GOUVERNEUR BANCORP, INC.
(Proposed Holding Company for Gouverneur Savings and Loan Association)
1,914,750 SHARES OF COMMON STOCK - $5.00 PER SHARE
THERE IS A GLOSSARY ON PAGE 5 WHICH EXPLAINS SOME OF THE TERMS USED IN
THIS PROSPECTUS.
Gouverneur Bancorp, Inc., a corporation organized under the laws of the
United States (referred to as the "Company"), is offering up to 1,914,750 shares
of its common stock, par value $.01 per share (referred to as the "Common
Stock"), for $5.00 per share as part of the Reorganization of Gouverneur Savings
and Loan Association (referred to as the "Bank"), into the mutual holding
company form of organization. The Common Stock offered represents a minority
interest in the Company. The majority interest in the Company will be owned by
Cambray Mutual Holding Company, a federally-chartered mutual holding company.
The Company may increase the amount of Common Stock offered to 2,201,962 shares.
See footnote 4 to the table below. (continued on next page)
FOR INFORMATION ON HOW TO PURCHASE COMMON STOCK, CALL (315) 287-4293.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE
PURCHASING COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 12.
----------------------------
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.
================================================================================
ESTIMATED UNDERWRITING ESTIMATED NET
PURCHASE FEES AND OTHER REORGANIZATION
PRICE(1) EXPENSES(2) PROCEEDS(3)
- --------------------------------------------------------------------------------
Per Share (at $5.00 $0.37 $4.63
minimum)
- --------------------------------------------------------------------------------
Per Share (at $5.00 $0.32 $4.68
midpoint)
- --------------------------------------------------------------------------------
Per Share (at $5.00 $0.27 $4.73
maximum)
- --------------------------------------------------------------------------------
Per Share (15% above $5.00 $0.24 $4.76
maximum)
- --------------------------------------------------------------------------------
Minimum Total(1) $7,076,250 $525,000 $6,551,250
- --------------------------------------------------------------------------------
Midpoint Total(1) $8,325,000 $525,000 $7,800,000
- --------------------------------------------------------------------------------
Maximum Total(1) $9,573,750 $525,000 $9,048,750
- --------------------------------------------------------------------------------
15% Above Maximum(4) $11,009,810 $525,000 $10,484,810
================================================================================
(1) Based on an appraisal by Keller and Company, Inc. The appraisal is based
upon estimates and projections that may change. The appraisal is not a
recommendation to purchase Common Stock nor any assurance that a purchaser
will be able to sell Common Stock at or above the $5.00 per share initial
purchase price. See "The Reorganization - Stock Pricing and Number of
Shares to be Issued."
(2) Consists of estimated expenses of the Reorganization, including fees
payable to First Albany Corporation. See "Pro Forma Data" for a description
of the assumptions used in these estimates. Actual fees and expenses may
vary from the estimates.
(3) Actual net proceeds may be substantially different from estimated amounts.
Net proceeds include the proceeds from the purchase of Common Stock by the
Company's Employee Stock Ownership Plan, using a loan from the Company. See
"Use of Proceeds" and "Pro Forma Data."
(4) This row shows the effect of selling 15% more shares of Common Stock. The
additional Common Stock may be sold without re-solicitation of subscribers
or any right of cancellation, due to regulatory or market considerations
and general financial and economic conditions. See "Pro Forma Data" and
"The Reorganization Stock - Pricing and Number of Shares to Be Issued."
THE SHARES OF COMMON STOCK OF THE COMPANY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR BY ANY OTHER GOVERNMENT AGENCY.
FIRST ALBANY CORPORATION
The date of this Prospectus is August 12, 1998.
(Continued from previous page)
Gouverneur Savings and Loan Association, referred to in this Prospectus as
the Bank, is reorganizing from the mutual form of organization to the mutual
holding company form of organization. After the Reorganization, the Company will
own the Bank. Cambray Mutual Holding Company, referred to in this Prospectus as
the "Mutual Holding Company," will own a majority of the Common Stock of the
Company. The public will own a minority of the Common Stock of the Company. The
depositors and certain borrowers of the Bank and the Office of Thrift
Supervision must approve the Reorganization for it to occur. The depositors of
the Bank (but not borrowers) must also approve changing the charter of the Bank
from a state to a federal institution. The Reorganization will not go forward
unless the Company sells at least $7,076,250 of Common Stock unless, among other
conditions, subscribers are resolicited and given an opportunity to withdraw or
change their subscriptions.
Keller and Company, Inc., an independent appraiser, has estimated that the
market value of the Common Stock immediately after the Reorganization, including
stock sold to the public and stock issued to Cambray Mutual Holding Company,
will be from $15,725,000 to $21,275,000 which is known as the Valuation Range.
Based on this valuation, the Company expects to issue between 3,145,000 and
4,255,000 shares, including both the shares issued to the Mutual Holding Company
and the shares sold to the public. The Company intends to sell 45% of those
shares, or from 1,415,250 to 1,914,750 shares, to depositors and the public at a
purchase price of $5.00 per share.
The following persons have priority subscription rights to purchase Common
Stock:
FIRST PRIORITY - Depositors with balances of at least $50 on March 31, 1997.
SECOND PRIORITY - Tax-qualified employee benefit plans of the Bank or
the Company.
THIRD PRIORITY - Depositors with balances of at least $50 on June 30, 1998.
FOURTH PRIORITY - Depositors with balances of at least $50
on July 31, 1998.
The offer of Common Stock by the Company to these four priority groups is
called the "Subscription Offering." SUBSCRIPTION RIGHTS MAY NOT BE TRANSFERRED.
PERSONS VIOLATING THIS PROHIBITION MAY LOSE THEIR RIGHT TO PURCHASE COMMON STOCK
IN THE SUBSCRIPTION OFFERING AND MAY SUFFER OTHER PENALTIES. The Company may
offer unsold shares of Common Stock in a community offering by itself directly
or through a syndicate of broker-dealers arranged by First Albany Corporation or
in an underwritten public offering through First Albany Corporation. See "The
Reorganization - Community Offering." and "The Reorganization - Public
Offering."
The Company's Employee Stock Ownership Plan, known as the "ESOP," will
subscribe for 8% of the Common Stock sold in the Reorganization, excluding the
stock issued to the Mutual Holding Company. The Company will make a loan to the
ESOP so the ESOP can pay for its stock subscription. The loan is expected to be
repaid over a period of up to ten years.
Except for the ESOP, no person, individually or together with associates
or other persons acting together, may purchase more than $150,000 of the Common
Stock in the Reorganization. This limit may be increased in the sole discretion
of the Bank and the Company. The minimum purchase is 25 shares. See "The
Reorganization - Additional Purchase Restrictions."
First Albany Corporation will consult with and advise the Company and the
Bank regarding the sale of Common Stock and has agreed to use its best efforts
to assist the Company in soliciting subscriptions. However, First Albany is not
obligated to take or purchase any Common Stock. The Company and the Bank have
agreed to indemnify First Albany against certain liabilities arising under the
Securities Act of 1933. See "The Reorganization - Marketing Arrangements."
The Subscription Offering will terminate at 12:00 noon, New York time, on
September 23, 1998 unless the Bank and the Company extend it, with the approval
of the Office of Thrift Supervision, if necessary. If you want to purchase
shares in the Subscription Offering, the Company must receive your executed
order form with
2
payment in full at $5.00 per share (or appropriate instructions authorizing
withdrawal from a deposit account) by that date. If the Subscription Offering is
extended beyond, or the Reorganization is not completed by, November 7, 1998,
subscribers will be resolicited and will have the option to cancel their
subscriptions and receive a refund of amounts paid, with interest. See "The
Reorganization Subscription Offering" and "-Purchasing Common Stock."
The Company has received conditional approval from The Nasdaq Stock
Market, Inc. to have the Common Stock quoted on the Nasdaq SmallCap Market
under the symbol GOUV upon completion of the Reorganization.
3
MAP
Showing market area and location of main office
4
TABLE OF CONTENTS
Page
Glossary............................................................ 5
Summary............................................................. 7
Risk Factors........................................................ 12
Forward-Looking Statements.......................................... 18
Selected Financial Information...................................... 19
Summary of Recent Developments ..................................... 21
Gouverneur Bancorp, Inc............................................. 24
Gouverneur Savings and Loan Association............................. 24
Regulatory Capital Compliance....................................... 26
Use of Proceeds..................................................... 27
Dividend Policy..................................................... 28
Market for the Common Stock......................................... 28
Pro Forma Data...................................................... 29
Capitalization...................................................... 33
Gouverneur Savings and Loan Association Statements of Income........ 34
Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 35
Business of the Company............................................. 50
Business of the Bank................................................ 50
Management of the Company........................................... 66
Management of the Bank.............................................. 68
The Reorganization.................................................. 73
Regulation.......................................................... 85
Taxation............................................................ 93
Restrictions on Acquisition of the Company and the Bank............. 94
Description of Capital Stock of the Company......................... 96
Transfer Agent and Registrar........................................ 98
Experts............................................................. 98
Legal and Tax Opinion............................................... 98
Additional Information.............................................. 98
Index to Financial Statements....................................... F-1
5
GLOSSARY
This Glossary explains some of the important capitalized terms used in this
Prospectus. At the end of the Glossary is a section entitled "Navigating Around
This Prospectus" which provides some helpful hints in reading this Prospectus.
"BANK" means Gouverneur Savings and Loan Association.
"COMMUNITY OFFERING" means the offer of Common Stock to the general public of
shares not subscribed for in the Subscription Offering, with preference given to
natural persons residing in St. Lawrence, Jefferson and Lewis Counties in New
York.
"COMMON STOCK" means the common stock, par value of $.01 per share, of
Gouverneur Bancorp, Inc.
"COMPANY" means Gouverneur Bancorp, Inc., the holding company for Gouverneur
Savings and Loan Association, and the issuer of the Common Stock being offered
by this Prospectus.
"ELIGIBLE ACCOUNT HOLDERs" means persons with deposit accounts of at least $50
at March 31, 1997. Eligible Account Holders have the first priority to subscribe
for Common Stock.
"ESOP" means the Employee Stock Ownership Plan of the Company.
"FDIC" means the Federal Deposit Insurance Corporation.
"FEDERAL RESERVE" means the Board of Governors of the Federal Reserve System.
"FHLBNY" means the Federal Home Loan Bank of New York.
"MUTUAL HOLDING COMPANY" means Cambray Mutual Holding Company, a federal mutual
holding company, which will own a majority of the issued and outstanding voting
stock of the Company.
"NASD" means the National Association of Securities Dealers, Inc.
"OTHER DEPOSITORS" means persons who are not Eligible Account Holders or
Supplemental Eligible Account Holders and who had deposit accounts of at least
$50 on July 31, 1998. Supplemental Eligible Account Holders have the fourth
priority to subscribe for Common Stock.
"OTS" means the Office of Thrift Supervision of the United States Treasury
Department.
"PLAN OF REORGANIZATION" means the Plan of Mutual Holding Company Reorganization
and Stock Issuance adopted by the Board of Directors of the Bank which allows
for the Reorganization and sets forth the procedures for the Reorganization to
be accomplished.
"PUBLIC STOCKHOLDERS" means all the stockholders of the Company after the
Reorganization except for the Mutual Holding Company.
"RESTRICTED STOCK PLAN" OR "RSP" means the plan expected to be submitted to the
Company's stockholders for approval no earlier than six months after the
Reorganization. The RSP is expected to allow for grants of stock to directors,
officers and employees in an aggregate amount equal to 4% of the Common Stock
sold in the Reorganization, excluding Common Stock issued to the Mutual Holding
Company (representing from approximately $283,500 to $440,000 of stock based
upon the initial offering price). Grants of stock under the RSP will be without
cost to the recipient.
6
"REORGANIZATION" means the reorganization of the Bank so that the Bank becomes a
stock form federal savings association, the Bank issues all of its common stock
to the Company, the Company sells 45% of its common stock to the Public
Stockholders and issues the remaining 55% of its common stock to the Mutual
Holding Company.
"SEC" means the Securities and Exchange Commission.
"STOCK OPTION PLAN" means the plan expected to be submitted to the Company's
stockholders for approval no earlier than six months after the Reorganization.
The Company expects that the plan will allow for the grant of options to
purchase stock in an aggregate amount equal to 10% of the Common Stock issued in
the Reorganization.
"SUBSCRIPTION EXPIRATION DATE" means 12:00 noon, New York Time, on
September 23, 1998.
"SUBSCRIPTION OFFERING" means the offer and sale of Common Stock to certain
depositors of the Bank and the ESOP.
"SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS" means persons who are not Eligible
Account Holders and who had deposit accounts of at least $50 on June 30, 1998.
Supplemental Eligible Account Holders have the third priority to subscribe for
Common Stock.
"VALUATION RANGE" means the estimate by Keller and Company Inc. of what the
total market value of the Common Stock of the Company will be on the day the
Reorganization is completed, including both shares sold to the Public
Stockholders and shares issued to the Mutual Holding Company. The Valuation
Range is from $15,725,000 (known as the minimum) to $21,275,000 (known as the
maximum), with a midpoint of $18,500,000.
NAVIGATING AROUND THIS PROSPECTUS
This Prospectus is divided into sections. Each section has a title, which
appears centered in the middle of a line in bold all capital letters at the
beginning of the section. The titles of the sections, and the page where each
begins, are shown in the table of contents appearing just before this Glossary.
Sections are divided with minor headings that appear before groups of related
paragraphs, printed in bold letters at the left margin. Within some of the minor
headings, there are sub-headings. The sub-headings are typed in italics and
appear at the beginning of a paragraph
Often in this Prospectus there are cross-references, which means that in
one discussion there is a reference to another related discussion elsewhere in
the Prospectus. These are accomplished by using the word "See" followed by the
title of the section where the related information is found. If the information
is included in only a minor heading within a section, or perhaps only within a
sub-heading, then the names of the minor headings and sub-headings are also
given. However, instead of always repeating the names of the major headings, if
there is a cross reference to two minor headings in the same section, then the
name of the section is mentioned only once. For example, a reference which
reads: See "Management of the Bank Benefits - Employee Stock Ownership Plan" and
"-Restricted Stock Plan" means that there are two sub-headings with related
information, one called "Employee Stock Ownership Plan" and one called
"Restricted Stock Plan." They both appear in the major heading "Management of
the Bank" and they both appear in the minor heading "Benefits."
Sometimes, a cross reference does not include the name of the section, but
instead starts with a dash. That means that the related information is included
in another minor heading within the same section. For example, in the section
"Business of the Bank - General" there might be a reference like this: See
"-Lending Activities." That means that the related information is included in
the "Business of the Bank" section under the minor heading "Lending Activities."
7
SUMMARY
The following questions and answers summarize some of the important
information in this Prospectus. Please read the questions and answers carefully,
and also read the rest of the Prospectus before you decide whether to purchase
any Common Stock.
WHAT IS GOUVERNEUR BANCORP, INC.?
Gouverneur Bancorp, Inc., known in this Prospectus as the Company, is a
new corporation formed under United States law and the regulations of the OTS.
After the Reorganization, the Company will own all the stock of the Bank.
Cambray Mutual Holding Company will own 55% of the Common Stock of the Company
and 45% of the Common Stock, which is the stock that is being offered by this
Prospectus, will be sold to and owned by the public. This Prospectus offers
Common Stock of the Company. See "Gouverneur Bancorp, Inc."
WHAT IS GOUVERNEUR SAVINGS AND LOAN ASSOCIATION?
Gouverneur Savings and Loan Association is a New York chartered mutual
savings and loan association, which means that it has no stockholders. It has
one banking office, located in Gouverneur, St. Lawrence County in north central
New York State. On March 31, 1998, the Bank had total assets of $55.1 million,
loans of $34.3 million, deposits of $42.9 million and net worth of $11.1
million. The Bank uses a fiscal year which ends on September 30 of each year.
For the six months ended March 31, 1998, the Bank had net income of $306,000 and
had net income of $537,000 for fiscal 1997, being the twelve months ended
September 30, 1997.
The Bank was first chartered in 1892. It obtains deposits, mainly from
local depositors, and lends money, mainly residential mortgage loans in St.
Lawrence County and the adjoining counties of Jefferson and Lewis in New York.
It also buys securities, such as Treasury bills issued by the United States and
securities which are backed by groups of mortgages. The Bank's income primarily
comes from the difference between the rate of interest it pays on its deposits
and the rate of interest earned on its loans and other investments. In addition
to the cost of its deposits, the Bank also has expenses for salaries and
employee benefits, maintaining its banking offices and equipment, computer data
processing, insurance and other operating costs.
The Bank's business strategy is to continue to seek residential mortgage
loan opportunities to support its core business activities while aggressively
seeking expansion opportunities through offering additional loan products to its
customer base. The Bank and the Company also expect to seek expansion
opportunities through acquisitions of financial institutions or purchases of
branches after the Reorganization. The Bank has begun seeking commercial lending
opportunities to expand its loan offerings, and is increasing its level of auto
loans. See "Gouverneur Savings and Loan Association" and "Business of the Bank."
WHAT IS CAMBRAY MUTUAL HOLDING COMPANY?
Cambray Mutual Holding Company, known in this Prospectus as the Mutual
Holding Company, is a holding company that will be chartered under federal law
as part of the Reorganization. As a mutual holding company, it will have no
owners. The depositors of the Bank will be the members of the Mutual Holding
Company. They will have the right to elect its directors. Under certain
circumstances, if the Mutual Holding Company is liquidated, depositors of the
Bank will be entitled to share in any of its assets that remain after all
creditors are paid. See "The Reorganization - General."
WHAT IS THE REORGANIZATION?
The Reorganization is a change in the Bank so the Bank can issue its
capital stock to the Company, and the Company can sell 45% of its Common Stock
to the public. After the Reorganization, the stockholders of the Company will
indirectly own the Bank. See "The Reorganization - General."
8
WHY IS THE BANK REORGANIZING?
The Bank is reorganizing because, among other reasons, the Reorganization
will:
o Allow the Bank's customers to obtain an ownership interest in the
Bank, fostering customer loyalty and encouraging them to promote the
Bank to others in the community.
o Increase the Bank's capital, which will support the Bank's expansion
plans.
o Increase flexibility to allow for possible expansion by acquisitions
while still allowing business combinations with other mutual savings
institutions as well as stock form institutions.
o Allow acquired institutions to continue to operate on a
semi-autonomous basis as subsidiaries of the Company if necessary or
appropriate in order to realize the benefits of an acquisition.
o Permit the Bank and the Company to offer stock incentives to
directors, officers and employees in order to attract and retain
high quality personnel.
See "The Reorganization - Reasons for the Reorganization."
WHAT IS THE DIFFERENCE BETWEEN THE REORGANIZATION AND A FULL CONVERSION OF THE
BANK WITHOUT A MUTUAL HOLDING COMPANY?
When a savings institution converts from the mutual to stock form of
organization using the mutual holding company structure, only a minority
interest in its stock, or the stock of its stock form holding company, is sold
to the public at the time of the Reorganization and the majority stock interest
is issued to a mutual holding company. By doing so, the institution raises less
than half of what would be raised in a traditional "full" mutual to stock
conversion in which all the stock to be issued is sold to the public and there
is no mutual holding company. Therefore, given the strong capital position of
the Bank before the Reorganization, the Bank will not be as overcapitalized as
if the Bank had converted in a full conversion. The shares that are issued to
the mutual holding company may be sold or reissued in the future to the Bank's
depositors if the mutual holding company converts from the mutual to the stock
form of organization. See "Regulation - Holding Company Regulation -
Conversion of the Mutual Holding Company to the Stock Form." In addition,
because the Mutual Holding Company controls a majority of the Company's Common
Stock, the Bank believes that the Reorganization will allow it to achieve the
benefits of a stock company without a loss of control that often follows a full
conversion from mutual to stock form. Sales of locally based, independent
savings institutions to larger, regional financial institutions can result in
closed branches, fewer choices for consumers, employee layoffs and the loss of
community support for and involvement by financial institutions. See "The
Reorganization-Reasons for the Reorganization."
HOW DO THE INTERESTS OF THE MUTUAL HOLDING COMPANY DIFFER FROM THOSE OF OTHER
STOCKHOLDERS OF THE COMPANY?
Because the Mutual Holding Company is a mutual corporation, its actions
will not necessarily always be in the interests of the Company's Public
Stockholders. In making business decisions, the Mutual Holding Company's Board
of Directors will consider a variety of constituencies, including the depositors
of the Bank, the employees of the Bank, and the communities in which the Bank
operates. As the majority stockholder of the Company, the Mutual Holding Company
is also interested in the continued success and profitability of the Bank and
the Company. Thus, the Mutual Holding Company will act in a manner which
furthers the general interests of all of its constituencies, including, but not
limited to, the interests of the Public Stockholders of the Company. The Mutual
Holding Company believes that the interests of the Public Stockholders of the
Company, and those of the Mutual Holding Company's other constituencies, are in
many circumstances the same, such as the increased profitability of the Company
and the Bank and continued service to the communities in which the Bank
operates.
9
HOW MUCH STOCK WILL BE SOLD?
Based on the independent appraisal of Keller and Company, Inc., the market
value of the Common Stock of the Company that will be outstanding when the
Reorganization is completed is expected to be from $15,725,000 to $21,275,000.
The Company is offering 45% of that amount of Common Stock at $5.00 per share,
or from 1,415,250 to 1,914,750 shares. The actual amount of Common Stock sold
will depend on a number of things, including the number of orders received and
the appraiser's updated estimate of the market value of the Common Stock upon
completion of the Reorganization. The Company may increase the amount of Common
Stock sold by 15%, to 2,201,962 shares, based upon the number of orders
received, the updated appraisal, and economic conditions when the Reorganization
is being completed.
WHY IS THE PURCHASE PRICE $5.00 PER SHARE?
The purchase price has been set at $5.00 per share in order to satisfy one
of the requirements to have the Common Stock listed on the Nasdaq SmallCap
Market. One requirement is that there be at least 1,000,000 shares outstanding,
not including the shares owned by the Mutual Holding Company, the ESOP and
directors and officers, known as the "public float." At $5.00 per share, the
public float will be at least 1,000,000 shares outstanding at the minimum of the
Valuation Range and at any higher level of shares sold.
WHO CAN BUY STOCK OF THE COMPANY IN THE REORGANIZATION?
Certain depositors of the Bank and the Company's employee stock ownership
plan will have priority subscription rights. If they do not purchase all of the
Common Stock to be sold, then other people may also be offered the opportunity
to purchase Common Stock. Persons who had deposits of at least $50 on March 31,
1997 will have the first priority to buy stock. The second priority goes to the
ESOP, the third priority to persons who had deposits of at least $50 on June 30,
1998 and the fourth priority to persons who had deposits of at least $50 on July
31, 1998. DEPOSITORS WHO HAVE THE RIGHT TO PURCHASE STOCK MAY NOT SELL OR
TRANSFER THAT RIGHT TO ANYONE ELSE. THE SALE OR TRANSFER OF SUBSCRIPTION RIGHTS
IS ILLEGAL AND MAY RESULT IN SEVERE PENALTIES.
CAN I BUY COMMON STOCK FOR SOMEONE ELSE WITH MY SUBSCRIPTION RIGHTS?
No. If you exercise your subscriptions rights, you may do so only for
yourself, and not for anyone else. It is illegal to transfer your subscription
rights or the benefits of your subscription rights to anyone else.
IF I HAVE SUBSCRIPTION RIGHTS, HOW DO I ORDER STOCK AND HOW DO I PAY FOR IT?
To order Common Stock, you must submit an order form to the Bank no later
than September 23, 1998 with payment in full. You may pay for Common Stock by
check, money order or, if delivered directly to the Bank, cash. You may also pay
for your stock by including, in your order form, an authorization to withdraw
the purchase price from an account you have at the Bank. The account does not
have to be the same account that gives you a right to subscribe. If you pay by
check, cash or money order, your payment will earn interest at 3.50% until the
Reorganization is completed or your money is refunded. If you authorize a
withdrawal from a deposit at the Bank, your deposit will continue to earn
interest at the regular rate for your deposit until it is used to purchase stock
when the Reorganization is completed. However, you may not use that part of your
deposit for any other purpose from the time you submit your order form until the
Reorganization is completed or November 7, 1998.
WHAT IS THE MAXIMUM AND MINIMUM AMOUNT OF COMMON STOCK THAT I CAN PURCHASE?
No person, related persons or persons acting together, may order or
purchase more than $150,000 of Common Stock (30,000 shares at the $5.00 per
share initial offering price). If more than one person is named as a depositor
on any account, such as a joint account, all named depositors will be considered
to be acting together for the purpose of the limit so that they may not
purchase, in total including their individual orders and orders by the group,
more than $150,000 of Common Stock. The minimum purchase is 25 shares. See "The
Reorganization-Additional Purchase Restrictions."
WHAT HAPPENS IF THERE IS NOT ENOUGH COMMON STOCK TO FILL ALL ORDERS?
If too much Common Stock is ordered, shares will be allocated based on the
priorities described above. If there is not enough Common Stock available for
all orders in any priority category, the shares available will be divided among
the orders. First, each person will get, to the extent possible, 100 shares or
the number of shares ordered, whichever is less. The remaining shares will then
be divided based on the dollar amount of the deposits of
10
the people with orders not yet filled in that category. However, no one in any
priority category will get any Common Stock unless first all proper orders for
Common Stock in the higher priorities are filled completely. See "The
Reorganization - Subscription Offering."
IF I ORDER STOCK, CAN I CHANGE MY ORDER?
If you want to order more stock, you must submit an additional order. You
will not be able to reduce or cancel your order unless:
(a) the amount of Common Stock to be sold to Public Stockholders (all the
stockholders of the Company including the ESOP, but excluding the Mutual
Holding Company) in the Reorganization is more than $7,076,250 or less
than $11,009,810;
(b) the Reorganization is not completed by November 7, 1998; or
(c) a government authority requires that the Company give you the chance
to change your order.
WHAT ARE SOME OF THE RISKS I SHOULD CONSIDER WHEN I DECIDE WHETHER TO PURCHASE
STOCK?
There is a section in this Prospectus titled "Risk Factors" beginning on
page 12 which describes some of the risks that you should consider before
deciding whether to purchase Common Stock. Please read that section carefully.
Remember that Common Stock is not a deposit account. It is not insured by the
FDIC or any other government agency and may not pay dividends. The market value
of the Common Stock may go up or down after the Reorganization, and you could
lose your investment. The appraisal by Keller and Company, Inc., is no assurance
that the Common Stock will be worth the estimated amount and you should not
treat the appraisal as a recommendation that you purchase any Common Stock.
There is also no assurance that an active and liquid market for purchasing and
selling Common Stock will develop after the Reorganization.
WILL THE COMPANY PAY DIVIDENDS ON THE COMMON STOCK TO STOCKHOLDERS?
The Board of Directors of the Company, which initially will be identical
to the Board of Directors of the Bank and the Mutual Holding Company, will
decide whether, when and how much to pay in dividends. There is no assurance
that dividends will be paid and if they are paid, when they will start and how
much they will be. The Board of Directors may not pay dividends on the Company's
stock immediately after the Reorganization. Even if the Company pays a dividend,
the Mutual Holding Company may decide not to take the dividend on the stock that
it owns because it does not need the funds. If the Mutual Holding Company waives
any of its dividends, then it will have certain priority rights as to the amount
waived, as discussed below. See "Dividend Policy."
HOW WILL THE PROCEEDS FROM THE REORGANIZATION BE USED?
The Company will use half of the proceeds, after paying expenses, to buy
all the stock that the Bank will issue. The Company will use a part of the
remaining proceeds to make a loan to the ESOP so the ESOP can buy 8% of the
stock sold in the Reorganization, excluding stock issued to the Mutual Holding
Company. The Bank and the Company expect that they will initially use the rest
of the proceeds (representing the amount contributed to the Bank by the Company
plus the amount retained by the Company after funding the loan to the ESOP) to
make short-term investments in securities, and the Bank expects that it will
gradually deploy its share of the proceeds into loans. The Company may use the
proceeds to repurchase its stock in the future. The proceeds will also be
available for use to finance the commencement or acquisition of new businesses
or mergers with other financial institutions. See "Use of Proceeds."
WHAT BENEFITS WILL THE BANK'S DIRECTORS, OFFICERS AND EMPLOYEES GET FROM THE
REORGANIZATION?
The Company will form an employee stock ownership plan, or ESOP, as part
of the Reorganization and the ESOP is expected to purchase up to 8% of the stock
sold in the Reorganization, excluding stock issued to the Mutual Holding
Company. The ESOP will purchase its stock using a loan from the Company. All
officers and other
11
employees of the Bank and the Company will be eligible to be participants in the
ESOP, after satisfying certain age and length of service requirements, but
directors who are not employees will not be eligible to participate. As the ESOP
gradually repays the loan, the stock that the ESOP owns will be gradually
divided among accounts for officers and other employees. The division of shares
is generally based upon salary. See "Management of the Bank - Benefits -
Employee Stock Ownership Plan."
In addition, the Company expects to adopt a Stock Option Plan and a
Restricted Stock Plan after the Reorganization is completed. The Company intends
to implement these plans within one year after the Reorganization. Therefore,
under OTS regulations, the Company's stockholders must first approve the plans,
without counting the vote of the Mutual Holding Company, at least six months
after the Reorganization. The Company expects that the Stock Option Plan will
permit the award of options for up to 10% of the stock sold to the public in the
Reorganization (equivalent to options, in total, to purchase from approximately
$708,000 to $1,101,000 of Common Stock based upon the initial offering price)
and the Restricted Stock Plan will permit the award of restricted stock equal to
4% of the stock sold to the public in the Reorganization (equivalent to total
awards, without cost to the recipients, of from $283,500 to $440,000 of Common
Stock based upon the initial offering price). Directors, officers and other
employees will be eligible to participate in these plans. Directors who are not
employees, as a group, may not receive awards of more than 30% of the shares
covered by each plan. No individual director who is not an employee may receive
an award of more than 5% of the shares covered by each plan. No officer or
employee may receive an award of more than 25% of the stock covered by either
plan. See "Management of the Bank - Benefits - Stock Option Plan" and
"-Restricted Stock Plan."
WHAT LIMITS ARE THERE ON THE ABILITY OF SOMEONE TO TAKE CONTROL OF THE COMPANY
OR THE BANK?
The Mutual Holding Company will own a majority of the voting stock of the
Company unless the Mutual Holding Company undergoes a full conversion to the
stock form. The Mutual Holding Company will control the election of directors of
the Company. Therefore, no person or entity can take over the Company or the
Bank unless the Mutual Holding Company's board of directors agrees. The
depositors of the Bank will elect the directors of the Mutual Holding Company,
so the stockholders of the Company will have no say in the election of directors
of the Mutual Holding Company unless they are also depositors of the Bank.
Furthermore, since the Mutual Holding Company does not itself have stockholders,
its board of directors is not subject to the same motivation as the board of
directors of a company with stockholders which may agree to a takeover to
maximize short term shareholder economic return. The mutual holding company
structure, being relatively new, has not been the subject of substantial
analysis and review by the courts. Although the scope of the duty of the Mutual
Holding Company to the Public Stockholders of the Company is far from certain,
the Mutual Holding Company does not owe a duty to the other stockholders of the
Company to maximize the value of their stock by agreeing to a takeover offer,
regardless of how advantageous it might be to the other stockholders.
In addition, OTS regulations and federal law put limits on the ability of
any person or company to seek to acquire control of the Company or the Bank.
First, under OTS regulations, no takeover is permitted during the first three
years after the Reorganization. In addition, no person may acquire 10% or more
of the stock of the Bank or the Company without first getting approval from the
OTS.
Furthermore, the voting of stock owned by the ESOP, and the other stock
compensation plans described above, could make it more difficult, and more
costly, for any person to acquire control of the Company.
12
RISK FACTORS
PLEASE REVIEW THE FOLLOWING RISK FACTORS BEFORE DECIDING WHETHER TO PURCHASE ANY
COMMON STOCK OF THE COMPANY.
INTEREST RATE RISK
Virtually all of the Bank's loans are fixed-rate loans, and most of those
loans are long-term residential mortgage loans. At March 31, 1998, 98.76% of the
Bank's loans had fixed interest rates and 82.50% of the Bank's loans were
long-term residential mortgage loans with fixed interest rates. Therefore, the
interest rates earned by the Bank on its loans generally adjust to market
conditions slowly in response to changes in interest rates. In contrast to the
slow anticipated adjustment of the interest rate on its loans, the rate of
interest paid by the Bank on its deposits can be expected to change more quickly
in response to changes in market interest rates. For example, the interest rate
paid on certificates of deposit, which totaled $22.6 million, or 53% of total
deposits, at March 31, 1998, can be expected to adjust to market interest rates
when the deposit matures. Of the Bank's certificates of deposit, $15.4 million,
or 68.2%, will mature by March 31, 1999, and more than 99% will mature by March
31, 2001. Accordingly, if general market interest rates increase, the net income
of the Bank can be expected to decline because the Bank's cost of funds can be
expected to increase more rapidly than the average yield on its loans.
Management of the Bank seeks to reduce the risk of interest rate
fluctuations through securities investments which have either adjustable rates
or shorter terms to maturity than the Bank's loans. Furthermore, management has
sought to increase the level of commercial loans and auto loans, which generally
have shorter terms than residential mortgage loans. The Bank has also offered
adjustable rate loans since 1995. However, in current periods of low interest
rates, customer demand for adjustable rate loans has been limited. When interest
rates are low, customers tend to prefer fixed-rate mortgage loans to lock in the
lower rates and when interest rates are high, customers tend to prefer
adjustable rate loans that they expect to adjust downward as market interest
rates decline. Therefore, the Bank's efforts to reduce the risk of interest rate
fluctuations are limited by the difficulty of originating adjustable rate loans.
Furthermore, during periods of low or declining interest rates, loan prepayment
rates tend to increase as customers seek to refinance existing higher rate
loans. This increases the volume of funds that the Bank must reinvest at a time
when investment alternatives have lower yields. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Market
Interest Rate Risk Analysis."
GEOGRAPHIC CONCENTRATION OF LOANS
Most of the Bank's loans are mortgage loans on property located in St.
Lawrence, Jefferson and Lewis Counties in New York. At March 31, 1998, 94% of
the Bank's loans were either mortgage loans secured, in whole or in part, by
property in St. Lawrence, Jefferson and Lewis counties in New York or were
non-mortgage loans made to residents or businesses in those three counties. The
area has not, in recent years, benefited from the economic recovery and growth
which much of the rest of the country has experienced. An economic slow-down or
decline in the local economy could have an adverse effect on the Bank. In
addition, the local economy is affected by Fort Drum, a large military base
located in the Bank's market area. A change in military policy or troop
deployment could have detrimental effects on the local economy. These factors
could hurt the ability of the Bank's borrowers to repay their loans. If housing
values decline at the same time, reductions in the value of collateral could
make it more difficult to recover the full amount due on loans in default.
Furthermore, economic difficulties can also increase deposit outflows as
customers must use savings to pay bills. This can increase the Bank's cost of
funds because of the need to replace the deposit outflow. All of these factors
can combine to reduce significantly the Bank's net income.
ADVERSE LOCAL CONDITIONS WHICH LIMIT OPPORTUNITIES FOR GROWTH IN THE BANK'S
MARKET AREA
In recent years, the Bank's loan and deposit growth rates have been
relatively low, which management believes is a result of slow growth rates in
the Bank's market area and competition in the Bank's local market place.
Population growth in the Bank's market area, if at all, is limited and there has
been no significant activity which would result in improved population trends
since the expansion of the Fort Drum military facility more than five years ago.
Recent economic growth has been limited and reported information reflects lower
than average income and housing value levels. As a result, opportunities for
future growth of the Bank's residential mortgage loan portfolio may be
inadequate to support the Bank's asset investment requirements. Furthermore,
changes in interest rate conditions could cause increases in the rate at which
the Bank's existing loans are refinanced, which could compel the Bank to either
decrease the rates it charges on its loans to maintain its level of loans or to
seek other investments. The Bank has begun to address this issue by expanding
its loan product offerings to include additional loan types, such as automobile
loans, commercial loans and commercial mortgage loans. However, these loans tend
to present greater risks than the Bank's traditional residential mortgage
portfolio. Furthermore, the leveraging of the new capital obtained in the
Reorganization will require either deposits from within the Bank's market area
or external funding sources, such as borrowings. Although locally-based deposits
tend to have lower costs and allow the development of desirable cross-product
customer relationships, local economic conditions indicate that increases in
local deposits may be insufficient to satisfy the Bank's leveraging needs. This
could require the Bank to either increase the rates paid on local deposits or
seek other funding sources, either of which would be expected to increase the
Bank's cost of funds and decrease the Bank's interest rate spread.
