As filed with the Securities and Exchange Commission on August 1, 1996
Registration No. 333-06399
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------
AFSALA BANCORP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 6035 Requested
- ---------------------------- -------------------------- --------------------
(State or Other Jurisdiction (Primary Standard Industry (I.R.S. Employer
of Incorporation or Classification Code Number) (Identification No.)
Organization)
161 Church Street, Amsterdam, New York 12010
(518) 842-5700
------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Mr. John M. Lisicki
President and Chief Executive Officer
AFSALA Bancorp, Inc.
161 Church Street, Amsterdam, New York 12010
(518) 842-5700
- --------------------------------------------------------------------------------
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Please send copies of all communications to:
John J. Spidi, Esq.
Gregory J. Rubis, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS AFSALA BANCORP, INC.
(Proposed Holding Company for Amsterdam Federal Bank)
Anticipated Maximum of 1,265,000 Shares of Common Stock
$10.00 Purchase Price Per Share
AFSALA Bancorp, Inc., a Delaware corporation (the "Company"), is offering
between 935,000 and 1,265,000 shares (subject to adjustment up to 1,454,750
shares) of its common stock, par value $0.10 per share (the "Common Stock"), in
a subscription offering in connection with the conversion of Amsterdam Federal
Savings and Loan Association (the "Association") from a federally chartered
mutual savings and loan association to a federally chartered stock savings bank
to be known as Amsterdam Federal Bank (the "Bank") and the issuance of all of
the Bank's outstanding capital stock to the Company pursuant to the
Association's Plan of Conversion (the "Plan"). The Company may offer shares not
subscribed for in the subscription offering in a public offering, as described
below. The simultaneous conversion of the Association to stock form, the
issuance of the Bank's outstanding common stock to the Company, and the
Company's offer and sale of Common Stock are referred to herein as the
"Conversion." References herein to the Bank refer to the Association in mutual
form and the Bank in stock form as the context may indicate.
Non-transferable rights to subscribe for the Common Stock have been
granted, in order of priority, to the Bank's deposit account holders with
deposits of at least $50 as of March 31, 1995 ("Eligible Account Holders"),
tax-qualified employee plans of the Bank, other deposit account holders with
deposits of at least $50 as of June 30, 1996 ("Supplemental Eligible Account
Holders"), and certain other depositors and certain borrowers of the Bank as of
the voting record date, ________ __, 1996, for a special meeting of members
called to vote on the Conversion ("Other Members") in a subscription offering
(the "Subscription Offering"). Pursuant to Office of Thrift Supervision ("OTS")
regulations, these subscription rights are non-transferable. Persons violating
this prohibition against transfer may lose their right to purchase stock in the
Conversion and be subject to other possible sanctions. Subject to the prior
rights of holders of subscription rights and market conditions at or near the
completion of the Subscription Offering, the Company may also offer the shares
of Common Stock for sale through Capital Resources, Inc. ("Capital Resources")
in a public offering to selected persons to whom this Prospectus is delivered
(the "Public Offering" and when referred to together with the Subscription
Offering, the "Offerings"). Depending on market conditions and availability of
shares, the shares of Common Stock may be offered for sale in the Public
Offering on a best-efforts basis by a selling group of selected broker-dealers
to be managed by Capital Resources. The Bank and the Company reserve the right,
in their absolute discretion, to accept or reject, in whole or in part, any or
all orders in the Public Offering at the time of receipt of an order or as soon
as practicable following completion of the Public Offering. See "The Conversion
- - Marketing Arrangements."
(Continued on next page)
----------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS," BEGINNING ON PAGE 1 OF THIS
PROSPECTUS. THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE, OR
OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
=========================================================================================
Purchase Estimated Underwriting Estimated
Price(1) Commissions and Expenses(2) Net Proceeds(2)
- -----------------------------------------------------------------------------------------
Per Share $10.00 $0.59 (3) $ 9.41 (3)
- -----------------------------------------------------------------------------------------
Total Minimum (1) $ 9,350,000 $620,000 $ 8,730,000
- -----------------------------------------------------------------------------------------
Total Midpoint (1) $11,000,000 $650,000 $10,350,000
- -----------------------------------------------------------------------------------------
Total Maximum(1) $12,650,000 $681,000 $11,969,000
- -----------------------------------------------------------------------------------------
Total Maximum, as adjusted (4) $14,547,500 $716,000 $13,831,500
=========================================================================================
(1) Determined in accordance with an independent appraisal, dated June 14,
1996, and confirmed as of July 26, 1996, by Capital Resources Group, Inc.,
an affiliate of Capital Resources. The estimated pro forma market value of
the Common Stock ranges from $9,350,000 to $12,650,000 ("Estimated
Valuation Range" or "EVR") or between 935,000 and 1,265,000 shares of
Common Stock at the purchase price of $10.00 per share in the Offerings.
See "The Conversion - Stock Pricing."
(2) Includes financial advisory and marketing fees to be paid to Capital
Resources that are estimated to be $158,000, $188,000, $219,000, and
$254,000, at the minimum, midpoint, maximum, and maximum as adjusted,
respectively, of the EVR. A portion of such fees and expenses may be
deemed to be underwriting fees and Capital Resources may be deemed to be
an underwriter. Also includes printing, postage, legal, appraisal,
accounting, and filing fees. Actual net proceeds and expenses may vary
from estimated amounts.
(3) Assumes the sale of the midpoint number of shares. If the minimum,
maximum, or 15% above the maximum number of shares are sold, estimated
expenses per share would be $0.66, $0.54, or $0.49, respectively,
resulting in estimated net proceeds per share of $9.34, $9.46, or $9.51,
respectively.
(4) Gives effect to an increase in the number of shares which could occur
without a resolicitation of subscribers or any right of cancellation due
to an increase in the Estimated Valuation Range of up to 15% above the
maximum of the Estimated Valuation Range (for an issuance of up to
1,454,750 shares) to reflect changes in market and financial conditions
following commencement of the Offerings or to fill in part or in whole the
order of the ESOP. See "The Conversion - Stock Pricing."
CAPITAL RESOURCES, INC.
The date of this Prospectus is August __, 1996
The Bank's Employee Stock Ownership Plan ("ESOP") intends to subscribe for
up to 8% of the total number of shares of Common Stock issued in the Conversion.
However, the ESOP may acquire some or all of its shares in the open market after
the Conversion. Shares sold above the maximum of the Estimated Valuation Range
may be sold to the ESOP to fill its subscription. With the exception of the
ESOP, no person, together with associates and persons acting in concert with
such person, may purchase in the aggregate more than 15,000 shares ($150,000) of
Common Stock sold in the Conversion. The minimum purchase is 25 shares. However,
the Bank and the Company in their sole discretion may increase or decrease the
purchase limitation without notice to members or subscribers. See "The
Conversion - Limitations on Purchases of Shares."
Capital Resources has been engaged to consult with and advise the Bank and
the Company in connection with the Conversion and with the sale of shares of the
Common Stock in the Offerings. Capital Resources has agreed to use its best
efforts to assist the Company and the Bank in the sale of the Common Stock in
the Subscription Offering. In addition, Capital Resources has agreed to manage
the Public Offering, if any. Neither Capital Resources nor any member of the
selling group of broker-dealers that would participate in a Public Offering will
have any obligation to purchase or accept any shares of Common Stock in the
Conversion. Capital Resources will be indemnified against certain liabilities,
including liabilities that may arise under the Securities Act of 1933, as
amended. See "Pro Forma Data," "The Conversion Plan of Distribution," and "-
Marketing Arrangements."
To subscribe for shares of Common Stock in the Subscription Offering, the
Company must receive an executed order form and certification form, together
with full payment of $10.00 per share (or appropriate instructions authorizing a
withdrawal from a deposit account at the Bank) for all shares for which
subscription is made, at the Bank's office, by 12:00 noon, Eastern Standard
Time, on _____ __, 1996, unless the Subscription Offering is extended, at the
discretion of the Board of Directors, up to an additional 45 days with the
approval of the OTS, if necessary, but without additional notice to subscribers
(the "Expiration Date"). Subscriptions paid by cash, check, bank draft or money
order will be placed in a segregated account at the Bank and will earn interest
at the Bank's passbook rate from the date of receipt until completion or
termination of the Conversion. Payments authorized by withdrawal from deposit
accounts at the Bank will continue to earn interest at the contractual rate
until the Conversion is completed or terminated; these funds will be otherwise
unavailable to the depositor until such time. Authorized withdrawals from
certificate accounts at the Bank for the purchase of Common Stock will be
permitted without the imposition of early withdrawal penalties or loss of
interest. Orders or subscriptions of $25,000 or more must be paid by withdrawal
authorization (if applicable), certified check, cashier's check, or money order.
To order Common Stock in the Public Offering, if any, an executed stock
order and account withdrawal authorization (if applicable) and certification
must be received by Capital Resources prior to the termination of the Public
Offering. The date by which orders must be received in the Public Offering, if
any, will be set by the Company at the time of such offering provided that, if
the Subscription Offering or Public Offering is extended beyond _________ __,
1996, each person who has submitted an order will have the right to modify or
rescind his or her order. In the event of such an extension, funds submitted by
persons to order shares will be returned promptly with interest to each person
unless he or she affirmatively indicates otherwise. See "The Conversion - Public
Offering."
The Company has received preliminary approval to have the Common Stock
listed on the Nasdaq Stock Market under the symbol "AFED." Prior to the
Offerings 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 $10.00
per share (the "Purchase Price"). See "Market for the Common Stock."
AMSTERDAM FEDERAL BANK
===============================================================================
[MAP]
===============================================================================
THE CONVERSION IS CONTINGENT UPON THE RECEIPT OF ALL REQUIRED REGULATORY
APPROVALS, APPROVAL OF THE PLAN BY THE MEMBERS OF THE BANK, AND THE SALE OF AT
LEAST THE MINIMUM NUMBER OF SHARES OFFERED PURSUANT TO THE PLAN.
SUMMARY
The following summary does not purport to be complete, and is qualified in
its entirety by more detailed information and the Financial Statements of the
Bank and the Notes thereto appearing elsewhere in this prospectus.
AFSALA Bancorp, Inc.: The Company was organized under Delaware
law in June 1996 at the direction of the
Board of Directors of the Bank to
acquire all of the capital stock that
the Bank will issue upon its conversion
from the mutual to stock form of
ownership. The Company has not engaged
in any significant business to date.
Management believes that the holding
company structure will provide
flexibility for possible diversification
or expansion of business activities,
although there are no current
arrangements, understandings, or
agreements regarding any such
opportunities. Subject to limitations on
repurchases, the holding company
structure will also enable the Company
to repurchase its own stock without
adverse tax consequences. See "AFSALA
Bancorp, Inc." and "Business of the
Company."
Amsterdam Federal Bank: The Bank, a federally chartered mutual
savings and loan association, operates a
traditional savings and loan association
business, attracting deposit accounts
from the general public and using those
deposits, together with other funds,
primarily to originate and invest in
loans secured by single-family
residential real estate. At March 31,
1996, the Bank had total assets of
$133.0 million, total deposits of $121.4
million, and equity of $8.2 million. See
"Amsterdam Federal Savings and Loan
Association" and "Business of the Bank."
The Plan and Approval by Members: The Board of Directors of the Bank
unanimously adopted the Plan on April
26, 1996. Pursuant to the Plan, the Bank
will convert from a federal mutual
savings and loan association into a
federal stock savings bank and will
become a wholly owned subsidiary of the
Company which will issue Common Stock in
the Offerings. The Plan must be approved
by the affirmative vote of the majority
of total votes eligible to be cast by
the Bank's members. See "The
Conversion."
The Offerings and the Purchase: Between 935,000 and 1,265,000 shares of
Common Stock Price: are being offered at
$10.00 per share in the Offerings. The
maximum number of shares sold in the
Offerings may be increased to up to
1,454,750 shares without a
resolicitation of subscribers in the
event of an increase in the pro forma
market value of the Bank to an amount
not more than 15% above the maximum of
the EVR. See "The Conversion - Stock
Pricing" and "- Number of Shares to be
Issued in the Conversion."
Distribution of Common Stock The shares of Common Stock will first be
and Purchase Priorities: offered in the Subscription Offering
according to the following priorities:
(i) Eligible Account Holders; (ii) the
ESOP; (iii) Supplemental Eligible
(i)
Account Holders; and (iv) Other Members.
The Company may offer shares of Common
Stock for sale through Capital Resources
in a Public Offering. See "The
Conversion - Public Offering." Any
shares of Common Stock sold in excess of
the maximum of the EVR may be first sold
to the ESOP prior to satisfying unfilled
orders from Eligible Account Holders.
See "The Conversion - Subscription
Rights and the Subscription Offering"
and "- Public Offering."
Transferability of Right to Depositors and certain borrowers may not
Purchase in the Offerings: transfer or enter into an agreement to
transfer the right to subscribe for
shares of Common Stock in the
Subscription Offering. Persons violating
this prohibition against transfer may
lose their right to purchase stock in
the Conversion and may be subject to
other possible sanctions. See "The
Conversion - Restrictions on Transfer of
Subscription Rights and Shares."
Purchase Limitations: The purchase limit for a person with
subscription rights is the greater of
(i) 15,000 shares ($150,000), (ii)
one-tenth of one percent of the total
offering, or (iii) 15 times the product
(rounded down to the next whole number)
obtained by multiplying the total number
of shares of Common Stock to be issued
by a fraction of which the numerator is
the amount of the qualifying deposit of
such person and the denominator is the
total amount of qualifying deposits of
all such persons in that same
subscription right category, but in no
event shall this number be greater than
the 15,000 share maximum purchase limit.
The maximum number of shares of Common
Stock that may be subscribed for or
purchased in the Offerings by any person
(or persons through a single account)
together with any associate or group of
persons acting in concert may not exceed
15,000 shares, except for the ESOP,
which intends to subscribe for up to 8%
of the Common Stock issued. No
assurances may be given that the number
of shares purchased by the ESOP will not
change. The Bank may, in its sole
discretion, without further notice to or
solicitation of prospective purchasers,
increase such maximum purchase
limitation to up to 5.0% of the total
number of shares offered or decrease the
maximum purchase limitation to as low as
1.0% of the maximum number of shares
offered. No person may purchase fewer
than 25 shares in the Offering. See "The
Conversion - Limitations on Purchase of
Shares."
The Common Stock: Each share of Common Stock will have the
same relative rights as, and will be
identical in all respects with, each
other share of Common Stock in the
Offerings. All of the issued and
outstanding voting stock of the Bank
will be held by the Company. The Common
Stock of the Company represents
nonwithdrawable capital, is not an
account of an insurable type, and is not
insured by the OTS, the Federal Deposit
Insurance Corporation ("FDIC"), the
Savings Association Insurance Fund
("SAIF"), or any other government agency
or fund. Upon payment of the Purchase
Price for the Common Stock, all such
shares will be fully paid and
nonassessable. See "Description of
Capital Stock."
(ii)
Dividends: The Board of Directors of the Company
does not currently intend to pay a
dividend following the Conversion, but
may consider doing so in the future. If
a dividend is paid in a future period,
the dividend will be subject to
determination and declaration by the
Board of Directors, which will take into
account a number of factors, including
the financial condition of the Company
and regulatory restrictions on the
payment of dividends by the Bank to the
Company, on which dividends the Company
eventually may be primarily dependent.
There can be no assurance that dividends
will be paid on the Common Stock or
that, if paid, such dividends will not
be reduced or eliminated in future
periods. See "Dividends."
Expiration Date of Subscription The Subscription Offering will terminate
Offering: at 12:00 noon, Eastern Time, on
September __, 1996 unless the
Subscription Offering is extended, at
the discretion of the Board of
Directors, up to an additional 45 days
with the approval of the OTS, if
necessary, but without additional notice
to subscribers. See "The Conversion -
Subscription Rights and the Subscription
Offering."
Conditions to Closing of the Consummation of the Offerings is subject
Offerings: to (i) consummation of the Conversion,
which is conditioned on, among other
things, approval of the Plan by the
members of the Bank and the OTS, (ii)
the receipt by the OTS of an update to
the Bank's appraisal of its pro forma
market value and authorization by the
OTS to sell Common Stock within the
range set forth in the update to that
appraisal, and (iii) the sale of a
minimum of 935,000 shares of Common
Stock. See "The Conversion - Conditions
and Termination." There can be no
assurances that all of these conditions
will be met.
Use of Proceeds: Net proceeds from the sale of the Common
Stock are estimated to be between
approximately $8.7 million and $13.8
million depending on the number of
shares of Common Stock sold and the
estimated expenses of the Offerings. The
Company intends to use approximately 50%
of the net proceeds from the Offerings
to purchase 100% of the to be
outstanding common stock of the Bank and
retain the remainder as its initial
capitalization. The portion of the net
proceeds retained by the Company will
initially be invested in U.S. government
and federal agency securities,
high-grade, short term marketable
securities, deposits of, or loans to,
the Bank, or a combination thereof and
ultimately may be used to support the
future expansion of operations.
Additionally, the Company intends to
fund the ESOP purchases through a loan
to the ESOP from net proceeds retained
by the Company. The portion of the net
proceeds from the Offerings exchanged by
the Company for all of the outstanding
capital stock of the Bank will be used
for general corporate purposes and will
increase the Bank's total capital to
support expanded lending, internal
growth and possible external growth
through acquisitions of branch offices,
expansion into new lending markets, and
other acquisitions. Net proceeds
received by the Bank may also be used to
make contributions to repay the ESOP
(iii)
loans and will initially be invested in
high-grade, short term investment
securities. See "Use of Proceeds."
Management Purchases: Directors, officers, and their
associates, collectively intend to
subscribe for approximately 68,500
shares of Common Stock at the Purchase
Price. See "The Conversion - Shares to
be Purchased by Management Pursuant to
Subscription Rights."
Potential Management Benefits: ESOP. The ESOP is expected to purchase
up to 8% of the shares of Common Stock
sold in the Conversion, which will be
awarded to employees without payment by
such persons of cash consideration. See
"Management of the Bank - Executive
Compensation - Employee Stock Ownership
Plan."
Restricted Stock Plan. Within one year
following the completion of the
Conversion, subject to stockholder and
Board of Director approvals and OTS
review, the Bank intends to adopt a
restricted stock plan (the "RSP") which
would acquire an amount of Common Stock
equal to 4.0% of the shares sold in the
Conversion. Assuming a $10.00 per share
grant price and the issuance of Common
Stock at the midpoint of the EVR, the
value to participants could total
approximately $440,000 in the aggregate.
No officer may receive more than 25%,
and directors who are not employees may
not receive more than 5% individually or
30% in the aggregate, of shares
purchased by the RSP. See "Pro Forma
Data" and "Management of the Bank -
Proposed Future Stock Benefit Plans -
Restricted Stock Plan" and "-
Restrictions on Benefit Plans."
Stock Option Plan. Within one year
following the completion of the
Conversion, subject to stockholder and
Board of Director approval and OTS
review, the Bank intends to establish a
Stock Option Plan (the "Option Plan"),
whereby options may be granted to
purchase additional authorized but
unissued shares of Common Stock that
equal in the aggregate up to 10% of the
stock sold in the Conversion.
Alternatively, such Common Stock may be
purchased in the open market by the
Company. See "Pro Forma Data" and
"Management of the Bank - Proposed
Future Stock Benefit Plans Stock Option
Plan."
Independent Valuation: Capital Resources Group, Inc. ("Capital
Resources Group"), an independent
appraisal firm, has determined that the
estimated pro forma market value of the
Bank was within an EVR from $9.4 million
to $14.5 million with a midpoint of
$11.0 million as of June 14, 1996 and
confirmed as of July 26, 1996. The
independent valuation will be updated
immediately prior to the consummation of
the Offerings. See "The Conversion -
Stock Pricing" and "- Number of Shares
to be Issued in the Conversion."
Risk Factors: See "Risk Factors" for a discussion of
the following factors which should be
considered by prospective investors:
potential impact of changes in interest
rates; disparity in insurance premiums
and special assessment; lack of growth
in the Bank's market areas; anti-
(iv)
takeover provisions; voting control;
possible dilutive effect of RSP and
stock options and effect of purchases by
the RSP and ESOP; regulatory oversight;
possible recapture of bad debt reserve;
possible adverse income tax consequences
of the distribution of subscription
rights; return on equity after
Conversion; and lack of liquidity for
the Common Stock.
Market for Common Stock: Neither the Company nor the Bank has
ever issued capital stock. Consequently,
there is no established market for the
Common Stock at this time. Given the
relatively small size of the offering,
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, nor is
there any assurance that persons
purchasing shares will be able to sell
at a price equal to or above the
Purchase Price. See "Market for the
Common Stock."
(v)
SELECTED FINANCIAL AND OTHER DATA
Set forth below are summaries of historical financial and other data
regarding the Bank. This information is derived in part from, and should be read
in conjunction with, the Financial Statements and Notes to the Financial
Statements of the Bank presented elsewhere in this Prospectus. The information
at or for the periods ended March 31, 1996 and 1995, is unaudited and, in the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the results for the unaudited periods have
been made. The results of operations for the six months ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the entire
year or any other period.
Selected Financial Data
The following table sets forth certain information concerning the
financial position of the Bank at the dates indicated:
At
March 31, At September 30,
--------- ------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
Total assets.......... $133,046 $127,962 $113,882 $105,038 $ 93,578 $ 81,297
Loans receivable, net. 67,729 65,447 58,623 52,813 51,274 47,727
Securities available for
sale, at fair value:
Collateralized
mortgage obligations 2,912 0 0 0 0 0
Other securities.... 15,273 2,563 0 0 0 0
Investment securities,
held to maturity:
Mortgage-backed
securities.......... 11,395 12,348 12,711 15,118 18,979 18,644
Collateralized mortgage
obligations......... 0 3,049 3,166 3,245 6,584 1,625
Other securities.... 19,614 31,326 30,223 21,478 8,823 3,687
Federal Home Loan Bank
of New York stock... 566 566 509 572 572 542
Deposits.............. 121,443 116,073 102,016 94,672 84,591 74,240
Federal Home Loan Bank
of New York long term
borrowings.......... 2,072 2,303 2,791 2,728 2,122 825
Total equity.......... 8,195 7,914 7,302 6,646 5,955 5,385
Full service offices.. 4 4 2 2 2 2
(vi)
Summary of Operations
The following table summarizes the Bank's results of operations for each
of the periods indicated:
Six Months Ended
March 31, Year Ended September 30,
------------------- ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ -----
(In Thousands)
Interest and dividend income $4,443 $3,826 $8,041 $6,886 $6,764 $7,109 $7,019
Interest expense.......... 2,650 2,047 4,528 3,592 3,741 4,589 4,964
----- ----- ----- ----- ----- ----- -----
Net interest income..... 1,793 1,779 3,513 3,294 3,023 2,520 2,055
Provision for loan losses. 80 85 165 293 217 116 148
------ ------ ----- ----- ----- ----- -----
Net interest income after
provision for loan losses 1,713 1,694 3,348 3,001 2,806 2,404 1,907
----- ----- ----- ----- ----- ----- -----
Non-interest income....... 197 100 275 221 187 141 135
Non-interest expense...... 1,453 1,278 2,731 2,245 1,938 1,684 1,446
----- ----- ----- ----- ----- ----- -----
Income before income
tax expense............ 457 516 892 977 1,055 861 596
Income tax expense........ 139 169 284 321 364 291 239
----- ----- ----- ----- ----- ----- -----
Net income............ $ 318 $ 347 $ 608 $ 656 $ 691 $ 570 $ 357
===== ===== ===== ===== ===== ===== =====
(vii)
Key Operating Ratios
The table below sets forth certain performance and financial ratios of the
Bank for the periods indicated.
At or For
the Six
Months Ended
March 31, At or For the Year Ended September 30,
----------------- --------------------------------------------
1996(1) 1995(1) 1995 1994 1993 1992 1991
------- ------- ---- ---- ---- ---- ----
Performance Ratios:
Return on average assets (net income
divided by average total assets)...... 0.49% 0.60% 0.51% 0.60% 0.69% 0.64% 0.46%
Return on average equity (net income
divided by average equity) ........... 7.88 9.30 8.00 9.41 10.97 10.05 6.83
Net interest rate spread ............... 2.55 2.97 2.78 2.89 2.74 2.87 2.65
Net interest margin .................... 2.90 3.24 3.08 3.17 3.19 2.99 2.80
Yield on average earning assets
for the period ended ................. 7.18 6.97 7.06 6.62 7.13 8.44 9.56
Rate on average interest-bearing
liabilities .......................... 4.63 4.00 4.28 3.73 4.39 5.58 6.92
Average interest-earning assets to
average interest-bearing liabilities . 107.99 107.27 107.59 107.96 111.41 102.27 102.22
Efficiency ratio (2) ................... 73.02 68.01 72.15 63.58 60.00 62.94 66.09
Expense ratio (3) ...................... 2.24 2.21 2.28 2.01 1.91 1.89 1.86
Asset Quality Ratios:
Non-performing loans to total assets ... 0.59 0.47 0.47 0.64 1.01 0.89 1.16
Non-performing loans to total loans .... 1.14 0.90 0.90 1.23 2.00 1.61 1.96
Allowance for loan losses to
non-performing loans ................. 96.04 124.34 113.57 85.62 39.04 37.58 48.36
Allowance for loan losses to total
loans receivable ..................... 1.10 1.12 1.02 1.05 0.78 0.61 0.95
Non-performing assets to total
assets, at period end ................ 0.59 0.47 0.47 0.64 1.08 0.89 1.16
Capital Ratios:
Equity to total assets at period end ... 6.16 6.38 6.18 6.41 6.33 6.36 6.62
Average equity to average total assets . 6.22 6.44 6.34 6.36 6.29 6.39 6.75
- ------------------------
(1) Ratios for six month periods are stated on an annualized basis. Such ratios
and results are not necessarily indicative of results that may be expected
for the full year.
(2) Total non-interest expense, excluding other real estate owned expense,
as a percentage of net interest income and total non-interest income,
excluding net gain (loss) on securities transactions.
(3) Total non-interest expense, excluding other real estate owned expense,
as a percentage of average total assets.
(viii)
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
RECENT SELECTED FINANCIAL AND OTHER DATA
Set forth below are summaries of historical financial and other data
regarding the Bank. This information is derived in part from, and should be read
in conjunction with, the Financial Statements and Notes thereto of the Bank
presented elsewhere in this Prospectus. The information at or for the periods
ended June 30, 1996 and 1995, is unaudited and, in the opinion of Management,
all adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results for the unaudited periods have been made. The
results of operations for the three and nine months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
or any other period.
Selected Financial Data
The following table sets forth certain information concerning the
financial position of the Bank at the dates indicated:
At At
June 30, September 30,
1996 1995
---- ----
(Dollars in Thousands)
Total assets............................................... $137,317 $ 127,962
Loans receivable, net...................................... 69,086 65,447
Securities available for sale, at fair value:
Collateralized mortgage obligations...................... 3,361 0
Other securities......................................... 13,677 2,563
Investment securities, held to maturity:
Mortgage-backed securities............................... 11,672 12,348
Collateralized mortgage obligations...................... 0 3,049
Other securities......................................... 21,605 31,326
Federal Home Loan Bank of New York stock................... 566 566
Deposits................................................... 125,334 116,073
Federal Home Loan Bank of New York long
term borrowings.......................................... 1,950 2,303
Total equity............................................... 8,353 7,914
Full service offices....................................... 4 4
(ix)
Summary of Operations
The following table summarizes the Bank's results of operations for
each of the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------- -----------------------------
1996 1995 1996 1995
------ ------ ------ ------
(In Thousands)
Interest and dividend income.......... $2,306 $2,061 $6,749 $5,886
Interest expense...................... 1,315 1,196 3,965 3,242
----- ----- ----- -----
Net interest income................. 991 865 2,784 2,644
Provision for loan losses............. 55 40 135 125
----- ----- ----- -----
Net interest income after
provision for loan losses.......... 936 825 2,649 2,519
----- ----- ----- -----
Non-interest income................... 91 83 288 183
Non-interest expense.................. 753 695 2,206 1,973
----- ----- ----- -----
Income before income
tax expense........................ 274 213 731 729
Income tax expense.................... 91 64 230 233
----- ----- ----- -----
Net income........................ $ 183 $ 149 $ 501 $ 496
===== ===== ===== =====
Regulatory Capital Requirements
Set forth below are the Bank's regulatory capital ratios at June 30,
1996, as compared to the minimum regulatory capital requirements imposed by the
OTS.
Requirement Actual Excess
-------------------- ---------------------- --------------------
(Dollars in Thousands)
Tangible capital............... $2,061 1.50% $8,411 6.12% $6,350 4.62%
Core capital................... $4,122 3.00% $8,411 6.12% $4,289 3.12%
Risk-based capital............. $4,685 8.00% $9,103 15.54% $4,418 7.54%
(x)
Key Operating Ratios
The table below sets forth certain performance and financial ratios of
the Bank for the periods indicated.
At or For At or For
the Three the Nine
Months Ended Months Ended
June 30, June 30,
------------------ ---------------------
1996(1) 1995(1) 1996(1) 1995(1)
---- ---- ---- ----
Performance Ratios:
Return on average assets (net income
divided by average total assets)............. 0.55% 0.49% 0.51% 0.56%
Return on average equity (net income
divided by average equity)................... 8.83 7.73 8.19 8.77
Net interest rate spread....................... 2.76 2.67 2.62 2.86
Net interest margin............................ 3.10 3.00 2.97 3.15
Yield on average earning assets
for the period ended......................... 7.21 7.14 7.19 7.01
Rate on average interest-bearing
liabilities.................................. 4.45 4.47 4.57 4.15
Average interest-earning assets to
average interest-bearing liabilities......... 108.33 107.95 108.09 107.50
Efficiency ratio (2)........................... 69.59 73.08 71.81 69.72
Expense ratio (3).............................. 2.25 2.29 2.24 2.24
Asset Quality Ratios:
Non-performing loans to total assets........... 0.54 0.42 0.54 0.42
Non-performing loans to total loans............ 1.06 0.79 1.06 0.79
Allowance for loan losses to
non-performing loans......................... 109.07 145.51 109.07 145.51
Allowance for loan losses to total
loans receivable............................. 1.15 1.16 1.15 1.16
Non-performing assets to total
assets, at period end........................ 0.56 0.42 0.56 0.42
Capital Ratios:
Equity to total assets at period end........... 6.08 6.35 6.08 6.35
Average equity to average total assets......... 6.18 6.35 6.21 6.41
- ------------------------
(1) Ratios for three and nine month periods are stated on an annualized
basis. Such ratios and results are not necessarily indicative of
results that may be expected for the full year.
(2) Total non-interest expense, excluding other real estate owned expense,
as a percentage of net interest income and total non-interest income,
excluding net gain (loss) on securities transactions.
(3) Total non-interest expense, excluding other real estate owned expense,
as a percentage of average total assets.
(xi)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RECENT SELECTED FINANCIAL AND OTHER DATA
Financial Condition
Total assets increased by $9.3 million or 7.3% to $137.3 million at
June 30, 1996 from $128.0 million at September 30, 1995, primarily due to an
increase in loans receivable of $3.6 million, or 5.6%, an increase in term
deposits with the Federal Home Loan Bank ("FHLB") of New York of $3.0 million,
or 200.0%, and an increase in federal funds sold of $1.3 million, or 38.8%.
The Bank's deposits increased by $9.2 million or 8.0% to $125.3 million
at June 30, 1996 from $116.1 million at September 30, 1995. This increase was
primarily due to new deposits generated from the recently opened supermarket
branches in October 1994 and May 1995, as well as general growth in the deposit
portfolio.
The Bank's securities available for sale increased $14.5 million to
$17.0 million at June 30, 1996 as the Bank reassessed its securities
classifications under SFAS No. 115. As of December 31, 1995, the Bank
reclassified securities with an amortized cost of $16.6 million from the held to
maturity classification to the available for sale classification. See "-
Liquidity and Capital Resources" and Note 1(f) of the Notes to Financial
Statements. The Bank's investment securities held to maturity decreased by $13.4
million to $33.3 million at June 30, 1996 primarily because of this same
securities reclassification.
The Bank's equity increased by $439,000 or 5.6% to $8.4 million at June
30, 1996 from $7.9 million at September 30, 1995. The increase was primarily the
result of earnings for the nine months ended June 30, 1996. Equity at June 30,
1996 was also affected by a $57,000 net unrealized loss on securities available
for sale, net of tax, primarily because of the reclassification of certain
securities from the held to maturity classification to the available for sale
classification discussed above.
Comparison of Operating Results for the Three Months Ended June 30, 1996 and
1995.
Net Income. Net income increased by $34,000 or 23.0% for the three
months ended June 30, 1996 to $183,000 from $149,000 for the three months ended
June 30, 1995. This increase was primarily due to an increase in net interest
income, partially offset by an increase in the provision for loan losses and a
$58,000 or 8.3% increase in non-interest expenses.
Net Interest Income. Net interest income increased by approximately
$126,000 or 14.6% to $991,000 for the three months ended June 30, 1996 as
compared to the same period in 1995. The increase was primarily due to an
increase in the net interest margin to 3.10% in the three months ended June 30,
1996, as compared to 3.00% in the same period in 1995, in addition to an
increase in the balance of average interest earning assets between the two
periods.
Interest earning assets primarily consist of loans receivable, federal
funds sold, securities (securities available for sale combined with securities
held to maturity), and interest bearing deposits in the FHLB of New York.
Interest bearing liabilities primarily consist of interest bearing deposits and
other borrowings from the FHLB of New York.
The interest rate spread, which is the difference between the yield on
average interest earning assets and the percentage cost of average interest
bearing liabilities, increased to 2.76% for the three months ended June 30, 1996
from 2.67% for the three months ended June 30, 1995. The increase in interest
rate spread is primarily the result of an increase in the yield on average
interest earning assets from 7.14% in the three months ended June 30, 1995, to
7.21% in the same period in 1996, combined with a slight decrease in the rate
paid on average interest bearing liabilities from 4.47% in the three months
ended June 30, 1995, to 4.45% for the same period in 1996.
(xii)
Interest and Dividend Income. Interest and dividend income increased by
approximately $245,000 or 11.9% to $2.3 million for the three months ended June
30, 1996 from $2.1 million for the three months ended June 30, 1995. The
increase was largely the result of an increase in average interest earning
assets during the three months ended June 30, 1996, as compared to the same
period in 1995, as well as an increase in the yield earned on average interest
earning assets as noted above.
Interest Expense. Interest on deposits, escrow accounts and Federal
Home Loan Bank of New York long term borrowings increased by approximately
$119,000 or 10.0% to $1.3 million for the three months ended June 30, 1996 from
$1.2 million for the three months ended June 30, 1995. This increase was
substantially due to an increase in average interest bearing liabilities during
the three months ended June 30, 1996, as compared to the same period in 1995,
offset slightly by a decrease in the rates paid on average interest bearing
liabilities as noted above.
Provision for Loan Losses. The Bank's management continually monitors
and adjusts its allowance for loan losses based upon its analysis of the loan
portfolio. The allowance is increased by a charge to the provision for loan
losses, the amount of which depends upon an analysis of the changing risks
inherent in the Bank's loan portfolio. The Bank has historically experienced a
limited amount of loan charge-offs. However, there can be no assurance that
additions to the allowance for loan losses will not be required in future
periods or that actual losses will not exceed estimated amounts. The Bank's
ratio of non-performing loans to total assets was 0.54% and 0.47% at June 30,
1996 and September 30, 1995, respectively. The provision for loan losses for the
three months ended June 30, 1996 increased $15,000 to $55,000 from $40,000 for
the three months ended June 30, 1995. For a discussion of the factors considered
by the Bank in determining the provision for loan losses, see "Business of the
Bank - Non- Performing and Problem Assets - Allowance for Loan Losses."
Non-Interest Income. Non-interest income increased to $91,000 during
the three months ended June 30, 1996 from $83,000 for the three months ended
June 30, 1995. The increase in non-interest income is primarily attributable to
increased service charges on deposit accounts of $18,000 for the three months
ended June 30, 1996 when compared to the three months ended June 30, 1995. The
increase in service charges on deposit accounts is primarily the result of an
increase in the number of deposit accounts.
Non-Interest Expense. Non-interest expense increased $58,000 or 8.2% to
$753,000 for the three months ended June 30, 1996 from $695,000 for the three
months ended June 30, 1995. This increase is primarily the result of an increase
in compensation and benefits expense and occupancy and equipment expenses due to
the new supermarket branch opened in May 1995.
Provision for Income Taxes. Provision for income taxes increased by
approximately $27,000 or 42.2% to $91,000 for the three months ended June 30,
1996 from $64,000 for the three months ended June 30, 1995. The increase was
primarily the result of the increase in net income before taxes.
Comparison of Operating Results for the Nine Months Ended June 30, 1996 and
1995.
Net Income. Net income increased by $5,000 or 1.1% for the nine months
ended June 30, 1996 to $501,000 from $496,000 for the nine months ended June 30,
1995. This increase was primarily due to increases in net interest income and
non-interest income, which were almost entirely offset by increases in the
provision for loan losses and non-interest expenses.
Net Interest Income. Net interest income increased by $140,000 or 5.3%
to $2.8 million for the nine months ended June 30, 1996 as compared to the same
period in 1995. The increase was primarily due to an increase in average
interest earning assets for the nine months ended June 30, 1996, as compared to
the same period in 1995, offset by a decline in the net interest margin from
3.15% in the nine months ended June 30, 1995 to 2.97% in the same period of
1996.
The interest rate spread declined to 2.62% for the nine months ended
June 30, 1996 from 2.86% for the nine months ended June 30, 1995. The decline in
interest rate spread is primarily the result of increases in the cost
(xiii)
of interest bearing liabilities being greater than increases in the yields on
interest earning assets during these periods.
Interest and Dividend Income. Interest and dividend income increased by
approximately $863,000 or 14.7% to $6.7 million for the nine months ended June
30, 1996 from $5.9 million for the nine months ended June 30, 1995. The increase
was largely the result of an increase in average interest earning assets during
the nine months ended June 30, 1996, as compared to the same period in 1995, as
well as an increase in the yield earned on average interest earning assets to
7.19% for the nine months ended June 30, 1996, as compared to 7.01% for the same
period in 1995.
Interest Expense. Interest on deposits, escrow accounts and FHLB of New
York long term borrowings increased by approximately $723,000 or 22.3% to $4.0
million for the nine months ended June 30, 1996 from $3.2 million for the nine
months ended June 30, 1995. This increase was due to an increase in average
interest bearing liabilities during the nine months ended June 30, 1996, as
compared to the same period in 1995, as well as an increase in the rates paid on
average interest bearing liabilities during the nine months ended June 30, 1996
to 4.57%, as compared to 4.15% for the same period in 1995.
Provision for Loan Losses. The Bank's ratio of non-performing loans to
total assets was 0.54% and 0.47% at June 30, 1996 and September 30, 1995,
respectively. The provision for loan losses for the nine months ended June 30,
1996 increased $10,000 to $135,000 from $125,000 for the nine months ended June
30, 1995. For a discussion of the factors considered by the Bank in determining
the provision for loan losses, see "Business of the Bank - Non-Performing and
Problem Assets - Allowance for Loan Losses."
Non-Interest Income. Non-interest income increased $105,000 or 57.4% to
$288,000 during the nine months ended June 30, 1996 from $183,000 for the nine
months ended June 30, 1995. The increase in non-interest income is primarily
attributable to increased service charges on deposit accounts of $114,000 for
the nine months ended June 30, 1996 when compared to the nine months ended June
30, 1995. The increase in service charges on deposit accounts is primarily the
result of an increase in the number of deposit accounts, as well as general
increases to the Bank's deposit account service fees.
Non-Interest Expense. Non-interest expense increased $233,000 or 11.8%
to $2.2 million for the nine months ended June 30, 1996 from $2.0 million for
the nine months ended June 30, 1995. The increase was primarily the result of
added expenses associated with the new supermarket branches opened in October
1994 and May 1995.
(xiv)
RISK FACTORS
Before investing in shares of the Common Stock offered hereby, prospective
investors should carefully consider the matters presented below in addition to
those discussed elsewhere in this prospectus.
Potential Impact of Changes in Interest Rates
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest earning assets, such as loans
and securities, and its interest expense on interest bearing liabilities, such
as deposits and other borrowings. Generally, during periods of increasing
interest rates, the Bank's interest rate sensitive liabilities would reprice
faster than its interest rate sensitive assets, causing a decline in the Bank's
interest rate spread and margin. This would result in an increase in the Bank's
cost of funds that would not be immediately offset by an increase in its yield
on earning assets. An increase in the cost of funds without an equivalent
increase in the yield on interest earning assets would tend to reduce net
interest income. As a result of the increase in interest rates during these
periods, the Bank's net interest rate spread decreased between the fiscal years
ended September 30, 1994 and September 30, 1995 from 2.89% to 2.78% and between
the six months ended March 31, 1995 and March 31, 1996 from 2.97% to 2.55%. For
additional discussion of this interest rate risk, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Net Portfolio
Value." For additional information on the Bank's management of its interest
bearing liabilities and interest earning assets, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset/Liability
Management."
Disparity in Insurance Premiums and Special Assessment
Deposits of the Bank are currently insured by the SAIF of the FDIC. As a
member of the SAIF, the Bank pays an insurance premium to the FDIC equal to
0.23% of its total deposits. The FDIC also maintains another insurance fund, the
Bank Insurance Fund ("BIF"), which primarily insures commercial bank deposits.
Effective September 30, 1995, the FDIC lowered the insurance premium for members
of the BIF to a range of between 0.04% and 0.31% of deposits, with the result
that most commercial banks would pay the lowest rate of 0.04%. However,
effective January 1, 1996, the annual insurance premium for most BIF members was
lowered to $2,000. These reductions in insurance premiums for BIF members have
placed SAIF members at a competitive disadvantage to BIF members and, for the
reasons set forth below, have had an adverse effect on the results of operations
and financial condition of the Bank.
The disparity in insurance premiums between those required for the Bank
and BIF members could allow BIF members to attract and retain deposits at higher
interest rates and at a lower effective cost than the Bank. This could put
competitive pressure on the Bank to raise its interest rates paid on deposits,
thus increasing its cost of funds and possibly reducing net interest income.
Although the Bank has other sources of funds, these other sources may have
higher costs than those of deposits. See "Regulation Insurance of Deposit
Accounts."
Several alternatives to mitigate the effect of the BIF/SAIF insurance
premium disparity have been proposed by the U.S. Congress, federal regulators,
industry lobbyists and the executive branch of the government. One such proposal
would require all SAIF-member institutions, including the Bank, to pay a
one-time fee of approximately 85 basis points (100 basis points equals 1%) on
the amount of deposits held by the member institution to recapitalize the SAIF.
If this proposal is enacted into law, the effect would be to immediately reduce
the capital of the SAIF-member institutions by the amount of the fee, net of any
tax deduction that may be available, and such amount would be immediately
charged to earnings. Based on $108.2 million in deposits outstanding at the Bank
at March 31, 1995 (the date most
1
recently considered in the SAIF recapitalization legislation), this fee would be
approximately $920,000 or $550,000 net of any tax effect. Management of the Bank
is unable to predict whether this proposal or any similar proposal will be
enacted or whether ongoing SAIF premiums will be reduced to a level equal to
that of BIF premiums.
Lack of Growth in the Bank's Market Areas
Economic growth in the Bank's market areas remains dependent upon the
local economy. The deposit and loan activity of the Bank is significantly
affected by economic conditions in its market areas. The economies of the Bank's
market areas have remained stagnant for several years. Although the Bank has
been able to increase its market share in originating first mortgage loans on
residential property within its primary market areas, total first mortgage loan
originations in the Bank's market areas have been declining. See also, "Business
of the Bank - Competition" and "Market Areas."
Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation and
Bylaws, particularly a provision limiting voting rights, as well as the Delaware
General Corporation Law and certain federal regulations, assist the Company in
maintaining its status as an independent, publicly owned corporation and serve
to render a hostile takeover more difficult. These provisions provide for, among
other things, supermajority voting, staggered terms for the Board of Directors,
noncumulative voting for directors, limits on the calling of special meetings,
and restrictions on certain business combinations. In particular, the Company's
Certificate of Incorporation provides that beneficial owners of more than 10% of
the Company's outstanding Common Stock may not vote the shares owned in excess
of the 10% limit for a period of five years from the completion of the
Conversion of the Bank, and no person may, directly or indirectly, offer to
acquire or acquire the beneficial ownership of more than 10% of any class of any
equity security of the Company. The impact of these provisions on a beneficial
holder of more than 10% of the Common Stock is to (1) require divestiture of the
amount of stock held in excess of 10% (if within five years of the Conversion
more than 10% of the Common Stock is beneficially owned by a person) and (2) at
any time, limit the vote on the Common Stock held by the beneficial owner to 10%
or possibly reduce the amount that may be voted below the 10% level. Unless the
grantor of a revocable proxy is an affiliate or an associate of a 10% holder or
there is an arrangement, agreement, or understanding with such 10% holder, these
provisions would not restrict (1) the ability of a 10% holder of revocable
proxies to exercise revocable proxies for which the 10% holder is neither a
beneficial nor record owner, or (2) the ability of a beneficial owner of less
than 10% of the Common Stock to solicit revocable proxies during a public proxy
solicitation for a particular meeting of stockholders and vote such proxies.
However, these provisions may discourage potential proxy contests. Additional
restrictions apply after five years from the completion of the Conversion.
The Bank and the Company believe these provisions will benefit
stockholders. Nonetheless, these provisions, although they do not preclude a
takeover, may have the effect of discouraging a future takeover attempt not
approved by the Company's Board of Directors, but pursuant to which stockholders
might 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 might not have the opportunity to do so. Such provisions will also
render the removal of the Company's Board of Directors and of management more
difficult and, therefore, may serve to perpetuate current management. The Boards
of Directors of the Bank and the Company, however, have concluded that the
potential benefits outweigh the possible disadvantages because they believe that
such provisions encourage potential acquirors to negotiate directly with the
Boards of Directors. The Boards of Directors believe that they are in the best
position to act on behalf of all stockholders. Further, the Board of Directors
of the Company has the ability to waive certain restrictions on acquisition,
provided that the acquisition is approved by a majority
2
of the disinterested Board of Directors in advance. The Bank has also entered
into employment agreements with the chief executive officer and another
executive officer and severance agreements with certain key employees. These
agreements could result in higher expenses for an acquiror, thereby making an
acquisition less attractive to potential acquirors. See "Certain Restrictions on
Acquisition of the Company."
Voting Control
The directors and executive officers of the Bank intend to purchase, at
the same price per share as the shares sold to other investors in the
Conversion, approximately 68,500 shares or 6.23% of the shares to be sold in the
Conversion (based upon an offering at the midpoint of the EVR of 1,100,000).
Assuming that stockholders approve the Option Plan and RSP, that the stock
options to be granted are exercised by recipients, and that the RSP purchases
and awards 4% of the shares sold in the Conversion, the aggregate beneficial
ownership of such directors and officers would increase after the Conversion to
222,500 shares, or 20.27% (based on an offering at the midpoint of the EVR). In
addition, such officers may acquire beneficial ownership of additional shares of
Common Stock through future ESOP allocations, which amounts cannot be determined
at this time. It is expected that certain directors of the Bank will serve as
the trustees to the ESOP ("ESOP Trustees") and as members of an ESOP Committee.
The ESOP Trustees must vote all allocated shares held in the ESOP as directed by
participating employees. Unallocated shares (approximately 88,000 shares at the
midpoint of the EVR immediately after Conversion and until allocated) and
allocated shares for which no timely direction is received will be voted by the
ESOP Trustees as directed by the Board of Directors or the ESOP Committee,
subject to the ESOP Trustees' fiduciary duties. In addition, shares sold above
the maximum of the EVR may be sold to the ESOP to fill its subscription (the
ESOP currently intends to purchase up to 8% of the Common Stock) prior to
satisfying unfilled orders of Eligible Account Holders, or the ESOP may purchase
shares in the open market.
The proposed purchases of the Common Stock by the Board of Directors,
management, and the ESOP, as well as the potential acquisition of the Common
Stock through the Option Plan and RSP, could render it difficult to obtain
majority support for stockholder proposals opposed by the Company's Board of
Directors and management. Moreover, such voting control could enable the Board
of Directors of the Company and management to block the approval of transactions
requiring the approval of 80% of the stockholders under the Company's
Certificate of Incorporation. See "Management of the Bank Executive
Compensation," "Description of Capital Stock," and "Certain Restrictions on
Acquisition of the Company."
