185 $ 990 413 $ 9,805 242 $ 1,735 377 $16,622
=== ====== === ======= === ====== === =======
Delinquent loans to total
loans(3).................... 0.04% 0.36% .07% .65%
====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996 AT MARCH 31, 1995
---------------------------------------------- ----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
--------------------- --------------------- --------------------- ---------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential... 19 $ 1,007 53 $ 3,504 15 $ 409 40 $ 4,761
Multi-family residential.... 4 486 4 3,379 -- -- 8 2,251
Commercial and other
mortgage loans............ 1 200 15 19,277 -- -- 6 1,975
Other loans:
Cooperative apartment
loans..................... 3 183 8 355 2 97 6 401
Consumer and commercial
business loans(1)......... 204 888 243 1,571 229 793 499 2,593
--- ------ --- ------- --- ------ --- -------
Total..................... 231 $ 2,764 323 $28,086(2) 246 $ 1,229 559 $11,981
=== ====== === ======= === ====== === =======
Delinquent loans to total
loans(3).................... 0.12% 1.19% 0.06% 0.59%
====== ======= ====== =======
</TABLE>
- ---------------
(1) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
(2) Includes $9.5 million of loans acquired in the Bay Ridge acquisition.
(3) Total loans includes loans receivable less deferred loan fees and
unamortized discounts, net.
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NON-PERFORMING ASSETS. The following table sets forth information with
respect to non-performing assets identified by the Bank, including
non-performing loans and other real estate owned at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
AT AUGUST 31, -------------------------------------------------
1997 1997 1996 1995 1994 1993
------------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Single-family residential..... $ 2,650 $ 2,474 $ 2,890 $ 2,074 $ 2,438 $ 2,905
Multi-family residential...... 479 1,918 3,379 2,018 2,095 1,953
Commercial and Other.......... 6,029(1) 11,155 12,600 1,975 2,033 3,183
Other loans:
Cooperative apartment loans... 363 427 355 451 606 1,068
Consumer and commercial
business loans(1)........... 570 956 1,135 1,590 1,621 1,597
------- ------- ------- ------- ------- -------
Total non-accruing
loans.................. 10,091 16,930 20,359(2) 8,108 8,793 10,706
Loans past due 90 days or more as
to:
Interest and accruing............ 1,909 1,718 8,737 7,564 4,715 5,004
Principal and accruing(3)........ 13,984 8,442 6,413 5,591 7,535 5,981
------- ------- ------- ------- ------- -------
Total past due loans and
accruing............... 15,893 10,160 15,150 13,155 12,250 10,985
------- ------- ------- ------- ------- -------
Total non-performing
loans.................. 25,984 27,090 35,509 21,263 21,043 21,691
------- ------- ------- ------- ------- -------
Other real estate owned, net(4).... 279 540 973 1,691 2,024 4,534
------- ------- ------- ------- ------- -------
Total non-performing assets(5)..... $26,263 $27,630 $36,482 $22,954 $23,607 $26,225
======= ======= ======= ======= ======= =======
Allowance for loan losses as a
percent of total loans........... 1.14% 1.06% 0.87% 0.58% 0.51% 0.43%
Allowance for loan losses as a
percent of non-performing
loans............................ 119.75 99.76 57.81 55.73 41.68 29.57
Non-performing loans as a percent
of total loans................... 0.96 1.07 1.51 1.04 1.23 1.47
Non-performing assets as a percent
of total assets.................. 0.69 0.74 0.94 0.88 0.90 1.10
</TABLE>
- ---------------
(1) Consists primarily of commercial business loans and home equity lines of
credit.
(2) Includes $9.5 million of loans acquired in the Bay Ridge acquisition.
(3) Reflects loans more than 90 days or more past maturity which continue to
make payments on a basis consistent with the original repayment schedule.
(4) Net of related loss allowances.
(5) Non-performing assets consist of non-performing loans and other real estate
owned. Non-performing loans consist of non-accrual loans and loans 90 days
or more past due as to interest and other loans which have been identified
by the Bank as presenting uncertainty with respect to the collectibility of
interest or principal.
At August 31, 1997, the Bank's non-performing assets totaled $26.3 million
compared to $27.6 million, $36.5 million and $23.0 million at March 31, 1997,
1996 and 1995, respectively. The Bank's total non-performing assets as a
percentage of total assets were 0.69%, 0.74%, 0.94% and 0.88% at August 31, 1997
and at March 31, 1997, 1996 and 1995, respectively. A primary emphasis in the
Bank's underwriting practices is to maintain high asset quality in the
origination of loans.
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<PAGE> 106
The $8.9 million, or 24.3%, decline in non-performing assets from March 31,
1996 to March 31, 1997 was due in large part to the return to performing status
of a $5.0 million loan to a partnership which owns the building housing the
Bank's executive offices (see "-- Classified and Criticized Assets"), the sale
or satisfaction of an aggregate of $2.3 million of non-performing loans acquired
in the Bay Ridge acquisition and aggregate charge-offs of $1.6 million. The Bank
recognized an immaterial loss upon the sale of non-performing loans acquired
from Bay Ridge. The decline in non-performing assets from March 31, 1996 to
March 31, 1997 was partially offset by a $2.0 million increase in loans past due
90 days or more as to principal.
The Bank's total non-accruing loans amounted to $10.1 million at August 31,
1997 compared to $16.9 million at March 31, 1997 and $20.4 million at March 31,
1996. The primary reason for the decline from March 31, 1997 to August 31, 1997
was the repayment of two non-accrual commercial loans aggregating $6.7 million
extended to one borrower. The primary reason for the $3.4 million decrease in
total non-accruing loans at March 31, 1997 compared to March 31, 1996 was the
aforementioned sales and charge-offs.
At August 31, 1997, the Bank had $6.0 million of non-accrual commercial and
other real estate mortgage loans. At such date, $2.0 million of the outstanding
non-accrual commercial and other real estate loans related to one loan to one
Brooklyn-based real estate developer originated by the Bank in August 1995 which
was placed on non-accrual status in February 1997. The loan is for the
conversion of an existing commercial property located in Brooklyn to a public
school. The New York Board of Education has entered into a lease with respect to
the property, subject to completion of construction (which has occurred).
However, as of the date hereof, the lease has not been entered into. The
developer who is the sponsor for these two projects also is, together with
affiliates, the Bank's largest single borrower with outstanding loans totaling
approximately $38.5 million at August 31, 1997, of which $4.2 million is
considered non-performing and/or classified substandard and $15.9 million is
classified special mention. As a result of the satisfaction by the borrower of
these loans extended thereto, the amount of non-performing loans extended to
this borrower deemed non-performing declined to $4.0 million. Such developer
also is the general partner of the partnership which owns the building in which
the Bank's executive offices are located. See "-- Classified and Criticized
Assets."
At August 31, 1997, the Bank's non-accrual multi-family residential
mortgage loans amounted to $479,000 and consisted of two loans.
At August 31, 1997, the Bank's $2.7 million of non-accrual single-family
residential mortgage loans consisted of 31 loans which had an average balance of
$86,000. At such date, non-accrual loans also included 12 cooperative apartment
loans with an aggregate balance of $363,000 and six home equity lines of credit
with an aggregate balance of $424,000. In addition, at August 31, 1997, the Bank
had three commercial business loans totaling $122,000 on non-accrual.
At August 31, 1997, the Bank had $1.9 million of loans past due 90 days or
more as to interest. Such amount consisted primarily of 326 student loans
totaling $1.2 million, with the remainder consisting primarily of a small number
of VA and FHA single-family residential loans and commercial real estate loans,
all of which were serviced by third parties.
At August 31, 1997, the Bank's $14.0 million of loans past due 90 days or
more as to principal consisted of loans which were contractually past due their
maturity but which continue to make payments on a basis consistent with the
loans' original amortization schedule. The amount of such loans increased by
$5.6 million from $8.4 million at March 31, 1997. Such loans consisted primarily
of $9.6 million of multi-family residential loans and $3.8 million of commercial
real estate loans. At such date, the $9.6 million of contractually past due
maturity multi-family residential loans consisted of 38 loans with an average
principal balance of approximately $253,000 while the $3.8 million of commercial
real estate loans consisted of 14 loans with an average principal balance of
approximately $269,000. The Bank's multi-family residential and commercial real
estate loans are generally structured as a five or ten year balloon loan with
the ability of the borrower to extend the term of the loan for an additional
five years. See "-- Lending Activities -- Multi-family Residential and
Commercial Real Estate Lending." At the contractual maturity date of these
particular loans, the borrowers have failed to repay in full the principal due.
The borrowers, however, have continued to make payments on the loans consistent
with the loans' payment terms based on the original amortization schedule.
Although the Bank has contacted the borrowers requesting that they refinance
their loans, the borrowers have not yet taken
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<PAGE> 107
such step. The majority of such loans bear interest rates which are above those
charged currently on newly originated multi-family residential and commercial
real estate loans. Furthermore, the Bank inspects each of such properties at
least annually. In addition, in many cases, based on current financial
information provided to the Bank, the properties are producing sufficient cash
flow to service the debt. Based upon management's review of these credits, the
Bank does not believe that any material losses will be incurred with respect to
such properties. However, the delinquency of such loans has been and continues
to be considered in establishing the level of the Bank's allowance for loan
losses. The Bank is increasing its efforts to have such loans either be
refinanced or have the term extended.
The interest income that would have been recorded during the five months
ended August 31, 1997 and the year ended March 31, 1997, if all of the Bank's
non-performing loans at the end of such period had been current in accordance
with their terms during such periods was $458,000 and $1.7 million,
respectively. The actual amount of interest recorded as income on such loans
during the periods amounted to $118,000 and $224,000, respectively.
At August 31, 1997, the Bank's other real estate owned consisted of a
$279,000 investment in one commercial real estate property and five individual
cooperative apartment loans.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
FDIC and the Department, which can order the establishment of additional general
or specific loss allowances. The FDIC, in conjunction with the other federal
banking agencies, has adopted an interagency policy statement on the allowance
for loan and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally
the policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. While the Bank believes that it has established an
adequate allowance for possible loan losses, there can be no assurance that the
regulators, in reviewing the Bank's loan portfolio, will not request the Bank to
materially increase at that time its allowance for possible loan losses, thereby
negatively affecting the Bank's financial condition and earnings at that time.
Although management believes that adequate specific and general loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the allowances for loan losses may become
necessary. In addition, if the Bank's involvement in multi-family residential
and commercial real estate lending continues to increase, additional provisions
may be required due to the generally greater risk engendered by such lending.
See "-- Asset Quality -- Allowance for Loan Losses" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Changes in
Financial Condition -- Allowance for Loan Losses."
CLASSIFIED AND CRITICIZED ASSETS. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss.
At August 31, 1997, the Bank had classified an aggregate of $16.2 million
of assets (a substantial portion of which were also considered non-performing
assets) including $2.0 million of loans acquired from Bay
69
<PAGE> 108
Ridge. In addition, at such date the Bank had $68.1 million of assets which were
designated by the Bank as special mention. At August 31, 1997, a major component
of the Bank's assets deemed special mention was a $15.0 million loan to the
partnership which owns the building in which the Bank's executive offices are
located. A wholly owned subsidiary of the Bank, Wiljo Development Corporation
("Wiljo"), has a 17% limited partnership interest in the partnership. See
"-- Subsidiaries." The general partner of the partnership, together with
affiliates, is the Bank's single largest borrower. See "-- Non-Performing
Assets." The loan was originated in 1993 in the amount of $5.0 million to help
fund the partnership's purchase of the building. Due to a variety of factors,
there were delays in fully leasing out the building due in part, to the need to
effect extensive renovations and tenant improvements, including asbestos
removal. As a consequence, payments on the initial loan were not made and the
loan was placed on non-accrual status in fiscal 1996. The Bank refinanced the
loan in early 1997 and increased the principal balance to $15.0 million. The
$10.0 million of additional funds were used in part to repay advances (plus
interest) made to the partnership by Wiljo for construction costs and other
expenses. The Bank's executive offices and a branch office occupy approximately
40% of the building. As of August 31, 1997, substantially all the remaining
space in the building was leased with lease terms generally of ten years or
more, and the new loan is performing in accordance with its terms. Also included
in assets deemed special mention were $12.7 million of loans which were 90 days
or more past due maturity which continued to make payments on a basis consistent
with the original repayment schedule.
ALLOWANCE FOR LOAN LOSSES. The Bank's allowance for loan losses amounted
to $31.1 million at August 31, 1997 as compared to $27.0 million at March 31,
1997. At August 31, 1997, the Bank's allowance amounted to 1.1% of total loans
and 119.8% of total non-performing loans. It is management's policy to maintain
an allowance for loan losses based upon total loans outstanding, the volume of
loan originations, the type, size and geographic concentration of loans held by
the Bank, general economic conditions, the level of past due and non-accrual
loans, and the number of loans requiring heightened management oversight.
The Bank's allowance for loan losses increased $4.1 million from March 31,
1997 to August 31, 1997 while in fiscal 1997 the allowance increased by $6.5
million as compared to March 31, 1996 due to provisions relating to mortgage
loans of $8.4 million, partially offset by charge-offs, net of recoveries, of
$1.5 million. The increases during the five months ended August 31, 1997 and
fiscal 1997 were due to several factors, including the Bank's increased
investment in multi-family residential loans, all of which were concentrated in
the New York City metropolitan area, an increase in the number of larger
multi-family residential and individual cooperative apartment loans as compared
to prior years, and an increase in the number of loans, which, while not
delinquent, exhibit risk characteristics which require heightened management
oversight, including loans which are contractually past due maturity 90 days or
more.
The Bank will continue to monitor and modify its allowance for possible
loan losses as conditions dictate. While management believes that, based on
information currently available, the Bank's allowance for possible loan losses
is sufficient to cover losses inherent in its loan portfolio at this time, no
assurances will be given that the Bank's level of allowance for loan losses will
be sufficient to absorb future possible loan losses incurred by the Bank or that
future adjustments to the allowance for possible loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for possible loan losses. Management may in the future further
increase the level of its allowance for loan losses as a percentage of total
loans and non-performing loans in the event the level of multi-family
residential and commercial real estate loans (which generally are considered to
have a greater risk of loss than single-family residential mortgage loans) as a
percentage of its total loan portfolio continues to increase. In addition, the
FDIC and the Department as an integral part of their examination process
periodically review the Bank's allowance for possible loan losses. Such agencies
may require the Bank to make additional provisions for estimated possible loan
losses based upon judgments different from those of management.
70
<PAGE> 109
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
AUGUST 31, YEAR ENDED MARCH 31,
------------------- -----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance at beginning of period............. $27,024 $20,528 $20,528 $11,849 $ 8,770 $6,415 $6,374
------- ------- ------- ------- ------- ------ ------
Allowance from acquisition(1)................ -- -- -- 6,910 -- -- --
Provision:
Mortgage loans(2).......................... 3,694 1,375 8,425 3,300 3,300 3,075 1,925
Consumer and Commercial business
loans(3)................................. 884 185 (465)(4) 379 292 750 1,862
------- ------- ------- ------- ------- ------ ------
Total provision...................... 4,578 1,560 7,960 3,679 3,592 3,825 3,787
Charge-offs:
Mortgage loans(2).......................... 876 940 1,636 1,634 842 1,049 2,371
Consumer and Commercial business
loans(3)................................. 54 93 509 751 220 1,259 2,066
------- ------- ------- ------- ------- ------ ------
Total charge-offs.................... 930 1,033 2,145 2,385 1,062 2,308 4,437
------- ------- ------- ------- ------- ------ ------
Recoveries:
Mortgage loans(2).......................... 300 377 545 176 294 28 41
Consumer and Commercial business loans..... 144 48 136 299 255 810 650
------- ------- ------- ------- ------- ------ ------
Total recoveries..................... 444 425 681 475 549 838 691
------- ------- ------- ------- ------- ------ ------
Net loans charged-off........................ (486) (608) (1,464) (1,910) (513) (1,470) (3,746)
------- ------- ------- ------- ------- ------ ------
Allowance at end of period................... $31,115 $21,480 $27,024 $20,528 $11,849 $8,770 $6,415
======= ======= ======= ======= ======= ====== ======
Net loans charged off to allowance for loan
losses..................................... 1.56% 2.83% 5.42% 9.30% 4.33% 16.76% 58.39%
Allowance for possible loan losses as a
percent of gross loans..................... 1.14% 0.84% 1.06% 0.87% 0.58% 0.51% 0.43%
Allowance for possible loan losses as a
percent of total non-performing loans...... 119.75% 56.09% 99.76% 57.81% 55.73% 41.68% 29.57%
======= ======= ======= ======= ======= ====== ======
</TABLE>
- ---------------
(1) Reflects allowance for loan losses acquired in the Bay Ridge acquisition in
January 1996.
(2) Includes individual cooperative apartment loans.
(3) Includes student loans, home equity loans and lines of credit, automobile
loans, secured and unsecured personal loans, and commercial business loans.
(4) Reflects adjustment to allowance related to commercial business loans.
(5) Non-performing loans consist of non-accrual loans and loans 90 days or more
past due as to interest or principal and other loans which have been
identified by the Bank as presenting uncertainty with respect to the
collectibility of interest or principal.
The following table sets forth information concerning the allocation of the
Bank's allowance for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
AT AUGUST 31, AT MARCH 31,
------------------- ----------------------------------------------------------------------------------
1997 1997 1996 1995 1994
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
OF TO TO TO TO
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1)........ $26,487 95.5% $23,370 95.4% $16,036 95.4% $ 7,284 94.6% $ 4,532 92.7%
Consumer and commercial
business loans(2)....... 4,628 4.5 3,654 4.6 4,492 4.6 4,565 5.4 4,238 7.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total............. $31,115 100.0% $27,024 100.0% $20,528 100.0% $11,849 100.0% $ 8,770 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
<CAPTION>
1993
-------------------
PERCENT OF
LOANS IN
EACH
CATEGORY
TO
TOTAL
AMOUNT LOANS
------- ----------
<S> <C> <C>
Mortgage loans(1)........ $ 2,478 9.1%
Consumer and commercial
business loans(2)....... 3,937 8.9
------- -----
Total............. $ 6,415 100.0%
======= =====
</TABLE>
- ---------------
(1) Includes individual cooperative apartment loans.
(2) Includes student loans, home equity loans, lines of credit, automobile
loans, and secured and unsecured personal loans and commercial business
loans.
71
<PAGE> 110
ENVIRONMENTAL ISSUES
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for costs
of cleaning up hazardous materials found on property securing their loans. In
addition, the existence of hazardous materials may make it unattractive for a
lender to foreclose on such properties. Although environmental risks are usually
associated with loans secured by commercial real estate, risks also may be
substantial for loans secured by residential real estate if environmental
contamination makes security property unsuitable for use. This could also have a
negative effect on nearby property values. The Bank attempts to control its risk
by requiring a phase one environmental assessment be completed as part of its
underwriting review for all non-residential mortgage applications.
The Bank believes its procedures regarding the assessment of environmental
risk are adequate and the Bank is unaware of any environmental issues which
would subject it to any material liability at this time. However, no assurance
can be given that the values of properties securing loans in the Bank's
portfolio will not be adversely affected by unforeseen environmental risks.
INVESTMENT ACTIVITIES
INVESTMENT POLICIES. The investment policy of the Bank, which is
established by the Board of Directors, is designed to help the Bank achieve its
fundamental asset/liability management objectives. Generally, the policy calls
for the Bank to emphasize principal preservation, liquidity, diversification,
short maturities and/or repricing terms, and a favorable return on investment
when selecting new investments for the Bank's investment and mortgage-backed and
mortgage-related securities portfolios. In addition, the policy sets forth
objectives which are designed to limit new investments to those which further
the Bank's goals with respect to interest rate risk management. The Bank's
current securities investment policy permits investments in various types of
liquid assets including obligations of the U.S. Treasury and federal agencies,
investment grade corporate obligations, various types of mortgage-backed and
mortgage-related securities, including CMOs, commercial paper, and insured
certificates of deposit. As a New York-chartered savings bank, the Bank is
permitted to make certain investments in equity securities and stock mutual
funds. At August 31, 1997, these equity investments totaled $16.2 million and
were comprised primarily of mutual funds and common and preferred stocks of
publicly traded companies.
The Bank currently does not participate in hedging programs, interest rate
swaps, or other activities involving use of off-balance sheet derivative
financial instruments. Similarly, the Bank does not invest in mortgage-related
securities which are deemed to be "high risk," or purchase bonds which are not
rated investment grade.
MORTGAGE-BACKED AND MORTGAGE-RELATED SECURITIES. Mortgage-backed
securities (which also are known as mortgage participation certificates or
pass-through certificates) represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally U.S. Government agencies and government sponsored enterprises) that
pool and repackage the participation interests in the form of securities, to
investors such as the Bank. Such U.S. Government agencies and government
sponsored enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, the FNMA and the Government National
Mortgage Association ("GNMA").
Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Bank. However, the existence of the guarantees or
insurance generally results in such securities bearing yields which are less
than the loans underlying such securities.
The FHLMC is a publicly traded corporation chartered by the U.S.
Government. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal on participation certificates. The FNMA is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. The
72
<PAGE> 111
FHLMC and FNMA securities are not backed by the full faith and credit of the
United States, but because the FHLMC and the FNMA are U.S. Government-sponsored
enterprises, these securities are considered to be among the highest quality
investments with minimal credit risks. The GNMA is a government agency within
the Department of Housing and Urban Development which is intended to help
finance government-assisted housing programs. GNMA securities are backed by
FHA-insured and VA-guaranteed loans, and the timely payment of principal and
interest on GNMA securities are guaranteed by the GNMA and backed by the full
faith and credit of the U.S. Government. Because the FHLMC, the FNMA and the
GNMA were established to provide support for low-and middle-income housing,
there are limits to the maximum size of loans that qualify for these programs.
The Bank's mortgage-related securities consist of $70.7 million of CMOs.
CMOs have been developed in response to investor concerns regarding the
uncertainty of cash flow associated with the prepayment option of the underlying
mortgage and are typically issued by governmental agencies, government-sponsored
enterprises and special purpose entities, such as trusts, corporations or
partnerships, established by financial institutions or other similar
institutions. A CMO can be collateralized by loans or securities which are
insured or guaranteed by the FNMA, the FHLMC or the GNMA. In contrast to
pass-through mortgage-related securities, in which cash flow is received pro
rata by all security holders, the cash flow from the mortgages underlying a CMO
is segmented and paid in accordance with a predetermined priority to investors
holding various CMO classes. By allocating the principal and interest cash flows
from the underlying collateral among the separate CMO classes, different classes
of bonds are created, each with its own stated maturity, estimated average life,
coupon rate and prepayment characteristics. At August 31, 1997, none of the CMOs
held by the Bank were interest only or principal only CMOs, but were primarily
planned amortization CMOs.
The Bank adopted SFAS No. 115, as of April 1, 1994. In accordance with this
Statement, the Bank segregated its mortgage-backed and mortgage-related
investment securities into two categories: those held to maturity and those
available for sale. Held to maturity securities are recorded at amortized cost
and available-for sale securities are recorded at fair value, with unrealized
gains and losses, net of related tax effects, excluded from earnings and
reported as a separate component of stockholders' equity. The effect of the
adoption was to increase equity by $2.7 million at April 1, 1994. In November
1995, the FASB issued a special report, "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities" which
allowed institutions to effect a one-time reclassification of its securities
from held to maturity to available for sale without requiring that all
securities held to maturity be reclassified to available for sale. As a result,
in December 1995 the Bank reclassified $169.1 million of securities from held to
maturity to available for sale, resulting in net unrealized losses of $1.8
million in fiscal 1996. Upon further consideration, the Bank determined during
the fourth quarter of fiscal 1997 to reclassify the remainder of its
mortgage-related and investment securities held to maturity (which at the time
totaled $129.8 million) as available for sale. The Bank subsequently sold in
March 1997 $397.3 million of these securities at a net loss of $4.5 million in
order to improve the yield on and reduce the interest rate volatility of the
Bank's investment securities and mortgage-backed and mortgage-related
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Changes in Financial Condition -- Investment Securities
and Mortgage-Backed and Mortgage-Related Securities." The Bank reinvested the
proceeds primarily into U.S. Treasury notes and bills with maturities of two
years or less, resulting in an increase in the yield of approximately 60 basis
points by comparison to the securities sold.
At August 31, 1997, the Bank's $167.3 million of mortgage-backed and
mortgage-related securities, representing 4.4% of the Bank's total assets, were
comprised of $96.6 million of mortgage-backed securities, which were issued or
guaranteed by the FHLMC, the FNMA or the GNMA, and $70.7 million of CMOs,
substantially all of which are secured by FNMA and FHLMC mortgage-backed
securities.
At August 31, 1997, the contractual maturity of approximately 18.7% of the
Bank's mortgage-backed and mortgage-related securities was in excess of ten
years. The actual maturity of a mortgage-related security is less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are different than anticipated will affect the yield to maturity. The yield is
based upon the interest income and the amortization of any premium or discount
related to the mortgage-backed security. In accordance with GAAP, premiums and
discounts are amortized over the estimated lives of the loans, which decrease
and increase
73
<PAGE> 112
interest income, respectively. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect actual prepayments. If prepayments are faster than
anticipated, the life of the security may be shortened and may result in a loss
of any premium paid, thus reducing the net yield on such security. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, 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
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because to the extent that the Bank's
mortgage-backed and mortgage-related securities amortize or prepay faster than
anticipated, the Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
The following table sets forth the activity in the Bank's aggregate
mortgage-backed and mortgage-related securities portfolio during the periods
indicated.
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS
ENDED AUGUST 31, YEAR ENDED MARCH 31,
------------------- -------------------------------
1997(1) 1996 1997(1) 1996 1995(2)
-------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage-backed and mortgage-related
securities at beginning of period........ $190,979 $516,023 $ 516,023 $305,545 $376,704
Purchases.................................. -- 105,266 132,587 276,777(3) --
Sales...................................... -- (75,647) (310,252) -- (345)
Repayments and prepayments................. (26,020) (72,335) (146,836) (60,920) (67,849)
Accretion of premium....................... (279) (1,514) (4,307) (2,624) (3,160)
Amortization of discounts.................. 84 166 385 189 195
Unrealized gains (losses) on
available-for-sale mortgage-backed and
mortgage-related securities.............. 2,575 (566) 3,379 (2,944) --
-------- -------- -------- -------- --------
Mortgage-backed and mortgage-related
securities at end of period.............. $167,339 $471,393 $ 190,979 $516,023 $305,545
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) All mortgage-backed and mortgage-related securities at August 31, 1997 and
March 31, 1997 were classified available for sale.
(2) All mortgaged-backed and mortgage-related securities were classified held to
maturity at March 31, 1995 and were reflected at their carrying value.
(3) Includes $81.1 million of mortgage-backed and mortgage-related securities
acquired from Bay Ridge.
INVESTMENT SECURITIES. The Bank has the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various Federal agencies and of state and municipal governments, mutual
funds, equity securities and corporate obligations. At August 31, 1997, the Bank
had U.S. Government and federal agency obligations totaling $536.1 million or
14.1% of total assets at such date. Of such amount, $27.2 million consisted of
U.S. Treasury bills with a maturity of less than one year and $486.3 million
consisted of U.S. Treasury notes with maturities of three years or less (of
which $50.0 million had maturities of one year or less).
74
<PAGE> 113
The following table sets forth the activity in the Bank's aggregate
investment securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS
ENDED
AUGUST 31, YEAR ENDED MARCH 31,
---------------------- -------------------------------------
1997(1) 1996 1997(1) 1996 1995
--------- --------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities at
beginning of period............ $ 357,487 $ 723,823 $ 723,823 $ 91,245 $ 355,886
Purchases........................ 468,098 381,369 785,334 1,154,428(2) 62,364
Sales............................ (178,568) (169,079) (339,842) (213,010) (242,057)
Maturities....................... (102,150) (570,000) (823,825) (307,512) (92,471)
Accretion of premium............. (194) 12 (85) (25) (1,624)
Amortization of discounts........ 3,972 5,551 11,551 5,945 2,253
Unrealized gains (losses) on
available-for-sale investment
securities..................... 5,129 431 531 (7,248) 6,894
--------- --------- --------- ---------- ---------
Investment securities at end of
period......................... $ 553,774 $ 372,107 $ 357,487 $ 723,823 $ 91,245
========= ========= ========= ========== =========
</TABLE>
- ---------------
(1) All investment securities at August 31, 1997 and March 31, 1997 were deemed
available for sale.
(2) Includes $178.2 million of investment securities acquired from Bay Ridge.
75
<PAGE> 114
The following table sets forth information regarding the amortized cost and
market value of the Bank's investment and mortgage-backed and mortgage-related
securities at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------------
AT AUGUST 31, 1997 1997 1996 1995
-------------------- -------------------- ----------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- ---------- ---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
Investment
securities:
U.S. Government and
federal agency
obligations........ $ -- $ -- $ -- $ -- $ 38,890 $ 38,803 $ 22,580 $ 21,718
Corporate
securities......... -- -- -- -- -- -- 3,339 3,177
Municipal
securities......... -- -- -- -- 1,105 1,128 1,106 1,127
Other................ -- -- -- -- -- -- 2,402 2,441
Mortgage-backed and
mortgage-related
securities:
FNMA............... -- -- -- -- 5,492 5,486 6,463 6,322
GNMA............... -- -- -- -- 98,303 99,859 108,352 108,042
FHLMC.............. -- -- -- -- 16,907 16,353 78,521 74,835
CMOs............... -- -- -- -- -- -- 112,209 108,187
-------- -------- -------- -------- ---------- ---------- -------- --------
Total......... $ -- $ -- $ -- $ -- $ 160,697 $ 161,629 $334,972 $325,849
======== ======== ======== ======== ========== ========== ======== ========
Available for sale:
Investment
securities:
U.S. Government and
federal agency
obligations........ $533,454 $536,131 $345,229 $345,144 $ 670,224 $ 669,281 $ 7,433 $ 7,468
Corporate
securities......... 296 293 363 358 3,220 3,685 5,000 5,000
Municipal
securities......... 1,104 1,104 1,104 1,104 -- -- -- --
Stocks:
Preferred.......... 281 285 281 280 450 445 19,500 19,500
Common............. 13,333 15,961 10,333 10,601 10,288 10,417 22,991 29,850
Mortgage-related
securities:
FNMA............... 5,965 6,064 7,319 7,175 3,108 3,091 -- --
GNMA............... 73,116 76,072 79,684 80,757 -- -- -- --
FHLMC.............. 14,339 14,502 18,780 18,594 60,493 59,819 -- --
CMOs............... 70,909 70,701 84,761 84,453 334,664 332,411 -- --
-------- -------- -------- -------- ---------- ---------- -------- --------
Total......... $712,797 $721,113 $547,854 $548,466 $1,082,447 $1,079,149 $ 54,924 $ 61,818
======== ======== ======== ======== ========== ========== ======== ========
</TABLE>
76
<PAGE> 115
The following table sets forth certain information regarding the maturities
of the Bank's investment and mortgage-backed and mortgage-related securities at
August 31, 1997, all of which were classified as available for sale.