POTENTIAL ADVERSE EFFECT ON STOCK PRICE AND LIQUIDITY DUE TO LOWER RETURN ON
EQUITY AFTER THE REORGANIZATION AND DIFFICULTIES IN INVESTING THE NET PROCEEDS
After the Reorganization, the Company on a consolidated basis will have
more total equity than the Bank had prior to the Reorganization. As discussed
above, growth opportunities are limited in the Bank's market area and the
Company does not expect that the loan portfolio will increase as quickly as the
increase in capital. The Company and the Bank initially intend to invest the net
proceeds from the Reorganization primarily in short-term investments which
generally have lower yields than loans. Furthermore, although the increased
capital will support additional expansion in total assets, the Company does not
expect that the additional capital can be leveraged immediately, due in part to
the limited opportunities for local deposit growth. The Company may not be able
to increase net income in future periods as fast as equity has increased in the
Reorganization. Therefore, after the Reorganization, return on equity (net
income divided by average equity) is expected to be lower than the annualized
return on equity of 5.84% for the six months ended March 31, 1998, and 5.36% for
fiscal 1997.
In addition, the initial investment of the net proceeds in debt securities
will substantially increase the percentage of the Bank's assets invested in
securities. Although much of the Bank's investment securities portfolio consists
of U.S. government and agency securities with negligible default rates, the Bank
also invests in mortgage-backed securities with higher risks of default and a
higher risk that the principal will be prepaid at a time when interest rates are
low. To manage these risks, the Bank limits its mortgaged-backed securities
investments primarily to securities which are either issued, insured or
guaranteed by the Federal National Mortgage Association (Fannie Mae), the
Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National
Mortgage Association (Ginnie Mae).
OTS regulations and policy may also limit the ability of the Company to
leverage the additional capital raised in the Reorganization. Current OTs policy
and regulations require that the Company first offer any shares of stock to be
issued by it to the depositors of the Bank before using the same for any other
purpose, such as an acquisition, unless the OTS approves otherwise. Hence, OTS
policy and regulations may make it more difficult for the Company or the Bank to
leverage the new capital by acquiring another institution by merger if the
institution desires to consummate the acquisition as a tax-free exchange of
stock.
COMPETITION
The Bank faces strong and increasing competition both in making loans and
in attracting deposits. Within its market area consisting of southern St.
Lawrence County, northern Jefferson County and northern Lewis County, the Bank
had 29% of total FDIC-insured deposits at June 30, 1997 according to FDIC bank
branch deposit data. The Bank estimates that it was the largest residential
mortgage lender in its market area by dollar amount of loans made during fiscal
1996
13
and fiscal 1997 and the second largest during the first six months of 1998.
However, the Bank's market area and surrounding communities include offices of
large regional and nationwide banks with the economic ability to compete
aggressively. In addition, non-bank alternatives, such as money market funds,
other mutual funds and annuities, compete for deposits and mortgage brokers,
mortgage bankers, insurance companies and other finance companies compete for
loans. The consolidation of the banking industry, the expansion of the powers of
banks and other major financial companies, and the lifting of interstate banking
and branching restrictions, may make it more difficult for smaller institutions,
such as the Bank, to compete effectively with large national and regional
banking institutions, insurance companies and securities brokerage firms.
LENDING RISKS
The Bank has historically employed an operating strategy that emphasized
the origination of one- to four-family residential mortgage loans. In recent
years, the Bank has sought to increase its level of commercial mortgage,
commercial and auto loans. These loans are generally considered to involve a
higher degree of credit risk than one- to four-family residential mortgage
loans. This greater risk is attributable to several factors, including the
higher concentration of principal in larger commercial mortgage loans, the
effects of general economic conditions on income-producing properties, the
increased difficulty of evaluating and monitoring these types of loans, and the
difficulty of realizing on collateral such as business equipment or automobiles.
These risks could result in increased defaults, higher levels of charge-offs,
and a resulting reduction in the Bank's net income. The Bank has increased its
allowance for loan losses as a result of its strategy to increase
non-residential lending. See "Business of the Bank - Lending Activities" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Comparison of Operating Results for the Six Months Ended March 31,
1998 and March 31, 1997 - Provision for Loan Losses."
YEAR 2000 COMPLIANCE
Accurate computer record keeping and data processing is essential for the
efficient operation of the Bank. In many cases, computer software and hardware,
as well as computer chips in other equipment, have been designed so that they
will not accurately reflect dates beyond December 31, 1999. The Bank is actively
involved in reviewing all of its computer-related functions to assure that the
Bank will be able to continue to operate successfully at the beginning of the
next millennium without significant interruption. The Bank may be required to
replace existing software and hardware in order to do so. Thus far, the Bank has
completed testing of internal hardware and software, security devices and
related equipment and has replaced all items that failed the tests without
incurring material costs. The Bank's external data processing service provider
has completed initial testing of Year 2000 compliance successfully. Additional
retesting is scheduled to be completed by year end 1998. During 1999, the Bank
will monitor computer functions to assure the accuracy of the test results.
The Bank does not believe that the cost of Year 2000 compliance not yet
recognized will have a material adverse effect on the Bank's financial condition
or results of operations, but the evaluation of the costs is not yet complete.
The Bank estimates that if its independent outside computer service bureau is
able to bring its computer system into Year 2000 compliance, as is anticipated,
the direct costs of Year 2000 compliance to the Bank are anticipated to be
approximately $50,000, of which approximately $5,000 has already been spent.
However, there can be no assurance that the Bank will not encounter
unanticipated problems, nor any assurance that its outside service bureau will
be Year 2000 compliant. If the Bank's outside service provider is unable to be
Year 2000 compliant, the Bank will either convert to an in house data processing
system or switch to a different outside service provider. The Bank has already
received a proposal for conversion to an in house system which is Year 2000
compliant as part of its contingency planning. If any such conversion is
necessary, which is not anticipated, costs could substantially increase.
Furthermore, computer problems experienced by the Bank's commercial borrowers
could have an adverse effect on their business operations and their ability to
repay their loans when due. The Bank has contacted most of its commercial
borrowers to alert them to the importance of Year 2000 compliance.
In addition, technological advances in general may require the Bank to
make substantial capital investments in the future so it can continue to compete
with its multitude of competitors.
RELIANCE ON CHIEF EXECUTIVE OFFICER
Richard Bennett, the President of the Bank, is the Bank's only executive
officer and the Bank currently does not have an employment contract with Mr.
Bennett. At March 31, 1998, the Bank had only 16 full-time employees, with all
of the remainder holding non-executive officer, teller, secretarial, clerk and
other comparable positions. Although these other employees form an important
part of the Bank's team, they do not perform executive functions. As a result,
the Bank relies heavily upon Mr. Bennett. If Mr. Bennett were to leave the Bank
or be unable to continue as its president and chief executive officer either
permanently or for a long temporary absence, the Bank might experience
difficulty in the smooth operation of its business, which could be interrupted.
In addition, the Bank is currently seeking a chief financial officer who can
assume responsibility for some of the executive tasks being performed by the
chief executive officer and who can be responsible for the public reporting
requirements that the
14
Company will have after the Reorganization. The Bank does not know how long it
will take to find a satisfactory individual, whether it will be possible to find
such a person, or the salary that will have to be paid to attract a person with
appropriate expertise.
INCREASED COMPENSATION AND OTHER EXPENSES AFTER THE REORGANIZATION
After the Reorganization, the compensation expense recorded by the Company
will be substantially greater than the compensation expense of the Bank prior to
the Reorganization as a result of expenses related to the ESOP and other plans
expected to be implemented by the Company. The ESOP is expected to acquire 8% of
the Common Stock sold to Public Stockholders in the Reorganization. Therefore,
the ESOP's Common Stock is expected to have a total purchase price of up to
approximately $881,000, which will be funded with a loan from the Company. The
Common Stock that the ESOP purchases will be pledged as collateral for the loan.
It is expected that the loan will be repaid over ten years using funds that the
Bank contributes to the ESOP.
As the ESOP repays the loan, the shares of Common Stock owned by the ESOP
will be gradually released as collateral for the loan and the Company will
record compensation expense based upon the released shares. If the price of the
Common Stock remains at $5.00 per share, then the amount of additional
compensation expense on account of the ESOP is expected to be approximately
$88,000 per year. However, under accounting rules applicable to the ESOP, the
Company must record compensation expense based on the fair market price of the
released stock. Therefore, if the market price of the Common Stock increases,
the amount of compensation expense attributable to the ESOP will be higher.
In addition, if, as is presently intended, the Company implements a
restricted stock plan permitting awards of Common Stock to directors, officers
and employees, the Company will record additional compensation expense. The plan
is expected to permit stock awards for up to approximately 88,078 shares. If
these shares are first acquired in open market purchases and then awarded to
recipients, to vest over five years, then the Company will record compensation
expense equal to one-fifth of the amount paid for the repurchased stock each
year for five years. If the stock is purchased at $5.00 per share, the annual
additional compensation expense will be approximately $88,000.
15
The Company also anticipates that, as a publicly traded stock corporation,
it will incur additional expenses not previously incurred by the Bank, such as
the expenses of preparing and filing periodic reports with the SEC, the cost of
holding annual and special stockholders' meetings, annual fees to maintain the
listing of the Company's Common Stock on the Nasdaq SmallCap Market, and other
stock-related expenses.
See "Pro Forma Data" and "Management of the Bank - Benefits."
THE MUTUAL HOLDING COMPANY STRUCTURE
New Form of Organization. The mutual holding company structure is
relatively new. The federal laws necessary for federal mutual holding companies
were not fully in place until 1989, and few states have laws which authorize
mutual holding companies. The OTS did not accept mutual holding company
applications until 1991 and did not finalize its mutual holding company
regulations until 1993. As a result, there is limited market history and limited
legal precedent regarding mutual holding companies. Furthermore, the OTS
regulations which permit an intermediate tier stock form holding company, such
as the Company, were first effective in April 1998. Therefore, the laws and
regulations applicable to such entities are still evolving and there is greater
uncertainty regarding the operations of such entities than with customary
state-chartered business corporations.
Control by the Mutual Holding Company; Anti-takeover Effects. The board of
directors of the Mutual Holding Company, the Company and the Bank will initially
be identical. The Mutual Holding Company will control the election of the entire
Board of Directors of the Company and the outcome of all other matters that come
to a vote of the stockholders of the Company, except for matters which the OTS
requires be approved by the Public Stockholders. Therefore, the Public
Stockholders of the Company, even if they were to mount a proxy contest, would
be unable to approve any matter requiring a stockholder vote and would be unable
to defeat any proposal put forth by the Mutual Holding Company, unless the
Mutual Holding Company agrees or the OTS requires approval by the Public
Stockholders on a particular matter. The Mutual Holding Company will be able to
defeat any proposed merger or other business combination even though the Public
Stockholders of the Company might approve the transaction.
Future Stock Issuance. Not only does the Mutual Holding Company own a
majority interest in the Company, but under OTS regulations the Mutual Holding
Company may not sell its stock in the Company and the Company may not issue
additional shares of its voting stock without first offering the stock to the
depositors of the Bank, unless the OTS approves otherwise. Furthermore, the
Company is not permitted to use its Common Stock to complete a merger with or
acquisition of another company unless it first offers that stock to the
depositors of the Bank, unless the OTS approves otherwise.
Dividend Waivers. When mutual holding companies were first created, many
analysts believed that the mutual holding company, not needing dividend income,
would waive the receipt of dividends from its subsidiary, thus enabling the
subsidiary to have a high dividend payout ratio to its public stockholders while
still retaining earnings to increase capital. However, OTS regulations and
policy now limit the ability of the Mutual Holding Company to waive the receipt
of dividends. The waiver of dividends will only be permitted by the OTS on a
case by case basis and only if certain conditions are met, including:
o The Mutual Holding Company's Board of Directors must first determine
that the waiver is consistent with the fiduciary duty that the
directors owe to the depositors of the Bank, who are the members of
the Mutual Holding Company.
o The amount of the waived dividend is considered as having been paid
when calculating the maximum permitted amount of future dividends.
o If the Company seeks a full conversion, the waived dividend must be
considered in determining appraised value.
16
Current OTS policy requires that if there is a full conversion to the
stock form of ownership by a mutual holding company after it has waived
dividends, the Public Stockholders must receive less than their pro rata share
of the stock of the resulting fully converted entity to make up for the
dividends that they received which were not received by the mutual holding
company. This could have the effect of reducing the market value of the Common
Stock owned by the Public Stockholders and could also reduce their voting power
after a full conversion.
Dilution. In a full conversion, the entire ownership interest in a bank is
sold, either directly or through a holding company. The amounts paid by the
stockholders for the newly issued stock, after paying expenses, is shared among
those stockholders. In a mutual holding company reorganization, the mutual
holding company receives its stock without any payment, but still has the
opportunity to share in the benefits of the net proceeds received from the other
stockholders. As a result, the book value per share after the Reorganization is
completed may, depending upon the dollar amount of Common Stock sold, be less
than the $5.00 purchase price. See "Pro Forma Data."
ABSENCE OF MARKET FOR COMMON STOCK
There is no established market for the Common Stock of the Company at this
time. The Company has received conditional approval from the Nasdaq Stock Market
to have its common stock quoted on the Nasdaq SmallCap Market under the symbol
"GOUV" upon completion of the Reorganization. For the listing to continue, there
must be at least two market makers for the Common Stock. Market makers are
securities broker/dealers who make a market in a stock by announcing prices at
which they are willing to buy and sell the stock and who are willing to
regularly purchase and sell the stock. Furthermore, in order to qualify for
listing on the Nasdaq SmallCap Market, among other things, there must be
1,000,000 shares of outstanding Common Stock held by the public, excluding
shares held directly or indirectly by officers or directors of the Company. The
Company is offering shares at $6.00 per share, rather than $10.00 per share
which is more customary in reorganization and conversion transactions, in order
to increase the number of shares sold and satisfy this requirement.
The Nasdaq Stock Market has recently become stricter in enforcing its
minimum listing requirements and some previously listed companies have been
delisted. The Company will seek to maintain sufficient market makers to satisfy
Nasdaq requirements. First Albany Corporation will assist the Company in that
effort and expects to be a market maker in the Common Stock. Furthermore, some
of the Nasdaq requirements for listing, such as the requirement that there be at
least 300 stockholders owning at least 100 shares, are outside the control of
the Company and difficult to verify because many shares are held in street name
by brokers. The Company anticipates that there will be sufficient market makers
for the Common Stock and that other listing criteria will be satisfied, but the
Company cannot assure investors that the Nasdaq listing can be maintained.
Furthermore, an active and liquid market for the Company's stock depends
upon whether there are willing buyers and sellers. This is not in the control of
the Company or any market maker. An active and liquid trading market for the
Common Stock may not develop or continue. The absence of an active and liquid
market may reduce the price of the Common Stock and if a market for Common Stock
does not develop, it may be difficult for investors to sell their shares. See
"Market for the Common Stock."
POSSIBLE INCREASE IN THE VALUATION RANGE AND NUMBER OF SHARES TO BE ISSUED
The number of shares to be sold in the Reorganization may be increased by
an additional 15% based upon the number of orders received, the updated
appraisal, and market, financial and economic conditions when the Reorganization
is being completed. If there is such an increase, the Company will sell
2,201,962 shares of Common Stock to the public in the Reorganization. An
increase in the number of shares sold can be expected to decrease net income per
share and stockholders' equity per share but would increase the Company's
consolidated stockholders' equity and net income. See "The Reorganization -
Stock Pricing and Number of Shares to be Issued."
17
POSSIBLE DILUTION FROM STOCK OPTIONS AND THE RESTRICTED STOCK PLAN
If a stock option plan is implemented after the Reorganization, which is
expected, it will cover 10% of the stock sold to the Public Stockholders in the
Reorganization. If all options under the plan are exercised and satisfied using
stock never previously issued, instead of using stock repurchased by the Company
from the Public Stockholders, the ownership interests of Public Stockholders
would be diluted (reduced) by approximately 9.09%. Similarly, if a restricted
stock plan is implemented for 4% of the stock sold to the Public Stockholders in
the Reorganization, and awards under the plan are satisfied with stock never
previously issued, the interests of Public Stockholders would be diluted by
approximately 3.85%. Stockholders will not have a first priority right to buy
shares issued to satisfy the exercise of stock options or awards under the
restricted stock plan. A dilution of the interests of existing stockholders
could be expected to have an adverse effect on the market price of the Common
Stock. See "Management of the Bank - Benefits - Stock Option Plan" and
" - Restricted Stock Plan."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF
SUBSCRIPTION RIGHTS
The Internal Revenue Service could take the position that the subscription
rights granted to depositors of the Bank have an ascertainable value and that
the value represents taxable income to the depositors. The Company has received
the opinion of Keller and Company, Inc. that the subscription rights have no
ascertainable value, but that opinion is not binding upon the IRS. If the
subscription rights are deemed to have value, recipients of the rights could be
taxed upon the receipt or exercise of the rights in an amount equal to such
value. The Bank might then be required to recognize taxable income on the
distribution of the subscription rights. Although the IRS is not known to have
taken the position that subscription rights constitute taxable income in similar
reorganizations, the IRS may change its position in the future. See "The
Reorganization - Effects of Reorganization on Depositors and Borrowers."
REGULATION OF FINANCIAL INSTITUTIONS
Federal banking laws and regulations will exert substantial control over
the operations of the Bank and the Company. Federal regulatory authorities have
extensive discretion in connection with their supervision of the Bank, such as
the right to impose restrictions on operations and the insistence that an
institution increase its allowance for loan losses. Furthermore, federal laws
affecting banks are constantly being revised, often imposing new restrictions or
increasing competitive pressures through de-regulation. Any change in the
regulatory structure or statutes or regulations applicable to banks or their
competitors, or to mutual holding companies, whether by the OTS, the FDIC, any
other regulator or the Congress, could have a material impact on the Company,
the Bank and their operations. See "Regulation."
FORWARD-LOOKING STATEMENTS
In this Prospectus, the Company, when discussing the future, may use words
like "will probably result," "are expected to," "may cause," "is anticipated,"
"estimate," "project," or similar words. These words indicate forward-looking
statements. In addition, certain disclosures and information in this Prospectus,
such as an analysis of the adequacy of the allowance for loan losses or an
analysis of the interest rate sensitivity of the Company's assets and
liabilities, are based upon attempts to predict future events and circumstances
and also represent forward-looking statements.
Many factors could cause the Company's actual future results and future
experiences to be different from what is described in the Company's
forward-looking statements. Future profitability, interest rate sensitivity, and
the adequacy of the allowance for loan losses, can be affected by, for example,
(i) deterioration in local, regional, national or global economic conditions
which could cause an increase in loan delinquencies, a decrease in property
values, or a change in the housing turnover rate; (ii) changes in market
interest rates or changes in the speed at which market interest rates change;
(iii) changes in laws and regulations affecting the financial services industry;
(iv) changes in competition; and (v) changes in consumer preferences.
Please do not place unjustified or excessive reliance on any
forward-looking statements. They speak only as of the date made and should not
be considered to be guarantees of what will happen in the future. Remember that
18
various factors, including those described above, could affect the Company's
financial performance and could cause the Company's actual results or
circumstances for future periods to be materially different from what has been
anticipated or projected.
19
SELECTED FINANCIAL INFORMATION
The selected data presented below under the captions "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years in the five-year period ended September 30, 1997, are derived from
the audited financial statements of Gouverneur Savings and Loan Association. The
financial statements as of September 30, 1997 and 1996 and for each of the years
in the three-year period ended September 30, 1997 are included in this
Prospectus beginning at page F-1. The selected data presented below as of and
for the six-month periods ended March 31, 1998 and 1997 are derived from the
unaudited financial statements of Gouverneur Savings and Loan Association
included elsewhere in this Prospectus. Results for the six month period ended
March 31, 1998 do not necessarily indicate the results that may be expected for
the year ended September 30, 1998.
SELECTED FINANCIAL CONDITION DATA:
At March 31, At September 30,
------------ -------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(In thousands)
Total assets............................. $ 55,092 $ 55,172 $ 54,347 $ 54,274 $ 52,831 $ 53,872
Loans receivable, net (1)................ 34,756 35,253 33,438 33,111 34,172 36,755
Allowance for loan losses................ 464 403 479 602 466 333
Securities available-for-sale (2)........ 8,632 7,903 10,817 10,540 10,183 -
Securities held-to-maturity (2).......... 7,121 8,660 5,416 4,506 4,494 12,125
Cash and cash equivalents................ 3,818 2,486 3,939 2,223 2,927 4,016
Real estate owned ....................... 176 157 149 130 367 286
Deposits................................. 42,923 43,576 43,502 44,200 43,753 45,372
Total net worth.......................... $ 11,123 $ 10,689 $ 9,993 $ 9,465 $ 8,741 $ 8,013
SELECTED OPERATIONS DATA:
Six Months
Ended March 31, Year Ended September 30,
-------------- ----------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(In thousands)
Interest income .................................................... $2,143 $2,126 $4,275 $4,338 $4,260 $4,264 $4,280
Interest expense ................................................... 936 945 1,896 1,980 1,823 1,659 1,918
------ ------ ------ ------ ------ ------ ------
Net interest income ............................................ 1,207 1,181 2,379 2,358 2,437 2,605 2,362
Provision for loan losses .......................................... 85 70 250 -- 190 411 235
------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses ................................ 1,122 1,111 2,129 2,358 2,247 2,194 2,127
Non-interest income ................................................ 84 77 149 165 141 204 202
Non-interest expenses .............................................. 692 691 1,406 1,774 1,378 1,377 1,186
------ ------ ------ ------ ------ ------ ------
Income before income taxes and
cumulative effect of changes in
accounting principles ........................................... 514 497 872 749 1,010 1,021 1,143
Income tax expense (benefit) ....................................... 208 201 335 297 416 445 441
------ ------ ------ ------ ------ ------ ------
Income before cumulative effect of
changes in accounting principles ................................ 306 296 537 452 594 576 702
Cumulative effect of changes in
accounting principles (3) ....................................... -- -- -- -- -- 137 --
------ ------ ------ ------ ------ ------ ------
Net income ......................................................... $ 306 $ 296 $ 537 $ 452 $ 594 $ 713 $ 702
====== ====== ====== ====== ====== ====== ======
Notes appear on following page.
20
SELECTED FINANCIAL RATIOS AND OTHER DATA (4):
At or for the
Six Months
Ended March 31, At or for the Year Ended September 30,
--------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
PERFORMANCE RATIOS:
Return on average assets (net income
to average total assets)...................... 1.14% 1.09% 0.99% 0.92% 1.04% 1.34% 1.33%
Return on average net worth
(net income to average net worth)................. 5.84% 6.02% 5.36% 5.33% 6.13% 8.59% 9.18%
Average interest-earning assets to
average interest-bearing liabilities.............. 121.84% 119.94% 120.21% 119.11% 117.45% 117.49% 116.26%
Net interest rate spread (5)....................... 3.88% 3.83% 3.82% 3.77% 4.21% 4.44% 3.95%
Net interest margin (6)............................ 4.67% 4.55% 4.56% 4.50% 4.84% 5.00% 4.55%
Net interest income after provision for
loan losses to total other expenses............ 1.62x 1.61x 1.51x 1.33x 1.63x 1.59x 1.79x
NET WORTH AND ASSET QUALITY RATIOS:
Average net worth to average total assets.......... 19.44% 18.15% 18.41% 17.22% 16.95% 15.58% 14.43%
Total net worth to assets end of period............ 20.19% 19.05% 19.37% 18.39% 17.44% 16.55% 14.87%
Non-performing assets to total assets.............. 0.95% 0.71% 1.31% 1.56% 1.25% 2.66% 5.09%
Non-performing loans to total loans................ 1.00% 0.69% 1.60% 2.08% 1.65% 3.02% 6.66%
Allowance for loan losses to total loans........... 1.33% 0.95% 1.14% 1.43% 1.81% 1.36% 0.90%
Allowance for loan losses to
non-performing loans.......................... 133.33% 136.21% 71.33% 68.72% 109.65% 44.85% 13.56%
OTHER DATA:
Number of real estate loans outstanding............ 1,367 1,394 1,386 1,424 1,476 1,549 1,650
Number of deposit accounts......................... 6,563 6,506 6,508 6,495 6,470 6,337 6,031
Full service offices............................... 1 1 1 1 1 1 1
(1) Shown net of deferred fees.
(2) During the year ended September 30, 1994, debt securities with an amortized
cost of $6.9 million were transferred from held-to-maturity to
available-for-sale upon the adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
(3) Represents the cumulative effect of change in accounting for income taxes.
(4) Asset quality and net worth ratios are at end of period. All other ratios
are based on daily balances except that 1994 and 1993 fiscal year ratios
are based on month end average balances. Ratios for the six-month periods
have been annualized where appropriate.
(5) The net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
21
SUMMARY OF RECENT DEVELOPMENTS
The following tables summarize certain financial and operational
information and other data for the Bank at or for the periods ended June 30,
1998 and 1997 (unaudited) and September 30, 1997. Information at June 30, 1998
and for the nine months ended June 30, 1998 and 1997 are unaudited, but in the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the results for such unaudited periods have
been made. Information at and for the year ended September 30, 1997 are derived
from the audited financial statements and should be read in conjunction with the
financial statements of the Bank included elsewhere in this Prospectus. The
results of operations for the nine months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the entire year
or any other period.
SELECTED FINANCIAL CONDITION DATA:
June 30, September 30,
1998 1997
------------ -------------
(In thousands)
Total assets.................................... $ 55,731 $ 55,172
Loans receivable, net (1)....................... 35,561 35,253
Allowance for loan losses....................... 484
Securities-available-for-sale................... 9,697 7,903
Securities held-to-maturity..................... 7,746 8,660
Cash and cash equivalents....................... 1,928 2,486
Deposits........................................ 43,429 43,576
Total net worth................................. $ 11,233 $ 10,689
SELECTED OPERATIONS DATA:
Nine Months
Ended June 30,
---------------------------------
1998 1997
--------------- --------------
(In thousands)
Interest income............................................... $3,233 $3,199
Interest expense.............................................. 1,414 1,418
--------------- --------------
Net interest income....................................... 1,819 1,781
Provision for loan losses..................................... 125 110
--------------- --------------
Net interest income after
provision for loan losses............................. 1,694 1,671
Non-interest income........................................... 129 120
Non-interest expenses......................................... 1,103 1,039
--------------- --------------
Income before tax expense..................................... 720 752
Income tax expense............................................ 281 299
--------------- --------------
Net income.................................................... $ 439 $ 453
=============== ==============
Notes appear on following page
22
SELECTED FINANCIAL RATIOS AND OTHER DATA: (2)
At or For the
Nine Months
Ended June 30,
------------------------
1998 1997
----------- ----------
PERFORMANCE RATIOS:
Return on average assets (net income to average total assets)................... 1.08% 1.12%
Return on average net worth (net income to average net worth)................... 5.52% 6.11%
Average interest-earning assets to average interest-bearing liabilities)........ 122.44% 120.41%
Net interest rate spread (3).................................................... 3.85% 3.83%
Net interest margin (4)......................................................... 4.66% 4.57%
Net interest income after provision for loan losses to total other expenses..... 1.54x 1.61x
NET WORTH AND ASSET QUALITY RATIOS:
Average net worth to average total assets....................................... 19.49% 18.27%
Total net worth to assets end of period......................................... 20.16% 18.77%
Non-performing assets to total assets........................................... 0.69% 1.20%
Non-performing loans to total loans............................................. 0.80% 1.30%
Allowance for loan losses to total loans........................................ 1.36% 0.96%
Allowance for loan losses to non-performing loans............................... 170.42% 73.98%
- ----------
(1) Shown net of deferred fees.
(2) Asset quality and net worth ratios are at end of period. All other ratios
are based on daily balances. Ratios for the nine-month periods have been
annualized where appropriate.
(3) The net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND SEPTEMBER 30, 1997
Total assets increased by $559,000, or 1%, from $55.2 million at September
30, 1997 to $55.7 million at June 30, 1998. Net loans increased by $227,000
during the nine month period, from $34.9 million at September 30, 1997 to $35.1
million at June 30, 1998. The increase in loans was caused substantially by a
$763,000 increase in automobile loans, a $214,000 increase in adjustable rate
residential mortgage loans, a $108,000 increase in commercial loans, and a
$72,000 increase in commercial mortgage loans, offset by an $873,000 decrease in
fixed-rate residential mortgage loans. This shift in the mix of the loan
portfolio reflects the Bank's efforts to increase the yield on its loans and
improve its interest rate sensitivity with shorter term loans. See "Business of
the Bank - Lending Activities - Commercial Mortgage Loans" " - Automobile Loans"
and " - Commercial Loans."
The increase in loans was funded by a decrease in federal funds sold,
which declined from $250,000 at September 30, 1997 to zero at June 30, 1998. The
$914,000, or 11%, decrease in securities held to maturity from $8.7 million to
$7.7 million was attributable to maturities and principal reductions of
adjustable rate mortgage-backed securities. Securities available for sale
increased by $1.8 million, or 23%,
23
from $7.9 million to $9.7 million, as the Bank purchased additional FHLBNY
debentures with remaining terms to maturity from two to three years.
Deposits declined by $147,000 from $43.6 million at September 30, 1997 to
$43.4 million at June 30, 1998. Management believes that the decrease, produced
by demand and savings account outflow, was caused by depositors withdrawing
funds to invest in higher yielding non-deposit products.
The Bank's net worth increased by $544,000 during the nine month period,
from $10.7 million to $11.2 million. The increase resulted from net income of
$439,000 and a $105,000 increase in unrealized gains on securities available for
sale. At June 30, 1998, the Bank's tangible capital ratio was 19.0%, its core
capital ratio was 19.0% and its total risk-based capital ratio was 44.1%. See
"Regulatory Capital Compliance."
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND JUNE
30, 1997
General. The Bank reported net income of $439,000 for the nine months
ended June 30, 1998, as compared to $453,000 for the same period in 1997. The
$14,000, or 3%, decrease in net income was due primarily to a $64,000 increase
in non-interest expense and a $15,000 increase in the provision for loan losses,
partially offset by a $38,000 increase in net interest income and an $18,000
decrease in income tax expense.
Interest Income. Interest income increased $34,000, or 1%, for the nine
months ended June 30, 1998, as compared to the same period in 1997. The increase
was produced primarily by a $1.5 million, or 5%, increase in the average balance
of loans, the Bank's highest yielding asset type, from $33.2 million for the
nine months ended June 30, 1997 to $34.7 million for the nine months ended June
30, 1998. The effect of the increase in the average balance of loans was
partially offset by a 21 basis point decrease in the average yield on loans,
reflecting generally lower market interest rates. Decreases in the average
balance of federal funds sold also served to partially offset the increase in
interest income. As a result of the shift in the composition of the Bank's
interest-earning assets, the average yield on interest earning assets was 8.28%
for the nine months ended June 30, 1998, as compared to 8.21% for the comparable
period in 1997.
Interest Expense. Interest expense decreased $4,000 for the nine months
ended June 30, 1998 as compared to the equivalent period in 1997. The decrease
was attributable to a decrease in the average balances of savings accounts and
certificate accounts, partially offset by a 10 basis point increase in the rate
paid on certificate accounts as the Bank increased its certificate account rates
to meet market competition. The increase in certificate account rates was the
primary reason for an increase in the Bank's average cost of interest-bearing
liabilities to 4.43% for the nine months ended June 30, 1998, from 4.38% for the
nine months ended June 30, 1997.
Net Interest Income. The Bank's net interest income increased $38,000, or
2%, from $1.78 million for the nine months ended June 30, 1997, to $1.82 million
for the comparable 1998 period. The increase in interest income and the decrease
in interest expense discussed above combined to cause this net interest income
increase.
Provision for Loan Losses. The provision for loan losses increased
$15,000, from $110,000 for the nine months ended June 30, 1997, to $125,000 for
the nine month period ended June 30, 1998. While the ratio of the Bank's
non-performing loans to total loans declined from 1.30% to 0.80%, management
concluded that an increase in the provision for loan losses was warranted
because higher yielding, and potentially higher risk automobile, commercial and
commercial mortgage loans had increased, both in amount and as a percentage of
the total loan portfolio, between the periods.
24
Non-interest Income. Non-interest income increased by $9,000, or 7.5%,
from $120,000 for the nine months ended June 30, 1997 to $129,000 for the nine
months ended June 30, 1998. The increase was attributable principally to a
$5,000 loss on the sale of an investment security during the 1997 period.
Non-interest Expense. Non-interest expense increased by $64,000, or 6.2%,
from $1.04 million for the nine months ended June 30, 1997 to $1.1 million for
the comparable period in 1998. The increase was due to the accrual of an expense
for the entire amount of a multi-year charitable pledge aggregating $30,000 to a
local hospital, regular increases in salaries and employee benefit expense and
increased costs associated with owned real estate.
Income Tax Expense. Income tax expense decreased by $18,000, or 6%, to
$281,000 for the nine month period ended June 30, 1998, as compared to $299,000
for the same period in 1997, which corresponded to the reduction in income
before taxes.
25
GOUVERNEUR BANCORP, INC.
The Bank recently organized Gouverneur Bancorp, Inc. to acquire all of the
capital stock of the Bank to be issued in the Reorganization. The OTS has
approved the Company as a savings and loan holding company and, when the
Reorganization is completed, it will be subject to OTS regulation. See "The
Reorganization - General" and "Regulation - Holding Company Regulation." When
the Reorganization is complete, the Company's significant assets will include
the shares of the Bank's common stock acquired in the Reorganization, the loan
that it makes to the ESOP, and 50% of the net proceeds of the Reorganization
minus the amount of those proceeds used to fund the ESOP loan. The Company
intends to lend a portion of the net proceeds it retains to the ESOP so the ESOP
can purchase 8% of the Common Stock sold in the Reorganization excluding stock
issued to the Mutual Holding Company. See "Use of Proceeds." The Company will
initially have no significant liabilities. The directors and the executive
officer of the Bank will be the initial directors and executive officer of the
Company and the Mutual Holding Company. See "Management of the Company" and
"Management of the Bank." At the present time, the Company does not intend to
employ any other persons, but will use the support staff of the Bank from time
to time. Additional employees will be hired as needed in the future.
Management believes that the holding company structure will allow
flexibility to diversify business activities through existing or newly formed
subsidiaries, or through acquisitions of, or mergers with, other financial
institutions and financial services companies. There are no current
arrangements, understandings or agreements regarding any such opportunities.
However, after the Reorganization, the Company will be able to explore
acquisition and expansion opportunities that may arise. The initial activities
of the Company are anticipated to be funded by the portion of the net proceeds
retained by the Company, income thereon and dividends from the Bank.
The Company's executive office is located at the main office of the Bank,
42 Church Street, Gouverneur, New York 13642. Its telephone number is (315)
287-2600.
GOUVERNEUR SAVINGS AND LOAN ASSOCIATION
The Bank was organized in 1892. The Bank's deposit accounts are insured to
the maximum allowable amount by the FDIC. The Bank services its customers from
its main office in Gouverneur. At March 31, 1998, the Bank had total assets of
$55.1 million, total deposits of $42.9 million and total equity of $11.1
million. The Bank's market area consists of the southern portion of St. Lawrence
County and the northernmost communities of Jefferson and Lewis Counties in New
York. Based upon data as of June 30, 1997 published by the FDIC, the Bank's
share of total FDIC-insured deposits within the Bank's market area was
approximately 29%.
The Bank is a community-oriented savings and loan association whose
businesses primarily consist of accepting deposits from local customers and
investing those funds in local residential mortgage loans. The Bank had $29.6
million of residential one-to-four family mortgage loans at March 31, 1998,
representing 85.1% of total loans and 53.8% of total assets. Virtually all of
these loans were secured by first mortgage liens, with the remainder being
junior lien loans such as home equity loans and home equity lines of credit. In
addition to residential mortgage loans, the Bank also makes commercial mortgage,
construction, automobile, property improvement, consumer and commercial
non-mortgage loans. At March 31, 1998, the Bank's loan portfolio, net, totaled
$34.3 million, or 62.2% of total assets. The Bank's loan origination and related
loan servicing activities are conducted entirely by its own personnel, except
that the Bank receives referrals of loan opportunities from automobile dealers.
In addition to loans, the Bank's largest asset categories are investment
and mortgage-backed securities. The Bank's investment activities primarily
consist of investing in debt securities issued by the United States Government
and its agencies, corporate debt securities, mortgage-backed securities and
certain equity securities. At March 31, 1998, the Bank had $4.3 million in fair
value of U.S. Government agency debt securities, representing 7.7% of total
assets. The Bank also had $7.1 million in carrying value of mortgage-backed
securities, representing 12.9% of total assets. At March 31, 1998, the Bank had
$3.5 million invested in a mutual fund which invested principally in
mortgage-backed securities, $379,000 of stock of the Federal Home Loan Bank of
New York separately reported on
26
the balance sheet and $849,000 in common stock of the Federal Home Loan Mortgage
Corporation.
The Bank's executive office is located at 42 Church Street, Gouverneur,
New York 13642. Its telephone number is (315) 287-2600.
27
REGULATORY CAPITAL COMPLIANCE
The table below shows the Bank's capital ratios at March 31, 1998 and the
related OTS minimum capital requirements. The table also shows approximately
what the capital ratios of the Bank would have been if the Reorganization had
taken place on March 31, 1998 (referred to as pro forma ratios), assuming that
the indicated number of shares as sold and assuming that 50% of the net
proceeds were paid to the Bank. The expected loan to the ESOP and the cost of
shares expected to be acquired by the Restricted Stock Plan are deducted from
pro forma regulatory capital, as is $100,000 expected to be used to capitalize
the Mutual Holding Company. See "Pro Forma Data".