Possible Dilutive Effect of RSP and Stock Options and Effect of Purchases by the
RSP and ESOP
Within one year following the completion of the Conversion, subject to the
approval of the Boards of Director of the Company and the Bank and stockholders,
the RSP expects to acquire 4% of the total number of shares sold in the
Offerings through the issuance of authorized but unissued shares or by open
market purchases. The issuance of authorized but unissued shares to the RSP in
an amount equal to 4% of the outstanding shares of Common Stock of the Company
would dilute existing stockholder interests by approximately 3.9%. The RSP and
the ESOP may acquire shares of Common Stock in the open market. In the event the
RSP acquires additional shares of Common Stock in the open market, the funds
available for investment by the Company and the Bank will be reduced by the
amount used to acquire such shares. In the event the ESOP acquires shares of
Common Stock in the open market and the purchase price is different than $10 per
share, the funds available for investment will be affected by the difference
between $10 and the purchase price. See "Pro Forma Data" and "Management of the
Bank - Proposed Future Stock Benefit Plans - Restricted Stock Plan." In
addition, the Bank intends to establish a stock option plan after the
Conversion, whereby options may be granted to purchase additional
3
authorized but unissued shares of Common Stock that equal in the aggregate up to
10% of the stock sold in the Conversion. Assuming that options for 10% of the
shares sold are granted and exercised and funded through previously authorized
but unissued stock, existing stockholders' interests would be diluted by
approximately 9.1%. See "Management of the Bank - Proposed Future Stock Benefit
Plans - Stock Option Plan." Benefit plans such as the RSP and the Option Plan
that are implemented within the first year after the Conversion are subject to
extensive OTS regulation.
Accounting practices require an employer such as the Company to record
compensation expense in an amount equal to the fair value of shares committed to
be released from plans such as the ESOP. If shares of Common Stock appreciate in
price over time, compensation expense related to the ESOP may be materially
increased as a result, although the extent of such an increase in expense cannot
be accurately quantified at this time. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Recent Accounting
Pronouncements."
Regulatory Oversight
The Bank is subject to extensive regulation, supervision, and examination
by the OTS as its chartering authority and primary federal regulator, and by the
FDIC, which insures its deposits up to applicable limits. The Bank is a member
of the Federal Home Loan Bank ("FHLB") of New York and is subject to certain
limited regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). As the savings and loan holding company of the Bank,
the Company is also subject to regulation and oversight by the OTS. Such
regulation and supervision governs the activities in which an institution may
engage and is intended primarily for the protection of the FDIC insurance funds
and depositors and not for the protection of stockholders. Regulatory
authorities have been granted extensive discretion in connection with their
supervisory and enforcement activities. Any change in the regulatory structure
or the applicable statutes or regulations could have a material impact on the
Company and the Bank, their operations and the Conversion. See "Regulation."
A bill has been introduced to the House Banking Committee that would
consolidate the OTS with the Office of the Comptroller of the Currency ("OCC").
The resulting agency would regulate all federally chartered commercial banks and
thrift institutions. In the event that the OTS is consolidated with the OCC, it
is possible that the thrift charter could be eliminated, requiring thrifts to
convert to commercial bank charters.
Bank holding companies are more limited in their investment authority than
are savings and loan holding companies. Under current law and regulation, a
unitary savings and loan holding company, such as the Company, which has only
one thrift subsidiary that meets the qualified thrift lender ("QTL") test, such
as the Bank, has essentially unlimited investment authority. See "Regulation -
Company Regulation." Legislation has also been proposed which, if enacted, would
limit the non-banking related activities of savings and loan holding companies
to those activities permitted for bank holding companies.
Possible Recapture of Bad Debt Reserve
A proposal has been introduced in Congress which, if enacted, would
trigger a recapture of a thrift institution's bad debt reserve maintained for
federal income tax purposes in excess of the amount at December 31, 1987, the
base year. For the Bank, this would result in an expense of approximately
$11,000 at March 31, 1996. The Bank is permitted to establish a tax reserve for
bad debts and to make annual additions thereto, which additions may, within
specified limitations, be deducted in arriving at taxable income. The Bank's
deduction with respect to "qualifying loans," which are generally loans secured
by certain interests in real property, may currently be 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
4
taxable income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve.
Under pending legislative proposals, the PTI Method would be repealed and
the Bank would be permitted to use only the Experience Method of computing
additions to its bad debt reserve. In addition, the Bank would be required to
recapture (i.e., take into taxable income) over a multi-year period the excess
of the balance of its bad debt reserves as of December 31, 1995 over the greater
of (a) the balance of such reserves as of December 31, 1987 or (b) an amount
that would have been the balance of such reserves as of December 31, 1995 had
the Bank always computed the additions to its reserves using the Experience
Method. (If the Bank were a "large bank," which it now is not, it would be
unable to make additions to its tax bad debt reserve, would be permitted to
deduct bad debts only as they occur and would additionally be required to
recapture over a multi-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). However, under the proposed 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 December 31,
1995. Similar consequences would result under present law if the Bank later
becomes a large bank and fails to satisfy the qualifying thrift definitional
test except that, under present law, the Bank would be required to recapture its
entire bad debt reserves, not only the excess over the December 31, 1987 balance
of its reserves, and present law does not provide a two year suspension of the
recapture. See "Taxation."
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Bank has received an opinion from Capital Resources Group that
subscription rights granted to Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members have no value. However, this opinion is not
binding on the Internal Revenue Service ("IRS"). If the subscription rights are
deemed to have an ascertainable value, receipt of such rights would be taxable
(either as capital gain or ordinary income) probably only to those who exercise
the subscription rights in an amount equal to such value. Additionally, the Bank
could recognize a gain for tax purposes on such distribution. Whether
subscription rights are considered to have ascertainable value is an inherently
factual determination. See "The Conversion - Effects of Conversion to Stock Form
on Depositors and Borrowers of the Bank - Tax Effects."
Return on Equity After Conversion
As a result of the Conversion, the Company, on a consolidated basis with
the Bank, will have equity that is substantially more than the equity of the
Bank prior to the Conversion. Accordingly, the increase in equity coupled with
the limited loan opportunities in the Bank's market areas is likely to adversely
affect the Company's ability to attain a return on average equity (net income
divided by average equity) at historical levels, absent a corresponding increase
in net income. The Company and the Bank initially intend to invest the net
proceeds in short to medium term investments which generally have lower yields
then residential mortgage loans. There can be no assurance that the Company will
be able to increase net income in future periods in amounts commensurate with
the increase in equity resulting from the Conversion. See, also, "Pro Forma
Data."
5
Lack of Liquidity for the Common Stock
Neither the Bank nor the Company has ever issued capital stock.
Consequently, there is not, at this time, any market for the Common Stock. The
Company has received conditional approval to have the Common Stock quoted on the
Nasdaq Stock Market under the symbol "AFED." The Company will seek to encourage
and assist at least two market makers to make a market in the Common Stock.
Capital Resources has indicated its intent to make a market in the Common Stock
upon the completion of the Conversion, subject to compliance with applicable
laws and regulations, but is under no obligation to do so. While the Company
anticipates that prior to the completion of the Conversion it will obtain a
commitment from at least one other broker-dealer to make a market in the Common
Stock, there can be no assurance that there will be two or more market makers
for the Common Stock. One of the conditions for Nasdaq quotation is that at
least two market makers make, or agree to make, a market in the stock.
Due to the relatively small size of the Offerings, an active and liquid
market for the Common Stock may not develop or be maintained. See "Market for
the Common Stock." Accordingly, prospective purchasers should consider the
potentially illiquid nature of an investment in the Common Stock and recognize
that the absence of an established market might make it difficult to buy or sell
the Common Stock.
AFSALA BANCORP, INC.
The Company is a Delaware corporation organized in June 1996 at the
direction of the Bank to acquire all of the capital stock that the Bank will
issue upon its conversion from the mutual to stock form of ownership. The
Company has not engaged in any significant business to date. The OTS has
approved the Company's application to become a savings and loan holding company
and the Company will retain approximately 50% of the net proceeds from the
issuance of Common Stock as its initial capitalization (ranging from
approximately $4.4 million assuming the sale of 935,000 shares at the minimum of
the EVR to $6.0 million assuming the sale of 1,265,000 shares at the maximum of
the EVR). The Company will use the balance of the net proceeds to purchase all
of the common stock of the Bank to be issued upon Conversion. Part of the
proceeds retained by the Company will be used to fund the loan to the ESOP.
Prior to the Conversion, the Company will not transact any material business.
Upon consummation of the Conversion, the Company will have no significant assets
other than that portion of the net proceeds of the Offerings retained by the
Company (less the loan to the ESOP) and the shares of the Bank's capital stock
acquired in the Conversion, and will have no significant liabilities. Cash flow
to the Company will be dependent upon earnings from the investment of the
portion of net proceeds retained by it in the Conversion and any dividends
received from the Bank. See "Use of Proceeds."
Management believes that the holding company structure will provide
flexibility for possible diversification of business activities through existing
or newly-formed subsidiaries, or through acquisitions of or mergers with both
savings institutions and commercial banks, as well as other financial services
related companies. Although there are no current arrangements, understandings,
or agreements regarding any such opportunities, the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial condition, to take advantage of any such acquisition and
expansion opportunities that may arise. However, some of these activities could
be deemed to entail a greater risk than the activities permissible for federally
chartered savings associations such as the Bank. The initial activities of the
Company are anticipated to be funded by the portion of the net proceeds retained
by the Company and earnings thereon.
The office of the Company is located at 161 Church Street, Amsterdam, New
York 12010 and its telephone number is (518) 842-5700.
6
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
The Bank is a federally chartered mutual savings and loan association
headquartered in Amsterdam, New York. The Bank was chartered in 1936 under the
name Amsterdam Federal Savings and Loan Association. The Bank's deposits have
been federally insured since 1937 under the SAIF as administered by the FDIC and
its predecessor, the Federal Savings and Loan Insurance Corporation, and the
Bank became a member of the FHLB System in 1937. At March 31, 1996, the Bank had
total assets of $133.0 million, deposits of $121.4 million, and equity of $8.2
million or 6.16% of total assets.
The Bank is a community oriented savings institution offering financial
services to meet the needs of the communities it serves. The Bank conducts its
business from its main office located in Amsterdam, New York, and three branch
offices, one also located in Amsterdam, New York, and the others located in Shop
N Save Supermarkets located in Gloversville and Oneonta, New York.
The principal sources of funds for the Bank's lending activities are
deposits and the amortization and repayment of loans and sales, maturities, and
calls of securities. The principal source of income is interest on loans and the
principal expense is interest paid on deposits.
The main office of the Bank is located at 161 Church Street, Amsterdam,
New York 12010 and the telephone number of that office is (518) 842-5700.
USE OF PROCEEDS
The Company will purchase all of the capital stock of the Bank to be
issued upon Conversion in exchange for 50% of the net proceeds of the Offerings,
with the remaining net proceeds to be retained by the Company as initial
capital. The Company has received the approval of the OTS to retain 50% of the
net proceeds. The net proceeds retained by the Company will be initially
invested in loans to the Bank, U.S. Government and federal agency securities,
interest earning deposits, high-grade short term marketable securities, or a
combination thereof. The portion of the net proceeds retained by the Company may
ultimately be used to support the future expansion of operations through
acquisitions of other financial service institutions, such as other savings
institutions and commercial banks, acquisitions of branches of financial service
institutions, although no such transactions are currently contemplated,
diversification into other related businesses, or for other business and
investment purposes including the payment of regular and special dividends on,
and repurchase of, the Common Stock. The Company also intends to make a loan
directly to the ESOP to enable the ESOP to purchase Common Stock in the
Conversion. If the Company is not permitted to make the ESOP loan, the ESOP may
borrow funds from an unaffiliated lender with such loan being guaranteed by the
Company. Based upon the issuance of 935,000 shares or 1,265,000 shares at the
minimum and maximum of the EVR, respectively, the Company would retain $4.4
million or $6.0 million, respectively, of the net proceeds from the Offerings,
out of which the loan to the ESOP to purchase 8% of the Common Stock would be
$748,000 or $1.0 million, respectively, and the Bank would receive additional
capital of $4.4 million or $6.0 million, respectively. The amount of the ESOP
loan would be reflected as a reduction to the capital of both the Company and
the Bank, whether such loan is obtained from the Company or instead from a third
party and guaranteed by the Company. See "Pro Forma Data."
In the event the ESOP does not purchase Common Stock in the Conversion,
the ESOP may purchase shares of Common Stock in the open market after the
Conversion. In the event the purchase price of the Common Stock is different
than $10.00 per share, the amount of proceeds required for the purchase by the
ESOP and the resulting effect on capital will be affected.
7
The portion of the net proceeds not retained by the Company will be added
to the Bank's general funds to be used for general corporate purposes,
including, but not limited to, investment in mortgage and other loans, U.S.
Government and federal agency securities, state and municipal obligations,
Federal Funds, certificates of deposit, mortgage-backed securities, and other
investments. The amount of proceeds added to the Bank's capital will further
strengthen the Bank's capital position. This capital provides an additional
source of funding for longer term assets. Following the Conversion, the amount
of proceeds will be evaluated as part of the Bank's ongoing review of its
asset/liability mix and may impact the structure of the assets and liabilities
of the Bank and the Company. Neither the Bank nor the Company has any specific
plans, arrangements, or understandings regarding any acquisitions or
diversification of activities at this time, nor have criteria been established
to identify potential candidates for acquisition.
Should the Company subsequently adopt a restricted stock plan, a portion
of the proceeds may be used to fund the purchase by the plan of Common Stock in
an amount up to 4% of the shares sold in the Conversion. The actual cost of such
purchase will depend on the number of shares sold in the Conversion and the
market price at the time of purchase. Based upon the midpoint of the EVR and on
a $10.00 per share purchase price, the cost would be approximately $440,000. It
is expected that a restricted stock plan will be adopted by the Board of
Directors within one year of the Conversion.
If additional benefit plans, such as the RSP, are adopted within one year
and the tangible capital of the Bank is not equal to or greater than 10% of
total assets at the time, the Company will provide additional capital to the
Bank so that tangible capital equals 10% of total assets to comply with OTS
rules requiring such capital prior to implementation of the RSP. On a pro forma
basis at March 31, 1996, assuming the sale of Common Stock at the midpoint of
the EVR, their may require the contribution of up to $1.9 million in additional
capital to the Bank from the Company. The actual amount required, if any, would
be affected by the Bank's earnings following the Conversion but prior to
implementation of the RSP and its asset size at the time of such implementation.
See footnote (1) under "Historical and Pro Forma Capital Compliance."
The net proceeds may vary because total expenses of the Conversion may be
more or less than those estimated. The net proceeds will also vary if the number
of shares to be issued in the Conversion are adjusted to reflect a change in the
estimated pro forma market value of the Bank. Payments for shares made through
withdrawals from existing Bank deposit accounts will not result in the receipt
of new funds for investment by the Bank but will result in a reduction of the
Bank's deposits and interest expense as funds are transferred from interest
bearing certificates or other deposit accounts.
DIVIDENDS
Upon conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Board of Directors of the Company does not intend
to pay dividends immediately following Conversion, but may consider doing so in
the future. If any dividends are paid in future periods, they will be subject to
determination and declaration by the Board of Directors, which will take into
account a number of factors, including the financial condition of the Company
and the Bank, and regulatory restrictions on the payment of dividends by the
Bank to the Company, on which dividends the Company eventually may be primarily
dependent for its source of income. 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. In addition to or in lieu of
recurring or regular dividends, the Company may pay nonrecurring or special
dividends. The Company may pay stock dividends in lieu of, or in addition to,
cash dividends.
It is anticipated that the principal source of income to the Company will
initially consist of the earnings on the capital retained by the Company in the
Conversion. Future declarations of cash dividends by the Company will depend in
part upon dividend payments by the Bank to the Company, which payments are
subject to various restrictions. See "Historical and Pro Forma Capital
Compliance," "The
8
Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of
the Bank Liquidation Account" and "Regulation - Dividend and Other Capital
Distribution Limitations."
Unlike the Bank, the Company is not subject to OTS 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. The Company
is subject, however, to the requirements of Delaware law, which generally limits
cash dividends to an amount that will not affect the ability of the Company,
after the dividend has been paid, to (i) pay its debts as they come due and (ii)
maintain the Company's total assets in an amount greater than its total
liabilities including any dissolution preferences.
In addition to the foregoing, earnings of the Bank appropriated for bad
debt reserves and deducted for federal income tax purposes cannot be used by the
Bank to pay cash dividends to the Company without the payment of federal income
taxes by the Bank at the then current income tax rate on the amount deemed
distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation - Federal Taxation" and Note 10
to the Financial Statements included elsewhere herein. The Company does not
contemplate any voluntary distribution by the Bank that would result in a
recapture of the Bank's bad debt reserve or create the above-mentioned federal
tax liabilities.
MARKET FOR THE COMMON STOCK
Neither the Company nor the Bank has ever issued capital stock.
Consequently, there is no established market for the Common Stock at this time.
The Company has received conditional approval to have the Common Stock quoted on
the Nasdaq Stock Market ("Nasdaq System") under the symbol "AFED." One of the
conditions for quotation on the Nasdaq System is that at least two market makers
make, or agree to make, a market in the Common Stock. Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements. Capital Resources has
indicated that, upon completion of the Conversion, it intends to act as a market
maker for the Common Stock, but is under no obligation to do so, and will seek
to obtain at least one additional market maker. The Company will seek to
encourage and assist two market makers to make a market in the Common Stock.
While the Company anticipates that prior to the completion of the Conversion it
will obtain a commitment from at least one other broker-dealer to make a market
in the Common Stock, there can be no assurance that there will be two or more
market makers. In the event the Common Stock is not listed on the Nasdaq System,
for example, because a second market maker cannot be secured or retained, the
Common Stock is expected to be quoted and traded on the OTC Bulletin Board or
the National Quotation Service "Pink Sheets." The development of a liquid public
market depends on the existence of willing buyers and sellers, the presence of
whom are not within the control of the Company, the Bank, Capital Resources, or
any other market maker. Due to the size of the Offerings, it is unlikely that a
stockholder base sufficiently large to create an active trading market will
develop and be maintained. Therefore, purchasers of the Common Stock should have
a long term investment intent and should recognize that the absence of an active
trading market may make it difficult to sell the Common Stock. There can be no
assurance that persons purchasing shares will be able to sell them promptly or
at a price equal to or above the Purchase Price.
The Company will register its Common Stock under the Securities Exchange
Act of 1934, as amended ("Exchange Act") at the completion of the Conversion and
will be subject to the reporting requirements of the Exchange Act for at least
three years following the Conversion. See "Registration Requirements."
9
CAPITALIZATION
The following table presents, as of March 31, 1996, the historical
capitalization of the Bank and the pro forma consolidated capitalization of the
Company after giving effect to the Conversion and other assumptions set forth
below and under "Pro Forma Data," based upon the sale of shares at the minimum,
midpoint, maximum, and 15% above the maximum of the EVR at a price of $10.00 per
share:
Pro Forma Consolidated Capitalization of the
Company Based on the Sale of
-----------------------------------------------------
Historical Maximum, as
Capitalization Minimum of Midpoint of Maximum of adjusted, of
of the 935,000 1,100,000 1,265,000 1,454,750
Bank Shares Shares Shares Shares
---- ------ ------ ------ ------
(In Thousands)
Deposits(1) ......................... $121,443 $121,443 $121,443 $121,443 $121,443
FHLB Borrowings...................... 2,072 2,072 2,072 2,072 2,072
------- ------- ------- ------- -------
Total deposits and borrowings.. $123,515 $123,515 $123,515 $123,515 $123,515
======= ======= ======= ======= =======
Capital Stock:
Preferred Stock, par value $0.10 per share:
Authorized - 500,000 shares; assumed
outstanding - none.............. $ 0 $ 0 $ 0 $ 0 $ 0
Common Stock, par value $0.10 per share:
Authorized - 3,000,000 shares; assumed
outstanding - as shown(2)....... 0 94 110 127 145
Paid in Capital(2)................... 0 8,636 10,240 11,842 13,687
Less: Common Stock acquired by ESOP with
borrowed funds(3)............ 0 (748) (880) (1,012) (1,164)
Common Stock acquired by RSP(3) 0 (374) (440) (506) (582)
Equity -- substantially restricted(4) 8,195 8,195 8,195 8,195 8,195
------- ------ ------ ------ ------
Total stockholders' equity..... $ 8,195 $15,803 $17,225 $18,646 $20,281
======= ====== ====== ====== ======
- ---------------------
(1) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(2) Does not reflect the increase in the number of shares of Common Stock after
the Conversion in the event of implementation of the Option Plan or RSP.
See "Management of the Bank - Proposed Future Stock Benefit Plans - Stock
Option Plan" and "- Restricted Stock Plan."
(3) Assumes that 8% and 4% of the shares issued in the Conversion will be
purchased by the ESOP and RSP, respectively. No shares will be purchased by
the RSP in the Conversion. It is assumed on a pro forma basis that the RSP
will be adopted by the Board of Directors, approved by stockholders of the
Company, and reviewed by the OTS. It is assumed that the RSP will purchase
Common Stock in the open market within one year of the Conversion in order
to give an indication of its effect on capitalization. The pro forma
presentation does not show the impact of (a) results of operations after
the Conversion, (b) changing market prices of shares of Common Stock after
the Conversion, or (c) a smaller than 4% purchase by the RSP. Assumes that
the funds used to acquire the ESOP shares will be borrowed from the Company
for a ten year term at the prime rate as published in The Wall Street
Journal. For an estimate of the impact of the ----------------------- ESOP
on earnings, see "Pro Forma Data." The Bank intends to make contributions
to the ESOP sufficient to service and ultimately retire its debt. The
amount to be acquired by the ESOP and RSP is reflected as a reduction of
stockholders' equity. The issuance of authorized but unissued shares for
the RSP in an amount equal to 4% of the outstanding shares of Common Stock
will have the effect of diluting existing stockholders' interests by 3.9%.
There can be no assurance that stockholder approval of the RSP will be
obtained. See "Management of the Bank - Proposed Future Stock Benefit Plans
- Restricted Stock Plan."
(4) The equity of the Bank will be substantially restricted after the
Conversion. See "Dividends," "Regulation - Dividends and Other Capital
Distribution Limitations," "The Conversion - Effects of Conversion to Stock
Form on Depositors and Borrowers of the Bank -Liquidation Account" and Note
10 to the Financial Statements.
10
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 $8.7 million and $13.8 million at the minimum
and maximum, as adjusted, of the EVR, based upon the following assumptions: (i)
8% of the stock issued in the Conversion will be sold to the ESOP and $685,000
will be sold to officers, directors, employees and members of their immediate
families; (ii) Capital Resources will receive a commission of 2.00% of the
Common Stock sold in the Conversion, excluding the sale of shares to the ESOP,
and to officers, directors and employees and members of their immediate
families; (iii) no shares will be sold in a Syndicated Public Offering by
selected dealers; (iv) other Conversion expenses, excluding the commission paid
to Capital Resources, will be approximately $462,000; and (v) 4% of the shares
issued in the Conversion will be sold to the RSP. Because management of the Bank
presently intends to adopt the RSP within the first year following the
Conversion, a purchase by the RSP in the Conversion has been included with the
pro forma data to give an indication of the effect of a 4% purchase by the RSP,
at a $10.00 per share purchase price in the market, even though the RSP does not
currently exist and is prohibited by OTS regulation from purchasing in the
Conversion. The pro forma presentation does not show the effect of (a) results
of operations after the Conversion, (b) changing market prices of shares of
Common Stock after the Conversion, or (c) less than a 4% purchase by the RSP.
The following table sets forth for the periods and as of the dates
indicated, the historical net earnings and equity of the Bank prior to the
Conversion and the pro forma consolidated net earnings and stockholders' equity
of the Company following the Conversion. Unaudited pro forma consolidated net
earnings and stockholders' equity have been calculated for the fiscal year ended
September 30, 1995 and for the six months ended March 31, 1996 as if the Common
Stock to be issued in the Conversion had been sold at October 1, 1994 and
October 1, 1995, respectively, and the estimated net proceeds had been invested
by the Company and the Bank at 5.75% for the fiscal year ended September 30,
1995 and for the six months ended March 31, 1996, which rate is equal to the one
year U.S. Treasury bill rate in effect during June 1996. The one year U.S.
Treasury bill rate, rather than an arithmetic average of the average yield on
interest earning assets and average rate paid on deposits, has been used to
estimate income on net proceeds because it is believed that the one year U.S.
Treasury bill rate is a more accurate estimate of the rate that would be
obtained on an initial investment of net proceeds from the Offerings. In
calculating pro forma income, an effective state and federal income tax rate of
40% for both the Bank and the Company has been assumed for the respective
periods, resulting in an after tax yield of 3.45% for the fiscal year ended
September 30, 1995 and for the six months ended March 31, 1996. Withdrawals from
deposit accounts for the purchase of the Common Stock are not reflected in the
pro forma adjustments. The computations are based upon the assumptions that
935,000 shares (minimum of EVR), 1,100,000 shares (midpoint of EVR), 1,265,000
shares (maximum of EVR) or 1,454,750 shares (maximum, as adjusted, of the EVR)
are sold at a price of $10.00 per share.
As discussed under "Use of Proceeds," the Company expects to retain 50%
of the net Conversion proceeds, part of which will be used to lend money to the
ESOP to purchase the Common Stock issued in the Conversion. The ESOP presently
plans to purchase up to 8% of the Common Stock issued in the Conversion. The
following table assumes that the yield on the net proceeds of the Conversion
retained by the Company will be the same as the yield on the net proceeds of the
Conversion transferred to the Bank.
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. Per share amounts have been computed as if the Common Stock had
been outstanding at the beginning of the periods or at the dates
11
shown. Pro forma stockholders' equity and pro forma stockholders' equity per
share have not been adjusted to reflect the earnings on the estimated net
proceeds.
The stockholders' equity information is not intended to represent the
fair market value of the Common Stock, or the current value of the Bank's assets
or liabilities, or the amounts, if any, that would be available for distribution
to stockholders in the event of liquidation. For additional information
regarding the liquidation account, see "The Conversion - Effects of the
Conversion to Stock Form on Depositors and Borrowers of the Bank - Liquidation
Account" and Note 14 to the Financial Statements. The pro forma income derived
from the assumptions set forth above should not be considered indicative of the
actual results of operations of the Bank or the Company for any period. Such pro
forma data may be materially affected by a change in the price per share or
number of shares to be issued in the Conversion and by other factors. For
information regarding investment of the proceeds see "Use of Proceeds" and "The
Conversion - Stock Pricing" and "Number of Shares to be Issued in the
Conversion."
12
At or For the Six Months Ended March 31, 1996
--------------------------------------------------------
935,000 1,100,000 1,265,000 1,454,750
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in Thousands, except per share amounts)
Gross proceeds................................ $ 9,350 $ 11,000 $12,650 $14,548
Less estimated offering expenses.............. (620) (650) (681) (716)
------ ------- ------ ------
Estimated net proceeds...................... 8,730 10,350 11,969 13,832
Less: ESOP funded by the Company............ (748) (880) (1,012) (1,164)
Less: RSP funded by the Company............. (374) (440) (506) (582)
------ ------- ------- ------
Estimated investable net proceeds........... $ 7,608 $ 9,030 $10,451 $12,086
====== ====== ====== ======
Earnings:
Historical earnings ........................ $318 $318 $318 $318
Pro forma earnings on investable net proceeds 131 156 180 208
Pro forma ESOP adjustment(1)................ (22) (26) (30) (35)
Pro forma RSP adjustment(2)................. (22) (26) (30) (35)
--- --- --- ---
Total................................... $405 $422 $438 $456
=== === === ===
Earnings per share:
Historical earnings ........................ $0.38 $0.33 $0.29 $0.24
Pro forma earnings on net proceeds.......... 0.15 0.15 0.15 0.16
Pro forma ESOP adjustment(1)................ (0.03) (0.03) (0.03) (0.03)
Pro forma RSP adjustment(2)................. (0.03) (0.03) (0.03) (0.03)
----- ----- ----- -----
Total(3)................................ $0.47 $0.42 $0.38 $0.34
==== ==== ==== ====
Weighted average shares used in calculation(1) 862,070 1,014,200 1,166,330 1,341,280
Stockholders' equity:(4)
Historical.................................. $8,195 $8,195 $8,195 $8,195
Estimated net proceeds(2)................... 8,730 10,350 11,969 13,832
Less: Common Stock acquired by ESOP(1)...... (748) (880) (1,012) (1,164)
Common Stock acquired by RSP(2)....... (374) (440) (506) (582)
----- ------ ------ ------
Total................................... $15,803 $17,225 $18,646 $20,281
====== ====== ====== ======
Stockholders' equity per share:(4)
Historical.................................. $8.76 $7.45 $6.48 $5.63
Estimated net proceeds(2)................... 9.34 9.41 9.46 9.51
Less: Common Stock acquired by ESOP(1)...... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by RSP(2)....... (0.40) (0.40) (0.40) (0.40)
----- ----- ----- -----
Total(3)................................ $16.90 $15.66 $14.74 $13.94
===== ===== ===== =====
Shares used in calculation(4)................. 935,000 1,100,000 1,265,000 1,454,750
Offering price as a percentage of pro forma
stockholders' equity per share.............. 59.17% 63.86% 67.84% 71.74%
===== ===== ===== =====
Ratio of offering price to pro forma earnings
per share, annualized 10.64x 11.90x 13.16x 14.71x
===== ===== ===== =====
- ----------------------
Footnotes on page 15
13
At or For the Year Ended September 30, 1995
--------------------------------------------------------
935,000 1,100,000 1,265,000 1,454,750
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in Thousands, except per share amounts)
Gross proceeds................................ $ 9,350 $ 11,000 $ 12,650 $ 14,548
Less estimated offering expenses.............. (620) (650) (681) (716)
------ ------ ------- -------
Estimated net proceeds...................... 8,730 10,350 11,969 13,832
Less: ESOP funded by the Company............ (748) (880) (1,012) (1,164)
Less: RSP funded by the Company............. (374) (440) (506) (582)
------ ------ ------- -------
Estimated investable net proceeds........... $ 7,608 $ 9,030 $ 10,451 $ 12,086
====== ====== ======= =======
Earnings:
Historical earnings ........................ $608 $608 $608 $608
Pro forma earnings on investable
net proceeds.............................. 262 312 361 417
Pro forma ESOP adjustment(1)................ (45) (53) (61) (70)
Pro forma RSP adjustment(2)................. (45) (53) (61) (70)
--- --- --- ---
Total.................................... $780 $814 $847 $885
=== === === ===
Earnings per share:
Historical earnings ........................ $ 0.70 $ 0.59 $ 0.51 $ 0.45
Pro forma earnings on net proceeds.......... 0.30 0.31 0.31 0.31
Pro forma ESOP adjustment(1)................ (0.05) (0.05) (0.05) (0.05)
Pro forma RSP adjustment(2)................. (0.05) (0.05) (0.05) (0.05)
----- ----- ----- -----
Total(3)................................. $ 0.90 $ 0.80 $ 0.72 $ 0.66
===== ===== ===== =====
Weighted average shares used in calculation(1) 863,940 1,016,400 1,168,860 1,344,189
Stockholders' equity:(4)
Historical.................................. $ 7,914 $ 7,914 $ 7,914 $ 7,914
Estimated net proceeds(2)................... 8,730 10,350 11,969 13,832
Less: Common Stock acquired by ESOP(1)......... (748) (880) (1,012) (1,164)
Common Stock acquired by RSP(2).......... (374) (440) (506) (582)
------ ------ ------ ------
Total....................................... $15,522 $16,944 $18,365 $20,000
====== ====== ====== ======
Stockholders' equity per share:(4)
Historical.................................. $ 8.46 $ 7.19 $ 6.26 $ 5.44
Estimated net proceeds(2)................... 9.34 9.41 9.46 9.51
Less: Common Stock acquired by ESOP(1)...... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by RSP(2)....... (0.40) (0.40) (0.40) (0.40)
----- ----- ----- -----
Total(3)................................ $16.60 $15.40 $14.52 $13.75
===== ===== ===== =====
Shares used in calculation(4)................. 935,000 1,100,000 1,265,000 1,454,750
Offering price as a percentage of pro forma
stockholders' equity per share.............. 60.24% 64.94% 68.87% 72.73%
===== ===== ===== =====
Ratio of offering price to pro forma earnings
per share................................... 11.11x 12.50x 13.89x 15.15x
===== ===== ===== =====
- ----------------------
Footnotes on next page
14
- --------------------------
(1) Assumes 8% of the shares sold in the Conversion are purchased by the ESOP
under all circumstances, and that the funds used to purchase such shares
are borrowed from the Company. The approximate amount expected to be
borrowed by the ESOP is not reflected as a liability but is reflected as a
reduction of capital. Although repayment of such debt will be secured
solely by the shares purchased by the ESOP, the Bank expects to make
discretionary contributions to the ESOP in an amount at least equal to the
principal and interest payments on the ESOP debt. Pro forma net earnings
have been adjusted to give effect to such contributions based upon a fully
amortizing debt with a ten year term. Because the Company will be providing
the ESOP loan, only principal payments on the ESOP loan are reflected as
employee compensation and benefits expense. For purposes of this table, the
Purchase Price of $10.00 was utilized to calculate the ESOP expense. The
Bank intends to record compensation expense related to the ESOP in
accordance with Statement of Position ("SOP") 93-6. As a result, to the
extent the value of the Common Stock appreciates over time, compensation
expense related to the ESOP will increase. SOP 93-6 also changes the
earnings per share computations for leveraged ESOPs to include as
outstanding only shares that have been committed to be released to
participants. For purposes of the preceding tables, it was assumed that a
ratable portion of the ESOP shares purchased in the Conversion were
committed to be released during the periods ended September 30, 1995 and
March 31, 1996. If it is assumed that all of the ESOP shares were included
in the calculation of earnings per share for the periods ended at September
30, 1995 and March 31, 1996, earnings per share would have been $0.83,
$0.74, $0.67 and $0.61 at September 30, 1995, and $0.43, $0.38, $0.35 and
$0.31 at March 31, 1996, respectively, based on the sale of shares at the
minimum, midpoint, maximum and the maximum, as adjusted, of the EVR. See
"Management of the Bank - Executive Compensation - Employee Stock Ownership
Plan."
(2) Assumes a number of shares of Common Stock equal to 4% of the Common Stock
sold in the Conversion will be purchased by the RSP in the open market in
the year following the Conversion. The dollar amount of the Common Stock to
be purchased by the RSP is based on the Purchase Price and represents
unearned compensation and is reflected as a reduction of capital. Such
amount does not reflect possible increases or decreases in the value of
such stock relative to the Purchase Price. As the Bank accrues compensation
expense to reflect the five year vesting period of such shares pursuant to
the RSP, the charge against capital will be reduced accordingly.
Implementation of the RSP within one year of Conversion would require
regulatory and stockholder approval at a meeting of the Company's
stockholders to be held no earlier than six months after the Conversion.
For purposes of this table, it is assumed that the RSP will be adopted by
the Boards of Directors of the Company and the Bank, reviewed by the OTS,
and approved the Company's stockholders, and that the RSP will purchase the
shares of Common Stock in the open market within the year following the
Conversion. If the shares to be purchased by the RSP are assumed at October
1, 1994 and October 1, 1995, respectively, to be newly issued shares
purchased from the Company by the RSP at the Purchase Price, at the
minimum, midpoint, maximum and maximum, as adjusted, of the EVR, pro forma
stockholders' equity per share would have been $16.35, $15.20, $14.34, and
$13.60 at September 30, 1995 and $16.64, $15.44, $14.56, and $13.79 at
March 31, 1996, respectively, and pro forma earnings per share would have
been $0.88, $0.78, $0.71, and $0.65 for the year ended September 30, 1995
and $0.46, $0.41, $0.37, and $0.33 for the six months ended March 31, 1996,
respectively. As a result of the RSP, stockholders' interests will be
diluted by approximately 3.9%. See "Management of the Bank - Proposed
Future Stock Benefit Plans - Restricted Stock Plan" and "Risk Factors -
Possible Dilutive Effect of RSP and Stock Options and Effect of Purchases
by the RSP and ESOP."
15
(3) Assumes that following the consummation of the Conversion, the Company will
adopt the Option Plan, which if implemented within one year of Conversion
would be subject to regulatory review and Board of Director and stockholder
approval, and that such plan would be considered and voted upon at a
meeting of the Company's stockholders to be held no earlier than six months
after the Conversion. Under the Option Plan, employees and directors could
be granted options to purchase an aggregate amount of Common Stock equal to
10% of the shares issued in the Conversion at an exercise price equal to
the market price of the Common Stock on the date of grant. In the event the
shares issued under the Option Plan were awarded, the interests of existing
stockholders would be diluted. At the minimum, midpoint, maximum and the
maximum, as adjusted, of the EVR, if all shares under the Option Plan were
newly issued at the beginning of the respective periods and the exercise
price for the option shares were equal to the Purchase Price, the number of
outstanding shares of Common Stock would increase to 1,028,500, 1,210,000,
1,391,500, and 1,600,225, respectively, pro forma stockholders' equity per
share would have been $16.00, $14.91, $14.11, and $13.41 at September 30,
1995 and $16.27, $15.14, $14.31, and $13.58 at March 31, 1996,
respectively, and pro forma earnings per share would have been $0.85,
$0.76, $0.69, and $0.63 at September 30, 1995 and $0.44, $0.39, $0.36, and
$0.32 at March 31, 1996, respectively.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the Company over its liabilities. The calculations
are based upon the number of shares issued in the Conversion, without
giving effect to SOP 93-6. The amounts shown do not reflect the federal
income tax consequences of the potential restoration to income of the tax
bad debt reserves for income tax purposes, which would be required in the
event of liquidation. The amounts shown also do not reflect the amounts
required to be distributed in the event of liquidation to eligible
depositors from the liquidation account which will be established upon the
consummation of the Conversion. Pro forma stockholders' equity information
is not intended to represent the fair market value of the Common Stock, the
current value of the Bank's assets or liabilities or the amounts, if any,
that would be available for distribution to stockholders in the event of
liquidation. Such pro forma data may be materially affected by a change in
the number of shares to be sold in the Conversion and by other factors.
16
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Bank's historical and pro forma capital
position relative to its capital requirements as of March 31, 1996. For a
discussion of the assumptions underlying the pro forma capital calculations
presented below, see "Use of Proceeds," "Capitalization" and "Pro Forma Data."
The definitions of the terms used in the table are those provided in the capital
regulations issued by the OTS. For a discussion of the capital standards
applicable to the Bank, see "Regulation - Regulatory Capital Requirements."
At March 31, 1996(1)
--------------------------------------------------------------------------------------
$9,350,000 $11,000,000 $12,650,000 $14,547,500
Historical Minimum Midpoint Maximum Maximum, as adjusted
------------------- ------------------- ------------------- ------------------- --------------------
Percent Percent Percent Percent Percent
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ----------- ------ ----------- ------ ----------- ------ ------------ ------ ------------
(Dollars in Thousands)
GAAP Capital........ $8,195 6.16% $ 11,438 8.35% $ 12,050 8.75% $12,661 9.14% $13,365 9.59%
===== ==== ====== ===== ====== ===== ====== ===== ====== =====
Tangible Capital:
Regulatory
requirement....... $1,996 1.50% $ 2,056 1.50% $ 2,067 1.50% $ 2,079 1.50% $ 2,091 1.50%
Actual capital(3)... 8,228 6.18 11,471 8.37 12,083 8.77 12,694 9.16 13,398 9.61
----- ---- ------ ---- ------ ---- ------ ----- ------ -----
Excess............ $6,232 4.68% $ 9,415 6.87% $10,016 7.27% $10,615 7.66% $11,307 8.11%
===== ==== ====== ===== ====== ===== ====== ===== ====== =====
Core Capital:
Regulatory
requirement(4).... $3,993 3.00% $ 4,113 3.00% $ 4,135 3.00% $ 4,157 3.00% $ 4,183 3.00%
Actual capital...... 8,228 6.18 11,471 8.37 12,083 8.77 12,694 9.16 13,398 9.61
----- ---- ------ ----- ------ ----- ------ ----- ------ -----
Excess............ $4,235 3.18% $ 7,358 5.37% $ 7,948 5.77% $ 8,537 6.16% $ 9,215 6.61%
===== ==== ====== ===== ====== ===== ====== ===== ====== =====
Risk-Based Capital:
Regulatory
requirement....... $4,465 8.00% $ 4,529 8.00% $ 4,541 8.00% $ 4,552 8.00% $ 4,566 8.00%
Actual capital(5)... 8,890 15.93 12,133 21.43 12,745 22.46 13,356 23.47 14,060 24.63
----- ----- ------ ------ ------ ------ ------ ------ ------ -----
Excess............ $4,425 7.93% $ 7,604 13.43% $ 8,204 14.46% $ 8,804 15.47% $ 9,494 16.63%
===== ==== ====== ===== ====== ====== ====== ====== ====== =====
- -----------------
(1) Institutions must value available for sale debt securities at amortized
cost, rather than at fair value, for purposes of calculating regulatory
capital. Institutions are still required to comply with Statement of
Financial Accounting Standards ("SFAS") No. 115 for financial reporting
purposes. The pro forma data has been adjusted to reflect reductions in
capital that would result from an assumed 8% purchase by the ESOP and 4%
purchase by the RSP as of March 31, 1996. It is assumed that the Company
will retain 50% of net conversion proceeds. See "Use of Proceeds." The
Company will provide additional paid-in capital to the Bank prior to the
formation of the RSP in order to attain a 10% capitalization level at the
Bank at that time if the RSP is adopted within one year of the Conversion
and the Bank's tangible capital is below 10% to comply with OTS rules
requiring such capital prior to implementation of the RSP. Assuming that
the RSP was formed immediately upon conversion, to attain that
capitalization level, the Company would invest approximately an additional
$2.5 million, $1.9 million, $1.3 million, and $600,000 at the minimum,
midpoint, maximum, and 15% above the maximum of the EVR, respectively.
(2) GAAP, adjusted, or risk-weighted assets as appropriate.
(3) The unrealized loss on securities available for sale, net of tax, of
$33,000, has been added to GAAP Capital to arrive at Tangible and Core
Capital.
(4) Proposed regulations of the OTS could increase the core capital requirement
to a ratio between 4% and 5%, based upon an association's regulatory
examination rating. See "Regulation - Regulatory Capital Requirements."
(5) Risk-Based Capital includes Tangible Capital plus $698,000 of the Bank's
$751,000 allowance for loan losses, less $36,000 of assets required to be
deducted. Risk-weighted assets as of March 31, 1996 totaled approximately
$55.8 million. Net proceeds available for investment by the Bank are
assumed to be invested in interest earning assets that have a 20%
risk-weighting.
17
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Income
(Unaudited)
Six Months Ended Years Ended
March 31, September 30,
-------------------- ---------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans..............$2,811,188 $2,488,272 $5,162,593 $4,487,873 $4,439,381
Interest on Federal funds sold.......... 162,933 65,820 228,638 93,656 137,315
Interest on FHLB term deposits.......... 44,773 7,553 29,817 118,507 50,336
Interest on securities available
for sale.............................. 341,673l 63,010 118,080 0 0
Interest on investment securities
held to maturity...................... 1,063,753 1,181,653 2,460,410 2,141,153 2,083,970
Dividends on Federal Home Loan Bank of
New York stock........................ 18,927 19,499 41,783 45,186 53,765
--------- --------- --------- --------- ---------
Total interest and dividend income... 4,443,247 3,825,807 8,041,321 6,886,375 6,764,767
--------- --------- --------- --------- ---------
Interest expense:
Deposits and escrow accounts............ 2,574,091 1,955,097 4,352,837 3,424,847 3,559,544
Federal Home Loan Bank of New York
long term borrowings.................. 76,056 91,542 175,764 167,336 181,754
--------- --------- --------- --------- ---------
Total interest expense............... 2,650,147 2,046,639 4,528,601 3,592,183 3,741,298
--------- --------- --------- --------- ---------
Net interest income.................. 1,793,100 1,779,168 3,512,720 3,294,192 3,023,469
Provision for loan losses................. 80,000 85,000 165,000 293,000 217,000
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses.......... 1,713,100 1,694,168 3,347,720 3,001,192 2,806,469
--------- --------- --------- --------- ---------
Non-interest income:
Service charges on deposit accounts..... 180,241 84,633 244,410 151,799 142,648
Net gain (loss) on security transactions 0 (3,151) 40,028 14,679
Other................................... 16,892 15,162 33,943 28,666 29,746
--------- --------- --------- --------- ---------
Total non-interest income............ 197,133 99,795 275,202 220,493 187,073
--------- --------- --------- --------- ---------
Non-interest expenses:
Compensation and benefits............... 627,288 538,395 1,122,778 928,457 812,537
Occupancy and equipment................. 232,471 166,193 385,591 301,355 294,872
FDIC deposit insurance premium.......... 128,904 115,199 235,360 218,632 178,737
Data processing fees.................... 132,966 108,936 234,713 150,985 128,291
Professional service fees............... 58,541 43,596 90,971 86,907 89,502
Advertising............................. 17,972 38,441 69,760 33,482 20,529
Supplies................................ 38,864 48,800 94,165 72,201 70,697
Other................................... 216,255 218,595 497,777 453,160 343,190
--------- --------- --------- --------- ---------
Total non-interest expense .......... 1,453,261 1,278,155 2,731,115 2,245,179 1,938,355
--------- --------- --------- --------- ---------
Income before income tax expense..... 456,972 515,808 891,807 976,506 1,055,187
Income tax expense........................ 138,600 168,882 283,882 320,707 364,580
--------- ---------- --------- --------- ---------
Net income $ 318,372 $ 346,926 $ 607,925 $ 655,799 $ 690,607
========= ========== ========= ========= =========
See accompanying notes to financial statements
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and, accordingly, has no results
of operations at this time. As a result, the following discussion principally
reflects the operations of the Bank. The Bank's results of operations are
primarily dependent on its net interest income, which is the difference between
the interest income earned on its assets, primarily loans and investments, and
the interest expense on its liabilities, primarily deposits and borrowings. Net
interest income may be affected significantly by general economic and
competitive conditions and policies of regulatory agencies, particularly those
with respect to market interest rates. The results of operations are also
significantly influenced by the level of non-interest expenses, such as employee
salaries and benefits, non-interest income, such as loan-related fees and
fees on deposit-related services, and the Bank's provision for loan losses.
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services. Management's
strategy has been to try to achieve a high loan to asset ratio and a high
proportion of lower-costing, non-time deposit accounts in the deposit portfolio.
At March 31, 1996, the Bank's loans receivable, net, to assets ratio was 50.9%.
At March 31, 1996, $58.3 million or 48.0% of total deposits were in non-time
deposit accounts.
Asset/Liability Management
The Bank's net interest income is sensitive to changes in interest rates,
as the rates paid on its interest-bearing liabilities generally change faster
than the rates earned on its interest-earning assets. As a result, net interest
income will frequently decline in periods of rising interest rates and increase
in periods of decreasing interest rates.
To mitigate the impact of changing interest rates on its net interest
income, the Bank manages its interest rate sensitivity and asset/liability
products through its asset/liability management committee. The asset/liability
management committee meets weekly to determine the rates of interest for loans
and deposits and consists of the President and Chief Executive Officer, the Vice
President and Chief Lending Officer, and the Treasurer and Chief Financial
Officer. Rates on deposits are primarily based on the Bank's need for funds and
on a review of rates offered by other financial institutions in the Bank's
market areas. Interest rates on loans are primarily based on the interest rates
offered by other financial institutions in the Bank's primary market areas as
well as the Bank's cost of funds.
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the Bank has
instituted certain asset and liability management measures, including (i)
originating, for its portfolio, a large base of adjustable-rate residential
mortgage loans, which, at March 31, 1996, totalled 30.00% of total loans, of
which 79.75% reprice annually, and (ii) maintaining substantial levels of
interest bearing deposits, federal funds, and securities with one to five year
terms to maturity.
The Committee manages the interest rate sensitivity of the Bank through
the determination and adjustment of asset/liability composition and pricing
strategies. The Committee then monitors the impact of the interest rate risk and
earnings consequences of such strategies for consistency with the Bank's
liquidity needs, growth, and capital adequacy. The Bank's principal strategy is
to reduce the interest rate sensitivity of its interest earning assets and to
match, as closely as possible, the maturities of interest earning assets with
interest bearing liabilities.
19
Net Portfolio Value
In order to encourage savings associations to reduce their interest rate
risk, the OTS adopted a rule incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its net portfolio value ("NPV") to changes in interest rates. NPV
is the difference between incoming and outgoing discounted cash flows from
assets, liabilities, and off-balance sheet contracts. An institution's IRR is
measured as the change to its NPV as a result of a hypothetical 200 basis point
("bp") change in market interest rates. A resulting change in NPV of more than
2% of the estimated present value of total assets ("PV") will require the
institution to deduct from its capital 50% of that excess change. The rules
provide that the OTS will calculate the IRR component quarterly for each
institution. The Bank, based on asset size and risk-based capital, has been
informed by the OTS that it is exempt from this rule. Nevertheless, the
following table presents the Bank's NPV at March 31, 1996, as calculated by the
OTS, based on quarterly information voluntarily provided to the OTS by the Bank.