<TABLE>
<CAPTION>
AT AUGUST 31, 1997 CONTRACTUALLY MATURING
----------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
UNDER 1 AVERAGE 1-5 AVERAGE 6-10 AVERAGE OVER 10 AVERAGE
YEAR YIELD YEARS YIELD YEARS YIELD YEARS YIELD TOTAL
-------- -------- -------- -------- ------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government
obligations............. $ 77,253 5.56% $436,366 6.35% $ 228 8.27% $ -- --% $513,847
Agency securities......... 6,987 5.53 15,297 6.66 -- -- -- -- 22,284
Corporate securities...... 110 8.22 183 8.22 -- -- -- -- 293
Municipal securities...... -- -- -- -- 1,104 7.25 -- -- 1,104
Mortgage-backed and
mortgage-related
securities:
FNMA...................... 4,052 6.97 1,727 6.33 215 8.31 70 8.96 6,064
GNMA...................... 4,078 8.25 19,793 8.27 26,229 8.41 25,972 8.57 76,072
FHLMC..................... 5,559 6.72 3,747 8.21 2,485 8.42 2,711 8.33 14,502
CMOs...................... 14,208 6.38 51,152 6.48 2,885 5.96 2,456 5.85 70,701
-------- -------- ------- ------- --------
Total............... $112,247 $528,265 $33,146 $31,209 $704,867
======== ======== ======= ======= ========
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments and prepayments, advances from the FHLB of New
York and certain other borrowings. Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows are influenced by general
interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis for general business
purposes.
DEPOSITS. The Bank's deposit products include NOW accounts (including the
"Active Management" NOW account), money market accounts, non-interest-bearing
checking accounts, passbook savings accounts and term certificate accounts.
Deposit account terms vary, with the principal differences being the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate. See Note 11 of Notes to Consolidated Financial Statements set
forth elsewhere herein.
The Bank's deposits are obtained primarily from the areas in which its
branch offices are located, and management of the Bank estimates that only a
minimal amount of the Bank's deposits are obtained from customers residing
elsewhere. The Bank does not pay fees to brokers to solicit funds for deposit
with the Bank or actively solicit negotiable-rate certificates of deposit with
balances of $100,000 or more.
The Bank attracts deposits through a network of convenient office locations
by offering a variety of accounts and services, competitive interest rates and
convenient customer hours. Currently the offices of the Bank consist of 34
traditional full-service offices.
In addition to the Bank's extensive branch network, the Bank currently
maintains 38 ATMs in its branch offices and plans to install an additional five
ATMs in its offices by the end of fiscal 1998.
Deposit account terms offered by the Bank vary according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. The Bank is not limited with respect to the
rates it may offer on deposit accounts. In determining the characteristics of
its deposit accounts, consideration is given to the profitability to the Bank,
matching terms of the deposits with loan products, the attractiveness to
customers and the rates offered by the Bank's competitors.
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<PAGE> 116
The Bank's focus on customer service has facilitated its retention of
lower-costing NOW accounts, money market accounts, non-interest bearing checking
accounts and savings accounts, which generally have rates substantially less
than certificates of deposit. At August 31, 1997, these types of deposits
amounted to $1.58 billion or 46.9% of the Bank's total deposits. During the five
months ended August 31, 1997 and fiscal 1997, the weighted average rate paid on
the Bank's demand deposits and passbook savings deposits amounted to 2.66% and
2.88%, respectively, and 2.65% and 2.91%, respectively, as compared to weighted
average rates of 5.59% and 5.53% paid on the Bank's certificates of deposit
during these periods.
The Bank's deposits increased from March 31, 1997 to August 31, 1997 by
$46.4 million due to the completion of a branch acquisition in April 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Acquisitions." The Bank's deposits declined by $71.3
million from March 31, 1996 to March 31, 1997. The decline was due primarily to
the sale of $51.4 million of deposits in September 1996 which related to one of
the branch offices acquired in the 1996 Branch Acquisition combined with
outflows of deposits totaling approximately $93.7 million at the remaining
branch offices purchased in the 1996 Branch Acquisition as well as $16.7 million
of deposits related to the Bay Ridge acquisition. A significant portion of such
deposits consisted of above market rate certificates of deposit which were not
reinvested at the Bank at maturity.
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED AUGUST
31, YEAR ENDED MARCH 31,
------------------------- ----------------------------------------
1997 1996 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance............ $3,325,558 $3,396,890 $3,396,890 $2,236,422 $2,207,441
Increase due to
acquisitions............... 69,997 -- -- 1,058,984 20,432
Decrease due to
disposition................ -- -- (51,407)
Other net decrease before
interest credited.......... (70,742) (131,126) (158,765) (4,895) (67,884)
Interest credited............ 46,873 46,552 138,840 106,379 76,433
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in
deposits................... 46,398 (84,574) (71,332) 1,160,468 28,981
---------- ---------- ---------- ---------- ----------
Ending balance............... $3,371,956 $3,312,316 $3,325,558 $3,396,890 $2,236,422
========== ========== ========== ========== ==========
</TABLE>
The following table sets forth by various interest rate categories the
certificates of deposit with the Bank at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
AT AUGUST 31, ----------------------------------------
1997 1997 1996 1995
------------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
2.00% to 3.99%........................... $ 3,035 $ 2,666 $ 6,775 $ 121,160
4.00% to 4.99%........................... 94,268 215,992 413,348 216,568
5.00% to 5.99%........................... 1,443,325 1,260,417 798,536 258,688
6.00% to 6.99%........................... 157,106 174,972 457,039 403,209
7.00% to 8.99%........................... 89,688 89,701 121,542 78,638
9.00% to 10.99%.......................... 2,792 8 8 94
---------- ---------- ---------- ----------
$ 1,790,214 $1,743,756 $1,797,248 $1,078,357
========== ========== ========== ==========
</TABLE>
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<PAGE> 117
The following table sets forth the amount and remaining maturities of the
Bank's certificates of deposit at August 31, 1997.
<TABLE>
<CAPTION>
OVER SIX MONTHS OVER ONE YEAR OVER TWO YEARS
SIX MONTHS THROUGH ONE THROUGH TWO THROUGH THREE OVER THREE
AND LESS YEAR YEARS YEARS YEARS TOTAL
---------- --------------- ------------- -------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
2.00% to 3.99%......... $ 2,801 $ 234 $ -- $ -- $ -- $ 3,035
4.00% to 4.99%......... 88,375 3,674 2,184 23 12 94,268
5.00% to 5.99%......... 670,064 535,556 185,120 20,180 32,405 1,443,325
6.00% to 6.99%......... 41,346 13,978 20,468 41,551 39,763 157,106
7.00% to 8.99%......... 7,275 1,367 5,541 74,915 590 89,688
9.00% to 10.99%........ 1,242 557 993 -- -- 2,792
-------- -------- -------- -------- -------- ----------
Total........ $811,103 $ 555,366 $ 214,306 $136,669 $ 72,770 $1,790,214
======== ======== ======== ======== ======== ==========
</TABLE>
As of August 31, 1997, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000 was
approximately $206.2 million. The following table presents the maturity of these
time certificates of deposit at such date.
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
3 months or less............................................... $ 50,177
Over 3 months through 6 months................................. 37,578
Over 6 months through 12 months................................ 59,338
Over 12 months................................................. 59,064
--------
$206,157
========
</TABLE>
BORROWINGS. The Bank may obtain advances from the FHLB of New York upon
the security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. At August 31,
1997, the Bank had $14.6 million of advances from the FHLB of New York with
maturities ranging between one year and seven years with the majority having a
maturity of less than five years. The other borrowings outstanding at August 31,
1997 consisted primarily of two mortgages extended to the Bank in connection
with the purchase of two of its branch offices.
EMPLOYEES
The Bank had 707 full-time employees and 163 part-time employees at August
31, 1997. None of these employees are represented by a collective bargaining
agent and the Bank considers its relationship with its employees to be good.
OFFICES AND PROPERTIES
At August 31, 1997, the Bank conducted its business from its executive
offices in Brooklyn and 33 full service offices including a branch office
located in Astoria, New York, purchased in April 1997. In addition, in December
1997, the Bank opened a new branch in the Red Hook section of Brooklyn.
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<PAGE> 118
The following table sets forth certain information relating to the Bank's
offices at August 31, 1997.
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY AND DEPOSITS
LEASE LEASEHOLD AT
OWNED OR EXPIRATION IMPROVEMENTS AT AUGUST 31,
LOCATION LEASED DATE AUGUST 31, 1997 1997
- ------------------------------------ --------- ------------------- ----------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EXECUTIVE AND ADMINISTRATIVE
OFFICES:
195 Montague Street................. Owned $17,109 $ 72,293
Brooklyn, New York 11201(1)
BRANCH OFFICES:
130 Court Street.................... Owned 5,300 186,445
Brooklyn, New York 11201(2)
6424-18th Avenue.................... Owned 1,004 349,482
Brooklyn, New York 11204
23 Newkirk Plaza.................... Owned 2,350 122,096
Brooklyn, New York 11226
443 Hillside Avenue................. Owned 2,214 203,755
Williston Park, New York 11596
23-56 Bell Boulevard................ Leased 9/30/1998(3) 325 208,633
Bayside, New York 11360
250 Lexington Avenue................ Leased 12/31/2001(4) 108 63,962
New York, New York 10016
1416 East Avenue.................... Leased (5) 446 116,342
Bronx, New York 10462
1108 Northern Boulevard............. Leased month to month(6) 196 74,977
Manhasset, New York 11030
1769-86th Street.................... Owned 1,603 166,754
Brooklyn, New York 11214
Pratt Institute Campus.............. Leased (7) -- 4,221
200 Willoughby Avenue
Brooklyn, New York 11205
2357-59 86th Street................. Owned 1,981 83,680
Brooklyn, New York 11214
4514 16th Avenue.................... Owned 1,994 126,267
Brooklyn, New York 11204
37-10 Broadway...................... Owned 1,163 113,084
Long Island City, New York 11103
22-59 31st Street................... Owned 671 94,262
Long Island City, New York 11105
24-28 34th Avenue................... Leased 6/30/2007 321 67,270
Long Island City, New York 11106
51-12 31st Avenue................... Leased 10/31/1997 314 41,739
Woodside, New York 11377
83-20 Roosevelt Avenue.............. Leased 1/31/2005 1,068 59,380
Jackson Heights, New York 11372
75-15 31st Avenue................... Leased 4/30/2004 374 79,758
Jackson Heights, New York 11370
89-01 Northern Boulevard............ Leased 7/31/2004 323 75,742
Jackson Heights, New York 11372
150-28 Union Turnpike............... Leased 5/31/2012 202 48,067
Flushing, New York 11367
</TABLE>
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<PAGE> 119
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY AND DEPOSITS
LEASE LEASEHOLD AT
OWNED OR EXPIRATION IMPROVEMENTS AT AUGUST 31,
LOCATION LEASED DATE AUGUST 31, 1997 1997
- ------------------------------------ --------- ------------------- ----------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
234 Prospect Park West.............. Owned $ 2,653 $ 32,766
Brooklyn, New York 11215
7500 Fifth Avenue................... Owned 591 67,381
Brooklyn, New York 11209
440 Avenue P........................ Owned 700 84,141
Brooklyn, New York 11223
4703 13th Avenue.................... Owned 1,143 85,603
Brooklyn, New York 11219
301 Avenue U........................ Owned 596 71,694
Brooklyn, New York 11223
8808 Fifth Avenue................... Owned 2,158 60,711
Brooklyn, New York 11209
1310 Kings Highway.................. Owned 412 69,603
Brooklyn, New York 11229
4823 13th Avenue.................... Owned 1,487 112,618
Brooklyn, New York 11219
1302 Avenue J....................... Owned 790 111,220
Brooklyn, New York 11230
1550 Richmond Road.................. Owned 1,094 136,593
Staten Island, New York 10304
1460 Forest Avenue.................. Leased 8/27/2011 14 125,458
Staten Island, New York 10302
35-06 Broadway...................... Leased 6/13/2002 811 55,959
Astoria, New York 11106
498 Columbia Street................. Leased 12/31/2002 45 --
Brooklyn, New York 11231(8)
------- ----------
Totals.................... $51,560 $3,371,956
======= ==========
</TABLE>
- ---------------
(1) The Bank operates a full-service branch on the ground floor of the building.
(2) Designated as the Bank's main office.
(3) The Bank has an option to extend this lease for an additional 10 year term.
(4) The Bank has an option to extend this lease for two additional 10 year
terms.
(5) Consists of two leases. The original lease executed March 1972 expires in
March 2002. In February 1987, the Bank entered into a lease for additional
space in the adjacent store which expires in November 2002.
(6) The Bank has entered into a lease for space in a building under
construction. Upon completion, the Bank will relocate the branch office into
the new building.
(7) The Bank executed a "Memorandum of Understanding" with the Pratt Institute
to occupy the space; no expiration date was stated in the Memorandum.
(8) Consists of property leased for a new branch office in the Red Hook area of
Brooklyn which opened in December 1997.
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<PAGE> 120
SAVINGS BANK LIFE INSURANCE
The Bank, through its Savings Bank Life Insurance ("SBLI") department,
engages in group life insurance coverage per individual under SBLI's Financial
Institution Group Life Insurance policy. The SBLI Department's activities are
segregated from the Bank and, while they do not directly affect the Bank's
earnings, management believes that offering SBLI is beneficial to the Bank's
relationship with its depositors and the general public. The SBLI Department
pays its own expenses and reimburses the Bank for expenses incurred on its
behalf. At August 31, 1997, the SBLI Department had policies totaling $414.0
million in force.
SUBSIDIARIES
At August 31, 1997, the Bank's two active subsidiaries were ICRC and Wiljo.
INDEPENDENCE COMMUNITY REALTY CORP. ICRC was established in September 1996
as a real estate investment trust. On October 1, 1996, the Bank transferred to
ICRC real estate loans with a fair market value of approximately $834.0 million
in return for all 1,000 shares of ICRC's common stock and all 10,000 shares of
ICRC's 8% junior preferred stock. In January 1997, 111 officers and employees of
the Bank each received one share of 8% junior preferred stock with a stated
value of $1,000 per share of ICRC. At August 31, 1997, ICRC held $799.5 million
of loans.
WILJO DEVELOPMENT CORP. The assets of Wiljo consist primarily of the
office space in the building in which the Bank's executive offices are located
and its limited partnership interest in the partnership which owns the remaining
portion of the building. At August 31, 1997, Wiljo had total assets of $7.8
million and the Bank's equity investment in Wiljo amounted to $6.9 million.
LEGAL PROCEEDINGS
The Bank is involved in routine legal proceedings occurring in the ordinary
course of business which in the opinion of management, in the aggregate, will
not have a material adverse effect on the consolidated financial condition and
results of operations of the Bank.
On May 17, 1995 and October 19, 1995, the purported class actions captioned
Simon v. Bay Ridge Bancorp., Inc., Dicunto, Ayoub, Christiansen, Canade, Kasler,
Mihailos, Apel and Cordano, and Pinkowitz v. Bay Ridge Bancorp., Inc., Dicunto,
Ayoub, Christansen, Canade, Kasler, Mihilos, Apel, Cordano, Independence
Community Bank Corp. and Hamm were filed in the Court of Chancery of the State
of Delaware in and for New Castle County. Such actions allege, among other
things, that the directors of Bay Ridge breached their fiduciary duties in
connection with the acquisition of Bay Ridge by the Mutual Holding Company. In
addition, the Pinkowitz complaint alleges that the Mutual Holding Company aided
and abetted the breaches of fiduciary duty allegedly committed by the directors
of Bay Ridge. The plaintiffs did not specify or claim a particular amount of
damages in such actions. The Mutual Holding Company and the Bank (as the
successor to Bay Ridge) intend to vigorously defend against the claims against
the Mutual Holding Company. The Bank believes plaintiffs' claims are without
merit.
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the Company and the Bank. The description of the laws
and regulations hereunder, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
THE COMPANY
GENERAL. Upon consummation of the Conversion, the Company will become
subject to regulation as a savings and loan holding company under the Home
Owners' Loan Act, as amended ("HOLA"), instead of being subject to regulation as
a bank holding company under the Bank Holding Company Act of 1956 because the
Bank has made an election under Section 10(l) of HOLA to be treated as a
"savings association" for purposes of Section 10(e) of HOLA. As a result, the
Company will be required to register with the OTS and
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<PAGE> 121
will be subject to OTS regulations, examinations, supervision and reporting
requirements relating to savings and loan holding companies. The Company will
also be required to file certain reports with, and otherwise comply with the
rules and regulations of, the Department and the Securities and Exchange
Commission ("SEC"). As a subsidiary of a savings and loan holding company, the
Bank will be subject to certain restrictions in its dealings with the Company
and affiliates thereof.
ACTIVITIES RESTRICTIONS. Upon consummation of the Conversion, the Bank
will be the sole savings association subsidiary of the Company. There are
generally no restrictions on the activities of a savings and loan holding
company which holds only one subsidiary savings institution. However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, he may impose such restrictions as are
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the qualified thrift lender ("QTL") test,
as discussed under "-- Qualified Thrift Lender Test," then such unitary holding
company also shall become subject to the activities restrictions applicable to
multiple savings and loan holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, shall register as, and become
subject to the restrictions applicable to, a bank holding company. See
"-- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business activity other than: (i) furnishing or performing management
services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the FRB as permissible for bank holding companies. Those
activities described in clause (vii) above also must be approved by the Director
of the OTS prior to being engaged in by a multiple savings and loan holding
company.
QUALIFIED THRIFT LENDER TEST. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended. A savings bank subsidiary of a savings and loan holding
company that does not comply with the QTL test must comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank; (iii)
the institution shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings institution ceases to meet the QTL test, it must
cease any activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
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<PAGE> 122
The QTL test set forth in the HOLA requires that qualified thrift
investments ("QTIs") represent 65% of portfolio assets of the savings
institution and its consolidated subsidiaries. Portfolio assets are defined as
total assets less intangibles, property used by a savings association in its
business and liquidity investments in an amount not exceeding 20% of assets.
Generally, QTIs are residential housing related assets. The 1996 amendments
allow small business loans, credit card loans, student loans and loans for
personal, family and household purposes to be included without limitation as
qualified investments. At August 31, 1997, approximately 68.4% of the Bank's
assets were invested in QTIs, which was in excess of the percentage required to
qualify the Bank under the QTL test in effect at that time.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At August 31, 1997, the Bank was in compliance with the
above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director, (i) control of any other savings institution or savings and
loan holding company or substantially all the assets thereof or (ii) more than
5% of the voting shares of a savings institution or holding company thereof
which is not a subsidiary. Except with the prior approval of the Director, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
The Director may only approve acquisitions resulting in the formation of a
multiple savings and loan holding company which controls savings institutions in
more than one state if (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
located in the state of the institution to be acquired as of March 5, 1987; (ii)
the acquiror is authorized to acquire control of the savings institution
pursuant to the emergency acquisition provisions of the Federal Deposit
Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
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<PAGE> 123
FEDERAL SECURITIES LAWS. The Company has filed with the SEC a registration
statement under the Securities Act, for the registration of the Common Stock to
be issued pursuant to the Conversion. Upon completion of the Conversion, the
Company's Common Stock will be registered with the SEC under Section 12(g) of
the Exchange Act. The Company will then be subject to the proxy and tender offer
rules, insider trading reporting requirements and restrictions, and certain
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
Common Stock purchased by persons who are not affiliates of the Company may be
sold without registration. Shares purchased by an affiliate of the Company will
be subject to the resale restrictions of Rule 144 under the Securities Act. If
the Company meets the current public information requirements of Rule 144 under
the Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks.
THE BANK
GENERAL. The Bank is subject to extensive regulation and examination by
the Department, as its chartering authority, and by the FDIC, as the insurer of
its deposits, and, upon Conversion, will be subject to certain requirements
established by the OTS as a result of the Company's savings and loan holding
company status. The federal and state laws and regulations which are applicable
to banks regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of
deposited funds and the nature and amount of and collateral for certain loans.
The Bank must file reports with the Department and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as establishing
branches and mergers with, or acquisitions of, other depository institutions.
There are periodic examinations by the Department and the FDIC to test the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Department, the FDIC or as a result of the enactment of legislation, could
have a material adverse impact on the Company, the Bank and their operations.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System.
The FDIC's capital regulations establish a minimum 3.0% Tier 1 leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier 1 leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, the highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization and are rated composite 1 under the
Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory goodwill and certain mortgage servicing rights.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier 1 capital and
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<PAGE> 124
supplementary (Tier 2) capital) to risk-weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item. The components of Tier
1 capital are equivalent to those discussed above under the 3% leverage capital
standard. The components of supplementary capital include certain perpetual
preferred stock, certain mandatory convertible securities, certain subordinated
debt and intermediate preferred stock and general allowances for loan and lease
losses. Allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core capital.
At August 31, 1997, the Bank met each of its capital requirements.
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate risk
in assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies
recently issued a joint policy statement providing guidance on interest rate
risk management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
The agencies have determined not to proceed with a previously issued proposal to
develop a supervisory framework for measuring interest rate risk and an explicit
capital component for interest rate risk.
See "Regulatory Capital Requirements" for information with respect to the
Bank's historical leverage and risk-based capital at August 31, 1997 and pro
forma after giving effect to the issuance of shares in the Offerings.
ACTIVITIES AND INVESTMENTS OF NEW YORK-CHARTERED SAVINGS BANKS. The Bank
derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and the regulations of the
Department, as limited by FDIC regulations and other federal laws and
regulations. See "-- Activities and Investments of Insured State -- Chartered
Banks." These New York laws and regulations authorize savings banks, including
the Bank, to invest in real estate mortgages, consumer and commercial loans,
certain types of debt securities, including certain corporate debt securities
and obligations of federal, State and local governments and agencies, certain
types of corporate equity securities and certain other assets. Under the
statutory authority for investing in equity securities, a savings bank may
directly invest up to 7.5% of its assets in certain corporate stock and may also
invest up to 7.5% of its assets in certain mutual fund securities. Investment in
stock of a single corporation is limited to the lesser of 2% of the outstanding
stock of such corporation or 1% of the savings bank's assets, except as set
forth below. Such equity securities must meet certain tests of financial
performance. A savings bank's lending powers are not subject to percentage of
asset limitations, although there are limits applicable to single borrowers. A
savings bank may also, pursuant to the "leeway" authority, make investments not
otherwise permitted under the New York State Banking Law. This authority permits
investments in otherwise impermissible investments of up to 1% of the savings
bank's assets in any single investment, subject to certain restrictions and to
an aggregate limit for all such investments of up to 5% of assets. Additionally,
in lieu of investing in such securities in accordance with the reliance upon the
specific investment authority set forth in the New York State Bank Law, savings
banks are authorized to elect to invest under a "prudent person" standard in a
wider range of debt and equity securities as compared to the types of
investments permissible under such specific investment authority. However, in
the event a savings bank elects to utilize the "prudent person" standard, it
will be unable to avail itself of the other provisions of the New York State
Banking Law and regulations which set forth specific investment authority. A New
York-chartered stock savings bank may also exercise trust powers upon approval
of the Department.
Under recently enacted legislation, the Department has been granted the
authority to maintain the power of state-chartered banks reciprocal with those
of a national bank. Under the terms of the legislation, the Department is
granted such authority for only one year unless legislation is adopted within
such period which extends the effective period of such power. However, any
regulations adopted by the Department pursuant to the authority granted by such
legislation would be effective regardless of whether legislation is enacted
extending the effective period.
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New York-chartered savings banks may also invest in subsidiaries under
their service corporation investment power. A savings bank may use this power to
invest in corporations that engage in various activities authorized for savings
banks, plus any additional activities which may be authorized by the Department.
Investment by a savings bank in the stock, capital notes and debentures of its
service corporations is limited to 3% of the bank's assets, and such
investments, together with the bank's loans to its service corporations, may not
exceed 10% of the savings bank's assets.
With certain limited exceptions, a New York-chartered savings bank may not
make loans or extend credit for commercial, corporate or business purposes
(including lease financing) to a single borrower, the aggregate amount of which
would be in excess of 15% of the bank's net worth. The Bank currently complies
with all applicable loans-to-one-borrower limitations.
ACTIVITIES AND INVESTMENTS OF FDIC-INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an
FDIC-insured state-chartered bank may not directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements.
Excluded from the foregoing proscription is the provision of savings bank
life insurance by an FDIC-insured state-chartered bank that is located in New
York or certain other states and is otherwise authorized to sell such insurance,
provided that (i) the FDIC does not alter its determination pursuant to the FDIA
that such activities do not pose a significant risk to the insurance fund of
which the Bank is a member, (ii) the insurance underwriting is conducted through
a division of the bank that meets the definition of "department" contained in
FDIC regulations and (iii) the bank discloses to purchasers of life insurance
policies and other products that they are not insured by the FDIC, among other
things. At August 31, 1997, the Bank's SBLI Department had $414.0 million of
insurance in force.
Also excluded from the foregoing proscription is the investment by a
state-chartered FDIC-insured bank in common and preferred stock listed on a
national securities exchange and in shares of an investment company registered
under the Investment Company Act of 1940. In order to qualify for the exception,
a state-chartered FDIC-insured bank must (i) have held such types of investments
during the 14-month period from September 30, 1990 through November 26, 1991,
(ii) be chartered in a state that authorized such investments as of September
30, 1991 and (iii) file a one-time notice with the FDIC in the required form and
receive FDIC approval of such notice. In addition, the total investment
permitted under the exception may not exceed 100% of the bank's tier one capital
as calculated under FDIC regulations. The Bank received FDIC approval of its
notice to engage in this investment activity on February 26, 1993. As of August
31, 1997, the book value of the Bank's investments under this exception was
$15.9 million, which equaled 6.2% of its tier one capital. Such grandfathering
authority is subject to termination upon the FDIC's determination that such
investments pose a safety and soundness risk to the Bank or in the event the
Bank converts its charter or undergoes a change in control.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement
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actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
Under the New York State Banking Law, the Department may issue an order to
a New York-chartered banking institution to appear and explain an apparent
violation of law, to discontinue unauthorized or unsafe practices and to keep
prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Department to
discontinue such practices, such director, trustee or officer may be removed
from office by the Department after notice and an opportunity to be heard. The
Bank does not know of any past or current practice, condition or violation that
might lead to any proceeding by the Department against the Bank or any of its
directors or officers. The Department also may take possession of a banking
organization under specified statutory criteria.
PROMPT CORRECTIVE ACTION. Section 38 of the Federal Deposit Insurance Act
("FDIA") provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking regulators,
an institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure, (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. The regulations also
provide that a federal banking regulator may, after notice and an opportunity
for a hearing, reclassify a "well capitalized" institution as "adequately
capitalized" and may require an "adequately capitalized" institution or an
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. The federal banking
regulator may not, however, reclassify a "significantly undercapitalized"
institution as "critically undercapitalized."
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with an appropriate federal banking regulator
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Immediately upon becoming undercapitalized, an
institution becomes subject to statutory provisions which, among other things,
set forth various mandatory and discretionary restrictions on the operations of
such an institution.
At August 31, 1997, the Bank had capital levels which qualified it as a
"well-capitalized" institution.
FDIC INSURANCE PREMIUMS. The Bank is a member of the BIF administered by
the FDIC but has accounts insured by both the BIF and the SAIF. The SAIF-insured
accounts are held by the Bank as a result of certain acquisitions and branch
purchases and amounted to $1.61 billion as of August 31, 1997 and June 30, 1997.
As insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order
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or any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of the termination, less subsequent withdrawals, shall continue to be insured
for a period of six months to two years, as determined by the FDIC. Management
is aware of no existing circumstances which would result in termination of the
Bank's deposit insurance.
On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF.
Effective October 8, 1996, the FDIC imposed a one-time special assessment
equal to 65.7 basis points for all SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. Certain BIF members, including
the Bank, qualified for a 20% reduction of its SAIF-assessable deposits for
purposes of calculating the one-time special assessment. The Bank's one-time
special assessment amounted to $8.6 million. Net of related tax benefits, the
one-time special assessment amounted to $5.3 million. The payment of the special
assessment reduced the Bank's capital by the amount of the assessment.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective SAIF rates range from zero basis points to 27 basis points which is
the same range of premiums as the BIF rates. From 1997 through 1999,
FDIC-insured institutions will pay 6.4 basis points of their SAIF-assessable
deposits and approximately 1.3 basis points of their BIF-assessable deposits to
fund the Financing Corporation. Based upon the $1.80 billion of BIF-assessable
deposits and $1.61 billion of SAIF-assessable deposits at June 30, 1997, the
Bank would expect to pay $309,000 in insurance premiums per quarter during 1997.