Pro Forma Based Upon Net Proceeds at March 31, 1998
--------------------------------------------------------
1,415,250 Shares 1,665,000 Shares
Historical at Sold (Minimum of Sold (Midpoint of
March 31, 1998 Valuation Range) Valuation Range)
------------------------------ -------------------------- ----------------------------
Percent of Percent of Percent of
Applicable Applicable Applicable
Amount Assets Amount Assets(2) Amount Assets(2)
--------------- -------------- ------------- ------------ --------------- ------------
(Dollars in thousands)
GAAP Capital (1)............. $ 11,123 20.2% $ 13,449 23.4% $ 13,924 24.1%
======== ===== ======== ===== ======== =====
Tangible capital:
Capital Level ............... $ 10,615 19.6% $ 12,941 22.9% $ 13,416 23.5%
Requirement (3).............. 814 1.5% 849 1.5% 856 1.5%
-------- ----- -------- ----- -------- -----
Excess....................... 9,801 18.1% 12,092 21.4% 12,560 22.0%
======== ===== ======== ===== ======== =====
Core capital:
Capital Level ............... $ 10,615 19.6% $ 12,941 22.9% $ 13,416 23.5%
Requirement (3).............. 1,627 3.0% 1,697 3.0% 1,711 3.0%
-------- ----- -------- ----- -------- -----
Excess....................... $ 8,988 16.6% $ 11,244 19.9% $ 11,705 20.5%
======== ===== ======== ===== ======== =====
Risk-based capital:(4)
Capital level ............... $ 10,916 45.3% $ 13,255 52.8% $ 13,732 54.3%
Requirement (3).............. 1,927 8.0% 2,008 8.0% 2,025 8.0%
-------- ----- -------- ----- -------- -----
Excess....................... $ 8,989 37.3% $ 11,247 44.8% $ 11,707 46.3%
======== ===== ======== ===== ======== =====
Pro Forma Based Upon Net Proceeds at March 31, 1998
-------------------------------------------------------------
1,914,750 Shares 2,201,962 Shares Sold
Sold (Maximum of (15% Above Maximum
Valuation Range) of Valuation Range)
--------------------------- --------------------------------
Percent of Percent of
Applicable Applicable
Amount Assets(2) Amount Assets(2)
--------------- ------------ --------------- ----------------
GAAP Capital (1)............. $ 14,399 24.7% $ 14,944 25.4%
======== ===== ======== =====
Tangible capital:
Capital Level ............... $ 13,891 24.1% $ 14,436 24.9%
Requirement (3).............. 863 1.5% 871 1.5%
-------- ----- ------- -----
Excess....................... 13,028 22.6% 13,565 23.4%
======== ===== ======= =====
Core capital:
Capital Level ............... $ 13,891 24.1% $ 14,436 24.9%
Requirement (3).............. 1,726 3.0% 1,742 3.0%
-------- ----- ------- -----
Excess....................... $ 12,165 21.1% $12,694 21.9%
======== ===== ======= =====
Risk-based capital:(4)
Capital level ............... $ 14,210 55.7% $ 14,758 57.3%
Requirement (3).............. 2,042 8.0% 2,061 8.0%
-------- ----- ------- -----
Excess....................... $ 12,168 47.7% $ 12,697 49.3%
======== ===== ======= =====
(1) Capital under generally accepted accounting principles includes the net
unrealized gain/loss, if any on available-for-sale securities, which is not
recognized as capital under OTS capital ratio rules. Total risk-based
capital includes the allowance for loan losses. See "Regulation -
Regulation of Federal Savings Association - Capital Requirements."
(2) Risk-based capital ratios shown as a percentage of risk-weighted assets.
Core and Tangible ratios shown as a percentage of adjusted total assets.
(3) In order to be classified as "well-capitalized," the Bank must, in addition
to other requirements, have a ratio of core capital to risk-weighted assets
of at least 6.00%, a total risk-based capital ratio of at least 10.00% and
a ratio of core capital to total assets of at least 5.00%. See "Regulation
- Regulation of Federal Savings Association-capital Requirements" and
"--Prompt Corrective Action."
(4) Pro forma risk-based capital data assumes the net proceeds are invested in
assets that carry a risk-weighting equal to 43.7%, being the average risk
weight of the Bank's assets at March 31, 1998.
28
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Reorganization is completed, the net proceeds are
expected to range from $6,551,250 to $10,484,810. See "Pro Forma Data" and "The
Reorganization Stock - Pricing and Number of Shares to be Issued" for a
discussion of the assumptions used to estimate those amounts. The proceeds will
not be available unless and until the Reorganization is completed.
The Company will purchase the capital stock of the Bank for 50% of the net
proceeds from the sale of Common Stock in the Reorganization. Therefore, it is
estimated that the amount paid by the Company to the Bank, before non-cash
accounting adjustments, will range from $3.3 million to $5.2 million. The Bank
intends to invest its share of the net proceeds in short- and medium-term,
investment grade debt securities. The amount received will become part of the
Bank's general funds, which the Bank currently intends to gradually deploy to
increase its levels of one-to-four family real estate loans, auto loans,
commercial mortgage loans and commercial loans, depending on market conditions
as suitable opportunities arise. The Company expects that initially it will use
the net proceeds remaining in its hands, after funding the loan to the ESOP, to
make investments in short and intermediate term investment-grade debt
securities. The Company may also use the proceeds it retains to purchase stock
to fund the Restricted Stock Plan or to satisfy the exercise of options issued
under the Stock Option Plan. Those purchases would generally not occur for at
least six months after the Reorganization and generally not until after the
Public Stockholders approve the two plans. See "Management of the Bank -
Benefits - Stock Option Plan" and "- Restricted Stock Plan."
If the ESOP purchases 8% of the stock sold to Public Stockholders in the
Reorganization at a price of $5.00 per share, the ESOP loan will be from
$566,100 to $880,780, depending upon the number of shares sold in the
Reorganization. The Company estimates that the term of the ESOP loan will be ten
years. The Company and the Bank may choose to use a loan from an independent
third party to fund the ESOP's stock purchase, but that is not presently
anticipated. See "Management of the Bank Benefits - Employee Stock Ownership
Plan."
The Bank or the Company may use the net proceeds from the Reorganization
to support future expansion through, for example, purchasing branches,
establishing new branches, acquiring other financial institutions, or expanding
into other banking related businesses. The Company and the Bank have no current
arrangements, understandings or agreements for any such expansion but the
Company and the Bank intend to actively seek such acquisitions after the
Reorganization is completed. The Company, after the Reorganization, will be
permitted to engage in only those activities which are permitted for a multiple
savings and loan holding company. In general, a multiple savings and loan
holding company can only engage in the activities permitted for a bank holding
company (generally defined as activities which are closely related to banking)
plus certain additional activities permitted by OTS regulation. See "Regulation
- - Holding Company Regulation."
After the Reorganization, the Board of Directors of the Company may
approve stock repurchase plans, subject to statutory and regulatory
requirements, and use a portion of the net proceeds to implement those
repurchase plans. Unless approved by the OTS, the Company may not repurchase any
Common Stock in the first year after the Reorganization and, during the next two
years, may only repurchase up to 5% of its outstanding capital stock each year.
Further, the Company may not repurchase any of its Common Stock if the
repurchase would cause the Bank to become "undercapitalized." See "Regulation -
Regulation of Federal Savings Association-Prompt Corrective Action." The Board
of Directors may authorize the use of a portion of the net proceeds to
repurchase stock depending upon facts and circumstances in the future. Such
facts and circumstances may include, for example: (i) market and economic
factors such as the price at which the stock is trading in the market, the
volume of trading, the attractiveness of other investment alternatives, the
ability to increase the book value and/or earnings per share of the remaining
outstanding shares, and the opportunity to improve the Company's return on
equity; (ii) avoiding dilution by not having to issue additional shares to cover
the exercise of stock options or to fund employee stock benefit plans; and (iii)
capital needs of the Company and the Bank in light of the level of
non-performing loans, current and projected results of operations, the economic
environment and other considerations. If the Company repurchases stock for more
than book value per share, the book value per share for remaining shares would
be reduced. The Company will not repurchase any stock if the repurchase would
cause the Company or the Bank not to satisfy any minimum regulatory capital
ratio requirements.
29
DIVIDEND POLICY
After the Reorganization, the Board of Directors of the Company, which
initially will be identical to the Boards of Directors of the Bank and the
Mutual Holding Company, may declare cash or stock dividends, subject to
statutory and regulatory requirements. However, the Board has not decided the
amount or timing of dividends, if any. Dividends will depend upon a number of
factors, such as profitability, available investment opportunities, capital
needs in connection with potential expansion or acquisitions, regulatory limits,
financial condition, tax considerations, general economic conditions, industry
standards and other factors. The Company cannot assure any potential purchaser
that dividends will be paid, when they might be paid or, if paid, whether the
payment of dividends will continue.
The Company is not subject to any express OTS regulations regarding the
amount of dividends it is permitted to pay to its stockholders. The Company has
agreed with the OTS that it will not pay an extraordinary dividend to its
stockholders which constitutes a tax free return of capital for one year after
the Reorganization without the OTS's consent.
One important source of funds for the Company to pay dividends is
dividends from the Bank to the Company. Under OTS regulations, the Bank may not
pay dividends if that would cause the Bank to become undercapitalized.
Furthermore, the Bank must provide the OTS with 30 days advance notice of an
intention to pay dividends and its ability to pay dividends without regulatory
intervention depends upon its earnings and capital. See "Regulation - Regulation
of Federal Savings Associations - Limitations on Capital Distributions."
The Mutual Holding Company may elect to waive the receipt of dividends
from the Company under certain circumstances, subject to the receipt of OTS
approval. However, it is anticipated that as a condition of the approval of any
waiver of dividends, the OTS would require that the Mutual Holding Company's
percentage interest in the Company, in the event of a full conversion to stock
form, be adjusted upward to take into account the value of the foregone
dividend.
MARKET FOR THE COMMON STOCK
The Company was recently formed and has never issued stock. Therefore,
there is currently no market for the Company's Common Stock. The NASDAQ Stock
Market has approved the listing of the Company's stock on the NASDAQ SmallCap
Market under the symbol "GOUV" subject to the completion of the Reorganization
and compliance with certain conditions. There must be at least three market
makers to commence and two market makers to maintain the listing. The Company
will seek to have sufficient market makers to maintain the listing for its
Common Stock. Making a market involves maintaining bid and ask quotations and
being able, as principal, to purchase and sell stock in reasonable quantities at
those quoted prices. The Company cannot guaranty that arrangements can be made
for there to be sufficient market makers for the Company's Common Stock.
Furthermore, the Company cannot control whether there will be enough willing
buyers and sellers for an active and liquid trading market. Without an active
and liquid trading market, it may be difficult for Public Stockholders to obtain
full value for their shares. See "Risk Factors - Absence of Market for Common
Stock."
30
PRO FORMA DATA
The tables in this section show estimated information as though the
Reorganization had occurred in the past. Each table shows estimated
stockholders' equity at the end of the period as though the Reorganization had
occurred at the end of the period and estimated net income for the entire period
shown as though the Reorganization had occurred at the beginning of the period.
The data contained in the tables, except for historical data, are based upon
assumptions and estimates, the most significant of which are described below.
It is assumed that the ESOP will purchase 8% of the Common Stock sold in
the Reorganization, not including Common Stock issued to the Mutual Holding
Company. The remaining shares are assumed to be sold for $6.00 per share. First
Albany Corporation will receive a fee of $120,000 in connection with its
marketing efforts and assistance to the Company related to the Reorganization.
Other Reorganization expenses are estimated to be approximately $405,000. Actual
expenses may vary from these estimates.
Pro forma net income has been calculated as if the Common Stock had been
sold at the beginning of the periods shown and the net proceeds had been
invested at 5.39% (the one year U.S. Treasury constant maturity index for the
week which included March 31, 1998). This rate has been used rather than the
average of the average rate earned on interest-earning assets and the average
rate paid on interest-bearing liabilities because it is believed to be a better
estimate of the rate that would be obtained on an investment of net proceeds.
The after-tax yield is assumed to be 3.23% (based on an estimated tax rate of
40%). The tables do not take into account possible withdrawals of deposits to
pay for stock purchases. Per share amounts have been calculated by dividing
applicable amounts by the number of shares shown, as adjusted for estimated ESOP
allocations. The calculation of pro forma stockholders' equity does not include
assumed earnings on the net proceeds during the period shown.
For the purpose of calculating the pro forma data, the Company assumes
that it will implement a restricted stock plan and repurchase 4% of the stock
sold to Public Stockholders in the Reorganization at $5.00 per share to fund the
plan. The Company also assumes that all the repurchased stock is awarded under
the plan in awards that vest gradually over five years. See "Management of the
Bank - Benefits - Restricted Stock Plan." No adjustments have been made to
estimate the effect of the stock option plan which the Company expects to
implement. The ESOP is assumed to be funded with a loan from the Company that
will be repaid in substantially equal principal payments over a period of ten
years. See "Management of the Bank - Benefits - Employee Stock Ownership Plan."
The following information is not intended to predict the future and may
not show or predict the financial effects of the Reorganization when it occurs
in the future. The information should not be taken as an indication of future
profitability. The pro forma stockholders' equity does not represent the fair
market value of the Common Stock and may be more than would be distributed to
stockholders in the unlikely event of a liquidation. The pro forma data should
not be used to project future market value of the Common Stock.
31
At or For the Six Months Ended March 31, 1998
----------------------------------------------
$15,725,000 $18,500,000
Minimum Midpoint
Value Value
------------------ ------------------
1,415,250 1,665,000
Shares at Shares at
$5.00 $5.00
per share per Share
(Minimum (Midpoint
of Range) of Range)
------------------ ------------------
(Dollars in thousands, except per share amounts)
GROSS PROCEEDS ...................................... $ 7,076 $ 8,325
Less offering expenses .............................. (525) (525)
------------------ ------------------
Estimated net conversion proceeds ............. 6,551 7,800
Less ESOP shares .................................... (566) (666)
Less Restricted Stock Plan shares ................... (283) (333)
------------------ ------------------
Estimated proceeds available
for investment (1) ......................... $ 5,702 $ 6,801
================== ==================
CONSOLIDATED NET INCOME:
Historical .................................... $ 306 $ 306
Pro forma adjustments:
Net income from proceeds ............. 92 110
ESOP (2) ............................. (17) (20)
Restricted Stock Plan (3) ............ (17) (20)
------------------ ------------------
Pro forma net income .............. $ 364 $ 376
================== ==================
NET INCOME PER SHARE (4):
Historical .................................... $ 0.10 $ 0.09
Pro forma adjustments:
Net income from proceeds ............. 0.03 0.03
ESOP (2) ............................. (0.01) (0.01)
Restricted Stock Plan (3) ............ (0.01) (0.01)
================== ==================
Pro forma net income .............. $ 0.11 $ 0.10
================== ==================
PRICE TO PRO FORMA EARNINGS PER SHARE ............... 22.73x 25.00x
NUMBER OF SHARES .................................... 3,037,441 3,573,460
STOCKHOLDERS' EQUITY (BOOK VALUE) (4):
Historical (retained earnings) ............. $ 11,023 $ 11,023
Estimated net conversion proceeds .......... 6,551 7,800
Less common stock acquired by:
ESOP (2) ................................ (566) (666)
Restricted Stock Plan (3) ............... (283) (333)
------------------ ------------------
Pro forma ............................ $ 16,725 $ 17,824
================== ==================
STOCKHOLDERS' EQUITY PER SHARE:
Historical (retained earnings) .......... $ 3.50 $ 2.98
Estimated net conversion proceeds ....... 2.08 2.11
Less common stock acquired by:
ESOP (2) ............................. (0.18) (0.18)
Restricted Stock Plan (3) ............ (0.09) (0.09)
------------------ ------------------
Pro forma ......................... $ 5.31 $ 4.82
================== ==================
PRICE TO PRO FORMA BOOK VALUE ....................... 94.16% 103.73%
NUMBER OF SHARES .................................... 3,145,000 3,700,000
MINORITY OWNERSHIP .................................. 45.00% 45.00%
At or For the Six Months Ended March 31, 1998
-------------------------------------------------
$21,275,000 $24,466,250
Maximum Maximum
Value Value,
as adjusted
------------------ -----------------
1,914,750 2,201,962
Shares at Shares at
$5.00 $5.00
per Share per Share
(Maximum (Super-
of Range) Maximum)
------------------ -----------------
(Dollars in thousands, except per share amounts)
GROSS PROCEEDS $ 9,574 $ 11,010
Less offering expenses .............................. (525) (525)
------------------ -----------------
Estimated net conversion proceeds ............. 9,049 10,485
Less ESOP shares .................................... (766) (881)
Less Restricted Stock Plan shares ................... (383) (440)
------------------ -----------------
Estimated proceeds available
for investment (1) ......................... $ 7,900 $ 9,164
================== =================
CONSOLIDATED NET INCOME:
Historical .................................... $ 306 $ 306
Pro forma adjustments:
Net income from proceeds ............. 128 148
ESOP (2) ............................. (23) (26)
Restricted Stock Plan (3) ............ (23) (26)
------------------ -----------------
Pro forma net income .............. $ 388 $ 402
================== =================
NET INCOME PER SHARE (4):
Historical .................................... $ 0.07 0.06
Pro forma adjustments:
Net income from proceeds ............. 0.03 0.03
ESOP (2) ............................. (0.01) (0.01)
Restricted Stock Plan (3) ............ (0.01) (0.01)
================== =================
Pro forma net income .............. $ 0.08 $ 0.07
================== =================
PRICE TO PRO FORMA EARNINGS PER SHARE ............... 31.25x 35.71x
NUMBER OF SHARES .................................... 4,109,479 4,725,902
STOCKHOLDERS' EQUITY (BOOK VALUE) (4):
Historical (retained earnings) ............. $ 11,023 $ 11,023
Estimated net conversion proceeds .......... 9,049 10,485
Less common stock acquired by:
ESOP (2) ................................ (766) (881)
Restricted Stock Plan (3) ............... (383) (440)
------------------ -----------------
Pro forma ............................ $ 18,923 $ 20,187
================== =================
STOCKHOLDERS' EQUITY PER SHARE:
Historical (retained earnings) .......... $ 2.59 $ 2.25
Estimated net conversion proceeds ....... 2.13 2.14
Less common stock acquired by:
ESOP (2) ............................. (0.18) (0.18)
Restricted Stock Plan (3) ............ (0.09) (0.09)
------------------ -----------------
Pro forma ......................... $ 4.45 $ 4.12
================== =================
PRICE TO PRO FORMA BOOK VALUE ....................... 112.36% 121.36%
NUMBER OF SHARES .................................... 4,255,000 4,893,250
MINORITY OWNERSHIP .................................. 45.00% 45.00%
Notes appear after following page.
32
At or For the Year Ended September 30, 1997
----------------------------------------------
$15,725,000 $18,500,000
Minimum Midpoint
Value Value
------------------ ------------------
1,415,250 1,665,000
Shares at Shares at
$5.00 $5.00
per share per Share
(Minimum (Midpoint
of Range) of Range)
------------------ ------------------
(Dollars in thousands, except per share amounts)
GROSS PROCEEDS ...................................... $ 7,076 $ 8,325
Less offering expenses .............................. (525) (525)
------------------ ------------------
Estimated net conversion proceeds ............. 6,551 7,800
Less ESOP shares .................................... (566) (666)
Less Stock Programs shares .......................... (283) (333)
------------------ ------------------
Estimated proceeds available
for investment (1) ......................... $ 5,702 $ 6,801
================== ==================
CONSOLIDATED NET INCOME:
Historical .................................... $ 537 $ 537
Pro forma adjustments:
Net income from proceeds ............. 184 220
ESOP (2) ............................. (34) (40)
Restricted Stock Plan (3) ............ (34) (40)
------------------ ------------------
Pro forma net income .............. $ 653 $ 677
================== ==================
NET INCOME PER SHARE (4):
Historical .................................... $ 0.18 $ 0.15
Pro forma adjustments:
Net income from proceeds ............. 0.06 0.06
ESOP (2) ............................. (0.01) (0.01)
Restricted Stock Plan (3) ............ (0.01) (0.01)
================== ==================
Pro forma net income .............. $ 0.22 $ 0.19
=================== ===================
PRO FORMA PRICE TO EARNINGS PER SHARE
22.73 x 26.32 x
NUMBER OF SHARES .................................... 3,043,120 3,580,120
STOCKHOLDERS' EQUITY (BOOK VALUE):
Historical (retained earnings) (1) ......... $ 10,589 $ 10,589
Estimated net conversion proceeds .......... 6,551 7,800
Less common stock acquired by:
ESOP (2) ................................ (566) (666)
------------------ ------------------
Restricted Stock Plan (3) ............... (283) (333)
------------------ ------------------
Pro forma ............................ $ 16,291 $ 17,390
================== ==================
STOCKHOLDERS' EQUITY PER SHARE:
Historical (retained earnings) .......... $ 3.37 $ 2.86
Estimated net conversion
proceeds ............................. 2.08 2.11
Less common stock acquired by:
ESOP (2) ............................. (0.18) (0.18)
Restricted Stock Plan (3) ............ (0.09) (0.09)
------------------ ------------------
Pro forma ......................... $ 5.18 $ 4.70
================== ==================
PRO FORMA PRICE TO BOOK VALUE ....................... 96.53% 106.38%
NUMBER OF SHARES .................................... 3,145,000 3,700,000
MINORITY OWNERSHIP .................................. 45.00% 45.00%
At or For the Year Ended September 30, 1997
------------------------------------------------
$21,275,000 $24,466,250
Maximum Maximum
Value Value,
as adjusted
------------------ -----------------
1,914,750 2,201,962
Shares at Shares at
$5.00 $5.00
per Share per Share
(Maximum (Super-
of Range) Maximum)
------------------ -----------------
(Dollars in thousands, except per share amounts)
GROSS PROCEEDS ...................................... $ 9,574 $ 11,010
Less offering expenses .............................. (525) (525)
------------------ -----------------
Estimated net conversion proceeds ............. 9,049 10,485
Less ESOP shares .................................... (766) (881)
Less Stock Programs shares .......................... (383) (440)
------------------ -----------------
Estimated proceeds available
for investment (1) ......................... $ 7,900 $ 9,164
================== =================
CONSOLIDATED NET INCOME:
Historical .................................... $ 537 $ 537
Pro forma adjustments:
Net income from proceeds ............. 255 296
ESOP (2) ............................. (46) (53)
Restricted Stock Plan (3) ............ (46) (53)
------------------ -----------------
Pro forma net income .............. $ 700 $ 727
================== =================
NET INCOME PER SHARE (4):
Historical .................................... $ 0.13 $ 0.11
Pro forma adjustments:
Net income from proceeds ............. 0.06 0.06
ESOP (2) ............................. (0.01) (0.01)
Restricted Stock Plan (3) ............ (0.01) (0.01)
================== =================
Pro forma net income .............. $ 0.17 $ 0.15
================== =================
PRO FORMA PRICE TO EARNINGS PER SHARE ............... 29.41 x 33.33 x
NUMBER OF SHARES .................................... 4,117,138 4.734,710
STOCKHOLDERS' EQUITY (BOOK VALUE):
Historical (retained earnings) (1) ......... $ 10,589 $ 10,589
Estimated net conversion proceeds .......... 9,049 10,485
Less common stock acquired by:
ESOP (2) ................................ (766) (881)
------------------ -----------------
Restricted Stock Plan (3) ............... (383) (440)
------------------ -----------------
Pro forma ............................ $ 18,489 $ 19,753
================== =================
STOCKHOLDERS' EQUITY PER SHARE:
Historical (retained earnings) .......... $ 2.49 $ 2.16
Estimated net conversion
proceeds ............................. 2.13 2.14
Less common stock acquired by:
ESOP (2) ............................. (0.18) (0.18)
Restricted Stock Plan (3) ............ (0.09) (0.09)
------------------ -----------------
Pro forma ......................... $ 4.35 $ 4.03
================== =================
PRO FORMA PRICE TO BOOK VALUE ....................... 114.94% 124.07%
NUMBER OF SHARES .................................... 4,255,000 4,893,250
MINORITY OWNERSHIP .................................. 45.00% 45.00%
Notes appear on following page.
33
(1) Estimated net proceeds available for investment consist of estimated net
proceeds from the sale of the Common Stock minus (i) the proceeds
attributable to the purchase by the ESOP; and (ii) the cost of the shares
covered by the Restricted Stock Plan, which, subject to receipt of
stockholder approval, are assumed to be purchased at a price of $5.00 per
share.
(2) The amount estimated to be borrowed by the ESOP from the Company is shown
as a reduction of stockholders' equity. ESOP expense is based upon
generally accepted accounting principles as described in accounting
Statement of Position 93-6. Generally accepted accounting principles
require that as and when shares pledged as security for an ESOP loan are
committed to be released from the loan (e.g., as the loan is repaid),
compensation expense is recorded based upon the fair value of the shares at
that time. The ESOP loan is assumed to have a term of ten years. It is
therefore assumed that one-tenth of the Common Stock acquired by the ESOP
is committed to be released from the lien of the ESOP loan each year, and
one-twentieth every six months. ESOP expense shown is equal to the
number of shares so committed to be released for the period, multiplied by
the per share fair value at that time, which is assumed to be $5.00 per
share. All shares released during the period are assumed to be outstanding
for the entire period for the purpose of calculating earnings per share and
book value per share. Shares not yet committed to be released are not
deemed to be outstanding for either purpose. See "Management of the Bank -
Benefits - Employee Stock Ownership Plan."
(3) The shares purchased by the Company to fund the anticipated Restricted
Stock Plan are assumed to be purchased at the beginning of the periods
shown at $5.00 per share and immediately awarded to directors, officers and
employees. Because the shares are assumed to vest gradually over five
years, 20% of the purchase price is treated as an expense for the year
ended September 30, 1997 and 10% for the six months ended March 31, 1998.
If the Company uses authorized but unissued shares to fund the plan, the
interests of existing stockholders would be reduced by approximately 3.85%.
In such event, pro forma net earnings per share would be $0.12, $0.11,
$0.10 and $0.09 and pro forma stockholders' equity per share would be
$5.31, $4.82, $4.46 and $4.14 at the minimum, midpoint, maximum and 15%
above the maximum of the Valuation Range, respectively, for the six months
ended March 31, 1998. Pro forma net earnings per share would be $0.22,
$0.20, $0.18 and $0.16, and pro forma stockholders' equity per share would
be $5.18, $4.71, $4.36 and $4.05, at the minimum, midpoint, maximum and 15%
above the maximum of the Valuation Range, respectively, for the year ended
September 30, 1997. If the per share price paid to repurchase stock to fund
the plan is greater than $5.00 per share, then net income per share and
stockholders equity per share would be lower. See "Management of the Bank -
Benefits - Restricted Stock Plan."
(4) If the Stock Option Plan covering up to 10% of the stock issued in the
Reorganization is implemented and funded with newly issued stock, the
estimated net income and book value per share for all of the alternatives
shown on the preceding tables would be reduced because of the additional
shares that would be outstanding. The effect of the implementation of a
stock option plan can not be reasonably estimated because the number of
options that may be awarded cannot be determined; the exercise price of the
options will depend upon the market price on the date the options are
awarded; the options will vest gradually over five years; and the exercise
of options is at the discretion of the director, officer or employee
holding the option. See "Management of the Bank - Benefits - Stock Option
Plan."
34
CAPITALIZATION
The following table presents the historical capitalization (capital
accounts, deposits and borrowings) of the Bank at March 31, 1998 and the
estimated consolidated capitalization of the Company as though the
Reorganization had been completed on that date. The table is based on the same
assumptions described above under "Pro Forma Data."
15% Above
Minimum Midpoint Maximum Maximum
3,145,000 3,700,000 4,255,000 4,893,250
Shares Issued Shares Issued Shares Issued Shares Issued
1,415,250 1,665,000 1,914,750 2,201,962
Historical Shares Sold Shares Sold Shares Sold Shares Sold
---------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Deposits (1)....................................... $ 42,923 $ 42,923 $ 42,923 $ 42,923 $ 42,923
Borrowings......................................... - - - - -
-------- -------- -------- -------- --------
Total deposits and borrowings...................... 42,923 42,923 42,923 42,923 42,923
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $0.01 par value
1,000,000 shares authorized
(none outstanding)........................... - - - - -
Common Stock, $0.01 par value(2)
9,000,000 shares authorized;
shares outstanding as shown.................... - 31 37 43 49
Additional paid-in capital......................... 6,520 7,763 9,006 10,436
Retained earnings(3)............................... 10,615 10,515 10,515 10,515 10,515
Net unrealized gain on securities, net of taxes ... 508 508 508 508 508
Less:
Common Stock acquired by ESOP(4)................. - (566) (666) (766) (881)
Common Stock acquired by RSP(5).................. - (283) (333) (383) (440)
-------- -------- -------- -------- --------
Total stockholders' equity......................... 11,123 16,725 17,824 18,923 20,187
-------- -------- -------- -------- --------
Total capitalization........................ $ 54,046 $ 59,648 $ 60,747 $ 61,846 $ 63,110
======== ======== ======== ======== ========
(1) Does not reflect withdrawals from deposit accounts to purchase Common
Stock.
(2) The effect of issuing additional Common Stock to satisfy the exercise of
options under the intended Stock Option Plan is not shown. See "Management
of the Bank - Benefits - Stock Option Plan."
(3) Estimated post-Reorganization information assumes that $100,000 is used to
capitalize Cambray Mutual Holding Company.
(4) The Common Stock acquired by the ESOP (8% of the Common Stock to be sold to
the Public Stockholders) is shown as a reduction of stockholders' equity
because it is assumed to be purchased with the proceeds of a loan from the
Company. See "Management of the Bank - Benefits - Employee Stock Ownership
Plan."
(5) Assumes that the Company repurchases 4% of the shares sold in the
Reorganization to fund the Restricted Stock Plan at $5.00 per share. The
purchase price is shown as a reduction of stockholders' equity. See "Risk
Factors - Possible Dilution from Stock Options and the Restricted Stock
Plan," "Pro Forma Data" and "Management of the Bank - Benefits - Restricted
Stock Plan."
35
GOUVERNEUR SAVINGS AND LOAN ASSOCIATION - STATEMENTS OF INCOME
The following Statements of Income of the Bank for each of the years in
the three-year period ended September 30, 1997 are a part of the audited
financial statements which appear beginning on page F-1 of this Prospectus. All
information contained in this Prospectus for the six months ended March 31, 1997
and 1998 is unaudited. In the opinion of management, all adjustments necessary
for a fair presentation of those interim periods have been included and are of a
normal recurring nature. Results for the six month period ended March 31, 1998
do not necessarily indicate the results that may be expected for the year ended
September 30, 1998. These Statements of Income should be read with the Financial
Statements and Notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Prospectus.
Six Months Ended
March 31, Years Ended September 30,
---------------- --------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
(In thousands)
Interest income:
Loans ........................... $ 1,622 $ 1,583 $ 3,183 $ 3,145 $ 3,264
Securities ...................... 483 482 989 1,052 907
Other short-term investments .... 38 61 103 141 89
------- ------- ------- ------- -------
Total interest income .............. 2,143 2,126 4,275 4,338 4,260
Interest expense on deposits ....... 936 945 1,896 1,980 1,823
------- ------- ------- ------- -------
Net interest income ................ 1,207 1,181 2,379 2,358 2,437
Provision for loan losses .......... 85 70 250 -- 190
------- ------- ------- ------- -------
Net interest income after
provision for loan losses ........ 1,122 1,111 2,129 2,358 2,247
------- ------- ------- ------- -------
Non-interest income:
Service charges ................. 24 24 52 48 48
Net loss on sale of securities .. -- (5) (23) -- (17)
Other ........................... 60 58 120 117 110
------- ------- ------- ------- -------
Total non-interest income ...... 84 77 149 165 141
Non-interest expenses:
Salaries and employee benefits .. 312 298 609 662 553
Directors fees .................. 30 28 60 58 53
Building, occupancy and equipment 89 86 163 162 164
Data processing ................. 41 40 78 79 74
Postage and supplies ............ 38 32 64 59 60
Professional fees ............... 23 27 48 57 41
Deposit insurance premium ....... 14 27 41 376 99
Real estate owned ............... 51 52 149 133 135
Other ........................... 94 101 194 188 199
------- ------- ------- ------- -------
Total non-interest expenses .... 692 691 1,406 1,774 1,378
------- ------- ------- ------- -------
Income before income tax expense .... 514 497 872 749 1,010
Income tax expense ................. 208 201 335 297 416
------- ------- ------- ------- -------
Net Income ......................... $ 306 $ 296 $ 537 $ 452 $ 594
======= ======= ======= ======= =======
See accompanying notes to financial statements
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, therefore, has no results
of operations. The Bank's results of operations depend principally on its net
interest income, which is the difference between the income earned on its loans
and securities and its cost of funds, principally interest paid on deposits.
Results of operations are also affected by the provision for loan losses, the
level of non-interest income, and non-interest expenses.
Sources of non-interest income currently include deposit account fees,
gains on the sale of securities and fees for banking services such as safe
deposit boxes. The largest category of non-interest expense is compensation and
benefits expense. Other principal categories of non-interest expense are
occupancy expense, data processing costs and the expense of real estate owned,
which represents expenses in connection with real estate acquired in foreclosure
or in satisfaction of a debt. Through fiscal 1996, FDIC deposit insurance
premiums represented a significant category of non-interest expense. During the
year ended September 30, 1996, the Bank, along with other institutions with
deposits insured by the Savings Association Insurance Fund of the FDIC, were
required by a new federal law to pay a one-time charge to augment that insurance
fund. The Bank's one time charge was $275,000. Since then, deposit insurance
premiums have been substantially reduced for most institutions, such as the
Bank. The Bank now pays a fee of approximately 0.065% of deposits, or
approximately $28,000 per year, which is used to pay the bonds created as part
of the savings and loan bailout in the late 1980's. This fee is subject to
semi-annual adjustment based upon the amount required to repay the bonds, but
has not varied materially since it was imposed. See "Regulation - Regulation of
Federal Savings Association - Insurance of Deposit Accounts."
MANAGEMENT STRATEGY
The Bank's primary operating strategy is to concentrate on investing its
funds in mortgage loans on properties located in its primary market area of
southern St. Lawrence and northern Jefferson and Lewis counties in New York
State. The largest component of the Bank's mortgage loans, and the Bank's
primary focus, are first lien loans on one-to-four family homes, which totaled
$28.8 million, or 82.9% of total loans, at March 31, 1998. All but $129,000 of
such loans were fixed-rate loans. In order to increase yields and improve the
interest rate sensitivity of its assets, management has invested a portion of
the Bank's assets in commercial mortgage loans as well as in shorter term
commercial loans, automobile loans, home equity loans and other consumer loans.
In recent years, the Bank has sought to increase its portfolio of automobile
loans and loans to businesses, which have higher yields than the currently low
residential mortgage loan rates. The Bank also seeks fee income by making credit
cards available to its customers, although the card issuer is a major
multi-state financial institution which pays fees to the Bank in exchange for
the credit card relationships.
In recent years, the Bank has sought to increase its portfolio of
automobile loans and loans to businesses, which have higher yields than the
currently low residential mortgage loan rates. This diversification of the
Bank's loan portfolio has been undertaken, in part, in response to local
economic conditions, which are not conducive to growth in the Bank's residential
mortgage loan portfolio. Higher than average unemployment, lower than average
income levels and housing values, coupled with increasing competitive pressures,
have made growth difficult in the past and are expected to continue to present
management with challenges in the foreseeable future. Ecomomic conditions will
make both the deployment and the leveraging of the new capital raised in the
Reorganization more difficult. Limited loan opportunities in the Bank's market
area could put downward pressure on the Bank's loan yields if lower rates must
be offered to obtain suitable lending opportunities. At the same time, higher
rates may need to be offered on deposits to attract additional funds needed to
leverage the new capital. These factors could combine to reduce the Bank's
spread (the difference between the rate earned on investments and the rate paid
on deposits and other funding sources) below the 3.81% spread at March 31, 1988
and the 3.88% spread for the six months ended March 31, 1998. As part of its
efforts to address these difficulties, the Bank is currently evaluating the
possibility of opening a loan production office in a community adjoining the
Bank's market area to expand its customer base and seek additional loan
opportunities.
In addition to interest income, the Bank also earns fee income by making
credit cards available to its customers. However, the card issuer is a major
multi-state financial institution which pays fees to the Bank in exchange for
the credit card relationships. The Bank does not make the credit card loans and
hence does not share in the resultant interest income.
Substantially all of the Bank's residential mortgage portfolio has fixed
interest rates. To provide liquidity and improve interest rate sensitivity,
management has invested a portion of the Bank's assets in securities and
short-term investments, including debt securities, mortgage-backed securities
and interest-bearing deposits with other banks. All of the Bank's securities
portfolio, other than mortgage-backed securities, had maturities of six years or
less at March 31, 1998. The largest part of the Bank's mortgage-backed
securities portfolio consists of short-term securities in which the underlying
mortgages have balloon payments originally due in five to seven years.