NPV as % of PV
Net Portfolio Value of Assets
---------------------------------- ------------------------
Change NPV
in Rates $ Amount $Change(1) %Change(2) Ratio(3) Change(4)
-------- -------- ---------- ---------- -------- ---------
(Dollars in Thousands)
+400 bp 8,304 (3,014) (27)% 6.37% -196 bp
+300 bp 9,343 (1,974) (17) 7.08 -125 bp
+200 bp 10,234 (1,083) (10) 7.67 -66 bp
+100 bp 10,920 (398) (4) 8.10 -23 bp
0 bp 11,318 8.33
- -100 bp 11,495 177 2 8.41 8 bp
- -200 bp 11,762 444 4 8.54 21 bp
- -300 bp 12,607 1,289 11 9.05 72 bp
- -400 bp 13,806 2,489 22 9.78 145 bp
- -----------------
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by present value of total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming
no change in interest rates.
Although the OTS has informed the Bank that it is not subject to the IRR
component discussed above, the Bank is still subject to interest rate risk and,
as can be seen above, changes in interest rates may reduce the Bank's NPV. The
OTS has the authority to require otherwise exempt institutions to comply with
the rule concerning interest rate risk.
20
See "Regulation - Regulatory Capital Requirements."
At March 31, 1996, a change in interest rates of a positive 200 basis
points would have resulted in a 66 basis point decrease in NPV as a percentage
of the present value of the Bank's total assets. A change in interest rates of a
negative 200 basis points would have resulted in a 21 basis point increase in
the NPV as a percentage of the present value of the Bank's total assets.
Utilizing the OTS IRR measurement described above, the Bank, at March 31, 1996,
would have been considered by the OTS to have been subject to "normal" IRR and
no additional amount would be required to be deducted from risk-based capital.
Certain assumptions utilized by the OTS in assessing the interest rate
risk of savings associations were employed in preparing the previous table.
These assumptions related to interest rates, loan prepayment rates, deposit
decay rates, and the market values of certain assets under the various interest
rate scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above.
Certain shortcomings are inherent in the preceding NPV tables since the
data reflect hypothetical changes in NPV based upon assumptions used by the OTS
to evaluate the Bank as well as other institutions. Based on the above, net
interest income should increase with an instantaneous 100 basis point increase
in interest rates while net interest income should decline with instantaneous
declines in interest rates. However, the experience of the Bank has been that
net interest income declines with increases in interest rates and that net
interest income increases with decreases in interest rates. Generally, during
periods of increasing interest rates, the Bank's interest rate sensitive
liabilities would reprice faster than its interest rate sensitive assets causing
a decline in the Bank's interest rate spread and margin. This would result from
an increase in the Bank's cost of funds that would not be immediately offset by
an increase in its yield on earning assets. An increase in the cost of funds
without an equivalent increase in the yield on earning assets would tend to
reduce net interest income. The Bank's net interest rate spread decreased for
the fiscal years ended September 30, 1994 and September 30, 1995 from 2.89% to
2.78% and for the six months ended March 31, 1995 and March 31, 1996 from 2.97%
to 2.55%.
In times of decreasing interest rates, fixed rate assets could increase in
value and the lag in repricing of interest rate sensitive assets could be
expected to have a positive effect on the Bank's net interest income.
21
Average Balance Sheet, Interest Rates, and Yield
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for or as of the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily balances, however, some balances are derived from month-end
balances where management does not believe the use of month-end balances has
caused any material difference in the information presented. There have been no
tax equivalent adjustments made to the yields.
At March 31, Six Months Ended March 31,
------------------ ---------------------------------------------------------
1996 1996 1995
------------------ ---------------------------- -------------------------
Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost(1) Balance Interest Cost(1)
(Dollars in Thousands)
Interest earning assets:
Federal funds sold.................... $ 6,150 5.18% $ 6,258 $ 163 5.21% $ 2,492 $ 66 5.31%
Term deposits with Federal Home Loan
Bank of New York.................... 2,000 5.32 1,601 45 5.62 253 8 6.34
Securities available for sale......... 18,185 5.45 12,143 341 5.62 2,712 63 4.66
Investment securities, held to maturity 31,009 6.02 36,228 1,064 5.87 43,360 1,182 5.47
Federal Home Loan Bank of New York
stock, at cost...................... 566 6.50 566 19 6.71 519 19 7.34
Loans receivable, net (2)............. 67,730 8.33 66,920 2,811 8.40 60,738 2,488 8.22
------- ------- ----- ------- -----
Total interest earning assets........ 125,640 7.05 123,716 4,443 7.18 110,074 3,826 6.97
---- ----- ---- ----- ----
Non-interest earning assets............ 7,406 6,132 5,758
------- ------- -------
Total assets......................... $133,046 $129,848 $115,832
======= ======= =======
Interest bearing liabilities:
Savings accounts...................... 35,366 3.00 34,198 514 3.00 38,321 575 3.00
NOW accounts.......................... 10,085 2.25 9,305 106 2.28 8,280 94 2.28
Money market accounts................. 6,260 3.63 6,012 106 3.53 5,394 80 2.97
Time deposit accounts................. 63,117 5.76 62,408 1,843 5.91 47,432 1,201 5.08
Escrow accounts....................... 309 2.00 474 5 2.11 530 5 1.89
Federal Home Loan Bank of New York
long term borrowings................ 2,072 6.74 2,170 76 7.00 2,655 92 6.95
------- ------- ----- ------- -----
Total interest bearing liabilities... 117,209 4.52 114,567 2,650 4.63 102,612 2,047 4.00
---- ----- ---- ----- ----
Non-interest bearing deposits.......... 6,616 6,245 4,866
Other non-interest bearing liabilities. 1,026 962 892
Equity................................. 8,195 8,074 7,462
------- ------- -------
Total liabilities and equity........ $133,046 $129,848 $115,832
======= ======= =======
Net interest income.................... $1,793 $1,779
Interest rate spread................... 2.53% ===== 2.55% ===== 2.97%
==== ==== ====
Net interest margin.................... 2.90% 3.24%
==== ====
Ratio of average interest-earning assets
to average interest bearing liabilities 107.19% 107.99% 107.27%
====== ====== ======
_________________________________
(1) Annualized.
(2) Calculated net of allowance for loan losses. Includes non-accrual loans.
22
Average Balance Sheet, Interest Rates, and Yields (Cont'd)
Year Ended September 30,
------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- --------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(Dollars in Thousands)
Interest earning assets:
Federal funds sold.................... $ 4,103 $ 229 5.58% $ 2,826 $ 94 3.33% $ 4,926 $ 137 2.78%
Term deposits with Federal Home Loan
Bank of New York.................... 508 30 5.91 3,376 118 3.50 1,644 50 3.04
Securities available for sale......... 2,457 118 4.80 0 0 0 0 0 0
Investment securities, held to maturity 44,028 2,460 5.59 42,394 2,141 5.05 35,888 2,084 5.81
Federal Home Loan Bank of New York
stock, at cost...................... 543 42 7.73 530 45 8.49 572 54 9.44
Loans receivable, net (2)............. 62,303 5,162 8.29 54,955 4,488 8.17 51,830 4,439 8.56
------ ----- ------ ----- ------ -----
Total interest earning assets........ 113,942 8,041 7.06 104,081 6,886 6.62 94,860 6,764 7.13
----- ---- ----- ---- ----- ----
Non-interest earning assets............ 5,813 5,617 5,366
------- ------- ------
Total assets......................... $119,755 $109,698 $100,226
======= ======= =======
Interest bearing liabilities:
Savings accounts...................... 36,313 1,089 3.00 41,484 1,244 3.00 36,239 1,200 3.31
NOW accounts.......................... 8,458 193 2.28 7,624 164 2.15 5,999 164 2.73
Money market accounts................. 5,237 157 3.00 5,964 189 3.17 6,170 200 3.24
Time deposit accounts................. 52,795 2,904 5.50 38,274 1,819 4.75 33,475 1,986 5.93
Escrow accounts....................... 562 10 1.78 565 9 1.59 556 9 1.62
Federal Home Loan Bank of New York
long term borrowings................ 2,534 176 6.95 2,494 167 6.70 2,708 182 6.72
------- ----- ------- ----- ------ -----
Total interest bearing liabilities... 105,899 4,529 4.28 96,405 3,592 3.73 85,147 3,741 4.39
----- ---- ----- ---- ----- ----
Non-interest bearing deposits.......... 5,459 5,475 7,938
Other non-interest bearing liabilities. 800 844 840
Equity................................. 7,597 6,974 6,301
------- ------- ------
Total liabilities and equity........ $119,755 $108,698 $100,226
======= ======= =======
Net interest income.................... $3,512 $3,294 $3,023
====== ====== ======
Interest rate spread................... 2.78% 2.89% 2.74%
==== ==== ====
Net interest margin.................... 3.08% 3.16% 3.19%
==== ==== ====
Ratio of average interest-earning assets
to average interest bearing liabilities 107.59% 107.96% 111.41%
====== ====== ======
_________________________________
(2) Calculated net of allowance for loan losses. Includes non-accrual loans.
23
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest earning assets and interest bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by old rate) and (ii) changes in rates (changes in
rate multiplied by old volume). Increases and decreases due to both rate and
volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
Six Months Ended March 31, Year Ended September 30,
------------------------------- ------------------------------- -------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
------------------------------- ------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
------------------- ------------------- -------------------
Total Total Total
Increase Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ---------- ------ ---- ----------
Interest income:
Federal Funds sold................. $ 98,078 $ (965) $ 97,113 $ 53,797 $ 81,185 $ 134,982 $(66,186) $ 22,528 $(43,659)
Term deposits with Federal Home
Loan Bank of New York............ 37,720 (500) 37,220 (138,478) 49,788 (88,690) 59,841 8,330 68,171
Securities available for sale...... 262,732 15,931 278,663 118,080 0 118,080 0 0 0
Investment securities.............. (204,611) 86,711 (117,900) 84,839 234,418 319,257 349,156 (291,973) 57,183
Federal Home Loan Bank of New
York stock, at cost.............. 1,683 (2,255) (572) 1,082 (4,485) (3,403) (3,822) (4,757) (8,579)
Loans receivable, net.............. 258,405 64,511 322,916 608,018 66,702 674,720 260,641 (212,150) 48,492
------- ------ ------- ------- ------ --------- ------- -------- ------
Total interest-earning assets.... 454,007 163,433 617,440 727,338 427,608 1,154,946 599,630 (478,022) 121,608
------- ------- ------- ------- ------- --------- ------- -------- -------
Interest expense:
Savings accounts.................... (61,942) 1,173 (60,769) (155,117) 487 (154,630) 163,785 (120,409) 43,376
NOW accounts........................ 11,694 289 11,983 18,612 10,067 28,679 39,063 (39,100) (37)
Money Market accounts............... 9,819 16,714 26,533 (22,162) (10,011) (32,173) (6,596) (4,903) (11,499)
Time deposit accounts............... 420,558 220,924 641,482 766,923 317,964 1,084,887 260,988 (427,780) (166,792)
Escrow accounts..................... (552) 317 (235) (54) 1,281 1,227 159 96 255
Federal Home Loan Bank of New
York long term borrowings......... (16,975) 1,489 (15,486) 2,737 5,691 8,428 (14,395) (23) (14,418)
------- ------- ------- ------- ------- --------- ------- ------- -------
Total interest-bearing
liabilities.................. 362,602 240,906 603,508 610,939 325,479 936,418 443,004 (592,119) (149,115)
------- ------- ------- ------- ------- --------- ------- -------- --------
Net change in net interest income... $91,405 $(77,473) $ 13,932 $116,399 $102,129 $ 218,528 $156,626 $114,097 $270,723
======= ======== ======== ======== ======== ========== ======== ======== ========
24
Financial Condition
Total assets increased by $5.1 million or 4.0% to $133.0 million at March
31, 1996 from $128.0 million at September 30, 1995 and by $14.1 million at
September 30, 1995 from $113.9 million at September 30, 1994, primarily due to
increases in loans receivable of $2.3 million and $6.8 million, respectively, as
well as increases of $2.8 million and $1.1 million in federal funds sold,
respectively, and increases of $500,000 and $1.5 million in term deposits with
the FHLB, respectively. The increases in loans receivable were due to improved
loan activity, primarily home equity loans, due primarily to the opening of two
supermarket branches in October 1994 and May 1995. The increases in federal
funds sold were primarily due to the investment of the proceeds from the growth
in deposits, discussed below, in federal funds sold rather than longer-term
securities to increase the Bank's liquidity position.
The Bank's deposits increased by $5.4 million or 4.6% to $121.4 million at
March 31, 1996 and by $14.1 million or 13.8% to $116.1 million at September 30,
1995 from $102.0 million at September 30, 1994. These increases were primarily
due to increased deposits obtained as a result of the opening of the two
supermarket branches discussed above.
The Bank's securities available for sale increased $15.6 million to $18.2
million at March 31, 1996 as the Bank reassessed its securities classifications
under SFAS No. 115. As of December 31, 1995, the Bank reclassified securities
with an amortized cost of $16.6 million from the held to maturity classification
to the available for sale classification. See "- Liquidity and Capital
Resources" and Note 1(f) of the Notes to Financial Statements. The Bank's
investment securities held to maturity decreased by $15.7 million to $31.0
million at March 31, 1996 primarily because of this same securities
reclassification.
The Bank's equity increased by $281,000 or 3.6% to $8.2 million at March
31, 1996 from $7.9 million at September 30, 1995. The Bank's equity increased
$612,000 or 8.4% at September 30, 1995 from $7.3 million at September 30, 1994.
The increases were primarily the result of earnings for the six months ended
March 31, 1996 and the fiscal year end September 30, 1995. Equity at March 31,
1996 was also effected by a $33,000 net unrealized loss on securities available
for sale, primarily because of the reclassification of certain securities from
the held to maturity classification to the available for sale classification
discussed above.
Comparison of Operating Results for the Six Months Ended March 31, 1996 and
1995.
Net Income. Net income decreased by $29,000 or 8.4% for the six months
ended March 31, 1996 to $318,000 from $347,000 for the six months ended March
31, 1995. Net income for the six months ended March 31, 1996 was reduced
primarily as a result of increased non-interest expenses, offset in part by an
increase in non-interest income. Net interest income and provision for loan
losses remained fairly constant for the six months ended March 31, 1996 and
March 31, 1995. Non-interest expenses increased by $175,000 to $1.5 million for
the six months ended March 31, 1996 as compared to $1.3 million for the six
months ended March 31, 1995. This increase was primarily due to the additional
operating costs associated with the two supermarket branches opened in October
1994 and May 1995. Non-interest income increased $97,000 to $197,000 for the six
months ended March 31, 1996 as compared to $100,000 for the six months ended
March 31, 1995. This increase was primarily the result of an increase in the
number of deposit accounts, as well as general increases to the Bank's deposit
account service fees.
25
Net Interest Income. Net interest income increased by approximately
$14,000 or 0.8% to $1.8 million for the six months ended March 31, 1996. The
nominal increase was primarily due to an increase of $13.6 million or 12.39% in
the average balance of interest earning assets, largely offset by an increase in
the average balance of total interest-bearing liabilities of $12.0 million or
11.7% and a decrease in the interest rate spread from 2.97% for the six months
ended March 31, 1995 to 2.55% for the six months ended March 31, 1996.
Interest earning assets primarily consist of loans receivable, federal
funds sold, securities (securities available for sale combined with securities
held to maturity), and interest bearing deposits in the FHLB of New York.
Interest bearing liabilities primarily consist of interest bearing deposits and
other borrowings from the FHLB of New York.
The interest rate spread, which is the difference between the yield on
average interest earning assets and the percentage cost of average interest
bearing liabilities, declined to 2.55% for the six months ended March 31, 1996
from 2.97% for the six months ended March 31, 1995. The decline in interest rate
spread is primarily the result of increases in the cost of interest bearing
liabilities being greater than increases in the yields on interest earning
assets during these periods. In addition, the disparity in insurance premiums as
described under non-interest expense has allowed BIF members to reduce rates on
loans and pay increased rates on deposits, putting competitive pressure on the
Bank to do likewise which could result in a further decline in the interest rate
spread.
Interest and Dividend Income. Interest and dividend income increased by
approximately $617,000 to $4.4 million for the six months ended March 31, 1996
from $3.8 million for the six months ended March 31, 1995. The increase was
largely the result of the average yield on all interest earning assets
increasing by 21 basis points primarily due to increased yields on loans and
securities resulting from an increase in market interest rates. Also adding to
the increase in interest and dividend income was an increase of $13.6 million in
the average balance of interest earning assets to $123.7 million for the six
months ended March 31, 1996 as compared to $110.1 million for the six months
ended March 31, 1995. The increase in the average balance of interest earning
assets consisted of an increase in the average balance of loans outstanding of
approximately $6.2 million, an increase in the average balance of federal funds
sold of $3.8 million, and an increase in the average balance of total securities
of $2.3 million.
Interest income on investment securities held to maturity decreased by
$118,000 or 10.0% to $1.1 million for the six months end March 31, 1996 from
$1.2 million for the six months ended March 31, 1995. The decrease in interest
income on investment securities held to maturity held to maturity is primarily
due to a decrease of $7.1 million in the average balance of investment
securities held to maturity for the six months ended March 31, 1996 reflecting
the reclassification in December 1995 previously discussed, partially offset by
a 40 basis point increase in the average yield on investment securities held to
maturity. Interest income on securities available for sale increased $278,000 to
$341,000 for the six months ended March 31, 1996 from $63,000 for the six months
ended March 31, 1995. This increase is primarily the result of an increase in
the average balance of securities available for sale of $9.4 million combined
with a 96 basis point increase in the average yield on these securities.
Interest and fees on loans increased $323,000 or 13.0% to $2.8 million for
the six months ended March 31, 1996 from $2.5 million for the six months ended
March 31, 1995. This increase was primarily the result of an increase in the
average balance of loans receivable of $6.2 million combined with a 18 basis
point increase in the average yield on loans receivable.
The yield on the average balance of interest earning assets was 7.18% and
6.97% for the six months ended March 31, 1996 and 1995, respectively.
26
Interest Expense. Interest on deposits and escrow accounts increased by
approximately $619,000 or 31.7% to $2.6 million for the six months ended March
31, 1996 from $2.0 million for the six months ended March 31, 1995. The increase
in interest on deposit accounts and escrow accounts was substantially due to
increases in the average cost of time deposits to 5.91% for the six months ended
March 31, 1996 from 5.08% for the six months ended March 31, 1995 as well as an
increase in the average balance of time deposits to $62.4 million from $47.4
million for these same periods, respectively. These rates increased as interest
rates in general increased in fiscal 1995 and the Bank's deposit funding mix
shifted moderately from lower cost savings and transaction accounts to higher
costing time deposits. Time deposits also increased as a result of the opening
of the two supermarket branches previously discussed.
Interest on long term borrowings, which is a less significant portion of
interest expense, decreased by $16,000 to $76,000 for the six months ended March
31, 1996 when compared to the six months ended March 31, 1995, as the average
amount of borrowing outstanding decreased by $485,000 partially offset by an
increase in the rate paid by the Bank of 5 basis points. The Bank uses FHLB
advances as a funding source and generally uses long term borrowings to
supplement deposits which are the Bank's primary source of funds.
Provision for Loan Losses. The Bank's management continually monitors and
adjusts its allowance for loan losses based upon its analysis of the loan
portfolio. The allowance is increased by a charge to the provision for loan
losses, the amount of which depends upon an analysis of the changing risks
inherent in the Bank's loan portfolio. The Bank has historically experienced a
limited amount of loan charge-offs. However, there can be no assurance that
additions to the allowance for loan losses will not be required in future
periods or that actual losses will not exceed estimated amounts. The Bank's
ratio of non-performing loans to total assets was 0.59% and 0.47% at March 31,
1996 and September 30, 1995, respectively. The provision for loan losses for the
six months ended March 31, 1996 decreased $5,000 to $80,000 from $85,000 for the
six months ended March 31, 1995. For a discussion of the factors considered by
the Bank in determining the provision for loan losses, see "Business of the Bank
- - Non-Performing and Problem Assets - Allowance for Loan Losses."
Non-Interest Income. Non-interest income increased to $197,000 during the
six months ended March 31, 1996 from $100,000 for the six months ended March 31,
1995. The increase in non-interest income is primarily attributable to increased
service charges on deposit accounts of $96,000 for the six months ended March
31, 1996 when compared to the six months ended March 31, 1995. The increase in
service charges on deposit accounts is primarily the result of an increase in
the number of deposit accounts, as well as general increases to the Bank's
deposit account service fees.
Non-Interest Expense. Non-interest expense increased $175,000 or 13.7% to
$1.5 million for the six months ended March 31, 1996 from $1.3 million for the
six months ended March 31, 1995. The increase in compensation and benefits
expense of $89,000 was caused by the additional expense associated with the two
supermarket branches discussed above, as well as general cost of living and
merit raises to Bank employees. Occupancy and equipment expenses also increased
by $66,000 due to the new supermarket branches. FDIC deposit insurance premiums
also increased by $14,000 due to an increase in the amount of deposits and data
processing fees increased by $24,000 due primarily to the opening of a
supermarket branch in October 1994. These increases were partially offset by a
$20,000 decrease in advertising expenses. Management believes that compensation
and benefits expenses will increase in future periods as a result of the
adoption of the ESOP and the implementation of the RSP. Furthermore, the Company
expects non-interest expenses will increase as a result of the costs associated
with being a public company.
27
Certain legislative proposals in Congress relating to the reform or
restructuring of the deposit insurance fund system are currently being
discussed. One proposal would impose a one-time assessment of 0.85% to 0.90% of
SAIF insured deposits on all institutions holding SAIF insured deposits. If a
one-time assessment of 0.85% of SAIF insured deposits had been imposed on the
Bank on March 31, 1996, based on the deposits of the Bank at March 31, 1995 (the
measurement date considered in various legislative proposals), the Bank would
have been required to pay approximately $920,000 in connection with the one-time
assessment without reduction for the effect of income taxes. There can be no
assurance as to the enactment of any of the current proposals, the form of any
such proposals, the amount, tax treatment or timing of any one-time assessment,
or the means used to calculate the deposit base subject to any such assessment.
See "Regulation - Insurance of Deposit Accounts."
Provision for Income Taxes. Provision for income taxes decreased by
approximately $30,000 or 17.8% to $139,000 for the six months ended March 31,
1996 from $169,000 for the six months ended March 31, 1995. The decrease was
primarily the result of the decrease in net income before taxes.
Comparison of Operating Results for the Years Ended September 30, 1995 and 1994
Net Income. Net income decreased by $48,000 or 7.3% for fiscal 1995 to
$608,000 from $656,000 for fiscal 1994. Net income for fiscal 1995 was reduced
primarily as a result of an increase of $486,000 in non-interest expenses
partially offset by increases of $219,000 and $54,000 in net interest and
non-interest income, respectively.
Net Interest Income. Net interest income increased by approximately
$219,000 or 6.6% to $3.5 million for fiscal 1995 from $3.3 million for fiscal
1994. The increase in net interest income was primarily the result of an
increase in the amount of average interest earning assets exceeding an increase
in average interest bearing liabilities. The interest rate spread decreased to
2.78% for fiscal 1995 from 2.89% for fiscal 1994. The decline in interest rate
spread is primarily the result of an increase in the cost of funds due to higher
market interest rates and an increase in the average balance of time deposits.
Interest and Dividend Income. Interest and fees on loans increased by
approximately $674,000 to $5.2 million for fiscal 1995 from $4.5 million for
fiscal 1994. The increase for fiscal 1995 was largely the result of an increase
of $7.3 million in the average balance of loans outstanding during fiscal 1995,
to $62.3 million, as compared to fiscal 1994. This increase was primarily in the
area of home equity loans. In addition, the yield earned on the average balance
of loans receivable increased by 12 basis points in fiscal 1995 as compared to
1994 due to an increase in the market interest rates.
The Bank's portfolio of securities available for sale was created at the
beginning of fiscal 1995 and generated $118,000 of interest income on an average
balance of $2.5 million, earning a yield of 4.80%. Interest income on investment
securities held to maturity increased by $319,000 or 14.9% to $2.5 million in
fiscal 1995 as compared to $2.1 million in fiscal 1994. This increase was
primarily the result of a 54 basis point increase in the average yield on
investment securities held to maturity in fiscal 1995 as compared to fiscal
1994. Interest income on federal funds sold increased $135,000 or 143.6% in
fiscal 1995 compared to fiscal 1994 as a result of a 225 basis point increase in
the average yield earned on federal funds sold from fiscal 1994 to fiscal 1995
due to an increase in the market interest rates, and an increase in the average
balance of federal funds sold to $4.1 million in fiscal 1995 from $2.8 million
in fiscal 1994.
The yield on the average balance of interest earning assets was 7.06% and
6.62%, respectively, for fiscal 1995 and 1994, respectively.
28
Interest Expense. Interest expense on deposits and escrow accounts
increased by approximately $928,000 or 27.1% to $4.4 million for fiscal 1995
from $3.4 million for fiscal 1994. The increase for fiscal 1995 was
substantially due to an increase in the average cost of time deposits to 5.50%
in fiscal 1995 from 4.75% in fiscal 1994 as well as an increase in the average
balance of time deposits to $52.8 million from $38.3 million during this same
period. The rates on time deposits increased as market interest rates increased
in fiscal 1995. The increase in the average balance of time deposits was the
result of the Bank's competitive pricing on time deposits during fiscal 1995 in
order to fund asset growth as well as a change in the Bank's funding mix
shifting from lower cost savings and transaction accounts to higher costing time
deposits. In addition, as previously noted, in October 1994 and May 1995, the
Bank opened two supermarket branches which also added to the increase in the
average balance of time deposit in fiscal 1995 as compared to fiscal 1994.
Interest expense on long term borrowings increased by $9,000 to $176,000 for
fiscal 1995 compared to fiscal 1994, as both the average cost and amount of
borrowed funds increased slightly.
Provision for Loan Losses. The provision for loan losses decreased
$128,000 or 43.7% to $165,000 for fiscal 1995 from $293,000 for fiscal 1994. The
Bank's ratio of non-performing loans to total assets was 0.47% and 0.64% at
September 30, 1995 and 1994, respectively. The decrease in the amount of the
provision for fiscal 1995 was based on management's evaluation of the inherent
risk in the Bank's loan portfolio, a $133,000 or 18.2% decrease in
non-performing loans to $597,000 at September 30, 1995 as compared to $730,000
at September 30, 1994, as well as management's evaluation of the general
economic conditions in the Bank's market areas.
Non-Interest Income. Non-interest income increased by $54,000 to $275,000
during fiscal 1995 from $221,000 for fiscal 1994. This increase was primarily
due to a $93,000 increase in service charges on deposit accounts, which was
partially offset by a loss of $3,000 compared to a gain of $40,000 on securities
transactions for the year ended September 30, 1995 and 1994, respectively. The
increase in service charges on deposit accounts was primarily the result of an
increase in the number of deposit accounts, as well as general increases to the
Bank's deposit account service fees.
Non-Interest Expense. Non-interest expense increased to $2.7 million or
21.6% for fiscal 1995 from $2.2 million during fiscal 1994. Compensation and
benefits expenses increased by $194,000 or 20.9% to $1.1 million for fiscal 1995
from $928,000 for fiscal 1994. The increase in compensation and benefits
expenses in fiscal 1995 was primarily the result of the additional operating
costs associated with the two supermarket branches opened in October 1994 and
May 1995, as well as general cost of living and merit raises to Bank employees.
Occupancy and equipment expenses increased by $84,000 or 28.0% to $386,000 for
fiscal 1995 also due to the opening of the supermarket branches. Data processing
fees increased by $84,000 or 55.5% to $235,000 for fiscal 1995 as a result of an
increased number of loan and deposit accounts, primarily as a result of the new
supermarket branches. Advertising, FDIC deposit insurance premium, professional
service fees, supplies, and other non-interest expenses also experienced
increases of $124,000 or 14.3% over fiscal 1994 due primarily to increased
operational costs associated with the opening of the new supermarket branches.
Provision for Income Taxes. Provision for income taxes decreased by
approximately $37,000 or 11.5% to $284,000 for fiscal 1995 from $321,000 for
fiscal 1994. The decrease in fiscal 1995 compared to fiscal 1994 was primarily
the result of the decrease in net income before taxes.
Comparison of Operating Results for the Years Ended September 30, 1994 and 1993
Net Income. Net income decreased by $35,000 or 5.1% for fiscal 1994 to
$656,000 from $691,000 for fiscal 1993 primarily as a result of increases in net
interest income and non-interest
29
income of $271,000 and $34,000, respectively, for fiscal 1994 being more than
offset by an increase in non-interest expenses of $307,000 or 15.8% for the same
period.
Net Interest Income. Net interest income increased to $3.3 million for
fiscal 1994 from $3.0 million for fiscal 1993, an increase of 9.0%. The increase
in net interest income for fiscal 1994 was due to an increase of $122,000 in
interest and dividend income combined with a decrease of $149,000 in interest
expense.
The interest rate spread increased in fiscal 1994 to 2.89% from 2.74% for
fiscal 1993. The increase in the interest rate spread is primarily due to the
decline in the cost of interest bearing liabilities being greater than the
decline in the yield on interest earning assets.
Interest and Dividend Income. Interest and fees on loans increased by
approximately $49,000 or 1.1% to $4.5 million for fiscal 1994. This increase was
due to a $3.1 million or 6.0% increase in the average balance of loans in fiscal
1994 as compared to fiscal 1993 offset by a 39 basis point or 4.6% decline in
the yield earned on loans between these two periods due to a decrease in market
interest rates. Interest on term deposits with the FHLB of New York increased by
$68,000 or 136.0% to $118,000 for fiscal 1994 primarily as a result of an
increased average balance of these term deposits, combined with a slightly
higher yield in fiscal 1994 compared to fiscal 1993. Interest on investment
securities held to maturity increased by $57,000 or 2.7% to $2.1 million for
fiscal 1994. The increase in interest on investment securities held to maturity
was due to a $6.5 million or 18.1% increase in the average balance of investment
securities held to maturity offset in large part by a decrease in the yield
earned on investment securities held to maturity from 5.81% in fiscal 1993 to
5.05% in fiscal 1994. These increases were partially offset by a $43,000
decrease in interest of federal funds sold and a slight decrease in dividends
paid on FHLB stock.
The yield on the average balance of interest earning assets was 6.62% and
7.13%, respectively, for fiscal 1994 and 1993.
Interest Expense. Interest expense on deposits and escrow accounts
decreased by approximately $134,000 or 3.8% for fiscal 1994 from $3.6 million
for fiscal 1993. The decrease for fiscal 1994 was substantially due to a
decrease of $167,000 or 8.4% in the cost of time deposits from $2.0 million in
fiscal 1993 to $1.8 million in fiscal 1994. This reduction was due primarily to
a decrease in the cost of time deposits of 118 basis points or 19.9% from 5.93%
in fiscal 1993 to 4.75% in fiscal 1994, due to a decrease in market interest
rates. The decrease in the cost of time deposits was offset in part by an
increase in the average balance of time deposits of $4.8 million, or 14.3% in
fiscal 1994 compared to fiscal 1993. Interest on FHLB of New York long term
borrowings decreased $15,000 or 8.2% during fiscal 1994 to $167,000 from
$182,000 for fiscal 1993 resulting from a decline in the average balance of FHLB
long term borrowings of $214,000 or 7.9% in fiscal 1994 compared to fiscal 1993.
Provision for Loan Losses. The provision for loan losses increased $76,000
or 35.0% to $293,000 for fiscal 1994 from $217,000 for fiscal 1993. The Bank's
ratio of non-performing loans to total assets was 0.64% and 1.01% at September
30, 1994 and 1993, respectively. The increase in the amount of the provision for
fiscal 1994 was based on management's evaluation of the increased inherent risk
in the Bank's loan portfolio as a result of the increased charge-offs in the
Bank's residential real estate portfolio, which constitutes the majority of the
Bank's loan portfolio, to $73,000 in fiscal 1994 from no charge-offs in fiscal
1993, combined with management's evaluation of the continued weak economy in the
Bank's market areas.
30
Non-Interest Income. Non-interest income increased $34,000 during fiscal
1994 from $187,000 for fiscal 1993. Service charges and fees on deposit accounts
increased slightly and the Bank had a $25,000 increase in net gain on securities
transactions.
Non-Interest Expense. Non-interest expense increased $307,000 or 15.8% for
fiscal 1994 from $1.9 million during fiscal 1993. Compensation and benefits
expense increased $116,000 or 14.3% from fiscal 1993 primarily due to the
termination of the Bank's defined benefit plan and the adoption of the Bank's
401(k) savings plan as well as general cost of living and merit raises to Bank
employees and additional staffing relating to the opening of a supermarket
branch in October 1994. Other non-interest expenses, increased $110,000 or 32.0%
for fiscal 1994 from $343,000 for fiscal 1993 due to administrative fees
relating to the termination of the Bank's defined benefit plan and the adoption
of the Bank's 401(k) savings plan as well as accounting adjustments related to
certain reconciliation differences. FDIC deposit insurance premium expense
increased $40,000 or 22.3% in fiscal 1994 as the average balance of deposits
increased in fiscal 1994. Advertising, data processing, professional service
fees, supplies, and occupancy and equipment expenses also experienced moderate
increases.
Provision for Income Taxes. Provision for income taxes decreased by
approximately $43,000 or 11.8% to $321,000 for fiscal 1994 from $364,000 for
fiscal 1993. The decrease in fiscal 1994 compared to fiscal 1993 was primarily
the result of a decrease in net income before taxes as well as a slight increase
in tax exempt income from municipal securities.
Liquidity and Capital Resources
The Bank is required by OTS regulations to maintain, for each calendar
month, a daily average balance of cash and eligible liquid investments of not
less than 5% of the average daily balance of its net withdrawable savings and
borrowings (due in one year or less) during the preceding calendar month. This
liquidity requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10%. The Bank's average liquidity ratio was 39.64%,
35.89%, 27.55%, and 22.95% at March 31, 1996 and September 30, 1995, 1994, and
1993, respectively.
The Bank's sources of liquidity include cash flows from operations,
principal and interest payments and prepayments on loans, maturities and
prepayments of securities, deposit inflows, and borrowings from the FHLB of New
York. During fiscal 1995, 1994, and 1993, the primary source of funds was cash
flows from deposit growth. During fiscal 1995, 1994, and 1993, the Bank also had
significant cash flows from the proceeds from the sale, maturity, and call of
securities.
Cash flow from net deposit growth was $5.4 million, $14.1 million, $7.3
million, and $10.1 million, for the six months ended March 31, 1996 and for
fiscal years ending September 30, 1995, 1994, and 1993, respectively. Cash flow
from the proceeds from the sale, maturity, and call of securities (securities
available for sale and investment securities combined) was $7.5 million, $5.0
million, $9.9 million, and $14.9 million, for the six months ended March 31,
1996 and for fiscal years ending September 30, 1995, 1994, and 1993,
respectively.
In addition, from time-to-time the Bank borrows funds from the FHLB of New
York to supplement its cash flows. At March 31, 1996, the Bank had outstanding
borrowings from the FHLB of $2.1 million. See Note 9 to the Notes to Financial
Statements.
At the beginning of fiscal 1995, the Bank implemented SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
identified the securities in the portfolio as either "held to maturity" or
"available for sale."
31
SFAS No. 115 requires classification of investments into three categories.
Debt securities that the Bank has the positive intent and ability to hold to
maturity must be reported at amortized cost. Debt and marketable equity
securities that are bought and held principally for the purpose of selling them
in the near term are considered trading securities and must be reported at fair
value, with unrealized gains and losses included in earnings. All other debt and
marketable equity securities must be considered available for sale and must be
reported at fair value, with unrealized gains and losses reported as a separate
component of total equity (net of tax effects). The Bank does not hold any
trading securities.
In November 1995, the Financial Accounting Standards Board ("FASB")
released its Special Report, "A Guide to the Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." In accordance
with the Special Report, the Bank was permitted to reassess the appropriateness
of the classifications of all its securities held at the time. At December 31,
1995, the Bank reclassified securities with an amortized cost of $16.6 million
and an approximate fair value of $16.7 million from securities held to maturity
to securities available for sale. This reclassification resulted in an increase
to equity at that time of approximately $39,000.
As of March 31, 1996, the Bank had $18.2 million of securities classified
as available for sale and $31.0 million of investment securities classified as
held to maturity. The equity of the Bank at March 31, 1996 was reduced by
$33,000 which represents the net unrealized loss, net of tax, on securities
classified as available for sale. See Notes 1 and 2 to the Notes to Financial
Statements.
The Bank is subject to federal regulations that impose certain minimum
capital requirements. At March 31, 1996, the Bank had risk-based capital of $8.9
million compared to its requirements of $4.5 million, an excess of $4.4 million.
Each of the Bank's tangible and core capital was $8.2 million at March 31, 1996,
compared to the requirements of $2.0 million for tangible capital and $4.0
million for core capital. See "Historical and Pro Forma Capital Compliance."
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to the
savings and loan industry, and similar matters. Further, the disparity in
insurance premiums as described herein could result in the Bank losing deposits
to BIF members who have lower costs of funds and therefore are able to pay
higher rates of interest on deposits. Management monitors projected liquidity
needs and determines the level desirable, based in part on the Bank's
commitments to make loans and management's assessment of the Bank's ability to
generate funds.
Recent Accounting Pronouncements
FASB Statement on Disclosures About Fair Value of Financial Instruments.
In December 1991, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 107. The Statement requires the
disclosure of the fair value of financial instruments in the footnotes to the
financial statements. The Statement is effective for the Bank for fiscal years
ending after December 15, 1995.
FASB Statement on Accounting by Creditors for Impairment of a Loan. In May
1993, FASB issued SFAS No. 114. SFAS No. 114 addresses the accounting by
creditors for impairment of a loan by specifying how allowances for credit
losses related to certain loans should be determined. A loan is considered
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 contractual
terms of the loan agreement. SFAS No. 114 generally requires 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. The
Statement also addresses the accounting by creditors
32
for loans that are restructured in a troubled debt restructuring involving a
modification of terms of a receivable including those involving a receipt of
assets in partial satisfaction of a receivable. This Statement is effective for
fiscal years beginning after December 15, 1994. In October 1994, FASB amended
certain provisions of SFAS No. 114 by the issuance of SFAS No. 118 "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures."
SFAS No. 118 amends SFAS No. 114 by eliminating provisions describing how a
creditor should report income on an impaired loan and increasing disclosure
requirements as to information on recorded investments in certain impaired loans
and how a creditor recognizes related interest income. The effective date of
SFAS No. 118 is the same as for SFAS No. 114. The adoption of SFAS No. 114 and
the amendment by SFAS No. 118 did not have a material effect on the Bank's
financial statements.
FASB Statement on Accounting for the Impairment of Long-Lived Asset and
for Long-Lived Assets to be Disposed of. In March 1995, FASB issued SFAS No.
121, which will become effective for fiscal years beginning after December 15,
1995. 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. Recoverability is evaluated based upon the estimated
future cash flows expected to result from the use of the asset and its eventual
disposition. If expected cash flows are less than the carrying amount of the
asset, an impairment loss is recognized. Additionally, this 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.
However, based on existing conditions, and a preliminary review, management
believes that the impact of adopting this Statement will not be material to the
Bank's financial statements.
FASB Statement on Accounting for Mortgage Servicing Rights. In May 1995,
FASB issued SFAS No. 122, which will become effective, on a prospective basis,
for fiscal years beginning after December 31, 1995. This Statement requires
mortgage banking enterprises to recognize as separate assets rights to service
mortgage loans, however those servicing rights are acquired. When mortgage
loans, acquired either through a purchase transaction or by origination, are
sold or securitized with servicing rights retained, an allocation of the total
cost of the mortgage loans should be made between the mortgage servicing rights
and the loans based on their relative fair values. In subsequent periods, all
mortgage servicing rights capitalized must be periodically evaluated for
impairment based on the fair value of those rights, and any impairments
recognized through a valuation allowance. However, based on existing conditions,
and a preliminary review, management believes that the impact of adopting this
Statement will not be material to the Bank's financial statements.
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB encouraged all entities to adopt the fair value
based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Under the intrinsic value based method, compensation cost is the
excess of the market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method had been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years beginning after December 15, 1995. Pro forma disclosures must
include the effects of all awards granted in fiscal years beginnings after
December 15, 1994. The Bank expects to continue to use the "intrinsic value
based method" as
33
prescribed by APB Opinion No. 25. Accordingly, the impact of adopting this
Statement will not be material to the Bank's financial statements.
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. In June 1996, FASB issued SFAS No.
125, which will be effective, on a prospective basis, for fiscal years beginning
after December 31, 1996. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends the "available for sale" and
"trading" approach of SFAS No. 115 to non-security financial assets that can be
contracturally prepaid or otherwise settled in such a way that the holder of the
asset would not recover substantially all of its recorded investment. In
addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from being
classified as held to maturity if the security can be prepaid or settled in such
a manner that the holder of the security would not recover substantially all of
its recorded investment. The extension of the SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 are effective
for financial assets held on or acquired after January 1, 1997. Management has
not yet determined the effect, if any, SFAS No. 125 will have on the Company's
financial statements.
In December 1994, the Accounting Standards Division of the American
Institute of Certified Public Accountants ("AICPA") approved SOP 94-6,
"Disclosure of Certain Significant Risks and Uncertainties." SOP 94-6 requires
additional disclosure in financial statements about the risk and uncertainties
existing as of the date of those financial statements in the following areas:
nature of operations, use of estimates in the preparation of financial
statements, certain significant estimates, current vulnerability due to certain
concentrations. The standard is effective for financial statements issued for
fiscal years ending after December 15, 1995. Management does not believe that
the adoption of SOP 94-6 will have a material impact on the financial position
of the Bank.
In November 1993, the AICPA issued SOP 93-6 Employers' Accounting for
Employee Stock Ownership Plan. SOP 93-6 addresses accounting for shares of stock
issued to employees by an employee stock ownership plan. SOP 93-6 requires that
the employer record compensation expense in an amount equal to the fair value of
shares committed to be released from the ESOP to employees. SOP 93-6 is
effective for fiscal years beginning after December 15, 1993 and relates to
shares purchased by an ESOP after December 31, 1992. Management has determined
that, assuming the Common Stock appreciates over time, the adoption of SOP 93-6
will likely increase compensation expense relative to the ESOP, as compared with
prior guidance that required recognition of compensation expense based on the
cost of the shares acquired by the ESOP. The amount of any such increase,
however, cannot be determined at this time because the expense will be based on
the fair value of the shares committed to be released to employees, which amount
is not determinable.
Effect of Inflation and Changing Prices
The Bank's financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike industrial companies, virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services.
34
BUSINESS OF THE COMPANY
The Company is a Delaware corporation organized in June 1996 at the
direction of the Bank to acquire all of the capital stock that the Bank will
issue upon the Bank's conversion from the mutual to stock form of ownership. The
Company is not an operating company and has not engaged in any significant
business to date. Management believes that the holding company structure and
retention of proceeds from the Offerings will, should it decide to do so,
facilitate diversification into other non-banking activities and possible future
acquisitions of other financial institutions such as savings institutions and
commercial banks, and thereby further its expansion into existing and new market
areas and also enable the Company to repurchase its own stock. However, there
are no present plans, arrangements, agreements, or understandings, regarding any
such activities.
Upon consummation of the Conversion, the Company will be a unitary savings
and loan holding company which, under existing laws, generally would not be
restricted in the types of business activities in which it may engage, provided
that the Bank retains a specified amount of its assets in housing-related
investments. The Company will not initially conduct any active business. The
Company does not intend to employ any persons other than officers, but will
utilize the support staff of the Bank from time to time.
BUSINESS OF THE BANK
General
The Bank attracts deposits from the general public and uses such deposits
primarily to originate loans secured by first mortgages on one- to four-family
residences in its market areas. Residential loans secured by first mortgages
totalled $44.0 million, or 64.19%, of the Bank's total loan portfolio at March
31, 1996. The Bank has recently increased its emphasis on originating home
equity loans, which totaled $12.3 million, or 18.00% of the Bank's total loan
portfolio at March 31, 1996. The Bank also originates consumer loans, consisting
of personal loans, home improvement loans, and passbook loans, which totaled
$7.4 million, or 10.74% of the total loan portfolio at March 31, 1996. To a much
lesser extent, the Bank originates commercial real estate loans and other
commercial loans. Although the total loan portfolio still consists of a small
amount of education loans, the Bank ceased making such loans in June 1994.
The principal sources of funds for the Bank's lending activities are
deposits, the repayment and maturity of loans and sale, maturity, and call of
securities, and FHLB advances. The principal source of income is interest on
loans and the principal expense is interest paid on deposits.
Market Areas
The Bank operates four offices. The main office and one branch office are
located in Amsterdam, New York, in Montgomery County. One branch office which
was opened in October 1994, is in a Shop N Save Supermarket located in
Gloversville, New York, in Fulton County, and one branch office, which was
opened in May 1995, is in a Shop N Save Supermarket located in Oneonta, New
York, in Otsego County. Based on the Bank's branch locations and deposit
activity, the Bank has two market areas. Both market areas are defined by
existing boundaries. One market area consists of the Cities of Amsterdam,
Gloversville, Johnstown, and the Towns of Amsterdam, Johnstown, Florida, Mohawk,
Broadalbin, Mayfield, and Perth. The other market area consists of the City of
Oneonta and Town of Oneonta.
35
Economic growth in the Bank's market areas remains dependent upon the local
economy. The deposit and loan activity of the Bank is significantly affected by
economic conditions in its market areas. The economies of the Bank's market
areas have remained stagnant for several years. The largest employers in the
Bank's market areas are smaller sized manufacturers. Trade, service, and
government related industries are the other major employers. Because there are
no major employers in these market areas, many residents commute to Schenectady
County or the state capitol for employment. The Bank has been able to increase
its market share in originating first mortgage loans on residential property
within its primary market areas, even though total first mortgage loan
originations in the Bank's market areas have been declining. The Bank has also
increased its market share of deposits and consumer loans for at least the last
five years.
Lending Activities
General. The Bank's loan portfolio predominantly consists of mortgage
loans secured by one- to four-family residences. The Bank has recently begun to
emphasize home equity loans secured by first and second mortgage loans on one-
to four-family residences. The Bank also originates consumer loans, consisting
of personal loans, home improvement loans, and passbook loans. To a much lesser
extent, the Bank originates commercial real estate loans and other commercial
loans. Although the loan portfolio still consists of a small amount of education
loans, the Bank ceased making such loans in June 1994.
At March 31, 1996, the Bank's loan portfolio totalled $68.5 million. Loans
secured by first mortgages on one- to four-family residences totalled $44.0
million, or 64.19%, of the Bank's total loan portfolio at March 31, 1996. Prior
to 1988, the Bank purchased loans, however, it is the current policy of the Bank
not to purchase loans. Other than educational loans which were recently sold,
the Bank does not sell loans, and the Bank is primarily a portfolio lender. For
its mortgage loan portfolio, the Bank originates fixed- and adjustable-rate
mortgage loans. At March 31, 1996, adjustable-rate residential mortgage loans
totalled approximately 36.69% of the Bank's residential mortgage loans.
Loan originations are generally obtained from existing customers, members
of the local community, and referrals from real estate brokers, lawyers,
accountants, and current and past customers within the Bank's lending area. The
Bank also advertises on an extensive basis in the local print media and
periodically advertises on radio and television. Mortgage loans originated by
the Bank in its portfolio generally include due-on-sale clauses that 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.
36
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio as of the dates indicated.
At March 31, September 30,
----------------- ------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------------- --------------- ---------------- ---------------- --------------- ----------------
$ % $ % $ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Type of Loans:
Real Estate Loans:
Residential....... $43,957 64.19% $44,608 67.46% $43,266 73.03% $40,130 75.39% $39,655 76.87% $37,764 78.38%
Commercial........ 3,109 4.54 2,796 4.23 2,581 4.35 1,846 3.47 1,358 2.64 1,067 2.21
Home equity ...... 12,324 18.00 9,771 14.78 5,240 8.84 4,184 7.86 3,952 7.66 3,973 8.25
------ ----- ------ ----- ------ ---- ----- ---- ----- ---- ----- ----
Total real
estate loans. 59,390 86.73 57,175 86.47 51,087 86.22 46,160 86.72 44,965 87.17 42,804 88.84
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Consumer Loans:
Personal secured(1) 4,774 6.97 4,462 6.75 3,765 6.36 2,252 4.23 2,158 4.18 2,264 4.70
Personal unsecured 413 0.60 407 0.62 304 0.52 319 0.60 222 0.43 390 0.81
Education......... 123 0.18 307 0.46 995 1.68 1,913 3.59 1,560 3.02 1,176 2.44
Home improvement.. 1,269 1.85 1,259 1.90 767 1.29 447 0.84 453 0.88 427 0.89
Passbook 897 1.31 834 1.26 646 1.09 750 1.41 871 1.69 1,072 2.22
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ------
Total consumer
loans........ 7,476 10.91 7,269 10.99 6,477 10.94 5,681 10.67 5,264 10.20 5,329 11.06
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial Loans.... 1,614 2.36 1,681 2.54 1,684 2.84 1,387 2.61 1,358 2.63 50 0.10
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total loans.... 68,480 100.00% 66,125 100.00% 59,248 100.00% 53,228 100.00% 51,587 100.00% 48,183 100.00%
====== ====== ====== ======= ======= =======
Less:
Allowance for
loan losses..... 751 678 625 415 313 456
------ ------ ------ ------ ------ ------
Total loans
receivable,
net.......... $67,729 $65,447 $58,623 $52,813 $51,274 $47,727
====== ====== ====== ====== ====== ======
(1) Includes loans secured by, among other things, automobiles, boats, and
mobile homes.