BROKERED DEPOSITS. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a "well capitalized insured depository institution" may solicit and accept,
renew or roll over any brokered deposit without restriction, (ii) an "adequately
capitalized insured depository institution" may not accept, renew or roll over
any brokered deposit unless it has applied for and been granted a waiver of this
prohibition by the FDIC and (iii) an "undercapitalized insured depository
institution" may not (x) accept, renew or roll over any brokered deposit or (y)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited. The term "undercapitalized insured depository
institution" is defined to mean any insured depository institution that fails to
meet the minimum regulatory capital requirement prescribed by its appropriate
federal banking agency. The FDIC may, on a case-by-case basis and upon
application by an adequately capitalized insured depository institution, waive
the restriction on brokered deposits upon a finding that the acceptance of
brokered deposits does not constitute an unsafe or unsound practice with respect
to such institution. The Bank had no brokered deposits outstanding at August 31,
1997.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with its
lending activities, the Bank is subject to a variety of federal laws designed to
protect borrowers and promote lending to various sectors of the economy and
population. Included among these are the federal Home Mortgage Disclosure Act,
Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit
Opportunity Act, Fair Credit Reporting Act and CRA.
The CRA requires insured institutions to define the communities that they
serve, identify the credit needs of those communities and adopt and implement a
"Community Reinvestment Act Statement" pursuant to which they offer credit
products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the Bank,
the FDIC) must conduct regular CRA examinations of insured financial
institutions and assign to them a CRA rating of "outstanding," "satisfactory,"
"needs improvement" or "unsatisfactory." The Bank's current federal CRA rating
is "outstanding."
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The Bank is also subject to provisions of the New York State Banking Law
which impose continuing and affirmative obligations upon banking institutions
organized in New York State to serve the credit needs of its local community
("NYCRA"), which are similar to those imposed by the CRA. Pursuant to the NYCRA,
a bank must file an annual NYCRA report and copies of all federal CRA reports
with the Department. The NYCRA requires the Department to make an annual written
assessment of a bank's compliance with the NYCRA, utilizing a four-tiered rating
system, and make such assessment available to the public. The NYCRA also
requires the Department to consider a bank's NYCRA rating when reviewing a
bank's application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any
such application. The Bank's latest NYCRA rating, received from the Department
was "satisfactory."
LIMITATIONS ON DIVIDENDS. The Company is a legal entity separate and
distinct from the Bank. The Company's principal source of revenue consists of
dividends from the Bank. The payment of dividends by the Bank is subject to
various regulatory requirements including a requirement, as a result of the
Company's savings and loan holding company status, that the Bank notify the
Director not less than 30 days in advance of any proposed declaration by its
directors of a dividend.
Under New York State Banking Law, a New York-chartered stock savings bank
may declare and pay dividends out of its net profits, unless there is an
impairment of capital, but approval of the Department is required if the total
of all dividends declared in a calendar year would exceed the total of its net
profits for that year combined with its retained net profits of the preceding
two years, subject to certain adjustments.
MISCELLANEOUS. The Bank is subject to certain restrictions on loans to the
Company or its non-bank subsidiaries, on investments in the stock or securities
thereof, on the taking of such stock or securities as collateral for loans to
any borrower, and on the issuance of a guarantee or letter of credit on behalf
of the Company or its non-bank subsidiaries. The Bank also is subject to certain
restrictions on most types of transactions with the Company or its non-bank
subsidiaries, requiring that the terms of such transactions be substantially
equivalent to terms of similar transactions with non-affiliated firms.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. The Bank had
$14.6 million of FHLB advances at August 31, 1997.
As a FHLB member, the Bank is required to purchase and maintain stock in
the FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of New York,
whichever is greater. At August 31, 1997, the Bank had approximately $25.8
million in FHLB stock, which resulted in its compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. As of August 31, 1997,
the Bank was in compliance with applicable requirements. However, because
required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.
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TAXATION
FEDERAL TAXATION
GENERAL. 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. The Bank's
federal income tax returns have been audited or closed without audit by the
Internal Revenue Service through 1992.
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 tax 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 chargeoff method in computing its bad debt deduction beginning with its
1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of December 31, 1996 is approximately $3.6
million.
As discussed more fully below, the Bank and subsidiaries file combined New
York State Franchise and New York City Financial Corporation tax returns. The
basis of the determination of each tax is the greater of a tax on entire net
income (or on alternative entire net income) or a tax computed on taxable
assets. However, for state purposes, New York State enacted legislation in 1996,
which among other things, decoupled the Federal and New York State tax laws
regarding thrift bad debt deductions and permits the continued use of the bad
debt reserve method under section 593. Thus, provided the Bank continues to
satisfy certain definitional tests and other conditions, for New York State and
City income tax purposes, the Bank is permitted to continue to use the special
reserve method for bad debt deductions. The deductible annual addition to the
state reserve may be computed using a specific formula based on the Bank's loss
history ("Experience Method") or a statutory percentage equal to 32% of the
Bank's New York State or City taxable income ("Percentage Method").
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a bank
charter.
At December 31, 1996 the Bank's total federal pre-1988 reserve was
approximately $30.0 million. 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. For the years beginning after August 5,
1997, a financial institution may carry back net operating losses to the
preceding two taxable years and forward to the succeeding 20 taxable years. At
December 31, 1996, the Bank had no net operating loss carryforwards for federal
income tax purposes.
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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. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
STATE AND LOCAL TAXATION
NEW YORK STATE AND NEW YORK CITY TAXATION. The Company and the Bank will
report income on a combined calendar year basis to both New York State and New
York City. New York State Franchise Tax on corporations is imposed in an amount
equal to the greater of (a) 9% of "entire net income" allocable to New York
State (b) 3% of "alternative entire net income" allocable to New York State (c)
0.01% of the average value of assets allocable to New York State or (d) nominal
minimum tax. Entire net income is based on federal taxable income, subject to
certain modifications. Alternative entire net income is equal to entire net
income without certain modifications. The New York City Corporation Tax is
imposed using similar alternative taxable income methods and rates.
A temporary Metropolitan Transportation Business Tax Surcharge on Banking
corporations doing business in the Metropolitan District has been applied since
1982. The Bank transacts a significant portion of its business within this
District and is subject to this surcharge. For the tax year ended December 31,
1996, the surcharge rate is 17% of the State franchise tax liability. For 1996,
an additional 2.5% tax surcharge on the New York State Franchise Tax is also
imposed on the Company. New York City does not impose surcharges applicable to
the Company.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $150,000.
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MANAGEMENT
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each
of which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Messrs. Catell, Desai, Gelfman, Hamm and Hand has a term of office
expiring at the first annual meeting of stockholders, a second class, consisting
of Messrs. Archie, Elliott and MacKay and Mrs. Luke has a term of office
expiring at the second annual meeting of stockholders and a third class,
consisting of Messrs. Edelstein, Kolowsky, Morgano and Ratcliff has a term of
office expiring at the third annual meeting of stockholders. Their names and
biographical information are set forth under "-- Management of the Bank."
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
EXECUTIVE POSITION HELD WITH COMPANY
- ----------------------------------- --------------------------------------------------------
<S> <C>
Chairman of the Board, President and Chief Executive
Charles J. Hamm.................... Officer
Joseph S. Morgano.................. Executive Vice President
Terence J. Mitchell................ Executive Vice President
John B. Zurell..................... Executive Vice President -- Chief Financial Officer
Thomas J. Brady.................... Senior Vice President and Treasurer
John K. Schnock.................... Senior Vice President, Secretary and Counsel
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors.
Information concerning the principal occupations, employment and
compensation of the directors and officers of the Company during the past five
years is set forth under "-- Management of the Bank" and "-- Executive Officers
Who Are Not Directors." Directors of the Company initially will not be
compensated by the Company but will serve and be compensated by the Bank. It is
not anticipated that separate compensation will be paid to directors of the
Company until such time as such persons devote significant time to the separate
management of the Company's affairs, which is not expected to occur until the
Company becomes actively engaged in additional businesses other than holding the
stock of the Bank. The Company may determine that such compensation is
appropriate in the future.
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MANAGEMENT OF THE BANK
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE(1) POSITIONS HELD WITH THE BANK SINCE
- -------------------------------------- ------ -------------------------------------- --------
<S> <C> <C> <C>
Willard N. Archie..................... 54 Director 1994
Robert B. Catell...................... 60 Director 1984
Rohit M. Desai........................ 58 Director 1992
Chaim Y. Edelstein.................... 54 Director 1991
Donald H. Elliott..................... 65 Director 1973
Robert W. Gelfman..................... 65 Director 1988
Charles J. Hamm....................... 59 Chairman of the Board, President and 1975
Chief Executive Officer
Scott M. Hand......................... 55 Director 1987
Donald E. Kolowsky.................... 64 Director 1989
Janine Luke........................... 59 Director 1976
Malcolm MacKay........................ 56 Director 1977
Joseph S. Morgano..................... 65 Director, Executive Vice President and 1996
Mortgage Officer
Wesley D. Ratcliff.................... 54 Director 1994
</TABLE>
- ---------------
(1) As of August 31, 1997.
Set forth below is information with respect to the principal occupations
during at least the last five years for the directors of the Bank.
Willard N. Archie. Mr. Archie is a certified public accountant and Vice
Chairman and Managing Partner of Mitchell & Titus, LLP, an accounting and
management consulting firm in New York City.
Robert B. Catell. Mr. Catell has been Chairman and Chief Executive Officer
of the Brooklyn Union Gas Company in Brooklyn, New York since May 1996.
Previously, Mr. Catell was President and Chief Executive Officer of the Brooklyn
Union Gas Company. Mr. Catell also is a director of the Houston Exploration
Company.
Rohit M. Desai. Mr. Desai is Chairman and President of Desai Capital
Management, an investment management firm in New York City. Mr. Desai also
serves as a director of the Rouse Company, Sunglass Hut International and Finlay
Fine Jewelry.
Chaim Y. Edelstein. Mr. Edelstein has been self-employed as a retail
consultant since May 1995. Previously he served as a consultant to Federated
Department Stores from March 1994 through April 1995 and, from March 1992
through February 1994, as Chairman and Chief Executive Officer of A&S/Jordan
Marsh, a department store in Brooklyn, New York. Mr. Edelstein also is a
director of Hills Stores, Inc. and Carson Pirie Scott.
Donald H. Elliott. Mr. Elliott has been an attorney with, and of counsel
to, the law firm, Hollyer, Brady, Smith, Troxell, Barrett, Rocket, Hines & Mone
LLP, New York City, since September 1995. Previously, Mr. Elliott was a partner
with the law firm, Mudge Rose Guthrie Alexander & Ferdon LLP, New York City. Mr.
Elliott also is a director of the Brooklyn Union Gas Company.
Robert W. Gelfman. Mr. Gelfman is a partner with the law firm, Battle
Fowler LLP, a law firm in New York City.
Charles J. Hamm. Mr. Hamm has served as President of the Bank since 1985
and was elected Chief Executive Officer of the Bank in 1986. Mr. Hamm also has
served as Chairman of the Board of the Bank since 1996.
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<PAGE> 133
Scott M. Hand. Mr. Hand is President and a director of Inco Limited, a
mining company headquartered in Toronto, Canada.
Donald E. Kolowsky. Mr. Kolowsky has been retired since December 1991.
Previously, Mr. Kolowsky was the President of the Special Chemicals Group of
Pfizer, Inc.
Janine Luke. Mrs. Luke has been a director of Windrove Service
Corporation, an investment advisory firm in New York City since January 1996.
Previously, until December 1995, Mrs. Luke was the President of Breecom Corp.,
an investment advisory firm.
Malcolm MacKay. Mr. MacKay is a Managing Director in Russell Reynolds
Associates, Inc., an executive placement firm in New York City. Mr. MacKay also
serves as a director of Empire Fidelity Life Insurance Company, Inc., a
subsidiary of Fidelity Investment Co.
Joseph S. Morgano. Mr. Morgano has served as Executive Vice President and
Mortgage Officer of the Bank since March 1993. Mr. Morgano has served in various
capacities in the mortgage area since joining the Bank in 1972.
Wesley D. Ratcliff. Mr. Ratcliff has been President and Chief Executive
Officer of Advanced Technological Solutions, Inc., an electronics service
provider located in Brooklyn, New York, since October 1993. Previously, Mr.
Ratcliff served as a plant manager for IBM Corporation.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information with respect to the principal occupations
during the last five years for the four executive officers of the Bank who do
not serve as directors.
Terence J. Mitchell. Age 45 years. Mr. Mitchell has been Executive Vice
President-Director of Marketing and Retail Banking of the Bank since February
1995. Previously, Mr. Mitchell served as a Senior Vice President of the Bank for
Marketing and Retail Banking.
John B. Zurell. Age 55 years. Mr. Zurell served as Executive Vice
President -- Financial Systems and Director of Commercial and Consumer Lending
from February 1994 until July 1997. In July 1997, he was appointed Chief
Financial Officer. Prior to February 1994, he served as a Senior Vice President
of the Bank. He is also a certified public accountant.
Thomas J. Brady. Age 63 years. Mr. Brady has been Senior Vice President of
the Bank since March 1993 and Treasurer of the Bank since September 1991.
Previously, Mr. Brady served in various positions since joining the Bank in
1971.
John K. Schnock. Age 53 years. Mr. Schnock has been Senior Vice President,
Secretary and Counsel of the Bank since February 1996. Previously, Mr. Schnock
served as a Vice President and then First Vice President since joining the
Bank's Secretary and Counsel department in June 1992. Prior thereto, Mr. Schnock
was an attorney with the law firm of Bleakley Platt Remsen Millham & Curran, New
York, New York, from April 1990 to June 1992.
DIRECTORS' COMPENSATION
Members of the Bank's Board of Directors, except for Messrs. Hamm and
Morgano, receive $1,500 per meeting attended of the Board and $850 per committee
meeting attended. Board fees are subject to periodic adjustment by the Board of
Directors. Commencing in fiscal 1998, members of the Board will also receive an
annual retainer of $10,000. In addition to fees paid to directors for Board and
committee meetings, the Bank's directors are expected to participate in the
Stock Option Plan and the Recognition Plan. See "-- Benefits -- Stock Option
Plan" and "-- Recognition Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Determinations regarding compensation of the Bank's employees are made by
the Organization Committee of the Board of Directors. Mr. Hamm is a member of
the Organization Committee.
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SUMMARY COMPENSATION TABLE
The following table sets forth a summary of certain information concerning
the compensation paid by the Bank (including amounts deferred to future periods
by the officers) for services rendered in all capacities during the fiscal year
ended March 31, 1997 to the President and Chief Executive Officer of the Bank
and the four other most highly compensated officers of the Bank.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION AWARDS
-------------------------------------- ----------------------- PAYOUTS
OTHER SECURITIES --------
NAME AND FISCAL ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3) STOCK OPTIONS PAYOUTS(4) COMPENSATION(5)
- -------------------- ------ --------- -------- --------------- ---------- ---------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles J. Hamm
Chairman,
President and
Chief Executive
Officer........... 1997 $488,463 $139,195 -- -- -- $145,070 $ 4,700
Joseph S. Morgano
Executive Vice
President and
Mortgage
Officer........... 1997 238,500 66,278 -- -- -- 42,946 4,700
Terence J. Mitchell
Executive Vice
President-Director
of Marketing and
Retail Banking.... 1997 152,327 38,214 -- -- -- 23,242 5,117
John B. Zurell
Executive Vice
President and
Chief Financial
Officer........... 1997 193,646 46,746 -- -- -- 33,656 4,868
Thomas J. Brady
Senior Vice
President and
Treasurer......... 1997 111,308 30,010 -- -- -- 19,159 4,841
</TABLE>
- ---------------
(1) Does not include amounts deferred by an officer in prior years and received
by such officer in the current fiscal year.
(2) Consists of payments under the Bank's Incentive Compensation Plan.
(3) Does not include amounts attributable to miscellaneous benefits received by
the named executive officer. In the opinion of management of the Bank, the
costs to the Bank of providing such benefits to the named executive officer
during the year ended March 31, 1997 did not exceed the lesser of $50,000 or
10% of the total of annual salary and incentive compensation reported for
the individual.
(4) Amount reflects one-third of an award received in April 1997 pursuant to the
Bank's Executive Long-Term Incentive Plan ("ELTIP"), which plan was
established in 1994 and provided for awards based upon the attainment of
certain pre-established performance goals and criteria during the period
from November 1, 1994 through December 31, 1996. In April 1997 the Board of
Directors determined to exclude the effect of the one-time special SAIF
assessment for purposes of the ELTIP.
(5) Consists of contributions to the Bank's 401(k) profit sharing plan, the
receipt of $1,000 face amount of 8% junior preferred stock of the REIT and
reimbursement of certain tax payments made by the named executive officers.
REPORT OF INDEPENDENT COMPENSATION CONSULTANT
Pursuant to regulations of the Department governing the Conversion, the
Bank must obtain the opinion of an independent compensation consultant as to
whether or not the total compensation for the executive officers and 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, which indicates that,
based upon published professional survey data of similarly situated
publicly-traded financial institutions operating in the relevant markets as of
August 1, 1997, with respect to the total cash compensation (base salary and
annual incentive) for executive officers and total compensation for directors of
the Bank, such
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<PAGE> 135
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 Recognition
Plan and Stock Option Plan as a whole, such amounts reserved for granting are
reasonable in comparison to similar publicly-traded financial institutions.
CHANGE IN CONTROL AGREEMENTS
The Company and the Bank collectively (the "Employers") will, upon
consummation of the Conversion, enter into Change in Control Agreements with
certain officers including Messrs. Hamm, Morgano, Mitchell, Zurell, Brady and
Schnock (the "Executives"). The Change in Control Agreements have terms of three
years, which term shall be extended each year for a successive additional
one-year period upon approval of the respective Board of Directors unless the
Executive elects, not less than 30 days prior to the annual anniversary date,
not to extend the term.
The Change in Control Agreements provide that if certain adverse actions
are taken with respect to the Executive's employment following a change in
control, as defined, of the Company or the Bank, the Executive will be entitled
to a cash severance amount equal to three times the Executive's annual
compensation. In addition, the Executive will be entitled to a continuation of
benefits similar to those he is receiving at the time of such termination for
the remaining term of the agreement or until he obtains full-time employment
with another employer.
A change in control is generally defined in the Change in Control
Agreements to include any change in control of the Company or the Bank required
to be reported under the federal securities laws, as well as (i) the acquisition
by any person of 25% or more of the Company's outstanding voting securities and
(ii) a change in a majority of the directors of the Company during any two-year
period without the approval of at least two-thirds of the persons who were
directors of the Company at the beginning of such period.
Each Change in Control Agreement with the Employers provides that if the
payments and benefits to be provided thereunder or otherwise upon termination of
employment are deemed to constitute a "parachute payment" within the meaning of
Section 280G of the Code, then the Executive would be reimbursed for any excise
tax liability pursuant to Sections 280G and 4999 of the Code and for any
additional income taxes imposed as a result of such reimbursement. Because the
amount of the payments and benefits that could constitute a parachute payment is
dependent upon the timing, price and structure of any change in control that may
occur in the future, it is not possible at this time to quantify the severance
benefits payable to an Executive under the employment agreements.
The Bank also anticipates entering into change in control agreements ("Bank
Change in Control Agreements") with 12 First Vice Presidents, Vice Presidents
and Assistant Vice Presidents (the "Officers") which are substantially similar
to the Change in Control Agreements except that such agreements will have terms
of one or two years, provide for severance benefits equal to one or two times
the Officer's annual compensation (depending on the terms of the specific
agreement) and limit the amount of severance payable to that amount which will
not result in any portion of such payment being deemed an excess parachute
payment under Section 280G of the Code.
Although the above-described Change in Control Agreements and Bank Change
in Control Agreements could increase the cost of any acquisition of control of
the Company, management of the Company does not believe that the terms thereof
would have a significant anti-takeover effect.
BENEFITS
EMPLOYEE STOCK OWNERSHIP PLAN. The Company has established the ESOP for
employees of the Company and the Bank to become effective upon the Conversion.
Full-time employees of the Company and the Bank who have been credited with at
least 1,000 hours of service during a twelve month period are eligible to
participate in the ESOP.
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<PAGE> 136
As part of the Conversion, in order to fund the purchase of up to 8% of the
Common Stock to be issued in the Conversion, it is anticipated that the ESOP
will borrow funds from the Company. It is anticipated that such loan will equal
100% of the aggregate purchase price of the Common Stock acquired by the ESOP.
The loan to the ESOP will be repaid principally from the Company's and the
Bank's contributions to the ESOP over a period of 20 years, and the collateral
for the loan will be the Common Stock purchased by the ESOP. The interest rate
for the ESOP loan is expected to be at a fixed rate at the Bank's prime rate as
of the date of the loan. The Bank also intends to use matching contributions
made with respect to ESOP participants' 401(k) profit sharing plan contributions
to satisfy the ESOP loan obligation. The Company may, in any plan year, make
additional discretionary contributions for the benefit of plan participants in
either cash or shares of Common Stock, which may be acquired through the
purchase of outstanding shares in the market or from individual stockholders,
upon the original issuance of additional shares by the Company or upon the sale
of treasury shares by the Company. Such purchases, if made, would be funded
through additional borrowings by the ESOP or additional contributions from the
Company. The timing, amount and manner of future contributions to the ESOP will
be affected by various factors, including prevailing regulatory policies, the
requirements of applicable laws and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released to participants on a pro rata basis as debt
service payments are made. Shares released from the ESOP will be allocated to
the accounts of ESOP participants pursuant to two methods. First, for each
eligible ESOP participant, a portion of the shares released for the plan year
will be allocated to a special "matching" account under the ESOP equal in value
to the amount matching the contribution, if any, that such participant would be
entitled to under the terms of the Bank's 401(k) profit sharing plan for the
plan year. Second, the remaining shares which have been released for the plan
year will be allocated to each eligible participant's general ESOP account based
on the ratio of each such participant's base compensation to the total base
compensation of all eligible ESOP participants. Forfeitures will be reallocated
among remaining participating employees and may reduce any amount the Company
might otherwise have contributed to the ESOP. The account balances of
participants within the ESOP will become 50% vested if the participant has at
least two but less than three years of service and will become 100% vested upon
the completion of three years of service. Credit is given for years of service
with the Bank prior to adoption of the ESOP. In the case of a "change in
control," as defined, however, participants will become immediately fully vested
in their account balances. Benefits may be payable upon retirement or separation
from service. The Company's contributions to the ESOP are not fixed, so benefits
payable under the ESOP cannot be estimated.
Marine Midland Bank will serve as trustee of the ESOP. Under the ESOP, the
trustee must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees, and subject to compliance with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the
trustee's fiduciary duties, the unallocated shares will be voted in the same
ratio on any matter as those allocated shares for which instructions are given.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Impact of Accounting Pronouncements" for a discussion
of SOP 93-6, which addresses the measure of compensation expense recorded by
employers for leveraged ESOPs from the cost of ESOP shares to the fair value of
ESOP shares.
GAAP requires that any third party borrowing by the ESOP be reflected as a
liability on the Company's statement of financial condition. Since the ESOP is
borrowing from the Company, such obligation is not treated as a liability, but
will be excluded from stockholders' equity. If the ESOP purchases newly issued
shares from the Company, total stockholders' equity would neither increase nor
decrease, but per share stockholders' equity and per share net earnings would
decrease as the newly issued shares are allocated to the ESOP participants.
The ESOP will be subject to the requirements of the ERISA, and the
regulations of the IRS and the Department of Labor thereunder.
STOCK OPTION PLAN. Following consummation of the Conversion, the Board of
Directors of the Company intends to adopt a Stock Option Plan, which will be
designed to attract and retain qualified
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<PAGE> 137
personnel in key positions, provide directors, officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the success
of the Company and reward key employees for outstanding performance. The Stock
Option Plan will provide for the grant of incentive stock options intended to
comply with the requirements of Section 422 of the Code ("incentive stock
options"), non-incentive or compensatory stock options, stock appreciation
rights and limited rights which will be exercisable only upon a change in
control of the Company or the Bank (collectively "Awards"). Awards may be
granted to directors and key employees of the Company and any subsidiaries. The
Stock Option Plan will be administered and interpreted by a committee of the
Board of Directors ("Committee"). Unless sooner terminated, the Stock Option
Plan shall continue in effect for a period of 10 years from the date the Stock
Option Plan is adopted by the Board of Directors. Subject to any applicable
Department and FDIC regulations, upon exercise of "Limited Rights" in the event
of a change in control, the employee will be entitled to receive a lump sum cash
payment equal to the difference between the exercise price of the related option
and the fair market value of the shares of common stock subject to the option on
the date of exercise of the right in lieu of purchasing the stock underlying the
option.
Under the Stock Option Plan, the Committee will determine which directors,
officers and key employees will be granted Awards, whether options will be
incentive or compensatory options, the number of shares subject to each Award,
the exercise price of each option, whether options may be exercised by
delivering other shares of Common Stock and when such options become
exercisable. The per share exercise price of an incentive stock option must at
least equal the fair market value of a share of Common Stock on the date the
option is granted (110% of fair market value in the case of incentive stock
options granted to employees who are 5% stockholders). The granting or vesting
of stock options may be conditioned upon the achievement of individual or
company-wide performance goals, which could include goals such as the
achievement by the Company or the Bank of specified levels of net income, asset
growth, return on assets, return on equity or other specific performance goals.
At a meeting of stockholders of the Company following the Conversion, which
under applicable Department regulations may be held no earlier than six months
after the completion of the Conversion, the Board of Directors intends to
present the Stock Option Plan to stockholders for approval and to reserve an
amount equal to 10% of the shares of Common Stock issued in the Offerings (or
6,122,685 shares based upon the issuance of 61,226,852 shares), for issuance
under the Stock Option Plan. Department regulations provide that, in the event
such plan is implemented within the one year following the Conversion, no
individual officer or employee of the Bank may receive more than 25% of the
options granted under the Stock Option Plan and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate of the options
granted under the Stock Option Plan. Department and FDIC regulations also
provide that exercise price of any options granted under any such plan must be
the fair market value of the Common Stock as of the date of grant. Each stock
option or portion thereof will be exercisable at any time on or after it vests
and will be exercisable until 10 years after its date of grant or for periods of
up to one year following the death, disability or other termination of the
optionee's employment or service as a director. However, failure to exercise
incentive stock options within three months after the date on which the
optionee's employment terminates may result in adverse tax consequences to the
optionee.
At the time an Award is granted pursuant to the Stock Option Plan, the
recipient will not be required to make any payment in consideration for such
grant. With respect to incentive or compensatory stock options, the optionee
will be required to pay the applicable exercise price at the time of exercise in
order to receive the underlying shares of Common Stock. The shares reserved for
issuance under the Stock Option Plan may be authorized but previously unissued
shares, treasury shares, or shares purchased by the Company on the open market
or from private sources. In the event of a stock split, reverse stock split or
stock dividend, the number of shares of Common Stock under the Stock Option
Plan, the number of shares to which any Award relates and the exercise price per
share under any option or stock appreciation right shall be adjusted to reflect
such increase or decrease in the total number of shares of Common Stock
outstanding. In the event the Company declares a special cash dividend or return
of capital following the implementation of the Stock Option Plan in an amount
per share which exceeds 10% of the fair market value of a share of Common Stock
as of the date of declaration, the per share exercise price of all previously
granted options which remain unexercised as of the
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<PAGE> 138
date of such declaration shall, subject to certain limitations, be
proportionately adjusted to give effect to such special cash dividend or return
of capital as of the date of payment of such special cash dividend or return of
capital.
Under current provisions of the Code, the federal income tax treatment of
incentive stock options and compensatory stock options is different. As regards
incentive stock options, an optionee who meets certain holding period
requirements will not recognize income at the time the option is granted or at
the time the option is exercised, and a federal income tax deduction generally
will not be available to the Company at any time as a result of such grant or
exercise. With respect to compensatory stock options, the difference between the
fair market value on the date of exercise and the option exercise price
generally will be treated as compensation income upon exercise, and the Company
will be entitled to a deduction in the amount of income so recognized by the
optionee. Upon the exercise of a stock appreciation right, the holder will
realize income for federal income tax purposes equal to the amount received by
him, whether in cash, shares of stock or both, and the Company will be entitled
to a deduction for federal income tax purposes in the same amount.
It is currently expected that 30% of the shares available under the Stock
Option Plan will be granted to non-employee directors, with each non-employee
director receiving an option for the same number of shares, in which event
options for a total of approximately 166,982 shares would be granted to each of
the eleven non-employee directors if the amount of Common Stock sold in the
Conversion is equal to the maximum of the Estimated Valuation Range. In
addition, the Stock Option Plan will provide that no individual officer will be
able to receive stock options for more than 25% of the shares available under
the Stock Option Plan, or 1,530,671 shares if the amount of Common Stock sold in
the Conversion is equal to the maximum of the Valuation Range, vesting over a
five-year period (or 306,134 shares per year based upon the maximum of the
Valuation Range).
RECOGNITION PLAN. Following consummation of the Conversion, the Board of
Directors of the Company intends to adopt a Recognition Plan for directors,
officers and employees. The objective of the Recognition Plan will be to enable
the Company to provide directors, officers and employees with a proprietary
interest in the Company as an incentive to contribute to its success. The
Company intends to present the Recognition Plan to stockholders for their
approval at a meeting of stockholders which, pursuant to applicable Department
regulations, may be held no earlier than six months subsequent to completion of
the Conversion.
The Recognition Plan will be administered by a committee of the Board of
Directors, which will have the responsibility to invest all funds contributed to
the trust created for the Recognition Plan (the "Trust"). The Company will
contribute sufficient funds to the Trust so that the Trust can purchase,
following the receipt of stockholder approval, a number of shares equal to an
aggregate of 4% of the Common Stock sold in the Conversion (2,449,074 shares,
based on the sale of 61,226,852 shares at the maximum of the Valuation Range).