The Bank seeks to maintain a ratio of loans to total assets of at least
66%. It is management's goal to maintain, and possibly increase, this ratio in
the future because loans represent the highest yielding asset category for the
Bank. However, the availability of acceptable lending opportunities is
substantially outside the control of the Bank, being driven primarily by
economic conditions and competitive pressures. Therefore, the Bank may be unable
to achieve its goal of increasing its loan to total assets ratio. Furthermore,
immediately after the Reorganization, the increase in capital from the sale of
the Company's Common Stock is initially expected to reduce the ratio of loans to
total assets because it is unlikely that the funds can be rapidly invested in
loans.
37
Paralleling the Bank's high level on mortgage loans in its local
community, the Bank's primary source of funds for investment is deposits from
its local community and augmented by the Bank's capital. The Bank estimates that
at March 31, 1998, approximately 86% of its deposits were held by persons who
resided in the Bank's market area. The Bank does not seek deposits from outside
St. Lawrence, Jefferson and Lewis Counties, does not utilize brokered deposits,
and has not utilized borrowings as a material funding source in recent years.
However, after the Reorganization, the Bank may use borrowings as a tool to
provide additional funding to assist in the leveraging of the additional capital
obtained in the Reorganization.
The Bank's average loan yield, which was 9.36% annualized for the six
months ended March 31, 1998, is believed to be higher than the average loan
yield for its peers. For example, based upon data made available by the FDIC,
for the twelve months ended December 31, 1997, the average yield on earning
assets for all savings institutions with assets of $100 million or less was 46
basis points lower than the comparable yield earned by the Bank, and was 50
basis points lower for the three months ended March 31, 1998. The Bank believes
that its high yields on loans result from a number of factors. Until recently,
in the Bank's market area, which is isolated from major population centers in
New York, competition from major secondary market residential mortgage lenders
was limited, allowing the Bank to command a higher rate on its mortgage
products. Furthermore, the Bank has historically counted among its customers
many people who, although judged creditworthy by the Bank, did not satisfy
secondary market lending standards because of blemishes on their credit
histories, difficulties in verifying income, residences with too high a portion
of the value in land because of the large acreage attached to the property, and
other factors. The Bank believes that its historically high yields are likely to
decline in the foreseeable future, absent increases in general market interest
conditions, because increased competition from secondary market sources has
driven down rates which can be earned on locally originated residential mortgage
loans at the same time that the Bank has sought to tighten its loan underwriting
policies to decrease delinquency rates.
ANALYSIS OF NET INTEREST INCOME
Net interest income, the Bank's primary income source, depends principally
upon (i) the amount of interest-earning assets that the Bank can maintain based
upon its funding sources; (ii) the relative amounts of interest-earning assets
versus interest-bearing liabilities; and (iii) the difference between the yields
earned on those assets and the rates paid on those liabilities. Non-performing
loans adversely affect net interest income because they must still be funded by
interest-bearing liabilities, but they do not provide interest income.
Furthermore, when the Bank designates an asset as non-performing, all interest
which has been accrued but not actually received is deducted from current period
income, further reducing net interest income.
38
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following tables present, for the periods indicated, the average
interest-earning assets and average interest-bearing liabilities by principal
categories, the interest income or expense for each category, and the resultant
average yields earned or rates paid. Also set forth is information regarding
actual balances and related yields or costs at March 31, 1998. No tax equivalent
adjustments were made. All average balances are daily average balances.
Non-interest-bearing checking accounts are included in the tables as a component
of non-interest-bearing liabilities.
At March 31, 1998
----------------------
Weighted
Average
Balance Rate
------- --------
Loans (1)........................................ $34,292 9.31%
Securities (2)................................... 15,285 6.28%
Other short-term investments..................... 2,763 5.56%
-------
Total interest-earning assets............... 52,340 8.23%
Non-interest-earning assets...................... 2,752
-------
Total assets................................ $55,092
=======
Savings and club accounts (3).................... $15,138 3.50%
Time certificates................................ 22,562 5.59%
NOW and money market accounts.................... 5,197 2.00%
-------
Total interest-bearing liabilities.......... 42,8978 4.42%
Non-interest-bearing liabilities................. 1,072
-------
Total liabilities........................... 43,969
Net worth........................................ 11,123
-------
Total liabilities and net worth............. $55,092
=======
Net interest income/spread (4)................... 3.81%
=====
Net earning assets/net interest margin (5)....... $ 9,443 NA
======= ==
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 1.22x
=====
For the Six Months Ended March 31,
-----------------------------------------------------------------------------
1998 1997
----------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost (6) Balance Interest Cost (6)
------- -------- -------- ------- -------- --------
(Dollars in thousands)
Loans (1)........................................ $34,763 $1,622 9.36% $33,100 $1,583 9.59%
Securities (2)................................... 15,555 483 6.23% 16,524 482 5.85%
Other short-term investments..................... 1,499 38 5.08% 2,454 61 4.99%
------- ------ ------- ------
Total interest-earning assets............... 51,817 2,143 8.29% 52,078 2,126 8.19%
Non-interest-earning assets...................... 2,223 2,240
------- -------
Total assets................................ $54,040 $54,318
======= =======
Savings and club accounts (3).................... $14,630 254 3.48% $15,011 261 3.49%
Time certificates................................ 22,454 628 5.61% 23,009 632 5.51%
NOW and money market accounts.................... 5,446 54 1.99% 5,400 52 1.93%
------- ------- ------- ------
Total interest-bearing liabilities.......... 42,530 936 4.41% 43,420 945 4.36%
Non-interest-bearing liabilities................. 1,121 1,041
------- -------
Total liabilities........................... 43,533 44,461
Net worth........................................ 10,507 9,857
------- -------
Total liabilities and net worth............. $54,040 $54,318
======= =======
Net interest income/spread (4)................... $1,207 3.88% $1,181 3.83%
====== ===== ====== =====
Net earning assets/net interest margin (5)....... $ 9,287 4.67% $ 8,658 4.55%
======= ===== ======= =====
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 1.22x 1.20x
===== =====
Notes appear on following page.
39
AVERAGE BALANCES, INTEREST RATES AND YIELDS (CONTINUED)
For the Year Ended September 30,
------------------------------
1997
-----------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- --------
Loans (1) ....................................... $33,520 $3,183 9.50%
Securities (2) .................................. 16,637 989 5.94%
Other short-term investments .................... 2,028 103 5.08%
------- ------
Total interest-earning assets ................. 52,185 4,275 8.19%
------
Non-interest-earning assets ..................... 2,259
-------
Total assets .................................. $54,444
=======
Savings and club accounts (3) ................... $15,115 527 3.49%
Time certificates ............................... 22,884 1,265 5.53%
NOW and money market accounts ................... 5,411 104 1.92%
------- ------
Total interest-bearing liabilities ............ 43,410 1,896 4.37%
Non-interest-bearing liabilities ................ 1,013
-------
Total liabilities ............................. 44,423
Net worth ....................................... 10,021
-------
Total liabilities and net worth ............... $54,444
=======
Net interest income/spread (4) .................. $2,379 3.82%
====== =====
Net earning assets/net interest margin (5) ...... $ 8,775 4.56%
======= =====
Ratio of average interest-earning assets
to average interest-bearing liabilities ....... 1.20x
=====
For the Year Ended September 30,
---------------------------------------------------------------
1996 1995
----------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- -------- ------- -------- --------
Loans (1) ....................................... $32,527 $3,145 9.67% $32,998 $3,264 9.89%
Securities (2) .................................. 17,465 1,052 6.02% 15,907 907 5.70%
Other short-term investments .................... 2,461 141 5.73% 1,471 89 6.05%
------- ------ ------- ------
Total interest-earning assets ................. 52,453 4,338 8.27% 50,376 4,260 8.46%
------ ------
Non-interest-earning assets ..................... 2,244 1,993
------- -------
Total assets .................................. $54,697 $52,369
======= =======
Savings and club accounts (3) ................... $15,644 544 3.48% $18,646 655 3.51%
Time certificates ............................... 23,236 1,314 5.66% 19,222 1,024 5.33%
NOW and money market accounts ................... 5,158 122 2.36% 5,023 144 2.87%
------- ------ ------- ------
Total interest-bearing liabilities ............ 44,038 1,980 4.50% 42,891 1,823 4.25%
Non-interest-bearing liabilities ................ 1,241 603
------- -------
Total liabilities ............................. 45,279 43,494
Net worth ....................................... 9,418 8,875
------- -------
Total liabilities and net worth ............... $54,697 $52,369
======= =======
Net interest income/spread (4) .................. $2,358 3.77% $2,437 4.21%
====== ===== ====== =====
Net earning assets/net interest margin (5) ...... $ 8,414 4.50% $ 7,485 4.84%
======= ===== ======= =====
Ratio of average interest-earning assets
to average interest-bearing liabilities ....... 1.19x 1.17x
===== =====
(1) Shown net of the allowance for loan losses. Average loan balances include
non-accrual loans. Interest is recognized on non-accrual loans only as and
when received.
(2) Securities are included at amortized cost, with net unrealized gains or
losses on securities available for sale included as a component of
non-interest-earning assets.
Securities include Federal Home Loan Bank of New York stock.
(3) Includes advance payments by borrowers for taxes and insurance (mortgage
escrow deposits).
(4) The spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(5) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
(6) Yields and related ratios for the six month periods have been annualized,
when appropriate.
40
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
One method of analyzing net interest income is to consider how changes in
average balances and average rates from one period to the next affect net
interest income. The following table shows changes in the dollar amount of
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It shows the amount of the change in
interest income or expense caused by either changes in outstanding balances
(volume) or changes in interest rates. The effect of a change in volume is
measured by applying the average rate during the first period to the volume
change between the two periods. The effect of changes in rate is measured by
applying the change in rate between the two periods to the average volume during
the first period. Changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
Six Months Ended
March 31,
------------------------------
1998 vs. 1997
---------------------------
Increase (Decrease) Due To:
Volume Rate Total
------ ---- -----
INTEREST-EARNING ASSETS:
Loans........................................... $ 78 $ (39) $ 39
Securities...................................... (29) 30 1
Other short-term investments.................... (24) 1 (23)
----- ------ -------
Total interest-earning assets................... 25 (8) 17
===== ====== =======
INTEREST-BEARING LIABILITIES:
Savings and club accounts....................... (6) (1) (7)
Time certificates............................... (15) 11 (4)
NOW and money market accounts................... - 2 2
----- ------ -------
Total interest-bearing liabilities.............. (21) 12 (9)
===== ====== =======
Net change in net interest income............... $ 46 $ (20) $ 26
===== ====== =======
Year Ended September 30,
--------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------- -----------------------------
Increase (Decrease) Due To: Increase (Decrease) Due To:
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
INTEREST-EARNING ASSETS:
Loans........................................... $ 94 $ (56) $ 38 $ (47) $ (72) $ (119)
Securities...................................... (49) (14) (63) 92 53 145
Other short-term investments.................... (23) (15) (38) 57 (5) 52
------- ------ ------ ------- -------- --------
Total interest-earning assets................... 22 (85) (63) 102 (24) 78
======= ====== ====== ======= ======== =======
INTEREST-BEARING LIABILITIES:
Savings and club accounts....................... (19) 2 (17) (105) (6) (111)
Time certificates............................... (19) (30) (49) 224 66 290
NOW and money market accounts................... 6 (24) (18) 4 (26) (22)
------- ------ ------ ------- -------- --------
Total interest-bearing liabilities.............. (32) (52) (84) 123 34 157
======= ====== ====== ======= ======== =======
Net change in net interest income............... $ 54 $ (33) $ 21 $ (21) $ (58) $ (79)
======= ====== ====== ======= ======== ========
41
MARKET INTEREST RATE RISK ANALYSIS
Qualitative Analysis. The principal objective of the Bank's interest rate
risk policy is to avoid taking undue interest rate risk while continuing to
satisfy customer demand for loans. Substantially all of the Bank's residential
mortgage loans have fixed interest rates and terms of up to 25 years. The Bank
has only recently offered adjustable residential mortgage loans. There is
currently very little customer demand for those loans, and they represent less
than 1% of the Bank's residential mortgage loan portfolio. Therefore, in a
rising interest rate environment, the yields on the Bank's residential mortgage
loan portfolio can be expected to increase relatively slowly, as loans are
repaid and the payments are reinvested, while the Bank's cost of funds can be
expected to rise more rapidly. In order to reduce this risk, Management has
adopted a multi-part strategy. First, the Bank is beginning to emphasize loan
types which generally involve shorter terms to maturity or adjustable interest
rates, such as automobile loans, home equity lines of credit, and commercial
loans. Second, the Bank has concentrated its securities investments in
short-term or adjustable rate securities. U.S. Treasury and federal agency
securities are purchased with terms to maturity that generally do not exceed two
years. Most of the Bank's mortgage-backed securities portfolio have either
adjustable rates or relatively short terms to maturity with balloon payments due
on the underlying mortgages in five to seven years after the loans were
originated. The Bank also seeks to cushion itself against interest rate
fluctuations by preserving a loyal customer base through paying above market
rates on its savings and club account deposits during present periods of low
interest rates. This allows the Bank to maintain customer accounts with core
deposits that are less prone to gravitate to high rate deposit products as
interest rates rise.
Interest rate pricing and interest rate risk strategy objectives are
implemented, in the first instance, by an internal committee which meets weekly
to review and assess the Bank's deposit and loan pricing. The OTS prepares a
quarterly interest-rate sensitivity report for the Bank, based upon its asset
and liability profile which seeks to estimate the effect of interest rate
changes on the net value of the Bank's assets and liabilities. This report is
reviewed with the Board quarterly.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest
sensitive" and by monitoring the Bank's estimated interest sensitivity "gap." An
asset or liability is said to be interest sensitive within a specific time
period if it will mature or its interest rate will adjust (reprice) within that
time period. The interest sensitivity gap for any period of time is defined as
the difference between the amount of interest-earning assets estimated to mature
or reprice within that period and the amount of interest-bearing liabilities
estimated to mature or reprice within that same period. At March 31, 1998, the
Bank's one year gap, the difference between the estimated amount of
interest-earning assets versus interest-bearing liabilities maturing or
repricing within one year, as a percentage of total assets, was estimated to be
negative 5.61%, as shown on the table below.
A gap is considered positive for any period when the amount of
interest-sensitive assets exceeds the amount of interest sensitive liabilities
estimated to reprice within such period. A gap is considered negative when the
amount of interest sensitive liabilities exceeds the amount of interest
sensitive assets estimated to reprice within a given period. Accordingly, during
a period of rising interest rates, an institution with a positive gap for that
period would expect its net interest income to increase as the cost of its
interest-bearing liabilities rises more slowly than the yield on its
interest-earning assets. The same institution would expect net interest income
to decline during such period if interest rates fall. An institution with a
negative gap would expect its net interest income to be affected in the opposite
way. However, the repricing of most assets and liabilities is discretionary and
subject to customer preference. Thus, for example, during periods of rising
interest rates, loan customers may delay the sales of their homes, resulting in
reduced loan turnover. At the same time, deposit customers with low-rate
savings, demand and NOW accounts may accelerate the migration of deposits into
higher rate certificates of deposit as the rates on certificates of deposit
become more attractive.
Quantitative Analysis. The following table sets forth the amounts of
interest-earning assets and interest-bearing liabilities outstanding at March
31, 1998, which are estimated by the Bank, based upon certain assumptions, to
reprice or mature in each of the future time periods shown. Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
42
repricing or the contractual maturity of the asset or liability. Loans and
mortgage-backed securities with adjustable rates are included during the earlier
of scheduled payment or repricing. The aggregate principal outstanding on
fixed-rate loans is assumed, based upon recent experience to be repaid evenly
over 80 months. Fixed-rate mortgage-backed securities are included in the table
based on scheduled principal payments but without any assumed voluntary
prepayments. Interest-earning deposits with other banks are included in the
table based upon the earliest date they can be withdrawn and reinvested.
The Bank assumes that 65% of savings accounts, money market accounts and
NOW accounts are core deposits and therefore are expected to reprice beyond five
years. The remainder of such deposits are assumed to reprice at the rate of 7%
per year for each of the first five years. Certificates of deposit are included
based upon their contractual maturities. Loan prepayment rates and deposit
turnover rates can have a significant impact on the Bank's estimated gap. While
the Bank believes the assumptions used to prepare the following table are
reasonable, there can be no assurance that such estimates will approximate
actual future loan repayment and deposit withdrawal activity. See "Business of
the Bank - Lending Activities," "-Investment Activities" and "-Sources of
Funds."
Less than
Three 3 months 1-5 Over 5
Months to 1 Year Years Years Total
------ --------- ----- ----- -----
(In thousands)
Interest-earning assets:
Securities ............................. $ 4,676 $ 843 $ 7,013 $ 3,221 $ 15,753
Loans .................................. 1,544 3,887 20,731 8,638 34,800
Other short-term investments ........... 2,763 -- -- -- 2,763
-------- ------- -------- ------- --------
Total interest-earning assets .... 8,983 4,730 27,744 11,859 53,316
-------- ------- -------- ------- --------
Interest-bearing liabilities:
Savings and club accounts .............. 263 789 4,206 9,764 15,022
NOW and money market accounts .......... 91 273 1,455 3,378 5,197
Time certificates ...................... 4,925 10,461 7,176 -- 22,562
-------- ------- -------- ------- --------
Total interest-bearing liabilities 5,279 11,523 12,837 13,142 42,781
-------- ------- -------- ------- --------
Interest sensitivity gap ................. $ 3,704 $(6,793) $ 14,907 $(1,283) $ 10,535
Cumulative interest sensitivity gap ...... $ 3,704 $(3,089) $ 11,818 $10,535
Ratio of cumulative gap to total
interest-earning assets ................ 6.95% (5.79%) 22.17% 19.76%
Ratio of cumulative gap to total assets .. 6.72% (5.61%) 21.45% 19.12%
Ratio of interest-earning assets to
interest-bearing liabilities ........... 170.16% 41.05% 216.13% 90.25% 124.63%
When the Reorganization is completed, the Company will initially
experience an increase in investable assets approximately equal to the net
proceeds from the sale of stock in the Reorganization minus the loan to the
ESOP. The investment of these net proceeds can be expected initially to increase
positive gaps and reduce negative gaps because such investment will add assets
estimated to mature or reprice within each period shown while there will be no
immediate corresponding increase in liabilities estimated to mature or reprice
during the same period.
Net Portfolio Value. Another method of analyzing the effect of interest
rate changes on the Bank is to seek to estimate how changes in interest rates
will affect the Bank's "net portfolio value." Net portfolio value, or "NPV",
akin to net worth, represents the net present value of the Bank's cash flow from
assets, liabilities and off
43
balance sheet items. Each calendar quarter, the OTS calculates the Bank's
estimated NPV and the estimated effect on NPV of instantaneous and permanent 1%
to 4% (100 to 400 basis points) increases and decreases in market interest
rates. The calculations are based upon the OTS's assumptions regarding loan
prepayments rates, deposit turnover and other factors affecting the repricing of
assets and liabilities.
The following table presents the Bank's estimated NPV at March 31, 1998,
and the estimated effect on NPV of the specified interest rate changes, as
calculated by the OTS. At March 31, 1998, the portfolio value of the Bank's
assets as estimated by the OTS was $56.7 million.
Estimated Change
Hypothetical Estimated in Estimated
Change in Interest Net Portfolio Net Portfolio Percentage Change
Rate Value Value in NPV(1)
- ------------------ ------------- ----------------- -----------------
(Dollars in thousands)
+4.00% $ 9,714 $-2,963 -23%
+3.00% 10,608 -2,069 -16%
+2.00% 11,483 -1,195 -9%
+1.00% 12,245 -432 -3%
0.00% 12,677 - -
-1.00% 12,860 +183 +1%
-2.00% 13,027 +350 +3%
-3.00% 13,379 +701 +6%
-4.00% $13,964 $+1,286 +10%
(1) Calculated as the amount of change in the estimated NPV divided by the
estimated current NPV.
The above table indicates that in a rising interest rate environment, the
Bank's net portfolio value is expected to decrease, while the reverse is
expected in a declining interest rate environment. It is believed that these
changes in net portfolio value would be accompanied by a decline in net income
during periods of rising interest rates and an increase in net income during
periods of declining interest rates.
Certain shortcomings are inherent in the methodology used to calculate
changes in NPV. In order to estimate changes in NPV, it is necessary to make
assumptions regarding repayment and turnover rates which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV table presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remain constant over the period being measured. So,
for example, the ratio of adjustable versus fixed-rate loans or short-term loans
versus long-term loans is assumed to remain the same. Furthermore, a change in
interest rates is assumed to be uniform regardless of the duration to maturity
or repricing of specific assets and liabilities. Accordingly, although the
information calculated by the OTS and set forth in the above table provides an
indication of the Bank's interest rate risk exposure at a particular point in
time, the analysis is not intended to and does not provide a precise forecast of
the effect of changes in market interest rates on the Bank's net interest
income.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND SEPTEMBER 30, 1997.
Total assets at March 31, 1998 were $55.1 million, a decrease of $80,000,
or 0.1%, from total assets of $55.2 million at September 30, 1997. The primary
cause of the decline was a $653,000 decline in deposits as the Bank experienced
competitive pressures from other investment alternatives. The Bank experienced a
$558,000 decline in loans, net, which served to fund the decline in deposits.
The decline in loans was caused by increasing competition for residential
mortgage loans, particularly competition from a larger local bank which sought
increased market share through aggressive pricing of its residential mortgage
loan products. Securities and other short-term investments increased by $750,000
as the Bank invested available funds in those asset categories when acceptable
lending opportunities were not available. Partially funding the decline in
deposits and the increase in securities and short term investments was an
increase in capital of $434,000 represented by the retention of earnings during
the six month
44
period of $306,000 and an increase in the unrealized gain on securities
available for sale as favorable market conditions improved the value of the
Bank's securities portfolio.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Total assets at September 30, 1997 were $55.2 million compared to $54.3
million at September 30, 1996. The primary cause of the $825,000, or 1.5%,
increase in total assets was an increase of $696,000 in capital due principally
to $537,000 of retained earnings during fiscal 1997, augmented by a $159,000
increase in the unrealized gain on securities available for sale. Loans, net,
increased by $1.9 million from fiscal year end 1996 to fiscal year end 1997 as
the Bank aggressively pursued automobile loan originations, which increased the
auto loan portfolio from $426,000 to $1.3 million between the fiscal year end
dates. During fiscal 1997, the Bank also began to offer commercial non-mortgage
loans, which went from zero at September 30, 1996 to $81,000 at September 30,
1997, and $101,000 at March 31, 1998.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND
MARCH 31, 1997.
General. Net income for the six months ended March 31, 1998 was $306,000,
an increase of $10,000, or 3.4%, from net income of $296,000 during the six
months ended March 31, 1997. The Bank principally experienced normal
fluctuations in income and expense categories, and a decline in yield on loans
was offset by a shift in the mix of assets towards loans, the Bank's highest
yielding asset category.
Interest Income. Interest income increased by $17,000 from the six months
ended March 31, 1997 to the six months ended March 31, 1998. This modest
increase resulted principally from a change in the mix of interest-earning
assets. The average balance of loans, the Bank's highest yielding asset
category, increased by $1.7 million when comparing the six months ended March
31, 1998 with the same period in 1997. In contrast, the average balance of lower
yielding securities and other short-term investments declined by $1.9 million,
resulting in an overall decline in average interest-earning assets of $261,000.
The ability of the Bank to shift interest-earning investments into higher
yielding loans is estimated to have resulted in a $78,000 increase in interest
income. This was partially offset by an estimated $53,000 decline in interest
income caused by the reduction in the average volume of securities and other
short-term investments.
The effect of the mix shift was slightly blunted by a decline in the
average yield on loans from 9.59% for the six months ended March 31, 1997 to
9.36% for the six months ended March 31, 1998. The decline in average loan yield
resulted from the continuation of low market interest rates for residential
one-to-four family mortgage loans which caused some customers to refinance their
loans at lower rates while new loans were also being originated at relatively
low rates. This was coupled with increased competition for mortgage loans and
tighter underwriting standards adopted by the Bank. The Bank sought to reduce
the decline in yields by pursuing the origination of auto loans and commercial
loans, both mortgage and non-mortgage. The Bank experienced an increase of 38
basis points in its yield on securities investments because during 1997, the
Bank sought to improve the yield on its securities investments by shifting
investments away from lower yielding U.S. Treasury securities in favor of higher
yielding mortgage-backed securities and government agency securities.
Interest Expense. Interest expense declined by $9,000 from the first six
months of 1997 to the first six months of 1998. The slight decline represented
the net effect of a decline in the average balance of interest-bearing
liabilities by $890,000, which was substantially offset by a slight increase in
cost of 5 basis points. The decline in the average balance is believed by the
Bank to have been caused by competitive pressures from other investment
alternatives at a time of historically high stock market values which motivated
more depositors to seek non-deposit investment vehicles for their deposited
funds. The slight increase in the average cost of funds, reflected almost
exclusively in an increase in the average rate paid on certificates of deposit,
was caused by competitive pressures for deposits.
Net Interest Income. The combined effect of the increase in interest
income and the decline in interest expense was a $26,000, or 2.2%, increase in
net interest income. The Bank's reported spread increased by five basis points
from 3.83% to 3.88% and the Bank's net interest margin increased by 12 basis
points from 4.55% to 4.67%.
45
The increase in spread resulted principally from the shift of assets into loans
and out of securities investments, coupled with the shift in the securities
portfolio towards more mortgage-backed securities investments. The increase in
the net interest margin resulted from the combined effect of the spread increase
and higher levels of non-interest bearing capital as a funding source due to the
retention of earnings.
Provision for Loan Losses. The provision for loan losses results from
management's analysis of the adequacy of the Bank's allowance for loan losses.
If management determines that an increase in the allowance is warranted, then
the increase is accomplished through a provision for loan losses which is
charged as an expense on the Bank's income statement. The provision for loan
losses was $85,000 for the six months ended March 31, 1998, compared to $70,000
for the six months ended March 31, 1997. The provision during the six months
ended March 31, 1998 resulted in a $61,000 increase in the allowance for loan
losses, after $24,000 of net charge-offs. Management believes the increase in
the allowance is appropriate because the Bank has pursued an increase in
higher-risk auto loans and commercial non-mortgage loans.
Non-interest Income. The Bank's non-interest income remained essentially
constant between the periods, increasing from $77,000 to $84,000 primarily
because the Bank had $5,000 of realized losses on the sale of securities during
the six months ended March 31, 1997 and no such losses during the 1998 period.
From time to time, the Bank sells debt securities at a loss if the Bank believes
that reinvestment alternatives will allow the Bank to recoup the loss over a
term shorter than the maturity of the security sold. Service charges on deposit
accounts remained constant at $24,000 for each six month period. Service charges
are generally a function of the Bank's service charge policy, the volume of
deposit accounts and economic conditions which can affect sub-categories of
service charges such as fees for bounced checks. All three of these factors
remained relatively constant throughout all the periods under review, resulting
in a consistent level of service charge income.
Non-interest Expense. Non-interest expense remained essentially constant
when comparing the first six months of 1997 to the first six months of 1998. The
Bank had an increase in salaries and employee benefits expense of $14,000, or
4.7%, due to normal increases in compensation expense and an increase in
staffing through the addition of a loan officer to pursue past due account
collection as well as loan originations. This increase was offset by a decline
in deposit insurance premiums from $27,000 to $14,000 due to refunds and other
adjustments related to statutory changes in the assessment of deposit insurance
premiums. Other variations in non-interest expense resulted from normal period
to period fluctuations in activity.
Income Taxes. Income tax expense increased from $201,000 for the six
months ended March 31, 1997 to $208,000 for the six months ended March 31, 1998.
The increase corresponded to the increase in net income as the Bank's effective
tax rate remained relatively constant.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996.
General. Net income for fiscal 1997 was $537,000 compared to net income of
$452,000 in fiscal 1996. During the fourth quarter of fiscal 1996, the Bank
accrued $275,000 for the special deposit insurance charge when a new law
required the payment to recapitalize the FDIC deposit insurance fund which
covered the Bank. The recapitalization legislation caused both the one-time
assessment in fiscal 1996 and a decrease in deposit insurance premiums in fiscal
1997.
Interest Income. Interest income declined by $63,000 from fiscal 1996 to
fiscal 1997. The decline was caused by a decline in the rates earned on all
categories of interest-earning assets as general market interest conditions
remained at low levels, and in some cases declined between the periods. This
reduced the yields that the Bank was able to earn upon the reinvestment of the
proceeds of loan repayments and securities maturities. As a result, overall
yields on interest earning assets declined by 8 basis points, from 8.27% to
8.19%. The decline in rates earned was augmented by a slight decline in the
volume of average interest-earning assets of $268,000, or 0.5%, from $52.5
million to $52.2 million. The decline was caused principally by the need to fund
a reduction in average interest bearing liabilities which was only partially
offset by an increase in average capital.
46
The decline in yields was partially offset by a change in the mix of
interest-earning assets as the Bank concentrated on increasing its level of
loans. Average loans increased by $1.0 million, or 3.1%, from $32.5 million to
$33.5 million. For fiscal 1997, average loans represented 64.2% of average
interest-earning assets, while they represented only 62.0% of average
interest-earning assets in fiscal 1996. The increases were primarily in the
categories of auto loans and commercial non-mortgage loans, which served to
further blunt the effect of declining market interest rates because they tend to
have higher yields than residential one-to-four family mortgage loans. The
overall increase in the average balance of loans was funded through a decrease
in the average balance of securities and other short-term investments.
Interest Expense. Interest expense declined by $84,000 from fiscal 1996 to
fiscal 1997. The decline resulted from the combined effect of a $628,000 decline
in the average balance of interest-bearing liabilities and a thirteen basis
point decline in the cost of funds. Deposit balances declined due to
competitive pressures from other investment opportunities, while rates paid on
certificates of deposit and NOW and money market accounts declined due to
declining market interest rates which allowed the Bank to reduce the rates paid
on certain deposit categories, while still seeking to maintain an advantage over
its local competitors by paying slightly higher rates on its deposits.
Net Interest Income. The combined effect of the decline in interest income
and the larger decline in interest expense was a $21,000, or 0.9%, increase in
net interest income. The increase in net interest income corresponded to a
slight increase in spread, by 5 basis points, from 3.77% to 3.82%. The decline
in the yield on interest-earning assets was less than the decline in the cost of
funds due to the shift of asset mix towards loans instead of securities. In
contrast, the Bank's deposit mix did not shift significantly as certificates of
deposit, the Bank's highest cost funding source, remained relatively steady at
52.7% of average interest-bearing liabilities during fiscal 1997, compared to
52.8% in fiscal 1996. The net interest margin increased a corresponding 6 basis
points as the positive effect of retained earnings as a no-cost funding source
was partially offset by a decline in average non-interest-bearing liabilities.
Thus, the excess of average interest-earning assets over average
interest-bearing liabilities increased by only $360,000, compared to an increase
in average net worth of $603,000.
Provision for Loan Losses. The provision for loan losses was $250,000
during fiscal 1997, compared to zero in fiscal 1996. During 1996, the Bank
believed that no additional provision for loan losses was required in light of
anticipated improvement in economic conditions, a historically high level of its
allowance at the beginning of fiscal 1996, a decline in total non-performing
assets during 1995 from much higher levels during the two prior years, and other
factors. During fiscal 1997, the Bank charged off $366,000 of loans, more than
twice the level in fiscal 1996. The Bank recorded substantial charge-offs on two
mortgage loan relationships during fiscal 1997. Both loan relationships resulted
in losses as borrowers delayed the collection by bankruptcy filings. In one
case, the bankruptcy delay caused such a high level of past due real estate
taxes that the value of the collateral to the Bank was completely eliminated and
the Bank recorded a total loss. Neither of the loans continues to be reflected
as an asset on the Bank's balance sheet. Furthermore, although total
non-performing assets declined from fiscal 1996 to fiscal 1997, the decline
resulted exclusively from the increase in charge-offs, without which the level
of non-performing assets would have increased. In addition, the Bank decided to
pursue increases in its level of auto loans and to begin originating commercial
non-mortgage loans, both of which loan types are believed to have greater risk
characteristics than single family residential mortgage lending. For these and
related reasons, the Bank recorded the $250,000 provision during fiscal 1997.
Non-interest Income. Non-interest income declined $16,000 from fiscal 1996
to fiscal 1997 principally due to a $23,000 loss on the sale of securities
recorded in fiscal 1997 as the Bank accepted the realization of the loss in
order to reinvest the proceeds from the sale of the securities. Other categories
of non-interest income remained relatively constant.
Non-interest expense. Non-interest expense declined by $368,000 from
fiscal 1996 to fiscal 1997. The principal reason for the decline was a reduction
in deposit insurance expense by $335,000. In fiscal 1996, the Bank had paid
deposit insurance premiums throughout the year at the rate of 0.23% of deposits,
because its deposits were insured by the Savings Association Insurance Fund of
the FDIC, which fund had an inadequate reserve balance. This created a
competitive problem for some institutions, such as the Bank, which were paying
higher deposit insurance
47
premiums than commercial banks and some other savings institutions. To solve the
competitive inequality and also to recapitalize the fund, Congress imposed a
one-time assessment covering all deposits insured by the Savings Association
Insurance Fund. The Bank recorded its assessment, in the amount of $275,000, as
a component of its deposit insurance premium for fiscal 1996. As a result of the
legislation, the Bank's deposit insurance premiums were decreased to 0.063% of
deposits in fiscal 1997.
Salaries and employee benefits expense declined by $53,000, or 8%, due to
a decline in staffing costs resulting from temporary increases in costs during
fiscal 1996. Other categories of non-interest expense experienced normal
year-to-year fluctuations.
Income Taxes. Income tax expense increased by $38,000 from fiscal 1996 to
fiscal 1997 to correspond to the increase in net income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995.
General. Net income for fiscal 1996 was $452,000 compared to net income of
$594,000 in fiscal 1995. The principal components of the net income changes from
fiscal 1995 to 1996 were the $275,000 deposit insurance assessment in fiscal
1996, a $79,000 decrease in net interest income, a $109,000 increase in salary
and employee benefits expense, and a $190,000 decline in the provision for loan
losses.
Interest Income. Interest income increased by $78,000 from fiscal 1995 to
fiscal 1996, caused principally by an increase in average interest-earning
assets of $2.1 million, which more than offset a 19 basis point decline in
average yields earned on interest-earning assets. The average volume of loans
declined by $471,000 because of competition for loans and stricter underwriting
criteria. However, as funding sources increased, reflected in an increase in
deposits believed to be caused by the high rates paid by the Bank, the Bank was
able to invest available funds in securities and other short-term investments,
which increased by $2.5 million. In addition, partially offsetting a 22 basis
point decline in the average yield earned on loans, the Bank had a 32 basis
point increase in the average yield on securities. Most of the increase in
securities was represented by purchases of mortgage-backed securities, which
tend to have higher yields than U.S. Treasury and federal agency securities. In
addition, interest rates peaked during the middle of fiscal 1995, allowing the
Bank to reinvest maturing securities in new higher-rate securities which
remained outstanding for most of fiscal 1996.
Interest Expense. Interest expense increased by $157,000 from fiscal 1995
to fiscal 1996, primarily the result of an increase in the average balance of
interest-bearing liabilities by $1.1 million. The increase in deposits is
believed to have been caused by the Bank's deposit pricing strategy of staying
ahead of its competitors. A shift in the mix of the Bank's liabilities away from
lower cost traditional savings accounts in favor of certificates of deposit with
higher yields augmented the increase caused by the increase in average volume.
The average balance of certificates of deposit increased by $4.0 million, with
an average cost in fiscal 1996 of 5.66%, while the average balance of savings
accounts declined by $3.0 million, with an average cost of 3.48% in fiscal 1996.
Management believes that a shift in depositor preference, resulting in the shift
in mix, occurred from early 1995 through 1996 as depositors sought higher yields
to compete with the yields available in the stock market. Publicity regarding
available investment alternatives made customers more cognizant of the rates on
their accounts and more sophisticated regarding maximizing the yields on their
bank deposits. The average rate paid on certificates of deposit also increased,
from 5.33% in fiscal 1995 to 5.66% in fiscal 1996, principally due to increased
competition from other investment alternatives and the Bank's pricing strategy.
Net Interest Income. The Bank experienced a decline in net interest income
of $79,000 from fiscal 1995 to fiscal 1996 as the increase in interest income
was eclipsed by the greater increase in interest expense. The Bank's spread
declined by 44 basis points, from 4.21% to 3.77% as the average cost of funds
increased due to the effect of the increased volume and rates on certificates of
deposit and the average yield on interest-earning assets declined due to the
reduction in both the volume and the rate earned on loans. The net interest
margin declined at a slower pace, by 34 basis points, as the excess of average
interest-earning assets over average interest-bearing liabilities increased by
48
$930,000 due to an increase in average capital of $543,000 and an increase in
non-interest-bearing liabilities of $638,000.