37
Loan Maturity Tables
The following table sets forth the estimated maturity of the Bank's loan
portfolio at March 31, 1996. The table does not include the effects of possible
prepayments or scheduled repayments. All mortgage loans are shown as maturing
based on contractual maturities.
At March 31, 1996
-----------------------------------------------------------------
Residential Commercial Commercial Consumer
Real Estate(1) Real Estate Loans Loans Total
-------------- ----------- ----- ----- -----
Non-performing $ 569 $ 40 $ 0 $ 173 $ 782
======= ===== ====== ===== ======
Amounts Due:
Within 3 months...... $ 94 $ 0 $1,303 $1,755 $ 3,152
3 months to 1 year... 179 0 0 181 360
After 1 year:
1 to 3 years....... 1,165 63 151 1,136 2,515
3 to 5 years....... 3,165 95 0 1,544 4,804
5 to 10 years...... 15,149 602 17 1,654 17,422
10 to 20 years..... 25,174 2,349 143 1,206 28,872
Over 20 years...... 11,355 0 0 0 11,355
------ ------ ----- ------ ------
Total due after one year 56,008 3,109 311 5,540 64,968
------ ----- ----- ----- ------
Total amount due..... $56,281 $3,109 $1,614 $7,476 68,480
====== ===== ===== =====
Less:
Allowance for loan loss 751
------
Loans receivable, net $67,729
======
- --------------------
(1) Includes home equity loans.
The following table sets forth the dollar amount of all loans
contractually due after March 31, 1997, and shows the amount of such loans which
have pre-determined interest rates and which have floating or adjustable
interest rates.
At March 31, 1996
--------------------------------------
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
Residential real estate(1) $35,459 $20,549 $56,008
Commercial real estate.. 2,787 322 3,109
Commercial loans........ 311 0 311
Consumer loans.......... 5,484 56 5,540
------ -------- -------
Total................. $44,041 $20,927 $64,968
====== ====== ======
- -----------------------
(1) Includes home equity loans.
38
The following table shows the total loan originations, repayments, and
sales activity by the Bank for the periods indicated:
Six months
ended March 31, Year ended September 30,
--------------- ---------------------------------
1996 1995 1994 1993
---- ---- ---- ----
(In Thousands)
Originations by Type:
One-to-four family and
construction.......... $ 2,700 $ 7,682 $10,635 $ 8,779
Multi-family and
commercial real estate 0 90 1,157 0
Consumer, commercial,
and home equity loans. 8,616 13,434 10,236 5,889
------ ------ ------ -----
Total loan originations 11,316 21,206 22,028 14,668
Principal repayments and
net decrease in other
items................. (8,776) (13,559) (14,650) (12,843)
Education loan sales(1). (178) (657) (1,261) 0
------ ------ ------ -------
Net loans made to
customers............. $ 2,362 $ 6,990 $ 6,117 $ 1,825
====== ====== ====== ======
- ----------------------
(1) Education loan sales were primarily at the unpaid principal balance of the
loans sold.
One- to Four-Family Residential Loans. The Bank's primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in the Bank's primary market areas. The Bank
generally originates owner-occupied one- to four-family residential mortgage
loans in amounts up to 80% of the lesser of the appraised value or selling price
of the mortgaged property without requiring mortgage insurance. The Bank will
originate a mortgage loan in an amount up to 95% of the lesser of the appraised
value or selling price of a mortgaged property, however, mortgage insurance is
required for the amount in excess of 80% of such value. Non-owner- occupied
residential mortgage loans are originated up to 75% of the lesser of the
appraised value or selling price of the property on a fixed rate basis only. The
Bank, on a very limited basis, also originates construction permanent loans on
one- to four-family residences. The Bank retains all mortgage loans that it
originates. Adjustable rate mortgage loans, which can adjust annually or every
three or five years over the life of the loan depending on the terms of the
loan, can have maturities of up to 30 years. Fixed rate loans can have
maturities of up to 15 or 20 years depending on the terms of the loan. The Bank
also originates a fixed rate 8 year balloon loan with principal and interest
payments calculated using a 30 year amortization.
For all adjustable-rate mortgage loans, the Bank requires the borrower to
qualify at the fully indexed rate after the first adjustment. The Bank's
adjustable-rate mortgage loans provide for periodic interest rate adjustments of
plus or minus 1% to 2% per year with a maximum adjustment over the term
39
of the loan as set forth in the loan agreement and usually ranges from 4% to
6.5% above the initial interest rate depending on the terms of the loan.
Adjustable-rate mortgage loans typically reprice every year, although some
adjust every three or five years, and provide for terms of up to 30 years with
most loans having terms of between 15 and 30 years. The Bank offers
adjustable-rate loans with initial interest rates set below the fully indexed
rate.
The Bank offers adjustable-rate mortgage loans indexed to the one year
U.S. Treasury bill rate. Interest rates charged on mortgage loans are
competitively priced based on market conditions and the Bank's cost of funds.
Generally, the Bank's standard underwriting guidelines for mortgage loans
conform to the Federal National Mortgage Corporation ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC") guidelines and most of the Bank's loans
are salable in the secondary market. However, it is the current policy of the
Bank to remain a portfolio lender.
Commercial Loans. The Bank originates a limited amount of commercial real
estate and other commercial loans. Commercial real estate loans consist of loans
made for the purpose of purchasing the commercial real estate used as collateral
and includes loans secured by mixed residential and commercial use property,
professional office buildings, and restaurants. At March 31, 1996, commercial
loans, other than commercial real estate loans, totaled $1.6 million or 2.36% of
the total loan portfolio. At March 31, 1996, commercial real estate loans
totalled $3.1 million, or 4.54% of the loan portfolio. Commercial loans, other
than commercial real estate loans, consist of, among other things, commercial
lines of credit, commercial vehicle loans, and working capital loans and are
typically secured by residential or commercial property, receivables or
inventory, or some other form of collateral. The Bank requires a personal
guarantee from the principal of the commercial enterprise on all commercial
loans. Loans secured by commercial property may be originated in amounts up to
75% of the appraised value for a maximum term of 15 years.
Home Equity Loans. At March 31, 1996, home equity loans secured by first
and second mortgages on residential real estate totalled $12.3 million, or
18.00% of total loans. The loans are originated as fixed rate loans with terms
of 3 to 15 years. The loans are generally subject to an 80% combined
loan-to-value ratio, including any other outstanding mortgages or liens.
However, the Bank may occasionally permit a higher loan-to-value ratio based on
other factors, such as the strength and credit history of the applicant and the
terms of the loan. The Bank has recently begun to emphasize these loans as a
means of supplementing its mortgage loan origination volume.
Consumer Loans. The Bank offers consumer loans in order to provide a wider
range of financial services to its customers. Federal savings associations are
permitted to make secured and unsecured consumer loans up to 35% of their
assets. In addition, savings associations have lending authority above the 35%
limitation for certain consumer loans, such as home equity, home improvement,
mobile home, and savings account or passbook loans. Consumer or other loans,
including home improvement loans but excluding home equity loans, totaled $7.5
million, or 10.91% of the Bank's total loans at March 31, 1996. The Bank
originates secured and unsecured consumer loans, consisting of personal loans,
home improvement loans, and passbook loans.
Loan Underwriting Risks. Adjustable-rate mortgage loans decrease the risks
associated with changes in interest rates by periodically repricing, but involve
other risks because as interest rates increase, the underlying payments by the
borrower increase, thus increasing the potential for default. At the same time,
the marketability of the underlying collateral may be adversely affected by
higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the maximum periodic interest rate adjustment permitted by the
adjustable-rate mortgage loan documents, and, therefore is
40
potentially limited in effectiveness during periods of rapidly rising interest
rates. These risks have not had an adverse effect on the Bank.
While commercial real estate and consumer or other loans provide benefits
to the Bank's asset/liability management program by reducing the Bank's exposure
to interest rate changes, due to their generally shorter terms, and producing
higher yields, such loans may entail significant additional credit risks
compared to owner-occupied residential mortgage lending. However, the Bank
believes that the higher yields and shorter terms compensate the Bank for the
increased credit risk associated with such loans.
Commercial lending entails significant additional risks when compared with
one- to four-family residential lending. For example, commercial loans typically
involve larger loan balances to single borrowers or groups of related borrowers,
the payment experience on such loans typically is dependent on the successful
operation of the project and these risks can be significantly impacted by the
cash flow of the borrowers and supply and demand conditions in the market for
commercial office, retail, and warehouse space. In periods of decreasing cash
flows, the commercial borrower may permit a lapse in general maintenance of the
property causing the value of the underlying collateral to deteriorate.
In addition, due to the type and nature of the collateral, and, in some
cases the absence of collateral, consumer lending generally involves more credit
risk when compared with one- to four-family residential lending. Consumer
lending collections are typically dependent on the borrower's continuing
financial stability, and thus, are more likely to be adversely effected by job
loss, divorce, illness, and personal bankruptcy. In most cases, any repossessed
collateral for a defaulted consumer loan will not provide an adequate source of
repayment of the outstanding loan balance. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower and is
usually turned over to a collection agency.
Loan Approval Authority and Underwriting. The Bank has established various
lending limits for its officers and maintains a Management Loan Committee and an
Executive Loan Committee. A report of all mortgage loans originated is presented
to the Board of Directors monthly. The President of the Bank has the authority
to approve all applications for consumer loans, both secured and unsecured, and
first mortgage loans up to $100,000 on an aggregate basis, exclusive of mortgage
balances on owner-occupied residential property. The Vice President of the Bank
has the authority to approve all applications for consumer credit, both secured
and unsecured, up to $50,000 on an aggregate basis, exclusive of mortgage
balances on owner-occupied residential property. Two other officers have
authority to approve consumer credit applications up to $25,000 and $15,000, on
an aggregate basis, respectively, exclusive of mortgage balances on
owner-occupied residential property.
The Management Loan Committee considers and resolves all applications for
commercial loans up to $100,000, whether secured or unsecured; all consumer
loans above the lending limit established for the President, up to $100,000; and
all mortgage loans not otherwise approved by the President, up to $150,000 on
one- to four-family residences, whether or not owner-occupied. The Executive
Loan Committee considers and resolves all applications for commercial real
estate loans up to $250,000; multi-family loans (greater then four family);
commercial loans, whether secured or unsecured, between $100,000 and $250,000;
and all other mortgage loans between $150,000 and $250,000. All loans in excess
of $250,000 require the consideration and approval of the entire Board of
Directors.
Upon receipt of a completed loan application from a prospective borrower,
a credit report is generally ordered, income and certain other information is
verified and, if necessary, additional financial information is requested. An
appraisal from an independent licensed fee appraiser of the real estate intended
to be used as security for the proposed loan is obtained. For
construction/permanent loans,
41
which totaled less than 1% of the total loan portfolio at March 31, 1996, funds
advanced during the construction phase are held in a loan-in-process account and
disbursed based upon various stages of completion in accordance with the results
of inspection reports that are based upon physical inspection of the
construction by a loan officer. For real estate loans, each title is reviewed by
the attorney for the Bank to determine the necessity for title insurance.
Historically, the Bank has not required title insurance except in those
instances where the attorney has seen a need for title insurance. Borrowers must
also obtain fire and casualty insurance (for loans on property located in a
flood zone, flood insurance is required) prior to the closing of the loan. The
Bank is named as mortgagee/loss payee of this insurance.
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all approved mortgage loans which generally expire within 60 days
of the date of issuance. The Bank charges no commitment fees or points to lock
in rates or to secure commitments. In some instances, after a review of the
rate, terms, and circumstances, commitments may be renewed or extended beyond
the 60 day limit. At March 31, 1996, the Bank had $388,000 of outstanding
commitments on residential mortgage loans and $291,000 in undisbursed funds
related to construction loans. Management believes that less than 5% of loan
commitments expire. Furthermore, at March 31, 1996, the Bank had $181,000 in
unused personal lines of credit and $62,000 in standby letters of credit.
Loans to One Borrower. Regulations limit loans-to-one borrower or
affiliated group of borrowers in an amount equal to 15% of unimpaired capital
and unimpaired surplus of the Bank. The Bank is authorized to lend up to an
additional 10% of unimpaired capital and unimpaired surplus if the loan is fully
secured by readily marketable collateral. The Bank's maximum loan-to-one
borrower limit as set by the Board of Directors is 10% of unimpaired capital and
surplus.
At March 31, 1996, the Bank's largest lending relationship was comprised
of loans secured by commercial and residential properties aggregating $641,000
located in the Bank's market areas. The second largest lending relationship
consisted of a residential loan with a balance of $533,000 at March 31, 1996,
secured by real estate located in the Bank's market areas. The third largest
lending relationship consisted of loans secured by commercial and residential
properties aggregating $507,000 at March 31, 1996 located in the Bank's market
areas. At March 31, 1996, all of these loans were performing in accordance with
their terms.
Non-Performing and Problem Assets
Loan Delinquencies. The Bank's collection procedures provide that when a
mortgage loan is 30 days past due, a delinquent notice is sent to the borrower
and a late charge is imposed in accordance with the mortgage or Deed of Trust
agreement. If payment is still delinquent after 60 days, the borrower will
receive a notice of default establishing a date by which the borrower must bring
the account current or foreclosure proceedings will be instituted. Late charges
are also imposed in accordance with the mortgage or Deed of Trust agreement. If
the delinquency continues, similar subsequent efforts are made to eliminate the
delinquency. If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, the account is turned over to an attorney
for foreclosure. Management meets regularly to determine when foreclosure
proceedings should be initiated and the borrower is notified when foreclosure
has been commenced. At March 31, 1996, loans past due greater than 90 days
totalled $782,000 or 0.59% of total assets.
Loans are reviewed on a monthly basis and are placed on non-accrual status
when considered doubtful of collection by management. Generally, loans past due
90 days or more as to principal or interest and, in the opinion of management,
are not adequately secured to insure the collection of the entire outstanding
balance of the loan including accrued interest are placed on non-accrual status.
Interest
42
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income. Subsequent cash payments, if any, are generally applied
to reduce the outstanding principal balance.
Non-Performing Assets. The following table sets forth information regarding
non-accrual loans, accruing loans which are past due 90 days or more as to
principal or interest payments, and foreclosed assets. As of the dates
indicated, the Bank had no loans categorized as troubled debt restructuring.
At
March 31, At September 30,
--------- ------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
Residential real estate(1)... $569 $487 $599 $856 $768 $886
Commercial real estate....... 40 0 0 0 0 0
Consumer and commercial loans 74 31 25 42 65 57
--- --- --- --- --- ---
Total $683 $518 $624 $898 $833 $943
=== === === === === ===
Accruing loans past due 90 days
or more:
Residential real estate(1)... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Commercial real estate....... 0 0 0 0 0 0
Consumer and commercial loans 99 79 106 165 0 0
-- -- --- --- ---- ----
Total..................... $99 $79 $106 $165 $ 0 $ 0
== == === === ==== ====
Total non-performing loans..... $782 $597 $730 $1,063 $833 $943
=== === === ===== === ===
Foreclosed assets:
Residential real estate(1)... 0 0 0 67 0 0
Commercial real estate....... 0 0 0 0 0 0
Consumer and commercial...... 0 0 0 0 0 0
---- ---- ---- ------ ---- ----
Total..................... 0 0 0 67 0 0
==== ==== ==== ====== ==== ====
Total non-performing assets.... $782 $597 $730 $1,130 $833 $943
=== === === ===== === ===
Allowance for loan losses...... $751 $678 $625 $415 $313 $456
=== === === === === ===
Coverage of non-performing loans(2) 96.04% 113.57% 85.62% 39.04% 37.58% 48.36%
===== ====== ===== ===== ===== =====
Non-performing assets as a
percentage of total assets... 0.59% 0.47% 0.64% 1.08% 0.89% 1.16%
==== ==== ==== ==== ==== ====
- -------------------
(1) Includes home equity loans.
(2) Calculated as the period end allowance for loan losses as a percentage of
the period end non-performing loans.
Interest income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was $17,000 for the
year ended September 30, 1995 and $27,000 was collected and included in the
Bank's interest income from non-accrual loans for the year ended September 30,
1995.
Other Loans of Concern. As of March 31, 1996, there was only one loan not
included in the table above where known information about possible credit
problems of the borrower caused management to have doubts as to the ability of
the borrower to comply with the present loan repayment terms. This loan has been
considered by management in conjunction with the analysis of the adequacy of the
allowance for loan losses. This loan had an outstanding balance of $263,000 as
of March 31, 1996. The
43
proceeds from this loan were used to purchase a commercial enterprise, as well
as purchase equipment for use in connection with such enterprise. In May 1995,
the borrower filed for bankruptcy as a result of financial difficulties
associated with another property owned by the borrower for which the Bank
provided no financing. The borrower has made timely loan payments since the
bankruptcy filing and at March 31, 1996, the loan was current.
Classified Assets. OTS regulations provide for a classification system for
problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered substandard if it is inadequately
protected by the current equity and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that does not
currently warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
In accordance with its classification of assets policy, the Bank regularly
reviews the problem assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. On the basis
of management's review of its assets, at March 31, 1996, the Bank had classified
$613,000 of loans as substandard, $394,000 of loans as doubtful, and none as
loss.
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired, it is recorded at the fair value at
the date of foreclosure less estimated costs of disposition.
The Bank records loans as in-substance foreclosures if the Bank has taken
possession of the collateral regardless of whether formal foreclosure
proceedings have been instituted. In-substance foreclosures are accounted for as
real estate acquired through foreclosure, however, title to the collateral has
not been acquired by the Bank. There may be significant other expenses incurred
such as legal and other servicing costs involved with in substance foreclosures
and foreclosed real estate. The Bank had no foreclosed real estate or in
substance foreclosed properties at March 31, 1996 or September 30, 1995.
Allowances for Loan Losses. Management regularly performs an analysis to
identify the inherent risk of loss in its loan portfolio. This analysis includes
evaluation of concentrations of credit,
44
past loss experience, current economic conditions, amount and composition of the
loan portfolio (including loans being specifically monitored by management),
estimated fair value of underlying collateral, loan commitments outstanding,
delinquencies, and other factors.
The Bank will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Bank maintains its allowance for loan
losses at a level that it considers to be adequate to provide for the inherent
risk of loss in its loan portfolio, there can be no assurance that future losses
will not exceed estimated amounts or that additional provisions for loan losses
will not be required in future periods. In addition, the Bank's determination as
to the amount of its allowance for loan losses is subject to review by the OTS,
as part of its examination process, which may result in the establishment of an
additional allowance based upon its judgment of the information available to the
time of the OTS examination.
Analysis of Allowance for Loan Losses
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
Six Months
Ended March 31, Year Ended September 30,
--------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
Total loans outstanding
(end of period)................ $68,481 $66,125 $59,248 $53,228 $51,587 $48,183
====== ====== ====== ====== ====== ======
Average total loans outstanding
(period to date)............... $67,626 $63,000 $55,475 $52,234 $49,965 $46,627
====== ====== ====== ====== ====== ======
Allowance for loan loss at
beginning of period............ 678 625 415 313 456 353
Loan charge-offs:
Residential real estate(1)..... 0 (5) (73) 0 0 (16)
Commercial real estate......... 0 (104) 0 (104) (254) (7)
Consumer and commercial loans.. (7) (3) (10) (11) (4) (22)
---- ---- --- --- ---- ----
Total charge-offs........... (7) (112) (83) (115) (258) (45)
---- ---- --- ---- ---- ----
Total recoveries................. 0 0 0 0 0 0
---- ---- --- --- --- ----
Loan charge-offs, net of recoveries (7) (112) (83) (115) (258) (45)
Provision charged to operations.. 80 165 293 217 115 148
---- --- ---- --- --- ----
Allowance for loan losses
at end of period............... $751 $678 $625 $415 $313 $456
=== === === === === ===
Ratio of net charge-offs during
the period to average loans
outstanding during the period.. 0.01% 0.18% 0.15% 0.22% 0.52% 0.10%
==== ==== ==== ==== ==== ====
Provision as a percentage
of average loans............... 0.12% 0.26% 0.53% 0.42% 0.23% 0.32%
==== ==== ==== ==== ==== ====
Allowance as a percentage of
total loans (end of period).... 1.10% 1.03% 1.05% 0.78% 0.61% 0.95%
==== ==== ==== ==== ==== ====
- -------------------
(1) Includes home equity loans.
45
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses by category as prepared by the Bank. In management's opinion, the
allocation has, at best, a limited utility. It is based on management's
assessment as of a given point in time of the risk characteristics of each of
the component parts of the total loan portfolio and is subject to changes as and
when the risk factors of each such component part change. The allocation is not
indicative of either the specific amounts or the loan categories in which future
charge-offs may be taken, nor should it be taken as an indicator of future loss
trends. In addition, by presenting the allocation, management does not mean to
imply that the allocation is exact or that the allowance has been precisely
determined from the allocation. The allocation of the allowance to each category
is not necessarily indicative of future loss in any particular category and does
not restrict the use of the allowance to absorb losses in any category.
March 31, September 30,
--------------------- --------------------------------------------------------------------
1996 1995 1994 1993
--------------------- --------------------- --------------------- ----------------------
Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in
Each Each Each Each
Amount of Category Amount of Category Amount of Category Amount of Category
Loan Loss to Total Loan Loss to Total Loan Loss to Total Loan Loss to Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- -----
(Dollars in Thousands)
Allocation of allowance for loan losses(1):
Residential real estate(2) $189 82.19% $124 82.24% $131 81.87% $139 83.25%
Commercial real estate.. 13 4.54 34 4.23 39 4.36 33 3.47
Consumer and commercial loans 236 13.27 195 13.53 67 13.77 56 13.28
Unallocated............. 313 0 325 0 388 0 187 0
--- ------ --- ------ --- ------- --- ------
Total.............. $751 100.00% $678 100.00% $625 100.00% $415 100.00%
=== ====== === ====== === ====== === ======
- -----------------------
(1) Percentages represent loans to gross loans in each category.
(2) Includes home equity loans.
46
Investment Activities
General. The Bank is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short term
securities and certain other investments. See "Regulation - Federal Home Loan
Bank System" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources." The Bank has
maintained a liquidity portfolio in excess of regulatory requirements. Liquidity
levels may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its expectation of
future yield levels, as well as management's projections as to the short term
demand for funds to be used in the Bank's loan origination and other activities.
The Bank classifies its investments as securities available for sale or
investments securities held to maturity in accordance with SFAS No. 115. At
March 31, 1996, the Bank's investment portfolio policy allowed investments in
instruments such as U.S. Treasury obligations, U.S. federal agency or federally
sponsored agency obligations, municipal obligations, mortgage-backed securities,
banker's acceptances, certificates of deposit, Federal Funds, including FHLB
overnight and term deposits (up to six months), as well as investment grade
corporate bonds, commercial paper and the mortgage derivative products described
below. The Board of Directors may authorize additional investments.
The Bank's securities available for sale and investment securities held to
maturity portfolios at March 31, 1996 did not contain securities of any issuer
with an aggregate book value in excess of 10% of the Bank's equity, excluding
those issued by the United States Government or its agencies.
Mortgage-Backed Securities. To supplement lending activities, the Bank has
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages, the principal and interest
payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, Government National Mortgage
Association ("GNMA"), and FNMA.
The Bank's mortgage-backed securities, other than collateralized mortgage
obligation ("CMOs"), are classified as investment securities held to maturity at
March 31, 1996 and were all issued by GNMA, FHLMC, or FNMA and represented
participating interests in direct pass-through pools of long-term mortgage loans
originated and serviced by the issuers of the securities. Expected maturities
will differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA, and GNMA make up a majority of the
pass-through certificates market.
47
The Bank also invests in CMOs, a type of mortgage-backed security, and as
of March 31, 1996 maintains CMOs classified as securities available for sale.
Substantially all of the Bank's CMOs were issued by GNMA, FHLMC, or FNMA. CMOs
have been developed in response to investor concerns regarding the uncertainty
of cash flows associated with the prepayment option of the underlying mortgagor
and are typically issued by government agencies, government sponsored
enterprises, and special purpose entities established by financial institutions
and other similar institutions. Some CMO instruments are most like traditional
debt instruments because they have stated principal amounts and traditionally
defined interest rate terms. Purchasers of certain other CMO instruments are
entitle to the excess, if any, of the issuer's cash inflows, including
reinvestment earnings, over the cash outflows for debt servicing and
administrative expenses. CMOs may include instruments designated as residual
interests, which represent an equity ownership interest in the underlying
collateral, subject to the first lien of the investors in the other classes of
the CMO and may be riskier than many regular CMO interests. At March 31, 1996,
all of the Bank's CMOs consisted of regular interests and did not include any
residual interests or interest-only or principal only securities. The securities
are backed by mortgages on one- to four-family residential real estate and have
contractual maturities up to 30 years in the case of adjustable rate and 15
years in the case of fixed rate mortgage-backed securities.
At March 31, 1996, the Bank held CMOs in its securities available for sale
portfolio with a fair value of $2.9 million resulting in a net unrealized loss
of approximately $75,000 at March 31, 1996. The Bank held mortgage-backed
securities in its investment securities held to maturity portfolio with an
amortized cost of $11.4 million at March 31, 1996. The average yield on CMOs
available for sale and mortgage-backed securities held to maturity at March 31,
1996 was 6.20% and 6.41%, respectively.
Securities Portfolio. The following table sets forth the carrying value of
the Bank's securities at the dates indicated. At March 31, 1996, the approximate
fair value of the Bank's securities available for sale was $18.2 million
resulting in a net unrealized gain of $33,000, net of taxes.
At March 31, At September 30,
------------------------------
1996 1995 1994 1993
---- ---- ---- ----
(In Thousands)
Securities available for sale,
at fair value (1):
U.S. Government and
agency securities................ $9,037 $2,004 $ 0 $ 0
States and political subdivisions.... 6,236 559 0 0
Collateralized mortgage obligations 2,912 0 0 0
------ ------ ------- -------
Total securities available for sale.. $18,185 $2,563 $ 0 $ 0
====== ===== ======= =======
Investment securities held to
maturity, at amortized cost:
U.S. Government and
agency securities................. $19,578 $25,213 $23,182 $16,047
States and political subdivisions.. 0 6,077 6,688 5,096
Mortgage-backed securities......... 11,395 12,348 12,711 15,118
Collateralized mortgage
obligations ..................... 0 3,049 3,166 3,245
Other.............................. 36 36 353 335
-------- -------- ------- -------
Total investment securities
held to maturity.............. $31,009 $46,723 $46,100 $39,841
====== ====== ====== ======
- ------------------
(1) Prior to October 1, 1994, the date the Bank adopted SFAS No. 115, the Bank
did not classify any securities as available for sale.
48
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for the Bank's securities portfolio at March 31, 1996 by contractual
maturity. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments.
At March 31, 1996
---------------------------------------------------------------------------------------------------------------
Less than 1 to 5 to Over 10 Total
1 year 5 years 10 years years Securities
------------------ -------------------- ------------------- ------------------ -------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Fair
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value
---- ----- ---- ----- ---- ----- ---- ----- ---- ----- -----
(Dollars in Thousands)
Securities
available for sale:
U.S. Government
and agencies
securities $4,501 5.96% $ 4,517 5.89% $ 0 0.00% $ 0 0.00% $ 9,018 5.92% $9,037
States and
political
subdivisions..... 1,022 4.04 5,207 4.46 0 0.00 0 0.00 6,229 4.39 6,236
Collateralized
mortgage
obligations...... 35 5.63 0 0.00 0 0.00 2,952 6.21 2,987 6.20 2,912
------ ------ --------- ----- ------ ------
Total securities
available
for sale...... $5,558 5.60% $9,724 5.13% $ 0 0.00% $2,952 6.21% $18,234 5.45% $18,185
===== ==== ===== ==== ======== ==== ===== ==== ====== ==== ======
Investment securities
held to maturity:
U.S. Government and
agencies
securities....... $2,763 4.99% $12,297 5.57% $4,018 6.68% $ 500 7.19% $19,578 5.78% $19,370
Mortgaged-backed
securities....... 383 7.89 669 6.50 493 9.47 9,850 6.20 11,395 6.41 11,537
Other.............. 0 0.00 0 0.00 0 0.00 36 0.00 36 0.00 36
------ ------ ------ ------ ------ ------
Total investment
securities
held to
maturity...... $3,146 5.38% $12,966 5.62% $4,511 7.03% $10,386 6.24% $31,009 6.02% $30,943
===== ==== ====== ==== ===== ==== ====== ==== ====== ==== ======
49
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending and
other investment purposes. The Bank also derives funds from the (1) amortization
and prepayment of loans, (2) sales, maturities, and calls of securities, and (3)
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions. The
Bank may also borrow funds from the FHLB as a source of funds.
Deposits. Consumer and commercial deposits are attracted principally from
within the Bank's primary market areas through the offering of a selection of
deposit instruments including savings accounts, NOW accounts, money market
accounts, and time deposits or certificate of deposit accounts. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate, among other factors.
The interest rates paid by the Bank on deposits are set weekly at the
direction of the asset/liability management committee. The Bank determines the
interest rate to offer the public on new and maturing accounts by reviewing the
market interest rates offered by competitors, the Bank's need for funds, and the
current cost of money. The Bank reviews, weekly, the interest rates being
offered by other financial institutions within its market areas.
Regular savings, money market, and NOW accounts constituted $51.7 million,
or 42.6%, of the Bank's deposit portfolio at March 31, 1996. Non-interest
bearing deposits constituted $6.6 million or 5.4% of the Bank's deposit
portfolio at March 31, 1996. Time deposits constituted $63.1 million or 52.0% of
the deposit portfolio of which $7.4 million or 6.1% of the deposit portfolio
were time deposits with balances of $100,000 or more. As of March 31, 1996, the
Bank had no brokered deposits.
50
Deposit Portfolio. Deposits in the Bank as of March 31, 1996, were
represented by various types of deposit programs described below.
Average Balance as of
Interest March 31, Percentage of
Term Rate 1996 Total Deposits
---- ---- ---- --------------
(In Thousands)
Savings accounts ................. N/A 3.00% $ 35,366 29.12%
N.O.W. accounts .................. N/A 2.25 - 2.75 10,085 8.31
Money market accounts ............ N/A 2.75 - 4.88 6,260 5.15
Non-interest bearing accounts..... N/A N/A 6,615 5.45
Time deposit accounts:
Fixed Term Fixed Rate .......... 30 days 4.25 150 0.12
Fixed Term Fixed Rate .......... 91 days 3.80 331 0.27
Fixed Term Fixed Rate .......... 150 days 5.13 3,838 3.16
Fixed Term Fixed Rate .......... 182 days 4.74 6,193 5.10
Fixed Term Fixed Rate .......... 12 months 5.33 7,135 5.87
Fixed Term Fixed Rate .......... 15 months 6.08 7,115 5.86
Fixed Term Fixed Rate .......... 18 months 5.63 2,839 1.55
Fixed Term Fixed Rate .......... 24 months 5.28 1,444 1.19
Fixed Term Fixed Rate .......... 25 months 6.25 17,540 14.44
Fixed Term Fixed Rate .......... 30 months 5.00 676 0.55
Fixed Term Fixed Rate .......... 36 months 5.08 1,280 1.05
Fixed Term Fixed Rate .......... 48 months 5.54 648 0.53
Fixed Term Fixed Rate .......... 60 months 6.22 12,029 9.90
Fixed Term Variable Rate ....... 18 months 5.02 1,899 2.38
-------- ------
Total time deposit accounts . 63,117 51.97
-------- ------
Total deposits .............. $121,443 100.00%
======== ======
Time Deposits by Rate. The following table sets forth the time deposits in
the Bank classified by interest rate as of the dates indicated.
At March 31, As of September 30,
---------------- ----------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
(In Thousands)
Interest Rate
2.00 - 2.99..... $ 0 $ 0 $ 350 $ 609
3.00 - 3.99..... 331 667 12,275 13,116
4.00 - 4.99..... 10,739 4,811 11,629 9,412
5.00 - 5.99..... 25,099 27,768 12,132 7,111
6.00 - 6.99..... 23,260 23,680 3,770 3,892
7.00 - 7.99..... 3,644 3,884 1,032 1,152
8.00 - 8.99..... 44 320 714 1,989
9.00 - 9.99..... 0 0 0 296
------ ------ ------ ------
Totals.......... $63,117 $61,130 $41,902 $37,577
====== ====== ====== ======
51
Time Deposits Maturity. The following table sets forth the amount and
maturities of time deposits at March 31, 1996.
Amount Due
--------------------------------------------------------------------------
12 month 12 month 12 month
period ended period ended period ended After
Interest Rate March 31, March 31, March 31, March 31, Total
- ------------- 1997 1998 1999 2000 -----
---- ---- ---- ----
(In Thousands)
3.00 - 3.99%............. $ 331 $ 0 $ 0 $ 0 $ 331
4.00 - 4.99%............. 8,844 1,727 168 0 10,739
5.00 - 5.99%............. 16,450 5,299 1,854 1,496 25,099
6.00 - 6.99%............. 15,120 6,211 245 1,684 23,260
7.00 - 7.99%............. 1,049 238 264 2,093 3,644
8.00 - 8.99%............. 0 0 0 44 44
-------- -------- ------- ------ -------
Total $41,794 $13,475 $2,531 $5,317 $63,117
====== ====== ===== ===== ======
Time Deposits. The following table indicates the amount of the Bank's time
deposits of $100,000 or more by time remaining until maturity as of March 31,
1996.
Maturity Period Time Deposits
--------------- -------------
(In Thousands)
Within three months........... $1,482
Three through six months...... 1,344
Six through twelve months..... 2,332
Over twelve months............ 2,216
-----
Total.................... $7,374
=====
Borrowings
The Bank may obtain advances from the FHLB of New York to supplement its
supply of lendable funds. Advances from the FHLB of New York are typically
secured by a pledge of the Bank's stock in the FHLB of New York and a portion of
the Bank's first mortgage loans. Each FHLB borrowing has its own interest rate,
which may be fixed or variable, and range of maturities. The Bank, if the need
arises, may also access the Federal Reserve Bank discount window to supplement
its supply of lendable funds and to meet deposit withdrawal requirements. At
March 31, 1996, the Bank had $2.1 million in fixed-rate long-term borrowings
outstanding from the FHLB of New York. See Note 9 to the Notes to Financial
Statements. At March 31, 1996, the Bank had no other borrowings outstanding.
Competition
The Bank has been able to maintain its position in mortgage loan
originations, market share, and deposit accounts throughout its market areas by
virtue of its local presence, competitive pricing, and referrals from existing
customers. The Bank is one of many financial institutions serving its market
areas. The deposit base of the Bank's market areas is sought by many of these
financial institutions.
52
The competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Bank's market areas. Competition for funds
also includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
other insured financial institutions such as commercial banks, thrift
institutions, credit unions, multi-state regional banks, and mortgage bankers,
many of whom have far greater resources then the Bank.
Subsidiary Activity
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. At March 31, 1996, the
Bank had one wholly-owned subsidiary, AFS Service Corp. AFS Service Corp. was
formed in October 1995 to act as an agent for the sale of Savings Bank Life
Insurance. The Bank's investment in its subsidiary totalled $1,000 at March 31,
1996. As of March 31, 1996, AFS Service Corp. had not conducted any operations.
Properties
The Bank operates from its main office and three branch offices. The
Bank's total investment in office property and equipment was $2.6 million with a
net book value of $1.6 million at March 31, 1996.
Net Book Value
Of Real Property
Year Leased or Leasehold
Location Leased or Owned or Acquired Improvements
- -------- --------------- ----------- ------------
MAIN OFFICE:
161 Church Street Owned 1961 $440,511
Amsterdam, New York
12010
AMSTERDAM BRANCH OFFICE:
Route 30N & Maple Avenue Extension Owned 1989 $612,996
Amsterdam, New York
SUPERMARKET BRANCH - GLOVERSVILLE:
Shop N Save Leased until 1994 $109,090
Fifth Avenue July 2004(1)
Gloversville, New York
SUPERMARKET BRANCH - ONEONTA:
Shop N Save Leased until 1995 $112,436
Route 28 January 2005(1)
Oneonta, New York
- --------------
(1) Lease has a ten year term with a renewal option at the end of first five
years.
53
The Bank has recently entered into a lease to occupy two spaces in the
Amsterdam Riverfront Center. A majority of this space will be used as an
operations center and will house the loan servicing, accounting, bookkeeping,
and proof departments, marketing and business development, and branch
operations. The remaining space is expected to be used as a small branch office
with an ATM.
Personnel
At March 31, 1996, the Bank had 34 full-time and 15 part-time employees.
None of the Bank's employees are represented by a collective bargaining group.
The Bank believes that its relationship with its employees is good.
Legal Proceedings
The Bank, from time to time, is a party to routine litigation, which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Bank. There were no lawsuits
pending or known to be contemplated against the Bank at March 31, 1996 that
would have a material effect on the operations or income of the Bank.
REGULATION
Set forth below is a brief description of certain laws which relate to the
regulation of the Bank and the Company. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
General
As a federally chartered, SAIF-insured savings association, the Bank is
subject to extensive regulation by the OTS and the FDIC. Lending activities and
other investments must comply with various federal and state statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve System").
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. 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 SAIF 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 regulations, whether by the OTS, the FDIC or the
United States Congress could have a material adverse impact on the Company and
the Bank and their operations.
54
Insurance of Deposit Accounts
The Bank's deposit accounts are insured by the SAIF to a maximum of
$100,000 for each insured member (as defined by law and regulation). If an
institution has no tangible capital, the FDIC has the authority, should it
initiate proceedings to terminate an institution's deposit insurance, to suspend
the insurance of any such institution. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan, or
the institution is operating in an unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The FDIC
may also prohibit an insured depository institution from engaging in any
activity the FDIC determines to pose a serious threat to the SAIF. The
management of the Bank is unaware of any practice, condition, or violation that
might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system, a savings association pays within a range of 23 cents to 31 cents
per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates on a semi-annual basis if it determines
that such action is necessary to cause the balance in the SAIF to reach the
designated reserve ratio of 1.25% of SAIF-insured deposits within a reasonable
period of time. The SAIF was substantially underfunded at March 31, 1996. In
addition, the FDIC may impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC. The Bank's federal deposit insurance premium expense for the year
ended September 30, 1995 amounted to approximately $235,000. By comparison, at
March 31, 1996, members of the BIF were required to pay substantially lower, or
virtually no, federal deposit insurance premium.
Regulatory Capital Requirements
OTS capital regulations require savings institutions to meet three capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) core
capital equal to at least 3% of total adjusted assets, and (3) risk-based
capital equal to 8% of total risk-weighted assets. The Bank's capital ratios are
set forth under "Historical and Pro Forma Capital Compliance."
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of
55
the allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. A savings association must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The OTS has adopted a rule requiring a deduction from capital for
institutions with certain levels of interest rate risk. This rule is not yet in
effect.
Dividend and Other Capital Distribution Limitations
OTS regulations require the Bank to give the OTS 30 days advance notice of
any proposed declaration of dividends to the Company, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Company. In addition, the Bank may not declare or pay a cash dividend on its
capital stock if the effect thereof would be to reduce the regulatory capital of
the Bank below the amount required for the liquidation account to be established
pursuant to the Bank's Plan. See "The Conversion - Effects of Conversion to
Stock Form on Depositors and Borrowers of the Bank Liquidation Account."
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of
September 30, 1995, the Bank was a Tier 1 institution.
In the event the Bank's capital fell below its fully phased-in requirement
or the OTS notified it that it was in need of more than normal supervision, the
Bank would become a Tier 2 or Tier 3 institution and as a result, its ability to
make capital distributions could be restricted. Tier 2 institutions, which are
institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75%
of net income over the most recent four quarter period. Tier 3 institutions,
which are institutions that do not meet current minimum capital requirements and
propose to make any capital distribution, and Tier 2 institutions that propose
to make a capital distribution in excess of the noted safe harbor level, must
obtain OTS approval prior to making such distribution. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. The OTS has
proposed rules relaxing certain approval and notice requirements for
well-capitalized institutions.
A savings association is prohibited from making a capital distribution if,
after making the distribution, the savings association would be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements).
Further, a savings association cannot distribute regulatory capital that is
needed for the liquidation account.
56
Qualified Thrift Lender Test
Savings institutions must meet a qualified thrift lender ("QTL") test. If
the Bank maintains an appropriate level of qualified thrift investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of New York. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every 12 months. As of March 31, 1996, the Bank was in compliance with its QTL
requirement with approximately 75% of its assets invested in QTIs.
Transactions With Affiliates
Generally, restrictions on transactions with affiliates require that
transactions between a savings association or its subsidiaries and its
affiliates be on terms as favorable to the Bank as comparable transactions with
non-affiliates. In addition, certain of these transactions are restricted to an
aggregate percentage of the Bank's capital and collateral in specified amounts
must usually be provided by affiliates in order to receive loans from the Bank.
Affiliates of the Bank include the Company and any company which would be under
common control with the Bank. In addition, a savings association may not extend
credit to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of any affiliate that is not a subsidiary. The
OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case-by-case basis.
Liquidity Requirements
All savings associations are required to maintain an average daily balance
of liquid assets equal to a certain percentage of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The liquidity requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations. At March 31, 1996, the Bank's required liquid asset ratio was 5%.
Monetary penalties may be imposed upon associations for violations of liquidity
requirements.
Federal Home Loan Bank System
The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs that administer the home financing credit function of savings
associations. 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.
As a 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. At March 31, 1996, the Bank had $566,000 in FHLB
stock, at cost, which was in compliance with this requirement. The FHLB imposes
various limitations on advances such as limiting the amount of certain types of
real estate related collateral to 30% of a member's capital and limiting total
advances to a member.
57
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended September 30,1995, dividends paid by
the FHLB of New York to the Bank totalled $42,000.
Federal Reserve System
The Federal Reserve System requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts)
and non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve System may be used to satisfy the
liquidity requirements that are imposed by the OTS. At March 31, 1996, the
Bank's reserve met the minimum level required by the Federal Reserve System.
Savings associations have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings associations to exhaust all other sources before borrowing from the
Federal Reserve System. The Bank had no borrowings from the Federal Reserve
System at March 31, 1996.
Company Regulation
General. After the Conversion, the Company will be a unitary savings and
loan holding company subject to regulatory oversight by the OTS. As such, the
Company is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS will have
enforcement authority over the Company and its non-savings association
subsidiaries, should such subsidiaries be formed, which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for the
benefit of stockholders of the Company. The Company will also be required to
file certain reports with, and otherwise comply with, the rules and regulations
of the OTS and the Securities and Exchange Commission ("SEC").
QTL Test. As a unitary savings and loan holding company, the Company
generally will not be subject to activity restrictions, provided the Bank
satisfies the QTL test. If the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to restrictions applicable to bank holding companies and
those activities specified by the OTS as permissible for a multiple savings and
loan holding company, unless such other associations each also qualify as a QTL
or were acquired in a supervised acquisition. See "- Qualified Thrift Lender
Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS
58
regulations, of a federally insured savings institution without giving at least
60 days written notice to the OTS and providing the OTS an opportunity to
disapprove the proposed acquisition. In addition, no company may acquire control
of such an institution without prior OTS approval.
Federal Securities Law. 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 the Exchange Act.
The Company will then be subject to the information, proxy solicitation, insider
trading restriction, and other requirements under the Exchange Act.
TAXATION
Federal Taxation
Savings associations are subject to the provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), in the same general manner as other
corporations. However, savings associations such as the Bank, which meet certain
definitional tests and other conditions prescribed by the Code may benefit from
certain favorable provisions regarding their deductions from taxable income for
annual additions to their bad debt reserve. The amount of the bad debt deduction
that a qualifying savings institution may claim with respect to additions to its
reserve for bad debts is subject to certain limitations. The Bank reviews the
most favorable way to calculate the deduction attributable to an addition to its
bad debt reserve on an annual basis.
Under the percentage of taxable income method, the bad debt deduction
attributable to "qualifying real property loans" cannot exceed the greater of
(i) the amount deductible under the experience method, or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equals the amount
by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeds the sum
of the surplus, undivided profits and reserves at the beginning of the taxable
year. The amount of the bad debt deduction attributable to qualifying real
property loans computed using the percentage of taxable income method is
permitted only to the extent that the institution's reserve for losses on
qualifying real property loans at the close of the taxable year does not exceed
6% of such loans outstanding at such time. The Bank used the percentage of
taxable income method for the tax years ended December 31, 1994 and 1993.
Under the experience method, the bad debt deduction may be based on (i) a
six-year moving average of actual losses on qualifying and non-qualifying loans,
or (ii) a fill-up to the institution's base year reserve amount, which is the
tax bad debt reserve determined as of December 31, 1987. The Bank used the
experience method for the tax year ended December 31, 1995. See Notes 1(l) and 8
to the Financial Statements.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage of taxable income bad debt deduction thus computed is reduced by the
amount permitted as a deduction for non-qualifying loans under the experience
method. The availability of the percentage of taxable income method permits
qualifying savings associations to be taxed at a lower effective federal income
tax rate than that applicable to corporations generally (approximately 31.3%
assuming the maximum percentage bad debt deduction).
59
If an association's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period, which is
immediately accruable for financial reporting purposes. As of March 31, 1996, at
least 60% of the Bank's assets were qualifying assets as defined in the Code. No
assurance can be given that the Bank will meet the 60% test for subsequent
taxable years.
Earnings appropriated to the Bank's bad debt reserve and claimed as a tax
deduction including the Bank's supplemental reserves for losses will not be
available for the payment of cash dividends or for distribution to stockholders
(including distributions made on dissolution or liquidation), unless the Bank
includes the amount in income, along with the amount deemed necessary to pay the
resulting federal income tax. As of March 31, 1996, the Bank had approximately
$2.5 million of accumulated earnings, representing its base year tax reserve,
for which federal income taxes have not been provided. If such amount is used
for any purpose other than bad debt losses, including a dividend distribution or
a distribution in liquidation, it will be subject to federal income tax at the
then current rate. See "Risk Factors - Possible Recapture of Bad Debt Reserve."
Generally, for taxable years beginning after 1986, the Code also requires
most corporations, including savings associations, to utilize the accrual method
of accounting for tax purposes. Further, for taxable years ending after 1986,
the Code disallows 100% of a savings association's interest expense deemed
allocated to certain tax-exempt obligations acquired after August 7, 1986.
Interest expense allocable to (i) tax-exempt obligations acquired after August
7, 1986 which are not subject to this rule, and (ii) tax-exempt obligations
issued after 1982 but before August 8, 1986, are subject to the rule which
applied prior to the Code disallowing the deductibility of 20% of the interest
expense.
The Internal Revenue Code imposes a tax ("AMT") on alternative minimum
taxable income ("AMTI") at a rate of 20%. AMTI is increased by certain
preference items, including the excess of the tax bad debt reserve deduction
using the percentage of taxable income method over the deduction that would have
been allowable under the experience method. Only 90% of AMTI can be offset by
net operating loss carryovers of which the Bank currently has none. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Bank's AMTI is increased by an amount equal to 75% of the
amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). In addition, for taxable years beginning after December 31,
1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of
AMTI (with certain modifications) over $2 million is imposed on corporations,
including the Bank, whether or not an AMT is paid. Under pending legislation,
the AMT rate would be reduced to zero for taxable years beginning after December
31, 1994, but this rate reduction would be suspended for taxable years beginning
in 1995 and 1996 and the suspended amounts would be refunded as tax credits in
subsequent years.
The Company may exclude from its income 100% of dividends received from
the Bank as a member of the same affiliated group of corporations. A 70%
dividends received deduction generally applies with respect to dividends
received from corporations that are not members of such affiliated group, except
that an 80% dividends received deduction applies if the Company and the Bank own
more than 20% of the stock of a corporation paying a dividend. The above
exclusion amounts, with the exception of the affiliated group figure, are
reduced in years in which the Bank avails itself of the percentage of taxable
income bad debt deduction method.
The Bank's federal income tax returns for the last five tax years have not
been examined by the IRS.
60
State Taxation
New York Taxation. The Bank is subject to New York State Franchise Tax on
Banking Corporations equal to the greater of (i) 9% of the Bank's "entire net
income" allocable to operations in New York, or (ii) the applicable alternative
minimum tax. The alternative minimum tax is generally the greater of (a) 0.01%
of the value of the Bank's assets allocable to operations in New York, with
certain modifications, (b) 3% of the Bank's "alternative entire net income"
allocable to operations in New York, or (c) $250. In addition, New York also
imposes a surtax of 3% on the applicable tax described above. The surtax is
scheduled to expire by the end of 1996. Entire net income is similar to federal
taxable income, subject to modifications (including the fact that net operating
losses cannot be carried back or carried forward) and alternative entire net
income is equal to entire net income without certain modifications.