Shares of Common Stock granted pursuant to the Recognition Plan generally will
be in the form of restricted stock vesting at the rate of 20% per year over the
five years following the date of grant. Shares granted pursuant to the
Recognition Plan will be awarded at no cost to the recipients. For accounting
purposes, compensation expense in the amount of the fair market value of the
Common Stock at the date of the grant to the recipient will be recognized pro
rata over the period during which the shares are payable. A recipient will be
entitled to all voting and other stockholder rights, except that the shares,
while restricted, may not be sold, pledged or otherwise disposed of and are
required to be held in the Trust. Under the terms of the Recognition Plan,
recipients of awards will be entitled to instruct the trustee of the Recognition
Plan as to how the underlying shares should be voted, and the trustee will be
entitled to vote all unallocated shares in its discretion. If a recipient's
employment is terminated as a result of death or disability, all restrictions
will expire and all allocated shares will become unrestricted. The Board of
Directors of the Company can terminate the Recognition Plan at any time, and if
it does so, any shares not allocated will revert to the Company. Recipients of
grants under the Recognition Plan will not be required to make any payment at
the time of grant or when the underlying shares of Common Stock become vested,
other than payment of withholding taxes.
It is currently expected that 30% of the shares available under the
Recognition Plan will be granted to non-employee directors, with each
non-employee director receiving an award for the same number of shares, in which
event equal awards totaling approximately 734,722 shares would be granted to the
eleven non-
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employee directors if the amount of Common Stock sold in the Conversion is equal
to the maximum of the Estimated Valuation Range. In addition, the Recognition
Plan will provide that no individual officer will be able to receive an award
for more than 25% of the shares available under the Recognition Plan, or 612,268
shares if the amount of Common Stock sold in the Conversion is equal to the
maximum of the Valuation Range, vesting over a five-year period (or 122,453
shares per year based upon the maximum of the Valuation Range).
RETIREMENT PLAN. The Bank maintains a non-contributory, tax-qualified
defined benefit pension plan (the "Retirement Plan") for eligible employees. All
salaried employees at least age 21 who have completed at least one year of
service are eligible to participate in the Retirement Plan. The Retirement Plan
provides for a benefit for each participant, including executive officers named
in the Executive Compensation Table above, equal to 2% of the participant's
final average compensation (average W-2 compensation during the highest 60
months of employment) multiplied by the participant's years (and any fraction
thereof) of eligible employment (up to a maximum of 30 years). A participant is
fully vested in his or her benefit under the Retirement Plan after five years of
service. The Retirement Plan is funded by the Bank on an actuarial basis and all
assets are held in trust by the Retirement Plan trustee.
The following table illustrates the annual benefit payable upon normal
retirement at age 65 (in single life annuity amounts with no offset for Social
Security benefits) at various levels of compensation and years of service under
the Retirement Plan and the Supplemental Executive Retirement Plan ("SERP")
maintained by the Bank.
<TABLE>
<CAPTION>
YEARS OF SERVICE(1)(2)
----------------------------------------------------
REMUNERATION(3)(4) 15 20 25 30 35
------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000......................... $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 75,000
150,000......................... 45,000 60,000 75,000 90,000 90,000
175,000......................... 52,500 70,000 87,500 105,000 105,000
200,000......................... 60,000 80,000 100,000 120,000 120,000
225,000......................... 67,500 90,000 112,500 135,000 135,000
250,000......................... 75,000 100,000 125,000 150,000 150,000
300,000......................... 90,000 120,000 150,000 180,000 180,000
400,000......................... 120,000 160,000 200,000 240,000 240,000
450,000......................... 135,000 180,000 225,000 270,000 270,000
500,000......................... 150,000 200,000 250,000 300,000 300,000
600,000......................... 180,000 240,000 300,000 360,000 360,000
</TABLE>
- ---------------
(1) The annual retirement benefits shown in the table do not reflect a deduction
for Social Security benefits and there are no other offsets to benefits.
(2) The maximum years of service credited for benefit purposes is 30 years.
(3) For the fiscal year of the Retirement Plan beginning on January 1, 1997, the
average final compensation for computing benefits under the Retirement Plan
cannot exceed $160,000 (as adjusted for subsequent years pursuant to Code
provisions). Benefits in excess of the limitation are provided through the
SERP.
(4) For the fiscal year of the Retirement Plan beginning on January 1, 1997, the
maximum annual benefit payable under the Retirement Plan cannot exceed
$125,000 (as adjusted for subsequent years pursuant to Code provisions).
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The following table sets forth the years of credited service and the
average annual earnings (as defined above) determined as of December 31, 1996,
the end of the 1996 plan year, for each of the individuals named in the
Executive Compensation Table.
<TABLE>
<CAPTION>
YEARS OF AVERAGE ANNUAL
CREDITED SERVICE EARNINGS
---------------- --------------
<S> <C> <C>
Charles J. Hamm................................... 12 years $473,475
Joseph S. Morgano................................. 24 years 236,354
Terence J. Mitchell............................... 22 years 126,525
John B. Zurell.................................... 24 years 179,480
Thomas J. Brady................................... 26 years 103,114
</TABLE>
401(k) PLAN. The Bank maintains the 401(k) Plan, which is a tax-qualified
defined contribution plan which permits salaried employees with at least one
year of service to make pre-tax salary deferrals under section 401(k) of the
Code. Salary deferrals are made by the election and are limited to 15% of
compensation up to $9,500 (for 1996). The Bank generally makes matching
contributions equal to 100% of deferred amounts up to 6% of salary, with an
annual limit of $3,000. Employees are fully vested in their salary deferrals,
and become 50% vested in the Bank's contribution after two years of employment
and 100% vested after three years of employment. The 401(k) Plan provides that
employees select the investment of their accounts among several options.
The Bank has amended the 401(k) Plan in connection with the Conversion to
provide for the option to invest 401(k) Plan assets in Common Stock. In
addition, participating employees may elect to invest all or any part of their
401(k) Plan account balances in Common Stock. Common Stock held by the 401(k)
Plan may be newly issued or treasury shares acquired from the Company or
outstanding shares purchased on the open market or in privately negotiated
transactions. All Common Stock held by the 401(k) Plan will be held by an
independent trustee and allocated to the accounts of individual participants.
Participants will control the exercise of voting and tender rights relating to
the Common Stock held in their accounts.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank has adopted the SERP to
provide for eligible employees benefits that would be due under its Retirement
Plan if such benefits were not limited under the Code. SERP benefits provided
with respect to the Retirement Plan are reflected in the pension table. The
Board of Directors of the Bank intends to adopt an amendment to the SERP to
provide eligible employees with benefits that would be due under the ESOP if
such benefits were not limited under the Code.
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PROPOSED PURCHASES BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock that
the executive officers and directors, and their associates, propose to purchase
in the Offerings, assuming shares of Common Stock are issued at $10.00 per share
at the minimum ($452,546,300) and maximum ($612,268,520) of the Estimated Price
Range and that sufficient shares will be available to satisfy their orders. The
table also sets forth the total expected beneficial ownership of Common Stock as
to all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM OF THE AT THE MAXIMUM OF THE
ESTIMATED PRICE RANGE(1) ESTIMATED PRICE RANGE(1)
----------------------------- -----------------------------
NUMBER OF AS A PERCENT OF NUMBER OF AS A PERCENT OF
NAME AMOUNT SHARES SHARES OFFERED SHARES SHARES OFFERED
- ---------------------------- ---------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Willard N. Archie........... $ 50,000 5,000 0.01% 5,000 0.01%
Robert B. Catell............ 50,000 5,000 0.01 5,000 0.01
Rohit M. Desai.............. 500,000 50,000 0.11 50,000 0.08
Chaim Y. Edelstein.......... 500,000 50,000 0.11 50,000 0.08
Donald H. Elliott........... 250,000 25,000 0.06 25,000 0.04
Robert W. Gelfman........... 300,000 30,000 0.07 30,000 0.05
Charles J. Hamm............. 500,000 50,000 0.11 50,000 0.08
Scott M. Hand............... 50,000 5,000 0.01 5,000 0.01
Donald E. Kolowsky.......... 500,000 50,000 0.11 50,000 0.08
Janine Luke................. 50,000 5,000 0.01 5,000 0.01
Malcolm MacKay.............. 500,000 50,000 0.11 50,000 0.08
Joseph S. Morgano........... 250,000 25,000 0.06 25,000 0.04
Wesley D. Ratcliff.......... 50,000 5,000 0.01 5,000 0.01
Terence J. Mitchell......... 250,000 25,000 0.06 25,000 0.04
John B. Zurell.............. 300,000 30,000 0.07 30,000 0.05
Thomas J. Brady............. 500,000 50,000 0.11 50,000 0.08
John K. Schnock............. 100,000 10,000 0.02 10,000 0.02
---------- ------- ---- ------- ----
All directors and executive
officers as a group
(17 persons).............. $4,700,000 470,000 1.04% 470,000 0.77%
========== ======= ==== ======= ====
</TABLE>
- ---------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are expected
to be 8% of the shares issued in the Conversion. Also does not include
shares to be contributed to the Foundation equal to 8% of the Common Stock
sold or 3,620,370 shares and 4,898,148 shares at the minimum and the
maximum, respectively of the Estimated Price Range. Common Stock which may
be awarded under the Recognition Plan to be adopted equal to 4% of the
Common Stock issued in the Conversion (or 1,810,185 shares and 2,449,074
shares at the minimum and the maximum, respectively, of the Estimated Price
Range), and Common Stock which may be purchased pursuant to options which
may be granted under the Stock Option Plan equal to 10% of the number of
shares of Common Stock issued in the Conversion (or 4,525,463 shares or
6,122,685 shares at the minimum and the maximum, respectively, of the
Estimated Price Range).
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THE CONVERSION
THE BOARD OF TRUSTEES OF THE MUTUAL HOLDING COMPANY AND THE BOARDS OF
DIRECTORS OF THE BANK AND THE COMPANY HAVE ADOPTED THE PLAN OF CONVERSION. THE
MUTUAL HOLDING COMPANY, AS THE SOLE STOCKHOLDER OF THE BANK, HAS ALSO APPROVED
THE PLAN. SUBJECT TO APPROVAL BY THE VOTING DEPOSITORS AND THE SATISFACTION OF
CERTAIN OTHER CONDITIONS, THE SUPERINTENDENT HAS APPROVED THE PLAN. THE APPROVAL
BY THE SUPERINTENDENT HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN BY THE SUPERINTENDENT.
GENERAL
The Board of Trustees of the Mutual Holding Company and the Board of
Directors of the Bank unanimously adopted the Plan on April 18, 1997. The Plan
was subsequently amended on November 5, 1997 and November 21, 1997. The Plan has
been approved by the Superintendent and the Bank and Mutual Holding Company have
received a notice of intent not to object to the Plan from the FDIC, subject to,
among other things, approval of the Plan by the Voting Depositors and by the
Mutual Holding Company, as the sole stockholder of the Bank. The Special Meeting
has been called for Voting Depositors' consideration of the Plan on February 10,
1998.
The following is a brief summary of pertinent aspects of the Plan and the
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan. A copy of the Plan is available from the Bank upon
written request and is available for inspection at the offices of the Bank and
at the offices of the Department. The Plan also is filed as an exhibit to the
Registration Statement of which this Prospectus is a part, copies of which may
be obtained from the SEC. See "Additional Information."
PURPOSES OF THE CONVERSION
The Mutual Holding Company, as a New York-chartered mutual holding company,
does not have stockholders and has no authority to issue capital stock. As a
result of the Conversion, the Company will be structured in the form used by
holding companies of commercial banks, most business entities and a growing
number of savings institutions. While the existing mutual holding company
organization provides greater structural flexibility than a mutual savings bank,
the stock holding company form of organization will provide the organization
with the greater ability to diversify its business activities through
acquisitions or otherwise as well as diversification into other businesses.
Although there are no current arrangements, understandings or agreements
regarding any such opportunities, the Company and the Bank will be in a position
after the Conversion, subject to regulatory limitations and the Company's
financial position, to take advantage of any such opportunities that may arise.
The Conversion also will be important to the future growth and performance
of the holding company organization by providing a larger capital base to
support the operations of the Bank and to sustain its continued growth and
development over the long term while maintaining its status as a
community-based, independent financial institution serving Brooklyn, Queens and
the greater New York City metropolitan area. The Conversion will also enhance
the organization's future access to capital markets and its ability to diversify
into other financial service-related activities and to provide services to the
public. Although the Bank currently has the ability to raise additional capital
through the sale of shares of Bank common stock, that ability is limited by the
mutual holding company structure which, among other things, requires that the
Mutual Holding Company hold a majority of the outstanding shares of Bank common
stock.
The Conversion also will result in a larger number of outstanding shares of
Common Stock following the Conversion as compared to the number of outstanding
shares of Bank Common Stock that would be outstanding if the Bank had determined
to pursue a public offering of Bank Common Stock within the mutual holding
company structure. The larger number of outstanding shares will increase the
likelihood of the development of an active and liquid trading market for the
Common Stock. See "Market for Common Stock."
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In furtherance of the Bank's commitment to the community which it serves,
the Plan provides for the establishment of the Foundation as part of the
Conversion. As is described in greater detail in the following section, the
Foundation is intended to complement the Bank's existing community reinvestment
activity and is a means of establishing a common bond between the Bank and the
communities that it serves and thereby enable such communities to share in the
growth and profitability of the Company over the long term. Consistent with the
Bank's goal, the Company intends to donate to the Foundation immediately
following the Conversion a number of shares of its authorized, but unissued
Common Stock, in an amount equal to 8% of the number of shares of Common Stock
issued in the Conversion.
In light of the foregoing, the Board of Directors of the Bank and the Board
of Trustees of the Mutual Holding Company believe that the Conversion is in the
best interests of such companies as well as in the best interests of the Bank's
depositors, employees, customers and the community historically served by the
Bank.
ESTABLISHMENT OF THE FOUNDATION
GENERAL. In furtherance of the Bank's commitment to the communities that it
serves, the Plan of Conversion provides for the establishment and funding of a
charitable foundation in connection with the Conversion. The Plan provides that
the Bank and the Company will establish the Foundation, which will be
incorporated under Delaware law as a non-stock corporation, and will fund the
Foundation with Common Stock of the Company. The Company and the Bank believe
that the funding of the Foundation with Common Stock of the Company is a means
of establishing a common bond between the Bank and its community and thereby
enables the Bank's community to share in the growth and success of the Company
over the long term. By further enhancing the Bank's visibility and reputation in
the communities that it serves, the Bank believes that the Foundation will
enhance the long-term value of the Bank's community banking franchise. The
Foundation will be dedicated to charitable purposes within the communities
served by the Bank, including community development activities.
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and community
development activities within the communities that it serves. The Foundation is
being formed as a complement to the Bank's existing community activities, not as
a replacement for such activities. While the Bank intends to continue to
emphasize community lending and community development activities following the
Conversion, such activities are not the Bank's sole corporate purpose. The
Foundation, conversely, will be completely dedicated to community activities and
the promotion of charitable causes, and may be able to support such activities
in ways that are not currently available to the Bank. The Bank believes that the
Foundation will enable the Company and the Bank to assist their local community
in areas beyond community development and lending. The Bank believes the
establishment of the Foundation will enhance its current activities under the
CRA. In this regard, the Board of Directors believes the establishment of a
charitable foundation is consistent with the Bank's commitment to community
service. The Board further believes that the funding of the Foundation with
Common Stock of the Company is a means of enabling the communities served by the
Bank to share in the growth and success of the Company long after completion of
the Conversion. The Foundation will accomplish that goal by providing for
continued ties between the Foundation and Bank, thereby forming a partnership
with the Bank's community. The establishment of the Foundation will also enable
the Company and the Bank to develop a unified charitable donation strategy and
will centralize the responsibility for administration and allocation of
corporate charitable funds. Charitable foundations have been formed by other
financial institutions for this purpose, among others. The Bank, however, does
not expect the contribution to the Foundation to take the place of the Bank's
traditional community lending activities.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's initial Board of Directors is currently expected to be
comprised of seventeen members, thirteen of whom would be existing directors and
officers of the Company, and four other individuals chosen in light of their
commitment and service to charitable and community purposes. A Nominating
Committee of the Foundation's Board, which is to be comprised of a minimum of
three members of the Board, will nominate individuals eligible for election to
the Board of
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Directors. The members of the Foundation, who are comprised of its Board
members, will elect the directors at the annual meeting of the Foundation from
those nominated by the Nominating Committee. Only persons serving as directors
of the Foundation qualify as members of the Foundation, with voting authority.
Directors will be divided into three classes with each class appointed for
three-year terms. The certificate of incorporation of the Foundation provides
that the corporation is organized exclusively for charitable purposes, including
community development, as set forth in Section 501(c)(3) of the Code. The
Foundation's certificate of incorporation further provides that no part of the
net earnings of the Foundation will inure to the benefit of, or be distributable
to its directors, officers or members.
The authority to manage the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The Directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt such
a policy upon establishment of the Foundation. As directors of a nonprofit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established. The Directors of the Foundation
will also be responsible for directing the activities of the Foundation,
including the management of the Common Stock of the Company held by the
Foundation. However, as a condition to receiving the non-objection of the FDIC
and the Superintendent's approval to the Bank's Conversion, all shares of Common
Stock held by the Foundation will be required to be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company; provided, however, that, consistent with the such
condition, the FDIC and the Superintendent may waive this voting restriction
under certain circumstances. However, there can be no assurance that the FDIC
and the Superintendent would grant, unconditionally or otherwise, such waiver.
In the event that the FDIC and the Superintendent were to waive the voting
requirement, the directors would direct the voting of the Common Stock held by
the Foundation. See "-- Regulatory Conditions Imposed on the Foundation."
The Foundation's place of business will be located at the Bank's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Company or the Bank.
The Board of Directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. 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 Foundation.
The Company intends to capitalize the Foundation with Common Stock of the
Company in an amount equal to 8.0% of the total amount of the Common Stock to be
sold in connection with the Conversion. At the minimum, midpoint and maximum of
the Estimated Price Range, the contribution to the Foundation would equal
3,620,370, 4,259,259 and 4,898,148 shares, which would have a market value of
$36.2 million, $42.6 million and $49.0 million, respectively, assuming the
Purchase Price of $10.00 per share. The Company and the Bank determined to fund
the Foundation with Common Stock rather than cash because it desired to form a
bond with the communities it serves in a manner that would allow them to share
in the growth and success of the Company and the Bank over the long term. The
funding of the Foundation with stock also provides the Foundation with a
potentially larger endowment than if the Company contributed cash to the
Foundation since, as a stockholder, the Foundation will share in the growth and
success of the Company. As such, the contribution of Common Stock to the
Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Company, if it were not making the
stock donation, would have to contribute to the Foundation in future years in
order to maintain a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that may be
paid on the Common Stock in the future, and subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of the
sale of any of the Common Stock in the open market from time to time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section
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501(c)(3) of the Code, the Foundation will be required to distribute annually in
grants or donations, a minimum of 5% of the average fair market value of its net
investment assets. One of the conditions imposed on the gift of Common Stock by
the Company is that the amount of Common Stock that may be sold by the
Foundation in any one year shall not exceed 5% of the average market value of
the assets held by the Foundation, except where the Board of Directors of the
Foundation determines that the failure to sell an amount of common stock greater
than such amount would result in a longer term reduction of the value of the
Foundation's assets and as such would jeopardize the Foundation's capacity to
carry out its charitable purposes. Upon completion of the Conversion and the
contribution of shares to the Foundation immediately following the Conversion,
the Company would have 48,875,000, 57,500,000 and 66,125,000 shares issued and
outstanding at the minimum, midpoint and maximum of the Estimated Price Range.
Because the Company will have an increased number of shares outstanding, the
voting and ownership interests of shareholders in the Company's Common Stock
would be diluted by 7.4%, as compared to their interests in the Company if the
Foundation was not established. For additional discussion of the dilutive
effect, see "Pro Forma Data."
TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent tax advisors that an organization created and operated for the above
charitable purposes would generally qualify as a Section 501(c)(3) exempt
organization under the Code, and further that such an organization would likely
be classified as a private foundation. This opinion presumes that the Foundation
will submit a timely request to the IRS to be recognized as an exempt
organization. As long as the Foundation files its application for recognition of
tax-exempt status within 15 months from the date of its organization, and
provided the IRS approves the application, the effective date of the
Foundation's status as a Section 501(c)(3) organization will be the date of its
organization. The Company's and the Bank's independent tax advisor, however, has
not rendered any advice on the condition to the contribution imposed on the
Foundation which requires that all shares of Common Stock of the Company held by
the Foundation must be voted in the same ratio as all other outstanding shares
of Common Stock of the Company on all proposals considered by stockholders of
the Company. See "-- Regulatory Conditions Imposed on the Foundation."
Under Delaware law, the Company is authorized by statute to make charitable
contributions and case law has recognized the benefits of such contributions to
a Delaware corporation. In this regard, Delaware case law provides that a
charitable gift must be within reasonable limits as to amount and purpose to be
valid. Under the Code, the Company is generally allowed a deduction for
charitable contributions made to qualifying donees within the taxable year of up
to 10% of its taxable income (with certain modifications) for such year.
Charitable contributions made by the Company in excess of the annual deductible
amount will be deductible over each of the five succeeding taxable years,
subject to certain limitations. The Company and the Bank believe that the
Conversion presents a unique opportunity to establish and fund a charitable
foundation given the substantial amount of additional capital being raised in
the Conversion. In making such a determination, the Company and the Bank
considered the dilutive impact of the contribution of Common Stock to the
Foundation on the amount of Common Stock available to be offered for sale in the
Conversion. Based on such consideration, the Company and Bank believe that the
contribution to the Foundation in excess of the 10% annual deduction limitation
is justified given the Bank's capital position and its earnings, the substantial
additional capital being raised in the Conversion and the potential benefits of
the Foundation to the communities served by the Bank. In this regard, assuming
the sale of the Common Stock at the midpoint of the Estimated Price Range, the
Company would have pro forma stockholders' equity of $799.5 million or 18.7% of
pro forma consolidated assets and the Bank's pro forma leverage and total
risk-based capital ratios would be 11.9% and 19.4%, respectively. See
"Regulatory Capital Requirements," "Capitalization," and "Comparison of
Valuation and Pro Forma Information with No Foundation." Thus, the amount of the
contribution will not adversely impact the financial condition of the Company
and the Bank and the Company and the Bank therefore believe that the amount of
the charitable contribution is reasonable given the Company's and the Bank's pro
forma capital positions. As such, the Company and the Bank believe that the
contribution does not raise safety and soundness concerns.
The Company and the Bank have received an opinion of their independent tax
advisor that the Company's contribution of its own stock to the Foundation would
not constitute an act of self-dealing, and that the Company will be entitled to
a deduction in the amount of the fair market value of the stock at the time of
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the contribution less the nominal par value that the Foundation is required to
pay to the Company for such stock, subject to the annual deduction limitation
described above. The Company, however, would be able to carry forward any unused
portion of the deduction for five years following the contribution, subject to
certain limitations. The Company's and the Bank's independent tax advisor,
however, has not rendered advice as to fair market value for purposes of
determining the amount of the tax deduction. If the Foundation had been
established in fiscal 1997, the Company would have received a tax benefit of
approximately $23.0 million (based on the Bank's pre-tax income for fiscal 1997,
an assumed marginal tax rate of 47% and a deduction for the contribution of
Common Stock equal to $49.0 million). The Company is permitted under the Code to
carry over the excess contribution over the five-year period following the
contribution to the Foundation. Assuming the close of the Offering at the
maximum of the Estimated Price Range, the Company estimates that for federal
income tax purposes, a substantial portion of the deduction should be deductible
over the six-year period. Neither the Company nor the Bank expect to make any
further contributions to the Foundation within the first five years following
the initial contribution. After that time, the Company and the Bank may consider
future contributions to the Foundation. Any such decisions would be based on an
assessment of, among other factors, the financial condition of the Company and
the Bank at that time, the interests of shareholders and depositors of the
Company and the Bank, and the financial condition and operations of the
Foundation.
Although the Company and the Bank have received an opinion of their
independent tax advisor that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that a deduction
for the charitable contribution will be allowed. In such event, the Company's
tax benefit related to the contribution to the Foundation would be expensed
without tax benefit, resulting in a reduction in earnings in the year in which
the IRS makes such a determination. See "Risk Factors -- Establishment of the
Foundation."
As a private 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 foundation will generally be subject
to a federal excise tax of 2.0%. The Foundation will be required to make an
annual filing with the IRS within four and one-half months after the close of
the Foundation's fiscal year to maintain its tax-exempt status. The Foundation
will be required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of such
public notice. The annual information return will be available from Edward F.
Gentner, Jr., Esq. at (212) 732-2000. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant. The Foundation will also be required to file an
annual report with the Charities Bureau of the Office of the Attorney General of
the State of New York.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is subject to the following conditions imposed as a condition of
receiving FDIC's non-objection to and Superintendent's approval of the
Conversion: (i) the Foundation will be subject to examination by the FDIC and
the Department; (ii) the Foundation must comply with supervisory directives
imposed by the FDIC and the Department; (iii) the Foundation will operate in
accordance with written policies adopted by the Board of Directors, including a
conflict of interest policy acceptable to the Department and the FDIC; (iv) the
Foundation shall not engage in self-dealing and shall comply with all laws
necessary to maintain its tax-exempt status under the Code; (v) no part of the
net earnings of the Foundation shall inure to the benefit of, or be
distributable to, the Foundation's directors, officers or other private persons
except for the payment of reasonable compensation for services rendered and
certain distributions and payments in furtherance of the corporate purposes of
the Foundation; (vi) the Foundation may not participate in any political
campaigns; (vii) the Foundation is prohibited from engaging in any activity
which would cause it to be subject to excise taxes or which would jeopardize its
status as a private foundation under Section 501(c)(3) of the Code; and (viii)
any shares of Common Stock of the Company held by the Foundation must be voted
in the same ratio as all other shares of Common Stock of the Company voted on
all proposals considered by stockholders of the Company; provided, however, that
the Department and the FDIC may waive this voting restriction under
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certain circumstances, such as the loss of the tax-exempt status of the
Foundation. If the voting restriction is waived or becomes unenforceable, the
Department and the FDIC may either impose a condition that provides a certain
portion of the members of the Foundation's board of directors shall be persons
who are not directors, officers or employees of the Company, the Bank or any
affiliate or impose such other conditions relating to control of the
Foundation's Common Stock as is determined by the Department and the FDIC to be
appropriate at the time. There can be no assurances that the Department or the
FDIC would grant a waiver, unconditional or otherwise, of the voting
restriction.
DESCRIPTION OF THE CONVERSION
On April 18, 1997, the Board of Directors of the Bank and the Board of
Trustees of the Mutual Holding Company adopted the Plan (and subsequently
amended it as of November 5, 1997 and November 21, 1997) and in June 1997 the
Bank incorporated the Company under Delaware law for the purpose of holding all
of the capital stock of the Bank and in order to facilitate the Conversion.
Pursuant to the Plan, (i) the Mutual Holding Company will convert to the stock
form of organization and simultaneously will merge with and into the Bank and
all of the outstanding shares of Bank common stock held by the Mutual Holding
Company will be cancelled. Pursuant to the Plan, the Company is offering shares
of Common Stock in the Offering as part of the Conversion. Upon consummation of
the Offerings, the Company will purchase from the Bank all of the Bank's common
stock and the Bank will become a wholly owned subsidiary of the Company
operating under the name "Independence Savings Bank."
In accordance with Department and FDIC regulations, consummation of the
Conversion (including the offering of Common Stock in the Offerings, as
described below) is conditioned upon the approval of the Plan by the Department
and the non-objection of the FDIC, as well as the approval of at least (1)
seventy-five percent (75%) in amount of deposit liabilities of Voting Depositors
represented in person or by proxy at the Special Meeting, and (2) a majority of
the total votes eligible to be cast by Voting Depositors at the Special Meeting.
The Mutual Holding Company, in its capacity as the sole stockholder of the Bank,
also has approved the Plan.
EFFECTS OF THE CONVERSION
GENERAL. Prior to the Conversion, each depositor in the Bank has both a
deposit account in the institution and a pro rata ownership interest in the net
worth of the Mutual Holding Company based upon the balance in his or her
account, which interest may only be realized in the event of a liquidation of
the Mutual Holding Company. However, this ownership interest is tied to the
depositor's account and has no tangible market value separate from such deposit
account. A depositor who reduces or closes his or her account receives a portion
or all of the balance in the account but nothing for his or her ownership
interest in the net worth of the Mutual Holding Company, which is lost to the
extent that the balance in the account is reduced.
Consequently, the depositors of the Bank normally have no way to realize
the value of their ownership interest in the Mutual Holding Company, which has
realizable value only in the unlikely event that the Mutual Holding Company is
liquidated. In such event, the Bank's depositors of record at that time, as
owners, would share pro rata in any residual surplus and reserves of the Mutual
Holding Company after other claims are paid.
Upon consummation of the Conversion, permanent nonwithdrawable capital
stock will be created to represent the ownership of the net worth of the
Company. The Common Stock is separate and apart from deposit accounts and cannot
be and is not insured by the FDIC or any other governmental agency. Certificates
are issued to evidence ownership of the permanent stock. The stock certificates
are transferable, and therefore the stock may be sold or traded if a purchaser
is available with no effect on any account the seller may hold in the Bank.
No assets of the Mutual Holding Company or the Bank will be distributed in
connection with the Conversion other than pursuant to the payment of expenses
incurred by such entities in connection therewith.
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CONTINUITY. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the
Department and the FDIC. After the Conversion, the Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff.
The directors and officers of the Bank at the time of the Conversion will
continue to serve as directors and officers of the Bank after the Conversion.
The directors and officers of the Company consist of individuals currently
serving as trustees and officers of the Mutual Holding Company and directors of
the Bank, and they generally will retain their positions in the Company after
the Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank at
the time of the Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms, except to the extent that funds
in the account are withdrawn to purchase Common Stock to be issued in the
Offerings. Each such account will be insured by the FDIC to the same extent as
before the Conversion. Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
EFFECT ON LOANS. No loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF DEPOSITORS. The voting rights and control of
the Mutual Holding Company are vested exclusively in its Board of Trustees and
the voting rights and control of the Bank are vested exclusively in its Board of
Directors, the members of which are elected by the Mutual Holding Company, its
sole stockholder. Upon completion of the Conversion, all voting rights in the
Bank will be vested in the Company as the sole stockholder of the Bank.