Provision for Loan Losses. During fiscal 1994 and 1993, the Bank had
experienced high levels of non-performing loans, increased foreclosures, and
high levels of real estate owned, which were accompanied by high levels of
charge-offs and provisions for loan losses. During 1995, the level of
non-performing loans, charge-offs and real estate owned began to decline.
Furthermore, the Bank experienced recoveries of $181,000 during fiscal 1995. As
a result, the allowance for loan losses was 1.81% of total loans at September
30, 1995. Therefore, the provision for loan losses was reduced from $411,000 in
fiscal 1994 to $190,000 in fiscal 1995 and further reduced to zero in fiscal
1996 because management believed the fiscal 1996 year end allowance to be
adequate at 1.43% of total loans.
Non-interest Income. Non-interest income increased slightly, from $141,000
to $165,000, principally as a result of $17,000 of net losses on the sale of
securities in fiscal 1995 as the Bank elected to sell securities and reinvest
the proceeds at higher yields.
Non-interest Expense. Non-interest expense increased by $396,000 from
fiscal 1995 to fiscal 1996. Deposit insurance expense increased by $277,000 due
to the $275,000 special deposit insurance premium assessment discussed above.
Salaries and employee benefits expense increased by $109,000 because of
additional interim staffing needed to smooth the transition associated with a
retired employee and other staff turnover costs.
Income Taxes. Income tax expense declined by $119,000. The decline
corresponded to the decline in net income.
LIQUIDITY AND CAPITAL
The Bank's primary sources of funds are deposits and proceeds from the
principal and interest payments on loans and securities. While maturities and
scheduled principal payments on loans and securities are predictable sources of
funds, deposit outflows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition.
The primary investing activity of the Bank is the origination of
residential one-to-four family mortgage loans and the purchase of
mortgage-backed and debt securities. During the six months ended March 31, 1998
and the years ended September 30, 1997, 1996 and 1995, the Bank's loan
originations totaled $3.1 million, $9.1 million, $6.8 million and $4.7 million,
respectively. However, loans, net, after payments and charge-offs, decreased by
$504,000 during the six months ended March 31, 1998, increased by $1.8 million
during fiscal 1997 and $312,000 during fiscal 1996 and declined by $1.1 million
during fiscal 1995. Investment and mortgage-backed securities, excluding the
effect of unrealized gains and losses, increased by $1.1 million during fiscal
1996, increased by $62,000 during fiscal 1997 and declined by $1.0 million
during the first six months of fiscal 1998.
Deposits increased by $447,000 in fiscal 1995 but decreased by $698,000 in
fiscal 1996. In fiscal 1997, deposits increased by $74,000, and then declined by
$653,000 during the first six months of fiscal 1998. Deposit flows are affected
by the level of interest rates, the availability of alternate investment
opportunities, general economic conditions, and other factors.
The Bank monitors its liquidity position on a regular basis. Excess
short-term liquidity is invested in overnight federal funds sold. If the Bank
requires funds beyond its ability to generate them internally, the Bank can
borrow needed funds. As a member of the Federal Home Loan Bank of New York, the
Bank had the ability to arrange to borrow in excess of $10 million, subject to
providing appropriate collateral and satisfying other applicable requirements
for Federal Home Loan Bank borrowings. The Bank has not needed to use borrowings
as a source of liquidity to fund either deposit outflows or new loan
opportunities. In addition to borrowings, the Bank believes that it has the
ability, through adjusting its pricing of certificates of deposit, to increase
its liquid assets by attracting additional deposits, if needed.
49
Loan commitments totaled $355,000 at March 31, 1998, and the Bank had
$236,000 of unused home equity lines of credit, $25,000 of unused commercial
lines of credit and $9,000 of unused overdraft lines of credit. Although the
Bank offers overdraft checking loans, balances are minimal and fluctuate by
insignificant amounts. Management anticipates that the Bank will have sufficient
funds to meet its current loan commitments. Certificates of deposit which are
scheduled to mature in one year or less from March 31, 1998 totaled $15.4
million. The Bank may elect to allow some of those deposits to leave the Bank if
it can reduce its cost of funds by doing so without adversely affecting
liquidity. However, management anticipates that the Bank will be able to retain
substantially all of such deposits if the Bank needs to do so to fund loans and
other investments.
At March 31, 1998, the Bank exceeded all regulatory capital requirements
of the OTS applicable to it, with Tier I capital of $10.6 million, or 19.6% of
average assets and 44.1% of risk-weighted assets and with total risk-based
capital of $10.9 million, or 45.3% of risk-weighted assets. The Bank also had
tangible capital of $10.6 million, or 19.6% of average tangible assets. The Bank
was classified as "well capitalized" at March 31, 1998 under OTS regulations.
See "Regulatory Capital Compliance" and "Regulation - Regulation of Federal
Savings Association - Capital Requirements" for further information regarding
OTS capital requirements.
The Bank is subject to mandatory liquidity ratio requirements of the OTS.
The Bank is required to maintain liquid assets equal to 4% on withdrawable
accounts. Liquidity for these purposes is measured on a monthly average basis
and the Bank had a liquidity ratio of 33% for the month of March 1998.
IMPACT OF INFLATION AND CHANGING PRICES
The financial information in this Prospectus has been prepared according
to Generally Accepted Accounting Principles, which require the measurement of
financial condition and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. Unlike industrial companies, nearly all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services. However, interest rates
generally increase during periods when the rate of inflation is increasing and
decrease during periods of decreasing inflation. Periods of high inflation are
ordinarily accompanied by high interest rates, which could have a negative
effect on the Bank's net income. Inflation can also increase the cost of the
Bank's operations. See "-Market Interest Rate Risk Analysis" for a discussion of
the effect of changing interest rates on the Bank.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 128 "Earnings Per Share."
SFAS 128 requires the disclosure of basic and diluted earnings per share. It
establishes rules for calculating diluted earnings per share based upon the
effect of agreements by publicly traded companies to issue additional stock.
SFAS 128 is now effective and will require the Company, after the
Reorganization, to report, in addition to basic earnings per share, fully
diluted earnings per share which would show, for example, the effect on earnings
per share of the exercise of outstanding stock options, if any.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which requires that comprehensive income and its effect on equity must be
disclosed prominently in the notes to the financial statements. Comprehensive
income includes net income as adjusted for items that are recorded as direct
entries to equity. Only the impact of unrealized gains or losses on securities
available-for-sale is expected to be disclosed as an additional component of the
Bank's income under the requirements of SFAS 130. SFAS 130 imposes disclosure
requirements only and will not affect the Company's financial condition or
results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly
50
reports issued to stockholders. The Company anticipates that, in the near
future, the Company's business will comprise only one segment and hence SFAS 131
will not have a material effect on its financial disclosures. However, if the
Company engages in material non-banking business in the future, separate segment
disclosure may be required.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures About
Pensions and Other Post-Retirement Benefits," which amends existing disclosure
rules regarding pension and other post-retirement benefits to standardize the
disclosure formats effective for fiscal years beginning after September 15,
1997. Disclosures regarding pensions and other non-pension post-retirement
benefits have been combined. SFAS 132 addresses disclosure issues only and does
not require any substantive change in the measurement or recognition of
liabilities arising out of the benefits covered by it. Hence, the implementation
of SFAS 132 will have no effect on the Company's financial condition or results
of operations.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes requirements for the
proper accounting, reporting and financial statement presentation of derivative
instruments and hedging activities. Among other provisions, SFAS 133 requires
that derivative instruments must be reflected in a company's financial
statements independent of any hedging or similar transaction designed to reduce
the risks of owning the derivative instrument. The Bank does not invest in
derivative instruments and neither the Bank nor the Company has any plans to do
so after the Reorganization. Therefore, these provisions of SFAS 133 are not
expected to have any effect on either the financial disclosures or the financial
condition of the Bank or the Company. SFAS 133 also permits certain
reclassifications of securities among the trading, available for sale and held
to maturity classifications. The Company and the Bank have no current intention
to reclassify any securities pursuant to SFAS 133.
YEAR 2000 COMPLIANCE
Accurate computer record keeping and data processing is essential for the
efficient operation of the Bank. In many cases, computer software and hardware,
as well as computer chips in other equipment, have been designed so that they
will not accurately reflect dates beyond December 31, 1999. The Bank is actively
involved in reviewing all of its computer-related functions to assure that the
Bank will be able to continue to operate successfully at the beginning of the
next millennium without significant interruption. The Bank may be required to
replace existing software and hardware in order to do so. Thus far, the Bank has
completed testing of internal hardware and software, security devices and
related equipment and has replaced all items that failed the tests without
incurring material costs. The Bank's external data processing service provider
has completed initial testing of Year 2000 compliance successfully. Additional
retesting is scheduled to be completed by year end 1998. During 1999, the Bank
will monitor computer functions to assure the accuracy of the test results.
The Bank does not believe that the cost of Year 2000 compliance not yet
recognized will have a material adverse effect on the Bank's financial condition
or results of operations, but the evaluation of the costs is not yet complete.
The Bank estimates that if its independent outside computer service bureau is
able to bring its computer system into Year 2000 compliance, as is anticipated,
the direct costs of Year 2000 compliance to the Bank are anticipated to be
approximately $50,000, of which approximately $5,000 has already been spent.
However, there can be no assurance that the Bank will not encounter
unanticipated problems, nor any assurance that its outside service bureau will
be Year 2000 compliant. If the Bank's outsider service provider is unable to be
Year 2000 compliant, the Bank will either convert to an in house data processing
system or switch to a different outside service provider. The Bank has already
received a proposal for conversion to an in house system which is Year 2000
compliant as part of its contingency planning. If any such conversion is
necessary, which is not anticipated, costs could substantially increase.
Furthermore, computer problems experienced by the Bank's commercial borrowers
could have an adverse effect on their business operations and their ability to
repay their loans when due. The Bank has contacted most of its commercial
borrowers to alert them to the importance of Year 2000 compliance.
In addition, technological advances in general may require the Bank to
make substantial capital investments in the future so it can continue to compete
with its multitude of competitors.
51
BUSINESS OF THE COMPANY
GENERAL
The Company was recently organized to acquire all the stock of the Bank to
be issued in the Reorganization. Upon completion of the Reorganization, the
Company will become a savings and loan holding company subject to regulation by
the OTS. See "Regulation - Holding Company Regulation."
BUSINESS
The Company is not an operating company. After the Reorganization, the
Company expects that it will invest the remaining net proceeds from the sale of
its Common Stock, after contributing one-half to the Bank, primarily in federal
funds, mortgage-backed securities, other debt securities, or deposits of or
loans to the Bank. The Company also intends to lend the ESOP the funds needed to
purchase 8% of the Common Stock sold in the Reorganization, excluding shares
issued to the Mutual Holding Company. In the future, the Company may purchase or
organize other operating subsidiaries, including other financial institutions,
or it may merge with or acquire other financial institutions and financial
services related companies. There are no current arrangements, understandings or
agreements for any such expansion. Furthermore, under OTS policy and
regulations, the ability of the Company to merge with or acquire other
institutions may be limited by the requirement that, unless the OTS approves
otherwise, the Company may not issue its stock except by first offering it to
depositors of the Bank. See "Use of Proceeds." Initially, the Company will not
own or lease any property but will instead use the premises, equipment and
furniture of the Bank. The Company does not presently intend to have any
employees except for certain officers of the Bank who will not be separately
paid by the Company. The Company may use the support staff of the Bank from time
to time, if needed. Additional employees may be hired, if appropriate.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business consists of gathering deposits from the
general public within its market area and investing those deposits primarily in
loans, debt obligations issued by the U.S. Government, its agencies, and
mortgage-backed securities. The Bank's principal loan type is residential
one-to-four family mortgage loans. In recent years, the Bank has tried to
diversify its lending by increasing its level of automobile loans and commercial
non-mortgage loans. The increased emphasis on non-real estate lending has been a
gradual process, with real estate loans declining gradually from 95.6% of total
loans at September 30, 1994 to 90.5% of total loans at March 31, 1998.
The Bank's revenues come principally from interest on loans and
securities. The Bank's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and investment securities.
MARKET AREA
The Bank's primary market area is southern St. Lawrence County and
northern Jefferson and Lewis Counties in New York. Based on 1990 census data,
the Bank estimates that the population of its primary market area is
approximately 98,000. The Bank's market area is predominantly rural with many
small towns. The population of the service area works in diverse industries,
including manufacturing, agriculture, retail trades, construction, mining,
health care, education and government service. The largest private employers in
the market area are two mining companies, one for zinc and the other for talc,
and a paper mill. Fort Drum, a major military installation, is located at the
southern edge of the Bank's primary market area. The Bank estimates that in the
six months ended March 31, 1998, its share of the residential mortgage lending
market in its market area was approximately 10% to 15%, which has declined from
approximately 25% in prior years due to aggressive competition from other
lenders. Based upon FDIC data as of June 30, 1997, the Bank had 29% of all bank
deposits of the bank branches in its market area.
Economic and demographic conditions in the Bank's market area may make
implementation of the Bank's operating strategy more difficult. Although precise
statistical data for the Bank's market area is not available because the market
area spans parts of three counties, 1990 census data reflects that, as is not
unusual for predominantly rural areas, per capita income and median home values
are below New York State and national levels in all three counties surrounding
the Bank. Unemployment at the end of 1997 in each of the three counties in the
Bank's market area, although not at critical levels, was higher than statewide
and national unemployment rates. Furthermore, population growth in the market
area, if any, has been limited in recent years since an increase in population
was experienced in the early 1990's related to expansion of Fort Drum.
Furthermore, demographic trends reflect an aging of the local population. These
conditions are believed to extend to communities adjoining the Bank's market
area as well. Therefore, growth opportunities for the Bank are limited, but the
Bank is exploring possibilities for gradual expansion into adjoining communities
through the use of a loan production office to expand its customer base.
The Bank's office has been located in the Town and Village of Gouverneur
since it was chartered in 1892.
52
COMPETITION
The Bank's principal competitors for deposits are savings banks, savings
and loan associations, commercial banks and credit unions in the Bank's market
area, as well as money market mutual funds, insurance companies and securities
brokerage firms, many of which are substantially larger in size than the Bank.
The Bank's competition for loans comes principally from savings banks, savings
and loan associations, commercial banks, mortgage bankers, finance companies and
other institutional lenders. Direct or indirect competition for loans from
nationally recognized mortgage secondary market lenders has increased in recent
years, having the effect of both reducing the Bank's market share and driving
down the interest rates it can earn on residential mortgages. The Bank's
principal methods of competition include loan and deposit pricing, flexible
underwriting which permits variation from secondary market underwriting
requirements when believed appropriate, maintaining close ties with its local
community, advertising and marketing programs and the types of services
provided.
The Bank is subject to competition from other financial institutions which
may have much greater financial and marketing resources. However, the Bank
believes it benefits from its community bank orientation as well as its
relatively high core deposit base. Recent acquisitions of other banks in central
New York by larger institutions may have also given the Bank a competitive edge
among those local residents who prefer doing business with a local bank.
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loans consist primarily of mortgage
loans secured by one-to-four family residences. At March 31, 1998, the Bank had
total loans of $34.8 million, of which $28.8 million, or 82.9%, were one-to-four
family first lien residential mortgage loans. The Bank had an additional
$783,000 of home equity loans and home equity lines of credit outstanding, or
2.3% of total loans, secured by subordinate liens on one-to-four family
residences. Commercial loans totaled $1.8 million, of which $1.7 million were
commercial mortgage loans and $101,000 were other commercial loans. The Bank
also had $1.4 million of auto loans, or 4.1% of total loans, and $1.3 million of
other consumer loans not secured by mortgages, or 3.8% of total loans. The
remainder of the Bank's loans consisted of passbook and construction loans. The
Bank's ratio of loans to total assets has been at least 60% at fiscal year end
for at least the past five years.
Interest rates earned on the Bank's loans are affected by the demand for
loans, the supply of money available for lending and the rates offered by
competitors. These factors are in turn affected by, among other things, economic
conditions, monetary policies of the federal government, and legislative tax
policies.
53
LOAN PORTFOLIO COMPOSITION
The following table sets forth the composition of the Bank's mortgage and other
loan portfolios in dollar amounts and in percentages at the dates indicated.
At September 30,
------------------------------------------------
March 31, 1998 1997 1996
---------------------- ---- ----
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Real estate loans:
Residential...................... $ 28,840 82.87% $28,896 81.85% $28,378 84.61%
Home equity...................... 783 2.25% 823 2.33% 473 1.41%
Commercial real estate........... 1,697 4.88% 1,825 5.17% 2,079 6.20%
Construction..................... 171 0.49% 308 0.87% 142 0.42%
-------- ------ ------- ------ ------- ------
Total real estate loans.......... 31,491 90.49% 31,852 90.22% 31,072 92.64%
Other loans:
Passbook loans................... 476 1.38% 475 1.36% 439 1.31%
Automobile loans................. 1,422 4.09% 1,283 3.63% 426 1.27%
Other consumer loans............. 1,310 3.76% 1,613 4.57% 1,603 4.78%
Commercial loans................. 101 0.29% 81 0.23% - 0.00%
-------- ------ ------- ------ ------- ------
Total other loans................ 3,309 9.51% 3,452 9.78% 2,468 7.36%
Total loans........................ 34,800 100.00% 35,304 100.00% 33,540 100.00%
-------- ====== ------- ====== ------- ======
Less:
Deferred loan fees, net.......... 44 51 102
Allowance for loan losses........ 464 403 479
-------- ------- -------
Total loans, net.................. $ 34,292 34,850 32,959
======== ======= =======
At September 30,
-----------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Real estate loans:
Residential...................... $28,406 85.49% $29,896 86.97% $31,299 84.88%
Home equity...................... 308 0.93% 299 0.87% 188 0.51%
Commercial real estate........... 2,383 7.17% 2,505 7.29% 2,872 7.79%
Construction..................... 311 0.94% 156 0.45% 352 0.95%
------- ------ ------- ------- ------- ------
Total real estate loans.......... 31,408 94.52% 32,856 95.58% 34,711 94.13%
Other loans:
Passbook loans................... 605 1.82% 527 1.53% 640 1.74%
Automobile loans................. 239 0.72% 84 0.24% 98 0.28%
Other consumer loans............. 976 2.94% 909 2.64% 1,427 3.87%
Commercial loans................. - 0.00% - 0.00% - 0.00%
------- ------ ------- ------- ------- ------
Total other loans................ 1,820 5.48% 1,520 4.42% 2,165 5.87%
Total loans........................ 33,228 100.00% 34,376 100.00% 36,876 100.00%
------- ====== ------- ====== ------- ======
Less:
Deferred loan fees, net.......... 117 204 121
Allowance for loan losses........ 602 466 333
------- ------- -------
Total loans, net.................. 32,509 33,706 36,422
======= ======= =======
54
Residential Mortgage Loans. Substantially all of the Bank's residential
mortgage loan originations are fixed-rate mortgage loans with terms up to 25
years, but predominantly from 10 to 15 years. The Bank has only recently begun
to offer adjustable-rate mortgage loans. In recent years, with relatively low
mortgage interest rates, customer preference has strongly favored fixed-rate
mortgage loans. Therefore, all but $129,000 of the Bank's $28.8 million of
residential mortgage loans have fixed interest rates.
When underwriting residential mortgage loan applications, the Bank
considers the income and assets of the borrower, the borrower's prior credit
history and the value of the collateral offered for the loan. In light of the
nature of the local market and competitive considerations, the Bank occasionally
waives adverse credit circumstances related to the borrower if the loan is
generally considered to be sound. In recent years, the Bank has become stricter
in its credit evaluations and currently experiences a residential mortgage loan
application rejection rate of approximately 25%.
The Bank obtains independent appraisals on all residential first mortgage
loans and attorneys' opinions of title are required at closing. Current surveys
are generally not required because the Bank believes that the cost of obtaining
a survey in the local market is not justified by the risks of not having a
survey. In almost all cases, the Bank accepts attorney's title opinions rather
than title insurance on residential mortgage loans, but has not experienced
losses due to its reliance on title opinions instead of title insurance. Private
mortgage insurance is required on loans with a loan to value ratio in excess of
90% and may be required on loans with loan to value ratios between 80% and 90%
depending upon other circumstances. For the past two years, real estate tax
escrows have been required on all mortgage loans. Previously, tax escrows were
required only on loans with loan to value ratios in excess of 85%.
Fixed-rate residential mortgage loans generally have terms of 10 to 25
years. Although fixed-rate mortgage loans may adversely affect the Bank's net
interest income in periods of rising interest rates, the Bank originates such
loans to satisfy customer demand. Such loans are generally originated at initial
interest rates which exceed the fully indexed rate on adjustable mortgage loans
offered at the same time. Therefore, during periods of level interest rates,
they tend to provide higher yields than adjustable loans. Fixed-rate residential
mortgage loans originated by the Bank generally include due-on-sale clauses
which permit the Bank to demand payment in full if the borrower sells the
property without the Bank's consent. Due-on-sale clauses are an important means
of adjusting the rates of the Bank's fixed-rate mortgage loan portfolio, and the
Bank has generally exercised its rights under these clauses.
Adjustable mortgage loans are offered with interest rates that adjust
annually or every three years based on the one or three year Treasury bill
index, plus 2.75%. Interest rate adjustments are generally limited to 2% per
year for one year adjustable loans and 3% per adjustment for three year
adjustable loans. There is normally a lifetime maximum interest rate adjustment,
measured from the initial interest rate, of 6%. Credit risks on adjustable rate
loans are somewhat greater than on fixed-rate loans primarily because, as
interest rates increase, so do borrowers' payments, increasing the potential for
default. The Bank offers teaser rate loans with low initial interest rates that
are not based upon the index plus the margin for determining future rate
adjustments; however, the Bank judges the borrower's ability to repay based on
the payment due at the fully-indexed interest rate.
The lack of title insurance and surveys, coupled with a more flexible
approach in analyzing borrower creditworthiness, means that a portion of the
Bank's residential mortgage loan portfolio may not be salable at par to major
secondary market purchasers. The Bank may elect, in the future, to develop a
secondary market lending operation which complies with secondary market criteria
in order to capture loan opportunities which are now being pursued by other
lenders in its marketplace. After the Reorganization, management intends to
continue to emphasize the origination of mortgage loans secured by one-to-four
family residences while at the same time seeking to expand the Bank's portfolio
of other loan types.
Home Equity Loans. The Bank offers a home equity line of credit secured by
a residential one-to-four family mortgage, usually a second lien. Home equity
revolving credit loans have only been offered since 1994, and the Bank has
sought to increase its volume of these loans because they have adjustable rates
of interest which improve the interest sensitivity of the Bank's assets. These
loans provide for an initial advance period of ten years, during which the
55
borrower pays 1/240th of the outstanding principal balance, plus interest, each
month, and can borrow, repay, and reborrow the principal balance. This is
followed by a repayment period, of ten years, during which the balance of the
loan is repaid in principal and interest installments.
The Bank also offers home equity junior mortgage loans which are fully
advanced at closing and repayable in monthly principal and interest installments
over a period not to exceed 15 years. Customers in the local market tend to
prefer these loans to adjustable rate revolving credit home equity loans
because, the Bank believes, they like the stability of the fixed interest rate
more than the flexibility of a line of credit.
The maximum loan to value ratio, including prior liens, is 75% for junior
mortgage loans. At March 31, 1998, the Bank had $260,000 in outstanding advances
on home equity lines of credit, $235,000 of unused home equity lines of credit
and $523,000 in regular amortizing home equity loans.
Commercial Mortgage Loans. The Bank had a portfolio of $1.7 million of
commercial mortgage loans at March 31, 1998, which had two components. The
primary component, loans secured by operating businesses and combined home and
business properties, represented $1,227,000 of the portfolio, an increase of
$3,000 over the level at September 30, 1997. The Bank seeks to market such loans
in order to diversify risk, obtain higher yields ordinarily associated with
commercial mortgage loans, and benefit from the improved interest rate
sensitivity of loans with shorter terms. However, the increase in the portfolio
has been slow because of competitive pressures and because the Bank has decided
to adopt a cautious approach as it develops additional expertise in the area.
After the Reorganization, the Bank intends to increase its focus on this
category of loans.
The second component of the commercial mortgage loan portfolio is loans
secured by operating and non-operating farms. These loans were all originated
more than five years ago, as the Bank no longer makes such loans. Farm mortgage
loans totaled $470,000 at March 31, 1998, a decline of $131,000 since September
30, 1997. The decline is represented by gradual principal reductions and
refinances.
The Bank currently offers commercial mortgage loans with loan to value
ratios up to 70% with either fixed interest rates or interest rates that adjust
annually based on the prime rate. At March 31, 1998, $1.6 million of the Bank's
commercial mortgage loans had fixed interest rates and $83,000 had adjustable
rates.
The Bank generally requires a debt service coverage ratio of at least 120%
and the personal guarantee of the principals of the borrower. The Bank also
requires an appraisal by an independent appraiser. Attorneys' opinions of title
are used instead of title insurance for commercial mortgage loans, but the Bank
has not experienced losses as a result of not having title insurance.
Loans secured by commercial properties generally involve a greater degree
of risk than one-to-four family residential mortgage loans. Because payments on
such loans are often dependent on successful operation or management of the
properties, repayment may be subject, to a greater extent, to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting policies. The Bank evaluates the qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property. The
factors considered by the Bank include net operating income; the debt coverage
ratio (the ratio of cash net income to debt service); and the loan to value
ratio. When evaluating the borrower, the Bank considers the financial resources
and income level of the borrower, the borrower's experience in owning or
managing similar property and the Bank's lending experience with the borrower.
The Bank's policy requires borrowers to present evidence of the ability to repay
the loan without having to resort to the sale of the mortgaged property.
Construction Loans. The Bank offers residential single family construction
loans to persons who intend to occupy the property upon completion of
construction. The loans are combination construction-permanent loans which
automatically convert to regular amortizing loans after construction is
complete. The proceeds of the construction loan are advanced in stages on a
percentage of completion basis as construction progresses. The loans generally
provide for a construction period of not more than twelve months during which
the borrower pays interest only. In
56
recognition of the risks involved in such loans, the Bank carefully monitors
construction through regular inspections. At March 31, 1998, the Bank had
$171,000 of such construction loans. Construction loan levels tend to increase
during the summer because of the seasonal nature of residential construction,
but even during the summer these loans generally do not represent more than 1%
of the Bank's loan portfolio.
Automobile Loans. In recent years, the Bank has exerted efforts to
increase its level of automobile loans in order to provide improved yields,
increase the interest rate sensitivity of its assets and expand its customer
base. Auto loans are originated both through direct contact between the Bank and
the borrower and through auto dealers who refer the borrowers to the Bank. The
Bank's auto loans are originated primarily through contacts with local auto
dealers, who refer customers to the Bank. However, the Bank itself underwrites
the loans and the loan is originated in the name of the Bank. The dealer is paid
a flat fee for each successful referral.
The Bank offers auto loans for both new and used cars. The loans have
fixed rates with maturities not more than five years. At March 31, 1998, the
Bank had $1.4 million of auto loans. Loans are offered in amounts up to 90% of
the purchase price of the car. The Bank evaluates the credit and repayment
ability of the borrower as well as the value of the collateral in determining
whether to approve a loan.
Other Consumer Loans. The Bank also makes fixed-rate consumer loans either
unsecured or secured by savings accounts or other consumer assets. Consumer
loans generally have terms to maturity not to exceed five years, but home
improvement loans are offered with terms up to 15 years, although most have
terms not exceeding ten years. Other consumer loans totaled $1.3 million, or
3.8% of total loans, at March 31, 1998. The fixed-rate loans generally have a
term of not more than five years and have interest rates higher than mortgage
loans. The shorter terms to maturity or adjustable rates are helpful in managing
the Bank's interest rate risk. Applications for these loans are evaluated based
upon the borrower's ability to repay and, if applicable, the value of the
collateral. Collateral value, except for loans secured by marketable securities,
is a secondary consideration because personal property collateral generally
rapidly depreciates in value, is difficult to repossess, and rarely generates
close to full value at a forced sale.
Commercial Loans. The Bank has recently begun offering commercial
non-mortgage loans to small local businesses for working capital, machinery and
equipment purchases, expansion, and other business purposes. These loans
generally have higher yields than mortgages loans, with maturities that
generally are not more than seven years. The Bank's commercial loan programs
have adjustable rates, with rates tied to the prime rate. The Bank had $101,000
of such loans at March 31, 1998, compared to $20,000 at March 31, 1997. The Bank
intends to aggressively market such loans to businesses in its market area in
the future. The Bank has decided to offer these loans in order to diversify its
product offerings, maintain and seek to expand market share in light of
increased competition, improve yields and improve the interest rate sensitivity
of its assets.
Applications for these loans are generally evaluated based upon the
borrower's ability to repay the loan from ongoing operations. The loans normally
present greater risks than mortgage loans because the collateral, if any, is
often rapidly depreciable, easier to conceal and of limited value to other
companies. Furthermore, changes in economic conditions and other factors outside
the control of the Bank, and often outside the control of the commercial
borrowers, can often have a substantial effect on delinquencies. Therefore, the
Bank monitors these credits on an ongoing basis after the loan is made to be
prepared to address any credit problems promptly if they occur. See "Risk
Factors-Lending Risks."
Origination of Loans. Loan originations come from a number of sources.
Residential loan originations can be attributed to depositors, retail customers,
telephone inquiries, advertising, the efforts of the Bank's loan officers, and
referrals from other borrowers, real estate brokers and builders. The Bank
originates loans through its own efforts and does not use mortgage brokers,
mortgage bankers or other non-employee fee paid loan finders except for the
referral of auto loans from local dealers.
All of the Bank's lending is subject to its written, nondiscriminatory
underwriting standards and to loan origination procedures prescribed by the
Bank's Board of Directors. Any two officers can approve a loan up to $25,000.
Loans from $25,000 to $100,000 must be approved by an ad hoc committee of two
directors created as and
57
when loan applications need to be reviewed. Loans over $100,000 and all
commercial loans must be approved by the full Board of Directors.
Under federal law and applicable OTS regulations, the Bank may not lend
more than 15% of its capital to any one borrower, with additional loans up to
10% of capital being permitted if the additional loans are secured by readily
marketable collateral. The Bank's largest loan had a balance of $215,000 and was
a mortgage loan secured by a first lien on a 16 unit residential apartment
building located in the Bank's market area. The Bank's largest loan relationship
at March 31, 1998, combining all loans to a single borrower or related group of
borrowers, is $364,000, which is substantially below its regulatory loan to one
borrower limit of more than $1.5 million. This loan relationship, which is with
the son of a director and his related interests, is secured by collateral
including approximately $158,000 of deposits with the Bank and the remainder by
mortgages on property in the Bank's market area.
The following table sets forth the Bank's loan originations, loan sales
and principal repayments for the periods indicated.
Six Months Ended
March 31, Year ended September 30,
---------------- -------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
(In thousands)
Total loans, beginning of period ................... $ 35,304 $ 33,540 $ 33,228 $ 34,376
-------- -------- -------- --------
Loans originated:
Real estate loans .................................. 1,906 6,354 5,164 3,853
Other loans ........................................ 1,145 2,737 1,587 887
-------- -------- -------- --------
Total loans originated ........................... 3,051 9,091 6,751 4,740
Principal repayments ............................... 3,400 6,753 5,946 5,333
Loans transferred to real estate owned ............. 68 208 322 320
Total charge-offs .................................. 87 366 171 235
-------- -------- -------- --------
Net loan activity .................................. (504) 1,764 312 (1,148)
-------- -------- -------- --------
Total loans, end of period ....................... $ 34,800 $ 35,304 $ 33,540 $ 33,228
======== ======== ======== ========
The Bank neither purchases nor sells loans. The Bank does not service
loans for other lenders and the Bank has never purchased loan servicing rights.
Loan Maturity. The following table shows the contractual maturity of the
Bank's loan portfolio at March 31, 1998. Loans are shown as due based on their
contractual terms to maturity. Loans which have adjustable interest rates are
shown as maturing when the final loan payment is due without regard to rate
adjustments. The table does not show the effects of loan amortization, possible
prepayments or enforcement of due-on-sale clauses. Non-performing loans are
shown as being due based upon their contractual maturity without regard to
acceleration due to default.
58
Residential Commercial
Mortgage(1) Mortgage Other loans Total
----------- ---------- ----------- ---------
(In thousands)
Amounts due:
Within 1 year..................... $ 36 $ 13 $ 616 $ 665
1 to 2 years...................... 124 29 312 465
2 to 3 years...................... 207 57 663 927
3 to 5 years...................... 2,007 262 1,662 3,931
5 to 10 years..................... 9,813 964 19 10,796
Over 10 years..................... 17,607 372 37 18,016
--------- -------- ------- -------
Total loans......................... $ 29,794 $ 1,697 $ 3,309 $34,800
========= ======== ======= =======
(1) Includes home equity and construction loans.
The following table shows, as of March 31, 1998, the amount of loans due
after March 31, 1999, and whether they have fixed interest rates or adjustable
interest rates.
Fixed Adjustable
Rates Rates Total
--------- ---------- ---------
(In thousands)
Residential mortgage............. $ 29,444 $314 $ 29,758
Commercial mortgage.............. 1,601 83 1,684
Other loans...................... 2,657 36 2,693
--------- ---- ---------
Total............................ $ 33,702 $433 $ 34,135
========= ==== =========
ASSET QUALITY
Delinquency Procedures. When a borrower fails to make a required payment
on a loan, the Bank attempts to cause the deficiency to be cured by contacting
the borrower. Late notices are sent when a payment is more than 15 days past due
and a late charge is generally assessed at that time. The Bank attempts to
contact personally any borrower who is more than 30 days past due. When a
mortgage loan is 90 days past due, the Bank sends a 30 day notice of
acceleration and if the loan is not brought current by the end of that period,
the loan is turned over to an attorney for collection, with foreclosure
generally commenced within 30 to 60 days thereafter. A foreclosure action, if
the default is not cured, generally leads to a judicial sale of the mortgaged
real estate. The judicial sale is delayed if the borrower files a bankruptcy
petition because the foreclosure action cannot be continued unless the Bank
first obtains relief from the automatic stay provided by the Bankruptcy Code.
The Bank has experienced losses due to delays caused by borrower bankruptcy
filings.
If the Bank acquires the mortgaged property at foreclosure sale or accepts
a voluntary deed in lieu of foreclosure, the acquired property is then
classified as real estate owned. At March 31, 1998, the Bank had $176,000 of
real estate owned, represented by seven single family residences. The Bank seeks
to dispose of these properties through real estate brokers. Due to adverse local
economic conditions in the residential housing market, the disposition of real
estate owned can take six months or more. When real estate is acquired in full
or part satisfaction of a loan, it is recorded at the lower of the principal
balance of the loan or fair value less costs of sale. Any shortfall between that
amount and the carrying value of the loan is then charged to the allowance for
loan losses. Subsequent changes in the value of the property are charged to the
expense of real estate operations. The Bank is permitted to finance sales of
real estate owned by "loans to facilitate," which may involve a lower down
payment or a longer repayment term or other more favorable features than
generally would be granted under the Bank's underwriting guidelines. At March
31, 1998, the Bank had $592,000 of "loans to facilitate," all of which were
current in accordance with their terms.
59
When an automobile loan becomes 90 days past due, the Bank seeks to
repossess the collateral. If the default is not cured, then upon repossession
the Bank sells the automobile as soon as practicable by public notice and a
secured party auction. The remaining balance of the loan is fully charged off
when the loan is 120 days past due. When other types of non-mortgage loans
become past due, the Bank takes measures to cure defaults through contacts with
the borrower and takes appropriate action, depending upon the nature of the
borrower and the collateral, to obtain repayment of the loan.
In the past, the Bank has experienced high levels of delinquencies and
charge-offs. As a result, in 1994, the Bank hired an individual whose primary
responsibility is loan collections, including regular contacts with past due
borrowers in an attempt to bring their loans current. The individual was
converted from part-time to full-time in 1995. The Bank believes that this has
reduced the level of past due loans and improved the general performance of its
loan portfolio.
From time to time, the Bank may give concessions to borrowers with past
due loans in order to assist the borrowers in repaying their loans by
restructuring the loan terms. These concessions generally involve lengthening
the repayment term of an existing loan in order to reduce monthly payments. The
Bank generally does not agree to interest rate reductions or principal
forgiveness in order to restructure a loan. At March 31, 1998, the Bank had
$394,000 of loans outstanding in which modifications had been made in order to
assist the borrower in repaying the loan. All such loans were current in
accordance with their restructured terms at March 31, 1998.
60
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at March 31, 1998.
Loans Delinquent For:
-----------------------------------------------------------------------
60-89 Days 90 Days or More
-------------------------------- -----------------------------
(Dollars in thousands)
Percent Percent
of Loan of Loan
Number Amount Category Number Amount Category
------ ------ -------- ------ ------ --------
(Dollars in thousands)
Real estate loans....................... 29 $543 1.72% 15 $345 1.10%
Other loans............................. 5 30 0.91 3 3 0.09
-- ---- ---- -- ---- ----
Total................................... 34 $573 1.65% 18 $348 1.00%
== ==== ==== == ==== ====
Loans Delinquent For:
------------------------------
Total Delinquent Loans
------------------------------
(Dollars in thousands)
Percent
of Loan
Number Amount Category
------ ------ --------
(Dollars in thousands)
Real estate loans....................... 44 $888 2.82%
Other loans............................. 8 33 1.00
-- ---- ----
Total................................... 52 $921 2.65%
== ==== ====
The following table sets forth information with respect to the Bank's
non-performing assets (which generally includes loan that are delinquent for 90
days or more and real estate owned) at the dates indicated. At March 31, 1998,
there were no loans other than those included in the table below with regard to
which management had information about possible credit problems of the borrower
that caused management to seriously doubt the ability of the borrower to comply
with present loan repayment terms.