The Bank's state income tax returns for the tax years of 1991, 1994, and
1995 have not been audited. An audit of the 1992 and 1993 tax years by the state
is in progress.
Delaware Taxation. As a Delaware corporation with no operations in the
State of Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual fee to the State of
Delaware. The Company is also subject to an annual franchise tax imposed by the
State of Delaware.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of those persons who
currently serve as Directors of the Bank. The Board of Directors is divided into
three classes, each of which contains approximately one-third of the Board. The
directors are 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 John M. Lisicki and Daniel J. Greco, has a term of
office expiring at the first annual meeting following the Conversion. A second
class, consisting of Ronald S. Tecler and John A. Tesiero, Jr. has a term of
office expiring at the annual meeting to be held one year thereafter. A third
class, consisting of John A. Kosinski, Jr., Joseph G. Opalka and Florence B.
Opiela, has a term of office expiring at the annual meeting to be held two years
thereafter.
The following individuals hold the executive offices in the Company set
forth below opposite their names.
Name Age (1) Positions Held With the Company
- ---- ------- -------------------------------
John M. Lisicki 49 President, Chief Executive Officer, and Director
James J. Alescio 34 Treasurer and Chief Financial Officer
Benjamin W. Ziskin 38 Vice President
- ---------------------
(1) At March 31, 1996.
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. Additional information
concerning the business experience and compensation of the directors
61
and executive officers of the Company is set forth under "Management of the Bank
- - Biographical Information."
MANAGEMENT OF THE BANK
Directors and Executive Officers
The Board of Directors of the Bank is composed of seven members each of
whom serves for a term of three years. The Bank's proposed Charter and Bylaws
require that directors be divided into three classes, as nearly equal in number
as possible, each class to serve for a three-year period, with approximately
one-third of the directors elected each year. Executive officers are elected
annually by the Board of Directors and serve at the Board's discretion.
The following table sets forth information with respect to the directors
and executive officers of the Bank, all of whom will continue to serve in the
same capacities after the Conversion.
Current
Director Term
Name Age (1) Position Since Expires
- ---- ------- -------- ----- -------
John M. Lisicki 49 President, Chief Executive 1984 1997
Officer, and Director
Daniel J. Greco 68 Director 1980 1997
Ronald S. Tecler 57 Director 1994 1998
John A. Tesiero, Jr. 68 Director 1994 1998
John A. Kosinski, Jr. 68 Director 1959 1999
Joseph G. Opalka 56 Director 1975 1999
Florence B. Opiela 81 Director 1984 1999
James J. Alescio 34 Treasurer and Chief
Financial Officer
Benjamin W. Ziskin 38 Vice President and Chief
Lending Officer
- ------------
(1) At March 31, 1996.
Biographical Information
The business experience of each director and executive officer of the Bank
is set forth below. All directors and executive officers have held their present
positions for a minimum of five years unless otherwise stated.
John M. Lisicki has been the President and Chief Executive Officer of the
Bank since 1978 and of the Company since its formation. Mr. Lisicki is the
Chairman of the Board of Amsterdam Memorial Hospital, a former President and a
board member of Industries for Amsterdam, Inc., the president and a board member
of Foundation Liberty Enterprises, a board member and former Vice President of
the Amsterdam Free Library, a board member of the Sarah J. Sanford Home for
Elderly Women, and a former board member of the Hospice Foundation.
62
Daniel J. Greco has been a director of the Bank since 1980 and a director
of the Company since its formation. Mr. Greco is a former school teacher and the
retired superintendent of the Greater Amsterdam School District. Mr. Greco
serves on the Board of Directors of the Amsterdam Memorial Hospital and
Industries for Amsterdam and is active in the Rotary Club, the Elks Club, and
the Boy Scouts of America.
Ronald S. Tecler has been a director of the Bank since 1994 and of the
Company since its formation. Mr. Tecler is the majority stockholder of a
professional corporation engaged in the practice of dentistry in Amsterdam, New
York and has practiced dentistry since 1971. Mr. Tecler is the Chairman of the
Board of the Amsterdam Urban Renewal Agency, a board member of Industries for
Amsterdam, Inc., the Vice President of the Twin Rivers Boy Scout Council, and is
active in the Amsterdam Rotary Club and the St. Mary's Hospital at Amsterdam
Foundation.
John A. Tesiero, Jr. has been a director of the Bank since 1994 and of the
Company since its formation. Mr. Tesiero is the sole owner of Cranesville Block
Co., Inc., a construction supply business supplying ready mix concrete, concrete
block, sand, gravel, and stone, located in Amsterdam, New York.
John A. Kosinski, Jr., has been a director of the Bank since 1959 and of
the Company since its formation. Mr. Kosinski is an attorney in Amsterdam, New
York and has practiced law since 1953. Mr. Kosinski serves as counsel for the
Bank. Mr. Kosinski is a Director Emeritus of the St. Mary's Hospital at
Amsterdam Foundation and is active in the Liberty House, the Elks Club, the
Montgomery County Chamber of Commerce, the Montgomery County Economic
Development Corp., the American and Montgomery County Bar Associations, and the
New York Trial Association.
Joseph G. Opalka has been a director of the Bank since 1975 and of the
Company since its formation. Mr. Opalka is a certified public accountant and the
sole owner of Joseph G. Opalka C.P.A., a public accounting firm. Mr. Opalka also
serves as an adjunct faculty member of the Schenectady County Community College
and from 1969 to 1993 was the Vice President of Finance for Amsterdam Printing &
Litho Corp., a mail order company. Mr. Opalka serves as a director of
Rehabilitation Support Services, Inc. and is active in the American Institute of
Certified Public Accountants and the New York State Society of Certified Public
Accountants.
Florence B. Opiela has been a director of the Bank since 1984 and of the
Company since its formation. Ms. Opiela is a retired Executive Vice President of
the Bank. Ms. Opiela is a member of the St. Mary's Hospital volunteers, St.
Mary's Hospital Auxiliary, Inc., and St. Stanislaus Rosary Auxiliary. Ms. Opiela
is also active in the Amsterdam Free Library and the Walter-Elwood Museum.
James J. Alescio served as the Assistant Treasurer of the Bank from 1984 to
1987 and was appointed Treasurer and Chief Financial Officer of the Bank in 1993
and of the Company upon its formation. From 1987 to 1993, Mr. Alescio was a
senior accountant with John G. Gilooly, C.P.A.'s, an independent public
accounting firm. Mr. Alescio in a member of the American Institute of Certified
Public Accountants and the New York Society of Certified Public Accountants.
Benjamin W. Ziskin served as the Treasurer of the Bank from 1985 to 1993
and was appointed Vice President of the Bank in 1989 and of the Company upon its
formation. Mr. Ziskin is a board member and past Treasurer of the Capital
District League of Savings Institutions, a board member and President of the
Montgomery Transitional Services, a board member and Secretary of the Amsterdam
Housing Authority, a past President and Treasurer of the Montgomery County Big
Brothers/Big Sisters, and a past board member of The Amsterdam City Center and
the St. Mary's Hospital at Amsterdam Foundation.
63
Meetings and Committees of the Board of Directors
The Bank's Board of Directors conducts its business through meetings of
the Board and through activities of its committees. During the fiscal year ended
September 30, 1995, the Board of Directors held 12 regular meetings and three
special meetings. No director attended fewer than 75% of the total meetings of
the Board of Directors of the Bank and committees on which such director served
during the fiscal year ended September 30, 1995.
The Executive Committee of the Board of Directors, which is comprised of
John M. Lisicki, John A. Kosinski, and Daniel J. Greco, meets as necessary
between meetings of the full Board of Directors of the Bank. The Executive
Committee did not meet during fiscal 1995. All actions of the Executive
Committee are ratified by the full Board of Directors.
The Audit Committee of the Bank is comprised of Florence B. Opiela and
Joseph Opalka. The President also attends these meetings but is excused during
certain portions. The Audit Committee is responsible for developing and
maintaining the Bank's audit program. The committee also meets with the Bank's
outside auditors to discuss the results of the annual audit and any related
matters. The Audit Committee met three times during the 1995 fiscal year.
The Compensation Committee consists of John M. Lisicki, John A. Tesiero,
Jr., John A. Kosinski, and Daniel J. Greco. The committee establishes the Bank's
salary budget, director fees, and employee benefits provided by the Bank for
approval by the Board of Directors. The committee met once during the 1995
fiscal year.
Director Compensation
Members of the Board of Directors received fees of $1,000 per month during
the 1995 fiscal year for attendance at meetings of the Board of Directors. No
additional fees are paid to board members for attendance at committee meetings.
The Bank paid a total of $76,300 in director fees for the year ended September
30, 1995.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by the President and Chief Executive
Officer of the Bank. No other executive officer of the Bank had a salary and
bonus during the year ended September 30, 1995 that exceeded $100,000 for
services rendered in all capacities to the Bank.
Annual Compensation
---------------------------------------
Other Annual All Other
Name and Principal Position Salary(1) Bonus Compensation(2) Compensation(3)
- --------------------------- --------- ----- --------------- ---------------
John M. Lisicki $110,452 $3,000 $16,640 $5,522
President and Chief Executive
Officer
- -------------
(1) Includes board of director's fees.
(2) Consists of the accrual of 16.99% of salary under the Supplemental
Retirement Plan. See "Supplemental Retirement Plan." Does not include the
value of certain other benefits, which do not exceed 10% of the total
salary and bonus of the individual.
(3) Includes Bank contribution of $1,008 to term life insurance and matching
contribution of $4,514 to the 401(k) Plan.
64
Employment and Severance Agreements. In February 1996, the Bank entered
into employment agreements with John M. Lisicki, President and Chief Executive
Officer and certain other officers of the Bank. Mr. Lisicki's salary under the
employment agreement was based on his then current salary, $115,000. Mr.
Lisicki's employment agreement is for a term of three years. The agreements are
terminable by the Bank for "just cause" as defined in the agreements. If the
Bank terminates the employee without just cause, the employee will be entitled
to a continuation of the employee's salary from the date of termination through
the remaining term of the agreement. Mr. Lisicki's employment agreement contains
a provision stating that in the event of the termination of employment in
connection with any future change in control of the Bank, as diversified in the
agreement, Mr. Lisicki will be paid in a lump sum an amount equal to 2.99 times
Mr. Lisicki's five year average annual cash compensation. In addition, the Bank
has entered into severance agreements with three key employees, which provide a
severance payment upon termination without just cause in the event of a change
in control, as defined in the agreements. If such payments were made under the
agreements to the above officers and key employees at March 31, 1996, such
payments would equal approximately $686,000. The aggregate payments that would
be made to such individuals would be an expense to the Bank, thereby reducing
net income and the Bank's capital by that amount, adjusted as appropriate for
income tax effects. The agreements may be renewed annually by the Board of
Directors upon a determination of satisfactory performance within the Board's
sole discretion.
Supplemental Retirement Plan. The Bank has adopted a supplemental
retirement plan ("SERP") for the benefit of John M. Lisicki, President and one
other officer of the Bank in connection with the termination of a defined
benefit retirement plan in fiscal 1994. The purpose of the SERP is to furnish
the participant with supplemental post-retirement benefits in addition to those
which will be provided under the Bank's 401(k) Plan. After an analysis of the
retirement benefits provided to all employees, the Bank determined that most
employees would benefit more from a 401(k) savings plan than the defined benefit
retirement plan. The SERP was adopted to compensate John Lisicki and the other
officer so that when the benefits under the SERP are added to the benefits under
the 401(k) Plan, the retirement benefits are approximately equal to the
retirement benefits these same officers would have received under the terminated
defined benefit retirement plan. The targeted level of retirement benefits under
the SERP are calculated as 60% of the Mr. Lisicki's final average compensation
(as defined in the SERP), as adjusted to take into account certain other
retirement benefits. Annually, a sum equal to 16.99% of Mr. Lisicki's annual
salary is expensed by the Bank for the benefit of Mr. Lisicki. The SERP provides
that the Bank can pay the benefits under the SERP either as a single lump sum
payment, by purchasing a straight life or joint and survivor annuity, or in
monthly installments over five, ten, or fifteen years. Payments under the SERP
will be accrued for financial reporting purposes based upon the yearly credit by
the Bank to the account of the officer. Upon receipt of payment of benefits, the
participant will recognize taxable ordinary income in the amount of such
payments received and the Bank will be entitled to recognize a tax-deductible
compensation expense at that time for tax return purposes. Benefits under the
SERP are immediately payable upon death or disability of the participant, or
upon involuntary termination of the participant prior to the officer obtaining
the age of 55 or obtaining 20 years of credited service under the SERP. For the
six months ended March 31, 1996, and the fiscal year ended September 30, 1995,
expenses associated with the SERP totaled approximately $11,000 and $21,000,
respectively.
Other Benefits
Employee Stock Ownership Plan. The Bank has established an employee stock
ownership plan, the ESOP, for the exclusive benefit of participating employees,
to be implemented upon the completion of the Conversion. Participating employees
are employees who have completed one year of service with the Bank and have
attained the age 21. The Bank will submit to the IRS an application for a letter
of
65
determination as to the tax-qualified status of the ESOP. Although no assurances
can be given, the Bank expects that the ESOP will receive a favorable letter of
determination from the IRS.
The ESOP is to be funded by tax-deductible contributions made by the Bank
in cash or the Common Stock. Benefits may be paid either in shares of the Common
Stock or in cash. In accordance with the Plan, the ESOP may borrow funds with
which to acquire up to 10% of the Common Stock to be issued in the Conversion,
(8% if the Bank adopts the RSP within one year after the consummation of the
Conversion and the RSP purchases 4% of the Common Stock sold in the conversion),
and intends to borrow funds from the Company. See "Proposed Future Stock Benefit
Plans - Restrictions on Benefit Plans." The loan is expected to be for a term of
ten years at an annual interest rate equal to the prime rate as published in The
Wall Street Journal. Presently it is anticipated that the ESOP will purchase up
to 8% of the Common Stock to be issued in the Offerings (i.e., approximately
$880,000, based on the midpoint of the EVR), however, no assurance may be given
that ESOP purchases, if any, will not change. This loan will be secured by the
shares purchased and earnings thereon. Shares of Common Stock purchased with
such loan proceeds will be held in a suspense account for allocation among
participants as the loan is repaid. The Bank anticipates contributing
approximately $88,000 annually (based on a 88,000 share purchase) to the ESOP to
meet principal obligations under the ESOP loan, as proposed. It is anticipated
that all such contributions will be limited to an amount that is tax-deductible.
Shares sold above the maximum of the EVR (i.e., more than 1,265,000
shares) may be sold to the ESOP before satisfying remaining unfilled orders of
Eligible Account Holders to fill the ESOP's subscription or the ESOP may
purchase some or all of the shares covered by its subscription after the
Conversion in the open market.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation. All
participants must be employed at least 1,000 hours in a plan year and be
employed on the last day of the plan year in order to receive an allocation.
Participant benefits become 100% vested after five years of service. Employment
prior to the adoption of the ESOP shall be credited for the purposes of vesting.
Vesting will be accelerated upon retirement, death, disability, change in
control of the Company, or termination of the ESOP. Forfeitures will be
reallocated to participants on the same basis as other contributions in the plan
year. Benefits may be payable in the form of a lump sum upon retirement, death,
disability, or separation from service. The Bank's contributions to the ESOP are
discretionary and may cause a reduction in other forms of compensation.
Therefore, benefits payable under the ESOP cannot be estimated.
The Board of Directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
Board of Directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees as
directed by the Board of Directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
401(k) Savings Plan. The Bank sponsors a tax-qualified defined
contribution savings plan ("401(k) Plan") for the benefit of its employees.
Employees become eligible to participate under the 401(k) Plan after reaching
age 21 and completing one year of service. Under the 401(k) Plan, employees may
voluntarily elect to defer between 1% and 10% of compensation, not to exceed
applicable limits under the Code (i.e., $9,500 in calendar 1995). The Bank
matches 100% of the first 3% of employee contributions and 50% of the next 3% of
employee contributions. The Bank does not match more than 4.5% of the employee's
base salary. Matching contributions vest over a five year period at a rate of
20%
66
per year, or become 100% vested upon termination of employment due to death,
disability, or retirement. Employee contributions are immediately vested. The
Bank intends to amend the 401(k) Plan to permit voluntary investments of plan
assets by participants in the Common Stock in the Conversion and thereafter.
Benefits are payable upon termination of employment, retirement, death,
disability, or plan termination. Normal retirement age under the 401(k) Plan is
age 65. Additionally, funds under the 401(k) Plan may be distributed upon
application to the plan administrator upon severe financial hardship in
accordance with uniform guidelines which comply with those specified by the
Code. It is intended that the 401(k) Plan operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the requirements of Section 401(a) of the Code.
Costs associated with the 401(k) Plan were $17,000 and $31,000 for the six
months ended March 31, 1996 and the year ended September 30, 1995. Contributions
to the 401(k) Plan by the Bank for employees may be reduced in the future or
eliminated as a result of contributions made to the Employee Stock Ownership
Plan. See "- Employee Stock Ownership Plan."
Proposed Future Stock Benefit Plans
Stock Option Plan. The Boards of Directors of the Company intend to adopt
a stock option plan (the "Option Plan") within one year of the Conversion,
subject to approval by the Company's stockholders at a stockholders meeting to
be held no sooner than six months after the Conversion. The Option Plan would be
in compliance with the OTS regulations then in effect. See "- Restrictions on
Benefit Plans." In accordance with OTS regulations, a number of shares equal to
10% of the aggregate shares of Common Stock to be issued in the Offerings (i.e.,
110,000 shares based upon the sale of 1,100,000 shares at the midpoint of the
EVR) would be reserved for issuance by the Company upon exercise of stock
options to be granted to officers, directors, and employees of the Company and
the Bank from time to time under the Option Plan. The purpose of the Option Plan
would be to provide additional performance and retention incentives to certain
officers, directors, and employees by facilitating their purchase of a stock
interest in the Company. The Option Plan, which would become effective upon
stockholder approval of the Option Plan, would provide for a term of 10 years,
after which no awards could be made, unless earlier terminated by the Board of
Directors pursuant to the Option Plan. The options would vest over a five year
period (i.e., 20% per year), beginning one year after the date of grant of the
option. Options would be granted based upon several factors, including
seniority, job duties and responsibilities, job performance, the Bank's
performance, and a comparison of awards given by other institutions converting
from mutual to stock form.
The Company would receive no monetary consideration for the granting of
stock options under the Option Plan, however, the Company would receive the
option price for each share issued to optionees upon the exercise of such
options. Shares issued as a result of the exercise of options will be either
authorized but unissued shares or shares purchased in the open market by the
Company, however, no purchases in the open market will be made that would
violate applicable regulations restricting purchases by the Company. The
exercise of options and payment for the shares received would contribute to the
equity of the Company.
If the Option Plan is implemented more than one year after the Conversion,
the Option Plan will comply with such OTS regulations and policies that are
applicable at such time.
Restricted Stock Plan. The Board of Director of the Bank and the Company
intends to adopt a restricted stock plan (the "RSP") within one year of the
Conversion, the objective of which is to enable
67
the Bank to retain personnel and directors of experience and ability in key
positions of responsibility. The Company expects to hold a stockholders' meeting
no sooner than six months after the Conversion in order for stockholders to vote
to approve the RSP. The RSP will be implemented in accordance with applicable
OTS regulations. See "- Restrictions on Benefit Plans." Awards would be granted
based upon a number of factors, including seniority, job duties and
responsibilities, job performance, the Bank's performance, and a comparison of
awards given by other institutions converting from mutual to stock form. The RSP
would be managed by a committee of non-employee directors (the "RSP Trustees").
The RSP Trustees would have the responsibility to invest all funds contributed
by the Bank to the trust created for the RSP (the "RSP Trust").
The Bank will contribute sufficient funds to the RSP so that the RSP Trust
can purchase, in the aggregate, up to 4% of the amount of Common Stock that is
sold in the Conversion. The shares purchased by the RSP would be authorized but
unissued shares or would be purchased in the open market. In the event the
market price of the Common Stock is greater than $10.00 per share, the Bank's
contribution of funds will be increased. Likewise, in the event the market price
is lower than $10.00 per share, the Bank's contribution will be decreased. In
recognition of their prior and expected services to the Bank and the Company, as
the case may be, the officers, employees, and directors responsible for
implementation of the policies adopted by the Board of Directors and the
profitable operation of the Bank will, without cost to them, be awarded stock
under the RSP. Based upon the sale of 1,100,000 shares of Common Stock in the
Offerings at the midpoint of the EVR, the RSP Trust is expected to purchase up
to 44,000 shares of Common Stock.
In accordance with applicable OTS regulations, the shares granted under
the RSP will be in the form of restricted stock vesting over a five year period
(i.e., 20% per year) beginning one year after the date of grant of the award.
Compensation expense in the amount of the cost of the Common Stock granted will
be recognized pro rata over the years during which the shares are payable. Until
they have vested, such shares may not be sold, pledged, or otherwise disposed of
and are required to be held in escrow. The RSP Trustees shall vote all shares
held by the RSP trust prior to vesting and delivery of shares to participants.
If the RSP is implemented more than one year after the Conversion, the RSP
will comply with such OTS regulations and policies that are applicable at such
time.
Restrictions on Benefit Plans. OTS regulations provide that in the event
the Bank implements or adopts stock option or management and/or employee stock
benefit plans within one year from the date of Conversion, such plans must
comply with the following restrictions: (1) the plans must be fully disclosed in
the prospectus, (2) for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares issued in the
Conversion, (3) for restricted stock plans, the shares may not exceed 3% of the
shares issued in the Conversion (4% for institutions with 10% or greater
tangible capital), (4) the aggregate amount of stock purchased by the ESOP in
the Conversion may not exceed 10% (8% for well-capitalized institutions
utilizing a 4% restricted stock plan), (5) no individual employee may receive
more than 25% of the available awards under any plan, (6) directors who are not
employees may not receive more than 5% individually or 30% in the aggregate of
the awards under any plan, (7) all plans must be approved by a majority of the
total votes eligible to be cast at any duly called meeting of the Company's
stockholders held no earlier than six months following the Conversion, (8) for
stock option plans, the exercise price must be at least equal to the market
price of the stock at the time of grant, (9) for restricted stock plans, no
stock issued in a conversion may be used to fund the plan, (10) neither stock
option awards nor restricted stock awards may vest earlier than 20% as of one
year after the date of stockholder approval and 20% per year thereafter, and
vesting may be accelerated only in the case of disability or death (or if not
inconsistent with applicable OTS regulations
68
in effect at such time, in the event of a change in control), (11) the proxy
material must clearly state that the OTS in no way endorses or approves of the
plans, and (12) prior to implementing the plans, all plans must be submitted to
the Regional Director of the OTS within five days after stockholder approval
with a certification that the plans approved by the stockholders are the same
plans that were filed with and disclosed in the proxy materials relating to the
meeting at which stockholder approval was received. Plans adopted and
implemented more than one year after the Conversion would not necessarily be
subject to these limitations. In addition, should the rules and regulations of
the OTS be liberalized, the Bank and the Company reserve the right to adopt
plans qualifying under the more liberal rules.
Compensation Committee Interlocks and Insider Participation
The compensation committee consists of President John M. Lisicki and
directors John A. Tesiero, Jr., John A. Kosinski, Jr. and Daniel J. Greco.
Director John A. Kosinski, Jr., is an attorney in Amsterdam, New York, and
performs legal work for the Bank, consisting of mortgage title reviews and
closings on loans. During the fiscal year ended September 30, 1995, Mr. Kosinski
collected fees of approximately $57,000 from the Bank, in connection with this
legal work, which fees were in excess of 5% of the total gross revenues of Mr.
Kosinski's firm.
Certain Related Transactions
Director John A. Kosinski, Jr., is an attorney in Amsterdam, New York, and
performs legal work for the Bank, consisting of mortgage title reviews and
closings on loans. During the fiscal year ended September 30, 1995, Mr. Kosinski
collected fees of $57,000 from the Bank, in connection with this legal work,
which fees were in excess of 5% of the total gross revenues of Mr. Kosinski's
firm.
Director Tesiero is a principal and substantial owner of the Amsterdam
Riverfront Center (the "Center"). The Bank has recently entered into two leases
with the Center to lease space to house portions of the Bank's operations and
possibly a small branch office with an ATM. The leases are for a term of five
years with an option to renew the leases for another five years. The leases with
the Center are at a rent that was equivalent to the market rate at the time the
leases were entered into and the Bank will pay approximately $125,000 in lease
payments over five years for the use of approximately 7,000 square feet. The
spaces leased by the Bank make up two of the 64 spaces available in the Center.
The Bank had no "interlocking" relationships existing on or after
September 30, 1995 in which (i) any executive officer is a member of the Board
of Directors/Trustees of another entity, one of whose executive officers is a
member of the Bank's Board of Directors, or where (ii) any executive officer is
a member of the compensation committee of another entity, one of whose executive
officers is a member of the Bank's Board of Directors.
The Bank, like many financial institutions, has followed a policy of
granting various types of loans to officers and directors. Such loans a) have
been made in the ordinary course of business, b) were made on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the Bank's other
customers, and c) do not involve more than the normal risk of collectibility or
present other unfavorable features. All loans by the Bank to its directors and
executive officers are subject to OTS regulations restricting loans and other
transactions with affiliated persons of the Bank. Loans to officers and
directors of the Bank and their affiliates, amounted to approximately $318,000
or 3.88% of the Bank's equity at March 31, 1996. Assuming the Conversion had
occurred as of March 31, 1996, and assuming the sale of 1,100,000 shares at the
midpoint of the EVR, loans to officers and directors of the Bank at that date
would have totalled approximately 1.85% of pro forma stockholders' equity of the
Company.
69
THE CONVERSION
The Boards of Directors of the Bank and the Company and the OTS have
approved the Plan subject to the Plan's approval by the Members of the Bank
entitled to vote on the matter and subject to the satisfaction of certain other
conditions imposed by the OTS in its approval. OTS approval, however, does not
constitute a recommendation or endorsement of the Plan by the OTS.
General
On April 26, 1996, the Board of Directors of the Bank adopted the Plan,
pursuant to which the Bank would be converted from a federally chartered mutual
savings and loan association to a federally chartered stock savings bank, with
the concurrent formation of the Company. It is currently intended that all of
the capital stock of the Bank will be held by the Company. The OTS has approved
the Plan subject to its approval by the members of the Bank entitled to vote on
the matter at a special meeting (the "Special Meeting") called for that purpose
and subject to the satisfaction of certain other conditions imposed by the OTS
in its approval.
The OTS has approved the Company's application to become a savings and
loan holding company and to acquire all of the Common Stock of the Bank to be
issued in the Conversion. Pursuant to such OTS approval, the Company plans to
retain 50% of the net proceeds from the sale of the Common Stock and to use the
remaining 50% to purchase all of the to be issued and outstanding capital stock
of the Bank.
The Conversion will be accomplished through adoption of the proposed
Federal Stock Charter and Bylaws to authorize the issuance of capital stock by
the Bank, at which time the Bank will change its name to Amsterdam Federal Bank
and will become a wholly owned subsidiary of the Company. The Conversion will be
accounted for at historical cost in a manner similar to a pooling of interests.
Under the Plan, the Common Stock is being offered for sale by the Company. As
part of the Conversion, the Company is conducting a Subscription Offering of the
Common Stock for holders of subscription rights and, depending upon market
conditions at or near the completion of the Subscription Offering, may also, or
in lieu thereof, conduct a Public Offering. The Plan provides that the
Conversion must be completed within 24 months after the date of the approval of
the Plan by the members of the Bank.
In the event that the Bank is unable to complete the sale of Common Stock
and effect the Conversion within 45 days after the end of the Subscription
Offering, the Bank may request an extension of the period by the OTS. No
assurance can be given that the extension would be granted if requested. Due to
the volatile nature of market conditions, no assurances can be given that the
Bank's valuation would not substantially change during any such extension. If
the EVR of the Common Stock must be amended, no assurance can be given that such
amended EVR would be approved by the OTS. Therefore, it is possible that if the
Conversion cannot be completed within the requisite period, the Bank may not be
permitted to complete the Conversion. A substantial delay caused by an extension
of the period may also significantly increase the expense of the Conversion. No
sales of the Common Stock may be completed in the Offerings unless the Plan is
approved by the members of the Bank.
Completion of the Offerings is subject to market conditions and other
factors beyond the Bank's control. No assurance can be given as to the length of
time following approval of the Plan at the Special Meeting that will be required
to complete the Offerings. If delays are experienced, significant changes may
occur in the estimated pro forma market value of the Bank upon Conversion
together with corresponding changes in the offering price and the net proceeds
realized by the Bank from the sale of the Common Stock. In the event the
Conversion is terminated, the Bank would be required to charge
70
all Conversion expenses against current income and any funds collected by the
Bank in the Offerings would be promptly returned to each potential investor,
plus interest at the prescribed rate.
Reasons for the Conversion
The principal factors considered by the Bank's Board of Directors in
reaching the decision to pursue a mutual-to-stock conversion are the future of
mutual institutions generally and the numerous competitive disadvantages which
the Bank faces if it continues in mutual form. These disadvantages relate to a
variety of factors, including growth opportunities, employee retention, and
regulatory uncertainty.
In the opinion of management, if the Bank is to continue to grow and
prosper, the mutual form of organization is the least desirable form from a
competitive standpoint. The only realistic growth opportunity available to the
Bank as a mutual is branching. The opportunities for a mutual to expand through
mergers are extremely scarce. The only realistic merger possibilities are mutual
to mutual mergers. As the number of mutual companies dwindles, so do the
opportunities for such mergers. Although the Bank does not have any specific
acquisitions planned at this time, the Conversion will position the Bank to take
advantage of any acquisition opportunities that may present themselves. Because
a conversion to stock form is a time-consuming and complex process, the Bank
cannot wait until an acquisition is imminent to begin the conversion process.
As an increasing number of the Bank's competitors convert to stock form
and can use stock based compensation programs, the Bank, as a mutual, is at a
disadvantage in attracting and retaining qualified management. The Bank believes
that the ESOP for all employees and the Stock Option Plan and the RSP for
directors, officers, and certain employees are important tools in achieving such
goals, even though the Bank will be required to wait until after the Conversion
to implement the Stock Option Plan and the RSP. See "Management of the Bank -
Proposed Future Stock Benefit Plans."
Another benefit of the conversion will be an increase in capital.
Notwithstanding the Bank's current capital position, the importance of higher
levels of capital cannot be ignored in the current interest rate environment.
For the last few years, thrift institutions have enjoyed very favorable net
interest margins as interest rates dropped to very low levels. In more recent
months, interest rates generally have been rising. As has been amply
demonstrated in the past, changing accounting principles, interest rate shifts,
and changing regulations can threaten even well-capitalized institutions. As a
mutual institution, the Bank can only increase capital through retained earnings
or the issuance of subordinated debentures, which do not count as Tier I capital
for regulatory capital purposes. Capital that may seem unnecessary now may help
the Bank withstand future threats to its capital.
In view of the competitive disadvantage and the ongoing debate about the
future of mutual institutions in the wake of regulatory consolidation and other
forces, the Bank is choosing to reject the uncertainty inherent in the mutual
structure in favor of the more widely used, recognized, and understood stock
form of ownership.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank
Voting Rights. Depositor and borrower members will have no voting rights
in the converted Bank and will therefore not be able to elect directors of the
Bank or to otherwise participate in the conduct of the affairs of the Bank or
the Company unless they hold Common Stock. Currently, these rights are accorded
to depositor and certain borrower members of the Bank. Although the Bank holds
annual meetings of members for the election of directors and for other purposes,
very few members exercise their voting rights. Accordingly, voting control of
the Bank has been effectively exercised by
71
the Board of Directors through their individual votes and through proxies given
by a limited number of members. Following the Conversion, the Bank will become a
wholly owned subsidiary of the Company, which will hold all voting rights in the
Bank. Voting rights in the Company will be vested exclusively in the Company's
stockholders. Stockholders will be entitled to vote on any matter to be
considered by the stockholders of the Company and will be entitled to one vote
for each share of the Common Stock owned. See "Certain Restrictions on
Acquisition of the Company" with respect to limitations applicable to the rights
of stockholders to exercise cumulative voting.
Savings Accounts and Loans. The Bank's savings accounts, balances of the
individual accounts, and the existing FDIC insurance coverage will not be
affected by the Conversion. Furthermore, the Conversion will not affect the loan
accounts, the balances of these accounts, or the obligations of the borrowers
under their individual contractual arrangements with the Bank.
Tax Effects. A discussion of the material taxes applicable to the Bank is
included above under "Taxation." A summary of the material tax effects of the
Conversion on the Bank and its members is set forth below. The Bank has received
an opinion from its counsel, Malizia, Spidi, Sloane & Fisch, P.C., Washington,
D.C., that the Conversion will constitute a nontaxable reorganization under
Section 368(a)(1)(F) of the Code. Among other things, the opinion, filed as an
exhibit to the registration statement of which this prospectus is a part,
provides that: (i) the Conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Code, and no gain or loss will be recognized by the Bank in
either its mutual form or its stock form, or by the Company, by reason of the
proposed Conversion; (ii) no gain or loss will be recognized by the Bank upon
the receipt of money from the Company for stock of the Bank, and no gain or loss
will be recognized by the Company upon the receipt of money for the Common
Stock; (iii) the assets of the Bank in either its mutual or its stock form will
have the same basis before and after the Conversion; (iv) the holding period of
the assets of the Bank will include the period during which the assets were held
by the Bank in its mutual form prior to conversion; (v) no gain or loss will be
recognized by the Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members of the Bank upon the issuance to them of withdrawable
savings accounts in the stock association in the same dollar amount as their
savings accounts in the Bank plus an interest in the liquidation account of the
stock association in exchange for their savings accounts in the Bank; (vi) the
receipt by Eligible Account Holders, Supplemental Eligible Account Holders, and
Other Members of non-transferable subscription rights to purchase shares of the
Common Stock under the Plan is taxable to Eligible Account Holders, Supplemental
Eligible Account Holders, and Other Members to the extent the subscription
rights have value; (vii) the basis of each account holder's savings accounts in
the Bank after the Conversion will be the same as the basis of his or her
savings accounts in the Bank prior to the Conversion, decreased by the fair
market value of the non-transferable subscription rights received and increased
by the amount, if any, of gain recognized on the exchange; (viii) the basis of
each account holder's interest in the liquidation account will be zero; (ix) the
holding period of the Common Stock acquired through the exercise of subscription
rights shall begin on the date on which the subscription rights are exercised;
(x) the Bank will succeed to and take into account the earnings and profits or
deficit in earnings and profits of the Bank, in its mutual form, as of the date
of Conversion; (xi) the Bank, immediately after Conversion, will succeed to the
bad debt reserve accounts of the Bank, in its mutual form, and the bad debt
reserves will have the same character in the hands of the Bank after Conversion
as if no distribution or transfer had occurred; and (xii) the creation of the
liquidation account will have no effect on the Bank's taxable income,
deductions, or addition to reserve for bad debts either in its mutual or stock
form.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based in part on
the assumption that the exercise price of the subscription rights to purchase
Common Stock will be approximately equal to the fair market value of that stock
at the time of the completion of the proposed Conversion. With
72
respect to the subscription rights, the Bank has received an opinion of Capital
Resources Group which, based on certain assumptions, concludes that the
subscription rights to be received by Eligible Account Holders, Supplemental
Eligible Account Holders, and Other Members do not have any economic value at
the time of distribution or at the time the subscription rights are exercised,
whether or not a public offering takes place. Such opinion is based on the fact
that such rights are: (i) acquired by the recipients without payment therefor,
(ii) non-transferable, (iii) of short duration, and (iv) afford the recipients
the right only to purchase Common Stock at a price equal to its estimated fair
market value, which will be the same price at which shares of Common Stock for
which no subscription right is received in the Subscription Offering may be
offered in the Public Offering. If the subscription rights granted to Eligible
Account Holders, Supplemental Eligible Account Holders, or Other Members are
deemed to have an ascertainable value, receipt of such rights would be taxable
probably only to those Eligible Account Holders, Supplemental Eligible Account
Holders, or Other Members who exercise the subscription rights in an amount
equal to such value (either as a capital gain or ordinary income), and the Bank
could recognize gain on such distribution.
The Bank is subject to New York taxation and has received the opinion of
KPMG Peat Marwick LLP that the Conversion will be treated for New York state tax
purposes similar to the Conversion's treatment for federal tax purposes.
Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane &
Fisch, P.C., Capital Resources, and KPMG Peat Marwick LLP have no binding effect
or official status, and no assurance can be given that the conclusions reached
in any of those opinions would be sustained by a court if contested by the IRS
or the New York tax authorities. Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members are encouraged to consult with their own tax
advisers as to the tax consequences in the event the subscription rights are
deemed to have an ascertainable value.
Liquidation Account. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each eligible Account Holder and
Supplemental Eligible Account Holder of the Bank is entitled to a liquidating
distribution from the liquidation account, pro rata to the value of his or her
accounts, of the Bank remaining after liquidation payment of claims of all
creditors (including the claims of all account holders to the withdrawal value
of their accounts). Each account holder's pro rata share of such liquidating
distribution would be in the same proportion as the value of his or her deposit
accounts was to the total value of all deposit accounts in the Bank at the time
of liquidation.
Upon a complete liquidation after the Conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
other general creditors of the Bank. Therefore, except as described below, a
depositor's claim would be solely in the amount of the balance in his or her
deposit account plus accrued interest. A depositor would not have an interest in
the residual value of the assets of the Bank above that amount, if any.
The Plan and OTS rules provide 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 equity of the Bank as of the date of its latest statement of
financial condition contained in the final prospectus. Each Eligible Account
Holder and Supplemental Eligible Account Holder, if he or she continues to
maintain his or her deposit account at the Bank, would be entitled pursuant to a
complete liquidation of the Bank after Conversion, to an interest in the
liquidation account prior to any payment to stockholders of the Bank. Each
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account held in the Bank on the qualifying date, March
31, 1996. Each Supplemental Eligible Account Holder would have a similar
interest as of the qualifying date, March 31, 1996. The interest as to each
deposit account would be in
73
the same proportion of the total liquidation account as the balance of the
deposit account on the qualifying dates was to the aggregate balance in all the
deposit accounts of Eligible Account Holders and Supplemental Eligible Account
Holders on such qualifying dates. However, if the amount in the deposit account
on any annual closing date of the Bank (September 30) is less than the amount in
such account on the respective qualifying dates, then the interest in this
special liquidation account would be reduced from time to time by an amount
proportionate to any such reduction, and the interest would cease to exist if
such deposit account were closed. The interest in the special liquidation
account will never be increased despite any increase in the related deposit
account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction the Bank is not the surviving
institution shall be considered a complete liquidation. In such transactions,
the liquidation account shall be assumed by the surviving institution.
Subscription Rights and the Subscription Offering
In accordance with OTS regulations, non-transferable subscription rights
to purchase shares of the Common Stock have been granted to all persons and
entities entitled to purchase the Common Stock in the Subscription Offering
under the Plan. The amount of the Common Stock which these parties may purchase
will be determined, in part, by the total amount of Common Stock to be issued
and by the availability of the Common Stock for purchase under the categories
set forth in the Plan. If the Subscription Offering extends beyond _________ __,
1996 (45 days following the Expiration Date of the Subscription Offering),
subscribers will be resolicited. Subscription priorities have been established
for the allocation of stock to the extent that the Common Stock is available
after satisfaction of all subscriptions of all persons having prior rights and
subject to the maximum and minimum purchase limitations set forth in the Plan
and as described below under "- Limitations on Purchases of Shares." The
following priorities have been established:
Eligible Account Holders. Each Eligible Account Holder (depositors of the
Bank with account balances of at least $50 on March 31, 1995) will receive
non-transferable subscription rights on a priority basis to purchase that number
of shares of Common Stock which is equal to the greater of 15,000 shares
($150,000) sold in the Conversion, one-tenth of one percent (0.10)% of the total
offering, or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of the qualifying deposit of
the Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Eligible Account Holders, but in no event shall this
number be greater than the maximum purchase limitation specified in the Plan. If
the allocation made in this paragraph results in an oversubscription, shares of
Common Stock shall be allocated among subscribing Eligible Account Holders so as
to permit each such account holder, to the extent possible, to purchase a number
of shares of Common Stock sufficient to make his or her total allocation equal
to 100 shares of Common Stock or the total amount of his or her subscription,
whichever is less. Any shares of Common Stock not so allocated shall be
allocated among the subscribing Eligible Account Holders on an equitable basis,
in the proportion that the amounts of their respective qualifying deposits bear
to the total qualifying deposits of all subscribing Eligible Account Holders. If
the amount so allocated exceeds the amount subscribed for by any one or more
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Eligible Account Holders whose subscriptions are still
not fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied. Subscription rights received by
officers and directors in this category based on their increased deposits in the
Bank in the one-year period preceding March 31, 1996, are subordinated to the
subscription rights of other Eligible Account Holders.
74
Tax-Qualified Employee Benefit Plans. Tax-qualified employee benefit plans
of the Bank ("Employee Plans") have been granted subscription rights to purchase
up to 10% of the total shares issued in the Conversion. The ESOP is an Employee
Plan and intends to purchase up to 8% of the Common Stock issued in the
Conversion.
The right of Employee Plans to subscribe for the Common Stock is
subordinate to the right of the Eligible Account Holders to subscribe for the
Common Stock. However, in the event the Offerings result in the issuance of
shares above the maximum of the EVR (i.e., more than 1,265,000 shares), the
Employee Plans have a priority right to fill their subscription (the ESOP, the
only Employee Plan, currently intends to purchase up to 8% of the Common Stock
issued in the Conversion). The Employee Plans may, however, determine to
purchase some or all of the shares covered by their subscriptions after the
Conversion in the open market or, if approved by the OTS, out of authorized but
unissued shares in the event of an oversubscription.
Supplemental Eligible Account Holders. Each Supplemental Eligible Account
Holder (depositors who are not Eligible Account Holders of the Bank with account
balances of at least $50 on June 30, 1996) will receive non-transferable
subscription rights to purchase that number of shares of Conversion Stock which
is equal to the greater of 15,000 shares ($150,000) sold in the Conversion,
one-tenth of one percent (0.10%) of the total offering, or 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Common Stock to be issued by a fraction of which the numerator is
the amount of the qualifying deposit of the Supplemental Eligible Account Holder
and the denominator is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders. These non-transferable subscription
rights shall be granted only in the event that the Eligibility Record Date is
more than 15 months prior to the date of the latest amendment to the Application
filed prior to OTS approval. If the allocation made pursuant to this paragraph
results in an oversubscription, shares of Common Stock shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each such
account holder, to the extent possible, to purchase a number of shares of Common
Stock sufficient to make his or her total allocation (including the number of
shares of Common Stock, if any, allocated in accordance with the subscription
rights of Eligible Account Holders) equal to 100 shares of Common Stock or the
total amount of his or her subscription, whichever is less. Any shares of Common
Stock not so allocated shall be allocated among the subscribing Supplemental
Eligible Account Holders on an equitable basis, related to the amounts of their
respective qualifying deposits as compared to the total qualifying deposits of
all subscribing Supplemental Eligible Account Holders.
The rights of Supplemental Eligible Account Holders to subscribe for the
Common Stock is subordinate to the rights of the Eligible Account Holders and
Employee Plans to subscribe for the Common Stock.
Other Members. Other Members (depositors and certain borrowers (borrowers
whose loans were outstanding on January 18, 1995) who are entitled to vote at a
special meeting of members called to vote on the Conversion) who are not
Eligible Account Holders or Supplemental Eligible Account Holders, will receive
non-transferable subscription rights to purchase up to the greater of 15,000
shares ($150,000), or one tenth of one percent (0.10%) of the total offering,
subject to maximum and minimum purchase limitations and exclusive of an increase
in the total number of shares issued due to an increase in the maximum EVR of up
to 15%, to the extent such stock is available following subscriptions by
Eligible Account Holders, Employee Plans, and Supplemental Eligible Account
Holders. If the allocation made pursuant to this paragraph results in an
oversubscription when added to the shares of Common Stock subscribed for by the
Eligible Account Holders, the Employee Plans, and the Supplemental Account
Holders, the subscriptions of such Other Members will be allocated among the
subscribing Other Members so as to permit each subscribing Other
75
Member, to the extent possible, to purchase a number of shares of Common Stock
sufficient to make his or her total allocation equal to 100 shares of Common
Stock or the total number of shares covered by the subscription of the Other
Member. Any remaining shares will be allocated among the subscribing Other
Members whose subscriptions remain unsatisfied on a 100 shares (or whatever
lesser amount is available) per order basis until all orders have been filled or
the remaining shares have been allocated.
Members in Non-Qualified States. The Company will make reasonable efforts
to comply with the securities laws of all states in the United States in which
persons entitled to subscribe for the Common Stock pursuant to the Plan reside.
However, no person will be offered or allowed to purchase any Common Stock under
the Plan if he or she resides in a foreign country or in a state of the United
States with respect to which any of the following apply: (i) a small number of
persons otherwise eligible to subscribe for shares under the Plan reside in such
state or foreign country; (ii) the granting of subscription rights or offer or
sale of shares of Common Stock to such persons would require the Bank, the
Company, or its employees to register, under the securities laws of such state
or foreign country, as a broker or dealer or to register or otherwise qualify
its securities for sale in such state or foreign country; or (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of subscription
rights to any such person.
Restrictions on Transfer of Subscription Rights and Shares. The OTS
conversion regulations prohibit any person with subscription rights, including
Eligible Account Holders, Supplemental Eligible Account Holders, and Other
Members of the Bank, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his or her account. Each person subscribing for shares will
be required to certify that such person is purchasing shares solely for his or
her own account and that such person has no agreement or understanding regarding
the sale or transfer of such shares. The regulations also prohibit any person
from offering or making an announcement of an offer or intent to make an offer
to purchase such subscription rights or shares of Common Stock prior to the
completion of the Conversion.
The Bank and the Company will pursue any and all legal and equitable
remedies 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.
Expiration Date. The Subscription Offering will expire at 12:00 noon,
Eastern Time, on ______ __, 1996, unless the Subscription Offering is extended,
at the discretion of the Board of Directors, up to an additional 45 days with
the approval of the OTS, if necessary, but without additional notice to
subscribers (the "Expiration Date"). Subscription rights will become void if not
exercised prior to the Expiration Date.
Public Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the Subscription Offering, the Company
may offer shares pursuant to the Plan, to selected persons in a Public Offering
on a best-efforts basis through Capital Resources in such a manner as to promote
a wide distribution of the Common Stock. Any orders received in connection with
the Public Offering, if any, will receive a lower priority than orders properly
made in the Subscription Offering by persons exercising Subscription Rights. In
addition, depending on market conditions, Capital Resources may utilize selected
broker-dealers ("Selected Dealers") in connection with the sale of shares in the
Public Offering. Common Stock sold in the Public Offering
76
will be sold at $10.00 per share and hence will be sold at the same price as all
other shares in the Conversion. The Company and the Bank have the right to
reject orders, in whole or in part, in their sole discretion in the Public
Offering.
No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than 15,000 shares or $150,000 of
Common Stock in the Public Offering. To order Common Stock in connection with
the Public Offering, if any, an executed stock order and account withdrawal
authorization (if applicable) must be received by Capital Resources prior to the
termination of the Public Offering. The date by which orders must be received in
the Public Offering ("Public Offering Expiration Date") will be set by the
Company at the time of commencement of the Public Offering; provided however, if
the Offerings are extended beyond _________ __, 1996, each purchaser will have
the opportunity to maintain, modify, or rescind his or her order. In such event,
all funds received in the Public Offering will be promptly returned with
interest to each purchaser unless he or she affirmatively indicates otherwise.
Capital Resources may enter into agreements with Selected Dealers to
assist in the sale of shares in the Public Offering. Selected Dealers may only
solicit indications of interest from their customers to place orders with the
Company as of a certain date ("Order Date") for the purchase of shares of Common
Stock with the authorization of Capital Resources. When and if Capital Resources
and the Company believe that enough indications of interest and orders have been
received to consummate the Conversion, Capital Resources will request, as of the
Order Date, Selected Dealers to submit orders to purchase shares for which they
have received indications of interest from their customers. Selected Dealers
will send confirmation of the orders to such customers on the next business day
after the Order Date. Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the closing date of the Conversion. On the closing date,
Selected Dealers will remit funds to the account that the Company established
for each Selected Dealer. Each customer's funds so forwarded to the Company,
along with all other accounts held in the same title, will be insured by the
FDIC up to the applicable legal limit. After payment has been received by the
Company from Selected Dealers, funds will earn interest at the Bank's passbook
rate until the completion of the Offerings. In the event the Conversion is not
consummated as described above, funds with interest will be returned promptly to
the Selected Dealers, who, in turn, are required to promptly credit their
customers' brokerage accounts.
It is estimated that the Selected Dealers will receive a negotiated
commission of up to 4% of the Common Stock sold by the Selected Dealers, payable
by the Company, and Capital Resources will also receive a fee of 1.5% of Common
Stock sold by such firms. Such fees in the aggregate will not exceed 5.5% of the
Common Stock. See "- Marketing Arrangements."