Exclusive voting rights with respect to the Company will be vested in the
holders of Common Stock.
TAX EFFECTS. Consummation of the Conversion is conditioned on prior
receipt by the Company and the Bank of rulings or opinions with regard to
federal and New York income taxation which indicate that the adoption and
implementation of the Plan of Conversion set forth herein will not be taxable
for federal or New York state and city income tax purposes to the Company or the
Bank or the Eligible Account Holders or Supplemental Eligible Account Holders,
except as discussed below. See "-- Tax Aspects" below.
EFFECT ON LIQUIDATION RIGHTS. Were the Mutual Holding Company to
liquidate, all claims of the Mutual Holding Company's creditors would be paid
first. Thereafter, if there were any assets remaining, depositors of the Bank
would receive such remaining assets, pro rata, based upon the deposit balances
in their deposit accounts at the Bank immediately prior to liquidation. In the
unlikely event that the Bank were to liquidate after the Conversion, all claims
of creditors (including those of depositors, to the extent of their deposit
balances) also would be paid first, followed by distribution of the "liquidation
account" to certain depositors (see "-- Liquidation Rights" below), with any
assets remaining thereafter distributed to the Company as the holder of the
Bank's capital stock.
THE OFFERINGS
SUBSCRIPTION OFFERING. In accordance with the Plan of Conversion, rights
to subscribe for the purchase of Common Stock have been granted under the Plan
of Conversion to the following persons in the following order of descending
priority: (1) Eligible Account Holders; (2) the ESOP; and (3) Supplemental
Eligible Account Holders. All subscriptions received will be subject to the
availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering and to the maximum and
minimum purchase limitations set forth in the Plan of Conversion and as
described below under "-- Limitations on Common Stock Purchases." No person
holding subscription rights may exceed any otherwise applicable purchase
limitation by submitting multiple orders for Common Stock in the Offerings.
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to
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the amount permitted to be purchased in the Community Offering, currently
$500,000 of Common Stock, subject to the overall purchase limitations. See
"-- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated so as to permit each subscribing Eligible Account
Holder to purchase a number of shares sufficient to make his or her total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Thereafter, unallocated shares will be allocated to subscribing Eligible
Account Holders whose subscriptions remain unfilled in the proportion that the
amounts of their respective eligible deposits bear to the total amount of
eligible deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled, provided that no fractional shares shall be
issued. The subscription rights of Eligible Account Holders who are also
trustees, directors or officers of the Mutual Holding Company or the Bank and
their associates will be subordinated to the subscription rights of other
Eligible Account Holders to the extent attributable to increased deposits in the
year preceding March 31, 1996.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. The ESOP will receive, without
payment therefor, second priority, nontransferable subscription rights to
subscribe for Common Stock in the Subscription Offering. The ESOP intends to
purchase 8.0% of the shares of Common Stock, or 4,898,148 shares based on the
maximum of the Estimated Price Range. Subscriptions by the ESOP will not be
aggregated with shares of Common Stock purchased directly by or which are
otherwise attributable to any other participants in the Subscription and
Community Offerings, including subscriptions of any of the Bank's directors,
officers, employees or associates thereof. See
"Management -- Benefits -- Employee Stock Ownership Plan." In the event that the
ESOP is unable to purchase 8.0% of the Common Stock in the Subscription
Offering, it is anticipated that the ESOP will consider purchasing an amount of
shares in the open market sufficient to increase its ownership to 8% of the
Common Stock sold in the Conversion.
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the amount permitted to be purchased in the Community Offering,
currently $500,000 of Common Stock, subject to the overall purchase limitations.
See "-- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated so as to permit each subscribing Supplemental
Eligible Account Holder to purchase a number of shares sufficient to make his or
her total allocation equal to the lesser of the number of shares subscribed for
or 100 shares. Thereafter, unallocated shares will be allocated to subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective eligible deposits bear to the
total amount of eligible deposits of all such subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled, provided that no fractional
shares shall be issued.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire at 3:00 p.m., Eastern Time, on January 29, 1998, unless extended for
up to 45 days or such additional periods by the Bank and the Company with the
approval of the Superintendent and FDIC, if necessary. Such extensions may not
be extended beyond December 30, 1999. Subscription rights which have not been
exercised prior to the Expiration Date will become void.
The Company and the Bank will not execute orders until at least the minimum
number of shares of Common Stock (45,254,630) have been subscribed for or
otherwise sold. If all shares have not been subscribed for or sold within 45
days after the Expiration Date, unless such period is extended with the consent
of the Superintendent and FDIC, if necessary, all funds delivered to the Bank
pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be cancelled.
If an extension beyond the 45-day period following the Expiration Date is
granted, the Company and the Bank will notify subscribers of the extension of
time and of any rights of subscribers to modify or rescind their subscriptions.
The Plan of Conversion provides that the Company complete the sale of the
Common Stock within 45 days after the close of the Subscription Offering. In the
event that the Company is unable to complete the sale
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of Common Stock and effect the Conversion within the 45-day time period, one or
more extensions, with each such extension up to 60 days, may be granted but such
extensions may not go beyond December 30, 1999 unless waived by the
Superintendent and FDIC, if necessary. If an extension is granted, each
subscriber will have the right to affirm, increase, decrease or rescind the
subscription at any time prior to 20 days before the end of the extension period
or at any time prior to the date of the commencement of the Community Offering
or the Syndicated Community Offering. No assurance can be given that an
extension would be granted if requested. If an extension is granted, the Company
will notify subscribers of such extension and of any rights of subscribers to
modify or rescind their subscriptions.
COMMUNITY OFFERING. Upon completion of the Subscription Offering, to the
extent that shares remain available for purchase after satisfaction of all
subscriptions of Eligible Account Holders, the ESOP and Supplemental Eligible
Account Holders, the Company and the Bank have determined to offer shares
pursuant to the Plan to certain members of the general public to whom a
Prospectus is delivered, with preference given to natural persons residing in
the counties in New York in which the Bank has a branch office (such natural
persons referred to as "Preferred Subscribers"). Such persons, together with
associates of and persons acting in concert with such persons, may purchase up
to $500,000 of Common Stock subject to the maximum purchase limitations. See
"-- Limitations on Common Stock Purchases." THE OPPORTUNITY TO SUBSCRIBE FOR
SHARES OF COMMON STOCK ISSUED IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO
THE RIGHT OF THE COMPANY AND THE BANK, IN THEIR SOLE DISCRETION, TO ACCEPT OR
REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN
ORDER, OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE OF THE COMMUNITY
OFFERING WHICH MUST BE NO LATER THAN 45 DAYS AFTER THE EXPIRATION OF THE
SUBSCRIPTION OFFERING, UNLESS EXTENDED BY THE COMPANY AND THE BANK WITH THE
APPROVAL OF THE SUPERINTENDENT AND THE FDIC, IF NECESSARY.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Subscription and Community
Offerings, such stock will be allocated first to each Preferred Subscriber whose
order is accepted by the Company and the Bank, in an amount equal to the lesser
of 100 shares or the number of shares subscribed for by each such Preferred
Subscriber, if possible. Thereafter, unallocated shares will be allocated among
the Preferred Subscribers whose orders remain unsatisfied on an equal number of
shares basis per order until all orders have been filled, provided that no
fractional shares shall be issued. If there are any shares remaining, shares
will be allocated to other members of the general public who subscribe in the
Community Offering applying the same allocation procedures described above for
Preferred Subscribers.
SYNDICATED COMMUNITY OFFERING. The Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community Offerings
may be offered for sale to the general public in a Syndicated Community Offering
through a syndicate of registered broker-dealers to be formed by Sandler O'Neill
acting as agent for the Company and the Bank. No person, together with
associates of and persons acting in concert with such persons, will be permitted
to subscribe in the Syndicated Community Offering for more than $500,000 of
Common Stock, subject to the maximum purchase limitations. This amount may be
increased to up to 5% of the Common Stock issued in the Conversion. If there is
not sufficient shares available to fill the orders of subscribers in the
Syndicated Community Offering, such stock will be allocated first to each
subscriber whose order is accepted by the Company and the Bank, in an amount
equal to the lesser of 100 shares or the number of shares subscribed for by each
subscriber, if possible. Thereafter, any remaining shares will be allocated on
an equal number of shares basis per order until all orders have been filled,
provided that no fractional shares shall be issued. The Company and the Bank
have the right to reject orders in whole or part in their sole discretion in the
Syndicated Community Offering. Neither Sandler O'Neill nor any registered
broker-dealer shall have any obligation to take or purchase any shares of Common
Stock in the Syndicated Community Offering; however, Sandler O'Neill has agreed
to use its best efforts in the sale of shares in the Syndicated Community
Offering.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his or her shares with funds held by or deposited
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with a selected dealer. If an order form is executed and forwarded to the
selected dealer or if the selected dealer is authorized to execute the order
form on behalf of a purchaser, the selected dealer is required to forward the
order form and funds to the Bank for deposit in a segregated account on or
before noon of the business day following receipt of the order form or execution
of the order form by the selected dealer. Alternatively, selected dealers may
solicit indications of interest from their customers to place orders for shares.
Such selected dealers shall subsequently contact their customers who indicated
an interest and seek their confirmation as to their intent to purchase. The
selected dealer will acknowledge receipt of the order to its customer in writing
on the following business day and will debit such customer's account on the
third business day after the customer has confirmed his or her intent to
purchase (the "debit date") and on or before noon of the next business day
following the debit date will send funds to the Bank for deposit in a segregated
account. If such alternative procedure is employed, purchasers' funds are not
required to be in their accounts with selected dealers until the debit date.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Company and the Bank with
the approval of the Superintendent and FDIC. See "-- Stock Pricing and Number of
Shares to be Issued" below for a discussion of rights of subscribers, if any, in
the event an extension is granted.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Plan of Conversion requires that the purchase price of the Common Stock
must be based on the appraised pro forma market value of the Common Stock, as
determined on the basis of an independent valuation. The Company and the Bank
have retained RP Financial to make such valuation. For its services in making
such appraisal and for the preparation of a business plan, RP Financial will
receive a fee of $70,000 for the initial appraisal, $10,000 for each updated
appraisal and $15,000 for the business plan, plus out of pocket expenses not to
exceed $10,000. The Company and the Bank have agreed to indemnify RP Financial
and its employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where RP Financial's liability results from its
negligence or a failure to exercise due diligence or in circumstances in which
it had knowledge of certain material facts.
The appraisal has been prepared by RP Financial in reliance upon the
information contained in this Prospectus, including the Consolidated Financial
Statements. RP Financial also considered the following factors, among others:
the current and projected operating results and financial condition of the
Company and the Bank and the economic and demographic conditions in the Bank's
existing market area; certain historical, financial and other information
relating to the Bank; a comparative evaluation of the operating and financial
statistics of the Bank with those of other similarly situated publicly traded
companies located in New York and other regions of the United States; the
aggregate size of the offering of the Common Stock; the impact of the Conversion
on the Bank's equity and earnings potential; the proposed dividend policy of the
Company and the Bank; the trading market for the securities of comparable
companies and general conditions in the market for such securities.
On the basis of the foregoing, RP Financial has advised the Company and the
Bank that in its opinion the estimated pro forma market value of the Common
Stock was $532.4 million as of June 20, 1997, as most recently updated as of
October 29, 1997. The Boards of Directors of the Bank and the Company determined
that the Common Stock would be sold at $10.00 per share, resulting in a range of
45,254,630 to 61,226,852 shares of Common Stock being offered. The Boards of
Directors of the Bank and Company reviewed RP Financial's appraisal report,
including the methodology and the assumptions used by RP Financial, and
determined that the Valuation Range was reasonable and adequate. The Valuation
Range may be amended with the approval of the Superintendent and FDIC, if
necessary, or if necessitated by subsequent developments in the financial
condition of the Company and the Bank or market conditions generally. In the
event the appraisal is updated to below $452.5 million or above $704.1 million
(the maximum of the Valuation Range, as adjusted by 15%), such appraisal will be
filed with the SEC by post-effective amendment.
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Based upon current market and financial conditions and recent practices and
policies of the FDIC, in the event the Company receives orders for Common Stock
in excess of $612.2 million (the maximum of the Valuation Range) and up to
$704.1 million (the maximum of the Valuation Range, as adjusted by 15%), the
Company may be required by the Superintendent and FDIC to accept all such
orders. No assurances, however, can be made that the Company will receive orders
for Common Stock in excess of the maximum of the Valuation Range or that, if
such orders are received, that all such orders will be accepted because the
Company's final valuation and number of shares to be issued are subject to the
receipt of an updated appraisal from RP Financial which reflects such an
increase in the valuation and the approval of such increase by the Department
and FDIC. There is no obligation or understanding on the part of management to
take and/or pay for any shares of Common Stock in order to complete the
Offerings.
RP FINANCIAL'S VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES. RP
FINANCIAL DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE BANK, NOR DID RP FINANCIAL VALUE INDEPENDENTLY
THE ASSETS OR LIABILITIES OF THE BANK. THE VALUATION CONSIDERS THE BANK AS A
GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION
VALUE OF THE BANK. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON
ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO
CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING
COMMON STOCK IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT
PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION
OF THE PRO FORMA MARKET VALUE THEREOF.
No sale of shares of Common Stock may be consummated unless prior to such
consummation RP Financial confirms that nothing of a material nature has
occurred which, taking into account all relevant factors, would cause it to
conclude that the Purchase Price is materially incompatible with the estimate of
the pro forma market value of a share of Common Stock upon consummation of the
Conversion. If such is not the case, a new Valuation Range may be set and a new
Subscription Offering, and/or Community Offering or Syndicated Community
Offering may be held or such other action may be taken as the Company and the
Bank shall determine and the Superintendent and FDIC may permit or require.
Prior to the completion of the Conversion, the total number of shares of
Common Stock to be issued in the Offerings may be increased or decreased to
reflect changes in market or financial conditions without a resolicitation of
subscribers, provided that the product of the total number of shares times the
Purchase Price is not below the minimum or more than 15% above the maximum of
the Valuation Range. In the event market or financial conditions change so as to
cause the aggregate Purchase Price of the shares to be below the minimum of the
Valuation Range or more than 15% above the maximum of such range, purchasers
will be resolicited (i.e., permitted to continue their orders, in which case
they will need to affirmatively reconfirm their subscriptions prior to the
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest at the Bank's passbook rate of interest, or be
permitted to modify or rescind their subscriptions). Any change in the Valuation
Range must be approved by the Department and FDIC. See "-- Limitations on Common
Stock Purchases."
An increase in the number of shares of Common Stock, as a result of an
increase in the appraisal of the estimated pro forma market value (see "-- The
Offerings -- Subscription Offering"), would decrease both a subscriber's
ownership interest and the Company's pro forma net income and equity on a per
share basis while increasing pro forma net income and equity on an aggregate
basis. A decrease in the number of shares of Common Stock would increase both a
subscriber's ownership interest and the Company's pro forma net income and
equity on a per share basis while decreasing pro forma net income and equity on
an aggregate basis. See "Risk Factors -- Possible Dilutive Effect of Issuance of
Additional Shares" and "Pro Forma Data."
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The appraisal report of RP Financial has been filed as an exhibit to the
Registration Statement and the Application for Conversion of which this
Prospectus is a part and is available for inspection in the manner set forth
under "Additional Information."
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the Plan reside. However, the Company and the
Bank are not required to offer stock in the Subscription Offering to any person
who resides in a foreign country.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased:
(1) No less than 25 shares of Common Stock may be purchased, to the
extent such shares are available;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the amount permitted to be purchased in the
Community Offering, currently $500,000 of Common Stock, subject to the
overall limitation in clause (6) below;
(3) The ESOP intends to purchase 8.0% of the shares of Common Stock to
be issued in the Offerings, including any additional shares issued in the
event of an increase in the Valuation Price Range;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the amount permitted to be
purchased in the Community Offering, currently $500,000 of Common Stock,
subject to the overall limitation in clause (6) below;
(5) Persons purchasing shares of Common Stock in the Community
Offering or the Syndicated Community Offering, together with associates of
and groups of persons acting in concert with such persons, may subscribe
for and purchase in the respective Offering up to $500,000 of Common Stock,
subject to the overall limitation in clause (6) below;
(6) Eligible Account Holders and Supplemental Eligible Account Holders
may purchase stock in the Community Offering and Syndicated Community
Offering subject to the purchase limitations described above, provided
that, except for the ESOP, the maximum number of shares of Common Stock
subscribed for or purchased in all categories by any person, together with
associates of and groups of persons acting in concert with such persons,
shall not exceed the number of shares of Common Stock that aggregate 1.0%
of the Offerings; and
(7) No more than 25% of the total number of shares issued in the
Conversion may be purchased by trustees, directors and officers of the
Company, Mutual Holding Company and the Bank and their associates in the
aggregate, excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the Voting
Depositors or the Mutual Holding Company, as the sole stockholder of the Bank,
both the individual amount permitted to be subscribed for and the overall
purchase limitation may be increased up to a maximum of 5% of the total shares
of Common Stock issued in the Conversion in the sole discretion of the Company
and the Bank. The overall purchase limitation may not be decreased below the
aggregate of 1% of the Offerings. If such amount is increased, subscribers for
the maximum amount will be, and certain other large subscribers, in the sole
discretion of the Company and the Bank, may be given the opportunity to increase
their subscriptions up to the then applicable limit.
In the event of an increase in the total number of shares of Common Stock
offered in the Conversion due to an increase in the Valuation Range of up to 15%
(the "Adjusted Maximum"), the additional shares will be allocated in the
following order of priority in accordance with the Plan: (i) to fill unfulfilled
subscriptions of Eligible Account Holders, inclusive of the Adjusted Maximum;
(ii) to fill the subscription of the ESOP;
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(iii) to fill unfulfilled subscriptions of Supplemental Eligible Account
Holders, inclusive of the Adjusted Maximum; (iv) to fill unfulfilled
subscriptions by Preferred Subscribers in the Community Offering to the extent
possible, inclusive of the Adjusted Maximum; and (v) to fill unfulfilled
subscriptions in the Community Offering other than from Preferred Subscribers,
inclusive of the Adjusted Maximum.
The term "associate" when used to indicate a relationship with a person
means (i) any corporation or organization (other than the Mutual Holding
Company, the Company or the Bank or a majority-owned subsidiary of the Bank or
the Company) of which such person is a director, officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, provided, however, that such term shall not
include any tax-qualified or non-tax-qualified employee stock benefit plan of
the Company or the Bank in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; and (iii)
any relative or spouse of such person, or any relative of such spouse, who has
the same home as such person or who is a director or officer of the Company or
the Bank or any of their subsidiaries.
MARKETING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a consultant and
financial advisor in connection with the offering of the Common Stock, and
Sandler O'Neill has agreed to use its best efforts to assist the Bank and the
Company in the solicitation of subscriptions for shares of Common Stock in the
Offerings. Sandler O'Neill is not obligated to take or purchase any shares of
Common Stock in the Offerings. Sandler O'Neill will receive a fee equal to
1.625% of the aggregate Purchase Price of all shares sold in the Offerings,
excluding in each case shares purchased by trustees, directors, officers and
employees of the Bank or the Company and any immediate family member thereof,
the Foundation and the Employee Plans, including the ESOP, for which Sandler
O'Neill will not receive a fee. In the event that a selected dealers' agreement
is entered into in connection with a Syndicated Community Offering, the Company
and Bank will pay a fee (to be negotiated at such time under such agreement) to
such selected dealers, any sponsoring dealers' fees, and a management fee to
Sandler O'Neill of 1.5% for shares sold by a NASD member firm pursuant to a
selected dealers' agreement; provided, however, that the aggregate fees payable
to Sandler O'Neill for Common Stock sold by them pursuant to such a selected
dealers' agreement shall not exceed 1.625% of the aggregate Purchase Price and
provided, further, however, that the aggregate fees payable to Sandler O'Neill
and the selected dealers will not exceed 7.0% of the aggregate purchase price of
the Common Stock sold by selected dealers. Fees to Sandler O'Neill and to any
other broker-dealer may be deemed to be underwriting fees, and Sandler O'Neill
and such broker-dealers may be deemed to be underwriters. Sandler O'Neill will
also be reimbursed for its reasonable out-of-pocket expenses, including legal
fees. The Company and the Bank have agreed to indemnify Sandler O'Neill for
reasonable costs and expenses in connection with certain claims or liabilities,
including certain liabilities under the Securities Act. Sandler O'Neill has
received advances towards its marketing and financial advisory service fees
totaling $50,000. Total marketing fees to Sandler O'Neill are expected to be
$6.7 million and $9.1 million at the minimum and the maximum of the Estimated
Price Range, respectively. See "Pro Forma Data" for the assumptions used to
arrive at these estimates.
Sandler O'Neill will also perform proxy solicitation services, conversion
agent services and records management services for the Bank in the Conversion
and will receive a fee for these services of $175,000, plus reimbursement of
reasonable out-of-pocket expenses.
Directors and executive officers of the Company and the Bank may
participate in the solicitation of offers to purchase Common Stock. Other
employees of the Bank may participate in the Offerings in ministerial capacities
or providing clerical work in effecting a sales transaction. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered representatives.
The Company will rely on Rule 3a4-1 under the Exchange Act, and sales of Common
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of Common Stock. No
officer, director or employee of the Company and the Bank will be compensated in
connection with his or her solicitations or other participation in the Offerings
by the
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payment of commissions or other remuneration based either directly or indirectly
on transactions in the Common Stock.
Sandler O'Neill has not prepared any report or opinion constituting
recommendations or advice to the Bank or the Company. In addition, Sandler
O'Neill has expressed no opinion as to the prices at which Common Stock to be
issued in the Offerings may trade. Furthermore, Sandler O'Neill has not verified
the accuracy or completeness of the information contained in the Prospectus.
PROCEDURE FOR PURCHASING SHARES IN THE OFFERINGS
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery of the Prospectus in accordance with Rule
15c2-8. Order forms will only be distributed with a Prospectus.
To purchase shares in the Offerings, an executed order form with the
required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks in the order form), must be
physically received by the Bank at any of its branch offices by 3:00 p.m.,
Eastern Time, on the Expiration Date. Stock order forms may not be delivered to
a walk up or drive through window located at any of the Bank's branch offices.
In addition, the Company and the Bank will require a prospective purchaser to
execute a certification in connection with any sale of Common Stock and will not
accept order forms unless such a certification is executed. Any order form which
is (i) not timely received, (ii) improperly completed or executed, (iii)
submitted by facsimile or is photocopied, (iv) not accompanied by the proper
payment (or authorization of withdrawal for payment) or in the case of
institutional investors in the Community Offering, not accompanied by an
irrevocable order together with a legally binding commitment to pay the full
amount of the purchase price prior to 48 hours before the completion of the
Offerings, or (v) submitted by a person whose representations the Company and
the Bank believe to be false or who they otherwise believe, either alone, or
acting in concert with others, is violating, evading or circumventing, or
intends to violate, evade or circumvent, the terms and conditions of the Plan,
are not required to be accepted. The Company and the Bank have the right to
waive or permit the correction of incomplete or improperly executed forms, but
do not represent that they will do so. Once received, an executed order form may
not be modified, amended or rescinded without the consent of the Company and the
Bank, unless the Offerings have not been completed within 45 days after the end
of the Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders and Supplemental Eligible
Account Holders are properly identified as to their stock purchase priority,
depositors as of the close of business on the Eligibility Record Date (March 31,
1996) or the Supplemental Eligibility Record Date (September 30, 1997) must list
on the order form all accounts in which they have an ownership interest, giving
all names in each account and the account numbers. Joint stock registration will
be allowed only if the qualifying deposit account is so registered.
Payment for subscriptions may be made (i) in cash if delivered in person at
any office of the Bank, (ii) by check or money order or (iii) by authorization
of withdrawal from deposit accounts maintained with the Bank. No wire transfers
will be accepted. Orders submitted by subscribers in the Subscription Offering
and purchasers in the Community Offering aggregating $50,000 or more must be
paid by official bank or certified check, a check issued by a NASD-registered
broker-dealer or by withdrawal authorization from a deposit account at the Bank.
Funds will be deposited in a segregated account at the Bank and interest will be
paid on funds submitted by cash, check or money order at the Bank's passbook
rate of interest from the date payment is received until completion or
termination of the Conversion. If payment is made by authorization of withdrawal
from deposit accounts, the funds authorized to be withdrawn from a deposit
account will continue to accrue interest at the contractual rates until
completion or termination of the Conversion, but a hold will be placed on such
funds, thereby making them unavailable to the depositor until completion or
termination of the Conversion.
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If a subscriber authorizes the Bank to withdraw the aggregate amount of the
purchase price from a deposit account, the Bank will do so as of the effective
date of the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be cancelled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the passbook rate.
The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes, but rather may pay for such shares of Common Stock
subscribed for by it at the Purchase Price upon consummation of the Offerings,
provided that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Company
to lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Offerings, provided that such IRAs are not
maintained at the Bank. In addition, ERISA provisions and IRS regulations
require that officers, directors and 10% stockholders who use self-directed IRA
funds to purchase shares of Common Stock in the Subscription and Community
Offerings make such purchases for the exclusive benefit of the IRAs. Any
interested parties wishing to use IRA funds for stock purchases are advised to
contact the Conversion Center for additional information.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to the rules and regulations of the Department, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for his or her account. Each person exercising such subscription rights
will be required to certify that he or she is purchasing shares solely for his
or her own account and that he or she has no agreement or understanding
regarding the sale or transfer of such shares. Department regulations also
prohibit any person from offering or making an announcement of an offer or
intent to make an offer to purchase such subscription rights or shares of Common
Stock prior to the completion of the Conversion. Certificates representing
shares of Common Stock purchased in the Subscription Offering must be registered
in the name of the Eligible Account Holder or Supplemental Eligible Account
Holder, as the case may be. Joint registrations will be allowed only if the
qualifying account is so registered.
THE COMPANY AND THE BANK WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS
AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Mutual Holding
Company, each depositor of the Bank would receive his or her pro rata share of
any assets of the Mutual Holding Company remaining after payment of claims of
all creditors. Each depositor's pro rata share of such remaining assets would be
in the same proportion as the value of his or her deposit account was to the
total value of all deposit accounts in the Bank at the time of liquidation.
After the Conversion, each depositor, in the event of a complete liquidation of
the Bank, would have a claim as a creditor of the same general priority as the
claims of all other general creditors of the Bank. However, except as described
below, his or her claim would be solely in the amount of the balance in his or
her deposit account plus accrued interest. He or she would not have an interest
in the value or assets of the Bank or the Company above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the Bank's total equity as reflected in its latest balance sheet contained in
the final Prospectus utilized in the Offerings. Such liquidation account will
not be reflected as an asset or liability on the
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Company's or the Bank's financial statements subsequent to the Conversion but
will only be a memorandum account. Each Eligible Account Holder and Supplemental
Eligible Account Holder, if he or she were to continue to maintain his or her
deposit account at the Bank, would be entitled, upon a complete liquidation of
the Bank after the Conversion, to an interest in the liquidation account prior
to any payment to the Company as the sole stockholder 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, including
passbook accounts, transaction accounts such as checking accounts, money market
deposit accounts and certificates of deposit, held in the Bank at the close of
business on March 31, 1996 and September 30, 1997, respectively. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account for each of his or her deposit
accounts based on the proportion that the balance of each such deposit account
on the March 31, 1996 Eligibility Record Date or the September 30, 1997
Supplemental Eligibility Record Date bore to the balance of all deposit accounts
in the Bank on such dates.
If, however, at the close of business on the last day of any period for
which the Bank or the Company has prepared audited financial statements
subsequent to the effective date of the Conversion ("annual closing date"), the
amount in any deposit account is less than the amount in such deposit account on
March 31, 1996 or September 30, 1997, as the case may be, or any other annual
closing date, then the interest in the liquidation account relating to such
deposit account would be reduced by the proportion of any such reduction, and
such interest will cease to exist if such deposit account is withdrawn or
closed. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related deposit account. Any
assets remaining after the above liquidation rights of Eligible Account Holders
and Supplemental Eligible Account Holders are satisfied would be distributed to
the Company as the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon prior receipt
of either a ruling from the IRS or an opinion of counsel with respect to
applicable federal tax laws, and either a ruling from the State of New York or
an opinion of counsel with respect to New York tax laws, to the effect that
consummation of the transactions contemplated hereby will not result in a
taxable reorganization under the provisions of the applicable tax codes or
otherwise result in any adverse tax consequences to the Mutual Holding Company,
the Bank, the Company or to account holders receiving subscription rights,
except to the extent, if any, that subscription rights are deemed to have fair
market value on the date such rights are issued. This condition may not be
waived by the Company and the Bank.
Prior to consummation of the Conversion, Elias, Matz, Tiernan & Herrick
L.L.P., Washington, D.C., will issue an opinion to the Company and the Bank to
the effect that, for federal income tax purposes: (1) the conversion of the
Mutual Holding Company to the stock form of organization and its simultaneous
merger with and into the Bank, with the Bank being the surviving institution,
will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of
the Code, (2) no gain or loss will be recognized by the Bank upon the receipt of
the assets of the converted Mutual Holding Company in such merger, (3) the Bank
will recognize no gain or loss upon the receipt of the Contributed Offering
Proceeds from the Company in constructive exchange for the Bank's common stock,
(4) the Company will recognize no gain or loss upon the receipt of cash in the
Offerings for shares of Common Stock, and (5) the Company will recognize no gain
or loss upon the transfer of the Contributed Offering Proceeds to the Bank in
constructive exchange for the Bank's Common Stock.
Prior to consummation of the Conversion, Ernst & Young, LLP, will issue an
opinion to the Company and the Bank to the effect that the income tax
consequences of the Conversion under New York law will be substantially the same
as the consequences for federal tax purposes.