At September 30,
At March 31, ---------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ---- ---- ---- ---- ----
(Dollars in thousands)
Non-accrual loans:
Real estate loans ................ $ 345 $ 553 $ 658 $ 546 $1,010 $1,756
Other loans ...................... 3 12 39 3 29 700
------ ------ ------ ------ ------ ------
Total non-accrual loans ........ 348 565 697 549 1,039 2,456
Real estate owned ................ 176 157 149 130 367 286
------ ------ ------ ------ ------ ------
Total non-performing assets ...... $ 524 $ 722 $ 846 $ 679 $1,406 $2,742
====== ====== ====== ====== ====== ======
Non-performing loans as a percent
of total loans .................. 1.00% 1.60% 2.08% 1.65% 3.02% 6.66%
Non-performing assets as a percent
of total assets ................. 0.95% 1.31% 1.56% 1.25% 2.66% 5.09%
It is the Bank's policy to discontinue accruing interest on a loan when
its fourth monthly payment is due and unpaid, unless the Bank determines that
the nature of the delinquency and the collateral are such that collection of the
principal and interest on the loan in full is reasonably assured. When the
accrual of interest is discontinued, all accrued but unpaid interest is charged
against current period income. Generally, once the accrual of interest is
discontinued, the Bank records interest as and when received until the loan is
restored to accruing status. However, if there is substantial doubt as to the
collectibility of the loan, amounts received are recorded as a reduction of
principal until the loan is returned to accruing status.
The amount of additional interest income that would have been recorded on
non-accrual loans had those loans been performing in accordance with their terms
was approximately $12,000 and $10,000 during the six months ended March 31, 1998
and 1997, approximately $24,000 for fiscal 1997, $36,000 for 1996 and $37,000
for 1995.
61
Classified Assets. OTS regulations require that the Bank classify its
assets on a regular basis and establish prudent valuation allowances based on
such classifications. In addition, in connection with examinations, OTS
examiners have the authority to identify problem assets and, if appropriate,
require that they be classified. There are three adverse classifications for
problem assets: Substandard, Doubtful and Loss. Substandard assets have one or
more defined weaknesses and are characterized by the distinct possibility that
the Bank will sustain some loss if the deficiencies are not corrected. Doubtful
assets have the weaknesses of Substandard assets, with the additional
characteristics that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high probability of loss. An asset classified Loss is considered
uncollectible and of such little value that its continuance as an asset on the
financial statements of the Bank is not warranted.
Assets classified as Substandard or Doubtful require the Bank to establish
prudent valuation allowances. If an asset or portion thereof is classified as
Loss, the Bank must either establish a specific allowance for loss equal to 100%
of the portion of the asset classified Loss or charge off such amount. If the
Bank does not agree with an examiner's classification of an asset, it may appeal
this determination. On the basis of management's review of its loans and other
assets at March 31, 1998, the Bank had $519,000 of assets classified
Substandard, none classified Doubtful and $17,000 classified Loss.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Bank's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover loan losses which are deemed probable and can be estimated.
The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, management's assessment
of the credit risk inherent in the portfolio, historical loan loss experience
and the Bank's underwriting policies. The Bank evaluates, on a monthly basis,
all loans identified as problem loans, including all non-accrual loans and other
loans where management has reason to doubt collection in full in accordance with
original payment terms. The Bank considers whether the allowance should be
adjusted to protect against risks associated with such loans. In addition, the
Bank applies fixed percentages for each category of performing loans not
designated as problem loans to determine an additional component of the
allowance to protect against unascertainable risks inherent in any portfolio of
performing loans. Finally, the Bank includes an unallocated component in its
allowance to address general factors and general uncertainties such as changes
in economic conditions and the inherent inaccuracy of any attempt to predict
future default rates and property values based upon past experience.
The analysis of the adequacy of the allowance is reported to and reviewed
by the Board of Directors monthly. Management believes it uses a reasonable and
prudent methodology to project potential future losses in the loan portfolio,
and hence assess the adequacy of the allowance for loan losses. However, any
such assessment is speculative and future adjustments may be necessary if
economic conditions or the Bank's actual experience differ substantially from
the assumptions upon which the evaluation of the allowance was based.
Furthermore, state and federal regulators, in reviewing the Bank's loan
portfolio as part of a future regulatory examination, may request the Bank to
increase its allowance for loan losses, thereby negatively affecting the Bank's
financial condition and earnings at that time. Moreover, future additions to the
allowance may be necessary based on changes in economic and real estate market
conditions, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of
management's control.
62
The following table analyzes activity in the Bank's allowance for loan
losses during the periods indicated.
Six Months
--------------- Year Ended September 30,
Ended March 31, --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
Allowance, beginning of period ............ $403 $479 $479 $602 $466 $333 $345
Provision ................................. 85 70 250 -- 190 411 235
---- ---- ---- ---- ---- ---- ----
Charge-offs:
Real estate ............................. 62 221 312 154 208 231 245
Other loans ............................. 25 35 54 17 27 75 22
---- ---- ---- ---- ---- ---- ----
Total charge-offs ....................... 87 256 366 171 235 306 267
Recoveries:
Real estate ............................. 53 19 22 38 158 13 14
Other loans ............................. 10 4 18 10 23 15 6
---- ---- ---- ---- ---- ---- ----
Total recoveries ........................ 63 23 40 48 181 28 20
Net charge-offs ........................... 24 233 367 123 54 278 247
---- ---- ---- ---- ---- ---- ----
Allowance, end of period .................. $464 $316 $403 $479 $602 $466 $333
==== ==== ==== ==== ==== ==== ====
Allowance as a percent of total loans ..... 1.33% 0.95% 1.14% 1.43% 1.81% 1.36% 0.90%
Allowance as a percentage of non-performing
loans ..................................... 133.33% 136.21% 71.33% 68.72% 109.65% 44.85% 13.56%
Ratio of net charge-offs to average loans
outstanding ............................... 0.07% 0.70% 0.97% 0.38% 0.16% 0.79% 0.68%
63
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any category.
At September 30,
At March 31, ----------------------------------------------------------------------------
1998 1997 1996 1995
--------------------- ----- ----- ----
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ ---------
(Dollars in thousands)
ALLOWANCE ALLOCATED TO:
Real estate loans........ $351 90.49% $315 90.22% $416 92.64% $576 94.52%
Other loans.............. 113 9.51% 88 9.78% 63 7.36% 26 5.48%
---- ------ ---- ------ ---- ------ ---- ------
Total allowance........... $464 100.00% $403 100.00% $479 100.00% $602 100.00%
==== ====== ==== ====== ==== ====== ==== ======
At September 30,
-------------------------------------------------
1994 1993
----- ----
Percent Percent
of Loans of Loans
to Total to Total
Amount Loans Amount Loans
------ -------- ------ --------
(Dollars in thousands)
ALLOWANCE ALLOCATED TO:
Real estate loans............ $431 95.58% $278 94.13%
Other loans.................. 35 4.42% 55 5.87%
---- ------ ---- ------
Total allowance.............. $466 100.00% $333 100.00%
==== ====== ==== ======
ENVIRONMENTAL ISSUES
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for costs
of cleaning up hazardous materials found on property securing their loans. In
addition, the presence of hazardous materials may have a substantial adverse
effect on the value of such property as collateral and may cause economic
difficulties for the borrower, causing the loan to go into default. Although
environmental risks are usually associated with loans secured by commercial real
estate, risks also may exist for loans secured by residential real estate if,
for example, there is nearby commercial contamination or if the residence was
constructed on property formerly used for commercial purposes. The Bank attempts
to control its risk by requiring a phase one environmental assessment by a
Bank-approved engineer as part of its underwriting review for all mortgage loans
other than those secured by one-to-four family residences.
The Bank believes its procedures regarding the assessment of environmental
risk are adequate and, as of March 31, 1998, the Bank was unaware of any
environmental issues with respect to any of its mortgage loans which would
subject it to any material liability at this time. Hidden or future
environmental contamination could adversely affect the values of properties
securing loans in the Bank's portfolio.
INVESTMENT ACTIVITIES
General. The investment policy of the Bank, which is approved by the Board
of Directors, is based upon its asset/liability management goals and is designed
primarily to provide satisfactory yields while maintaining adequate liquidity, a
balance of high quality, diversified investments, and minimal risk. In
recognition of the high level of fixed-rate residential mortgage loans, the Bank
has sought to limit its securities investments to those with adjustable rates or
short terms to maturity. The investment policy is implemented by the Bank's
President. All securities purchases and sales are reported to the Board of
Directors each month.
64
As required by SFAS 115, securities are classified into three categories:
trading, held-to-maturity and available-for-sale. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of income.
Securities that the Bank has the positive intent and ability to hold to maturity
are classified as held-to-maturity and reported at amortized cost. All other
securities are classified as available-for-sale. Available-for-sale securities
are reported at fair value with unrealized gains and losses included, on an
after-tax basis, as a separate component of retained earnings. The Bank does not
have a trading securities portfolio and has no current plans to maintain such a
portfolio in the future. At March 31, 1998, the Bank's securities portfolio
included securities with a fair value of $8.6 million which were classified as
available for sale and securities with amortized cost of $7.1 million which were
classified as held to maturity. The Bank classifies each security between the
available for sale and held to maturity categories when the security is
purchased.
Investment Debt Securities. The Bank's investment debt securities totaled
$4.3 million at March 31, 1998, all of which are classified as available for
sale. The Bank invests primarily in debt securities issued by the United States
Government and its agencies to maintain the highest possible quality, and such
securities totaled $4.0 million at March 31, 1998. Investment debt securities
are purchased in order to invest funds that may be needed to make loans and to
provide an easy source of liquidity should the need for funds arise for other
reasons. These securities are generally purchased with a remaining term to
maturity of from one to three years, although at March 31, 1998 the Bank had
$1.5 million of U.S. Government agency and government sponsored enterprise
securities with maturities in excess of five years. These longer term securities
include a Federal Home Loan Mortgage Corporation debenture and a Federal Farm
Credit Administration debenture which were acquired to take advantage of higher
available yields for longer-term investments.
Equity Securities. At March 31, 1998, the Bank had $849,000 in fair value
of corporate equity securities represented by common stock of the Federal Home
Loan Mortgage Corporation with an amortized cost of $17,000. In addition, the
Bank also had, at March 31, 1998, a mutual fund investment classified as
available for sale with a carrying value of $3.5 million. The mutual fund
invests substantially all of its assets in mortgage-backed securities which are
themselves qualified investments for the Bank. Although the mutual fund does not
qualify as a liquid asset because the terms to maturity of the underlying
mortgage-backed securities are too long, the Bank considers it a potential
source of liquidity because it can be easily redeemed on a daily basis as and
when funds are needed.
At March 31, 1998, the Bank also had $379,000 of stock in the Federal Home
Loan Bank of New York which was necessary for the Bank to maintain its
membership in the federal home loan bank system. The stock is redeemable at par.
The yield on this stock was 7.40% (annualized) for the first quarter of calendar
year 1998.
Mortgage-backed Securities. The Bank invests in mortgage-backed securities
to supplement the yields on its loan portfolio. At March 31, 1998, the Bank's
mortgage-backed securities portfolio totaled $7.1 million, all classified as
held to maturity. In furtherance of its asset/liability management goals and to
improve its interest rate sensitivity position, the Bank invests in
mortgage-backed securities which either have short terms with balloon payments
at maturity or which have adjustable rates. At March 31, 1998, $5.7 million of
the Bank's mortgage-backed securities had maturities of five years or less,
representing 79.6% of the mortgage-backed securities portfolio.
The Bank's mortgage-backed securities portfolio had a weighted average
yield of 6.12% at March 31, 1998. This yield was lower than the yield on the
Bank's investment debt securities portfolio because the mortgage-backed
securities were purchased during previous years when interest rates were lower.
The Bank's mortgage-backed securities generally tend to have lower yields than
the mortgage-backed securities held by many other financial institutions because
the Bank invests principally in short-term balloon or adjustable rate
mortgage-backed securities which tend to have lower yields. Furthermore, the
mortgage-backed securities help the Bank satisfy regulatory tests to maintain
its charter. See "Regulation - Regulation of Federal Savings Associations - QTL
Test."
65
Substantially all of the mortgage-backed securities were issued, insured
or guaranteed by the Federal National Mortgage Association (Fannie Mae), the
Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National
Mortgage Association (Ginnie Mae). The Bank purchases only investment grade
mortgage-backed securities and, at March 31, 1998, none of its mortgage-backed
securities were in default or otherwise classified.
Mortgage-backed securities are more liquid than individual mortgage loans
and may be used to collateralize borrowings of the Bank. However, these
securities generally yield less than the loans that underlie them because of the
cost of payment guarantees or credit enhancements that reduce credit risk.
Mortgage-backed securities of the type held by the Bank are generally weighted
at 20%, rather than the 50% weighting for performing residential one-to-four
family mortgage loans, in determining risk-based capital ratios.
While investment and mortgage-backed securities carry a reduced credit
risk as compared to loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. See "Risk Factors - Interest Rate Risk."
66
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's available for sale, held to maturity and
trading securities portfolios at the dates indicated.
At September 30,
At March 31, -----------------------------------------------------------------
1998 1997 1996 1995
------------------ ---- ---- ----
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- ----- --------- -----
(In thousands)
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities........... $ 999 $ 1,009 $ 1,498 $ 1,508 $ 2,971 $ 1,999 $ 3,444 $ 3,475
U.S. Government agencies........... 3,000 3,001 1,500 1,499 2,001 2,991 1,501 1,494
Other debt securities.............. 257 258 - - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total debt securities............ 4,256 4,268 2,998 3,007 4,972 4,990 4,945 4,969
Corporate equity securities........ 17 849 17 631 17 436 17 309
Mutual funds....................... 3,513 3,515 4,253 4,265 5,461 5,391 5,337 5,262
------- ------- ------- ------- ------- ------- ------- -------
Total available-for-sale....... 7,786 8,632 7,268 7,903 10,450 10,817 10,299 10,540
------- ------- ------- ------- ------- ------- ------- -------
SECURITIES HELD TO MATURITY:
Mortgage-backed securities......... 7,111 7,128 8,650 8,617 5,406 5,292 4,503 4,407
Other securities................... 10 19 10 19 10 17 3 9
------- ------- ------- ------- ------- ------- ------- -------
Total held-to-maturity......... 7,121 7,147 8,660 8,636 5,416 5,309 4,506 4,416
------- ------- ------- ------- ------- ------- ------- -------
TOTAL SECURITIES............ $14,907 $15,779 $15,928 $16,539 $15,866 $16,126 $14,805 $14,956
======= ======= ======= ======= ======= ======= ======= =======
The table below sets forth certain information regarding the carrying
value, weighted average yields and stated maturity of the Bank's securities at
March 31, 1998. There were no securities (exclusive of obligations of the U.S.
Government and federal agencies) issued by any one entity with a total carrying
value in excess of 10% of the Bank's net worth at that date.
One Year From One From Five More Than
or Less to Five Years to Ten Years Ten Years
------------------ ------------------ ------------------ ------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
U.S. Treasury securities........... $ - 0.00% $1,009 6.28% $ - 0.00% $ - 0.00%
U.S. Government agencies........... - 0.00% 1,498 6.42% 1,503 6.83% - 0.00%
Mortgage-backed securities......... 1,155 6.22% 4,506 6.12% 762 6.42% 688 5.63%
Other debt securities.............. - 0.00% - 0.00% 10 6.76% 258 6.76%
------ ---- ------ ---- ------ ---- ---- ----
Total.............................. $1,155 6.22% $7,013 6.21% $2,275 6.69% $946 5.94%
====== ==== ====== ==== ====== ==== ==== ====
Total Securities
-----------------------------
Carrying Average Market
Value Yield Value
----- ----- -----
(Dollars in thousands)
U.S. Treasury securities........... $ 1,009 6.28% $ 1,009
U.S. Government agencies........... 3,001 6.62% 3,001
Mortgage-backed securities......... 7,111 6.12% 7,128
Other debt securities.............. 268 6.76% 258
------- ---- -------
Total.............................. $11,389 6.28% $11,396
======= ==== =======
SOURCES OF FUNDS
General. The Bank's primary source of funds is deposits. In addition, the
Bank derives funds for loans and investments from loan and security repayments
and prepayments and revenues from operations. Scheduled payments on loans and
mortgage-backed and investment securities are a relatively stable source of
funds, while savings inflows and outflows and loan and mortgage-backed and
investment securities prepayments are significantly influenced by general
interest rates and money market conditions.
Deposits. The Bank offers several types of deposit programs to its
customers, including passbook savings accounts, NOW accounts, money market
deposit accounts, checking accounts and certificates of deposit. Deposit account
terms vary according to the minimum balance required, the time periods the funds
must remain on deposit and the interest rate, among other factors. The Bank's
deposits are obtained predominantly from its primary market
67
area. The Bank relies primarily on customer service and long-standing
relationships with customers to attract and retain these savings deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
savings deposits. The Bank does not use brokers to obtain deposits and has no
brokered deposits. At March 31, 1998, the Bank had $42.9 million of deposits.
The Bank prices its deposit offerings based upon market and competitive
conditions in its market area and generally prices its deposits at or above the
rates offered by competitors. Pricing determinations are made weekly by a
committee of officers. The Bank seeks to price its deposit offerings to be
competitive with other institutions in its market area. Due to declining market
interest rates, certificates of deposits with rates of 6.00% or more totaled
$1.2 million, or 2.8%, of total deposits at March 31, 1998, compared to $13.6
million, or 30.7%, at September 30, 1995. Total deposits during that period
declined from $44.2 million to $42.9 million. Management believes that the
decline was due to competition from non-deposit investment products with
attractive yields.
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated. Interest rates shown for non-time accounts are
the rates in effect at March 31, 1998.
At September 30,
At March 31, ----------------------------------------------------------------------
1998 1997 1996 1995
------------------ ---- ---- ----
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ --------
(In thousands)
NON-TIME ACCOUNTS:
Savings and club accounts
(3.0-3.5%) ............ $15,022 35.00% $14,878 34.14% $15,158 34.84% $16,063 36.34%
NOW and money market
accounts (2.0-3.0%) ... 5,197 12.11% 5,742 13.18% 5,060 11.63% 5,413 12.25%
Demand accounts ......... 142 0.33% 113 0.26% 43 0.10% 30 0.07%
------- ------ ------- ------ ------- ------ ------- ------
Total non-time accounts . 20,361 47.44% 20,733 47.58% 20,261 46.57% 21,506 48.66%
TIME ACCOUNTS:
4.00 - 4.99% ............ -- 0.00% -- 0.00% 4,361 10.02% 1,936 4.38%
5.00 - 5.99% ............ 21,344 49.73% 20,651 47.39% 14,392 33.08% 7,186 16.26%
6.00 - 6.99% ............ 531 1.25% 1,406 3.23% 3,718 8.55% 13,572 30.71%
7.00 - 7.99% ............ 687 1.60% 786 1.80% 770 1.77% -- 0.00%
------- ------ ------- ------ ------- ------ ------- ------
Total time accounts ..... 22,562 52.56% 22,843 52.42% 23,241 53.43% 22,694 51.34%
Total deposits ........... $42,923 100.00% $43,576 100.00% $43,502 100.00% $44,200 100.00%
======= ====== ======= ====== ======= ====== ======= ======
68
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Six months ended
March 31, Year ended September 30,
---------------- ----------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In thousands)
Net withdrawals ....... $(1,589) $(1,822) $(2,678) $(1,376)
Interest credited ..... 936 1,896 1,980 1,823
Net increase (decrease)
in deposits ........... $ (653) $ 74 $ (698) $ 447
The following table sets forth the amount of certificates of deposit
outstanding and the remaining period to maturity of such deposits at March 31,
1998. Approximately 95% of such certificates of deposit had interest rates of
from 5.00% to 5.99%.
Amount Due During the
Twelve Months Ended March 31, Due After
---------------------------- March 31,
1999 2000 2001 2001 Total
---- ---- ---- ---- -----
(In thousands)
$15,386 $5,894 $1,166 $116 $22,562
======= ====== ====== ==== =======
At March 31, 1998, the Bank had $2.4 million in certificates of deposit
with balances of $100,000 or more ("jumbo deposits"), representing 5.5% of all
deposits. The following table sets forth information regarding those deposits.
The interest rates shown are rates offered on March 31, 1998 for deposits of the
stated maturity with balances of at least $100,000 and do not represent the
rates payable on the deposits outstanding. The Bank did not offer a 91 day
certificate of deposit at March 31, 1998.
Original Minimum Interest Percentage of Percentage of
Term Balance Rate Balance Total Deposits Jumbo Deposits
-------- ---------- -------- ------- -------------- --------------
(In Thousands)
91 days............................ $ 100,000 N/A $ 224 0.52% 9.50%
6 Months........................... 100,000 5.10% 110 0.26% 4.67%
Over Twelve Months................. 100,000 5.50-5.95% 2,023 4.71% 85.83%
--------- ---- ------
Total.......... $ 2,357 5.49% 100.00%
========= ==== ======
Borrowings. The Bank has not borrowed funds in recent years. After the
Reorganization, the Company or the Bank may used borrowed funds to assist in the
process of leveraging the capital raised in the Reorganization. As a member, the
Bank could establish a borrowing arrangement with the Federal Home Loan Bank of
New York of more than $10 million based on its current asset size and mortgage
portfolio composition. The Bank has not done so because it has not needed to use
borrowed funds. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital."
SUBSIDIARY ACTIVITIES
The Bank is permitted to own subsidiaries for certain limited purposes,
generally to engage in activities which are permissible for a subsidiary of a
national bank. The Bank has no subsidiaries.
69
PROPERTIES
The Bank conducts its business through its headquarters at 42 Church
Street in the Town and Village of Gouverneur. The Bank owns the premises. The
net book value of the premises is $171,000. The Bank believes its current
facilities are barely adequate for its current needs and is in the initial
stages of considering possible expansion at its present location through the
construction of an addition to its main office. However, this is only at the
early exploratory stages and the Bank has not yet obtained any estimates of the
cost of expansion.
PERSONNEL
At March 31, 1998, the Bank had 16 full-time and two part-time employees.
The employees are not represented by a collective bargaining unit, and the Bank
considers its relationship with its employees to be good. See "Management of the
Bank - Benefits" for a description of certain compensation and benefit programs
offered to the Bank's employees.
LEGAL PROCEEDINGS
In the ordinary course of its operations, the Bank is a party to routine
litigation involving claims incidental to the savings bank business. Management
believes that no current litigation, threatened or pending, to which the Bank or
its assets is or may become a party, poses a substantial likelihood of potential
loss or exposure which would have a material adverse effect on the financial
condition or results of operations of the Bank or the Company.
70
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company currently consists of seven members,
each of whom is also a director of the Bank. Each director of the Company has
served as such since its inception. The Board of Directors of the Company is
divided into three classes, each of which contains approximately one-third of
the Board. The initial terms of office of the directors of the Company have been
staggered so that the terms of office of approximately one-third of the Board
expires at each of the first three annual meetings of the Company after the
Reorganization. Thereafter, directors will be elected by the stockholders of the
Company for staggered three-year terms, or until their successors are elected
and qualified. See "Management of the Bank--Directors and Executive Officer."
The sole executive officer of the Company is Richard Bennett, President
and Chief Executive Officer. See "Management of the Bank--Directors and
Executive Officers." Executive officers of the Company are elected annually by
the Board of Directors and hold office until their respective successors have
been elected and qualified or until death, resignation or removal by the Board
of Directors. Information concerning the principal occupations, employment and
compensation of the directors and executive officer of the Company is set forth
under "Management of the Bank--Biographical Information," "-Directors'
Compensation" and "-Executive Compensation."
COMMITTEES OF THE COMPANY
The Company has established or plans to establish the following committees
of its Board of Directors:
The Personnel Committee. The Personnel Committee, consisting of directors
Petitto, Jones, Leader and Straw, will review and make recommendations to the
Board regarding compensation of the executive officers and employees of the
Company. The committee will also be responsible for administering and making
grants or awards under the Stock Option Plan and the Restricted Stock Plan when
and if approved by the stockholders, and will oversee the Company's activities
related to the ESOP.
The Audit Committee. The Audit Committee, consisting of directors Jones
(Chairman), Straw and Leader, will meet periodically with the Company's
independent certified public accountants to arrange for the Company's annual
financial statement audit and to review and evaluate recommendations made during
the annual audit. The Audit Committee will also review and approve the internal
auditing procedures of the Company.
The bylaws of the Company provide for a nominating committee for the
purpose of nominating persons for election to the Board of Directors. The
nominating committee will be established prior to the first meeting of
stockholders. No procedures have yet been established for submitting stockholder
suggestions for nominations to the committee.
DIRECTORS' COMPENSATION
It is anticipated that directors of the Company who are not employees of
the Company or the Bank or any of their subsidiaries shall receive an attendance
fee of $300 for each Board of Directors meeting and $100 for each committee
meeting, but separate fees will not be paid for meetings which are joint or
contemporaneous meetings with the Board or committees of the Bank. Directors
will also be eligible for participation in the Stock Option Plan and Restricted
Stock Plan expected to be implemented by the Company. See "Management of the
Bank - Benefits - Stock Option Plan" and "-Restricted Stock Plan."
EXECUTIVE COMPENSATION
Since the formation of the Company, none of the officers of the Company
has received remuneration from the Company. It is currently expected that,
unless and until the Company becomes actively involved in business activities
separate from those conducted by the Bank, no separate compensation will be paid
to the officers of the Company. Decisions regarding the Company's executive
compensation will be made by the Company's Board of
71
Directors, acting upon the recommendations of the Personnel Committee. Executive
Officers of the Company who are directors will not vote on their own
compensation.
INDEMNIFICATION AND LIABILITY OF DIRECTORS
The directors and officers of the Company are entitled to indemnification
against certain liabilities in accordance with the provisions of section 545.121
of the OTS regulations, which generally provide that directors, officers and
employees are entitled to indemnification against liability, costs and expenses
arising out of any action brought or threatened because such person is or was a
director, officer or employee of the Company. Indemnification is permitted if a
final judgment on the merits is rendered in favor of the indemnified person. If
there is a settlement or a final judgment against the indemnified person, then
indemnification is permitted only if a majority of the Company's disinterested
directors determines that the indemnified person was acting in good faith within
the scope of his or her employment or authority as he or she could have
reasonably believed under the circumstances was in the best interests of the
Company or its stockholders.
MANAGEMENT OF THE BANK
DIRECTORS AND EXECUTIVE OFFICER
The following table sets forth certain information regarding the Board of
Directors of the Bank. Mr. Bennett is the sole executive officer of the Bank.
Ages are as of August 13, 1998. Each of these persons will also serve as
directors of the Company and the Mutual Holding Company.
DIRECTOR TERM
NAME AGE POSITION(S) HELD WITH THE BANK SINCE EXPIRES
- ---- --- ------------------------------ ----- -------
Richard F. Bennett 54 President & Chief Executive 1989 2000
Officer, Director
Charles E. Graves 73 Director 1966 1999
Richard E. Jones 57 Director 1970 2001
Carl Petitto 68 Director 1974 2001
Robert J. Leader 64 Director 1983 1999
Frank Langevin 64 Director 1987 2001
Larry A. Straw 47 Director 1993 1999
Officers are elected by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
The following biographical information is provided for the directors and
executive officer of the Bank. Professional background and employment history
are provided for at least the past five years.
72
DIRECTORS
RICHARD F. BENNETT serves as President and Chief Executive Officer of the
Bank, a position he has held since 1988. Mr. Bennett has been with the Bank
since December 1986. Mr. Bennett is a Director of the Community Bankers
Association of New York State and was formerly chairman of its Regional Group
II. Mr. Bennett was a member of the Gouverneur Rotary Club and has served as a
member of the board of directors of a local non-profit organization providing
rehabilitation financing for low income housing. Mr. Bennett is the Treasurer
and Chairman of the Finance Committee of the Gouverneur EJ Noble Hospital.
CHARLES E. GRAVES was formerly the President and Chief Executive Officer
of the Bank, a position which he held from 1966 until his retirement in 1988.
Mr. Graves serves as a Director of the Gouverneur Foundation, Inc., the
Gouverneur Historical Association and as a Vice President and Director of the
Gouverneur & St. Lawrence County Fair.
RICHARD E. JONES has been the owner/operator of J&H Feed & Farm Store
since 1978. Mr. Jones is active in the Gouverneur Elks Lodge.
CARL PETITTO was formerly the owner/operator of the Roma Restaurant, a
position from which he has since retired. Mr. Petitto is active in the
Gouverneur Volunteer Fire Department.
ROBERT J. LEADER has been a Partner in Case & Leader LLP, a law firm
located in Gouverneur, New York, since 1966. Mr. Leader has served as Chairman
of the Board (and currently as Trustee) of the Gouverneur EJ Noble Hospital;
Secretary and Trustee of North Country Hospitals; President (and currently as
Director) of Kinney Nursing Home Co., Inc.; and as a Director of B-S Industrial
Contractors, Inc. Mr. Leader has served as Counsel to the Villages of Gouverneur
and Hermon; the Towns of Fowler, Pitcairn, Rossie and Edwards and the Gouverneur
Central School. Mr. Leader is a member and past President of the Gouverneur
Rotary Club and President of the Gouverneur Development Corporation.
FRANK LANGEVIN was the owner/operator of P.A. Langevin Inc., a commercial
buildings contractor, a position from which he retired in 1993. Mr. Langevin is
a Director of the Gouverneur Country Club and was a member of the Gouverneur
Board of Education for 17 years.
LARRY A. STRAW is a Vice President and Division Manager of the Balmat
Mining Division of Zinc Corporation of America. Mr. Straw has been a member of
the Board of Trustees of the Gouverneur EJ Noble Hospital since 1989.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK
The Board of Directors of the Bank meets on a monthly basis and may have
additional special meetings from time to time. During fiscal 1997, the Board of
Directors met 12 times. No current director attended fewer than 75% of the total
number of Board meetings and meeting of committees of which such director was a
member during 1997.
The following are the principal committees of the Bank's Board of
Directors:
The Executive Committee consists of the entire board of directors. The
Executive Committee meets on an as needed basis and functions on matters of
general policy and strategy. The Executive Committee has the power of the Board
of Directors with respect to most matters. The Executive Committee met twice
during fiscal 1997.
The Audit Committee consists of directors Jones (Chairman), Straw and
Leader. The Audit Committee meets periodically with the Bank's independent
certified public accountants to arrange for the Bank's annual financial
73
statement audit and to review and evaluate recommendations made during the
annual audit. The Audit Committee also reviews the regulatory reports of
examination and reviews and approves the Bank's internal auditing procedures.
The Audit Committee did not meet during 1997 because its functions were
performed directly by the Board.
The Personnel Committee, consisting of directors Petitto (Chairman),
Jones, Leader and Straw reviews and makes recommendations to the Board regarding
compensation of the officers and employees of the Company. The committee also
functions on matters related to the pension and other compensation plans of the
Bank. The Personnel Committee met four times during fiscal 1997.
The Ad Hoc Loan Committee, consisting of two non-officer directors
rotating on an as available basis, reviews and acts on all loan applications in
excess of $25,000. The Loan Committee met nine times during fiscal 1997.
DIRECTORS' COMPENSATION
Each director of the Bank who is not an employee of the Company or the
Bank or any of their subsidiaries, receives an annual retainer fee of $3,600
plus $300 for each Board of Directors meeting and $100 for each committee
meeting. It is anticipated that directors will also receive benefits under the
Stock Option Plan and Restricted Stock Plan expected to be implemented by the
Company upon receipt of stockholder approval. See "-Benefits - Stock Option
Plan" and "-Restricted Stock Plan."
Directors may defer the receipt of all or part of their fees by making
annual elections. The deferred amounts are retained as general assets of the
Bank and are not segregated. The Bank credits each director with earnings on the
deferred amount quarterly at the same rate as is earned on the investment option
that the director chooses from among the investment options available to
employees under the Bank's 401(k) plan. The Bank expenses the amount of the
deferred fees as and when earned by the director, without regard to the
deferral. The director may receive the deferred fees, together with income
earned thereon, in either a lump sum or in an annuity, at retirement.
EXECUTIVE COMPENSATION
Decisions regarding the Bank's executive compensation are made by the
Bank's Board of Directors, upon the recommendations made by the Personnel
Committee. The President, who is a director, does not vote on his own
compensation.
The following table sets forth the cash compensation paid by the Bank for
services rendered in all capacities during fiscal 1997, to the President and
Chief Executive Officer. No officer of the Bank received compensation in excess
of $100,000 during fiscal 1997. Effective June 15, 1998, Mr. Bennett's annual
compensation was increased to $105,000 per year.
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION (1)
- -------------------------------------------------------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) COMPENSATION(2)
====================================================================================================================================
Richard F. Bennett, President 1997 $77,760 $--- $--- $241.84
and Chief Executive Officer
- ------------------------------------------------------------------------------------------------------------------------------------
(1) In accordance with Securities and Exchange Commission policy, summary
compensation information is excluded for fiscal 1996 and 1995 because neither
the Bank nor the Company was a public company during such years. For fiscal
1997 there were no: (a) perquisites with an aggregate value in excess of the
lesser of $50,000 or 10% of the total
74
of the individual's salary and bonus for the year; (b) payments of above-market
preferential earnings on deferred compensation; (c) payments of earnings with
respect to long-term incentive plans prior to settlement or maturation; or (d)
preferential discounts on stock. For fiscal 1997, the Bank had no restricted
stock or stock-related plans in existence.
(2) All other compensation consists of the Bank's contributions under its 401(k)
plan.
________________.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The directors and the executive officer of the Bank maintain normal
deposit account relationships with the Bank on terms and conditions no more
favorable than those available to the general public. In the ordinary course of
business, the Bank makes loans to directors, officers and employees. All loans
to directors and the executive officer are on substantially the same terms,
including interest rate and collateral, as those prevailing at the same time for
comparable loans to other customers and do not involve more than the normal risk
of collectibility or present other unfavorable features.
Director Robert J. Leader is a principal of the law firm of Case & Leader
LLP, which provides legal services to the Bank on a variety of lending,
litigation and other general banking matters. The total amount paid to Mr.
Leader by the Bank was approximately $21,800 during fiscal 1997 and
approximately $13,000 during the first six months of fiscal 1998. In addition to
these fees, on most loan closings handled by Case & Leader LLP, the borrower
pays the firm directly for the Bank's legal fees, which were approximately
$31,000 during fiscal 1997 and $12,500 during the six months ended March 31,
1998. The firm is expected to continue to represent the Bank on similar matters
after the Reorganization.
BENEFITS
401(k) Plan. The Bank maintained a non-contributory, tax-qualified defined
contribution pension plan for eligible employees which was converted into a
401(k) plan during fiscal 1997. All employees and officers with more than 1,000
hours of service per year who have attained age 21 and completed one year of
service are eligible to participate in the 401(k) plan. The Bank contributes 2%
of base salary for each participating employee to the 401(k) plan, without
regard to any employee matching contribution. The Bank may, from time to time,
make additional voluntary contributions to the 401(k) Plan. Employees may make
voluntary contributions to the plan up to 15% of their base salary. Employer
contributions vest 20% per year beginning at the end of the first year of plan
participation. An employee's own contributions are always fully vested.
An employee is permitted to withdraw the full amount of his or her vested
account balance upon the termination of employment with the Bank, but the
employee may defer receipt of some or all of the amount distributable until
April 1 following attainment of age 70-1/2. The employee is also permitted to
elect to receive payments over a period not to exceed 20 years after
termination, subject to certain limits.
Employee Stock Ownership Plan. The Company has established, and the Bank
has adopted, an ESOP and related trust to become effective upon completion of
the Reorganization. Substantially all employees of the Bank or the Company who
have attained age 21 and have completed one year of service are eligible to
become participants in the ESOP. The ESOP intends to purchase eight percent (8%)
of the Common Stock sold in the Reorganization, excluding shares issued to the
Mutual Holding Company, using the proceeds of a loan from the Company. Although
future contributions to the ESOP will be discretionary, the Company and the Bank
intend to make annual contributions to the ESOP in an aggregate amount at least
equal to the payments due on the loan. It is expected that this loan will be for
a term of ten years and will call for level annual payments of principal and
interest designed to amortize the loan over its term. The loan will permit
optional pre-payment. The Company and the Bank may contribute more to the ESOP
than is necessary to service the loan.