In the event the Company determines to conduct a Public Offering, persons
to whom a Prospectus is delivered may order shares of Common Stock by submitting
a completed stock order and account withdrawal authorization (provided by
Capital Resources, if applicable) and an executed certification along with
immediately available funds (which may be obtained by debiting a Capital
Resources account) to Capital Resources by not later than the Public Offering
Expiration Date (as established by the Company). Promptly upon receipt of
available funds, together with a properly executed stock order and account
withdrawal authorization, if applicable, and certification, Capital Resources
will forward such funds to the Bank to be deposited in a subscription escrow
account.
If an order in the Public Offering is accepted, promptly after the
completion of the Conversion, a certificate for the appropriate amount of shares
will be forwarded to Capital Resources as nominee for the beneficial owner. In
the event that an order is not accepted or the Conversion is not consummated,
77
the Bank will promptly refund with interest the funds received to Capital
Resources which will then return the funds to purchasers' accounts. If the
aggregate pro forma market value of the Company and the Bank, as converted, is
less than $9,350,000 or more than $14,547,500, each purchaser will have the
right to modify or rescind his or her order.
If a Public Offering is held, the opportunity to order shares of Common
Stock in the Public Offering is subject to the right of the Bank and the
Company, in their sole discretion, to accept or reject any such orders in whole
or in part.
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an Order Form or stock order and account withdrawal authorization
("Stock Order"), if applicable, in the case of the Public Offering. Any person
receiving an Order Form or Stock Order who desires to subscribe for shares of
Common Stock must do so prior to the Expiration Date or, if applicable, the
Public Offering Expiration Date, by delivering (by mail or in person ) to the
Bank a properly executed and completed Order Form or Stock Order, together with
full payment of the Purchase Price for all shares for which subscription is
made; provided, however, that if the Employee Plans subscribe for shares during
the Subscription Offering, the Employee Plans will not be required to pay for
the shares at the time they subscribe but rather may pay for the shares upon
consummation of the Conversion. Except for institutional investors, all
subscription rights under the Plan will expire on the Expiration Date, whether
or not the Bank has been able to locate each person entitled to such
subscription rights. The Bank and Company shall have the right, in their sole
discretion, to permit institutional investors to submit contractually
irrevocable orders in the Public Offering at any time prior to the completion of
the Conversion. Once tendered, subscription orders cannot be revoked without the
consent of the Bank and the Company unless the Conversion is not completed
within 45 days of the Expiration Date.
In the event an Order Form or Stock Order (i) is not delivered and is
returned to the Bank by the United States Postal Service or the Bank is unable
to locate the addressee; (ii) is not received or is received after the
Expiration Date or the Public Offering Expiration Date; (iii) is defectively
completed or executed; (iv) is not accompanied by the full required payment for
the shares subscribed for (including instances where a savings account or
certificate balance from which withdrawal is authorized is insufficient to fund
the amount of such required payment, but excluding subscriptions by the Employee
Plans) or, in the case of an institutional investor in the Public or Syndicated
Public Offering, by delivering irrevocable orders together with a legally
binding commitment to pay the full purchase price prior to 48 hours before the
completion of the Conversion; or (v) is not mailed pursuant to a "no mail" order
placed in effect by the account holder, the subscription rights for the person
to whom such rights have been granted will lapse as though such person failed to
return the completed Order Form or Stock Order within the time period specified.
However, the Company may, but will not be required to, waive any irregularity on
any Order Form or Stock Order or require the submission of corrected Order Forms
or Stock Orders or the remittance of full payment for subscribed shares by such
date as the Company may otherwise specify. The waiver of an irregularity on an
Order Form or Stock Order in no way obligates the Company to waive any other
irregularity on any other Order Form or Stock Order. Waivers will be considered
on a case by case basis. The Bank and the Company reserve the right in their
sole discretion to accept or reject orders received on photocopies or facsimile
Order Forms or Stock Orders, or whose payment is to be made by wire transfer or
payment from private third parties. The interpretation by the Bank or Company of
the terms and conditions of the Plan and of the acceptability of the Order Forms
or Stock Orders will be final, subject to the authority of the OTS.
78
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date or, if applicable, the Public Offering 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 or Stock Order
will confirm receipt or delivery in accordance with Rule 15c2-8. Order Forms or
Stock Orders will only be distributed with a Prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares, computed on the basis of the Purchase Price, will be required
to accompany all properly completed Order Forms, on or prior to the expiration
date specified on the Order Form unless such date is extended by the Bank or the
Company. Employee Plans subscribing for shares during the Subscription Offering
may pay for such shares upon consummation of the Conversion. Payment for shares
of Common Stock may be made (i) in cash, if delivered in person, (ii) by check
or money order, or (iii) for shares of Common Stock subscribed for in the
Subscription Offering, by authorization of withdrawal from savings accounts
(including certificates of deposit) maintained with the Bank. For orders or
subscriptions of $25,000 or more, payments must be made by withdrawal
authorization (if applicable), certified check, cashier's check, or money order.
Appropriate means by which such withdrawals may be authorized are provided in
the Order Form. Once such a withdrawal has been authorized, none of the
designated withdrawal amount may be used by a subscriber for any purpose other
than to purchase the Common Stock for which a subscription has been made until
the Conversion has been completed or terminated. In the case of payments
authorized to be made through withdrawal from savings accounts, all sums
authorized for withdrawal will continue to earn interest at the contract rate
until the Conversion has been completed or terminated. Interest penalties for
early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares, however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal, without penalty, and the remaining balance will earn
interest at the passbook savings account rate subsequent to the withdrawal. In
the case of payments made in cash or by check or money order, such funds will be
placed in a segregated account and interest will be paid by the Bank at the
passbook savings account rate from the date payment is received until the
Conversion is completed or terminated. An executed Order Form, once received by
the Company, may not be modified, amended, or rescinded without the consent of
the Bank, unless the Conversion is not completed within 45 days after the
conclusion of the Subscription Offering, in which event subscribers may be given
the opportunity to increase, decrease, or rescind their subscription for a
specified period of time. In the event that the Conversion is not consummated
for any reason, all funds submitted pursuant to the Offerings will be promptly
refunded with interest as described above.
In addition to the foregoing, if shares are offered through Selected
Dealers, a purchaser may pay for shares of Common Stock with funds held by or
deposited with a Selected Dealer. If a Stock Order is executed and forwarded to
the Selected Dealer or if the Selected Dealer is authorized to execute the Stock
Order 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 Stock Order form or
execution of the Stock Order by the Selected Dealer. Alternatively, Selected
Dealers may solicit indications of interest from their customers who indicated
an interest and seek their confirmation as to their intent to purchase. Those
indicating an intent to purchase shall forward executed Stock Order and
certifications to their Selected Dealer or authorize the Selected Dealer to
execute such forms. The Selected Dealer will acknowledge receipt of the order to
its customer in writing on the following business day and will debit such
customer's account on the third business day after the customer has confirmed
his intent to purchase (the "debit date") and on or before noon of the next
business day following the debit date will send Stock Orders and 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.
79
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 on deposit at the Bank. Persons with IRAs maintained at the Bank must
have their accounts transferred to an unaffiliated institution or broker to
purchase shares of Common Stock in the Offerings. Instructions on how to
transfer self-directed IRAs maintained at the Bank can be obtained from the
Stock Center located at the Bank's main office.
Federal regulations prohibit the Bank from lending funds or extending
credit to any person to purchase the Common Stock in the Conversion.
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Conversion will be mailed to the persons entitled thereto at the
address noted on the Order Form, as soon as practicable following consummation
of the Conversion. Any certificates returned as undeliverable will be held until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for the Common Stock are
available and delivered to subscribers, subscribers may not be able to sell the
shares of stock for which they subscribed.
Restriction on Sales Activities
The Common Stock will be offered in the Offerings principally by the
distribution of this prospectus and through activities conducted at a Stock
Center located at the Bank's main office but in an area away from publicly
accessible areas (including teller windows) of that office. The Stock Center is
expected to operate during normal business hours throughout the Offerings. It is
expected that a registered representative employed by Capital Resources will be
working at, and supervising the operation of, the Stock Center. Capital
Resources will be responsible for overseeing the mailing of materials relating
to the Offerings, responding to questions regarding the Conversion and the
Offerings and processing Order Forms and Stock Orders. It is expected that Bank
and the Company personnel will be present in the Stock Center to assist Capital
Resources with clerical matters and to answer questions related solely to the
business of the Bank.
Directors and executive officers of the Company may participate in the
solicitation of offers to purchase Common Stock in jurisdictions where such
participation is not prohibited. Other employees of the Company and 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 of the Company or registered representatives of Capital
Resources. The Company will rely on Rule 3a4-1 promulgated under the Exchange
Act, and sales of Common Stock will be conducted in accordance with 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 or the Bank will
be compensated in connection with such person's solicitations or other
participation in the Offerings by the payment of commissions or other
remuneration based either directly or indirectly on transactions in the Common
Stock.
Limitations on Purchases of Shares
The Plan provides for certain additional limitations to be placed upon the
purchase of the Common Stock by eligible subscribers and others in the
Conversion. Each purchaser must purchase a minimum of 25 shares; provided,
however, that the minimum number of shares requirement shall not apply if the
number of shares of Conversion Stock purchased times the price per share exceeds
$500. No person (or persons through a single account), together with any
associate or group of persons acting in concert, may subscribe for or purchase
more than 15,000 shares of Common Stock ($150,000), except for the Employee
Plans which may purchase up to 10% of the Common Stock issued in the Conversion,
80
but currently intend to purchase 8% of the Common Stock issued in the
Conversion. Depending on market conditions and the results of the Offerings, the
Board of Directors, in its sole discretion, may increase or decrease the
purchase limitation without the approval of the members of the Bank and without
resoliciting subscribers, provided that the maximum purchase limitation may not
be increased to a percentage in excess of 5%. The OTS regulations governing the
Conversion limit the number of shares that officers and directors and their
associates may purchase. In the aggregate, the officers and directors or their
associates may not purchase more than 33% of the shares of the Common Stock
issued pursuant to the Conversion. For purposes of the Plan, the directors are
not deemed to be acting in concert solely by reason of their Board membership.
Requests to purchase additional shares of Common Stock under the Plan will
be allocated by the Board of Directors on a pro rata basis giving priority in
accordance with the priority rights set forth above and in the Plan. Pro rata
reduction within each subscription rights category will be made in allocating
shares to the extent that the maximum purchase limitation is exceeded.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the EVR of up to 15% (the "Adjusted Maximum"),
the additional shares will be allocated in the following order of priority: (i)
to fill the Employee Plans' subscription of up to 8% of the Adjusted Maximum
number of shares; (ii) in the event that there is an oversubscription by
Eligible Account Holders, to fill unfulfilled subscriptions of Eligible Account
Holders exclusive of the Adjusted Maximum; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unfulfilled
subscriptions to Supplemental Eligible Account Holders exclusive of the Adjusted
Maximum; and (iv) in the event that there is an oversubscription by Other
Members, to fill unfulfilled subscriptions of Other Members exclusive of the
Adjusted Maximum.
The term "associate" of a person is defined in the Plan to mean (i) any
corporation or organization (other than the Bank or a majority-owned subsidiary
of the Bank) of which such person is an 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, (excluding tax-qualified employee stock benefit
plans or tax-qualified employee stock benefit plans in which a person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity and except that, for purposes of aggregating total shares that may be
held by officers and directors, the term "Associate" does not include any
tax-qualified employee stock benefit plan), and (iii) any relative or spouse of
such person or any relative of such spouse, who has the same home as such person
or who is a director or officer of the Bank, or any of its parents or
subsidiaries. For example, a corporation of which a person serves as an officer
would be an associate of such person, and therefore, all shares purchased by
such corporation would be included with the number of shares which such person
individually could purchase under the above limitations.
The term "officer" is defined in the Plan to mean an executive officer of
the Bank and may include the Bank's Chairman of the Board, Chief Executive
Officer, President, Senior Vice Presidents, Vice Presidents in charge of
principal business functions, Secretary and Treasurer and any other person
performing similar functions. All references herein to an officer shall have the
same meaning as used for an officer in the Plan.
Each person purchasing shares of the Common Stock in the Conversion will
be deemed to confirm that such purchase does not conflict with the maximum
purchase limitation. In the event that such purchase limitation is violated by
any person (including any associate or group of persons affiliated or otherwise
acting in concert with such persons), the Bank will have the right to purchase
from such person at the Purchase Price per share all shares acquired by such
person in excess of such purchase
81
limitation or, if such excess shares have been sold by such person, to receive
the difference between the Purchase Price per share paid for such excess shares
and the price at which such excess shares were sold by such person. This right
of the Bank to purchase such excess shares will be assignable by the Bank.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the Bank.
For certain restrictions on the Common Stock purchased by directors and
officers, see "- Restrictions on Transferability by Directors and Officers." In
addition, under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
Plan of Distribution
The Company and the Bank have entered into an Agency Agreement with
Capital Resources under which Capital Resources will assist, on a best efforts
basis, in the distribution of the Common Stock in the Conversion. Capital
Resources is a broker-dealer registered with the NASD. Specifically, Capital
Resources will assist in the Subscription Offering in the following manner: (i)
training and educating the Company's and the Bank's employees regarding the
mechanics and regulatory requirements of the stock conversion process; (ii)
conducting information meetings for potential subscribers, if necessary; (iii)
managing the sales efforts in the Subscription and Public Offerings; and (iv)
keeping records of all stock subscriptions. Selected dealers may also be used in
the Offerings. See "- Marketing Arrangements."
Materials for the Offerings have been initially distributed to eligible
subscribers by mail, with additional copies available at the Stock Center. In
the Subscription Offering, officers of the Company may be available to answer
questions about the Conversion. Such officers will not be permitted to make
statements about the Bank or the Company unless such information is also set
forth in this Prospectus, and they will not be authorized to render investment
advice. All subscribers for the shares to be offered will be instructed to send
payment directly to the Bank, where such funds will be held in a segregated
special escrow account and not released until the closing of the Conversion or
its termination.
Marketing Arrangements
The Bank and the Company have engaged Capital Resources as a financial and
marketing advisor in connection with the Offerings and Capital Resources has
agreed to act as an underwriter on a best efforts basis to solicit subscriptions
and purchase orders for shares of Common Stock in the Offerings. Capital
Resources will receive, as compensation, a fee of 2.00% of the total dollar
amount of Common Stock sold in the Offerings, excluding subscriptions by
directors, officers and employees of the Bank and the Company and their
immediate family members, the ESOP, and Common Stock sold by other NASD member
firms participating in the Offerings. In the event that selected dealer
agreements are entered into in connection with a Public Offering, the Company
will pay commissions to selected dealers of, typically, up to 4.0% for shares of
Common Stock sold by the selected dealer. In addition, the Company will pay
Capital Resources a management fee of 1.5% for shares sold by selected dealers.
Fees paid to Capital Resources and to any other broker/dealer may be deemed to
be underwriting fees and Capital Resources and such broker/dealers may be deemed
to be underwriters. Capital Resources will also be reimbursed for its legal fees
up to $30,000 and for reasonable out-of-pocket expenses. The Bank and the
Company have agreed to indemnify Capital Resources, to the extent allowed by
law, for reasonable costs and expenses in connection with certain claims or
liabilities, including certain liabilities under the Securities Act. Capital
Resources has received fees totalling $75,000 for consulting and advisory
services relating to the Conversion, which fees will be credited against
marketing fees payable to Capital Resources. See
82
"Pro Forma Data" for further information regarding expenses of the Conversion.
Capital Resources is affiliated with Capital Resources Group.
Shares to be Purchased by Management Pursuant to Subscription Rights
The following table sets forth certain information as to the approximate
purchases of Common Stock by each director and executive officer of the Bank and
by all directors and officers as a group, including their "associates." All such
shares will be purchased for investment purposes and not for purposes of resale.
For purposes of the following table, it has been assumed that 1,100,000 shares
(the midpoint of the EVR) of the Common Stock will be sold at $10.00 per share
and that sufficient shares will be available to satisfy subscriptions in all
categories.
Aggregate
Total Price of Percent
Shares Shares of Shares
Name Position Purchased(1) Purchased(1) Purchased(1)
---- -------- ------------ ------------ ------------
John M. Lisicki President, Chief 10,000 $100,000 0.91%
Executive Officer
and Director
Daniel J. Greco Director 5,000 50,000 0.45
Ronald S. Tecler Director 15,000 150,000 1.36
John A. Tesiero, Jr. Director 15,000 150,000 1.36
John A. Kosinski, Jr. Director 10,000 100,000 0.91
Joseph G. Opalka Director 7,500 75,000 0.68
Florence B. Opiela Director 2,500 25,000 0.22
James J. Alescio Treasurer and 500 5,000 0.05
Chief Financial
Officer
Benjamin W. Ziskin Vice President and 3,000 30,000 0.27
----- ------ -----
Chief Lending
Officer
Total executive officers
and directors (9 persons) 68,500 $685,000 6.2%
====== ======= ====
- --------------------
(1) Does not include shares purchased by the ESOP.
Stock Pricing
Capital Resources Group, a financial consulting and appraisal firm that is
experienced in the evaluation and appraisal of business entities, including
thrift institutions involved in the conversion process, has been retained by the
Bank to prepare an appraisal of the estimated pro forma market value of the
Common Stock to be sold pursuant to the Conversion. Capital Resources Group will
receive a fee of $15,000 for its appraisal and to assist in the preparation of
other material and will be reimbursed for
83
reasonable out-of-pocket expenses, up to $2,500. Capital Resources Group will
receive a fee of $2,500 for any appraisal update. The Bank has agreed to
indemnify Capital Resources Group under certain circumstances against
liabilities and expenses (including certain legal fees) arising out of or based
on any misstatement or untrue statement of a material fact contained in the
information supplied by the Bank to Capital Resources Group, except where
Capital Resources Group is determined to have been negligent or failed to
exercise due diligence in the preparation of the appraisal. Capital Resources
Group is independent of the Company and the Bank but is affiliated with Capital
Resources. In addition, Capital Resources Group will receive a fee of $12,500
plus up to an additional $7,500 in expenses for its assistance with record
management and proxy solicitation services in connection with the Conversion.
The appraisal was prepared by Capital Resources Group in reliance upon the
information contained herein, including the financial statements. The appraisal
contains an analysis of a number of factors including, but not limited to, the
Bank's financial condition and operating trends, the competitive environment
within which the Bank operates, operating trends of certain thrift institutions
and savings and loan holding companies, relevant economic conditions, both
nationally and in the State of New York which affect the operations of thrift
institutions, and stock market values of certain institutions. In addition,
Capital Resources Group has advised the Bank that it has considered and will
consider the effect of the additional capital raised by the sale of the Common
Stock on the estimated aggregate pro forma market value of such shares. The
appraisal has been filed as an exhibit to the registration statement of which
this prospectus is a part. See "Additional Information."
On the basis of the above, Capital Resources Group has determined, in its
opinion, that as of June 14, 1996 and confirmed as of July 26, 1996, the
estimated aggregate pro forma market value of the Common Stock to be issued in
the Conversion was $11,000,000. The Company has determined to offer the shares
in the Conversion at a price of $10.00 per share. By dividing the price per
share into the estimated aggregate value, the Company initially plans to issue
1,100,000 shares. OTS regulations require, however, that the appraiser establish
a range of value for the stock to allow for fluctuations in the aggregate value
of the stock due to changing market conditions and other factors. Accordingly,
Capital Resources Group has established a range of value from $9,350,000 to
$14,547,500 for this offering (the Estimated Valuation Range) that will be
updated prior to consummation of the Conversion. If the final value is outside
the Estimated Valuation Range, the total number of shares being offered will be
further adjusted and a new Estimated Valuation Range may be established without
resolicitation of subscriptions and without the approval of the Bank's Members,
unless required by the OTS or unless the final valuation is less than $9,350,000
or more than $14,547,500 (15% above the maximum of the Estimated Valuation
Range).
The Board of Directors has reviewed the independent appraisal, including
the stated methodology of the independent appraiser and the assumptions used in
the preparation of the independent appraisal. The Board of Directors is relying
upon the expertise, experience and independence of the appraiser and is not
qualified to determine the appropriateness of the assumptions or the
methodology.
No sale of the shares will take place unless prior thereto Capital
Resources Group confirms to the OTS that, to the best of Capital Resources
Group's knowledge and judgment, nothing of a material nature has occurred which
would cause it to conclude that the Purchase Price on an aggregate basis was
incompatible with its estimate of the aggregate pro forma market value of the
Common Stock at the time of the sale thereof. If, however, the facts do not
justify such a statement, an amended Estimated Valuation Range may be set and
subscribers may be resolicited. Subscribers will not be resolicited in the event
the final valuation is not less than the minimum of the Estimated Valuation
Range and is not more than 15% above the Estimated Valuation Range.
84
The appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the Common
Stock. In preparing the appraisal, Capital Resources Group has relied upon and
assumed the accuracy and completeness of financial and statistical information
provided by the Bank. Capital Resources Group did not independently verify the
financial statements and other information provided by the Bank, nor did Capital
Resources Group value independently the assets and liabilities of the Bank. The
appraisal considers the Bank only as a going concern and should not be
considered as an indication of the liquidation value of the Bank. Moreover,
because such appraisal is necessarily based upon estimates and projections of a
number of matters, all of which are subject to change from time to time, no
assurance can be given that persons purchasing the Common Stock will thereafter
be able to sell such shares at prices within the estimated range at the time of
the Offerings.
Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the completion
of the Offerings, the Company may significantly increase or decrease the number
of shares to be issued in the Conversion. No resolicitation of subscribers will
be made and subscribers will not be permitted to modify or cancel their
subscriptions unless the change in the number of shares to be issued in the
Conversion results in an offering which is either below the minimum of the EVR
or materially above the maximum of the EVR, provided that up to a 15% increase
in the maximum of the EVR will not be deemed to be material. Any adjustments to
the EVR as a result of market and financial conditions would be subject to OTS
review.
In the event of a material increase in the valuation, the Company may
increase the total number of shares to be issued in the Conversion. An increase
in the total number of shares to be issued in the Conversion would decrease both
a subscriber's ownership interest and the pro forma equity and income on a per
share basis while increasing the pro forma net income and equity and income on
an aggregate basis. If the number of shares to be offered is to be increased,
any person who subscribed in the Subscription Offering for the maximum number of
shares permitted may be given the opportunity to purchase an additional number
of shares sufficient to make the total number of shares of the Common Stock
purchased by such subscriber equal to the same percentage of the increased
number of shares of Common Stock to be issued in the Conversion. Purchase
limitations will be based on the actual number of shares issued in the
Conversion.
In the event of a material reduction in the valuation, the Bank may
decrease the number of shares to reflect fully the reduced valuation. A decrease
in the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the pro forma equity on a per share basis
while decreasing equity on an aggregate basis. A decrease in the total number of
shares to be issued in the Conversion would not affect subscription rights by
reducing the maximum number of shares that may be purchased under various
purchase limitations and would not change the number of shares that a subscriber
may purchase unless the purchase limitation was also changed. However, such a
decrease could reduce the amount of shares allocated in the event of an
oversubscription.
Restrictions on Repurchase of Stock
Generally, within one year following the Conversion, the Company may not
repurchase Common Stock and in the second and third year following the
Conversion, the Company may only repurchase Common Stock as part of an
open-market stock repurchase program in an amount up to 5% of the outstanding
stock during each of those two years, provided the repurchase does not cause the
Bank to become undercapitalized and at least 10 days prior notice of the
repurchase is provided to the OTS. The OTS may disapprove the repurchase program
upon a determination that (1) the repurchase program would adversely affect the
financial condition of the Bank, (2) the information submitted is insufficient
upon
85
which to base a conclusion as to whether the financial condition would be
adversely affected, or (3) a valid business purpose was not demonstrated.
However, the Regional Director of the OTS may permit repurchases after six
months following the Conversion and may permit additional repurchases during the
second and third year. In addition, SEC rules also restrict the method, time,
price, and number of shares of Common Stock that may be repurchased by the
Company and affiliated purchasers. If, in the future, the rules and regulations
regarding the repurchase of stock are liberalized, the Company may utilize the
rules and regulations then in effect.
Restrictions on Transferability by Directors and Officers
Shares of the Common Stock purchased by directors and officers of the
Company shall be subject to the restriction that said shares shall not be sold
for a period of one year following completion of the Conversion, except for a
disposition of shares in the event of the death of the stockholder or in any
exchange of the Common Stock in connection with a merger or acquisition of the
Company approved by the regulatory authorities. Accordingly, shares of the
Common Stock issued by the Company to directors and officers shall bear a legend
giving appropriate notice of the foregoing restriction, and, in addition, the
Company will give appropriate instructions to the transfer agent for the Common
Stock with respect to the applicable restriction relating to the transfer of any
restricted stock. Any shares issued to directors and officers as a stock
dividend, stock split, or otherwise with respect to restricted stock shall be
subject to the same restrictions.
For a period of three years following the Conversion, no director or
officer of the Bank, the Company or their associates may, without the prior
approval of the OTS, purchase any shares of Common Stock other than from or
through a broker or dealer registered with the SEC unless the purchase involves
more than 1% of the outstanding shares of Common Stock through an arm's length
transaction.
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the
Board of Directors of the Bank will be final, however, such interpretations
shall have no binding effect on the OTS. The Plan provides that, if deemed
necessary or desirable by the Board of Directors, the Plan may be substantively
amended by the Board of Directors as a result of comments from the OTS or
otherwise, prior to the solicitation of proxies from the members and at any time
thereafter with the concurrence of the OTS, except that in the event that the
regulations under which the Plan was adopted are liberalized subsequent to the
approval of the Plan by the OTS and the members at the Special Meeting, the
Board of Directors may amend the Plan to conform to the regulations without
further approval of the OTS or the members of the Bank to the extent permitted
by law. An amendment to the Plan that would result in a material adverse change
in the terms of the Conversion would require a resolicitation. In the event of a
resolicitation, subscriptions for which a confirmation or modification was not
received would be rescinded.
Conditions and Termination
Completion of the Conversion requires the approval of the Plan and the
affirmative vote of not less than a majority of the total number of votes of the
members of the Bank eligible to be cast at the Special Meeting and the sale of
all shares of Common Stock within 24 months following approval of the Plan by
members. If these conditions are not satisfied, the Plan will be terminated and
the Bank will continue its business in the mutual form of organization. The Plan
may be terminated by the Board of Directors at any time prior to the Special
Meeting and, with the approval of the OTS, by the Board of Directors at any time
thereafter.
86
Other
All statements made in this prospectus are hereby qualified by the
contents of the Plan, the material terms of which are set forth herein. The Plan
is attached to the Proxy Statement. Copies of the Plan are available from the
Bank and it should be consulted for further information. Adoption of the Plan by
the Bank's members authorizes the Board of Directors to amend or terminate the
Plan.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
Although the Boards of Directors of the Bank and the Company are not aware
of any effort that might be made to obtain control of the Company after
Conversion, the Boards of Directors, as discussed below, believe it is
appropriate to include certain provisions in the Company's Certificate of
Incorporation to protect the interests of the Company and its stockholders from
takeovers which the Board of Directors of the Company might conclude are not in
the best interests of the Bank, the Company or the Company's stockholders.
The following discussion is a general summary of certain material
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other regulatory provisions, which may be deemed to have an "anti-takeover"
effect. The following description of certain of these provisions is necessarily
general and, with respect to provisions contained in the Company's Certificate
of Incorporation and Bylaws and the Bank's proposed stock charter and bylaws,
reference should be made in each case to the document in question, each of which
is part of the Bank's application to the OTS and the Company's Registration
Statement filed with the SEC. See "Additional Information."
Provisions of the Company's Certificate of Incorporation and Bylaws
Limitations on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. In addition, for a period of five years from
the completion of the Conversion of the Bank, no person may directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of an equity security of the Company. After five years from the
date of the Conversion, a beneficial holder submitting a proxy or proxies
totalling more than 10% of the then outstanding shares of Common Stock will be
able to vote in the following manner: the number of votes which may be cast by
such a beneficial owner shall be a number equal to the total number of votes
that a single record owner of all Common Stock owned by such person would be
entitled to cast, multiplied by a fraction, the numerator of which is the number
of shares of such class or series which are both beneficially owned and owned of
record by such beneficial owner and the denominator of which is the total number
of shares of Common Stock beneficially owned by such beneficial owner. The
impact of these provisions on the submission of a proxy on behalf of a
beneficial holder of more than 10% of the Common Stock is (1) to disregard for
voting purposes and require divestiture of the amount of stock held in excess of
10% (if within five years of the Conversion more than 10% of the Common Stock is
beneficially owned by a person) and (2) limit the vote on Common Stock held by
the beneficial owner to 10% or possibly reduce the amount that may be voted
below the 10% level (if more than 10% of the Common Stock is beneficially owned
by a person more than five years after the Conversion). Unless the grantor of a
revocable proxy is an affiliate or an associate of such a 10% holder or there is
an arrangement, agreement or understanding with such a 10% holder, these
provisions would not restrict the ability of such a 10% holder of revocable
proxies to exercise revocable proxies for which the 10%
87
holder is neither a beneficial nor record owner. A person is a beneficial owner
of a security if he has the power to vote or direct the voting of all or part of
the voting rights of the security, or has the power to dispose of or direct the
disposition of the security. The Certificate of Incorporation of the Company
further provide that this provision limiting voting rights may only be amended
upon the vote of 80% of the outstanding shares of voting stock.
Election of Directors. Certain provisions of the Company's Certificate of
Incorporation and Bylaws will impede changes in majority control of the Board of
Directors. The Company's Certificate of Incorporation provides that the Board of
Directors of the Company will be divided into three classes, with directors in
each class elected for three-year staggered terms except for the initial
directors. Thus, it would take two annual elections to replace a majority of the
Company's Board. The Company's Certificate of Incorporation provides that the
size of the Board of Directors may be increased or decreased only if two-thirds
of the directors then in office concur in such action. The Certificate of
Incorporation also provides that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the Certificate of Incorporation
and the bylaws impose certain notice and information requirements in connection
with the nomination by stockholders of candidates for election to the Board of
Directors or the proposal by stockholders of business to be acted upon at an
annual meeting of stockholders.
The Certificate of Incorporation provides that a director may only be
removed for cause by the affirmative vote of at least 80% of the shares of the
Company entitled to vote generally in an election of directors cast at a meeting
of stockholders called for that purpose.
Restrictions on Call of Special Meetings. The Certificate of Incorporation
of the Company provides that a special meeting of stockholders may be called
only pursuant to a resolution adopted by a majority of the Board of Directors,
or a Committee of the Board or other person so empowered by the Bylaws. The
Certificate of Incorporation also provides that any action required or permitted
to be taken by the stockholders of the Company may be taken only at an annual or
special meeting and prohibits stockholder action by written consent in lieu of a
meeting.
Absence of Cumulative Voting. The Company's Certificate of Incorporation
provides that there shall be no cumulative voting rights in the election of
directors.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 3,000,000 shares of Common Stock and 500,000 shares of preferred
stock ("Preferred Stock"). The shares of Common Stock and Preferred Stock were
authorized in an amount greater than that to be issued in the Conversion to
provide the Company's Board of Directors with as much flexibility as possible to
effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its fiduciary
duty to deter future attempts to gain control of the Company. The Board of
Directors also has sole authority to determine the terms of any one or more
series of Preferred Stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post-tender offer merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Company's Board currently has no plans
for the issuance of additional shares, other than the issuance of additional
shares upon exercise of stock options.
88
Procedures for Certain Business Combinations. The Certificate of
Incorporation requires the affirmative vote of at least 80% of the outstanding
shares of the Company entitled to vote in the election of director in order for
the Company to engage in or enter into certain "Business Combinations," as
defined therein, with any Principal Stockholder (as defined below) or any
affiliates of the Principal Stockholder, unless the proposed transaction has
been approved in advance by the Company's Board of Directors, excluding those
who were not directors prior to the time the Principal Stockholder became the
Principal Stockholder. The term "Principal Stockholder" is defined to include
any person and the affiliates and associates of the person (other than the
Company or its subsidiary) who beneficially owns, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Company. Any amendment to
this provision requires the affirmative vote of at least 80% of the shares of
the Company entitled to vote generally in an election of directors.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by the Company's Board
of Directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to restrictions on the acquisition and voting of greater
than 10% of the Common Stock; number, classification, election and removal of
directors; amendment of Bylaws; call of special stockholder meetings; director
liability; certain business combinations; power of indemnification; and
amendments to provisions relating to the foregoing in the Certificate of
Incorporation).
The Bylaws may be amended by a majority vote of the Board of Directors or
the affirmative vote of the holders of at least 80% of the outstanding shares of
the Company entitled to vote in the election of Directors cast at a meeting
called for that purpose.
Purpose and Takeover Defensive Effects of the Company's Certificate of
Incorporation and Bylaws. The Board of Directors of the Bank believes that the
provisions described above are prudent and will reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist the Bank and the Company in the orderly deployment of the
Conversion proceeds into productive assets during the initial period after the
Conversion. The Board of Directors believe these provisions are in the best
interests of the Bank and of the Company and its stockholders. In the judgment
of the Board of Directors, the Company's Board will be 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
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of the Company and that these provisions will encourage such
negotiations and discourage hostile takeover attempts. It is also the view of
the Board of Directors 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 which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding companies
have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Company and its
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Company's assets.
89
Effect of Takeover Defenses on Stockholder Interests. An unsolicited
takeover proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Although a tender offer or other
takeover attempt may be made at a price substantially above the current market
prices, such offers are sometimes made for less than all of the outstanding
shares of a target company. As a result, stockholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise that is under
different management and whose objectives may not be similar to those of the
remaining stockholders.
Potential Negative Impact of Takeover Defenses on Stockholder Interests.
Despite the belief of the Bank and the Company as to the benefits to
stockholders of these provisions of the Company's Certificate of Incorporation
and Bylaws, these provisions may also have the effect of discouraging a future
takeover attempt which would not be approved by the Company's Board, but
pursuant to 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 any opportunity to do
so. Such provisions will also render the removal of the Company's Board of
Directors and of management more difficult. The Boards of Directors of the Bank
and the Company, however, have concluded that the potential benefits outweigh
the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Company may adopt additional charter
provisions regarding the acquisition of its equity securities that would be
permitted to a Delaware corporation. The Company and the Bank do not presently
intend to propose the adoption of further restrictions on the acquisition of the
Company's equity securities.
Effect of Employment and Severance Agreements. The Bank has entered into
an employment agreement with President John M. Lisicki that provides for
payments in the event of termination of employment following a change in
control, as defined in the agreement, of 2.99 times the then current salary of
Mr. Lisicki. In addition, the Bank has entered into employment agreements with
two other executive officers and severance agreements with three key employees
that provide for payments in the event of termination of employment following a
change in control, as defined in the agreements. At March 31, 1996, such
payments would have totalled approximately $686,000, rendering an acquisition,
followed by termination of their employment, more expensive to a possible
acquiror as a result of these agreements. See "Management of the Bank -
Executive Compensation - Employment Agreement."
Federal Regulation. A federal regulation prohibits any person prior to the
completion of a conversion from transferring, or entering into any agreement or
understanding to transfer, the legal or beneficial ownership of the subscription
rights issued under a plan of conversion or the stock to be issued upon their
exercise. This regulation also prohibits any person prior to the completion of a
conversion from offering, or making an announcement of an offer or intent to
make an offer, to purchase such subscription rights or stock. For three years
following conversion, OTS regulations prohibit any person, without the prior
approval of the OTS, from acquiring or making an offer to acquire more than 10%
of the stock of any converted savings institution if such person is, or after
consummation of such acquisition would be, the beneficial owner of more than 10%
of such stock. In the event that any person, directly or indirectly, violates
this regulation, the securities beneficially owned by such person in excess of
10% 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 matter submitted
to a vote of stockholders.
Federal law provides that no company, "directly or indirectly or acting in
concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
90
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of a savings
association or the power to control in any manner the election of a majority of
the directors of such institution.
Federal law also provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire control of
a savings association unless at least 60 days prior written notice has been
given to the OTS and the OTS has not objected to the proposed acquisition.
Control is defined for this purpose as the power, directly or indirectly, to
direct the management or policies of a savings association or to vote more than
25% of any class of voting securities of a savings association. Under federal
law (as well as the regulations referred to below) the term "savings
association" includes state chartered and federally chartered SAIF-insured
institutions, federally chartered savings and loans and savings banks whose
accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an insured
institution, a person, other than a company, must give 60 days notice to the OTS
and have received no OTS objection to such acquisition of control, and a company
must apply for and receive OTS approval of the acquisition. Control, as defined
under federal law, involves a 25% voting stock test, control in any manner of
the election of a majority of the institution's directors, or a determination by
the OTS that the acquiror has the power to direct, or directly or indirectly to
exercise a controlling influence over, the management or policies of the
institution. Acquisition of more than 10% of an institution's voting stock, if
the acquiror also is subject to any one of either "control factors," constitutes
a rebuttable determination of control under the regulations. The determination
of control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock after the effective date of the regulations must file with
the OTS a certification that the holder is not in control of such institution,
is not subject to a rebuttable determination of control, and will take no action
which would result in a determination or rebuttable determination of control
without prior notice to or approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 3,000,000 shares of the Common Stock,
$0.10 par value per share, and 500,000 shares of serial preferred stock, $0.01
par value per share. The Company currently expects to issue up to 1,454,750
shares of Common Stock in the Conversion. The Company does not intend to issue
any shares of serial preferred stock in the Conversion, nor are there any
present plans to issue such preferred stock following the Conversion. The
aggregate par value of the issued shares will constitute the capital account of
the Company. The balance of the purchase price will be recorded for accounting
purposes as additional paid-in capital. See "Capitalization." The capital stock
of the Company will represent nonwithdrawable capital and will not be insured by
the Company, the Bank, the FDIC, or any other government agency.
91
Common Stock
Voting Rights. Each share of the Common Stock will have the same relative
rights and will be identical in all respects with every other share of the
Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of the
Common Stock will be entitled to only one vote for each share held of record on
all matters submitted to a vote of holders of the Common Stock and will not be
permitted to cumulate their votes in the election of the Company's directors.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company (including all deposits in the Bank and accrued interest thereon); (ii)
any accrued dividend claims; (iii) liquidation preferences of any serial
preferred stock which may be issued in the future; and (iv) any interests in the
liquidation account established upon the Conversion for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders who continue their
deposits at the Bank.
Restrictions on Acquisition of the Common Stock. See "Certain Restrictions
on Acquisition of the Company" for a discussion of the limitations on
acquisition of shares of the Common Stock.
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. Therefore, the Board of Directors may sell shares of
capital stock of the Company without first offering such shares to existing
stockholders of the Company. The Common Stock is not subject to call for
redemption, and the outstanding shares of Common Stock when issued and upon
receipt by the Company of the full purchase price therefor will be fully paid
and non-assessable.
Transfer Agent and Registrar. American Stock Transfer and Trust Co. is
expected to act as the transfer agent and registrar for the Common Stock of the
Company.
Issuance of Additional Shares. Except in the Subscription and Community
Offerings and possibly pursuant to the RSP or Option Plan, the Company has no
present plans, proposals, arrangements or understandings to issue additional
authorized shares of the Common Stock. In the future, the authorized but
unissued and unreserved shares of the Common Stock will be available for general
corporate purposes, including, but not limited to, possible issuance as stock
dividends, in connection with mergers or acquisitions, under a cash dividend
reinvestment or stock purchase plan, in a public or private offering, or under
employee benefit plans. See "Risk Factors - Possible Dilutive Effect of RSP and
Stock Options and Effect of Purchases by the RSP and ESOP" and "Pro Forma Data."
Normally no stockholder approval would be required for the issuance of these
shares, except as described herein or as otherwise required to approve a
transaction in which additional authorized shares of the Common Stock are to be
issued.
For additional information, see "Dividends," "Regulation," and "Taxation"
with respect to restrictions on the payment of cash dividends; "- Restrictions
on Transferability by Directors and Officers" relating to certain restrictions
on the transferability of shares purchased by directors and officers; and
"Certain Restrictions on Acquisition of the Company" for information regarding
restrictions on acquiring Common Stock of the Company.
92
Serial Preferred Stock
None of the 500,000 authorized shares of serial preferred stock of the
Company will be issued in the Conversion. After the Conversion is completed, the
Board of Directors of the Company will be authorized to issue serial preferred
stock and to fix and state voting powers, designations, preferences, or other
special rights of such shares and the qualifications, limitations, and
restrictions thereof, subject to regulatory approval but without stockholder
approval. If and when issued, the serial preferred stock is likely to rank prior
to the Common Stock as to dividend rights, liquidation preferences, or both, and
may have full or limited voting rights. The Board of Directors, without
stockholder approval, can issue serial preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the Common Stock. The Board of Directors has no present intention to issue
any of the serial preferred stock.
LEGAL AND TAX MATTERS
The legality of the Common Stock has been passed upon for the Bank and the
Company by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain legal
matters for Capital Resources will be passed upon by Serchuk & Zelermyer, White
Plains, New York. The federal income tax consequences of the Conversion have
been passed upon for the Bank and the Company by Malizia, Spidi, Sloane & Fisch,
P.C., Washington, D.C. The New York income tax consequences of the Conversion
have been passed upon for the Bank and the Company by KPMG Peat Marwick LLP.
EXPERTS
The financial statements of the Bank as of September 30, 1995 and for
the year ended September 30, 1995, appearing in this prospectus have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, as
set forth in their report thereon appearing elsewhere herein, and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. The financial statements of the Bank as of September
30, 1994 and for each of the years in the two year period ended September 30,
1994, appearing in this prospectus have been audited by T.M. Byxbee Company,
CPAs, NY, P.C. ("T.M. Byxbee Company"), independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein,
and is included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
Capital Resources Group has consented to the inclusion herein of a summary
of its appraisal report setting forth its opinion as to the estimated pro forma
market value of the Common Stock to be issued in the Conversion and its opinion
setting forth the value of subscription rights and to the use of its name and
statements with respect to it appearing herein.
CHANGE IN AUDITOR
On September 12, 1995, the audit proposal of KPMG Peat Marwick LLP for the
fiscal year ended 1995 was accepted; approval of the selection of KPMG Peat
Marwick LLP was obtained at a meeting of the Board of Directors of the Bank held
on September 26, 1995. During July 1995, T.M. Byxbee Company orally advised the
Bank that it did not wish to continue as independent auditors of the Bank
following a conversion from the mutual to the stock form. The report of T.M.
Byxbee Company as of September 30, 1994 and for the fiscal years ended September
30, 1994 and 1993 contained no adverse opinion or disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles except for an explanatory paragraph that described the adoption of
SFAS No. 109 "Accounting for Income Taxes" which changed its method of
accounting for income taxes in the fiscal
93
year 1994. During the fiscal years ended September 30, 1994 and 1993 and during
the period from September 30, 1994 to September 12, 1995, there were no
disagreements between the Bank and T.M. Byxbee concerning accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
REGISTRATION REQUIREMENTS
The Common Stock of the Company will be registered pursuant to Section
12(g) of the Exchange Act prior to completion of the Conversion. The Company
will be subject to the information, proxy solicitation, insider trading
restriction, tender offer rule, periodic reporting and other requirements of the
SEC under the Exchange Act. The Company will not deregister the Common Stock
under the Exchange Act for a period of at least three years following the
Conversion.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. As permitted by the rules and regulations of the SEC, this prospectus
does not contain all the information set forth in the registration statement.
Such information can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
The statements contained herein as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions thereof and are not necessarily complete; each such statement
is qualified by reference to such contract or document.
The Bank has filed an Application for Conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
prospectus omits certain information contained in that Application. The
Application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Northeast Regional Office of the OTS, 10
Exchange Place, Jersey City, New Jersey 07302 without charge.
A copy of the Certificate of Incorporation and Bylaws of the Company are
available without charge from the Bank.
94
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Index to Financial Statements
Page(s)
Independent Auditors' Reports .............................................F-1
Balance Sheets as of March 31, 1996 (unaudited)
and September 30, 1995 and 1994..........................................F-3
Statements of Income for the Six Months ended
March 31, 1996 and 1995 (unaudited) and for the Years
Ended September 30, 1995, 1994 and 1993...................................18
Statements of Changes in Equity for the Six Months ended
March 31, 1996 (unaudited) and for the
Years Ended September 30, 1995, 1994, and 1993 ......................... F-4
Statements of Cash Flows for the Six Months ended
March 31, 1996 and 1995 (unaudited) and for the
Years Ended September 30, 1995, 1994, and 1993 ..........................F-5
Notes to Financial Statements .............................................F-7
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
Separate financial statements for the Company have not been included because the
Company will not engage in material transactions until after the Conversion. The
Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses, or contingent liabilities.
95
Independent Auditors' Report
The Board of Directors
Amsterdam Federal Savings
and Loan Association:
We have audited the accompanying balance sheet of Amsterdam Federal Savings and
Loan Association (the Association) as of September 30, 1995, and the related
statement of income, changes in equity and cash flows for the year ended
September 30, 1995. These financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The accompanying financial statements
of Amsterdam Federal Savings and Loan Association as of September 30, 1994 and
for the years ended September 30, 1994 and 1993, were audited by other auditors
whose report, dated November 8, 1994, except for note 14, which is as of April
26, 1996, on those statements included an explanatory paragraph that described
the adoption of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
changed its method of accounting for income taxes effective October 1, 1993.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above as of and for the
year ended September 30, 1995, present fairly, in all material respects, the
financial position of Amsterdam Federal Savings and Loan Association as of
September 30, 1995 and the results of its operations and its cash flows for the
year ended September 30, 1995, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the financial statements, as of October 1, 1994, the
Association adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which changed its method of
accounting for certain investments in debt and equity securities.
/s/KPMG Peat Marwick LLP
November 22, 1995, except for note 14,
which is as of April 26, 1996
F-1
[LETTERHEAD OF T. M. BYXBEE COMPANY]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Amsterdam Federal Savings and Loan Association
Amsterdam, New York
We have audited the accompanying balance sheet of Amsterdam Federal
Savings and Loan Association as of September 30, 1994, and the related
statements of income, changes in equity, and cash flows for the years ended
September 30, 1994 and 1993. These financial statements are the responsibility
of the Association's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amsterdam Federal Savings
and Loan Association as of September 30, 1994 and the results of its operations
and its cash flows for the years ended September 30, 1994 and 1993, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1994 the
Association adopted FASB Statement No. 109, Accounting for Income Taxes, which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
/s/ T.M. Byxbee Company, CPAs, NY, P.C.
November 8, 1996, except for Note 14, which is as of April 26, 1996.
F-2
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Balance Sheets
(Unaudited)
March 31, September 30,
1996 1995 1994
---- ---- ----
Assets
Cash and due from banks $ 4,464,837 4,823,328 3,985,791
Federal funds sold 6,150,000 3,350,000 2,250,000
Term deposits with the Federal Home
Loan Bank 2,000,000 1,500,000 -
---------- ----------- ---------
Total cash and cash
equivalents 12,614,837 9,673,328 6,235,791
---------- ----------- ----------
Securities available for sale 18,184,644 2,563,266 -
Investment securities held to maturity
(estimated fair value of
$30,942,901 in 1996, $46,892,622 in
1995, and $44,781,113 in
1994) 31,008,985 46,722,683 46,099,781
Federal Home Loan Bank of New York
stock, at cost 566,200 566,200 508,800
Loans receivable, net 67,729,508 65,447,528 58,622,767
Accrued interest receivable 1,128,780 1,130,654 872,558
Premises and equipment, net 1,586,850 1,613,668 1,308,444
Other assets 225,996 244,510 233,851
----------- ----------- -----------
Total assets $133,045,800 127,961,837 113,881,992
=========== =========== ===========
Liabilities and Equity
Liabilities:
Deposits 121,443,001 116,072,579 102,016,369
Federal Home Loan Bank of New York
long term borrowings 2,071,875 2,303,125 2,790,625
Escrow accounts 309,225 500,523 545,834
Accrued expenses and other
liabilities 1,026,351 1,171,481 1,227,543
----------- ----------- -----------
Total liabilities 124,850,452 120,047,708 106,580,371
----------- ----------- -----------
Commitments and contingent liabilities (note 12)
Equity:
Retained earnings 8,227,918 7,909,546 7,301,621
Net unrealized gain (loss) on
securities available for sale,
net of tax (32,570) 4,583 -
----------- ----------- -----------
Total equity 8,195,348 7,914,129 7,301,621
----------- ----------- -----------
Total liabilities and equity $133,045,800 127,961,837 113,881,992
============ =========== ===========
See accompanying notes to financial statements.