In the view of RP Financial, which view is not binding on the IRS, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the Common Stock
at a price equal to its estimated fair market value, which will be the same
price as the Purchase Price for the unsubscribed shares of Common Stock. If the
subscription rights granted to eligible subscribers are deemed to have an
ascertainable
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value, receipt of such rights likely would be taxable only to those eligible
subscribers who exercise the subscription rights (either as a capital gain or
ordinary income) in an amount equal to such value, and the Company and the Bank
could recognize gain on such distribution. Eligible subscribers are encouraged
to consult with their own tax advisor as to the tax consequences in the event
that such subscription rights are deemed to have an ascertainable value.
Unlike private rulings, an opinion is not binding on the IRS and the IRS
could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
DELIVERY OF CERTIFICATES
Certificates representing Common Stock issued in connection with the
Offering will be mailed by the Company's transfer agent for the Common Stock to
the persons entitled thereto at the addresses of such persons appearing on the
stock order form for Common Stock as soon as practicable following consummation
of the Conversion. Any certificates returned as undeliverable will be held by
the Company until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until certificates for Common
Stock are available and delivered to subscribers, subscribers may not be able to
sell the shares of Common Stock for which they have subscribed, even though
trading of Common Stock may be commenced.
REQUIRED APPROVALS
Various approvals of the Superintendent and the non-objection of the FDIC
are required in order to consummate the Conversion. The Superintendent has
approved and the FDIC has issued a notice of intent not to object to the Plan of
Conversion, subject to approval by the Voting Depositors and certain other
conditions. See "Business -- Lending Activities -- Loan Originations, Purchases,
Sales and Servicing". In addition, consummation of the Conversion is subject to
OTS approval of the Company's application to acquire all of the
to-be-outstanding Bank common stock, which has been received. Applications with
respect to the merger of the Mutual Holding Company (following its conversion to
the stock form of organization) into the Bank have been filed with the FDIC and
the Department and have been approved.
Pursuant to Department and FDIC regulations, the Plan of Conversion also
must be approved by (1) holders of at least seventy-five percent (75%) in amount
of the deposit liabilities of Voting Depositors represented in person or by
proxy at the Special Meeting, and (2) at least a majority of the total number of
votes eligible to be cast by Voting Depositors at the Special Meeting.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
director or an officer of the Company and the Bank will be subject to a
restriction that the shares not be sold for a period of one year following the
Conversion, except in the event of the death or judicial declaration of
incompetence of such director or executive officer or pursuant to a merger or
similar transaction approved by the Department. Each certificate for restricted
shares will bear a legend giving notice of this restriction on transfer, and
appropriate stop-transfer instructions will be issued to the Company's transfer
agent. Any shares of Common Stock issued within this one-year period as a stock
dividend, stock split or otherwise with respect to such restricted stock will be
subject to the same restrictions. The directors and executive officers of the
Company will also be subject to the insider trading rules promulgated pursuant
to the Exchange Act.
Purchases of Common Stock by directors, officers and their associates
during the three-year period following completion of the Conversion (or any
person who was an officer, director or trustee at any time after the date on
which the Board of Directors of the Bank and the Board of Trustees of the Mutual
Holding Company adopted the Plan) may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the
Department. This restriction does not apply, however, to the
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purchase of stock pursuant to any tax-qualified employee stock benefit plan,
such as the ESOP, or by any non-tax-qualified employee stock benefit plan
following stockholder approval of such plan.
Pursuant to Department regulations, the Company will generally be
prohibited from repurchasing any shares of Common Stock within one year
following consummation of the Conversion. During the second and third years
following consummation of the Conversion, the Company may not repurchase any
shares of its Common Stock in excess of 5% of its outstanding capital stock
during a 12-month period, without the prior written approval of the Department.
In addition, the FDIC prohibits an institution which has converted from mutual
to stock form of ownership from repurchasing its capital stock within one year
following the date of its conversion to stock form, except that stock
repurchases of no greater than 5% of a bank's outstanding capital stock may be
repurchased during this one-year period where compelling and valid business
reasons are established to the satisfaction of the FDIC.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
As described below, certain provisions in the Company's Certificate of
Incorporation and Bylaws and in the Company's and the Bank's benefit plans,
together with provisions of Delaware corporate law, may have anti-takeover
effects. In addition, regulatory restrictions may make it difficult for persons
or companies to acquire control of either the Company or the Bank. Below is a
summary of certain material restrictions on acquisitions of the Company and the
Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
GENERAL. A number of provisions of the Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws which might
be deemed to have a potential "anti-takeover" effect. These provisions may have
the effect of discouraging a future takeover attempt which is not approved by
the Board of Directors but which individual Company stockholders may deem to be
in their best interests or in which stockholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not have
an opportunity to do so. Such provisions will also render the removal of the
current Board of Directors or management of the Company more difficult. The
following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
LIMITATION ON VOTING RIGHTS. Article 12.B. of the Company's Certificate of
Incorporation provides that no person shall directly or indirectly offer to
acquire or acquire the beneficial ownership of (i) more than 10% of the issued
and outstanding shares of any class of an equity security of the Company, or
(ii) any securities convertible into, or exercisable for, any equity securities
of the Company if, assuming conversion or exercise by such person of all
securities of which such person is the beneficial owner which are convertible
into, or exercisable for, such equity securities (but of no securities
convertible into, or exercisable for, such equity securities of which such
person is not the beneficial owner), such person would be the beneficial owner
of more than 10% of any class of an equity security of the Company. The terms
"person" and "beneficial ownership" are broadly defined to prevent circumvention
of this restriction.
The foregoing restrictions do not apply to (i) any offer with a view toward
public resale made exclusively to the Company by underwriters or a selling group
acting on its behalf, (ii) any tax-qualified employee benefit plan or
arrangement established by the Company or the Bank and any trustee of such a
plan or arrangement, and (iii) any other offer or acquisition approved in
advance by the affirmative vote of two-thirds of the Company's entire Board of
Directors. In the event that shares are acquired in violation of Article 12.B.,
all
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shares beneficially owned by any person in excess of 10% shall be considered
"Excess Shares" and shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with any
matters submitted to stockholders for a vote, and the Board of Directors may
cause such Excess Shares to be transferred to an independent trustee for sale on
the open market or otherwise, with the expenses of such trustee to be paid out
of the proceeds of sale. In addition, the Company may refuse to recognize any
transfer or attempted transfer of the Company's equity securities which would
result in the transferee becoming the beneficial owner of Excess Shares.
BOARD OF DIRECTORS. Article 7.A. of the Certificate of Incorporation of
the Company contains provisions relating to the Board of Directors and provides,
among other things, that the Board of Directors shall be divided into three
classes as nearly equal in number as possible, with the term of office of one
class expiring each year. See "Management -- Management of the Company." The
classified Board is intended to provide for continuity of the Board of Directors
and to make it more difficult and time consuming for a stockholder group to
fully use its voting power to gain control of the Board of Directors without the
consent of the incumbent Board of Directors of the Company. Cumulative voting in
the election of directors is not permitted.
Directors may be removed only for cause at a duly constituted meeting of
stockholders called expressly for that purpose upon the vote of the holders of
at least 80% of the total votes eligible to be cast by stockholders. Cause for
removal shall exist only if the director whose removal is proposed has been
either declared incompetent by order of a court, convicted of a felony or of an
offense punishable by imprisonment for a term of more than one year by a court
of competent jurisdiction, or deemed liable by a court of competent jurisdiction
for gross negligence or misconduct in the performance of such director's duties
to the Company. Any vacancy occurring in the Board of Directors for any reason
(including an increase in the number of authorized directors) may be filled by
the affirmative vote of a majority of the remaining directors, whether or not a
quorum of the Board of Directors is present, or the sole remaining director of
the Company, and a director appointed to fill a vacancy shall serve until the
expiration of the term to which he was appointed.
The Company's Bylaws govern nominations for election to the Board, and
requires all nominations for election to the Board of Directors other than those
made by the Board to be made by a stockholder eligible to vote at an annual
meeting of stockholders who has complied with the notice provisions in that
section. Written notice of a stockholder nomination must be delivered to, or
mailed to and received at, the principal executive offices of the Company not
later than 120 days prior to the anniversary date of the immediately preceding
annual meeting. Each such notice shall set forth certain information as
specified in Section 4.15 of the Bylaws, including (a) as to each person whom
the stockholder proposes to nominate as a director, and as to the stockholder
giving the notice, (i) the name, age, business address and residence address of
such person; (ii) the principal occupation or employment of such person; (iii)
the class and number of shares of the Company's stock beneficially owned by such
person; and (iv) such other information regarding such person as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the SEC; and (b) the name and address of any other stockholders supporting
such nominees and/or those affiliated with, controlling or under common control
with such persons, and the class and number of shares of the Company's stock
beneficially owned by such other stockholders.
The Company's Certificate of Incorporation provides that the personal
liability of the directors and officers of the Company for monetary damages
shall be eliminated to the fullest extent permitted by the General Corporation
Law of the State of Delaware as it exists on the effective date of the
Certificate of Incorporation or as such law may be thereafter in effect. Section
102(b)(7) of the Delaware General Corporation Law currently provides that
directors (but not officers) of corporations that have adopted such a provision
will not be so liable, except for (i) any breach of the director's duty of
loyalty to the corporation or its shareholders, (ii) acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) the payment of certain unlawful dividends and the making of certain stock
purchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. This provision would absolve directors of
personal liability for negligence in the performance of their duties, including
gross negligence. It would not permit a director to be exculpated, however, for
liability for actions involving conflicts of interest or breaches of the
traditional "duty of loyalty" to the Company and its stockholders, and it would
not affect the availability of injunctive or other equitable relief as a remedy.
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The Company's Bylaws provide that the Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a director, officer or employee of the Company or any predecessor of the
Company, or is or was serving at the request of the Company or any predecessor
of the Company as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines, excise taxes and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding to the fullest extent authorized by the General
Corporation Law of the State of Delaware, provided that the Company shall not be
liable for any amounts which may be due in connection with a settlement of any
action, suit or proceeding effected without its prior written consent or any
action, suit or proceeding initiated by any person seeking indemnification
thereunder without its prior written consent. The indemnification provisions
also permit the Company to pay reasonable expenses in advance of the final
disposition of any action, suit or proceeding as authorized by the Company's
Board of Directors, provided that the indemnified person undertakes to repay the
Company if it is ultimately determined that such person was not entitled to
indemnification. The rights of indemnification provided in the Company's
Certificate of Incorporation are not exclusive of any other rights which may be
available under the Company's Bylaws, any insurance or other agreement, by vote
of stockholders or directors (regardless of whether directors authorizing such
indemnification are beneficiaries thereof) or otherwise. In addition, the
Certificate of Incorporation authorizes the Company to maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Company, whether or not the Company would have the power to provide
indemnification to such person. These provisions are designed to reduce, in
appropriate cases, the risks incident to serving as a director, officer,
employee or agent and to enable the Company to attract and retain the best
personnel available.
The provisions regarding director elections and other provisions in the
Certificate of Incorporation and Bylaws are generally designed to protect the
ability of the Board of Directors to negotiate with the proponent of an
unfriendly or unsolicited proposal to take over or restructure the Company by
making it more difficult and time-consuming to change majority control of the
Board, whether by proxy contest or otherwise. The general effect of these
provisions will be to generally require at least two (and possibly three) annual
stockholders' meetings, instead of one, to effect a change in control of the
Board of Directors of the Company even if holders of a majority of the Company's
capital stock believed that a change in the composition of the Board of
Directors was desirable. Because a majority of the directors at any given time
will have prior experience as directors, these requirements will help to ensure
continuity and stability of the Company's management and policies and facilitate
long-range planning for the Company's business. The provisions relating to
removal of directors and filling of vacancies are consistent with and supportive
of a classified board of directors.
The procedures regarding stockholder nominations will provide the Board of
Directors with sufficient time and information to evaluate a stockholder nominee
to the Board and other relevant information, such as existing stockholder
support for the nominee. The proposed procedures, however, will provide
incumbent directors advance notice of a dissident slate of nominees for
directors, and will make it easier for the Board to solicit proxies resisting
such nominees. This may make it easier for the incumbent directors to retain
their status as directors, even when certain stockholders view the stockholder
nominations as in the best interests of the Company or its stockholders.
AUTHORIZED SHARES. Article 4 of the Certificate of Incorporation
authorizes the issuance of 125,000,000 shares of Common Stock and 25,000,000
shares of Preferred Stock. The shares of Common Stock and Preferred Stock were
authorized in an amount greater than that to be issued in the Conversion to
provide the Company's Board of Directors with as much flexibility as possible to
effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its fiduciary
duty to deter future attempts to gain control of the Company. The Board of
Directors also has sole authority to determine the terms of any one or more
series of Preferred Stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of Preferred Stock, the Board has the
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power, to the extent consistent with its fiduciary duty, to issue a series of
Preferred Stock to persons friendly to management in order to attempt to block a
post-tender offer merger or other transaction by which a third party seeks
control, and thereby assist management to retain its position. The Company's
Board currently has no plans for the issuance of additional shares, other than
the issuance of additional shares pursuant to stock benefit plans and to the
Foundation.
MEETINGS OF STOCKHOLDERS. The Company's Certificate of Incorporation
provides that any action required or permitted by the General Corporation Law of
the State of Delaware or the Certificate of Incorporation to be approved by or
consented to by the stockholders of the Company, must be effected at a duly
called annual or special meeting of stockholders and may not be effected by
written consent by stockholders in lieu of a meeting of stockholders. The
Certificate of Incorporation further provides that, with limited exceptions,
special meetings of stockholders may be called only by a three-fourths vote of
the Board of Directors.
STOCKHOLDER PROPOSALS. The Company's Bylaws provide that only such
business as shall have been properly brought before an annual meeting of
stockholders shall be conducted at the annual meeting. In order to be properly
brought before an annual meeting following completion of the Conversion,
business must be (a) brought before the meeting by or at the direction of the
Board of Directors or (b) otherwise properly brought before the meeting by a
stockholder who has given timely and complete notice thereof in writing to the
Company. For stockholder proposals to be included in the Company's proxy
materials, the stockholder must comply with all the timing and informational
requirements of Rule 14a-8 of the Exchange Act. With respect to stockholder
proposals to be considered at the annual meeting of stockholders but not
included in the Company's proxy materials, the stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 120 days prior to the anniversary date of the immediately
preceding annual meeting; provided, however, that with respect to the first
scheduled annual meeting following completion of the Conversion, such written
notice must be received by the Company not later than the close of business on
March 26, 1998. A stockholder's notice shall set forth as to each matter the
stockholder proposes to bring before the annual meeting certain information as
specified in Section 2.14 of the Bylaws, including (a) a brief description of
the proposal desired to be brought before the annual meeting, (b) the name and
address, as they appear on the Company's books, of the stockholder proposing
such business, and, to the extent known, any other stockholders known by such
stockholder to be supporting such proposal, (c) the class and number of shares
of the Company which are beneficially owned by the stockholder; and, to the
extent known, by any other stockholders known by such stockholder to be
supporting such proposal on the date of such stockholder notice, (d) the
identification of any person retained to make stockholder solicitations or
recommendations with respect to such proposal, and (e) any material interest of
the stockholder in such proposal. Any such proposal not made in accordance with
the Bylaws may be rejected.
The procedures regarding stockholder proposals are designed to provide the
Board with sufficient time and information to evaluate a stockholder proposal
and other relevant information, such as existing stockholder support for the
proposal. The proposed procedures, however, will give incumbent directors
advance notice of a stockholder proposal. This may make it easier for the
incumbent directors to defeat a stockholder proposal, even when certain
stockholders view such proposal as in the best interests of the Company or its
stockholders.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer to the Company from another party to (i) make a tender or exchange offer
for any equity security of the Company, (ii) merge or consolidate the Company
with another corporation or entity or (iii) purchase or otherwise acquire all or
substantially all of the properties and assets of the Company, may, consistent
with the exercise of its fiduciary duties and in connection with the exercise of
its judgment in determining what is in the best interest of the Company and the
stockholders of the Company, give due consideration to the extent permitted by
law not only to the price or other consideration being offered, but also to all
other relevant factors, including, without limitation, the financial and
managerial resources and future prospects of the other party, the possible
effects on the business of the Company and its subsidiaries and on the
employees, customers, suppliers and creditors of the Company and its
subsidiaries, and the effects on the communities in which the Company's and its
subsidiaries' facilities are located. By having
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these standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then market
price of any equity security of the Company.
STOCKHOLDER APPROVAL OF MERGERS AND CERTAIN OTHER EXTRAORDINARY
TRANSACTIONS. Article 11 of the Company's Certificate of Incorporation provides
that any action taken by stockholders under Subchapter IX of the Delaware
General Corporation Law (which relates to merger or consolidation transactions)
and Subchapter X (which relates to sale of assets, dissolution and winding up
transactions) shall, with certain exceptions, generally require the affirmative
vote of at least 80% of the votes eligible to be cast by stockholders. The
supermajority 80% vote requirement of Article 11 of the Certificate of
Incorporation shall not be applicable to any transaction approved in advance by
at least two-thirds of the entire Board of Directors of the Company, in which
case the transaction will require only such stockholder approval as specified
under Delaware law. The Delaware General Corporation Law requires the approval
of the Board of Directors and the holders of a majority of the outstanding stock
of the Company entitled to vote thereon for mergers of consolidations, and for
sales, leases or exchanges of all substantially all of the Company's assets. The
Delaware General Corporation Law permits the Company to merge with another
corporation without obtaining the approval of the Company's stockholders if: (i)
the Company is the surviving corporation of the merger; (ii) the merger
agreement does not amend the Company's Certificate of Incorporation; (iii) each
share of the Company's stock outstanding immediately prior to the effective date
of the merger is to be an identical outstanding or treasury share of the Company
after the merger; and (iv) any authorized but unissued shares or treasury shares
of Common Stock to be issued or delivered under the plan of merger plus those
initially issuable upon conversion of any other securities or obligations to be
issued or delivered under such plan do not exceed 20% of the shares of the
Common Stock outstanding immediately prior to the effective date of the merger.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Article 13 of the
Company's Certificate of Incorporation generally provides that any amendment of
the Certificate of Incorporation must be approved first by a majority of the
Board of Directors and then by the holders of 80% of the shares of the Company
entitled to vote in an election of directors, except that the approval of only a
majority of the shares of the Company entitled to vote in an election of
directors is required for any amendment previously approved by at least
two-thirds of the entire Board of Directors.
The Bylaws of the Company may be amended by a majority of the Board of
Directors or by the affirmative vote of a majority of the total shares entitled
to vote in an election of directors, except that the affirmative vote of at
least 80% of the total shares entitled to vote in an election of directors shall
be required to amend, adopt, alter, change or repeal any provision inconsistent
with certain specified provisions of the Bylaws.
DELAWARE CORPORATE LAW
In addition to the provisions contained in the Company's Certificate of
Incorporation, the Delaware General Corporation Law ("GCL") includes certain
provisions applicable to Delaware corporations, such as the Company, which may
be deemed to have an anti-takeover effect. Such provisions include requirements
relating to certain business combinations.
Section 203 of the GCL ("Section 203") imposes certain restrictions on
business combinations between the Company and large shareholders. Specifically,
Section 203 prohibits a "business combination" (as defined in Section 203,
generally including mergers, sales and leases of assets, issuances of securities
and similar transactions) between the Company or a subsidiary and an "interested
shareholder" (as defined in Section 203, generally the beneficial owner of 15%
or more of the Company Common Stock) within three years after the person or
entity becomes an interested shareholder, unless (i) prior to the person or
entity becoming an interested shareholder, the business combination or the
transaction pursuant to which such person or entity became an interested
shareholder shall have been approved by the Company's Board of Directors, (ii)
upon consummation of the transaction in which the interested shareholder became
such, the interested shareholder holds at least 85% of the Company Common Stock
(excluding shares held by persons
125
<PAGE> 164
who are both officers and directors and shares held by certain employee benefit
plans), or (iii) the business combination is approved by the Company's Board of
Directors and by the holders of at least two-thirds of the outstanding Company
Common Stock, excluding shares owned by the interested shareholders.
One of the effects of Section 203 may be to prevent highly leveraged
takeovers, which depend upon getting access to the acquired corporation's assets
to support or repay acquisition indebtedness and certain coercive acquisition
tactics. By requiring approval of the holders of two-thirds of the shares held
by disinterested shareholders for business combinations involving an interested
shareholder, Section 203 may prevent any interested shareholder from taking
advantage of its position as a substantial, if not controlling, shareholder and
engaging in transactions with the Company that may not be fair to the Company's
other shareholders or that may otherwise not be in the best interests of the
Company, its shareholders and other constituencies.
For similar reasons, however, these provisions may make more difficult or
discourage an acquisition of the Company, or the acquisition of control of the
Company by a principal shareholder, and thus the removal of incumbent
management. In addition, to the extent that Section 203 discourages takeovers
that would result in the change of the Company's management, such a change may
be less likely to occur.
ANTI-TAKEOVER EFFECTS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS AND
MANAGEMENT REMUNERATION ADOPTED IN THE CONVERSION
The foregoing provisions of the Certificate of Incorporation and Bylaws of
the Company and Delaware law could have the effect of discouraging an
acquisition of the Company or stock purchases in furtherance of an acquisition,
and could accordingly, under certain circumstances, discourage transactions
which might otherwise have a favorable effect on the price of the Company's
Common Stock. In addition, such provisions may result in the Company being
deemed to be less attractive to a potential acquiror and/or might result in
stockholders receiving a lesser amount of consideration for their shares of
Common Stock than otherwise could have been available.
In addition, the Company and the Bank intend to enter into agreements with
certain of their officers upon consummation of the Conversion which provide such
officers with additional payments upon the officers' termination in connection
with a change in control of the Company or the Bank. See "Management -- Change
in Control Agreements." The foregoing provisions and limitations may make it
more difficult for companies or persons to acquire control of the Bank.
Additionally, the provisions could deter offers to the stockholders which might
be viewed by such stockholders to be in their best interests.
The Board of Directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated with and approved by the Board of Directors
of the Company. The Board of Directors believes that these provisions are in the
best interests of the Company and its future stockholders. In the Board of
Directors' judgment, the Board of Directors is in the best position to determine
the true value of the Company and to negotiate more effectively for what may be
in the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interests of the Company and its future
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors and that these provisions will encourage such negotiations
and discourage hostile takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at prices reflective of the true value of the Company and
where the transaction is in the best interests of all stockholders.
Despite the Board of Directors' belief as to the benefits to the Company's
stockholders of the foregoing provisions, these provisions also may have the
effect of discouraging a future takeover attempt in which stockholders might
receive a substantial premium for their shares over then current market prices
and may tend to perpetuate existing management. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. The Board of Directors, however, has concluded that the potential
benefits of these provisions outweigh their possible disadvantages.
126
<PAGE> 165
The Board of Directors of the Company and the Bank are not aware of any
effort that might be made to acquire control of the Bank or the Company.
REGULATORY RESTRICTIONS
CHANGE IN BANK CONTROL ACT. The Change in Bank Control Act provides that no
person, acting directly or indirectly or through or in concert with one or more
other persons, may acquire control of a savings and loan holding company unless
the OTS has been given 60 days' prior written notice. The HOLA provides that no
company may acquire "control" of a savings and loan holding company without the
prior approval of the OTS. Any company that acquires such control becomes a
savings and loan holding company subject to registration, examination and
regulation by the OTS. Pursuant to federal regulations, control of a savings and
loan holding company is conclusively deemed to have been acquired by, among
other things, the acquisition of more than 25% of any class of voting stock of
the institution or the ability to control the election of a majority of the
directors of an institution. Moreover, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock, or of more than 25% of any class of stock, of a savings
and loan holding company where certain enumerated "control factors" are also
present in the acquisition. The OTS may prohibit an acquisition if (i) it would
result in a monopoly or substantially lessen competition, (ii) the financial
condition of the acquiring person might jeopardize the financial stability of
the institution, or (iii) the competence, experience or integrity of the
acquiring person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of control by such person.
The foregoing restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25% of any class of equity security.
NEW YORK STATE BANKING BOARD CONVERSION REGULATIONS. Regulations of the
New York Banking Board prohibit any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The New York Banking Board regulations also
prohibit any person, prior to the completion of the Conversion, from offering,
or making an announcement of an offer or intent to make an offer, to purchase
such subscription rights or Common Stock. See "The Conversion -- Restrictions on
Transfer of Subscription Rights and Shares."
For one year following the Conversion, the New York Banking Board
regulations prohibit any person from acquiring or making an offer to acquire
more than 10% of the stock of any converted savings institution, except with the
prior approval of the Superintendent.
NEW YORK STATE BANK HOLDING COMPANY LAW. Under the New York Banking Law,
the prior approval of the New York 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 to be
merged or consolidated with a subsidiary of a bank holding company; (3) any bank
holding company acquires direct or indirect ownership or control of more than 5%
of the voting stock of a banking institution; (4) any bank holding company or
subsidiary thereof acquires all or substantially all of the assets of a banking
institution; or (5) any action is taken that causes any bank holding company to
merge or consolidate with another bank holding company. See "Regulation -- The
Company -- Restrictions on Acquisition."
NEW YORK STATE CHANGE IN CONTROL LAW. Prior approval of the New York
Banking Board is also required before any action is taken that causes any
company to acquire direct or indirect control of a banking institution. Control
is presumed to exist if any company directly or indirectly owns, controls or
holds with power to vote 10% or more of the voting stock of a banking
institution or of any company that owns, controls or holds with power to vote
10% or more of the voting stock of a banking institution. Accordingly, prior
approval of the New York Banking Board would be required before any company
could acquire 10% or more of the Common Stock of the Company.
127
<PAGE> 166
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 125,000,000 shares of Common Stock
having a par value of $0.01 per share and 25,000,000 shares of preferred stock
having a par value of $0.01 per share (the "Preferred Stock"). The Company
currently expects to issue up to a maximum of 61,226,852 shares (70,410,880
shares in the event that the maximum of the Valuation Range is increased by 15%)
of Common Stock and no shares of Preferred Stock in the Conversion. Each share
of the Company's Common Stock will have the same relative rights as, and will be
identical in all respects with, each other share of Common Stock. Upon payment
of the Purchase Price for the Common Stock in accordance with the Plan of
Conversion, all such stock will be duly authorized, fully paid and
nonassessable. Presented below is a description of all aspects of the Company's
capital stock which are deemed material to an investment decision with respect
to the Conversion.
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
DISTRIBUTIONS. The Company can pay dividends if, as and when declared by
its Board of Directors, subject to compliance with limitations which are imposed
by law. See "Dividend Policy." The holders of Common Stock of the Company will
be entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Company out of funds legally available therefor.
If the Company issues Preferred Stock, the holders thereof may have a priority
over the holders of the Common Stock with respect to dividends.
VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Each holder of Common Stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. Cumulative voting
means that holders of stock of a corporation are entitled, in the election of
directors, to cast a number of votes equal to the number of shares which they
own multiplied by the number of directors to be elected Because a stockholder
entitled to cumulative voting may cast all of his votes for one nominee or
disperse his votes among nominees as he chooses, cumulative voting is generally
considered to increase the ability of minority stockholders to elect nominees to
a corporation's board of directors. Under certain circumstances, shares in
excess of 10.0% of the issued and outstanding shares of Common Stock may be
considered "Excess Shares" and, accordingly, not be entitled to vote. See
"Restrictions on Acquisition of the Company and the Bank." If the Company issues
Preferred Stock, holders of the Preferred Stock may also possess voting rights.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "The
Conversion -- Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
128
<PAGE> 167
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control. The Company has
no present plans to issue Preferred Stock.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Amended and Restated Organization Certificate of the Bank authorizes
the issuance of capital stock consisting of 100 shares of common stock, par
value $1.00 per share. Each share of common stock of the Bank will have the same
relative rights as, and will be identical in all respects with, each other share
of common stock. After the Conversion, the Board of Directors will be authorized
to approve the issuance of common stock up to the amount authorized by the
Amended and Restated Organization Certificate without the approval of the
Company's stockholders. Upon Conversion, all of the issued and outstanding
common stock of the Bank will be held by the Company as the Bank's sole
stockholder. The capital stock of the Bank will represent nonwithdrawable
capital, will not be an account of an insurable type, and will not be insured by
the FDIC. Presented below is a description of all aspects of the Bank's capital
stock which are deemed material to an investment decision with respect to the
Conversion.
DIVIDENDS
The holders of the Bank's common stock will be entitled to receive and to
share equally in such dividends as may be declared by the Board of Directors of
the Bank out of funds legally available therefore. See "Dividend Policy" for
certain restrictions on the payment of dividends.
VOTING RIGHTS
Immediately after the Conversion, the holders of the Bank's common stock,
which will consist solely of the Company, will possess exclusive voting rights
in the Bank. Each holder of shares of common stock will be entitled to one vote
for each share held and there shall be no right to cumulate votes.
LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the Bank,
the holders of common stock will be entitled to receive, after payment of all
debts and liabilities of the Bank (including all deposit accounts and accrued
interest thereon), and distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders,
all assets of the Bank available for distribution in cash or in kind. If
additional preferred stock is issued subsequent to the Conversion, the holders
thereof may also have priority over the holders of common stock in the event of
liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION
Holders of the common stock of the Bank will not be entitled to preemptive
rights with respect to any shares of the Bank which may be issued. The common
stock will not be subject to redemption. Upon receipt by the Bank of the full
specified purchase price therefor, the common stock will be fully paid and
nonassessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
Registrar and Transfer Company.
129
<PAGE> 168
EXPERTS
The consolidated financial statements of the Bank as of March 31, 1997 and
1996, and for each of the years in the three-year period ended March 31, 1997,
included in the Prospectus have been audited by Ernst & Young LLP, independent
certified public accountants, as stated in their report appearing elsewhere
herein, and have been so included in reliance upon the report of such firm,
given upon their authority as experts in accounting and auditing.
William M. Mercer, Incorporated has consented to the publication herein of
the summary of its opinion relating to compensation matters.