Shares purchased by the ESOP will be pledged as collateral for the
loan from the Company and will be allocated among participants as the loan is
repaid. The pledged shares will be released annually from the security interest
proportional to the repayment of the loan for that year. The released shares,
and any subsequently acquired shares that are not pledged to secure a loan, will
be allocated among ESOP participants on the basis of the participant's total
taxable compensation for the year of allocation. Benefits generally become
vested at the rate of
75
20% per year beginning after the participant's first year of service, with 100%
vesting after five years of service. Employees will receive credit for service
prior to the Reorganization for vesting purposes. Participants are immediately
vested upon termination of employment due to death, retirement at age 65 or
older, permanent disability or upon the occurrence of a change of control.
Forfeitures (shares allocated to an employee which are not yet vested when such
employee's employment terminates) will be reallocated among remaining
participating employees, in the same proportion as contributions. Vested
benefits may be paid in a single sum or installment payments and are payable
upon death, retirement at age 65 or older, disability or termination of
employment.
A corporate trustee for the ESOP not affiliated with the Bank or the
Company will be appointed prior to the Reorganization and will continue
thereafter. The trustee, subject to its fiduciary duty, must vote all allocated
shares held in the ESOP in accordance with instructions received from the
employees to whom the shares have been allocated. Allocated shares for which no
instructions have been received and shares not yet allocated are voted generally
in the same proportion as allocated shares for which voting instructions are
received.
The ESOP may purchase additional shares of Common Stock in the future, in
the open market or otherwise, and may do so either with borrowed funds or with
cash dividends, employer contributions or other cash flow.
Stock Option Plan. After the Reorganization, the Board of Directors of the
Company intends to adopt a Stock Option Plan. If implemented prior to the first
anniversary of the Reorganization, regulations require that the plan be first
approved by stockholders of the Company (without counting the votes of the
Mutual Holding Company) at a meeting held no earlier than six months after the
Reorganization. The plan is expected to allow for options covering 10% of the
Common Stock sold in the Reorganization, excluding Common Stock issued to the
Mutual Holding Company. This equates to options to purchase from approximately
$708,000 to $1,101,000 of Common Stock at the initial offering price. No
determinations have been made by the Board of Directors as to the specific terms
of the Stock Option Plan or the amount of awards thereunder. However, OTS
regulations provide that no officer or employee may receive more than 25% of the
options granted and that non-employee directors may not receive more than 5%
individually or more than 30% in the aggregate of the options granted, if the
plan is implemented within one year after the Reorganization.
The purpose of the Stock Option Plan is to attract and retain qualified
personnel in key positions, provide directors, officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the success
of the Company and its subsidiaries and reward directors, officers and key
employees for outstanding performance. Although the terms of the Stock Option
Plan have not yet been determined, it is expected that the Stock Option Plan
will provide for the grant of: (i) options to purchase the Company's Common
Stock intended to qualify for special tax benefits under Section 422 of the
Internal Revenue Code (ii) options that do not qualify for special tax benefits;
and (iii) rights exercisable only upon a change of control. The Stock Option
Plan is expected to be in effect for 10 years. Stock options granted to
non-employee directors will not qualify for the special tax treatment. If Mr.
Bennett and the non-employee directors are granted the maximum number of options
permitted, Mr. Bennett would receive options to purchase from 35,381 to
50,049 shares and each non-employee director would receive options to
purchase from 7,076 to 11,009 shares. In each case, the exercise price of the
options will be based on the market value at the time the options are granted,
so it cannot be determined at this time. No determination regarding the amount
of options to be granted to directors, officers and employees has been made and
such determination is not currently expected to be made until just prior to, if
not after, the solicitation of proxies for the anticipated stockholders' meeting
at which the Stock Option Plan is presented for approval.
The Stock Option Plan will be administered by the Personnel Committee of
the Board of Directors, which will determine which officers and employees will
be granted benefits under the plan, the nature and amount of the benefits, the
exercise price of any options granted, any vesting conditions in addition to
those imposed by regulations, and other conditions which may be imposed. It is
expected that the Stock Option Plan will permit options to be granted for terms
of up to 10 years (5 years for certain options granted to employees who are 10%
stockholders) and at exercise prices no less than the fair market value at date
of grant (110% of fair market value for certain options granted to employees who
are 10% stockholders).
The Stock Option Plan is expected to provide for the exercisability and
vesting of options granted thereunder in the manner specified by the Personnel
Committee. OTS regulations generally require that options granted under plans
implemented within one year after the Reorganization begin vesting no earlier
than one year from the date of
76
stockholder approval of the plan and thereafter vest at a rate of no more than
20% per year. It is also expected that, in the event of death or disability,
grants would be 100% vested, and options would terminate upon or within a fixed
period after termination of employment of an officer or employee, or upon
termination of service as a director.
The Stock Option Plan, to the extent permitted by OTS regulations and
subject to applicable OTS vesting requirements, may provide for rights, either
attached to or independent of each option, which, upon a change of control, will
allow the holder to exercise the rights and receive a lump sum cash payment
instead of being required to exercise a stock option, pay the exercise price,
and then receive stock.
An employee who receives a stock option that qualifies for special tax
benefits will not have taxable income when the option is granted or exercised,
unless shares received upon exercise are disposed of within one year after the
stock is received or within two years after the grant of the option. Likewise,
the Company gets no tax deduction as a result of the grant or exercise of that
option unless the employee disposes of the stock in violation of the limits
described in the preceding sentence. For options that do not qualify for the
special tax treatment, or if an employee with an option that does qualify
violates the restrictions on disposition, the employee will be deemed to receive
ordinary taxable income when the option is exercised in an amount equal to the
excess of the fair market value of the Stock on the date of exercise over the
exercise price. The amount of ordinary taxable income deemed to be received by
an optionee may be a deductible expense for tax purposes for the Company.
Restricted Stock Plan. After the Reorganization, the Company also intends
to establish a Restricted Stock Plan to provide officers, employees and
non-employee directors with a proprietary interest in the Company in a manner
designed to encourage such persons to remain with the Bank and the Company at no
cost to the recipients of such awards. The plan will provide for the award of
shares of Common Stock without cost to the recipient, the full ownership of
which will gradually vest over five years. If implemented prior to the first
anniversary of the Reorganization, OTS regulations require that the adoption of
the plan be subject to stockholder approval (without counting the votes of the
Mutual Holding Company) obtained at a meeting held at least six months after the
Reorganization.
The plan is expected to cover 4% of the shares of Common Stock issued in
the Reorganization, excluding Common Stock issued to the Mutual Holding Company.
This equates to from approximately $283,500 to $440,000 of Common Stock based
upon the $5.00 per share initial offering price. These shares are expected to be
acquired through open market purchases, if permitted, or from authorized but
unissued shares. Current OTS regulations provide that no individual employee may
receive more than 25% of the shares of any plan and that non-employee directors
may not receive more than 5% of the shares individually or 30% in the aggregate
for all directors, in the case of plans implemented within one year after the
Reorganization. If Mr. Bennett and the non-employee directors are awarded the
maximum number of shares permitted, Mr. Bennett would receive from approximately
$71,000 to $110,000 of Common Stock and each non-employee director would receive
from approximately $14,000 to $27,000 of Common Stock, based upon the $5.00 per
share initial offering price. No determination regarding the amount of shares to
be awarded to directors, officers and employees has been made and such
determination is not currently expected to be made until just prior to, if not
after, the solicitation of proxies for the anticipated stockholders' meeting at
which the Restricted Stock Plan is presented for approval.
The plan will be administered by the Personnel Committee, which will have
similar authority with respect to the plan as it will have for the stock option
plan discussed above. OTS regulations require gradual five year vesting of
awards, in the same manner as stock option grants.
When shares under the plan vest, the recipient will recognize income equal
to the fair market value of the Common Stock at that time. The amount of income
recognized by the participants may be a deductible expense for tax purposes for
the Company. For financial reporting purposes, the Company will record
compensation expense as and when the awards vest equal to the fair market value
of the Common Stock on the date of grant. This is expected to significantly
increase compensation expense for the Company after the plan is approved.
Dividends, if any, paid on unvested shares will be held and then distributed to
the grantee as and when the shares vest. It is expected that the plan will be
structured so that persons awarded shares under the plan will be permitted to
vote those shares prior to the vesting of the shares.
77
If authorized but unissued shares are used to fund the Restricted Stock
Plan after the Reorganization, the interests of existing stockholders will be
diluted. See "Pro Forma Data."
78
THE REORGANIZATION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN OF
REORGANIZATION. OTS APPROVAL DOES NOT MEAN THAT THE OTS RECOMMENDS OR ENDORSES
THE PLAN OF REORGANIZATION. CERTAIN TERMS USED IN THE FOLLOWING DISCUSSION OF
THE REORGANIZATION ARE DEFINED IN THE PLAN OF REORGANIZATION, A COPY OF WHICH
MAY BE OBTAINED FROM THE BANK.
GENERAL
The Board of Directors of the Bank has adopted a Plan of Reorganization,
as amended. If the plan is approved and the Reorganization is completed, the
Bank will be reorganized into the mutual holding company structure. This means
that the Bank will change its charter so that it can, and will, become owned by
Gouverneur Bancorp, Inc., the Company, and Gouverneur Bancorp, Inc. will issue
its Common Stock so that 55% will be owned by Cambray Mutual Holding Company and
45% will be sold to the public, with preferred subscription rights being given
to certain depositors of the Bank. The Company plans to keep 50% of the net
proceeds from the sale of the Common Stock and to use the remaining 50% to
purchase all of the stock of the Bank to be issued as part of the
Reorganization. For the Reorganization to be completed, the depositors of the
Bank must approve the Plan of Reorganization and other conditions imposed by the
OTS must be satisfied. In addition, since the Bank now has a New York State
charter, the depositors of the Bank must also approve a conversion of the Bank
into a federal savings association from a state savings and loan association.
The Reorganization will be accounted for as a pooling of interests, which
generally means that the financial statement entries of the Bank that existed
before the Reorganization will continue without change after the Reorganization.
As part of the Reorganization, the Company is conducting a Subscription Offering
to sell a minority interest in its Common Stock. Many depositors and the
Company's ESOP will have priority rights to subscribe for the Common Stock being
sold in the Reorganization. Depending upon market conditions at or near the
completion of the Subscription Offering, the Company may also conduct a Public
Offering through First Albany Corporation. The Plan also allows the Bank to
conduct a Community Offering with preference given to natural persons residing
in St. Lawrence, Jefferson and Lewis Counties, New York. The Reorganization must
be completed within 24 months after the date of the approval of the Plan of
Reorganization by the Bank's depositors. See "Effect of Delay in Consummating
the Reorganization."
The following diagram shows who will own the Bank after the
Reorganization:
------------------- -----------------------
Cambray Mutual
Public Stockholders
Holding Company
------------------ -----------------------
| |
55% Stock Ownership | | 45% Stock Ownership
| |
| |
---------------------------
Gouverneur Bancorp, Inc.
---------------------------
|
|
---------------------------
Gouverneur Savings and
Loan Association
---------------------------
79
REASONS FOR THE REORGANIZATION
The Bank has several business purposes for the Reorganization. The sale of
the Company's Common Stock will provide the Bank with additional equity capital
to support its existing operations and to provide capital for expansion
opportunities. The Bank intends to expand its business base to include higher
levels of commercial mortgage loans, commercial non-mortgage loans, auto loans
and other types of consumer loans. The sale of the Common Stock will provide
additional capital support for these activities. At March 31, 1998, the Bank had
tangible and core capital equal to 19.3% of adjusted total assets and total
risk-based capital equal to 45.5% of risk-weighted assets. See "Regulatory
Capital Compliance" for estimates of the effects of the Reorganization on the
Bank's capital ratios. In addition, investment of the net proceeds from the
Reorganization is expected to provide additional operating income to further
increase the Bank's capital on a continuing basis.
The Reorganization will give many of the Bank's depositors the opportunity
to become stockholders of the Company, allowing them to own stock in the
financial organization in which they maintain deposit accounts. Such ownership
should encourage depositors who become stockholders to promote the Bank to
others, further contributing to the Bank's earnings potential. The Bank also
expects that the ESOP, the Stock Option Plan and the Restricted Stock Plan will
assist it in attracting and retaining qualified personnel and successfully
competing with other financial institutions in its primary market area. If the
Stock Option Plan and the Restricted Stock Plan are implemented within one year
after the Reorganization, which is presently intended, they must first be
approved by the Company's stockholders (not including votes that can be cast by
the Mutual Holding Company) no earlier than six months after the Reorganization.
See "Management of the Bank - Benefit Plans - Stock Option Plan" and
"-Restricted Stock Plan."
The mutual holding company structure presents advantages and disadvantages
over the more common full conversion of a mutual institution to the stock form
of ownership. The Bank's Board of Directors believes that the advantages
outweigh the disadvantages. The mutual holding company form of organization will
allow the Bank to control, and reduce, the amount of capital that it raises so
that it will not be as over-capitalized as it might be if it completed a full
conversion. However, the Bank and the Mutual Holding Company will have the
flexibility to raise additional capital through a full conversion of the Mutual
Holding Company in the future. In addition, the mutual holding company structure
will allow the existing directors of the Bank, who will also be the directors of
the Company and the Mutual Holding Company, to continue to control the Bank,
reducing the risk of a hostile takeover by another bank that does not have the
interests of the Bank's local community and employees at heart.
The Board of Directors of the Bank also believes that the holding company
structure will make it easier to diversify the Bank's business activities,
allowing the acquisition of other banks or non-bank companies. The holding
company structure will enable an acquired bank to operate on a more autonomous
basis as a wholly-owned subsidiary of the Company, rather than as a division of
the Bank. For example, the acquired bank could retain its own directors,
officers and corporate name as well as have representation on the Board of
Directors of the Company. As of the date of this Prospectus, the Company has no
understandings or agreements to acquire any other institution or engage in any
activities other than holding the Bank's stock.
The mutual holding company structure does involve certain disadvantages.
The Public Stockholders of the Company will not be able to obtain majority
control of the Company. The Mutual Holding Company will be able to elect the
entire Board of Directors of the Company and will indirectly control the
election of the entire Board of Directors of the Bank. Except for matters which
require the approval of the Public Stockholders under OTS regulations, the
Mutual Holding Company will be able to control the vote of the stockholders of
the Company on all matters which require a majority vote. This could perpetuate
existing management and make it more difficult to complete a transaction, such
as a merger, which might be supported by the Public Stockholders but opposed by
management. Furthermore, the mutual holding company form of organization has
existed for less than fifteen years,
80
and regulations regarding how a mutual holding companies must operate are
constantly being revised. Future revisions could have an adverse effect on the
Public Stockholders.
EFFECTS OF REORGANIZATION ON DEPOSITORS AND BORROWERS
Voting Rights. After the Reorganization, the Bank's depositors will have
no voting rights in either the Bank or the Company and will not be able to elect
directors or to otherwise participate in the conduct of the affairs of the Bank
or the Company unless they own Common Stock. However, they will become members
of the Mutual Holding Company and they will be entitled to share in any proceeds
from a liquidation of the Mutual Holding Company in the unlikely event that
occurs. In addition, they will have the right to vote in the election of the
directors of the Mutual Holding Company, who in turn control the election of
directors of the Company. Proxies executed prior to the Reorganization by the
depositors for use in connection with meetings of the depositors of the Bank
(other than proxies solicited to vote on the Reorganization) will apply to the
Mutual Holding Company after the Reorganization. Those proxies may not be used
to approve the Reorganization.
The Bank will be a wholly-owned subsidiary of the Company, which will hold
all voting rights in the Bank. The Company's stockholders will have exclusive
voting rights in the Company, and a majority of the Company's stock will be
owned by the Mutual Holding Company. Stockholders of the Company may vote on any
matter to be considered by the stockholders of the Company and will generally
have one vote for each share of Common Stock owned. However, under OTS
regulations or policy, certain matters, such as the approval of a stock option
plan or a restricted stock plan within the first year after the Reorganization,
and the approval of a full conversion of the Mutual Holding Company, require the
approval of the Public Stockholders of the Company, excluding the Mutual Holding
Company. See "Restrictions on Acquisition of the Company and the
Bank-Restrictions in the Company's Certificate of Incorporation and Bylaws-The
Mutual Holding Company Structure" and "-- Provisions of the Company's Charter."
Deposit Accounts and Loans. The Bank's deposit accounts, balances of the
individual accounts, and the existing FDIC insurance coverage of deposit
accounts will not change due to the Reorganization. The Reorganization will not
change the loan accounts, the balances owed, or the obligations of the borrowers
under their loans from the Bank.
Tax Effects. The Bank has received an opinion from its attorneys, Serchuk
& Zelermyer, LLP stating that, for federal income tax purposes:
o The Bank will not recognize any gain or loss for tax purposes
because of the Reorganization.
o The Bank's holding period in its assets after the Reorganization
will include the period during which such assets were held by it as
a mutual form entity.
o The Bank's basis in its assets after the Reorganization will be the
same as immediately prior to the Reorganization.
o The Bank, after the Reorganization, will succeed to and take into
account its earnings and profits or deficit in earnings and profits,
as of the date of the Reorganization.
o The Bank's depositors will recognize no gain or loss solely by
reason of the Reorganization.
o The Mutual Holding Company and the Public Stockholders will
recognize no gain or loss upon the transfer of the Bank's capital
stock and cash, respectively, to the Company in exchange for Common
Stock of the Company.
o The Company will recognize no gain or loss upon its receipt of
property from the Mutual Holding Company and Public Stockholders in
exchange for Common Stock.
81
o The basis of the Common Stock to the Public Stockholders will be the
actual purchase price paid, and the holding period for Common Stock
acquired through the exercise of subscription rights will begin on
the date the rights are exercised.
The opinion of Serchuk & Zelermyer, LLP 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 Common Stock at the time
of the completion of the Reorganization. With respect to the subscription
rights, the Bank has received an opinion of Keller and Company, Inc., which,
based on certain assumptions, concludes that the subscription rights have no
economic value when distributed or exercised. That opinion is based on the fact
that such rights: (i) are acquired by the recipients without payment, (ii) are
non-transferable, (iii) are of short duration, and (iv) afford the recipients
the right only to purchase Common Stock at 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 Community Offering. If the subscription rights
are deemed to have an ascertainable value, receipt of such rights would be
taxable probably only to those persons 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 the distribution of subscription rights.
The Bank is subject to New York taxation and has received the opinion of
Serchuk & Zelermyer, LLP that the Reorganization will be treated for New York
state tax purposes similar to the treatment of the Reorganization for federal
tax purposes.
Unlike a private letter ruling, the opinions of Serchuk & Zelermyer, LLP
and Keller and Company, Inc. 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. DEPOSITORS WITH SUBSCRIPTION RIGHTS ARE ENCOURAGED TO CONSULT WITH
THEIR OWN TAX ADVISERS AS TO THE TAX CONSEQUENCES IF THE SUBSCRIPTION RIGHTS ARE
DEEMED TO HAVE AN ASCERTAINABLE VALUE.
Liquidation Rights. The Bank has no plans to liquidate. However, if there
is ever a complete liquidation of the Bank, either before or after the
Reorganization, deposit account holders will receive the protection of FDIC
insurance up to applicable limits. Additional liquidation rights before and
after the Reorganization are described below.
If the Bank does not complete the Reorganization and does not become a
federal savings association, it will remain a New York state-chartered savings
and loan association. In the event of a liquidation of the Bank as a state
chartered savings and loan association, depositors would receive a share of any
of its assets remaining after payment of claims of all creditors, including the
claims of all depositors for the withdrawal value of their accounts.
After the Reorganization, each depositor, in the event of a complete
liquidation, would have a claim for the amount of his or her deposit of the same
general priority as the claims of all other general creditors of the Bank. Any
assets remaining after the payment of claims of depositors and other creditors
would be distributed to the Company as the sole stockholder of the Bank.
If the Mutual Holding Company were to liquidate, dissolve or wind up its
affairs, then all of its remaining assets, after the payment of all of its
creditors, would be distributed to the depositors of the Bank pro rata based
upon the value of their deposits with the Bank.
SUBSCRIPTION OFFERING.
The following persons and entities have non-transferrable rights to
subscribe for Common Stock in the Reorganization in the following order of
priority:
FIRST PRIORITY: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder
(depositors of the Bank on March 31, 1997 with balances of at least $50) will
receive non-transferable subscription rights on a priority basis to purchase up
to 30,000 shares ($150,000) of Common Stock. If Eligible Account Holders
exercise subscription rights for more shares than the total number available,
shares shall be allocated first to permit each subscriber, to the extent
possible,
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to purchase 100 shares or the total amount of his or her subscription, whichever
is less. Remaining shares shall be allocated to each Eligible Account Holder
based on the proportion that his or her qualifying deposits bear to the total
qualifying deposits of all subscribing Eligible Account Holders. Excess shares
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 year preceding
March 31, 1997, are subordinated to the subscription rights of other Eligible
Account Holders.
SECOND PRIORITY: EMPLOYEE PLANS. Tax-qualified employee benefit plans of
the Bank or the Company have been granted subscription rights to purchase up to
10% of the total shares issued in the Reorganization. The ESOP, as such a plan,
intends to purchase 8% of the Common Stock sold in the Reorganization, not
including stock issued to the Mutual Holding Company. No other employee plan
will purchase any Common Stock in the Reorganization.
The ESOP will have a first priority right to purchase any shares to be
sold as a result of an increase in the Valuation Range above $21,275,000, which
would correspond to an increase in the number of shares sold to Public
Stockholders above 1,914,750 shares.
THIRD PRIORITY: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder (depositors of the Bank on June 30, 1998 with balances
of at least $50 who are not Eligible Account Holders) will receive
non-transferable subscription rights to purchase 30,000 shares ($150,000) of
Common Stock. If Supplemental Eligible Account Holders exercise subscription
rights for more shares of than the total number of shares remaining after
satisfying higher priority subscription rights, shares shall be allocated in the
same manner as described above regarding Eligible Account Holders.
The subscription rights of Supplemental Eligible Account Holders are
subordinate to the rights of the Eligible Account Holders and the ESOP to
purchase Common Stock.
FOURTH PRIORITY: OTHER DEPOSITORS. Other Depositors (depositors with
balances of at least $50 who are entitled to vote at the meeting of the Bank to
approve the Reorganization and who are not Eligible Account Holders or
Supplemental Eligible Account Holders) will receive non-transferable
subscription rights to purchase up to the greater of 30,000 shares ($150,000),
of Common Stock. If Other Depositors subscribe for more shares than the number
of shares remaining, then the shares available will be allocated among the
subscribing Other Depositors so as to permit each subscribing Other Depositor,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation equal to 100 shares or the total number of shares covered
by the subscription of the Other Depositor. Any remaining shares will be
allocated among the subscribing Other Depositors 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.
SUBSCRIPTION EXPIRATION DATE. THE SUBSCRIPTION OFFERING WILL EXPIRE AT
12:00 NOON, NEW YORK TIME, ON SEPTEMBER 23, 1998, 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 "SUBSCRIPTION EXPIRATION DATE").
SUBSCRIPTION RIGHTS WILL BECOME VOID IF NOT EXERCISED ON OR PRIOR TO THE
SUBSCRIPTION EXPIRATION DATE. SEE "-PURCHASING COMMON STOCK" FOR A DESCRIPTION
OF HOW TO SUBSCRIBE FOR COMMON STOCK. IF THE SUBSCRIPTION OFFERING IS EXTENDED
BEYOND NOVEMBER 7, 1998 (45 DAYS AFTER SEPTEMBER 23, 1998), SUBSCRIBERS WILL BE
RESOLICITED AND WILL HAVE AN OPPORTUNITY TO RECEIVE A REFUND OF AMOUNTS PAID,
WITH INTEREST.
COMMUNITY OFFERING
The Company may offer Common Stock remaining after the Subscription
Offering in a Community Offering with a preference given to natural persons
residing in St. Lawrence, Jefferson and Lewis Counties in New York. Any order
received in the Community Offering, if held, will receive a lower priority than
orders in the Subscription Offering by persons exercising subscription rights.
If a Community Offering is held, Common Stock sold in the Community Offering
will be sold at the same price as shares sold in the Subscription Offering. The
Company and the Bank have the right to reject, in whole or in part, in their
sole discretion, any orders for Common Stock in a
83
Community Offering. The Community Offering may also be conducted, in whole or in
part, through a syndicate of broker/dealers arranged by First Albany
Corporation. The commission payable to First Albany Corporation and such
broker/dealers shall not exceed 4.5% of the purchase price of the Common Stock
sold by them in the Community Offering.
PUBLIC OFFERING
The Plan of Reorganization also provides that the Company may offer shares
of Common Stock in a public offering through an underwriter in such a manner as
to promote a wide distribution of the Common Stock. A public offering is not
currently anticipated. If a public offering is held, it is expected that it
would be held on a best efforts basis through First Albany Corporation. Orders
received in a public offering, if held, will receive a lower priority than
orders properly made in the Subscription Offering by persons exercising
subscription rights. Common Stock sold in the public offering will be sold at
$5.00 per share, the same price as all other shares sold in the Reorganization.
Depending on market conditions, First Albany Corporation may utilize a
syndicate of broker/dealers for the sale of Common Stock in the public offering.
The Bank will pay commissions to First Albany Corporation or such broker/dealers
not to exceed 4.5% on the Common Stock sold by them in a public offering.
No person, together with any associate or group of persons acting in
concert, may purchase more than 30,000 shares or $150,000 of Common Stock in the
public offering. The date by which orders must be received in the public
offering will be set by the Company at the time of commencement of the public
offering.
ADDITIONAL PURCHASE RESTRICTIONS
Each purchaser must purchase at least 25 shares. No person, together with
any associate or group of persons acting together, may subscribe for or purchase
more than 30,000 shares ($150,000) of Common Stock, except that the ESOP may
purchase 8% of the shares sold, excluding shares that will be issued to the
Mutual Holding Company. If more than one person is a named depositor on an
account, such as with a joint account, all depositors on that account will be
deemed to be acting together and they will be permitted to subscribe, in the
aggregate, for 30,000 shares of Common Stock. The Board of Directors of the
Bank, in its sole discretion, may increase or decrease the purchase limitation
without the approval of the depositors of the Bank and without resoliciting
subscribers except as described below, provided that the maximum purchase
limitation may not be increased to a percentage in excess of 5%. The maximum
purchase limitation can be further increased to 9.99% if the amount by which
subscriptions exceed 5% does not, in the aggregate, exceed 10%. If the maximum
purchase limit is increased, subscribers who submit orders for $150,000 of
Common Stock will be resolicited and given an opportunity to increase their
orders and other subscribers may also be resolicited.
The officers and directors of the Bank or their associates may not
purchase more than 34.8% of the shares of the Common Stock sold in the
Reorganization. The directors and officers of the Bank and the Company are not
deemed to be acting in concert solely by reason of their being directors and
officers of the Bank or the Company.
The term "associate" of a person means (i) any corporation or organization
(other than the Bank, the Company 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
(except that the ESOP and, in some cases, other benefit plans of the Bank or the
Company are generally not associates), 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 the Company, 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.
84
Each person purchasing Common Stock in the Reorganization will be deemed
to confirm that such purchase does not conflict with the maximum purchase limit.
If the purchase limit is violated by any person (including any associate or
group of persons affiliated or otherwise acting in concert with such persons),
the Company will have the right to repurchase, at $5.00 per share, all shares
acquired in excess of the purchase limit or, if such excess shares have been
sold, to receive the difference between the $5.00 per share and the price at
which such excess shares were sold. This right will be assignable by the
Company.
Common Stock purchased in the Reorganization 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 of Subscription Rights and Common Stock." In
addition, members of the National Association of Securities Dealers and their
associates are subject to certain restrictions on the transfer of securities
purchased by using subscription rights and to certain reporting requirements
upon purchase of such securities.
PURCHASING COMMON STOCK
Subscribers in the Subscription Offering must deliver to the Bank, on or
before the Subscription Expiration Date, (i) a Subscription Offering stock order
form (an "Order Form") fully completed and signed, (ii) a certification form
properly signed, and (iii) payment in full. The ESOP will not be required to pay
for its shares until the Reorganization is completed. All subscription rights
will expire on September 23, 1998, whether or not the Bank has been able to
locate each person entitled to such subscription rights. ONCE SUBMITTED,
SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE CONSENT OF THE BANK AND THE
COMPANY UNLESS THE REORGANIZATION IS NOT COMPLETED BY NOVEMBER 7, 1998, WHICH IS
45 DAYS AFTER THE SUBSCRIPTION EXPIRATION DATE.
If an Order Form (i) is not delivered to the addressee by the United
States Postal Service or the Bank is otherwise unable to locate the addressee;
(ii) is not received by the Bank or is received after the Subscription
Expiration Date; (iii) is defectively completed or executed; (iv) is not
accompanied by the full required payment (including balances in deposit accounts
covered by withdrawal authorizations which are insufficient to pay the required
payment); or (v) is not mailed pursuant to a "no mail" order placed in effect by
the account holder, then in any such event the related subscription rights will
lapse as though the person holding such rights failed to return the completed
Subscription Order Form within the time period specified. The Company may, but
will not be required to, waive any irregularity on any Order Form or require the
submission of corrected Order Forms 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 in no way obligates the Company to waive any
other irregularity on any other Order Form. 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 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 will be
final, subject to the authority of the OTS.
To ensure that each purchaser receives a Prospectus at least 48 hours
before the applicable offering expires as required by Rule 15c2-8 of the
Securities and Exchange Commission, no Prospectus will be mailed any later than
five days prior to expiration or hand delivered any later than two days prior to
expiration. Execution of an Order Form will confirm receipt or delivery
satisfying Rule 15c2-8. Order Forms will only be distributed with a Prospectus.
Payment for shares of Common Stock at $5.00 per share 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 bank check, money order or withdrawal authorization, if applicable, from
an account with sufficient collected funds. Payments made in cash or by check or
money order will be placed in a segregated account and interest will be paid by
the Bank at 3.50% per annum from the date payment is received until the
Reorganization is completed or terminated. If the Reorganization is not
consummated for any reason, all funds submitted to purchase Common Stock will be
refunded promptly, with interest, as described above.
85
The Order Form provides the method for subscribers to authorize
withdrawals from deposit accounts. Once a subscriber authorizes a withdrawal to
purchase Common Stock, the withdrawal amount may not be used for any other
purpose until the Reorganization has been completed or terminated. However, all
sums authorized for withdrawal will continue to earn interest at the regular
rate for the account until the Reorganization has been completed or terminated.
Interest penalties for early withdrawal applicable to certificates of deposit
will not apply to withdrawals authorized for the purchase of shares. If a
partial withdrawal results in a certificate of deposit 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 after the withdrawal.
Owners of self-directed IRAs may use the assets of their IRAs to purchase
Common Stock, but only if the IRAs are not maintained at the Bank. Persons with
IRAs at the Bank must transfer their accounts to an unaffiliated institution or
broker to purchase Common Stock. Instructions on how to transfer IRAs at the
Bank can be obtained from the Stock Center located at the Bank's main office.
IT IS UNLAWFUL FOR THE BANK TO LEND FUNDS OR EXTEND CREDIT TO ANY PERSON
TO PURCHASE COMMON STOCK IN THE REORGANIZATION.
DELIVERY OF STOCK CERTIFICATES. Certificates representing Common Stock
issued in the Reorganization will be mailed to the persons entitled to them at
the address noted on the Order Form as soon as practicable after the
Reorganization. Any certificates returned as undeliverable will be held until
claimed by persons legally entitled to them 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
their shares of Common Stock.
MARKETING ARRANGEMENTS
To assist in the marketing of the Common Stock, the Bank has retained
First Albany Corporation, a broker/dealer registered with the National
Association of Securities Dealers, Inc. First Albany Corporation will assist the
Bank as follows: (i) in training and educating the Bank's employees regarding
the mechanics and regulatory requirements of the sale of Common Stock; (ii) in
conducting informational meetings for employees, customers and the general
public; (iii) in coordinating the selling efforts in the Bank's local
communities; and (iv) in soliciting orders for Common Stock. First Albany has
also agreed to provide other related assistance to the Bank in completing the
Reorganization. For these services, First Albany Corporation will receive a
marketing fee of $105,000 and an additional fee of $15,000 for assistance in the
Reorganization.
The Bank also will reimburse First Albany Corporation for its reasonable
out-of-pocket expense associated with marketing efforts not to exceed $15,000,
plus fees of its attorneys not to exceed $25,000, unless approved in advance
by the Bank. The Bank has made an advance payment of $27,500 to First Albany
Corporation on account of fees payable. The Bank will indemnify First Albany
Corporation against liabilities and expenses (including legal fees) incurred in
connection with certain claims or litigation arising out of or based upon untrue
statements or omissions contained in the offering material for the Common Stock,
including liabilities under the Securities Act of 1933. See "Pro Forma Data" for
further information regarding amounts payable to First Albany Corporation
The Common Stock will be offered principally by the distribution of this
Prospectus and through activities conducted at a Stock Center located at the
Bank's main office, in an area that is not publicly accessible. The Stock Center
is expected to operate during normal business hours. It is expected that a
registered representative employed by First Albany Corporation will be working
at, and supervising the operation of, the Stock Center. First Albany Corporation
will be responsible for overseeing the mailing of materials relating to the sale
of Common Stock, responding to questions regarding the Reorganization and
processing Order Forms. It is expected that Bank and Company personnel will be
present in the Stock Center to assist with clerical matters and to answer
questions related solely to the business of the Bank.
86
Directors and 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 sale of Common Stock 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
officers of the Company or registered representatives of First Albany
Corporation. The Company will rely on Rule 3a4-1 of the Securities and Exchange
Commission, 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 sale of Common Stock by the payment of commissions or other
remuneration based either directly or indirectly on transactions in the Common
Stock.
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 (a) in a foreign country or (b) in a state of the United States with
respect to which any of the following apply: (i) a small number of persons with
subscription rights reside in such state; (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, as a broker or dealer or to register or otherwise qualify its
securities for sale in such state; 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.
PARTICIPATION BY THE BOARD AND SENIOR MANAGEMENT
The following table sets forth certain information as to the intended
purchases of Common Stock by each director and executive officer of the Bank and
by all directors and executive officers as a group, including their
"associates." The directors and executive officer of the Bank have expressed
their intentions to purchase an aggregate of approximately $745,000 of Common
Stock in the Subscription Offering. For purposes of the following table, it has
been assumed that 1,665,000 shares (the midpoint of the Valuation Range) of
Common Stock, representing 45% of the Common Stock to be outstanding after
consummation of the Reorganization, will be sold at $5.00 per share and that
sufficient shares will be available to satisfy subscriptions in all categories.
Shares purchased by the ESOP which may be allocated to Mr. Bennett in his
capacity as an executive officer are excluded.
Aggregate
Number Purchase Percent
Name Position of Shares Price of Shares
- ---- -------- ---------- --------- ---------
Richard F. Bennett President & Chief Executive 20,000 $100,000 0.54%
Officer, Director
Charles E. Graves Director 5,000 $ 25,000 0.13%
Richard E. Jones Director 4,000 $ 20,000 0.11%
Carl Petitto Director 30,000 $150,000 0.81%
Robert J. Leader Director 30,000 $150,000 0.81%
Frank Langevin Director 30,000 $150,000 0.81%
Larry A. Straw Director 30,000 $150,000 0.81%
------- -------- -----
Total 149,000 $745,000 4.02%
======= ======== =====
EFFECT OF DELAY IN CONSUMMATING THE REORGANIZATION
The completion of the Reorganization will depend, in part, upon the Bank's
operating results and market conditions. The Bank and the Company anticipate
completing the Reorganization within 45 days after the special
87
meeting of depositors and borrowers held to approve the Reorganization. However,
if the Boards of Directors of the Bank and the Company are of the opinion that
economic conditions generally or the market for publicly traded thrift
institution stocks make it undesirable to sell the Common Stock necessary to
complete the Reorganization, then the sale may be delayed until conditions
improve.
A material delay in the completion of the sale of shares may result in a
significant increase in the costs of completing the Reorganization. Significant
changes in the Bank's operations and financial condition, the aggregate market
value of the shares to be issued in the Reorganization and general market
conditions may occur during such material delay. If the Reorganization is not
completed within 24 months after the approval of the Plan of Reorganization by
the Bank's depositors, the Bank would charge Reorganization costs as operating
expenses at that time.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Keller and Company, Inc., a financial consulting and appraisal firm that
is experienced in the evaluation and appraisal of business entities, including
converting thrift institutions, was retained by the Bank to prepare an appraisal
of the estimated market value, as of the completion of the Reorganization, of
the Common Stock to be sold in the Reorganization. Keller and Company, Inc. will
receive a fee of $15,000 for its appraisal and to assist in the preparation of
related material. In addition, Keller and Company, Inc. will receive a fee of
$7,500 for its assistance with the preparation of a business plan for the Bank
and will receive reimbursement for out-of-pocket expenses. The Bank has agreed
to indemnify Keller and Company, Inc. 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 Keller and Company, Inc., except where
Keller and Company, Inc. is determined to have been negligent or failed to
exercise due diligence in the preparation of its appraisal. Keller and Company,
Inc. is independent of the Company and the Bank.
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, Keller and Company, Inc. has advised the Bank that it
has considered and will consider both the effect of the additional capital
raised by the sale of the Common Stock and the effect of the issuance of a
majority of the stock of the Company to the Mutual Holding Company on the
estimated market value of the Common Stock and the amount of any minority
interest discount which should be applied in determining the market value of the
stock to be sold to the Public Stockholders in the Reorganization. The Board of
Directors has reviewed the appraisal, including the stated methodology of Keller
and Company, Inc. and the assumptions used in the preparation of the appraisal.