F-3
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Changes in Equity
Net
Unrealized
Gain (Loss) on
Securities
Retained Available for Sale, Total
Earnings Net of Tax Equity
-------- ---------- ------
Balance, October 1, 1992 $ 5,955,215 - 5,955,215
Net income 690,607 - 690,607
--------- ------ ---------
Balance, September 30, 1993 6,645,822 - 6,645,822
Net income 655,799 - 655,799
--------- ------- ---------
Balance, September 30, 1994 7,301,621 - 7,301,621
Net income 607,925 - 607,925
Net unrealized gain on
securities available for
sale, net of tax - 4,583 4,583
--------- ------- ---------
Balance, September 30, 1995 7,909,546 4,583 7,914,129
Net income (unaudited) 318,372 - 318,372
Change in net unrealized gain
on securities available
for sale, net of tax
(unaudited) - (37,153) (37,153)
--------- ------- ---------
Balance, March 31, 1996
(unaudited) $ 8,227,918 (32,570) 8,195,348
========= ======= =========
See accompanying notes to financial statements.
F-4
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Cash Flows
(Unaudited)
Six Months Ended Years Ended
March 31, September 30,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Increase (decrease) in cash and cash equivalent:
Cash flows from operating activities:
Net income $ 318,372 346,926 607,925 655,799 690,607
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation 81,871 66,766 145,594 104,761 80,795
Provision for loan losses 80,000 85,000 165,000 293,000 217,000
Deferred tax expense (benefit) (4,666) (20,638) (55,756) (62,160) 1,957
Net (gain) loss on security
transactions - - 3,151 (40,028) (14,679)
Gain on sale of real estate owned - - - (6,453) -
Write off of real estate owned - - - 2,463 -
Decrease (increase) in accrued
interest receivable 1,874 (75,109) (258,096) 13,384 (113,746)
Decrease (increase) in other assets 18,514 (45,486) (10,659) (126,814) (6,470)
Increase (decrease) in accrued expenses and
other liabilities (121,325) (384,194) (2,667) 816,645 222,263
--------- --------- --------- ----------- ---------
Total adjustments 56,268 (373,661) (13,433) 994,798 387,120
--------- --------- --------- ----------- ---------
Net cash provided by (used in)
operating activities 374,640 (26,735) 594,492 1,650,599 1,077,727
--------- --------- --------- ----------- ---------
Cash flows from investing activities:
Proceeds from the sale of securities
available for sale - - 314,268 - -
Proceeds from the maturity and call of
securities available for sale 924,819 750,812 1,015,725 - -
Purchases of securities available for sale - (8,275) (783,519) - -
Proceeds from the sale of investment
securities - - - 1,981,422 491,298
Proceeds from the maturity and call of investment
securities 6,538,108 2,571,725 3,640,075 7,907,120 14,452,702
Purchases of investment securities (7,426,899) (4,096,734) (7,368,924) (16,106,809) (20,385,096)
Purchase of Federal Home Loan Bank of New
York stock - (57,400) (57,400) - -
Redemption of Federal Home Loan Bank of
New York stock - - - 63,300 -
Net loans made to customers (2,361,980) (3,840,583) (6,989,761) (6,117,037) (1,825,144)
Proceeds from sale of real estate owned - - - 86,422 -
Capital expenditures (55,053) (276,372) (450,818) (97,042) (120,384)
--------- --------- --------- ----------- ---------
Net cash used in investing
activities (2,381,005) (4,956,827) (10,680,354) (12,282,624) (7,386,624)
---------- ---------- ----------- ----------- ----------
Cash flows from financing activities:
Net increase in deposits 5,370,422 6,195,466 14,056,210 7,343,659 10,081,655
Net increase (decrease) in escrow accounts (191,298) (63,108) (45,311) 27,507 (142,989)
Long term borrowings from the Federal Home
Loan Bank - - - 500,000 1,000,000
Repayments on long term borrowings from the
Federal Home Loan Bank (231,250) (243,750) (487,500) (437,500) (393,750)
--------- --------- --------- ----------- ---------
Net cash provided by financing
activities 4,947,874 5,888,608 13,523,399 7,433,666 10,544,916
--------- --------- ---------- ----------- ----------
Net increase (decrease) in cash and cash
equivalents 2,941,509 905,046 3,437,537 (3,198,359) 4,236,019
Cash and cash equivalents at beginning of period 9,673,328 6,235,791 6,235,791 9,434,150 5,198,131
--------- --------- --------- ----------- ---------
Cash and cash equivalents at the end of period $12,614,837 7,140,838 9,673,328 6,235,791 9,434,150
========== ========= ========= =========== =========
(Continued)
F-5
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Cash Flows, Continued
(Unaudited)
Six Months Ended Years Ended
March 31, September 30,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Additional Disclosures Relative to Cash Flows:
Interest paid $ 2,647,905 2,045,918 4,518,515 3,623,590 3,705,378
========== ========= ========= ========== =========
Taxes paid $ 40,000 91,650 327,569 640,057 175,671
========== ========= ========= ========= =========
Supplemental schedules of non-cash investing
and financing activities:
Transfer of loans to real estate owned $ - - - 15,009 67,423
========== ========= ========= ========= =========
Investment securities transferred to
securities available for sale upon the
adoption of Financial Accounting Standard
No. 115, fair value of securities
transferred $3,065,404 $ - 3,105,947 3,105,947 - -
========== ========= ========= ========= ========
Investment securities held to maturity
transferred to securities available
for sale in accordance with the FASB
"Special Report," fair value of securities
transferred $16,662,196 $16,602,489 - - - -
========== ========= ========= ========= ========
Change in net unrealized (gain) loss on
securities available for sale, net of tax
during the period $ (37,153) 15,554 31,341 - -
========== ========= ========= ========= ========
See accompanying notes to financial statements.
F-6
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying financial statements consists only of the accounts of
Amsterdam Federal Savings and Loan Association (the Association). The
accounting and reporting policies of the Association conform in all
material respects to generally accepted accounting principles and to
general practice within the thrift industry. The Association utilizes
the accrual method of accounting for financial reporting purposes.
The balance sheet as of March 31, 1996 and the related statements of
income and cash flows for the six month periods ended March 31,
1996 and 1995 and changes in equity for the six month period
ended March 31, 1996 are unaudited and, in the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation as of March 31, 1996 and for the
results for the unaudited periods have been made.
(b) Business
A substantial portion of the Association's loans are secured by real
estate located in Montgomery and neighboring counties in New York
State. Accordingly, the ultimate collectibility of a substantial
portion of the Association's loan portfolio is dependent upon market
conditions in these market areas. In addition, other real estate
owned, if any, is also generally located in Montgomery and
neighboring counties in New York State.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance
for loan losses and the valuation of other real estate owned, if any,
acquired in connection with foreclosures or in-substance
foreclosures. In connection with the determination of the allowance
for loan losses and the valuation of other real estate owned, if any,
management obtains independent appraisals for properties.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowance for loan losses may be
necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Association's allowance for loan
losses. Such agencies may require the Association to recognize
additions to the allowance for loan losses based on their judgments
about information available to them at the time of their examination
which may not be currently available to management.
(c) Cash Equivalents
For purposes of the statements of cash flows, the Association considers
all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
(d) Cash Reserve Requirements
The Association is required to maintain certain cash reserves and other
deposits with the Federal Reserve Bank. The amount of this reserve
requirement, included in cash and due from banks, was approximately
$770 thousand, $744 thousand, and $494 thousand at March 31, 1996 and
September 30, 1995 and 1994, respectively.
(Continued)
F-7
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(e) Securities Available for Sale, Investment Securities Held to
Maturity, and Federal Home Loan Bank of New York Stock
The Association adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115), on October 1, 1994. Management determines
the appropriate classification of securities, including
mortgage-backed securities, at the time of purchase. If management
has the positive intent and ability to hold debt securities to
maturity, they are classified as investment securities held to
maturity and are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are
classified as trading securities and are reported at fair value with
unrealized holding gains and losses reflected in current earnings.
All other debt and equity securities are classified as securities
available for sale and are reported at fair value, with net
unrealized gains or losses reported as a separate component of
equity, net of estimated income taxes. The Association does not
maintain a trading portfolio.
Realized gains and losses on the sale of securities are based on the
net proceeds and the amortized cost of the securities sold, using the
specific identification method. The cost of securities is adjusted
for amortization of premium and accretion of discount, which is
calculated on an effective interest method.
Mortgage-backed securities, which are guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC"), or the Federal National Mortgage
Association ("FNMA"), represent participating interests in direct
pass-through pools of long-term first mortgage loans originated and
serviced by the issuers of the securities.
Unrealized losses on securities are charged to earnings when the
decline in fair value of a security is determined to be other than
temporary.
Prior to the adoption of SFAS No. 115, all debt securities, including
mortgage-backed securities, were carried at amortized cost and
adjusted for amortization of premium and accretion of discount, which
was calculated on an effective interest method. Marketable equity
securities, if any, were carried at the lower of aggregate cost or
fair value, with any unrealized losses reflected in equity. Upon the
adoption of SFAS No. 115 on October 1, 1994, the Association
transferred $3,105,947 of securities to the available for sale
classification. At the time of transfer, these securities had a fair
value of $3,065,404.
Non-marketable equity securities, such as Federal Home Loan Bank of New
York Stock, is stated at cost. The investment in Federal Home Bank of
New York stock is required for membership. This investment is pledged
to secure Federal Home Loan Bank of New York long term borrowings.
(Continued)
F-8
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(f) Reclassification of Investment Securities
In November 1995, the Financial Accounting Standards Board (FASB)
released its Special Report, "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity
Securities." The Special Report contained, among other things, a
unique provision that allowed entities to, as of one date either
concurrent with the initial adoption of the Special Report (November
15, 1995), but no later than December 31, 1995, reassess the
appropriateness of the classifications of all securities held at that
time. In accordance with the FASB's Special Report, the Association
reclassified securities with an amortized cost of $16,602,489 and an
approximate fair value of $16,662,196 from investment securities held
to maturity to securities available for sale as of December 31, 1995.
(g) Loans Receivable
Loans receivable are stated at the unpaid principal amount, net of the
allowance for loan losses. Interest income on loans is not recognized
when considered doubtful of collection by management. Loans
considered doubtful of collection by management are placed on a
non-accrual status for the recording of interest. Generally, loans
past due 90 days or more as to principal or interest are considered
to be in non-accrual status except for those loans which, in
management's judgment, are adequately secured and for which
collection is probable. Previously accrued income that has not been
collected is generally reversed from current income. Fees received
from and costs incurred for loan originations are recorded to
interest income on loans as received or incurred. Based upon
management's analysis, recording loan origination fees and costs on
the cash basis does not have a material impact on the Association's
financial statements.
(h) Allowance for Loan Losses
The allowance for loan losses is established through a provision for
loan losses charged to operations. Loans are charged against the
allowance for loan losses when management believes that
collectibility of the principal is unlikely. The allowance for loan
losses is maintained at a level deemed appropriate by management
based on an evaluation of the known and inherent risks in the
portfolio, past loan loss exposure, estimated value of underlying
collateral, and current and prospective economic conditions that may
affect borrowers' ability to pay.
(Continued)
F-9
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(i) Loan Impairment
On May 31, 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS No. 114). SFAS No. 114 was
amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures," (SFAS No. 118). These Statements were
adopted by the Association on October 1, 1995 and prescribe
recognition criteria for loan impairment, generally related to
commercial loans, and measurement methods for certain impaired loans
and all loans whose terms are modified in trouble debt restructurings
subsequent to the adoption of these Statements. A loan is considered
impaired when it is probable that the borrower will not repay the
loan according to the original contractual terms of the loan
agreement. Under these new Statements the allowance for loan losses
related to impaired loans is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the
collateral for certain loans where repayment of the loan is expected
to be provided solely by the underlying collateral (collateral
dependent loans).
Other real estate owned, if any, includes both formally foreclosed and
insubstance foreclosed real properties. In accordance with SFAS No.
114, a loan is classified as an insubstance foreclosure when the
Association has taken possession of the collateral regardless of
whether formal foreclosure proceedings have taken place. Prior to the
adoption of SFAS No. 114 and SFAS No. 118, insubstance foreclosed
properties included those properties where the borrower had little or
no remaining equity in the property considering its fair value; where
repayment was only expected to come from the operation or sale of the
property; and where the borrower effectively abandoned control of the
property or it was doubtful that the borrower would be able to
rebuild equity in the property.
Loans previously classified as insubstance foreclosed properties but
for which the Association had not taken possession of the collateral
have been reclassified to loans for all periods presented. These
reclassifications did not significantly impact the Association's
financial position or results of operations.
There was no real estate owned or insubstance foreclosed properties at
March 31, 1996, or September 30, 1995 and 1994.
(j) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the shorter of the terms of the
related leases or the useful lives of the assets.
(k) Employee Benefit Plans
The Association has a defined contribution 401(k) plan covering all
full time employees meeting age and service requirements. In
addition, the Association has a supplemental employee retirement plan
for certain executive officers.
(Continued)
F-10
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(l) Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes." SFAS No. 109 requires a change from
the deferred method of accounting for income taxes of APB Opinion 11
to the asset and liability method of accounting for income taxes.
Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The
Association's policy is that deferred tax assets are reduced by a
valuation allowance if, based on the weight of available evidence, it
is more likely than not that some or all of the deferred tax assets
will not be realized.
Effective October 1, 1993, the Association adopted SFAS No. 109.
The effect of the adoption of SFAS No. 109 was not material to the
financial statements. Prior years' financial statements were not
restated for the effect of adopting SFAS No. 109.
(m) Financial Instruments
In the normal course of business, the Association is a party to certain
financial instruments with off-balance-sheet risk, such as
commitments to extend credit, unused lines of credit, and standby
letters of credit. The Association's policy is to record such
instruments when funded.
(n) Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 107 (SFAS No. 107),
"Disclosures about Fair Value of Financial Instruments." SFAS No. 107
requires certain disclosures about fair value for all financial
instruments, whether recognized or not recognized in the balance
sheet, and is effective for the Association's fiscal year ended
September 30, 1996 financial statements.
(o) Reclassifications
Amounts in the prior periods' financial statements are reclassified
whenever necessary to conform to current period presentations.
(Continued)
F-11
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(2) Securities Available for Sale
The amortized cost and approximate fair value of securities available for
sale at March 31, 1996 and September 30, 1995 is as follows:
March 31, 1996
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government and
agency securities $ 9,018,342 33,401 15,104 9,036,639
States and political
subdivisions 6,228,841 31,131 23,566 6,236,406
Collateralized
mortgage
obligations 2,986,810 438 75,649 2,911,599
---------- ------- --------- ----------
Total securities
available for
sale $18,233,993 64,970 114,319 18,184,644
========== ======= ========= ==========
September 30, 1995
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government and
agency securities $ 2,002,078 4,020 1,720 2,004,378
States and political
subdivisions 554,244 4,644 - 558,888
--------- ------- --------- ---------
Total securities
available for
sale $ 2,556,322 8,664 1,720 2,563,266
========== ======= ========= =========
The amortized cost and approximate fair value of securities available for
sale at March 31, 1996 and September 30, 1995, by contractual maturity,
are shown below (collateralized mortgage obligations are included by
final contractual maturity). Expected maturities will differ from
contractual maturities because certain issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Substantially all of the collateralized mortgage obligations at March
31, 1996 consist of Federal National Mortgage Association (FNMA),
Federal Home Loan Mortgage Corporation (FHLMC), and Government National
Mortgage Assocation (GNMA) securities.
March 31, 1996
--------------------------
Amortized Approximate
Cost Fair Value
---- ----------
Due within one year $ 5,557,610 5,579,237
Due one year to five years 9,724,324 9,728,094
Due five years to ten years - -
Due after ten years 2,952,059 2,877,313
---------- ---------
Total securities available for sale $ 18,233,993 18,184,644
========== ==========
(Continued)
F-12
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
September 30, 1995
------------------------
Amortized Approximate
Cost Fair Value
---- ----------
Due within one year $ 1,799,699 1,800,946
Due one year to five years 756,623 762,320
---------- ---------
Total securities available for sale $ 2,556,322 2,563,266
========== =========
Proceeds from the sale of securities available for sale were approximately
$314 thousand during the year ended September 30, 1995, which resulted in
gross realized losses of approximately $3 thousand, with no gross
realized gains. There were no sales of securities available for sale
during the six months ended March 31, 1996 and 1995, respectively.
(3) Investment Securities Held to Maturity
The amortized cost and approximate fair value of investment securities held
to maturity at March 31, 1996, September 30, 1995 and 1994 is as follows:
March 31, 1996
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government and
agency securities $ 19,577,768 18,204 225,914 19,370,058
Mortgage-backed
securities 11,395,243 210,368 68,742 11,536,869
Other 35,974 - - 35,974
---------- ------- ------- ----------
Total investment
securities
held to
maturity $ 31,008,985 228,572 294,656 30,942,901
========== ======= ======= ==========
September 30, 1995
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government and
agency securities $ 25,212,733 91,892 208,082 25,096,543
Mortgage-backed
securities 12,347,680 210,937 13,909 12,544,708
States and political
subdivisions 6,076,897 127,535 23,904 6,180,528
Collateralized
mortgage
obligations 3,049,399 16,253 30,783 3,034,869
Other 35,974 - - 35,974
---------- ------- ------- ----------
Total investment
securities
held to
maturity $ 46,722,683 446,617 276,678 46,892,622
========== ======= ======= ==========
(Continued)
F-13
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
September 30, 1994
-----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government and
agency securities $ 23,181,668 11,070 806,359 22,386,379
Mortgage-backed
securities 12,711,440 86,053 375,314 12,422,179
States and political
subdivisions 6,687,774 14,466 112,319 6,589,921
Collateralized
mortgage
obligations 3,166,005 5,500 124,981 3,046,524
Other 352,894 - 16,784 336,110
---------- -------- --------- ----------
Total investment
securities
held to
maturity $ 46,099,781 117,089 1,435,757 44,781,113
========== ======= ========= ==========
The amortized cost and approximate fair value of investment securities
held to maturity at March 31, 1996 and September 30, 1995, by
contractual maturity, are shown below (mortgage-backed securities and
collateralized mortgage obligations are included by final contractual
maturity). Expected maturities will differ from contractual
maturities because certain issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Substantially all of the mortgage-backed securities at March 31, 1996,
September 30, 1995 and 1994, and the collateralized mortgage
obligations at September 30, 1995 and 1994, consist of Federal
National Mortgage Assocation (FNMA), Federal Home Loan Mortgage
Corporation (FHLMC), and Government National Mortgage Association
(GNMA) securities.
March 31, 1996
--------------------------
Amortized Approximate
Cost Fair Value
---- ----------
Due within one year $ 3,145,185 3,153,848
Due one year to five years 12,966,167 12,815,363
Due five years to ten years 4,511,408 4,512,917
Due after ten years 10,386,225 10,460,773
---------- ----------
Total $ 31,008,985 30,942,901
========== ==========
September 30, 1995
--------------------------
Amortized Approximate
Cost Fair Value
---- ----------
Due within one year $ 5,570,187 5,582,465
Due one year to five years 25,499,707 25,476,404
Due five years to ten years 1,922,703 1,954,170
Due after ten years 13,730,086 13,879,583
---------- ----------
Total $ 46,722,683 46,892,622
========== ==========
(Continued)
F-14
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
There were no sales of investment securities held to maturity during
the six months ended March 31, 1996 and 1995, or the year ended
September 30, 1995. Proceeds from the sale of investment securities
were approximately $2.0 million and $491 thousand during the years
ended September 30, 1994 and 1993, respectively, which resulted in
gross realized gains of approximately $43 thousand and $15 thousand,
respectively, and gross realized losses of approximately $3 thousand
and $0 thousand, respectively.
(4) Loans Receivable, Net
A summary of loans receivable at March 31, 1996 and September 30, 1995
and 1994 is as follows:
March 31, September 30,
1996 1995 1994
---- ---- ----
Loans secured by real estate:
Conventional one-to-four family
mortgages $ 42,679,797 43,076,165 41,319,303
Commercial 3,109,441 2,796,597 2,581,457
Home equity 12,323,827 9,770,549 5,239,779
FHA insured 432,748 526,354 714,028
VA guaranteed 844,696 1,005,639 1,231,810
---------- ---------- ----------
59,390,509 57,175,304 51,086,377
---------- ---------- ----------
Other loans:
Personal secured 4,773,991 4,462,462 3,765,101
Personal unsecured 413,287 406,630 304,499
Commercial 1,614,134 1,680,545 1,684,274
Home improvement 1,268,776 1,258,587 767,224
Passbook 896,538 834,285 645,800
Education 123,387 307,396 994,347
---------- ---------- ----------
9,090,113 8,949,905 8,161,245
---------- ---------- ----------
68,480,622 66,125,209 59,247,622
Less: Allowance for loan losses (751,114) (677,681) (624,855)
---------- ---------- ----------
Loans receivable, net $ 67,729,508 65,447,528 58,622,767
========== ========== ==========
Certain conventional mortgage loans held in the Association's loan
portfolio are used to secure Federal Home Loan Bank of New York long term
borrowings.
A summary of the allowance for loan losses is as follows:
Six Months Ended Years Ended
March 31, September 30,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Balance at
beginning of
period $ 677,681 624,855 624,855 414,649 313,237
Provision for loan
losses 80,000 85,000 165,000 293,000 217,000
Charge-offs (6,567) (4,629) (112,174) (82,794) (115,588)
Recoveries - - - - -
-------- -------- -------- -------- -------
Balance at end of
period $ 751,114 705,226 677,681 624,855 414,649
======== ======== ======== ======== ========
(Continued)
F-15
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
The following table sets forth information with regard to non-performing
loans:
March 31, September 30,
1996 1995 1994
---- ---- ----
Loans in non-accrual status $ 683,171 518,247 623,865
Loans contractually past due
90 days or more and still
accruing interest 98,711 78,656 106,552
-------- -------- --------
Total non-performing loans $ 781,882 596,903 730,417
======== ======== ========
There were no troubled debt restructurings at March 31, 1996, September 30,
1995 or 1994.
Accumulated interest on non-accrual loans, as shown above, of approximately
$17 thousand was not recognized in interest income during the year ended
September 30, 1995. Approximately $27 thousand of interest on non-accrual
loans, as shown above, was collected and recognized as interest income
during the year ended September 30, 1995. Accumulated interest on
non-accrual loans, as shown above, not recognized in interest income, and
interest on non-accrual loans, as shown above, collected and recognized
as interest income for the six months ended March 31, 1996 and 1995, and
the years ended September 30, 1994 and 1993, was not material to equity
or total interest income.
Certain directors and executive officers of the Association are customers
of and have other transactions with the Association in the ordinary
course of business. Loans to these parties were made in the ordinary
course of business at the Association's normal credit terms, including
interest rate and collateralization. The aggregate of such loans totaled
approximately $318 thousand, $328 thousand, and $466 thousand at March
31, 1996 and September 30, 1995 and 1994, respectively. Total advances to
the directors and executive officers during the year ended September 30,
1995 were $31 thousand. There were no advances during the six months
ended March 31, 1996. Total payments made on these loans were
approximately $169 thousand and $10 thousand for the year ended September
30, 1995 and the six months ended March 31, 1996, respectively.
As of March 31, 1996, the recorded investment in the loan that is
considered to be impaired under SFAS No. 114 totaled $40,275, for which
the related allowance for loan loss is $4,028. During the six months
ended March 31, 1996, the average balance of the impaired loan was
$40,275. No interest income was collected on the impaired loan during the
six months ended March 31, 1996.
(5) Accrued Interest Receivable
A summary of accrued interest receivable as of March 31, 1996, September
30, 1995 and 1994 is as follows:
March 31, September 30,
1996 1995 1994
---- ---- ----
Term deposits with the Federal
Home Loan Bank $ 15,256 7,690 -
Securities available for sale 263,862 37,394 -
Investment securities held to
maturity 374,352 617,944 473,896
Loans receivable 475,310 467,626 398,662
--------- --------- ---------
Total accrued interest
receivable $ 1,128,780 1,130,654 872,558
========= ========= =========
(Continued)
F-16
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(6) Premises and Equipment, Net
Premises and equipment at March 31, 1996, September 30, 1995 and 1994 are
summarized by major classification as follows:
March 31, September 30,
1996 1995 1994
---- ---- ----
Land and land improvements $ 388,044 388,044 388,044
Office buildings 1,128,801 1,128,801 1,123,301
Leasehold improvements 226,845 226,845 -
Furniture, fixtures and
equipment 871,942 816,889 598,276
--------- --------- ---------
Total 2,615,632 2,560,579 2,109,621
Less accumulated depreciation (1,028,782) (946,911) (801,177)
---------- --------- ---------
Premises and equipment, net $ 1,586,850 1,613,668 1,308,444
========= ========= =========
Depreciation included in occupancy and equipment expense amounted to
approximately $146 thousand, $105 thousand, and $81 thousand for the
years ended September 30, 1995, 1994, and 1993, respectively, and
approximately $82 thousand and $67 thousand for the six months ended
March 31, 1996 and 1995, respectively.
(7) Deposits
Deposit account balances at March 31, 1996, September 30, 1995 and 1994 are
summarized as follows:
Stated March 31, September 30,
rate 1996 1995 1994
---- ---- ---- ----
Savings accounts 3.00% $ 35,365,653 34,468,922 41,565,499
N.O.W. accounts 2.25 - 2.75 10,085,190 8,953,569 8,409,466
Money market
accounts 2.75 - 4.88 6,259,830 5,436,649 5,674,347
Time deposit accounts:
2.00 - 2.99 - - 349,674
3.00 - 3.99 331,340 666,824 12,274,810
4.00 - 4.99 10,738,479 4,811,456 11,629,012
5.00 - 5.99 25,098,624 27,768,045 12,132,224
6.00 - 6.99 23,259,887 23,679,666 3,769,714
7.00 - 7.99 3,644,455 3,884,362 1,032,214
8.00 - 8.99 43,989 320,095 714,577
9.00 - 9.99 - - -
10.00 - 10.99 - - -
---------- ---------- ----------
Total time deposit
accounts 63,116,774 61,130,448 41,902,225
---------- ---------- ----------
Non-interest bearing
accounts - 6,615,554 6,082,991 4,464,832
---------- ---------- ----------
Total deposits $121,443,001 116,072,579 102,016,369
=========== =========== ===========
(Continued)
F-17
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
The approximate amount of contractual maturities of time deposit accounts
for the twelve month periods subsequent to March 31, 1996 are as follows:
Twelve month periods ended March 31,
------------------------------------
1997 $ 41,794,034
1998 13,474,239
1999 2,531,265
2000 2,925,272
2001 2,391,964
----------
$ 63,116,774
==========
The approximate amount of contractual maturities of time deposit accounts
for the years subsequent to September 30, 1995 are as follows:
Years ended September 30,
-------------------------
1996 $ 32,943,471
1997 18,805,927
1998 4,182,440
1999 1,799,084
2000 3,399,526
----------
$ 61,130,448
==========
At March 31, 1996, September 30, 1995 and 1994, the aggregate amount of
time deposit accounts with balances equal to or in excess of $100
thousand was approximately $7.4 million, $7.2 million, and $4.7 million,
respectively. Deposits in excess of $100 thousand are not Federally
insured.
Interest expense on deposits and escrow accounts for the six months ended
March 31, 1996 and 1995, and the years ended September 30, 1995, 1994,
and 1993 is summarized as follows:
Six Months Ended Years Ended
March 31, September 30,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Savings accounts $ 513,804 574,573 1,089,256 1,243,886 1,200,510
N.O.W. accounts 106,176 94,193 192,471 163,792 163,829
Money market
accounts 106,426 79,893 156,722 188,895 200,394
Time deposits 1,842,876 1,201,394 2,903,991 1,819,104 1,985,896
Escrow accounts 4,809 5,044 10,397 9,170 8,915
--------- --------- --------- --------- --------
Total $2,574,091 1,955,097 4,352,837 3,424,847 3,559,544
========= ========= ========= ========= =========
Weighted average
interest rate
at end of period 4.22% 4.09% 4.30% 3.47% 3.55%
==== ==== ==== ==== ====
(Continued)
F-18
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(8) Income Taxes
The following is a summary of the components of income tax expense for the
six months ended March 31, 1996 and 1995, and the years ended September
30, 1995, 1994, and 1993:
Six Months Ended Years Ended
March 31, September 30,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Current tax
expense:
Federal $ 119,226 162,824 287,572 352,385 307,715
State 24,040 26,696 52,066 30,482 54,908
Deferred tax
(benefit) expense (4,666) (20,638) (55,756) (62,160) 1,957
-------- -------- -------- -------- --------
Income tax
expense $ 138,600 168,882 283,882 320,707 364,580
======== ======== ======== ======== ========
Income tax expense for financial reporting purposes is less than the amount
computed by applying the statutory federal income tax rate of 34% to
income before taxes for the reasons noted in the table below:
Six Months Ended Years Ended
March 31, September 30,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Expense at
statutory
federal tax rate $ 155,370 175,375 303,214 332,012 358,764
Tax-exempt income (36,516) (43,829) (81,193) (85,540) (56,738)
State income
taxes, net of
federal tax
benefit 27,823 32,054 56,064 65,255 72,080
Other, net (8,077) 5,282 5,797 8,980 (9,526)
-------- -------- -------- -------- --------
Income tax
expense $ 138,600 168,882 283,882 320,707 364,580
======== ======== ======== ======== ========
Effective tax rate 30.3% 32.7% 31.8% 32.8% 34.6%
==== ==== ==== ==== ====
(Continued)
F-19
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at March 31, 1996,
September 30, 1995 and 1994 are as follows:
March 31, September 30,
1996 1995 1994
---- ---- ----
Deferred tax assets:
Differences in reporting the
provision for loan losses and
loan charge-offs $ 324,669 296,011 259,294
Other 16,473 12,503 7,646
--------- --------- ---------
Total gross deferred tax
assets 341,142 308,514 266,940
Less valuation allowance (200,000) (200,000) (200,000)
--------- --------- ---------
Net deferred tax assets 141,142 108,514 66,940
--------- --------- ---------
Deferred tax liabilities:
Depreciation (13,550) (12,718) (26,900)
Prepaid expenses (27,130) - -
--------- --------- ---------
Total deferred tax
liabilities (40,680) (12,718) (26,900)
--------- --------- ---------
Net deferred tax asset at
end of period 100,462 95,796 40,040
Net deferred tax asset
(liability) at beginning
of period 95,796 40,040 (22,120)
--------- --------- ---------
Deferred tax benefit for the
period $ (4,666) (55,756) (62,160)
========= ========= =========
In addition to the deferred tax amounts described above, the Association
also had a deferred tax asset of approximately $17 thousand at March 31,
1996 related to the net unrealized loss on securities available for sale
and a deferred tax liability of approximately $2 thousand at September
30, 1995 related to the net unrealized gain on securities available for
sale.
The valuation allowance for deferred tax assets as of October 1, 1993 was
$200 thousand. There was no change in the total valuation allowance for
the years ended September 30, 1995 and 1994 or for the six months ended
March 31, 1996. In establishing the valuation allowance, the Association
takes into consideration the nature and timing of the deferred tax asset
items as well as the amount of available open tax carrybacks. The
Association has fully reserved its New York State net deferred tax asset,
which is a significant component of deferred tax assets, due to the lack
of carryback and carryforward provisions available in New York State. Any
changes in the deferred tax asset valuation allowance is based upon the
Association's continuing evaluation of the level of such allowance and
the realizability of the temporary differences creating the deferred tax
asset, particularly reserves for loan losses, and after considering the
estimates of future taxable income.
As a qualifying thrift institution under IRS guidelines, the Association is
allowed a special bad debt deduction which has not been subject to
deferred taxes through December 31, 1987 in accordance with SFAS No. 109.
Accordingly, no deferred tax liability has been recorded for the tax bad
debt reserve at December 31, 1987. This reserve, along with the
"supplemental" reserve was approximately $2.5 million at December 31,
1987, will not be subject to tax as long as the Association continues to
qualify as a thrift for IRS purposes.
(Continued)
F-20
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(9) Federal Home Loan Bank of New York Long Term Borrowings
The long term borrowings from the Federal Home Loan Bank of New York are
secured by conventional mortgage loans held in the Association's loan
portfolio as well as Federal Home Loan Bank of New York stock. The rates
on the various advances ranged from 4.76% to 10.30%, 4.50% to 10.30%, and
3.99% to 10.30% at March 31, 1996, September 30, 1995 and 1994,
respectively. The weighted average rate on the borrowings was 6.74%,
6.64%, and 6.41% at March 31, 1996, September 30, 1995 and 1994,
respectively. The following table sets forth the maturities of the term
advances at March 31, 1996 and September 30, 1995:
Periods subsequent to March 31, 1996
------------------------------------
April 1, 1996 to September 30, 1996 $ 256,250
Years ended September 30,
1997 400,000
1998 350,000
1999 337,500
2000 321,875
2001-2004 406,250
----------
$ 2,071,875
==========
Years ended September 30,
-------------------------
1996 $ 487,500
1997 400,000
1998 350,000
1999 337,500
2000 321,875
2001-2004 406,250
----------
$ 2,303,125
==========
(10) Retained Earnings
As a qualifying mutual thrift institution, the Association has been
eligible to claim special Federal tax deductions substantially in excess
of actual loss experience as a tax bad debt reserve. Such reserve,
aggregating approximately $2.5 million at December 31, 1995, is included
within equity in the accompanying balance sheets. Federal tax law
restricts the use of such reserves to charges for bad debts. If this
reserve is charged for amounts other than bad debts, taxable income of an
identical amount is created. Since ineligible charges to the reserve are
not anticipated, no provision has been made for Federal income taxes
thereon.
(11) Related Party Transactions
The law firm of a Director of the Association provides the majority of the
Association's legal services. The Association expensed approximately $31
thousand, $28 thousand, $57 thousand, $52 thousand, and $47 thousand in
fees to this law firm for legal services for the six months ended March
31, 1996 and 1995, and the years ended September 30, 1995, 1994, and
1993, respectively.
(Continued)
F-21
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
The Association leases certain branch facilities and office space from an
entity controlled by a member of the Board of Directors. The leases
expire in February 2001. The terms of the leases provide for increased
payments each year ranging in total from $20 thousand in the first year
to $30 thousand in the last year. Management believes the terms of these
leases to be consistent with normal market terms.
See also note 4.
(12) Commitments and Contingent Liabilities
(a) Off-Balance Sheet Financing and Concentrations of Credit
The Association is a party to certain financial instruments with
off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments consist
of commitments to extend credit, unused personal lines of credit, and
standby letters of credit. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized
on the balance sheet. The contract amounts of these instruments
reflect the extent of involvement by the Association.
The Association's exposure to credit loss in the event of
nonperformance by the other party to the commitment to extend credit
is represented by the contractual notional amount of those
instruments. The Association uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
Unless otherwise noted, the Association does not require collateral or
other security to support off-balance-sheet financial instruments
with credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being fully drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. The Association evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral,
if any, required by the Association upon the extension of credit is
based on management's credit evaluation of the customer. Mortgage
and construction loan commitments are secured by a first or second
lien on real estate. Collateral on extensions of credit for
commercial loans varies but may include accounts receivable,
inventory, property, plant and equipment, and income producing
commercial property.
Standby letters of credit are conditional commitments issued by the
Association to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support borrowing
arrangements. The credit risk involved in issuing standby letters of
credit is essentially the same as that involved in extending loan
facilities to customers.
(Continued)
F-22
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
Contract amounts of financial instruments that represent credit risk as
of March 31, 1996, September 30, 1995 and 1994, at fixed and variable
interest rates are as follows:
March 31, 1996
------------------------------------
Fixed Variable Total
----- -------- -----
Commitments outstanding:
Residential mortgages $ 200,000 188,000 388,000
Unadvanced portion of
construction loans 290,672 - 290,672
---------- ---------- ---------
490,672 188,000 678,672
---------- ---------- ---------
Unused lines and standby letters of credit:
Personal lines of credit 181,000 - 181,000
Standby letters of credit - 62,000 62,000
---------- ---------- ---------
181,000 62,000 243,000
---------- ---------- ---------
$ 671,672 250,000 921,672
========== ========== =========
September 30, 1995
------------------------------------
Fixed Variable Total
----- -------- -----
Commitments outstanding:
Residential mortgages $ 260,500 - 260,500
Unadvanced portion of
construction loans 572,051 - 572,051
---------- ---------- ---------
832,551 - 832,551
---------- ---------- ---------
Unused lines and standby letters of credit:
Personal lines of credit 114,409 - 114,409
Standby letters of credit - 57,000 57,000
---------- ---------- ---------
114,409 57,000 171,409
---------- ---------- ---------
$ 946,960 57,000 1,003,960
========== ========== =========
September 30, 1994
------------------------------------
Fixed Variable Total
----- -------- -----
Commitments outstanding:
Residential mortgages $ 942,000 1,002,725 1,944,725
Commercial mortgages 53,500 - 53,500
Unadvanced portion of
construction loans 517,488 - 517,488
---------- ---------- ---------
1,512,988 1,002,725 2,515,713
---------- ---------- ---------
Unused lines and standby letters of credit:
Personal lines of credit 8,400 - 8,400
Standby letters of credit - 58,000 58,000
---------- ---------- ---------
8,400 58,000 66,400
---------- ---------- ---------
$ 1,521,388 1,060,725 2,582,113
========== ========== =========
(Continued)
F-23
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
The range of interest rates on fixed rate residential mortgage and
unadvanced construction loan commitments was 7.625% to 8.750% at
March 31, 1996. The interest rate on unused personal lines of credit
was 15.000% at March 31, 1996.
Commitments on residential mortgage loans generally expire within 60
days of the date of issuance. Funds for construction loans are
advanced during the construction phase based upon various stages of
completion in accordance with the results of inspection reports. All
funds for construction loans are generally advanced within 180 days.
The Association does not engage in investments in futures contracts,
forwards, swaps, or option contracts or other derivative investments
with similar characteristics.
The Association grants residential, consumer, and commercial loans in
Montgomery and neighboring counties in New York State. Accordingly,
a substantial portion of its debtors' ability to honor their
contracts is dependent upon the economy of this region.
(b) Lease Commitments
The Association leases certain branch facilities and office space under
noncancelable operating leases. Total expenses under these leases for
the six months ended March 31, 1996 and 1995, and the years ended
September 30, 1995, 1994, and 1993 were $43 thousand, $10 thousand,
$51 thousand, $0, and $0, respectively.
A summary of the future minimum commitments required under
noncancelable operating leases as of March 31, 1996 are as follows:
Periods subsequent to March 31, 1996
------------------------------------
April 1, 1996 to September 30, 1996 $ 52,400
Years ended September 30,
1997 105,762
1998 109,337
1999 112,362
2000 54,499
2001 12,375
Thereafter -
----------
$ 446,735
==========
A summary of the future minimum commitments required under
noncancelable operating leases as of September 30, 1995 are as
follows:
Years ending September 30,
--------------------------
1996 $ 85,000
1997 85,000
1998 85,000
1999 85,000
2000 25,486
Thereafter -
----------
$ 365,486
==========
(Continued)
F-24
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(c) Savings Association Insurance Fund - Special Assessment
The United States Congress has sent to the President of the United
States numerous versions of legislation related to the Savings
Association Insurance Fund (SAIF) which includes, among other things,
provisions to recapitalize the Savings Association Insurance Fund
(SAIF) through a special assessment, as well as provisions to merge
the SAIF with the Bank Insurance Fund. Although no such SAIF
legislation has been enacted, legislation with provisions to
recapitalize the SAIF through a special assessment continues to be
debated in Congress.
If SAIF recapitalization legislation is passed, SAIF members are
expected to be required to pay a special assessment to recapitalize
the SAIF based on insured deposits held as of a selected date. The
amount of the special SAIF assessment is expected to range from 85
and 90 basis points. Based upon the Association's insured deposits on
March 31, 1995 (the date most recently considered in SAIF
recapitalization legislation), management estimates that the special
SAIF assessment will range from $920 thousand to $975 thousand ($550
thousand to $585 thousand on an after tax basis, if this assessment
is tax deductible). The Association would accrue for such a liability
at the time that such legislation is enacted, if ever. There can be
no assurance as to the enactment of any recapitalization legislation,
the form of any such recapitalization legislation, the amount, tax
treatment or timing of any such recapitalization legislation, or the
means used to calculate the deposit base subject to any such
recapitalization legislation.
(d) Legal Proceedings
The Association is, from time to time, a defendant in legal proceedings
relating to the conduct of its business. In the best judgment of
management, the financial position of the Association will not be
affected materially by the outcome of any pending legal proceedings.
(13) Employee Benefit Plans
The Association's defined 401(k) contribution plan covers all full time
employees meeting age and service requirements. The Association matches
participant contributions up to a maximum of 4.5%. Costs associated with
this plan were approximately $17 thousand, $16 thousand, $31 thousand,
$27 thousand, and $15 thousand for the six months ended March 31, 1996
and 1995 and the years ended September 30, 1995, 1994, and 1993,
respectively.
The Association also has a supplemental employee retirement plan (SERP) for
certain executive officers. During the six months ended March 31, 1996
and 1995 and the years ended September 30, 1995, 1994, and 1993, the
expense associated with this plan was approximately $11 thousand, $10
thousand, $21 thousand, $20 thousand, and $0, respectively. The SERP is
funded annually.
(Continued)
F-25
AMSTERDAM FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(Data as of and for the six months ended
March 31, 1996 and 1995 is unaudited)
(14) Subsequent Event - Adoption of Plan of Conversion
On April 26, 1996, the Board of Directors of the Association, subject to
regulatory approval and approval by members of the Association,
unanimously adopted a Plan of Conversion to convert from a federally
chartered mutual association to a federally chartered capital stock
savings institution with the concurrent formation of a holding company.
The conversion is expected to be accomplished through amendment of the
Association's federal charter and the sale of the holding company's
common stock in an amount equal to the proforma market value of the
Association after giving effect to the conversion. A subscription
offering of the sale of the Association's common stock will be offered
initially to the Association's depositors, then to other members and
directors, officers and employees of the Association. Any shares of the
Association's common stock not sold in the subscription offering will be
offered for sale to the general public in the Association's market area.
At the time of conversion, the Association will establish a liquidation
account in an amount equal to its total equity as of the date of the
latest balance sheet appearing in the final prospectus. The liquidation
account will be maintained for the benefit of eligible depositors who
continue to maintain their accounts at the Association after the
conversion. The liquidation account will be reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete
liquidation, each eligible depositor will be entitled to receive a
distribution from the liquidation account in an amount proportionate to
the current adjusted qualifying balances for accounts then held prior to
any payment to the stockholders. The Association may not pay dividends
that would reduce stockholders' equity below the required liquidation
account balance.
Under Office of Thrift Supervision (OTS) regulations, limitations have been
imposed on all "capital distributions" by savings institutions, including
cash dividends. The regulation establishes a three-tiered system of
restrictions, with the greatest flexibility afforded to thrifts which are
both well-capitalized and given favorable qualitative examination ratings
by the OTS. For example, a thrift which is given one of the two highest
examination ratings and has "capital" (as defined) equal to its fully
phased-in regulatory capital requirements could, after prior notice but
without prior approval of the OTS, make capital distributions in any year
that would reduce by one-half the amount of its capital which exceeds its
fully phased-in capital requirement, as adjusted to reflect net income to
date during the year. Other thrifts would be subject to more stringent
procedural and substantive requirements, the most restrictive being prior
OTS approval of any capital distribution.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. If the conversion is not completed, all
costs will be charged to expense. As of March 31, 1996 and September 30,
1995, approximately $43 thousand and $34 thousand of conversion costs had
been deferred.
F-26
======================================== =======================================
No dealer, salesman or other person has
been authorized to give any information
or to make any representations not
contained in this prospectus in
connection with the offering made
hereby, and, if given or made, such
information or representations must not
be relied upon as having been authorized
by the Bank or the Company. This
prospectus does not constitute an offer
to sell, or the solicitation of an offer
to buy, any of the securities offered
hereby to any person in any jurisdiction
in which such offer or solicitation
would be unlawful. Neither the delivery
of this prospectus by the Bank or the
Company nor any sale made hereunder Up to 1,265,000 Shares
shall in any circumstances create an (Anticipated Maximum)
implication that there has been no Common Stock
change in the affairs of the Bank or the
Company since any of the dates as of
which information is furnished herein or
since the date hereof.
_________________
TABLE OF CONTENTS
Page
Summary............................. (i)
Selected Financial and Other Data...
Risk Factors........................
AFSALA Bancorp, Inc.................
Amsterdam Federal Savings and
Loan Association..................
Use of Proceeds..................... ALSALA BANCORP, INC.
Dividends........................... (Proposed Holding Company for
Market for the Common Stock......... Amsterdam Federal Bank)
Capitalization......................
Pro Forma Data......................
Historical and Pro Forma Capital
Compliance.........................
Statements of Operations............
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations........................ ______________
Business of the Company.............
Business of the Bank................ PROSPECTUS
Regulation.......................... ______________
Taxation............................
Management of the Company...........
Management of the Bank..............
The Conversion......................
Certain Restrictions on
Acquisition of the Company........
Description of Capital Stock........ CAPITAL RESOURCES, INC.
Legal and Tax Matters...............
Experts.............................
Registration Requirements...........
Additional Information..............
Index to Financial Statements.......
Until the later of _____ _, 1996, or 25 Dated August ___, 1996
days after commencement of the offering
of Common Stock, all dealers effecting
transactions in the registered
securities, whether or not participating
in this distribution, may be required to
deliver a prospectus. This is in
addition to the obligation of dealers to
deliver a prospectus when acting as THESE SECURITIES ARE NOT DEPOSITS OR
underwriters and with respect to their ACCOUNTS AND ARE NOT FEDERALLY
unsold allotments or subscriptions. INSURED OR GUARANTEED
======================================== =======================================
PROSPECTUS SUPPLEMENT
Supplement to the AFSALA Bancorp, Inc.
Prospectus dated August ____, 1996
AFSALA Bancorp, Inc.
COMMON STOCK, $0.10 PAR VALUE
AMSTERDAM FEDERAL SAVINGS & LOAN ASSOCIATION
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
(27,530 SHARES OF COMMON STOCK AND PARTICIPATION INTERESTS THEREIN)
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") under the Amsterdam Federal Savings & Loan Association
401(k) Plan in RSI Retirement Trust, as amended (the "Plan") of participation
interests offered under the Plan and of a maximum of 27,530 shares of common
stock of AFSALA Bancorp, Inc. (the "Company"), par value $0.10 per share (the
"Common Stock"), as set forth herein.
In connection with the proposed conversion of Amsterdam Federal Savings &
Loan Association (the "Association" or "Employer") from a mutual savings and
loan association to a stock savings bank (the "Conversion") the Plan has been
amended effective August ____, 1996, to permit the investment of Plan assets in
various participant directed investment alternatives, including investment in
Common Stock. The Plan will permit Participants to direct the trustee of the
Plan (the "Trustee") to purchase Common Stock with Plan assets which are
attributable to such Participants. This Prospectus Supplement relates to the one
time election of a Participant to direct the purchase of Common Stock under the
Plan in connection with the Conversion and to the purchase of the Common Stock
under the Plan thereafter in the open-market.
The Prospectus dated August ____, 1996, of the Company (the "Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion, the Common Stock and financial condition,
results of operation and business of the Association. This Prospectus
Supplement, which provides detailed information with respect to the Plan, should
be read only in conjunction with the Prospectus. Terms not otherwise defined in
this Prospectus Supplement are defined in the Plan or the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "Special Considerations" in the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR
OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK AND THE PARTICIPATION INTERESTS UNDER THE PLAN
OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
The date of this Prospectus Supplement is August ____, 1996.
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 Association, or the
Plan. This Prospectus Supplement does not constitute an offer to sell or
solicitation of an offer to buy any securities in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation in such jurisdiction.
Neither the delivery of this Prospectus Supplement and the Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
there has been no change in the affairs of the Association or the Plan since the
date hereof, or that the information herein contained or incorporated by
reference is correct as of any time subsequent to the date hereof. This
Prospectus Supplement should be read only in conjunction with the Prospectus
that is attached hereto and should be retained for future reference.
TABLE OF CONTENTS
The Offering.................................................................1
Securities Offered.....................................................1
Election to Purchase Common Stock in Connection
with the Conversion...............................................1
Value of Participation Interests.......................................1
Method of Directing Investments........................................1
Time for Directing Investment..........................................2
Irrevocability of Investment 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 of Common Stock...............................3
Minimum Investment.....................................................3
Description of the Plan......................................................3
General................................................................3
Eligibility and Participation..........................................4
Contributions and Benefits Under the Plan..............................4
Limitations on Contributions...........................................5
Investment of Plan Assets..............................................7
Investment of Contributions............................................7
Benefits Under the Plan................................................9
Withdrawals and Distributions From the Plan...........................10
Administration of the Plan............................................12
Reports to Plan Participants..........................................13
Plan Administrator....................................................13
Amendment and Termination.............................................13
Merger, Consolidation or Transfer.....................................13
Federal Income Tax Consequences.......................................13
ERISA and Other Qualifications........................................17
Restrictions on Resale................................................17
SEC Reporting and Short-Swing Liability...............................17
Additional Information................................................18
Legal Opinions..............................................................18
Investment Election Form............................................Appendix A
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan and
up to 27,530 shares (assuming the actual purchase price is $10 per share) of
Common Stock which may be acquired by the Plan for the accounts of Participants.