RP Financial has consented to the publication herein of the summary of its
report to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its opinion with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the Federal income tax consequences of
the Conversion will be passed upon for the Bank and the Company by Elias, Matz,
Tiernan & Herrick L.L.P., Washington, D.C., special counsel to the Bank and the
Company. The New York income tax consequences of the Conversion will be passed
upon for the Bank and the Company by Ernst & Young LLP. The federal income tax
consequences of certain matters relating to establishment of the Foundation
(including, among other things, the qualification of the Foundation as a
charitable organization and the deductibility of the contribution thereto for
income tax purposes) will be passed upon for the Bank and the Company by Potter
Anderson & Corroon. Certain legal matters will be passed upon for Sandler
O'Neill by Muldoon, Murphy & Faucette, Washington, D.C.
130
<PAGE> 169
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. Such information, including
the Conversion Valuation Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company. The
appraisal report of RP Financial may also be inspected at the administrative
offices of the Bank located at 195 Montague Street, Brooklyn, New York during
normal business hours. The statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
Registration Statement are, of necessity, brief descriptions thereof and are not
necessarily complete.
The Bank has filed an Application for Conversion with the Superintendent
with respect to the Conversion. This Prospectus omits certain information
contained in that application. The Application may be examined at the office of
the Superintendent, Two Rector Street, New York, New York 10006.
The Company has filed with the Office of Thrift Supervision an Application
to Form a Holding Company. This Prospectus omits certain information contained
in such Application. Such Application may be inspected at the offices of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion.
A copy of the Plan of Conversion and Certificate of Incorporation and the
Bylaws of the Company and the Amended and Restated Organization Certificate and
Bylaws of the Bank are available without charge from the Bank.
131
<PAGE> 170
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Statements of Financial Condition at August 31, 1997 (unaudited) and at
March 31, 1997 and 1996............................................................. F-3
Consolidated Statements of Income for the five months ended August 31, 1997 and 1996
(unaudited) and for the years ended March 31, 1997, 1996 and 1995................... 38
Consolidated Statements of Changes in Stockholders' Equity for the five months ended
August 31, 1997 and 1996 (unaudited) and for the years ended March 31, 1997, 1996
and 1995............................................................................ F-4
Consolidated Statements of Cash Flows for the five months ended August 31, 1997 and
1996 (unaudited) and for the years ended March 31, 1997, 1996 and 1995.............. F-5
Notes to Consolidated Financial Statements............................................ F-6
</TABLE>
All schedules are omitted as the required information is not applicable or the
information is presented in the Consolidated Financial Statements.
The Mutual Holding Company has limited assets other than its shares of Bank
Common Stock (which will be cancelled in connection with the Conversion);
accordingly, the financial statements of the Mutual Holding Company have been
omitted because of their immateriality.
The financial statements of Independence Community Bank Corp. have been omitted
because Independence Community Bank Corp. has only an initial capitalization of
$1,000, has no other assets or liabilities, and has not conducted any business
other than of an organizational nature.
F-1
<PAGE> 171
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Independence Savings Bank
We have audited the accompanying consolidated statements of financial
condition of Independence Savings Bank (the "Bank") as of March 31, 1997 and
1996, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for each of the three years in the period
ended March 31, 1997. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Independence
Savings Bank at March 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
[ERNST & YOUNG LLP]
New York, New York
May 29, 1997
F-2
<PAGE> 172
INDEPENDENCE SAVINGS BANK
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
AUGUST 31, -------------------------
1997 1997 1996
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and due from banks................................ $ 39,893 $ 310,429 $ 44,410
Certificates of deposit................................ 72,659 -- --
Commercial paper....................................... -- 39,866 --
Federal funds sold..................................... 72,977 24,341 58,782
---------- ---------- ----------
Total cash and cash equivalents................... 185,529 374,636 103,192
Investment securities, held-to-maturity (estimated fair
value of $39,931).................................... -- -- 39,995
Mortgage-backed and mortgage related securities,
held-to-maturity (estimated fair value of
$121,698)............................................ -- -- 120,702
Securities available-for-sale:
Debt and equity...................................... 553,774 357,487 683,828
Mortgage-backed and mortgage related................. 167,339 190,979 395,321
---------- ---------- ----------
Total securities.................................. 721,113 548,466 1,239,846
Mortgage loans on real estate.......................... 2,192,115 2,065,153 1,894,926
Other loans............................................ 516,406 464,960 448,410
---------- ---------- ----------
Total loans....................................... 2,708,521 2,530,113 2,343,336
Less allowance for possible loan losses................ (31,115) (27,024) (20,528)
---------- ---------- ----------
Total loans, net.................................. 2,677,406 2,503,089 2,322,808
Premises, furniture and equipment, net................. 61,057 60,367 51,906
Accrued interest receivable............................ 25,863 17,384 21,070
Intangible assets, net................................. 60,935 60,499 80,268
Other assets........................................... 62,304 168,875 50,692
---------- ---------- ----------
Total assets................................. $3,794,207 $3,733,316 $3,869,782
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Savings accounts..................................... $1,017,793 $1,018,199 $1,109,503
Money market accounts................................ 216,543 218,230 215,545
Demand deposit accounts.............................. 347,406 345,373 274,594
Time deposit accounts................................ 1,790,214 1,743,756 1,797,248
---------- ---------- ----------
Total deposits.................................... 3,371,956 3,325,558 3,396,890
Due to banks........................................... -- -- 215
Borrowings............................................. 17,109 17,232 57,295
Escrow and other deposits.............................. 34,804 41,034 35,597
Accrued expenses and other liabilities................. 45,569 40,378 89,966
---------- ---------- ----------
Total liabilities................................. 3,469,438 3,424,202 3,579,963
Stockholder's equity:
Common stock ($1.00 par value, 100 shares authorized,
issued and outstanding)........................... -- -- --
Contributed capital.................................. 52,670 52,670 52,670
Surplus.............................................. 56,158 55,812 53,791
Undivided profits.................................... 210,899 200,264 185,105
Net unrealized gain (loss) on securities
available-for-sale, net of tax.................... 5,042 368 (1,747)
---------- ---------- ----------
Total stockholder's equity........................ 324,769 309,114 289,819
---------- ---------- ----------
Total liabilities and stockholder's equity... $3,794,207 $3,733,316 $3,869,782
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 173
INDEPENDENCE SAVINGS BANK
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FIVE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) AND
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
COMMON CONTRIBUTED UNDIVIDED ON SECURITIES
STOCK(a) CAPITAL SURPLUS PROFITS AVAILABLE-FOR-SALE TOTAL
-------- ----------- ------- --------- ------------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance -- March 31, 1994................. $ -- $52,670 $46,704 $ 121,316 $ -- $220,690
Unrealized net gain, net of tax, upon
adoption of SFAS 115.................... -- -- -- -- 2,718 2,718
Changes in net unrealized gains in
securities available-for-sale, net of
tax..................................... -- -- -- -- 885 885
Net income for the year ending March 31,
1995.................................... -- -- 3,490 31,414 -- 34,904
----- -------- -------- -------- ------- --------
Balance -- March 31, 1995................. -- 52,670 50,194 152,730 3,603 259,197
Net unrealized loss on securities
transferred from held-to-maturity to
available-for-sale, net of tax.......... -- -- -- -- (1,826) (1,826)
Changes in net unrealized losses in
securities available-for-sale, net of
tax..................................... -- -- -- -- (3,524) (3,524)
Net income for the year ended March 31,
1996.................................... -- -- 3,597 32,375 -- 35,972
----- -------- -------- -------- ------- --------
Balance -- March 31, 1996................. -- 52,670 53,791 185,105 (1,747) 289,819
Net unrealized gain on securities
transferred from held-to-maturity to
available-for-sale, net of tax.......... -- -- -- -- 269 269
Changes in net unrealized gains in
securities available-for-sale, net of
tax..................................... -- -- -- -- 1,846 1,846
Net income for the year ended March 31,
1997.................................... -- -- 2,021 15,159 -- 17,180
----- -------- -------- -------- ------- --------
Balance -- March 31, 1997................. -- 52,670 55,812 200,264 368 309,114
----- -------- -------- -------- ------- --------
Changes in net unrealized gains in
securities available-for-sale, net of
tax (unaudited)......................... -- -- -- -- 4,674 4,674
Net income for the five months ended
August 31, 1997 (unaudited)............. -- -- 346 10,635 -- 10,981
----- -------- -------- -------- ------- --------
Balance -- August 31, 1997 (unaudited).... $ -- $52,670 $56,158 $ 210,899 $ 5,042 $324,769
===== ======== ======== ======== ======= ========
</TABLE>
- ---------------
(a) $1.00 par value, 100 shares common stock authorized, issued and outstanding.
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 174
INDEPENDENCE SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
AUGUST 31, YEAR ENDED MARCH 31,
--------------------- -----------------------------------
1997 1996 1997 1996 1995
--------- --------- --------- ----------- ---------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................... $ 10,981 $ 11,821 $ 17,180 $ 35,972 $ 34,904
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses....................... 4,577 1,560 7,960 3,679 3,592
Net (gain) loss on sale of loans and
securities.................................... (13) 282 3,347 (12,222) 3,952
Amortization of deferred income and premiums.... (3,905) (5,791) (11,164) (6,631) (2,888)
Amortization of intangibles..................... 3,678 3,901 8,278 1,842 905
Depreciation and amortization................... 2,777 2,227 5,972 3,545 2,218
Deferred income tax benefit..................... (1,753) 2,786 (7,137) (1,416) (1,946)
Change in assets and liabilities net of effects
from purchase of Bay Ridge Bancorp.
(Increase) decrease in accrued interest
receivable.................................... (8,479) (1,166) 3,687 (1,291) 2,318
Decrease (increase) in accounts
receivable-securities transactions............ 107,244 -- (107,624) -- --
Decrease in due to banks........................ -- (215) (215) (729) (5,183)
Increase (decrease) in accrued expenses and
other liabilities............................. 5,191 (45,554) (49,588) 62,732 (4,357)
Other, net...................................... (1,192) 1,326 (6,625) (858) 154
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities.................................... 119,106 (28,723) (135,929) 84,623 33,669
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and purchases................. (332,894) (309,566) (503,153) (232,485) (578,437)
Principal payments on loans..................... 148,700 110,554 261,161 189,064 116,129
Proceeds from sale of loans..................... 4,545 2,947 76,002 8,686 133,672
Proceeds from sale of securities
available-for-sale............................ 178,591 241,633 648,416 175,691 99,254
Proceeds from maturities of securities
available-for-sale............................ 104,284 570,000 823,825 302,966 62,100
Principal collected on securities
available-for-sale............................ 23,886 285 1,177 318 --
Purchases of securities available-for-sale...... (468,098) (486,635) (927,977) (1,178,896) (57,381)
Proceeds from sale of investment securities..... -- -- -- -- 142,742
Proceeds from maturities of investment
securities.................................... -- -- -- 4,000 21,562
Principal collected on investment securities.... -- -- -- 228 8,809
Purchases of investment securities.............. -- -- -- -- (4,983)
Principal collected on mortgage-backed and
mortgage related securities................... -- 72,335 146,836 60,920 67,849
Proceeds from sales of other real estate........ 220 725 1,308 2,512 1,154
Purchases of Federal Home Loan Bank stock....... -- -- (3,579) -- (2,460)
Net additions to premises, furniture and
equipment..................................... (3,467) (6,801) (14,433) (6,242) (12,741)
Payment for purchase of Bay Ridge Bancorp, net
of cash acquired.............................. -- -- -- (74,731) --
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing
activities.................................... 344,233 195,477 509,583 (747,969) (2,731)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits sold, net of premium................... -- -- (47,661) -- --
Deposits purchased, net of premium.............. 65,972 -- -- 560,948 20,432
Net (decrease) increase in demand and savings
deposits...................................... (23,343) (20,125) 2,276 (14,291) (225,558)
Net (decrease) increase in time deposits........ (256) (64,449) (22,199) 120,861 234,108
Net (decrease) increase in other borrowings..... (123) (39,243) (40,063) (11,453) 7,159
Net (decrease) increase in escrow and other
deposits...................................... (6,230) (6,862) 5,437 79 5,648
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities.................................... 36,020 (130,679) (102,210) 656,144 41,789
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash
equivalents................................... (189,107) 33,643 271,444 (7,202) 72,727
Cash and cash equivalents at beginning of
year.......................................... 374,636 103,192 103,192 110,394 37,667
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period...... $ 185,529 $ 136,835 $ 374,636 $ 103,192 $ 110,394
========= ========= ========= ========= =========
Income taxes paid............................... $ 6,000 $ 18,200 $ 25,200 $ 30,383 $ 31,394
========= ========= ========= ========= =========
Interest paid................................... $ 48,132 $ 47,465 $ 138,823 $ 110,586 $ 76,483
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 175
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
1. GENERAL
Independence Savings Bank (the "Bank") is a New York State chartered stock
form savings bank which provides financial services primarily to individuals and
small businesses within the New York metropolitan area. The Bank is subject to
regulation by the Federal Deposit Insurance Corp. ("FDIC") and New York State
Banking Department. Independence Savings Bank is the wholly-owned, sole
subsidiary of Independence Community Bank Corp. ("ICBC").
2. ACQUISITIONS
On January 3, 1996, the Bank acquired, via a cash acquisition, the stock of
Bay Ridge Bancorp, Inc. and its thrift subsidiary, Bay Ridge Federal Savings
Bank. The purchase price paid was approximately $127.8 million, and as a result
the Bank acquired approximately $558.6 million in assets and $445.2 million in
liabilities, with the transaction recorded on a purchase accounting basis. The
cost in excess of the net assets acquired is being amortized on a straight-line
basis over approximately 14 years.
On March 15, 1996, the Bank assumed approximately $615.6 million of
deposits and acquired $8.1 million in assets from First Nationwide Bank ("FNB").
The Bank also received approximately $557.9 million in cash from FNB to fund the
assumption of these deposit liabilities. The Bank subsequently sold, in
September of 1996, approximately $51.4 million of these deposits. The adjusted
cost in excess of the assets received and the deposits assumed is being
amortized on a straight-line basis over 7 years.
On April 25, 1997, the Bank assumed approximately $70.0 million of deposits
and acquired $1.1 million in assets from Apple Bank for Savings ("ABS"). The
Bank also received approximately $64.9 million in cash from ABS to fund the
assumption of these deposit liabilities. The adjusted cost in excess of the
assets received and the deposits assumed is being amortized on a straight-line
basis over 7 years.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies of
the Bank and its subsidiaries. These policies conform to generally accepted
accounting principles.
Principles of Consolidation
The consolidated financial statements of the Bank include all
majority-owned subsidiaries, after elimination of intercompany transactions and
accounts.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year's presentation.
F-6
<PAGE> 176
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment, Mortgage-backed and Mortgage Related Securities Held-to-Maturity
Investment, mortgage-backed and mortgage related securities
held-to-maturity are stated at cost, adjusted for amortization of premiums and
discounts which are recognized as adjustments to interest income over the life
of the security so as to provide a level yield.
To the extent management determines a decline in value in an investment,
mortgage-backed or mortgage related security held-to-maturity to be other than
temporary the Bank will provide allowances and will reflect such provisions in
the consolidated statements of income.
Gains or losses on disposition of investment, mortgage-backed and mortgage
related securities held-to-maturity are based on the net proceeds, minus the
adjusted carrying amount of the securities sold, using the specific
identification method.
In March 1997, all remaining investment, mortgage-backed and mortgage
related securities classified as held-to-maturity were reclassified to
available-for-sale (see Notes 5 and 6).
Securities Available-for-Sale
Securities available-for-sale are carried at fair value. Unrealized gains
or losses on securities available-for-sale are included as a separate component
of stockholder's equity, net of tax. Gains or losses on such securities are
recognized using the specific identification method.
Loans
Loans are stated at unpaid principal balances, net of deferred net loan
origination and commitment fees. Interest income on loans is credited as earned.
Accrual of interest income is discontinued and uncollected interest is reversed
for loans on which a default on interest has existed for a period in excess of
90 days, or for loans which management believes, after giving consideration to
economic and business conditions and collection efforts, collection of interest
is doubtful.
Loan origination and commitment fees and certain direct costs incurred in
connection with loan originations are deferred and amortized to interest income,
using a method which approximates the interest method, over the life of the
related loans as an adjustment to yield.
Allowance for Loan Losses
The allowance for loan losses is determined based upon management's
evaluation of the Bank's loan portfolios considering past loan loss experience,
assessment of current and prospective economic conditions, the size and
composition of the loan portfolios, and other relevant factors.
Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that may
be susceptible to significant change. In the opinion of management, the
allowance, when taken as a whole, is adequate to absorb reasonable estimated
loan losses inherent in the Bank's loan portfolios.
Premises, Furniture and Equipment
Land is carried at cost. Buildings and improvements, leasehold
improvements, furniture, automobiles and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed on a
F-7
<PAGE> 177
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
straight-line basis over the estimated useful lives of the assets. The estimated
useful lives of the assets are as follows:
<TABLE>
<S> <C>
Buildings............................................. 10 to 55 years
Furniture and equipment............................... 3 to 10 years
Automobiles........................................... 3 years
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the
lives of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
Income Taxes
The Bank uses the liability method to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws expected to be in effect when the
differences are expected to reverse.
Stockholder's Equity -- Surplus
In accordance with the New York State Banking Law and New York State
Banking Board Regulations, the Bank credits 10% of quarterly net income to
surplus and is required to do so until such time as stockholder's equity is
equal to 10% of amounts due to depositors.
Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Bank defines
cash and cash equivalents as highly liquid investments with original maturities
of three months or less.
Recently Adopted Accounting Pronouncements
On April 1, 1995, the Bank adopted Statement of Financial Accounting
Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures." Under SFAS No. 114, a loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the loan's
contractual terms. Impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The adoption of SFAS No. 114 did not have a material
impact on the Bank's financial statements.
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995 and establishes accounting standards for
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement requires that
long-lived assets and certain identifiable intangibles, to be held and used by
an entity, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows is less
than the carrying amount of the asset, an impairment loss should be recognized.
This
F-8
<PAGE> 178
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statement requires that long-lived assets and certain identifiable intangibles
to be disposed of be reported at the lower of carrying amount or fair value less
cost to sell. The Bank adopted SFAS No. 121 on April 1, 1996. The adoption of
SFAS No. 121 did not have an impact on the Bank's financial statements.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" which provides
accounting and reporting standards for sales, securitizations, and servicing of
receivables and other financial assets, secured borrowing and collateral
transactions, and the extinguishments of liabilities. The standard requires an
entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when control has
been surrendered in accordance with criteria provided in SFAS No. 125. SFAS No.
125 supersedes SFAS No. 122, "Accounting for Mortgage Servicing Rights" and is
to be applied to transactions occurring after December 31, 1996. The adoption of
SFAS No. 125 did not have a material impact on the Bank's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management is in the process of determining
the impact, if any, this statement will have on the Bank.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 requires disclosures for
each segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader geographic
regions as permitted under current standards. SFAS No. 131 is effective for
fiscal year beginning after December 15, 1997 with earlier application
permitted.
4. CASH AND DUE FROM BANKS
Cash and due from banks at March 31, 1997 includes $270,173,600 on deposit
at the Federal Home Loan Bank of New York (the "FHLB"). This primarily
represents cash received from the sale of securities that settled on or prior to
March 31, 1997. These funds were invested by April 2, 1997 in U.S. Treasury
notes.
5. INVESTMENT SECURITIES HELD-TO-MATURITY
In March 1997, investment securities held-to-maturity with an amortized
cost of $31,291,800 and a net unrealized loss of $608,300 were reclassified to
available-for-sale. In reassessing the classification designation for each
security the Bank determined it no longer had the intent to hold these
securities to maturity.
F-9
<PAGE> 179
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
5. INVESTMENT SECURITIES HELD-TO-MATURITY (CONTINUED)
The carrying values and estimated fair values of investment securities
held-to-maturity are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. government and agencies.................. $ 38,890 $283 $ (370) $38,803
Municipals.................................... 1,105 23 -- 1,128
------- ---- ----- ------
Total............................... $ 39,995 $306 $ (370) $39,931
======= ==== ===== ======
</TABLE>
The amortized cost and estimated fair value of investment securities by
contractual maturity are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------
CARRYING FAIR
VALUE VALUE
-------- -------
(IN THOUSANDS)
<S> <C> <C>
One year or less.......................................... $ 6,034 $ 6,027
One year through five years............................... 32,856 32,776
Five years through ten years.............................. 1,105 1,128
------- -------
$ 39,995 $39,931
======= =======
</TABLE>
There were no sales from investment securities held-to-maturity for the
periods April 1, 1996 through March 31, 1997 or April 1, 1995 through March 31,
1996.
Proceeds from sales of investment securities held-to-maturity during the
period April 1, 1994 through March 31, 1995 were $142,742,000. Gross gains and
losses of $8,000 and $100,000, respectively, were realized on those sales.
The amortized cost of investment securities held-to-maturity sold during
the period April 1, 1994 through March 31, 1995, which were sold within three
months of maturity was $120,045,000, with gross gains of $8,000 and gross losses
of $41,000. The amortized cost of investment securities held-to-maturity sold
during the period April 1, 1994 through March 31, 1995, which were sold within
six months of maturity was $22,798,000, with gross losses of $59,000. Based on
an analysis performed by the Bank, interest rate risk had been eliminated as a
pricing factor on the above sales, and these securities were considered in
substance held-to-maturity.
6. MORTGAGE-BACKED AND MORTGAGE RELATED SECURITIES HELD-TO-MATURITY
In March 1997, mortgage-backed and mortgage related securities
held-to-maturity with an amortized cost of $98,045,300 and an unrealized net
gain of $1,071,300 were reclassified to available-for-sale. In reassessing the
classification designation for each security the Bank determined it no longer
had the intent to hold these securities to maturity.
F-10
<PAGE> 180
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
6. MORTGAGE-BACKED AND MORTGAGE RELATED SECURITIES HELD-TO-MATURITY (CONTINUED)
The carrying values and estimated fair values of mortgage-backed and
mortgage related securities held-to-maturity are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C> <C>
Federal National Mortgage Assoc.
Pass Through Certificates......... $ 5,492 $ 70 $ (76) $ 5,486
Government National Mortgage Assoc.
Pass Through Certificates......... 98,303 2,967 (1,411) 99,859
Federal Home Loan Mortgage Corp.
Pass Through Certificates......... 16,907 145 (699) 16,353
-------- ------ ------- --------
Total..................... $120,702 $3,182 $ (2,186) $ 121,698
======== ====== ======= ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed and mortgage
related securities held-to-maturity by contractual maturity are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
CARRYING FAIR
VALUE VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
One year through five years............................. $ 108 $ 110
Five years through ten years............................ 25,273 25,318
Over ten years.......................................... 95,321 96,270
-------- --------
$120,702 $121,698
======== ========
</TABLE>
There were no sales of mortgage-backed and mortgage related securities
held-to-maturity for the three years ended March 31, 1997.
F-11
<PAGE> 181
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
7. SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Debt securities:
U.S. government and agencies...................... $ 533,454 $2,771 $ (94) $ 536,131
Municipals........................................ 1,104 -- -- 1,104
Corporate......................................... 296 -- (3) 293
-------- ------ ------ --------
Total debt securities............................... 534,854 2,771 (97) 537,528
-------- ------ ------ --------
Equity securities:
Preferred......................................... 281 4 285
Common............................................ 13,333 2,772 (144) 15,961
-------- ------ ------ --------
Total equity securities............................. 13,614 2,776 (144) 16,246
-------- ------ ------ --------
Mortgage-backed and mortgage related securities:
Federal National Mortgage Assoc. Pass Through
Certificates................................... 5,965 125 (26) 6,064
Government National Mortgage Assoc. Pass Through
Certificates................................... 73,116 2,998 (42) 76,072
Federal Home Loan Mortgage Corp. Pass Through
Certificates................................... 14,339 219 (56) 14,502
Collateralized Mortgage Obligation Bonds.......... 70,909 33 (241) 70,701
-------- ------ ------ --------
Total mortgage-backed and mortgage related
securities........................................ 164,329 3,375 (365) 167,339
======== ====== ====== ========
Total securities available-for-sale................. $ 712,797 $8,922 $ (606) $ 721,113
======== ====== ====== ========
</TABLE>
F-12
<PAGE> 182
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
7. SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Debt securities:
U.S. government and agencies...................... $ 345,229 $ 346 $ (431) $ 345,144
Municipals........................................ 1,104 -- -- 1,104
Corporate......................................... 363 -- (5) 358
-------- ------ ------ --------
Total debt securities............................... 346,696 346 (436) 346,606
-------- ------ ------ --------
Equity securities:
Preferred......................................... 281 -- (1) 280
Common............................................ 10,333 268 -- 10,601
-------- ------ ------ --------
Total equity securities............................. 10,614 268 (1) 10,881
-------- ------ ------ --------
Mortgage-backed and mortgage related securities:
Federal National Mortgage Assoc. Pass Through
Certificates................................. 7,319 18 (162) 7,175
Government National Mortgage Assoc. Pass
Through Certificates......................... 79,684 1,433 (360) 80,757
Federal Home Loan Mortgage Corp. Pass Through
Certificates................................. 18,780 90 (276) 18,594
Collateralized Mortgage Obligation Bonds....... 84,761 22 (330) 84,453
-------- ------ ------ --------
Total mortgage-backed and mortgage related
securities........................................ 190,544 1,563 (1,128) 190,979
======== ====== ====== ========
Total securities available-for-sale................. $ 547,854 $2,177 $ (1,565) $ 548,466
======== ====== ====== ========
</TABLE>
F-13
<PAGE> 183
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
7. SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Debt securities:
U.S. government and agencies................... $ 670,224 $ 35 $ (978) $ 669,281
Corporate...................................... 3,220 474 (9) 3,685
--------- ---- -------- ----------
Total debt securities............................ 673,444 509 (987) 672,966
--------- ---- -------- ----------
Equity securities:
Preferred...................................... 450 2 (7) 445
Common......................................... 10,288 282 (153) 10,417
--------- ---- -------- ----------
Total equity securities.......................... 10,738 284 (160) 10,862
--------- ---- -------- ----------
Mortgage-backed and mortgage related securities:
Federal National Mortgage Assoc. Pass Through
Certificates................................ 3,108 10 (27) 3,091
Federal Home Loan Mortgage Corp. Pass Through
Certificates................................ 60,493 50 (724) 59,819
Collateralized Mortgage Obligation Bonds....... 334,664 123 (2,376) 332,411
--------- ---- -------- ----------
Total mortgage-backed and mortgage related
securities..................................... 398,265 183 (3,127) 395,321
--------- ---- -------- ----------
Total securities available-for-sale.............. $1,082,447 $976 $ (4,274) $1,079,149
========= ==== ======== ==========
</TABLE>
Sales of securities available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
AUGUST 31, YEAR ENDED MARCH 31,
-------------------- -------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proceeds from sales................ $178,591 $241,633 $648,416 $175,691 $99,254
Gross gains........................ 30 85 1,042 12,681 --
Gross losses....................... 6 345 4,905 41 237
</TABLE>
The amortized cost and estimated fair value of debt securities by
contractual maturity are as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997
--------------------
CARRYING FAIR
VALUE VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
One year or less........................................ $ 84,369 $ 84,350
One year through five years............................. 449,153 451,846
Five years through ten years............................ 1,332 1,332
-------- --------
$534,854 $537,528
======== ========
</TABLE>
F-14
<PAGE> 184
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
7. SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
The amortized cost and estimated fair value of mortgage-backed and mortgage
related securities by contractual maturity are as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997
--------------------
CARRYING FAIR
VALUE VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
One year or less........................................ $ 27,686 $ 27,897
One year through five years............................. 75,854 76,419
Five years through ten years............................ 30,673 31,814
Over ten years.......................................... 30,116 31,209
-------- --------
$164,329 $167,339
======== ========
</TABLE>
Corporate debt securities includes an investment with carrying and fair
values of $2,690,000 and $3,164,000, respectively, at March 31, 1996. This
carrying value is net of a $1,950,000 reserve. The investment was sold during
1997.
On November 15, 1995, the Financial Accounting Standards Board issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." In accordance with
provisions in that Special Report, the Bank chose to reclassify securities from
held-to-maturity to available-for-sale. At the date of transfer (December, 1995)
the amortized cost of those securities was $169,092,000 and the net unrealized
losses were $3,511,000.
F-15
<PAGE> 185
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
8. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
AUGUST 31, ------------------------
1997 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS ON REAL ESTATE
One-to-four family............................... $ 552,426 $ 552,745 $ 534,539
Multi-family..................................... 1,487,403 1,365,124 1,208,039
Other............................................ 163,533 158,336 162,799
---------- ---------- ----------
2,203,362 2,076,205 1,905,377
Less net deferred fees......................... 11,247 11,052 10,451
---------- ---------- ----------
Total mortgage loans on real estate.............. 2,192,115 2,065,153 1,894,926
OTHER LOANS
Cooperative apartment loans...................... 392,799 348,029 340,507
Student loans (guaranteed)....................... 43,728 45,262 45,947
Home equity and improvement loans................ 17,500 19,545 23,458
Commercial loans................................. 32,199 25,249 18,003
Consumer loans................................... 18,110 15,241 8,284
Passbook loans................................... 10,345 9,710 9,995
Credit card loans................................ 1,948 2,054 2,332
---------- ---------- ----------
516,629 465,090 448,526
Less unearned discount and deferred fees......... 223 130 116
---------- ---------- ----------
Total other loans................................ 516,406 464,960 448,410
Less allowance for loan losses................... (31,115) (27,024) (20,528)
========== ========== ==========
Total loans, net................................. $2,677,406 $2,503,089 $2,322,808
========== ========== ==========
</TABLE>
At August 31, 1997 and March 31, 1997, 1996 and 1995, the Bank was
servicing loans on behalf of others which are not included in the consolidated
financial statements of $297,204,500, $314,638,700, $275,306,400 and
$287,319,000, respectively.
At August 31, 1997 and March 31, 1997, 1996 and 1995 included in mortgage
loans on real estate are $9,158,100, $15,547,200, $18,869,000 and $6,066,000,
respectively, of nonaccrual loans. If interest on the nonaccrual loans had been
accrued, such income would have approximated $417,000 and $1,186,800 for the
five months ended August 31, 1997 and 1996 and $1,574,600, $730,300 and $504,000
for the three years in the period ended March 31, 1997, respectively.