The Company is the issuer of the Common Stock. Only employees of the Association
who meet the eligibility requirements under the Plan may participate in the
Plan. Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operation and business of the Association is contained in
the attached Prospectus. The address of the principal executive office of the
Company and the Association is 161 Church Street, Amsterdam, New York 12010. The
Company's and the Association's telephone number is (518) 842-5700.
Election to Purchase Common Stock in Connection with the Conversion
In connection with the Conversion, the Plan has been amended to permit
each Participant to direct that all or part of the funds which represent his or
her beneficial interest in the assets of the Plan may be transferred to an
investment fund (the "Employer Stock Fund") for the purpose of purchasing Common
Stock issued in connection with the Conversion. Participants will also be
permitted to direct ongoing purchases of Common Stock under the Plan after the
Conversion. See "Direction to Purchase Common Stock After Conversion." The
Trustee will follow the Participants' investment directions. Funds not
transferred to the Employer Stock Fund will remain invested in the other
investment funds of the Plan as directed by the Participant (see "Investment of
Contributions" herein).
Value of Participation Interests
The assets of the Plan were valued as of June 30, 1996, and each
Participant was informed of the value of his or her beneficial interest in the
Plan. This value represented the market value as of June 30, 1996, of past
contributions to the Plan by the Association and by the Participants and
earnings thereon, less previous withdrawals, if any. The assets of the Plan
shall also be valued prior to accepting a Participant's directed investment to
ascertain that such directed investment does not exceed the Participant's
account assets.
Method of Directing Investments
Appendix A of this Prospectus Supplement includes a form to direct a
transfer to the Employer Stock Fund (the "Investment Form") of all or a portion
of a Participant's account under the Plan ("Account"). If a Participant wishes
to transfer all or part of his or her beneficial interest in the assets of the
Plan to the purchase of Common Stock issued in connection with the Conversion,
he or she should indicate that investment decision on the Investment Form. The
Investment Form must be properly signed by the Participant in order for such
Investment Form to be honored by the Trustee. Additionally, a Participant may
indicate the directed investment of future contributions under the Plan for
investment in the Employer Stock Fund. If a Participant does not wish to make an
investment election to purchase Common Stock under the Plan in the Conversion,
or thereafter, he or she does not need to take any action.
1
Time for Directing Investment
The deadline for submitting the Investment Form directing the transfer of
amounts to the Employer Stock Fund in order to purchase Common Stock issued in
connection with the Conversion is ________________ ____, 1996. The Investment
Form should be returned to the Association's Personnel Department by 12:00 noon
on such date.
Subsequent to the Conversion, Participants will continue to be able to
direct the investment of their Account under the Plan in the Employer Stock Fund
and in the other investment alternatives, as detailed below and at Appendix B.
Irrevocability of Investment Direction
A Participant's direction to transfer amounts credited to such
Participant's Account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable as of noon on ________________ ____, 1996.
Direction to Purchase Common Stock After the Conversion
Following completion of the Conversion, a Participant shall be permitted
to direct that a certain percentage of such Participant's interests in his or
her Account be transferred to the Employer Stock Fund and invested in Common
Stock, or to the other investment funds available under the Plan. Alternatively,
a Participant may direct that a certain percentage of such Participant's
interest in the Employer Stock Fund be transferred to his or her Account to be
invested in the other investment funds available in accordance with the terms of
the Plan. Participants will be permitted to direct that future contributions
made to the Plan by or on their behalf will be invested in the Employer Stock
Fund. Following the initial election, the allocation of a Participant's interest
in the Employer Stock Fund may be changed quarterly by filing a written notice
with the Plan's administrator (the "Plan Administrator"). Special restrictions
apply to transfers directed by those Participants who are officers, directors
and principal shareholders of the Company who are subject to the provisions of
Section 16(b) of the Securities Exchange Act of 1934 (the "1934 Act"). See
"Restrictions on Resale" and "SEC Reporting and Short-Swing Liability" herein.
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund will be used by the
Trustee to purchase shares of Common Stock in the Conversion. The initial price
paid for such shares of Common Stock will be the same price that is paid by all
other persons who purchase shares of Common Stock in the Conversion.
Account assets directed for investment in the Employer Stock Fund after
the Conversion shall be invested by the Trustee to purchase shares of Common
Stock in open market transactions. The price paid by the Trustee for shares of
Common Stock in the Conversion, or otherwise, 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 Participant's Interest in the Common Stock
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant has an allocable interest in the investment funds of
the Plan but not in any particular assets
2
of the Plan. Accordingly, a specific number of shares of Common Stock will not
be directly attributable to the Account of any Participant. Dividend rights
associated with the Common Stock held by the Employer Stock Fund shall be
allocated to the Employer Stock Fund. Any increase (or decrease in the value of
such fund attributed to dividend rights shall be reflected in a Participant's
allocable interest in the Employer Stock Fund.
Voting and Tender Rights of Common Stock
The Trustee generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust 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 or tender, each Participant will be allocated
a number of voting or tender instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The number of shares of
Common Stock held in the Employer Stock Fund that are voted or tendered in the
affirmative and negative on each matter shall be determined by the number of
voting instruction rights or tender instruction rights exercised in the
affirmative and negative, respectively, from the Participants. With respect to
shares for which no voting instruction rights or tender instruction rights are
received by the Trustee, the Trustee shall vote or tender such shares within its
discretion as a fiduciary under the Plan or as directed by the Plan
Administrative Committee ("Committee").
Minimum Investment
The minimum investment of assets directed by a Participant for the
purchase of Common Stock in the Conversion shall be $__________ and may only be
specified in increments of $10.00. Funds may be directed for the purchase of
such Common Stock attributable to a Participant's Account whether or not such
account assets are 100% vested at the time of such investment election. With
respect to investment in the Employer Stock Fund after the Conversion, there is
no minimum level of investment specific to this investment fund.
DESCRIPTION OF THE PLAN
General
The Plan was initially established on February 1, 1993. The Plan is a
deferred compensation arrangement established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Plan will be submitted to the
Internal Revenue Service (the "IRS") in a timely manner for a determination that
the Plan is qualified under Section 401(a) of the Code, and that its related
trust is qualified under Section 501(a) of the Code. The Association intends
that the Plan, in operation, will comply with the requirements under Section
401(a) and Section 401(k) of the Code. The Association will adopt any amendments
to the Plan that may be necessary to ensure the continued qualified status of
the Plan under the Code and applicable Treasury Regulations.
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a
3
money purchase plan). The Plan is not subject to Title IV (Plan Termination
Insurance) of ERISA. Neither the funding requirements contained in Part 3 of
Title I of ERISA nor the plan termination insurance provisions contained in
Title IV of ERISA will be extended to Participants (as defined below) or
beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
OR HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF
EMPLOYMENT WITH THE ASSOCIATION. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE
IMPOSED ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2,
REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH
THE ASSOCIATION OR AFTER TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The statements contained in this
Prospectus Supplement are summaries of certain provisions of the Plan. They are
not complete and are qualified in their entirety by the full text of the Plan
which is filed as an exhibit to the registration statement filed with the
Securities and Exchange Commission. Copies of the Plan are available for
inspection to all employees by filing a request with the Plan Administrator.
Each employee is urged to carefully read the full text of the Plan.
Eligibility and Participation
All employees of the Employer are eligible to participate in the Plan on
the first day of the calendar month coinciding with or next following the date
such employee completes one year of service (during which the employee works at
least 1,000 hours during a 12-month period) with the Association. As of
September 30, 1995, there were approximately _____ employees eligible to
participate in the Plan and _____ employees had elected to participate in the
Plan.
Contributions and Benefits Under the Plan
401(k) Plan Contributions. Each Participant 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 10% and
have that amount ("Elective Deferral") contributed to the Plan on such
Participant's behalf. Changes in the level of such Elective Deferrals may be
made to be effective as of the first day of a payroll period. Participants may
suspend such Elective Deferrals by completing a form to suspend future Elective
Deferrals. Elective Deferrals are credited to the Participant's "Basic
Contribution Account." Only once in any calendar quarter may an election be made
which would prospectively increase, decrease, suspend or resume Basic
Contributions made on behalf of a Participant. "Compensation" under the Plan
generally means a Participant's wages, salary, fees and other amounts received
for personal services actually rendered in the course of employment with the
Association for the calendar year, prior to any reduction pursuant to a
Compensation Reduction Agreement. Commencing with the initial Plan Year, the
annual compensation of each Participant taken into account under the Plan was
limited to $200,000 (adjusted for increases in the cost of living as permitted
by the Code). For Plan Years commencing after December 31, 1993, such Plan limit
is $150,000, subject to adjustments in accordance with the Code. A Participant
may elect to modify the amount contributed to the Plan under such Participant's
Compensation Reduction Agreement each month by providing notice to the Plan
4
Administrator in accordance with procedures established by the Plan
Administrator from time to time. Elective Deferrals are transferred by the
Employer to the Trustee.
Matching Contributions. At its sole discretion, the Association may
contribute a Matching Contribution in addition to each Participant's Elective
Deferral of 100% of the first 3% of the amount of a Participant's Elective
Deferral and 50% of the next 3% of the Participant's Elective Deferral, up to a
maximum of 4.5% of the Participant's Compensation. Such Matching Contributions
are discretionary and are subject to revision by the Association from time to
time. Matching Contributions shall be subject to the applicable vesting schedule
noted hereinafter.
Special Contributions. In addition to any other contributions, the
Association may, in its discretion, make Special Contributions for a Plan Year,
to the Basic Contribution Account of any employee of the Association who is
eligible to participate in the Plan ("Eligible Employee"). Such Special
Contributions may be limited to the amount necessary to insure that the Plan
complies with the requirements of Code Section 401(k). No Matching Contributions
shall be made with respect to any Special Contributions.
Discretionary Employer Contributions. Subject to the limitation of Code
Section 415, the Association may, in its sole and absolute discretion, make
Discretionary Employer Contributions to the Plan for a Plan Year. Discretionary
Employer Contributions shall be in an amount determined by the Association's
Board of Directors between 0% and 15% of the compensation of Eligible Employees
who are in the employ of the Association on the last day of the Plan Year.
Rollover Contributions. Subject to the terms and conditions set forth in
the Plan, an employee of the Association, whether or not a Participant, may
contribute a Rollover Contribution to the Plan; provided, however, that such
employee shall submit a written certification, in form and substance
satisfactory to the Committee, that the contribution qualifies as a Rollover
Contribution. Rollover Contribution means (i) a contribution to the Plan of
money received by an employee from a qualified plan, or (ii) a contribution to
the Plan of money transferred directly from another qualified plan on behalf of
the employee, which the Code permits to be rolled over into the Plan.
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions and forfeitures
allocated to each Participant's Basic Contribution Account during any Plan Year
may not exceed the lesser of 25% of the Participant's ss. 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 ss. 415 Compensation is a Participant's
Compensation, excluding any employer contribution to the Plan or to any other
plan or deferred compensation or any distributions from a plan or deferred
compensation. In addition, annual additions are limited to the extent necessary
to prevent the limitations for the combined plans of the Association 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 Association's contributions for such Participant in the next
Limitation Year, and each succeeding Limitation Year if necessary; and
5
(ii) If an excess amount still exists, and the Participant is not
covered by the Plan at the end of the Limitation Year, the excess amount
will be held unallocated in a suspense account which will then be applied
to reduce future Association contributions for all remaining Participants
in the next Limitation Year, and each succeeding Limitation Year if
necessary.
Limitation on 401(k) Plan Contributions. The amount of a Participant's
Elective Deferrals (when aggregated with any elective deferrals of the
Participant under a simplified employee pension plan or a tax-deferred annuity),
on an annual basis, may not exceed $7,000 adjusted for increases in the cost of
living as permitted by the Code (the limitation for 1996 is $9,500).
Contributions in excess of this limitation ("excess deferrals") will be included
in the Participant's gross income for federal income tax purposes in the year
they are made. In addition, any such excess deferral will again be subject to
federal income tax when distributed by the Plan to the Participant, unless the
excess deferral (together with any income allocable thereto) is distributed to
the Participant not later than the first April 15th following the close of the
taxable year in which the excess deferral is made. Any income on the excess
deferral that is distributed not later than such date shall be treated, for
federal income tax purposes, as earned and received by the Participant in the
taxable year in which the excess deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees. Section
401(k) of the Code limits the amount of Elective Deferrals that may be made to
the Plan in any Plan Year on behalf of Highly Compensated Employees (defined
below) in relation to the amount of Elective Deferrals made by or on behalf of
all other employees eligible to participate in the Plan. Specifically, the
actual deferral percentage (i.e., the average of the ratios, calculated
separately for each eligible employee in each group, by dividing the amount of
Elective Deferrals 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 (a) 200% of the actual deferral percentage of all other eligible employees,
or (b) the actual deferral percentage of all other eligible employees plus two
percentage points.
In general, 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 an employer, or
stock possessing more than 5% of the total combined voting power of all stock of
an employer), (2) received compensation from an employer in excess of $100,000,
(3) received compensation from an employer in excess of $66,000 and was in the
group consisting of the top 20% of employees when ranked on the basis of
compensation paid during the Plan Year, or (4) was at any time an officer of the
Association and received compensation in excess of $60,000 (a "Highly
Compensated Employee"). The dollar amounts in the foregoing sentence adjust
annually to reflect increases in the cost of living.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Association 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 Plan is a Top-Heavy
Plan (as defined below), then (i) the Association may be required to make
certain minimum contributions to the Plan on
6
behalf of non-key employees (as defined below), and (ii) certain additional
restrictions would apply with respect to the combination of annual additions to
the Plan and projected annual benefits under any defined benefit plan maintained
by the Association.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance of
the Accounts of Participants who are Key Employees 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 Association having annual compensation in excess
of $60,000 who is in an administrative or policy-making capacity, (2) one of the
ten employees having annual compensation in excess of $30,000 and owning,
directly or indirectly, the largest interests in the 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 Plan Assets
All amounts credited to Participants' Accounts under the Plan are held in
the Plan Trust (the "Trust") which is administered by the Trustee appointed by
the Association's Board of Directors. Prior to the Conversion, all Plan assets
are invested in the funds listed below, except for the Employer Stock Fund. Upon
the Conversion, the Accounts of a Participant held in trust under the Plan will
be invested by the Trustee, at the direction of the Participant, in the
following funds, including the Employer Stock Fund:
a. Core Equity Fund
b. Emerging Growth Equity Fund
c. Value Equity Fund
d. Actively Managed Bond Fund
e. Intermediate-Term Bond Fund
f. Short-Term Investment Fund
g. Employer Stock Fund
Participants will have the right to transfer multiples of 10% of the net value
of their Accounts in any of the above listed funds to any one or more of the
above listed funds, not more than once per calendar quarter. A brief summary of
such funds is as follows:
a. Core Equity Fund.
[DESCRIPTION OF FUND]
b. Emerging Growth Equity Fund.
[DESCRIPTION OF FUND]
7
c. Value Equity Fund.
[DESCRIPTION OF FUND]
d. Actively Managed Bond Fund.
[DESCRIPTION OF FUND]
e. Intermediate-Term Bond Fund.
[DESCRIPTION OF FUND]
f. Short-Term Investment Fund.
[DESCRIPTION OF FUND]
g. Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common Stock made
on the effective date of the Conversion. Cash dividends paid on Common Stock
held in the Employer Stock Fund will be credited to a cash dividend subaccount
for each Participant investing in the Employer Stock Fund. The Trustee will, to
the extent practicable, use all amounts held by it in the Employer Stock Fund
(except the amounts credited to cash dividend subaccounts) to purchase shares of
Common Stock of the Company as of the effective date of the Conversion.
Following the Conversion, the Employer Stock Fund may purchase shares of Common
Stock in the open-market or from Accounts directing the sale of Common Stock.
Prior to investment in Common Stock, assets held in the Employer Stock Fund will
be placed in bank deposits or other short-term investments.
When Common Stock is purchased in the Conversion no sales commissions will
be paid. The Association expects to pay any transfer fees and other expenses
incurred in the purchase of Common Stock for the Employer Stock Fund in the
Conversion. Accounts will be adjusted to reflect changes in the value of shares
of Common Stock resulting from stock dividends, stock splits and similar
changes.
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.
In connection with the Conversion, Participants may, prior to the
expiration of the Subscription Offering conducted by the Company in connection
with the Conversion, elect to liquidate all or part of their investments in the
other investment funds under the Plan and transfer the liquidation proceeds to
the Employer Stock Fund. See "Time for Directing Investment." Investment
elections will be evidenced by a properly signed and timely delivered Investment
Form. The Trustee will then subscribe to purchase in the Conversion the maximum
number of shares of Common Stock of the Company that may be purchased by
Participants with the amounts allocated to the Employer Stock Fund as of the end
of the
8
subscription period. In all instances, purchases by Participants shall be
subject to the individual purchase limitations set forth in the Association's
Plan of Conversion. In the event that, in connection with the Conversion, an
insufficient amount of Common Stock is available for purchase by the Plan to
satisfy all requests to direct the investment of account balances within the
Plan to the purchase of Common Stock, then the available shares of Common Stock
shall be allocated among Participants in the Plan. Such shares shall be
allocated, to the extent possible, in a manner which shall permit each
Participant to purchase an interest in the Employer Stock Fund equivalent to a
number of shares which will make the total acquisition for his or her account
equal to the lesser of the number of shares subscribed for or 100 shares. Any
shares remaining which may be acquired by the Plan, after each Participant has
been allocated such minimum interest in the Employer Stock Fund, shall be
allocated among Participants in the Plan in the proportion which the aggregate
account balances of such Participants bears to the total aggregate account
balances of all Participants who desire to purchase shares of Common Stock under
the Employer Stock Fund.
The Association or the Trustee may adopt investment guidelines, which may
limit or restrict a Participant's investment in the Employer Stock Fund. In no
event may any Participant (or a Participant together with any associate or group
of persons acting in concert) purchase in the aggregate shares of Common Stock
through the Employer Stock Fund, or otherwise, in an amount in excess of
[15,000] shares of Common Stock being offered by the Company in the Conversion.
(See the discussion under "The Conversion -- Limitations on Purchases of Shares"
in the accompanying Prospectus for clarification of purchases aggregated for
purposes of this purchase limitation.)
Each Participant who makes an election to direct investment of assets
under the Employer Stock Fund may liquidate such investment at a future date, in
whole, or in part, by filing a notice with the Trustee in accordance with
established procedures to dispose of such Plan investment and reinvest the net
proceeds in an alternative investment under the Plan, by submitting such request
to the Plan Administrator prior to any calendar month. The Trustee shall
complete such sale as soon as administratively feasible. The process of such
sale, net of expenses, shall be allocated to the Participant's Account and
reinvested in accordance with the Plan.
Please refer to the section "Restrictions on Resale" contained herein for
additional information related to the sale of Common Stock held under the
Employer Stock Fund as an investment in a Participant's Account.
Investments in the Employer Stock Fund may involve certain special risks
related to investment in Common Stock of the Company. For a discussion of these
risk factors, see "Risk Factors" in the Prospectus. Please note that investment
in the Employer Stock Fund is not an investment in a savings account or
certificate of deposit, and such investment in the Common Stock through the
Employer Stock Fund is not insured by the FDIC or any other regulatory agency.
Further, no assurances can be given with respect to the price at which such
Common Stock may be sold in the future.
Investment of Contributions
The Trust assets are invested by the Trustee pursuant to Participants'
directions, as described below. The assets of any Account shall consist of the
units credited to such Account. The units shall be valued from time to time by
the Trustee, but not less than monthly. On the basis of such valuations, each
Account shall be adjusted to reflect the effect of income collected and accrued,
realized and
9
unrealized profits and losses, expenses and all other transactions during the
period ending on the applicable valuation date.
Each Participant directs that the contributions made shall be invested to
purchase units for his or her credit in one or more of the above listed funds.
You may elect a new investment mix for future contributions to the Plan only
once per calendar quarter. Participants are entitled to designate what
percentage of employee contributions and employer contributions made on their
behalf will be invested in the various investment funds offered by the
Association. Reallocation and reinvestment of previously invested contributions
may be made annually. To the extent that a Participant fails to make an
investment direction, his or her accounts are invested in the investment fund
which provides for short-term investments.
The Plan provides that a Participant may direct the Trustee to invest all
or a portion of his or her Account in the investment funds set forth above. In
addition, as of ________________ ____, 1996, a Participant may make an
investment election to invest all, or a portion thereof, of his or her Account
in the Employer Stock Fund for the purchase of Common Stock in the Conversion,
or thereafter, as described below. Participants may change their investment
directions or direct a transfer among investment funds; however, changes of
investment direction or directions to transfer must be made by a Participant at
least 10 days prior to the effective date of such direction.
Investment Accounts.
As of the date of this Prospectus Supplement, no 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 Common Stock.
The following table provides performance data with respect to the various
investment funds available to Participants, based on information provided to the
Company by RSI Retirement Trust ("RSI"), the trustee for funds invested in the
various investment funds under the Plan.
The information set forth below with respect to the various investment
funds available to Participants has been reproduced from materials supplied by
RSI. The Association and the Company take no responsibility for the accuracy of
such information. Additional information regarding the available investment
funds may be available from RSI or the Association. Participants should review
any available additional information regarding these available investment funds
before making an investment decision under the Plan.
10
RSI RETIREMENT TRUST INVESTMENT FUNDS Net Investment
Performance For Periods Ended June 30, 1996(1)
Annualized
--------------------------------
Qtr Ended
06/30/96 12 Months 3 Years 5 Years 10 Years
-------- --------- ------- ------- --------
EQUITY FUNDS (%) (%) (%) (%) (%)
Core Equity Fund 6.21 26.13 17.43 15.51 12.67
Value Equity Fund 3.96 26.11 14.34 13.44 10.44
Emerging Growth Equity Fund 12.44 45.81 28.65 25.44 14.57
FIXED-INCOME FUNDS
Short-Term Investment Fund 1.11 4.88 4.08 3.83 5.57
Intermediate-Term Bond Fund 0.59 4.31 4.11 6.85 7.58
Actively Managed Bond Fund 0.36 3.99 4.37 8.25 7.44
____________________
(1) All performance results shown are net of management fees and all related
investment expenses.
Each Participant should note that past performance is not necessarily an
indicator of future results.
Benefits Under the Plan
Vesting. A Participant, at all times, has a fully vested, nonforfeitable
interest in his or her Basic Contribution Account and Rollover Contribution
Account, and the earnings thereon under the Plan. Special Contributions are 100%
nonforfeitable when made and are not distributable to Participants or their
beneficiaries until the earliest of (i) the Participant's death, disability, or
separation of service for other reasons, (ii) the Participant's attainment of
age 59-1/2, or (iii) termination of the Plan.
11
A Participant will become vested and have a nonforfeitable interest in his
or her Matching Contribution Account and any Discretionary Employer Contribution
Account based on the number of years of service and the vesting schedule set
forth below.
Number of Full Years of Service Nonforfeitable % of Account
------------------------------- ---------------------------
Less than 1 year 0%
1 year but less than 2 years 20%
2 years but less than 3 years 40%
3 years but less than 4 years 60%
4 years but less than 5 years 80%
5 or more years 100%
Withdrawals and Distributions From the Plan
Non-Hardship Withdrawals Prior to Termination of Employment. Subject to
the terms and conditions of the Plan, upon 10 days prior written notice to the
Committee each Participant who has attained age 59-1/2 or each employee who has
attained age 59-1/2 and who solely maintains a Rollover Contribution Account,
shall be entitled to withdraw all or any portion of his or her Accounts, but not
more often than once during any Plan Year. Withdrawals may subject the
Participant to significant tax liability on such withdrawn amounts. See "Federal
Income Tax Consequences" herein.
Hardship Withdrawals Prior to Termination of Employment. A Participant may
make a withdrawal from his Basic Contribution Account subject to the hardship
distribution rules under the Plan, but not more than once in any Plan Year.
These requirements insure that Participants have a true financial need before a
withdrawal may be made. Withdrawals may subject the Participant to significant
tax liability on such withdrawn amounts. See "Federal Income Tax Consequences"
herein.
Loans From Participant Account. A Participant may borrow from his or her
Account any amount between $1,000 and $50,000, (reduced by the highest
outstanding loan balance(s) from the Plan during the preceding 12 months).
However, in no event may a Participant borrow more than 50% of the Participant's
total account balance.
Only one loan shall be outstanding to any Participant at any time. The
amount of the loan shall be distributed from the investment accounts in which
the Participant's Accounts are invested in the following order of priority: (i)
Basic Contribution Accounts; (ii) Rollover Contribution Account; (iii) vested
Matching Contribution Account; and (iv) vested Discretionary Employer
Contribution Account. Distributions from each of the foregoing Accounts shall be
made on a pro rata basis among the investment accounts previously selected by
the Participant. An outstanding loan will not affect a Participant's right to
continue making or receiving contributions.
A Participant may prepay his or her entire loan, plus all interest accrued
and unpaid thereon, as of any valuation date. Alternatively and subject to such
other terms and conditions as may be established from time to time by the
Committee, a Participant may prepay a portion of his or her loan on any
valuation date. Such prepayment shall be applied first to all accrued and unpaid
interest on the
12
outstanding balance of the loan. After any partial prepayment of principal,
interest will only be charged on the remaining outstanding balance of the loan.
All loans shall be for a fixed term of not more than 5 years, except that
a loan which shall be used to acquire any dwelling which within a reasonable
time is to be used as the principal residence of the Participant, may, in the
discretion of the Committee, be made for a term of not more than 15 years.
Interest on a loan shall be based on a reasonable rate of interest. Such rate
shall be the "prime rate" as set forth in the first publication of The Wall
Street Journal issued during the month in which the Participant requests the
loan, rounded to the nearest quarter of one percent (1/4 of 1%), increased by
one (1) percentage point. Such rate shall remain in effect until the outstanding
loan is completely repaid.
In the event the Plan is terminated, the entire unpaid principal amount of
the loan hereunder, together with any accrued and unpaid interest thereon, shall
become immediately due and payable.
If a Participant fails to make any payment on any loan when due, the
entire unpaid principal amount of such loan, together with any accrued and
unpaid interest thereon, shall be deemed in default and become due and payable
90 days after the initial date of payment delinquency. If a Participant fails to
make any payment on a loan and is deemed to be in default, the Committee shall
establish a lien against the Participant's Accounts in an amount equal to any
unpaid principal and interest. The lien shall be foreclosed by applying the
value of the Participant's loan (determined as of the next valuation date
immediately following foreclosure) in satisfaction of said unpaid principal and
interest.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment for reasons other than death, shall be made in
the form of a lump sum cash payment or installment payments. At the discretion
of the Plan Administrator, the distribution may include an in kind distribution
of Common Stock of the Company credited to the Participant's Account related to
investment in the Employer Stock Fund. Benefit payments ordinarily shall be made
unless the Participant elects otherwise in accordance with the Plan, in no event
shall the payment of benefits commence later than the 60th day after the close
of the Plan Year in which the latest of the following events occur: (i) the
attainment by the Participant of age 65, (ii) the 10th anniversary of the year
in which the Participant commenced participation in the Plan, or (iii) the
termination of the Participant's employment with the Employer. In no event shall
benefit payments be made later than the April 1 following the calendar year in
which the Participant attains age 70 1/2. However, if the vested portion of the
Participant's Account balances exceeds $3,500, no distribution shall be made
from the Plan prior to the Participant's attaining age 65 unless the Participant
consents to an earlier distribution. Special restrictions apply to the
distribution of Common Stock of the Association to those Participants who are
officers, directors and 10% shareholders of the Company who are subject to the
provisions of Section 16(b) of the 1934 Act.
Distribution Upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have such benefits paid to the surviving spouse
in a lump sum as soon as practicable following the date of his or her death, or
if the payment of his and her benefit had commenced before death, in accordance
with the distribution method in effect at death. With respect to an unmarried
Participant, and in the case of a married Participant with spousal consent to
the designation of another beneficiary, payment of benefits to the beneficiary
of a deceased Participant shall be made in the form of a lump-sum payment in
cash, or, if the payment of his or her benefit had commenced before death, in
accordance with the distribution method in effect at death.
13
Distributions of Common Stock. Participants receiving a distribution from
the Plan where assets under the Plan have been directed by the Participant to be
invested in the Employer Stock Fund may have such assets distributed in kind in
the form of Common Stock.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Administration of the Plan
The Association administers the Plan. The Association has delegated general
plan administrative responsibility to ________________, ________________, and
________________. These individuals serve together as Plan Administrator. The
address of the Plan Administrator is: 161 Church Street, Amsterdam, New York
12010.
The Trustee with respect to the Plan is the named fiduciary of the Plan
for purposes of Section 402 of ERISA. The Trustee of the Plan is
________________. The Trustee receives and holds the contributions to the Plan
in trust and distributes them to Participants and beneficiaries in accordance
with the terms of the Plan and the directions of the Plan Administrator. The
Trustee is responsible for investment of the assets of the Trust. The address of
the Trustee is: ______________________.
Reports to Plan Participants
The Plan Administrator will furnish to each Participant a statement at
least quarterly showing (i) the balance in the Participant's Account as of the
end of that period, (ii) the amount of contributions allocated to the
Participant's Account for that period, and (iii) the adjustments to such
Participant's Account to reflect earnings or losses (if any). Participants
investing in the Employer Stock Fund shall also receive a copy of the Company's
Annual Report to Stockholders and a proxy statement related to the Company's
stockholder meetings.
Plan Administrator
Pursuant to the terms of the Plan, the Plan is administered by a Committee
consisting of one or more persons who are appointed by and who serve at the
pleasure of the Association (the "Committee"). Presently, the Committee consists
of _________________, ________________, and ________________. The address and
telephone number of the Committee is the same as that of the Association. The
Committee is responsible for the administration of the Plan, interpretation of
the provisions of the Plan, prescribing procedure for filing applications for
benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
14
Amendment and Termination
It is the intention of the Association to continue the Plan indefinitely.
Nevertheless, the Association within its sole discretion may terminate the Plan
at any time. The Association reserves the right to make, from time to time, any
amendment or amendments to the Plan that 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 Association may
make any amendment it determines necessary or desirable, with or without
retroactive effect, to comply with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that each
Participant would (if either the Plan or the other plan then terminated) receive
a benefit immediately after the merger, consolidation or transfer that is equal
to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
Federal Income Tax Consequences
The following discussion is only a brief summary of certain federal income
tax aspects of the Plan which are of general application under the Code and is
not intended to be a complete or definitive description of the federal income
tax consequences of participating in or receiving distributions from the Plan.
The summary is necessarily general in nature and does not purport to be
complete. Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. Participants are urged to
consult their tax advisors with respect to any distribution from the Plan and
transactions involving the Plan.
The Plan will be submitted to the IRS for a determination that it is
qualified under Section 401(a) and 401(k) of the Code, and that the related
Trust is exempt from tax under Section 501(a) of the Code. A plan that is
"qualified" under these sections of the Code is afforded special tax treatment
which include the following: (1) The sponsoring employer is allowed an immediate
tax deduction for the amount contributed to the Plan each year; (2) Participants
pay no current income tax on amounts contributed by the sponsoring 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 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 Association expects to
timely adopt any amendments to the Plan that may be necessary to maintain the
qualified status of the Plan under the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code and that the IRS issues a favorable determination as described in
the preceding paragraph, participation in the Plan under existing federal income
tax laws will have the following effects:
(a) Amounts contributed to a Participant's Basic Contribution
Account and the investment earnings on this Account are not includable in
a Participant's federal taxable income until such contributions or
earnings are actually distributed or withdrawn from the Plan. Special tax
treatment may apply to the taxable portion of any distribution that
includes Common Stock or qualifies as a Lump Sum Distribution (as
described below).
15
(b) Income earned on assets held by the Trust will not be taxable
to the Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a Lump Sum Distribution if it
is made: (i) within one taxable year of the Participant or beneficiary; (ii) on
account of the Participant's death, disability or separation from service, or
after the Participant attains age 59-1/2; and (iii) consists of the balance to
the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Association. 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 Association which is included in such
distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation in this Plan or in any other
profit-sharing plan maintained by the Association (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in this Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in this Plan or any other profit-sharing plan maintained by an 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
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59-1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule or under the prior law ten-year averaging
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the participant's pre-1974 participation in the
Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock
(i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost to the 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 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 Treasury Regulations.
Contribution to Another Qualified Plan or to an IRA. A Participant may
defer federal income taxation of all or any portion of the total taxable amount
of a Lump Sum Distribution (including the proceeds from the sale of any Common
Stock included in the Lump Sum Distribution) to the extent that
16
such amount, or a portion thereof, is contributed, within sixty days after the
date of its receipt by the Participant, to another qualified plan or to an
individual retirement account ("IRA"). If less than the total taxable amount of
a Lump Sum Distribution is contributed to another qualified plan or to an IRA
within the applicable 60 day period, the amount not so contributed must be
included in the Participant's income for federal income tax purposes and will
not be eligible for the special averaging rules or for capital gains treatment.
Additionally, a Participant may defer the federal income taxation of any portion
of an amount distributed from the Plan on account of the Participant's death,
disability or separation from service, generally, if the amount is distributed
within one taxable year of the Participant, is equal to at least 50% of the
balance of the Participant's Account and such amount is contributed, within 60
days after the date of its receipt by the Participant, to an IRA. Following the
partial distribution of a Participant's Account, any remaining balance under the
Plan (and the balance to the credit of the Participant under any other profit
sharing plan sponsored by the Association) will not be eligible for the special
averaging rules or for capital gains treatment. The beneficiary of a Participant
who is the Participant's surviving spouse may also defer federal income taxation
of all or any portion of a distribution from the Plan to the extent that such
amount, or a portion thereof, is contributed, within 60 days after the date of
its receipt by the surviving spouse, to an IRA. If all or any portion of the
total taxable amount of a Lump Sum Distribution is contributed by the surviving
spouse of a Participant to an IRA within the applicable 60-day period, any
subsequent distribution from the IRA will not be eligible the special averaging
rules or for capital gains treatment. Any amount received by the Participant's
surviving spouse that is not contributed to another qualified plan or to an IRA
within the applicable 60 day period, and any amount received by a non-spouse
beneficiary will be included in such beneficiary's income for federal tax
purposes in the year in which it is received.
A payment from the Plan that is eligible for "rollover" can be taken in
two ways. You can have all or any portion of your payment either 1) PAID IN A
"DIRECT ROLLOVER" or 2) PAID TO YOU. A rollover is a payment of your Plan
benefits to your IRA or to another employer plan. This choice will affect the
Federal tax you owe.
If you choose a DIRECT ROLLOVER
* Your payment will not be taxed in the current year and no income tax
will be withheld.
* Your payment will be made directly to your IRA or, if you choose, to
another employer plan that accepts your rollover.
* Your payment will be taxed later when you take it out of the IRA or
the employer plan.
If you choose to have your Plan benefit PAID TO YOU
* You will receive only 80% of the payment, because the plan
administrator is required to withhold 20% of the payment and send it
to the IRS as income tax withholding to be credited against your
taxes.
* Your payment will be taxed in the current year unless you roll it
over. You may be able to use special tax rules that could reduce the
tax you owe. However, if you receive the payment before age 59-1/2,
you also may have to pay an additional 10% tax.
17
* You can rollover the payment by paying it to your IRA or to another
employer plan that accepts your rollover within 60 days of receiving
the payment. The amount rolled over will not be taxed until you take
it out of the IRA or employer plan.
* If you want to roll over 100% of the payment to an IRA or an
employer plan, you must find other money to replace the 20% that was
withheld. If you roll over only the 80% that you received, you will
be taxed on the 20% that was withheld and that is not rolled over.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59-1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of the Participant)
on or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his beneficiary, (iv)
made to the Participant after separation from service on account of early
retirement under the Plan after attainment of age 55, (v) made to pay medical
expenses to the extent deductible for federal income tax purposes, (vi) pursuant
to a qualified domestic relations order, or (vii) made to effect the
distribution of excess contributions or excess deferrals.
The foregoing is only a brief summary of certain federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Participant is urged to consult a tax advisor concerning the
federal, state, and local tax consequences of participating in and receiving
distributions from the Plan.
ERISA and Other Qualifications
As noted above, the Plan is subject to certain provisions of ERISA and
will be submitted to the IRS for a determination that it is qualified under
Section 401(a) of the Code.
Restrictions on Resale
Any person receiving shares of Common Stock under the Plan who is an
"affiliate" of the Association or the Company as the term "affiliate" is used in
Rules 144 and 405 under the Securities Act of 1933 ("1933 Act") (e.g.,
directors, officers and substantial shareholders of the Company) may reoffer or
resell such shares only pursuant to a registration statement filed under the
1933 Act or, assuming the availability thereof, pursuant to Rule 144 or some
other exemption of the registration requirements of the 1933 Act. Any person who
may be an "affiliate" of the Association or the Company may wish to consult with
counsel before transferring any Common Stock owned by him. Participants who
serve as directors, officers or 10% stockholders of the Company are advised to
consult with counsel as to the applicability of Section 16 of the 1934 Act which
may restrict the sale of Common Stock where acquired under the Plan, or other
sales of Common Stock. In addition, directors and officers of the Association
may be restricted from transferring shares purchased in the Conversion for a
period of one year in accordance with regulations of the Office of Thrift
Supervision.
18
Persons who are not deemed to be "affiliates" of the Association or the
Company at the time of resale will be free to resell any shares of Common Stock
received by them under the Plan, either publicly or privately, without regard to
the registration and Prospectus delivery requirements of the 1993 Act or
compliance with the restrictions and conditions contained in the exemptive rules
thereunder. An "affiliate" is someone who directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control,
with the Association or the Company. Normally, a director, principal officer or
major shareholder of a corporation may be deemed to be an "affiliate" of that
corporation. A person who may be deemed an "affiliate" at the time of a proposed
resale will be permitted to make public resales of the Common Stock only
pursuant to a "reoffer" prospectus or in accordance with the restrictions and
conditions contained in Rule 144 in any three-month period may not exceed the
greater of one percent of the Common Stock then outstanding or the average
weekly trading volume reported on the National Association of Securities Dealers
Automated Quotation System during the four calendar weeks prior to the sale.
Such sales may be made only though 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 Liability
Section 16 of the 1934 Act imposes reporting and liability requirements on
officers, directors, and persons beneficially owning more than ten percent of
the stock 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 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 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.
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 Common Stock ("Section 16(b) Persons") resulting from the purchase and sale
or sale and purchase of the 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 Plan, provided certain requirements are met.
These requirements generally involve restrictions upon the timing of elections
to acquire or dispose of employer securities for the accounts of Section 16(b)
Persons. Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, under the Plan, Section 16(b) Persons are required to hold shares of
Common Stock distributed for six months after receiving such a distribution.
19
Additional Information
This Prospectus Supplement dated August ____, 1996, is part of the
Prospectus of the Company dated August ____, 1996. This Prospectus Supplement
shall be delivered to Plan Participants in conjunction with the Prospectus and
is not complete unless it is accompanied by the Prospectus dated August ____,
1996.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C., which acted as special
counsel for the Company and the Association in connection with the Conversion.
20
Exhibit A: Investment Form
Appendix-A
----------
AMSTERDAM FEDERAL SAVINGS & LOAN ASSOCIATION
401(K) SAVINGS PLAN IN RSI RETIREMENT TRUST
----------------------------------------------
Participant Voluntary Investment Election Form
----------------------------------------------
________________________ ______________________
Name of Plan Participant Social Security Number
1. Instructions.
In connection with the proposed Conversion of Amsterdam Federal Savings &
Loan Association ("Association") from a mutual savings and loan association to a
stock based organization (the "Conversion"), the Amsterdam Federal Savings &
Loan Association 401(k) Savings Plan in RSI Retirement Trust ("Plan") has been
amended to permit participants to direct all, or a portion, of the assets
attributable to their Participant Account as of ________________ ____, 1996,
into a new investment fund: the Employer Stock Fund. The assets attributable to
a Participant's Account under the Plan transferred at the direction of the
Participant into the Employer Stock Fund will be used to purchase shares of
common stock (the "Common Stock") of AFSALA Bancorp, Inc. ("Company") to be
issued in the initial stock offering of the Company.
To direct a transfer of all or a part of the funds credited to your
accounts to the Employer Stock Fund, you should complete and file this form with
________________, the Plan Administrator, at 161 Church Street, Amsterdam, New
York, who will retain this form and return a copy to you. If you need any
assistance in completing this form, please contact ________________ at (518)
842-5700. If you do not complete and return this form to the Plan Administrator
by ________________ ____, 1996, at 12:00 noon, 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.
As a Participant in the Plan, I hereby voluntarily elect to direct the
Trustee of the Plan to invest the below indicated dollar sum of my Participant
Account balance under the Plan as indicated below.
I hereby voluntarily elect and request to direct investment of the below
indicated dollar amount of my Participant Account funds for the purchase of the
Common Stock to be issued in the Association's Conversion as indicated below
(minimum investment of $__________; rounded down to the nearest [$100.00]
increment; maximum investment permissible is 15,000 shares of the Common Stock
being offered or $150,000.00): $________________. Enter your $ level of
requested purchase through the Plan. Such amount does not exceed the vested
portion of assets held under the Plan for the underlying Participant. Please
note that the actual number of shares of Common Stock purchased on your behalf
under the Plan may be limited or reduced in accordance with the Plan of
Conversion of the Association based upon the total number of shares of Common
Stock subscribed for by other parties.
All other funds in my Participant Account will remain invested as
previously requested. All future contributions under the Plan will continue to
be invested as previously requested.
3. Acknowledgement.
I fully understand that this self-directed portion of my Participant
Account does not share in the overall net earnings, gains, losses, and
appreciation or depreciation in the value of assets held by the Plan's other
investment funds, but only in my Account's allocable portion of such items from
the Employer Stock Fund. I understand that the Plan's Trustee, in complying with
this election and in following my directions for the investment of my Account,
is not responsible or liable in any way for the expenses or losses that may be
incurred by my Account assets invested in Common Stock under the Employer Stock
Fund.
I further understand that this one time election shall become irrevocable
by me upon execution and submission of this Investment Form.
Only properly signed forms delivered to the Plan's Trustee on or before
________________ ____, 1996, at 12:00 noon, will be honored.
The undersigned Participant and Spouse (if applicable) acknowledge and
consent that such sums invested in the Common Stock under the Employer Stock
Fund will be distributed in the future, pursuant to the terms of the Plan, in
the form of Common Stock at the sole discretion of the Plan Administrator, and
that the undersigned hereby waives any claim, right or option which may exist,
if any, to receive any other optional form of benefit payment for such
Participant Account assets being invested in such Common Stock under the
Employer Stock Fund.
The undersigned Participant acknowledges that they have received and read
the Prospectus of the AFSALA Bancorp, Inc., dated August ____, 1996, the
Prospectus Supplement dated August ____, 1996, regarding the Amsterdam Federal
Savings & Loan Association 401(k) Savings Plan in RSI Retirement Trust and this
Investment Form. The undersigned hereby acknowledges that the shares of Common
Stock to be purchased with the funds noted above are not savings accounts or
deposits and are not insured by the Federal Deposit Insurance Corporation, the
Bank Insurance Fund, the Savings Association Insurance Fund or any other
governmental agency. Investment in such Common Stock will expose the undersigned
to the investment risks and potential fluctuations in the market price of such
Common Stock. Such investment in the Common Stock does not offer any guarantees
regarding maintenance of the principal value of such investment or any
projections or guarantees associated with future value or dividend payments with
respect to such Common Stock. The undersigned has read and understands the above
listed documents and hereby voluntarily makes and consents to this investment
election and voluntarily signed his (her) name as of the date listed below. If
you so elect, you may choose not to make any investment decision at this time.
- ------------------------ ------------- ------------------------ -------------
Witness Date Participant Date
- ------------------------ ------------- ------------------------ -------------
Witness Date Participant's Spouse Date
For the Trustee For the Plan Administrator
- --------------- --------------------------
- ------------------------ ------------- ------------------------ -------------
Date Date
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
(a) List of Exhibits:
1.1 Agency Agreement with Capital Resources, Inc.
1.2 Selected Dealers Agreement***
2 Plan of Conversion of Amsterdam Federal Savings and Loan
Association*
3(i) Certificate of Incorporation of AFSALA Bancorp, Inc.*
3(ii)Bylaws of AFSALA Bancorp, Inc.*
4 Specimen Stock Certificate of AFSALA Bancorp, Inc.*
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding
legality of securities registered*
5.2 Opinion of Capital Resources Group, Inc. as to the value of
subscription rights*
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 State Tax Opinion of KPMG Peat Marwick LLP
10.1 Employment Agreement with John M. Lisicki*
10.2 Supplemental Retirement Benefit Agreement with
John M. Lisicki*
16 Letter from T.M. Byxbee Company, CPAs, NY, P.C.*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C.
(contained in its opinions filed as Exhibits 5.1 and 8.1)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of T.M. Byxbee Company, CPAs, NY, P.C.
23.4 Consent of Capital Resources Group, Inc.*
- ----------------------
* Previously filed.
*** To be filed by amendment.
24 Power of Attorney (reference is made to the signature page)
99.1 Stock Order Form
99.2 Appraisal Report of Capital Resources Group, Inc.
99.3 Marketing Materials
(b) Financial Statements Schedules**:
- ----------------------
* Previously filed.
** All schedules are omitted because they are not required or applicable or
the required information is shown in the financial statements or the notes
thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 ("Securities Act");
(ii)To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Amsterdam, New York, as of July 29,
1996.
AFSALA BANCORP, INC.
By: /s/ John M. Lisicki
------------------------------------------------
John M. Lisicki
President, Chief Executive Officer, and Director
(Duly Authorized Representative)
We the undersigned directors and officers of AFSALA Bancorp, Inc. (the
"Company") do hereby severally constitute and appoint John M. Lisicki our true
and lawful attorney and agent, to do any and all things and acts in our names in
the capacities indicated below and to execute all instruments for us and in our
names in the capacities indicated below which said John M. Lisicki may deem
necessary or advisable to enable the Company to comply with the Securities Act
of 1933, as amended, and any rules, regulations, and requirements of the
Securities and Exchange Commission, in connection with the registration
statement on Form S-1 relating to the offering of the Company's common stock,
including specifically but not limited to, power and authority to sign for us or
any of us in our names in the capacities indicated below the registration
statement and any and all amendments (including post-effective amendments)
thereto; and we hereby ratify and confirm all that John M. Lisicki shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated as of July 29, 1996.
/s/ John M. Lisicki /s/ James J. Alescio
- ------------------------------ ------------------------------
John M. Lisicki James J. Alescio
President, Chief Executive Treasurer and Chief Financial Officer
Officer and Director (Principal Financial and Accounting Officer)
(Principal Executive Officer)
/s/ Daniel J. Greco /s/ Ronald S. Tecler
- ------------------------------ ------------------------------
Daniel J. Greco Ronald S. Tecler
Director Director
/s/ John A. Tesiero, Jr. /s/ John A. Kosinski, Jr.
- ------------------------------ ------------------------------
John A. Tesiero, Jr. John A. Kosinski, Jr.
Director Director
/s/ Joseph G. Opalka /s/ Florence B. Opiela
- ------------------------------ ------------------------------
Joseph G. Opalka Florence B. Opiela
Director Director
As filed with the Securities and Exchange Commission on August 1, 1996
Registration No. 333-06399
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
EXHIBITS TO
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
AFSALA BANCORP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 6035 Requested
- ---------------------------- --------------------------- -------------------
(State or Other Jurisdiction (Primary Standard Industry (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
161 Church Street, Amsterdam, New York 12010
(518) 842-5700
------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Mr. John M. Lisicki
President and Chief Executive Officer
AFSALA Bancorp, Inc.
161 Church Street, Amsterdam, New York 12010
(518) 842-5700
- --------------------------------------------------------------------------------
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Please send copies of all communications to:
John J. Spidi, Esq.
Gregory J. Rubis, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
INDEX TO EXHIBITS TO FORM S-1
1.1 Agency Agreement with Capital Resources, Inc.
1.2 Selected Dealers Agreement***
2 Plan of Conversion of Amsterdam Federal Savings and Loan Association*
3(i) Certificate of Incorporation of AFSALA Bancorp, Inc.*
3(ii) Bylaws of AFSALA Bancorp, Inc.*
4 Specimen Stock Certificate of AFSALA Bancorp, Inc.*
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of
securities registered*
5.2 Opinion of Capital Resources Group, Inc. as to the value of
subscription rights*
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 State Tax Opinion of KPMG Peat Marwick LLP
10.1 Employment Agreement with John M. Lisicki*
10.2 Supplemental Retirement Benefit Agreement with John M. Lisicki*
16 Letter from T.M. Byxbee Company, CPAs, NY, P.C.*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C.
(contained in its opinions filed as Exhibits 5.1 and 8.1)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of T.M. Byxbee Company, CPAs, NY, P.C.
23.4 Consent of Capital Resources Group, Inc.*
24 Power of Attorney (reference is made to the signature page)
99.1 Stock Order Form
99.2 Appraisal Report of Capital Resources Group, Inc.
99.3 Marketing Materials
- --------------------------
* Previously filed.
*** To be filed by amendment.