At August 31, 1997 and March 31, 1997, 1996, and 1995, included in other
loans are $932,900, $1,383,400, $1,490,000 and $2,041,000, respectively, of
nonaccrual loans. If interest on the nonaccrual loans had been accrued, such
income would have approximated $40,500 and $50,800 for the five months ended
August 31, 1997 and 1996 and $117,800, $78,800 and $36,000 for the three years
in the period ended March 31, 1997, respectively.
F-16
<PAGE> 186
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
8. LOANS (CONTINUED)
A summary of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
AUGUST 31, YEAR ENDED MARCH 31,
------------------ ----------------------------
1997 1996 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......... $27,024 $20,528 $20,528 $11,849 $ 8,770
Allowance from acquisition.............. -- -- -- 6,910 --
Provision charged to operations......... 4,577 1,560 7,960 3,679 3,592
Charge-offs, net of recoveries.......... (486) (608) (1,464) (1,910) (513)
------- ------- ------- ------- -------
Balance at end of period................ $31,115 $21,480 $27,024 $20,528 $11,849
======= ======= ======= ======= =======
</TABLE>
The Bank's loan portfolios are primarily comprised of secured loans made to
individuals and small businesses located in the New York City Metropolitan area.
In December, 1994 the Bank securitized and sold $119,971,000 of
multi-family loans. The Bank has pledged $7,800,000 of U.S. government
securities as a credit enhancement for the transaction.
9. PREMISES, FURNITURE AND EQUIPMENT
A summary of premises, furniture and equipment, net of accumulated
depreciation and amortization is as follows:
<TABLE>
<CAPTION>
MARCH 31,
AUGUST 31, ------------------
1997 1997 1996
---------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Land............................................ $ 3,232 $ 3,303 $ 2,238
Buildings and improvements...................... 43,873 44,284 38,863
Leasehold improvements.......................... 4,456 3,591 2,963
Furniture and equipment......................... 9,496 9,189 7,842
------- ------- -------
Total premises, furniture and equipment......... $ 61,057 $60,367 $51,906
======= ======= =======
</TABLE>
Depreciation and amortization expense amounted to $2,777,400, $2,227,000,
$5,972,200, $3,545,200 and $2,218,000 for the five month periods ended August
31, 1997 and 1996 and the years ended March 31, 1997, 1996 and 1995,
respectively.
F-17
<PAGE> 187
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
10. OTHER ASSETS
A summary of other assets is as follows:
<TABLE>
<CAPTION>
MARCH 31,
AUGUST 31, -------------------
1997 1997 1996
---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
FHLB stock..................................... $ 25,752 $ 25,752 $22,173
Net deferred tax asset......................... 16,554 17,830 12,727
Prepaid expenses............................... 1,470 1,604 1,783
Other real estate.............................. 279 540 973
Accounts receivable-securities transactions.... 380 107,624 --
Other.......................................... 17,869 15,525 13,036
------- -------- -------
$ 62,304 $168,875 $50,692
======= ======== =======
</TABLE>
11. DEPOSITS
The amounts due to depositors and the weighted average interest rates are
as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------
AUGUST 31,
1997 1997 1996
--------------------- --------------------- ---------------------
DEPOSIT AVERAGE DEPOSIT AVERAGE DEPOSIT AVERAGE
LIABILITY RATE LIABILITY RATE LIABILITY RATE
---------- ------- ---------- ------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings................... $1,017,793 2.80% $1,018,199 2.80% $1,109,503 3.00%
Money Market.............. 216,543 3.00 218,230 3.00 215,545 3.11
NOW....................... 277,003 2.56 268,681 2.49 218,317 2.13
Checking.................. 70,403 -- 76,692 -- 56,277 --
Time Deposits............. 1,790,214 5.61 1,743,756 5.50 1,797,248 5.63
---------- ---------- ----------
$3,371,956 $3,325,558 $3,396,890
========== ========== ==========
</TABLE>
Scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
MARCH 31,
AUGUST 31, ------------------------
1997 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
One year................................. $1,366,469 $1,333,075 $1,336,895
Two years................................ 214,306 212,451 226,562
Three years.............................. 136,669 110,601 83,329
Four years............................... 31,102 52,008 98,464
Thereafter............................... 41,668 35,621 51,998
---------- ---------- ----------
$1,790,214 $1,743,756 $1,797,248
========== ========== ==========
</TABLE>
Time deposit accounts in denominations of $100,000 or more totaled
approximately $206,156,800, $189,752,900 and $180,092,800 at August 31, 1997,
March 31, 1997 and March 31, 1996, respectively.
F-18
<PAGE> 188
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
12. BORROWINGS
A summary of borrowings is as follows:
<TABLE>
<CAPTION>
MARCH 31,
AUGUST 31, ------------------------
1997 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C>
FHLB borrowings................................. $ 14,550 $ 14,550 $ 56,045
Other........................................... 2,559 2,682 1,250
------- ------- -------
$ 17,109 $ 17,232 $ 57,295
======= ======= =======
</TABLE>
Advances from the FHLB are made at fixed rates with maturities between one
and fifteen years, summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
AUGUST 31, ------------------------
1997 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C>
After one year through five years............... $ 9,250 $ 8,350 $ 5,185
After five years through seven years............ 5,300 4,900 45,195
After seven years through fifteen years......... -- 1,300 5,665
------- ------- -------
$ 14,550 $ 14,550 $ 56,045
======= ======= =======
</TABLE>
Advances from the FHLB are collateralized by all FHLB stock owned by the
Bank in addition to a blanket pledge of eligible assets in an amount required to
be maintained so that the estimated fair value of such eligible assets exceeds,
at all times, 110% of the outstanding advances (see Note 14).
The average cost of borrowing for the five month period ended August 31,
1997 and the years ended March 31, 1997 and March 31, 1996 was 7.4%, 7.6% and
6.2%, respectively.
13. BENEFIT PLANS
The Bank has a noncontributory defined benefit pension plan (the "Plan")
covering substantially all of its full-time employees and certain part-time
employees who qualify. The Bank makes annual contributions to the Plan equal to
the amount necessary to satisfy the funding requirements of ERISA.
The Bank also has a Supplemental Executive Retirement Plan (the
"Supplemental Plan"). The Supplemental Plan is a nonqualified, unfunded plan of
deferred compensation covering those senior officers of the Bank whose benefit
under the Plan would be limited by Internal Revenue Code Sections 415 and
401(a)(17).
F-19
<PAGE> 189
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
13. BENEFIT PLANS (CONTINUED)
The following table sets forth the defined benefit plans' funded status and
net periodic pension cost:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation (including vested
benefits of $18,146 and $21,252, respectively)........ $(18,938) $(22,107)
========= =========
Projected benefit obligation for services rendered to
date.................................................. $(25,577) $(27,625)
Plan assets, at fair value.............................. 24,547 24,649
--------- ---------
Plan assets less than projected benefit obligation...... (1,030) (2,976)
Unrecognized prior service cost......................... 581 844
Unrecognized net (gain) or loss......................... (1,230) 1,033
Unrecognized transition asset........................... (1,823) (2,210)
--------- ---------
Accrued pension cost at December 31, 1996 and 1995...... (3,502) (3,309)
Net adjustment.......................................... (134) 1,650
--------- ---------
Accrued pension cost.................................... $ (3,636) $ (1,659)
========= =========
</TABLE>
Net pension expense included the following components:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C>
Service cost-benefits earned during the period................... $ 924 $ 759 $ 1,311
Interest cost on projected benefit obligation.................... 1,818 1,483 1,499
Actual return on plan assets..................................... (2,530) (4,972) 659
Net amortization and deferral.................................... 328 3,405 (2,293)
Settlement gain.................................................. (344) -- --
------ ------ ------
Net pension expense for the years ended December 31, 1996, 1995,
and 1994....................................................... 196 675 1,176
Net adjustment................................................... (63) (117) 73
------ ------ ------
Net pension expense.............................................. $ 133 $ 558 $ 1,249
====== ====== ======
</TABLE>
At December 31, 1996 and 1995, the projected benefit obligation for the
plans was determined using an assumed discount rate of 7.75% and 7.00%,
respectively, and an assumed rate of compensation increase of 6% for the Plan
and 7% for the Supplemental Plan. At December 31, 1996 and 1995, the weighted
average assumed rate of return on plan assets was 9%. Plan assets consist mainly
of investments in U.S. government and agency obligations, mortgage-backed
securities and common stocks.
The Bank also sponsors an incentive savings plan (401(k) plan) whereby
eligible employees may make tax deferred contributions up to certain limits. The
Bank makes matching contributions up to the lesser of 6% of employee
compensation, or $3,000. The Bank may reduce or cease matching contributions if
it is determined that the current or accumulated net earnings or undivided
profits of the Bank are insufficient to pay the full amount of contributions in
a plan year. Contributions to the plan by the Bank aggregated approximately
$508,400, $459,000 and $423,000 for the years ended March 31, 1997, 1996 and
1995, respectively.
F-20
<PAGE> 190
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
13. BENEFIT PLANS (CONTINUED)
Effective April 1, 1995, the Bank adopted SFAS No. 106, "Employer's
Accounting for Postretirement Benefits Other Than Pensions." In accordance with
SFAS No. 106, the Bank elected to recognize the cumulative effect of this change
in accounting principle over future accounting periods.
Status of the plan is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................... $(3,266) $ (4,481)
Fully eligible active plan participants................ (2,972) (3,664)
Other active plan participants......................... (2,605) (4,207)
------- -------
Accumulated benefit obligation......................... (8,843) (12,352)
Unrecognized transition obligation being recognized
over 20 years....................................... 4,817 7,786
Unrecognized net loss due to past experience difference
from assumptions made............................... 1,409 2,595
Unrecognized prior service cost........................ 30 956
------- -------
Accrued postretirement benefit cost at December 31,
1996 and 1995....................................... (2,587) (1,015)
Net adjustment......................................... (393) (718)
------- -------
Accrued postretirement benefit cost.................... $(2,980) $ (1,733)
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
-------------------
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Components of postretirement benefit cost:
Service cost-benefits earned during the period........ $ 457 $ 295
Interest cost on accumulated postretirement benefit
obligation......................................... 850 681
Net amortization...................................... 684 409
------ ------
Postretirement benefit expense -- years ended December
31, 1996 and 1995..................................... 1,991 1,385
Net adjustment.......................................... 152 348
------ ------
Net postretirement benefit expense...................... $2,143 $1,733
====== ======
</TABLE>
The assumptions used in arriving at the above include the initial rate of
increase in health care costs of 11% decreasing gradually to 6% by the year
2001. At December 31, 1996 and 1995, discount rates of 7.75% and 7.00%,
respectively, were used.
The health care cost trend rate assumption has a significant effect on the
amounts reported. A 1% increase in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by $1,098,300 and the
aggregate of the service and interest cost components of the net periodic
postretirement benefits expense for the year then ended by $177,100.
F-21
<PAGE> 191
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
14. COMMITMENTS AND CONTINGENCIES
At August 31, 1997 and March 31, 1997, there were outstanding commitments
and unused lines of credit by the Bank to originate or acquire mortgage loans on
real estate aggregating $75,107,400 and $96,890,300, respectively, and other
loans aggregating $21,833,300 and $33,161,400, respectively, substantially all
of which were fixed and adjustable rate residential loans and fixed rate
commercial loans that are expected to close during the next twelve months. The
difference between the estimated fair value and the estimated book value of
commitments and unused lines of credit is not significant.
The Bank has entered into noncancellable lease agreements with respect to
Bank premises. The minimum annual rental commitments under these operating
leases, exclusive of taxes and other charges, are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Year ended August 31:
1998................................................ $1,432
1999................................................ 1,314
2000................................................ 1,321
2001................................................ 1,287
2002 and thereafter................................. 8,804
</TABLE>
The rent expense for the five month periods ended August 31, 1997 and
August 31, 1996 and the years ended March 31, 1997, 1996 and 1995 was $498,100,
$528,900, $1,127,600, $980,300 and $984,000, respectively.
The Bank is a member of the FHLB, and owns FHLB stock with a carrying value
of $25,752,100, $25,752,100 and $22,173,300 at August 31, 1997, March 31, 1997
and March 31, 1996, respectively. As a member, the Bank is able to borrow on a
secured basis up to twenty times the amount of its capital stock investment at
either fixed or variable interest rates for terms ranging from six months to
fifteen years (see Note 12). The borrowings are limited to 30% of total assets
except for borrowings to fund deposit outflows.
In the normal course of business, there are outstanding various legal
proceedings, claims, commitments and contingent liabilities. In the opinion of
management, the financial position of the Bank will not be affected materially
by the outcome of such legal proceedings and claims.
F-22
<PAGE> 192
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
15. INCOME TAXES
The components of deferred tax assets and liabilities are summarized as
follows:
<TABLE>
<CAPTION>
MARCH 31,
AUGUST 31, ------------------------
1997 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Securities available-for-sale................. $ -- $ -- $ 1,788
Allowance for loan losses..................... 13,409 11,271 9,297
Deferred loan fees............................ 5,122 5,311 5,614
Amortization of intangible assets............. 3,702 3,088 1,539
Nonaccrual interest........................... 1,328 1,330 1,466
Employee benefits............................. 3,567 3,367 1,791
Other......................................... 776 792 1,356
------- ------- -------
Gross deferred tax asset........................ 27,904 25,159 22,851
------- ------- -------
Less valuation allowance........................ -- -- --
------- ------- -------
Deferred tax assets............................. $ 27,904 $ 25,159 $ 22,851
------- ------- -------
Deferred tax liabilities:
Securities available-for-sale................. $ 3,274 $ 245 $ --
Acquisition premium on mortgage-backed and
mortgage related securities................ 1,332 1,017 1,990
Acquisition premium on mortgages.............. 3,216 3,414 3,068
Depreciation.................................. 699 698 1,560
Other......................................... 2,829 1,955 3,506
------- ------- -------
Gross deferred tax liabilities.................. 11,350 7,329 10,124
------- ------- -------
Net deferred tax asset.......................... $ 16,554 $ 17,830 $ 12,727
======= ======= =======
</TABLE>
The Bank has reported taxable income for Federal, state and local income
tax purposes in each of the past two years and in management's opinion, in view
of the Bank's previous, current and projected future earnings trend, such net
deferred tax asset will be fully realized. Accordingly, no valuation allowance
was deemed necessary for the net deferred tax asset at August 31, 1997, March
31, 1997 or March 31, 1996.
F-23
<PAGE> 193
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
15. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes
attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
AUGUST 31, YEAR ENDED MARCH 31,
------------------ -----------------------------
1997 1996 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current:
Federal.............................. $ 6,284 $ 8,551 $14,832 $22,645 $19,701
State and local...................... 675 3,469 3,037 9,553 9,572
------- ------- ------- ------- -------
6,959 12,020 17,869 32,198 29,273
------- ------- ------- ------- -------
Deferred:
Federal.............................. (1,303) (1,885) (4,873) (518) (1,174)
State and local...................... (450) (901) (2,264) (898) (772)
------- ------- ------- ------- -------
(1,753) (2,786) (7,137) (1,416) (1,946)
------- ------- ------- ------- -------
Total.................................. $ 5,206 $ 9,234 $10,732 $30,782 $27,327
======= ======= ======= ======= =======
</TABLE>
The table below presents a reconciliation between the reported tax
provision and the tax provision computed by applying the statutory Federal
income tax rate to income before provision for income taxes:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
AUGUST 31, YEAR ENDED MARCH 31,
------------------ -----------------------------
1997 1996 1997 1996 1995
------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal income tax provision at
statutory rates...................... $5,665 $7,369 $ 9,769 $23,364 $21,781
Increase (reduction) in tax resulting
from:
State and local taxes, net of federal
income tax effect................. 146 1,669 502 5,626 5,720
Other................................ (605) 196 461 1,792 (174)
------ ------ ------- ------- -------
$5,206 $9,234 $10,732 $30,782 $27,327
====== ====== ======= ======= =======
</TABLE>
The Bank is included in the consolidated Federal income tax return of ICBC,
which is filed on a calendar year basis. For Federal income tax purposes, prior
to 1996, if certain definitional tests and other conditions were met, the Bank
was allowed a special bad debt deduction in determining its taxable income. The
deduction was based on either specified experience formulas or a percentage of
taxable income. Federal tax legislation enacted during 1996 repealed the special
bad debt deduction provisions. As a result, a large thrift institution such as
the Bank is required to use the specific charge-off method in computing its
federal bad debt deduction for tax years beginning after December 31, 1995.
However, New York State enacted legislation which, among other things, would
permit a large thrift institution such as the Bank to continue to use the bad
debt reserve method for both New York State and New York City tax purposes.
The 1996 Federal tax legislation also provided that a large thrift
institution such as the Bank is required to recapture the excess of its tax bad
debt reserves at December 31, 1995 over the balance of such reserves as of
December 31, 1987 (the "base year"), whether the additions were made under the
percentage of taxable income method or the experience method. The Bank will be
required to recapture its excess bad debt reserves,
F-24
<PAGE> 194
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
15. INCOME TAXES (CONTINUED)
for which deferred taxes have been recognized, over a six year period on a
straight line basis beginning in 1998. The base year reserve will remain subject
to recapture in the case of certain excess distributions to and redemptions of
shareholders or if the Bank ceases to be a bank. The New York State legislation
provides that the recapture of excess bad debt reserves is not required for
either New York State or New York City tax purposes.
At August 31, 1997 and March 31, 1997, the base year bad debt reserve for
federal income tax purposes was approximately $30 million, for which deferred
taxes are not required to be recognized. Bad debt reserves maintained for New
York State and New York City tax purposes as of August 31, 1997 and March 31,
1997, for which deferred taxes are not required to be recognized, amounted to
approximately $85 million. Accordingly, deferred tax liabilities of
approximately $21 million have not been recognized as of August 31, 1997 and
March 31, 1997.
Consolidated current and deferred tax expenses are allocated to the Bank as
if the Bank filed consolidated or combined tax returns only with its
subsidiaries.
16. REGULATORY REQUIREMENT
As a New York State chartered stock form savings bank, the deposits of
which are insured by the FDIC, the Bank is subject to certain FDIC capital
requirements. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly 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.
Based on its regulatory capital ratios at August 31, 1997 and March 31,
1997 and 1996, the Bank is categorized as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain Tier I leverage, Tier I risk-based and
minimum total risk-based ratios as set forth in the table.
F-25
<PAGE> 195
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
16. REGULATORY REQUIREMENT (CONTINUED)
The Bank's actual capital amounts and ratios are presented in the tables
below as of August 31, 1997 and March 31, 1997 and 1996:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
ACTUALS AS OF FOR CAPITAL ADEQUACY FDIC GUIDELINES AT
8/31/97 PURPOSES AT 8/31/97 8/31/97
------------------ ------------------------------------------ -------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ ---------- ------ ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage.... $258,319 6.91% [greater $149,520 [greater 4.0% [greater $186,900 [greater 5.0%
than or than or than or than or
equal to] equal to] equal to] equal to]
Tier 1
Risk-Based....... 258,319 10.13 [greater 101,980 [greater 4.0 [greater 152,971 [greater 6.0
than or than or than or than or
equal to] equal to] equal to] equal to]
Total Risk-Based... 289,434 11.35 [greater 203,961 [greater 8.0 [greater 254,951 [greater 10.0
than or than or than or than or
equal to] equal to] equal to] equal to]
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
ACTUALS AS OF FOR CAPITAL ADEQUACY FDIC GUIDELINES AT
3/31/97 PURPOSES AT 3/31/97 3/31/97
------------------ ------------------------------------------ -------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ ---------- ------ ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage.... $247,520 6.83% [greater $145,064 [greater 4.0% [greater 181,330 [greater 5.0%
than or than or than or than or
equal to] equal to] equal to] equal to]
Tier 1
Risk-Based....... 247,520 10.05% [greater 98,525 [greater 4.0% [greater 147,788 [greater 6.0%
than or than or than or than or
equal to] equal to] equal to] equal to]
Total Risk-Based... 274,544 11.15% [greater 197,050 [greater 8.0% [greater 246,313 [greater 10.0%
than or than or than or than or
equal to] equal to] equal to] equal to]
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
ACTUALS AS OF FOR CAPITAL ADEQUACY FDIC GUIDELINES AT
3/31/96 PURPOSES AT 3/31/96 3/31/96
------------------ ----------------------------------------- --------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ ---------- ------ ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage.... $201,693 6.13% [greater $131,548 [greater 4.0% [greater $164,436 [greater 5.0%
than or than or than or than or
equal to] equal to] equal to] equal to]
Tier 1
Risk-Based....... 201,693 9.82% [greater 82,153 [greater 4.0% [greater 123,229 [greater 6.0%
than or than or than or than or
equal to] equal to] equal to] equal to]
Total Risk-Based... 222,221 10.82% [greater 164,306 [greater 8.0% [greater 205,382 [greater 0.0%
than or than or than or than or
equal to] equal to] equal to] equal to]
</TABLE>
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statements of financial condition, for which it
is practicable to estimate fair value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by 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. SFAS No. 107 requirements exclude certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Additionally, tax consequences related to the realization of the
unrealized gains and losses can have a potential effect on fair value estimates
and have not been considered in the estimates. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Bank.
F-26
<PAGE> 196
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The book values and estimated fair values of the Bank's financial
instruments are summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1997 MARCH 31, 1997 MARCH 31, 1996
----------------------- ----------------------- -----------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks... $ 39,893 $ 39,893 $ 310,429 $ 310,429 $ 44,410 $ 44,410
Commercial paper.......... 72,659 72,659 39,866 39,866 -- --
Federal funds sold........ 72,977 72,977 24,341 24,341 58,782 58,782
Investment securities,
held to maturity........ -- -- -- -- 39,995 39,931
Mortgage-backed and
mortgage related
securities, held to
maturity................ -- -- -- -- 120,702 121,698
Securities
available-for-sale...... 721,113 721,113 548,466 548,466 1,079,149 1,079,149
Mortgage loans on real
estate.................. 2,203,362 2,184,235 2,076,205 2,025,243 1,905,377 1,926,882
Other loans............... 516,629 513,642 465,090 466,757 448,526 448,956
Accrued interest
receivable.............. 25,863 25,863 17,384 17,384 21,070 21,070
FHLB stock................ 25,752 25,752 25,752 25,752 22,173 22,173
FINANCIAL LIABILITIES
Deposits and escrow....... 1,616,546 1,616,546 1,622,836 1,622,836 1,635,239 1,635,239
Time deposit accounts..... 1,790,214 1,793,932 1,743,756 1,748,692 1,797,248 1,811,947
Borrowings................ 17,109 15,015 17,232 15,487 57,295 57,261
</TABLE>
The following methods and assumptions were used by the Bank in estimating
the fair values of financial instruments:
Cash and due from banks: Carrying amounts approximate fair value
since these instruments are payable on demand.
Commercial paper: Carrying amounts approximate fair value since these
instruments have short-term maturities.
Federal funds sold: Carrying amounts approximate fair value since
these instruments have short-term maturities.
Investment securities held-to-maturity: The estimated fair values are
based on independent dealer quotation and quoted market prices.
Mortgage-backed and mortgage related securities held-to-maturity: The
estimated fair values are based on quoted market prices.
Securities available-for-sale: The estimated fair values are based on
quoted market prices.
Mortgage loans on real estate: At March 31, 1997, the Bank changed
its methodology of calculating fair value on mortgage loans on real estate.
Management believes that this methodology is a more practical and accurate
approach to calculating fair value for mortgage loans.
F-27
<PAGE> 197
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
At August 31, 1997 and March 31, 1997, the Bank's mortgage loans on
real estate were segregated into two categories, residential loans and
commercial/multi-family loans. These were stratified further based upon
historical delinquency and loan to value ratios. The fair value for each
loan was then calculated by discounting the projected mortgage cash flow to
a yield target equal to a spread, which is commensurate with the loan
quality and type, over the Treasury curve at the average life of the cash
flow.
At March 31, 1996, the Bank's mortgage loans were segregated into 1-4
family, multifamily and nonresidential mortgage loans. Each loan category
was further segmented into fixed and adjustable rate loans. At March 31,
1996, quoted secondary market prices and discounted cash flows were used to
value the entire mortgage portfolio. Also the fair value of adjustable
mortgage loans, which reprice frequently, were assumed to approximate their
carrying value.
Other loans: At March 31, 1997, the Bank changed its methodology of
calculating fair value on co-op loans. Management believes that this
methodology is a more practical and accurate approach to calculating fair
value for co-op loans.
At August 31, 1997 and March 31, 1997, the co-op loan portfolio was
priced using the same methodology as the mortgage loans on real estate. The
fair value of the remaining other loan category has been estimated to
approximate its carrying value. This is based on the short-term duration of
these loans and the fact that the majority of these loans reprice
frequently.
At March 31, 1996, quoted secondary market prices were used to value
both the fixed and variable rate co-op loan portfolios. The fair value of
the remaining other loan category has been estimated to approximate its
carrying value. This is based on the short-term duration of these loans and
the fact that the majority of these loans reprice frequently.
Accrued interest receivable: Carrying amount approximates fair value
since these instruments have short-term maturities.
FHLB stock: Carrying amount approximates fair value since it is
redeemable at cost, with the issuer only.
Deposits: The estimated fair values of deposits with no stated
maturity such as savings, money market, checking, NOW and escrow accounts
approximate the respective obligations.
Time deposit accounts: The estimated fair value for time deposits is
based on a discounted cash flow calculation that applies interest rates
currently being offered by the Bank to its current deposit portfolio.
Borrowings: The estimated fair value of Federal Home Loan Bank
borrowings is based on the discounted value of their contractual cash
flows. The discount rate used in the present value computation is estimated
by comparison to the current interest rates charged by the Federal Home
Loan Bank for advances of similar remaining maturities.
18. ASSET AND DIVIDEND RESTRICTIONS
The Bank is required to maintain a reserve balance with the Federal Reserve
Bank. The required reserve balance was $1,300,000, $1,461,000 and $14,972,000 at
August 31, 1997, March 31, 1997 and March 31, 1996, respectively.
F-28
<PAGE> 198
INDEPENDENCE SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996 (UNAUDITED) AND
MARCH 31, 1997, 1996 AND 1995
18. ASSET AND DIVIDEND RESTRICTIONS (CONTINUED)
Limitations exist on the availability of the Bank's undistributed earnings
for the payment of dividends to ICBC without prior approval of the Bank's
regulatory authorities.
19. CONVERSION
On April 18, 1997, the Board of Directors of the Bank and the Board of
Trustees of ICBC unanimously adopted a plan of Conversion (the "Plan" or "Plan
of Conversion") whereby ICBC would convert from the mutual to stock form and
offer shares of common stock in a subscription and community offering. As part
of the conversion, newly authorized shares of the new stock holding company,
Independence Community Bank Corp. (the "Company"), will be offered to the Bank's
depositors and employee benefit plans in accordance with applicable state and
federal regulations. The amount and pricing of the proposed stock offering will
be based upon an independent appraisal of the Bank. The Plan must be approved by
certain depositors of the Bank and the New York State Banking Department and not
objected to by the Federal Deposit Insurance Corporation. In connection with the
conversion, the costs of issuing the common stock will be deferred and deducted
from the sale proceeds. At August 31, 1997, no costs related to the conversion
had been recorded. In the event that consummation of the conversion does not
occur, any recorded costs will be expensed.
At the time of conversion, the Bank will establish a liquidation account in
an amount equal to its capital as of the date of the latest consolidated
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 deposit 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 balances
for accounts then held.
Pursuant to the Plan of Conversion, the Company intends to establish the
Independence Community Foundation, a private charitable foundation (the
"Foundation"), in connection with the conversion. The Plan provides that the
Bank and the Company will create the Foundation immediately following the
conversion by contributing Company common stock in an amount equal to 8.0% of
the total amount of common stock to be sold in the conversion. The Foundation is
being formed as a complement to the Bank's existing community activities and
will be dedicated to community activities and the promotion of charitable
causes.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization. A contribution of common stock to the
Foundation by the Company would be tax deductible, subject to certain
limitations. The Company, however, would be able to carry forward any unused
portion of the deduction for five years following the contribution. Upon funding
the Foundation, the Company will recognize an expense in the full amount of the
contribution, offset in part by the corresponding tax benefits, during the
quarter in which the contribution is made.
F-29
<PAGE> 199
============================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY INDEPENDENCE COMMUNITY BANK CORP., INDEPENDENCE SAVINGS BANK OR
SANDLER O'NEILL & PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF INDEPENDENCE COMMUNITY BANK CORP. OR
INDEPENDENCE SAVINGS BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary Overview........................... 1
Summary.................................... 4
Selected Consolidated Financial and Other
Data..................................... 12
Risk Factors............................... 14
Independence Community Bank Corp. ......... 23
Independence Savings Bank.................. 24
Use of Proceeds............................ 26
Dividend Policy............................ 27
Market for Common Stock.................... 27
Regulatory Capital Requirements............ 28
Capitalization............................. 30
Pro Forma Data............................. 32
Comparison of Valuation and Pro Forma
Information with No Foundation........... 37
Consolidated Statements of Income.......... 38
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 39
Business................................... 56
Regulation................................. 82
Taxation................................... 91
Management................................. 93
The Conversion............................. 104
Restrictions on Acquisition of the Company
and the Bank............................. 121
Description of Capital Stock of the
Company.................................. 128
Description of Capital Stock of the Bank... 129
Transfer Agent and Registrar............... 129
Experts.................................... 130
Legal and Tax Opinions..................... 130
Additional Information..................... 131
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
UNTIL FEBRUARY 2, 1998, OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, 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.
============================================================
============================================================
61,226,852 SHARES
INDEPENDENCE COMMUNITY BANK CORP. LOGO
(PROPOSED HOLDING COMPANY FOR
INDEPENDENCE SAVINGS BANK)
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
------------------------
PROSPECTUS
------------------------
DECEMBER 31, 1997
Sandler O'Neill & Partners, L.P.
============================================================