The Board of Directors is relying upon the expertise, experience and
independence of Keller and Company, Inc. and is not qualified to determine the
appropriateness of the assumptions or the methodology. The appraisal has been
filed as an exhibit to the registration statement filed with the Securities and
Exchange Commission in connection with the Reorganization. See "Additional
Information."
On the basis of the above, Keller and Company, Inc. has determined, in its
opinion, that as of June 5, 1998, the estimated aggregate pro forma market value
of the Common Stock to be issued in the Reorganization, including the Common
Stock to be issued to the Mutual Holding Company, was within a range of from
$15,725,000 to $21,275,000 with a midpoint of $18,500,000. The Company has
determined to offer a minority interest in the Company equal to 45% of the
Common Stock to be outstanding after the Reorganization at a price of $5.00 per
share. Therefore, the Company expects to sell to the public, and is offering,
from 1,415,250 to 1,914,750 shares of Common Stock, subject to increase up to
2,201,962 shares of Common Stock as described below.
Keller and Company, Inc. will update its appraisal prior to consummation
of the Reorganization. If the final estimated aggregate pro forma market value
of the Common Stock to be issued in the Reorganization, including stock issued
to the Mutual Holding Company, is between $21,275,000 (the maximum of the
Valuation Range) and $24,466,250 (15% above the maximum of the Valuation Range),
the total dollar amount of Common Stock to be sold
88
to the public may be increased to 45% of the final estimate without
resolicitation of subscribers and without a new vote of Bank's depositors and
borrowers, unless required by the OTS. Any such increase would be subject to OTS
review. If the final estimated value is less than $15,725,000 or more than
$24,466,250, then subscribers will be resolicited and, unless the OTS permits
otherwise, a new vote of the Bank's depositors and borrowers to approve the
Reorganization will be required. No sale of the shares will take place unless
Keller and Company, Inc. first confirms to the OTS that, to the best of Keller
and Company, Inc.'s knowledge and judgment, nothing of a material nature has
occurred which would cause it to conclude that the aggregate purchase price of
all shares to be sold in the Reorganization is incompatible with its estimate of
the aggregate pro forma market value of the Common Stock at the time of the
sale.
THE APPRAISAL BY KELLER AND COMPANY, INC. 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, KELLER AND COMPANY, INC. HAS
RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND
STATISTICAL INFORMATION PROVIDED BY THE BANK. KELLER AND COMPANY, INC. DID NOT
INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY
THE BANK, NOR DID KELLER AND COMPANY, INC. 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 THE 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 BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE $5.00 PURCHASE PRICE.
An increase in the total number of shares to be issued in the
Reorganization would decrease both a subscriber's ownership interest and the
estimated pro forma equity and net income on a per share basis while increasing
the estimated pro forma equity and net income on an aggregate basis. In the
event of a material reduction in the valuation, the Bank may decrease the number
of shares to reflect the reduced valuation. A decrease in the number of shares
to be issued in the Reorganization would increase both a subscriber's ownership
interest and the estimated pro forma equity and net income on a per share basis
while decreasing estimated equity and net income on an aggregate basis.
RESTRICTIONS ON REPURCHASE OF COMMON STOCK
Generally, unless the OTS permits otherwise, the Company will not be
permitted to repurchase Common Stock for three years after the Reorganization.
This prohibition does not apply to repurchases by tax-qualified or
non-tax-qualified employee benefit plans of the Bank, which are permitted to
purchase stock of the Company. The exception would, for example, apply to a
purchase of Common Stock of the Company by the restricted stock plan intended to
be implemented after the receipt of the approval of the Public Stockholders of
the Company. 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 Common Stock are liberalized, the Company may utilize the
rules and regulations then in effect.
RESTRICTIONS ON TRANSFERABILITY OF SUBSCRIPTION RIGHTS AND COMMON STOCK
Depositors with subscription rights may not transfer or enter into any
agreement or understanding to transfer the legal or beneficial ownership of the
subscription rights that they receive in the Subscription Offering or the shares
of Common Stock to be issued upon the exercise of those rights. Subscription
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 he or she is purchasing shares solely for his or her own account
and that he or she has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Reorganization.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES IF THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND WILL
NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
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Shares of Common Stock purchased in the Subscription Offering by directors
and officers of the Company and the Bank may not be sold for one year after the
Reorganization, except for a disposition of shares in the event of the death of
the stockholder. Common Stock issued by the Company to directors and officers in
the Reorganization will bear a legend giving appropriate notice of the
restriction, and, in addition, the Company will give appropriate instructions to
the transfer agent for the Common Stock with respect to the restriction. 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 three years after the Reorganization, 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 registered
broker or dealer, except that this restriction shall not apply to negotiated
transactions involving more than 1% of any class of stock and shall not apply to
any purchases made and held by any tax-qualified or non-tax-qualified employee
stock benefit plan.
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan of
Reorganization by the Board of Directors of the Bank will be final; however,
such interpretations shall have no binding effect on the OTS. If deemed
necessary or desirable by the Board of Directors, the Plan of Reorganization may
be substantively amended by the Board of Directors with the concurrence of the
OTS, except that if regulations are liberalized after the approval of the Plan
of Reorganization by the OTS and the Bank's depositors, the Board of Directors
may amend the Plan of Reorganization to conform to the regulations without
further depositor or borrower approval to the extent permitted by law. An
amendment to the Plan of Reorganization that would result in a material adverse
change in the terms of the Reorganization would require a resolicitation.
CONDITIONS AND TERMINATION
Completion of the Reorganization requires the approval of the Plan of
Reorganization by the affirmative vote of not less than a majority of the total
number of votes of the depositors of the Bank eligible to be cast and the sale
of all shares of Common Stock within 24 months after the approval of the
Reorganization by the Bank's depositors. If these conditions are not satisfied,
the Reorganization will not occur and the Bank will continue its business in the
mutual form of organization. The Plan of Reorganization may be terminated by the
Board of Directors at any time prior to the meeting of depositors and borrowers
to approve the Reorganization and may be terminated after that meeting with the
approval of the OTS.
OTHER
ALL STATEMENTS MADE IN THIS PROSPECTUS ARE QUALIFIED BY THE CONTENTS OF
THE PLAN OF REORGANIZATION, THE MATERIAL TERMS OF WHICH ARE SET FORTH IN THIS
PROSPECTUS. THE PLAN OF REORGANIZATION (WITHOUT EXHIBITS) IS ATTACHED TO THE
PROXY STATEMENT DISTRIBUTED IN CONNECTION WITH THE MEETING OF DEPOSITORS TO
APPROVE THE REORGANIZATION. COPIES OF THE PLAN OF REORGANIZATION ARE ALSO
AVAILABLE FROM THE BANK AND IT SHOULD BE CONSULTED FOR FURTHER INFORMATION.
APPROVAL OF THE PLAN OF REORGANIZATION BY THE BANK'S DEPOSITORS AUTHORIZES
THE BOARD OF DIRECTORS TO AMEND OR TERMINATE IT.
REGULATION
The Bank is a New York chartered mutual savings and loan association. The
Bank will become a federal savings bank if its depositors approve its conversion
to a federal savings bank and the charter conversion is approved by the OTS. Set
forth below is a brief summary of the laws and regulations that will govern the
Bank as a federal savings bank and the Company and the Mutual Holding Company as
savings and loan association holding companies.
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GENERAL
The Bank, upon becoming a federal savings association, will be subject to
extensive regulation, examination, and supervision by the OTS, as its primary
federal regulator and by the FDIC, as its deposit insurer. The Bank's deposit
accounts are and will continue to be insured up to applicable limits by the
Savings Association Insurance Fund of the FDIC, and the Bank is a member of the
Federal Home Loan Bank of New York. The Bank will be required to file reports
with the OTS and the FDIC concerning its activities and financial condition, and
it must obtain regulatory approvals prior to entering into certain transactions,
such as mergers with, or acquisitions of, other depository institutions. The OTS
and the FDIC will have the authority to conduct periodic examinations to assess
the Bank's compliance with various regulatory requirements. The Mutual Holding
Company and the Company, as savings and loan holding companies, will also be
required to file certain reports with, and otherwise comply with, the rules and
regulations of the OTS. In addition, the Company will be subject to the federal
securities law and rules and regulations of the SEC under the federal securities
laws. See "-Holding Company Regulation."
The OTS and the FDIC have substantial discretion in the exercise and
administration of their supervisory, examination and enforcement powers and
policies, including policies with respect to the classification of assets, the
establishment of adequate loan loss reserves and capital maintenance. Any change
in such policies, whether by the OTS, the FDIC or the Congress, could have a
material adverse impact on the Company or the Bank.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
Business Activities. As a federal savings association, the Bank's lending,
investment and deposit taking powers will come from the Home Owners' Loan Act,
as amended (the "HOLA"), and the regulations of the OTS. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of debt
securities, and certain other assets. The Bank may also establish service
corporations that may engage in activities not otherwise permissible for the
Bank, including real estate, securities and insurance brokerage. The Bank's
lending and investment powers are subject to limits, including, among others,
(a) a prohibition against acquiring any corporate debt security that is not
rated in one of the four highest rating categories; (b) a limit of 400% of
capital that can be invested in loans secured by non-residential real estate
property; (c) a limit of 10% of assets that can be invested in commercial loans;
(d) a limit of 35% of assets that can be invested in consumer loans, commercial
paper and corporate debt securities; (e) a limit of 5% of assets which can be
invested in non-conforming loans (loans in excess of the specific limitations of
the HOLA); (f) a limit of the greater of 5% of assets or its total capital which
can be invested in certain construction loans made for the purpose of financing
what is or is expected to become residential property; and (g) a limit of 10% of
assets that can be invested in personal property used for general leasing
activities. The HOLA authorizes the Bank, as a federal savings association, to
offer a variety of kinds of deposit accounts, including savings, certificate
(time), demand and NOW accounts.
Loans to One Borrower. Under the HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, a savings association may not make a loan or extend credit to
a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Up to an additional 10% of unimpaired capital and surplus
can be lent if the additional amount is fully secured by readily-marketable
collateral. Such collateral may consist of cash, certain debt and equity
securities and bullion but generally does not include real estate. At March 31,
1998, the Bank's regulatory limit on loans to one borrower was in excess of $1.5
million. At that date, the Bank's largest aggregate loans to one borrower was
$364,000. The Bank is in compliance with all applicable limitations on loans to
one borrower.
QTL Test. The HOLA requires a savings association to meet a qualified
thrift lender, or "QTL" test. Under the QTL test, a savings association must
maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" in at least nine months of the most recent 12-month period.
"Portfolio assets" means, in general, total assets less (a) specified liquid
assets up to 20% of total assets, (b) certain intangibles, including goodwill
and credit card and purchased mortgage servicing rights, and (c) the value of
property used to conduct the association's business. "Qualified thrift
investments" include various types of loans made for residential and housing
purposes, investments related to such purposes, such as certain mortgage-backed
securities, education, small business and credit card loans,
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and consumer loans and certain other loans and investments up to, in the
aggregate, 20% of portfolio assets. The Bank satisfies the QTL test.
A savings association that fails the QTL test must either restrict its
activities or convert to a commercial bank charter. The initial restrictions
include prohibitions against (a) engaging in any new activity not permissible
for a national bank, (b) paying dividends not permissible under national bank
regulations, (c) obtaining new advances from any Federal Home Loan Bank and (d)
establishing any new branch office in a location not permissible for a national
bank located in the association's home state. In addition, within one year after
a savings association ceases to meet the QTL test, any company controlling the
association must register under, and become subject to the requirements of, the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). If the savings
association does not requalify under the QTL test within three years after it
fails the QTL test, it must terminate any activity and dispose of any investment
not permissible for a national bank and must repay as promptly as possible any
outstanding advances from a Federal Home Loan Bank. A savings association that
has failed the QTL test may requalify under the QTL test and be free of such
limitations, but it may do so only once.
Capital Requirements. OTS regulations require savings associations to
maintain tangible capital equal to 1.5% of total assets as adjusted under the
OTS regulations, core capital equal to 3% of such adjusted total assets and
total capital (core capital plus supplementary capital) equal to 8% of
risk-weighted assets. Tangible capital is defined, generally, as common
stockholders' equity (including the Bank's net worth as a mutual institution),
certain noncumulative perpetual preferred stock and related earnings and
minority interests in equity accounts of fully consolidated subsidiaries, less
intangibles (other than certain purchased mortgage servicing rights) and
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank. The Bank's tangible capital at March 31, 1998 was $10.6
million. Core capital is equal to tangible capital plus certain qualifying
supervisory goodwill and certain purchased credit card relationships. At March
31, 1998, the Bank had no core capital which was not also tangible capital.
In determining compliance with the risk-based capital requirement, a
savings association computes its risk-weighted assets by multiplying its assets
and certain off-balance sheet items by risk-weights, which range from 0% for
cash and obligations issued by the United States Government or its agencies to
100% for consumer and commercial loans, as established by the OTS based on the
perceived risks inherent in the type of asset. Supplementary capital for
determining compliance with the risk-based capital requirement includes
cumulative and other perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses. The allowance for loan and lease losses includable in
supplementary capital is limited to 1.25% of risk-weighted assets, and
supplementary capital cannot exceed the amount of core capital. The Bank has no
supplementary capital except for its allowance for loan losses, which totaled
$464,000 at March 31, 1998, compared to risk-weighted assets of $24.1 million.
Therefore, only $301,000 of the allowance for loan losses was includable as
supplementary capital for the purpose of calculating risk-based capital ratios.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% of the
portfolio value of the association's assets must deduct an interest rate
component in calculating its total capital under the risk-based capital rule.
The interest rate risk component is an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association such as the Bank with assets of less than $300 million and
risk-based capital ratios in
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excess of 12% is not subject to the interest rate risk component, unless the OTS
determines otherwise. The rule also provides that the Director of the OTS may
waive or defer an association's interest rate risk component on a case-by-case
basis. The OTS has postponed indefinitely the date that the component will first
be deducted from an institution's total capital. The Bank believes that the rule
will not have a material adverse effect on the Bank because of the Bank's
capital ratios, which substantially exceed OTS requirements. See "Managements
Discussion and Analysis of Financial Condition and Results of Operations -
Market Interest Rate Risk Analysis - Net Portfolio Value."
Limitations on Capital Distributions. OTS regulations impose limits on
capital distributions by savings associations, 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. These regulations apply to distributions by the Bank, but not to
distributions by the Company. At least 30-days written notice must be given to
the OTS of a proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions must
first be approved by the OTS. An association such as the Bank that satisfies all
regulatory capital requirements and that is not otherwise restricted in making
capital distributions may, after notifying the OTS, and provided that the
capital distribution will not cause the association to fail to meet any
regulatory capital requirement, make capital distributions during a calendar
year equal to the greater of (a) 100% of its net earnings during the current
calendar year plus the amount that would reduce by one-half the excess of its
capital over its capital requirements at the beginning of the calendar year, or
(b) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. The OTS can prohibit a
proposed capital distribution if the OTS has determined that the association is
in need of more than normal supervision or if it determines that a proposed
distribution would constitute an unsafe or unsound practice. See " Prompt
Corrective Action."
Liquidity. The Bank must maintain an average daily balance of liquid
assets (cash, certain time deposits, bankers' acceptances, specified United
States Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to a
monthly average of a percentage of its net withdrawable deposit accounts plus
short-term borrowings. The applicable percentage, currently 4%, may be changed
from time to time by the OTS within the range of 4% to 10% depending upon
economic conditions and the savings flows of member institutions. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Bank's liquidity ratio, for March 1998, calculated in accordance with OTS
regulations, was 33%.
Assessments. Savings associations must pay assessments to the OTS to fund
the operations of the OTS. The general assessment, paid on a semi-annual basis,
is computed upon the savings association's total assets, including consolidated
subsidiaries. The Bank's annual OTS assessment for the year ended September 30,
1997 was $18,729. As a New York chartered savings and loan association, the Bank
also pays assessments and examination fees to the New York State Banking
Department, which totaled $2,380 in fiscal 1997. As a federal savings
association, the Bank will pay assessments to the OTS but will no longer pay
assessments and examination fees to the New York State Banking Department.
Branching. As a federal savings association, the Bank will be permitted to
open branches throughout New York State. Subject to certain limitations, the
Bank may also establish branches in any state of the United States if either (a)
the state expressly authorizes branches of savings associations located in
another state or (b) the Bank satisfies certain requirements under the Internal
Revenue Code of 1986 similar to those for a "qualified thrift lender" under the
HOLA. See "-QTL Test." This authority preempts any state law purporting to
regulate branching by federal savings associations. The Bank has no present
plans to open a branch outside New York State.
Community Reinvestment. Under the federal Community Reinvestment Act (the
"CRA"), a savings association must, consistent with its safe and sound
operation, help meet the credit needs of its entire community, including low and
moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop products and services that it believes are
best suited to its particular community. The OTS, in connection with its
examination of a savings association, must assess the association's record of
meeting the credit needs of its community and must take such record into account
in its evaluation of certain applications by such association. The CRA rating
system focuses on
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three tests: (a) a lending test, to evaluate the Bank's record of investing in
home mortgage and small business loans, community development projects,
affordable housing, and programs benefiting low or moderate income individuals
and businesses; (b) an investment test, to evaluate the Bank's investments made
to benefit its community; and (c) a service test, to evaluate the Bank's
delivery of retail banking services. The CRA also requires all institutions to
make public disclosure of their CRA ratings. As a New York chartered savings and
loan association, the Bank is also subject to comparable state community
reinvestment laws and regulations implemented by the New York State Banking
Department. The Bank received a "satisfactory" CRA rating in its most recent OTS
and New York State Banking Department examinations.
Transactions With Related Parties. The Bank's authority to engage in
transactions with its "Affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act. In general, an affiliate of the
Bank is any company that controls the Bank or any other company that is
controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates must be secured by
certain specified collateral, and the purchase of low quality assets from
affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are at least as
favorable to the association as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive
officers, and 10% stockholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among
other things, these provisions require that extensions of credit to insiders (a)
be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features and (b)
not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.
However, recent legislation permits the Bank to make loans to executive
officers, directors and principal shareholders ("insiders") on preferential
terms, provided the extension of credit is made pursuant to a benefit or
compensation program of the Bank that is widely available to employees of the
Bank or its affiliates and does not give preference to any insider over other
employees of the Bank or affiliate. The Bank has no such benefit or compensation
programs.
Enforcement. The OTS has primary enforcement responsibility over savings
associations and has the authority to bring enforcement action against all
"institution-affiliated parties," including any controlling stockholder or any
stockholder, attorney, appraiser or accountant who knowingly or recklessly
participates in any violation of applicable law or regulation or breach of
fiduciary duty or certain other wrongful actions that causes or is likely to
cause more than a minimal loss or other significant adverse effect on an insured
savings association. Civil penalties range from $5,000 for each day during which
violations of law, regulations, orders, and certain written agreements and
conditions continue, up to $1 million per day for such violations if the person
obtained a substantial pecuniary gain as a result of such violation or knowingly
or recklessly caused a substantial loss to the institution. Criminal penalties
for certain financial institution crimes include fines of up to $1 million and
imprisonment for up to 30 years. In addition, regulators may take enforcement
action against an institution that fails to comply with its regulatory
requirements. Possible enforcement actions range from the imposition of a
capital plan and capital directive to receivership, conservatorship, or the
termination of deposit insurance. The FDIC may recommend to the OTS that
enforcement action be taken with respect to a particular savings association. If
action is not taken by the Director of the OTS, the FDIC has authority to take
such action under certain circumstances.
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Standards for Safety and Soundness. The OTS, together with the other
federal bank regulatory agencies, has prescribed guidelines which establish
minimum general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines also cover asset quality and earnings evaluation and monitoring as
well. The guidelines prohibit excessive compensation as an unsafe and unsound
practice and describe compensation as excessive when the amounts paid are
unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal stockholder. In addition, the OTS may
order an institution that has been given notice by the OTS that it is not
satisfying any of such safety and soundness standards to submit a compliance
plan. If an institution then fails to submit an acceptable plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" requirements described below. If an
institution fails to comply with such an order, the OTS may seek enforcement in
judicial proceedings and civil money penalties.
Prompt Corrective Action. Under federal law, the OTS is required to take
prompt action to correct deficiencies in undercapitalized savings associations.
A savings association is categorized as "well capitalized" or "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
10.0% or 8.0%, respectively, its ratio of core capital to risk-weighted assets
is at least 6.0% or 4.0%, respectively, its ratio of core capital to total
assets is at least 5.0% or 4.0% (3.0% if the institution has the best
supervisory rating), respectively, and it is not subject to any order or
directive by the OTS to meet a specific capital level. Savings associations that
do not meet these standards are classified as "undercapitalized." A savings
association with a total risk-based capital ratio of less than 6.0% or a core
capital ratio of less than 3.0% is considered to be "significantly
undercapitalized." A savings association with a tangible capital to assets ratio
of 2% or less is deemed to be "critically undercapitalized." The Bank qualifies
as "well capitalized" on the basis of its existing capital ratios and regulatory
classification. See "-Capital Requirements."
Dividends, other capital distributions or the payment of management fees
to any controlling person are prohibited if, following such distribution or
payment, an association would be undercapitalized. An undercapitalized
association must file a plan to restore its capital within 45 days after being
notified that it is undercapitalized. Undercapitalized, significantly
undercapitalized and critically undercapitalized institutions are subject to
increasing prohibitions on permitted activities, and increasing levels of
regulatory supervision, based upon the severity of their capital problems. The
OTS is required to monitor closely the condition of an undercapitalized
association. Enforcement action taken by the OTS can escalate to the appointment
of a conservator or receiver of a critically undercapitalized institution. When
appropriate, the OTS can also require corrective action by a savings association
holding company under the "prompt corrective action" requirements.
Insurance of Deposit Accounts. Deposit insurance premiums payable to the
FDIC are based upon a system which categorizes insured institutions based upon
their perceived risks to the FDIC insurance fund. The FDIC assigns an
institution to one of three capital categories: (a) well capitalized, (b)
adequately capitalized or (c) undercapitalized. The FDIC also assigns an
institution to one of three supervisory categories based on an evaluation by the
institution's primary federal regulator and information that the FDIC considers
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. Deposit insurance premiums depend on an institution's
capital and supervisory categories. At present, the Bank pays no regular deposit
insurance premiums based upon its risk-based categorization. However, the Bank
is required to pay a share of the cost of the bonds issued in the late 1980s to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The
Bank must pay an annual assessment for this purpose, currently equal to
approximately 0.065% of its insured deposits, which is recorded as a deposit
insurance expense for financial statement purposes.
Federal Home Loan Bank System. The Bank is a member of the FHLBNY, which
is one of the regional Federal Home Loan Banks composing the Federal Home Loan
Bank System. Each Federal Home Loan Bank acts as a central credit facility for
its member institutions. The Bank must own shares of capital stock in the FHLBNY
at least
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equal to the greater of 1% of the principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year or 5% of
its advances from the FHLBNY. At March 31, 1998, the Bank held $379,000 of
capital stock of the FHLBNY, which satisfied this requirement and it had no
FHLBNY borrowings. During the three months ended March 31, 1998, the FHLBNY paid
a 7.4% (annualized) dividend on its capital stock. If the Bank materially
increases its residential mortgage loans, or obtains significant advances from
the FHLBNY, the Bank would be required to increase its investment in FHLBNY
capital stock. Advances from the FHLBNY must be secured by specified types of
collateral, and all long-term advances may be obtained only for the purpose of
providing funds for residential housing finance.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of earnings that the FHLBNY
can pay as dividends to its members and could also result in the FHLBNY imposing
a higher rate of interest on advances. Further, there can be no assurance that
the impact of current or future federal laws on the FHLBNY or of economic
conditions will not also cause a decrease in the value of FHLBNY capital stock.
The Federal Reserve System. The Bank is required, under the regulations of
the Federal Reserve, to maintain non-interest-earning reserves against its
transaction accounts (primarily NOW and regular checking accounts). The Bank is
generally able to satisfy the reserve requirements with cash on hand and other
non-interest bearing deposits which it maintains for other purposes, so the
reserve requirements do not impose a material burden on the Bank.
HOLDING COMPANY REGULATION
The Mutual Holding Company and the Company will be nondiversified
mutual savings and loan holding companies. As such they must register with the
OTS and are subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Mutual
Holding Company and the Company and its non-savings association subsidiaries, if
any. Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. As federal corporations, the Company and the Mutual Holding Company
are generally not subject to state business laws regulating the powers or
operations of business organizations.
Pursuant to Section 10(o) of the HOLA and OTS regulations and policy, a
mutual holding company and a federally chartered mid-tier holding company such
as the Company may engage in the following activities: (i) investing in the
stock of a savings association; (ii) acquiring a mutual association through the
merger of such association into a savings association subsidiary of such holding
company or an interim savings association subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings association subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity (A) that
the Federal Reserve, by regulation, has determined to be permissible for bank
holding companies under Section 4(c) of the Bank Holding Company Act of 1956,
unless the OTS, by regulation, prohibits or limits any such activity for savings
and loan holding companies; or (B) in which multiple savings and loan holding
companies were authorized (by regulation) to directly engage on March 5, 1987;
and (x) purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such savings and loan
holding company is approved by the OTS. If a mutual holding company acquires or
merges with another holding company, the holding company acquired or the holding
company resulting from such merger or acquisition may only invest in assets and
engage in activities listed in (i) through (x) above, and has a period of two
years to cease any nonconforming activities and divest any nonconforming
investments.
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A savings and loan holding company may not, directly or indirectly, or
through one or more subsidiaries, acquire another savings association or holding
company thereof without prior written approval of the OTS; acquire or retain,
with certain exceptions, more than 5% of a savings association or holding
company that is not a subsidiary, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquire or retain control of a depository institution that is not
insured by the FDIC. In evaluating an application by a holding company to
acquire a savings association, the OTS must consider the financial and
managerial resources and future prospects of the company and savings association
involved, the effect of the acquisition on the risk to the FDIC deposit
insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings associations in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings association in another state if the laws of the state
of the target savings association specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Waivers of Dividends by the Mutual Holding Company. OTS regulations
require the Mutual Holding Company to notify the OTS of any proposed waiver of
its right to receive dividends from a subsidiary savings association or an
intermediate tier holding company, such as the Company. The OTS reviews dividend
waiver notices on a case-by-case basis, and, in general, does not object to any
such waiver if: (i) the mutual holding company's board of directors determines
that such waiver is consistent with such directors' fiduciary duties to the
mutual holding company's members; (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company are considered as a restriction
to the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with SFAS 5,
where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; (iv) the amount of any waived dividend is considered as having
been paid by the savings association in evaluating any proposed dividend under
OTS capital distribution regulations; and (v) in the event the mutual holding
company converts to stock form, the appraisal submitted to the OTS in connection
with the conversion application takes into account the aggregate amount of the
dividends waived by the mutual holding company.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to convert from the mutual to the capital
stock form of organization (a "Conversion Transaction"). The Board of Directors
has no current intention or plan to undertake a Conversion Transaction. In a
Conversion Transaction, a new holding company would be formed as the successor
to the Company (the "New Holding Company"), the Mutual Holding Company's
corporate existence would end, and certain depositors of the Bank would receive
the right to subscribe for additional shares of the New Holding Company. In a
Conversion Transaction, each share of Common Stock held by Public Stockholders
would be automatically converted into a number of shares of common stock of the
New Holding Company determined pursuant to an exchange ratio that ensures that
after the Conversion Transaction, subject to the Dividend Waiver Adjustment
described below and any adjustment to reflect the receipt of cash in lieu of
fractional shares, the percentage of the to-be outstanding shares of the New
Holding Company issued to Public Stockholders in exchange for their Common Stock
would be equal to the percentage of the outstanding shares of Common Stock held
by Public Stockholders immediately prior to the Conversion Transaction. The
total number of shares held by Public Stockholders after the Conversion
Transaction would also be affected by any purchases by such persons in the
offering that would be conducted as part of the Conversion Transaction.
The Dividend Waiver Adjustment would decrease the percentage of the to-be
outstanding shares of common stock of the New Holding Company issued to Public
Stockholders in exchange for their shares of Common Stock to reflect (i) the
aggregate amount of dividends waived by the Mutual Holding Company and (ii)
assets other than Common Stock held by the Mutual Holding Company. Pursuant to
the Dividend Waiver adjustment, the percentage of the to-be outstanding shares
of the New Holding Company issued to Public Stockholders in exchange for their
97
shares of Common Stock would be equal to the percentage of the outstanding
shares of Common Stock held by Public Stockholders multiplied by the Dividend
Waiver Fraction. The Dividend Waiver Fraction is equal to the product of (a) a
fraction, of which the numerator is equal to the Company's stockholders' equity
at the time of the Conversion Transaction less the aggregate amount of dividends
waived by the Mutual Company and the denominator is equal to the Company's
stockholders' equity at the time of the Conversion Transaction, and (b) a
fraction, of which the numerator is equal to the appraised pro forma market
value of the New Holding Company minus the value of the Mutual Holding Company's
assets other than Common Stock and the denominator is equal to the pro forma
market value of the New Holding Company.
Office of Thrift Supervision regulations applicable to the conversion of a
mutual institution to the stock form would generally apply to a conversion of
the Mutual Holding Company to the stock form. These regulations include, among
other provisions, maximum purchase limits. It is the position of the OTS that
any exchange of shares of the Company for shares of the New Holding Company
would be the same as the purchase of New Holding Company shares. The application
of this rule could cause some stockholders to exceed the purchase limits and
require them to sell some of their stock of the Company prior to a Conversion
Transaction.
FEDERAL SECURITIES LAWS
Upon completion of the Reorganization, the Company's Common Stock will be
registered with the SEC under the Exchange Act. The Company will then be subject
to the information, reporting, proxy solicitation, insider trading restrictions
and other requirements under the Exchange Act.
Shares of the Common Stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (a) 1% of the outstanding
shares of the Company or (b) the average weekly volume of trading in such shares
during the preceding four calendar weeks. Provision may be made in the future by
the Company to permit affiliates to have their shares registered for sale under
the Securities Act under certain circumstances.
TAXATION
GENERAL
The following is a discussion of material tax matters and does not purport
to be a comprehensive description of the Federal and State income tax rules
applicable to the Bank or the Company. For a discussion of the tax consequence
of the Reorganization, see "The Reorganization - Effects of Reorganization on
Depositors and Borrowers-Tax Effects."
FEDERAL TAXATION
General. The Bank is taxed for Federal income tax purposes in accordance
with the Internal Revenue Code of 1986, as amended, in substantially the same
manner as all other business corporations, subject to certain special provisions
applicable to financial institutions. The Bank has not been audited by the
Internal Revenue Service during the last five years. For Federal income tax
purposes, after the Reorganization, the Company and the Bank will file
consolidated income tax returns and will be subject to Federal income taxation
in the same manner as other corporations, but generally subject, as to the Bank,
to the same special provisions applicable to financial institutions filing tax
returns on an unconsolidated basis.
Bad Debt Deduction. In 1996, the Internal Revenue Code was amended,
effective for tax years beginning in 1996, to change the method by which the
Bank may take tax deductions for bad debts. The Bank is now required, for
Federal income tax purposes, to use the experience method in determining its tax
bad debt deduction, which generally permits tax deductions for bad debts based
upon a six-year moving average of actual loan loss experience.
Distributions. If the Bank makes certain types of distributions
("non-dividend distributions") to the Company which are not in the nature of
dividends, such distributions will be considered to have been made first from
the Bank's unrecaptured tax bad debt reserves (including the balance of its
reserves as of December 31, 1987
98
which are not part of excess reserves). An amount based on the non-dividend
distribution will be included in the Bank's income for tax purposes.
Non-dividend distributions subject to this rule include distributions in excess
of the Bank's current and accumulated earnings and profits, as calculated for
Federal income tax purposes, distributions in redemption of stock, and
distributions in partial or complete liquidation. Dividends paid out of the
Bank's current or accumulated earnings and profits are not subject to this rule.
The amount of additional taxable income caused by a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Reorganization, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such non-dividend
distribution would be includable in income for Federal income tax purposes,
assuming a 34% Federal corporate income tax rate. The Company and the Bank do
not anticipate that the Bank will pay any non-dividend distributions to the
Company after the Reorganization. See "Regulation" and "Dividend Policy" for
limits on the payment of dividends by the Bank. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a tax
on alternative minimum taxable income at a rate of 20%. In general, the
alternative minimum tax is imposed if, because of high levels of certain
deductions and tax-exempt income, there is a substantial difference between a
corporation's gross income and its taxable income. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. The Bank has not been subject to the alternative minimum tax
and has no such amounts available as credits for carryover to future years.
Dividends Received Deduction. The Company may exclude from its income 100%
of dividends received from the Bank as a member of the same affiliated group of
corporations. A 70% dividends received deduction generally applies with respect
to dividends received from domestic 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. Under pending legislative proposals, the 70% dividends received
deduction would be reduced to 50% with respect to dividends paid after enactment
of such legislation.
NEW YORK STATE TAXATION
General. The Bank and the Company will report income on a combined basis
to New York State. New York State franchise tax on banking corporations is
imposed in an amount equal to the greater of (i) 9% of the Bank's "entire net
income" allocable to New York State during the taxable year or (ii) the
applicable alternative minimum tax. The alternative minimum tax is generally the
greatest of (a) .01% of the value of the Bank's assets allocable to New York
State with certain modifications, (b) 3% of the Bank's "alternative entire net
income" allocable to New York State or (c) $250. Entire net income is based on
Federal taxable income, subject to certain modifications and "alternative entire
net income" is equal to entire net income without certain deductions.
Bad Debt Deduction. The Bank is currently using a six-year moving average
experience method, similar to the Federal method, to calculate the New York bad
debt deduction.
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
The following discussion is a general summary of material regulatory
restrictions on the acquisition of the Common Stock. In addition, the following
discussion generally summarizes certain provisions of the charter of the Company
and certain regulatory provisions that may be deemed to have an "anti-takeover"
effect.
99
THE MUTUAL HOLDING COMPANY STRUCTURE
Under OTS regulations, the Plan of Reorganization, and the charter of the
Company, at least a majority of the Company's voting shares must be owned by the
Mutual Holding Company. The Mutual Holding Company will be controlled by its
Board of Directors, which will initially consist of the same persons who are
members of the Board of Directors of the Bank and the Company. The Mutual
Holding Company will be able to elect all members of the Board of Directors of
the Company, and, as a general matter, will be able to control the outcome of
all matters presented to the stockholders of the Company for resolution by vote,
except for matters that require a vote greater than a majority or matters which,
pursuant to OTS policy, require the approval of the Public Stockholders of the
Company. The Mutual Holding Company, acting through its Board of Directors, will
be able to control the business and operations of the Company and the Bank, and
will be able to prevent any challenge to the ownership or control of the Company
by the Public Stockholders. Accordingly, a change in control of the Company and
the Bank generally cannot occur unless the Mutual Holding Company first converts
to the stock form of organization. Although OTS regulations and policy and the
Plan of Reorganization permit the Mutual Holding Company to convert from the
mutual to the capital stock form of organization, the Board of Directors has no
current plan to do so.
PROVISIONS OF THE COMPANY'S CHARTER
General. In addition to the anti-takeover aspects of the mutual holding
company structure, the following discussion is a general summary of certain
provisions of the Company's charter and certain other regulatory provisions
which will restrict the ability of stockholders to influence management
policies, and 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 and the Bank's proposed
charter, 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."
Classified Board of Directors and Related Provisions. The Company's
Charter provides that the Board of Directors is to be divided into three classes
which shall be as nearly equal in number as possible. The directors in each
class hold office for terms of three years and until their successors are
elected and qualified. One class is elected annually. Management of the Company
believes that the staggered election of directors tends to promote continuity
and stability of management but makes it more difficult for stockholders to
change a majority of the directors because it generally takes at least two
annual elections of directors for this to occur.
Absence of Cumulative Voting. The Company's Charter provides that there
shall be no cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The Company's Charter authorizes shares
of serial preferred stock, without par value. The Company is authorized to issue
preferred stock from time to time in one or more series subject to applicable
provisions of law; and the Board of Directors is authorized to fix the
designations, and relative preferences, limitations, voting rights, if any,
including without limitation, conversion rights of such shares. In the event of
a proposed merger, tender offer or other attempt to gain control of the Company
that the Board of Directors does not approve, it might be possible for the Board
of Directors to authorize the issuance of a series of preferred stock with
rights and preferences that would impede the completion of such a transaction.
Therefore, the potential issuance of preferred stock could itself deter a future
takeover attempt, without the preferred stock actually being issued. The Board
of Directors has no present plans or understandings to issue any preferred stock
but it may issue preferred stock in the future on terms which the Board
considers to be in the best interests of the Company and its stockholders.
Restrictions on Acquisitions of Securities. The Company's Charter provides
that for five years after the effective date of the charter, no person other
than the Mutual Holding Company may directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10% of any class of equity
security of the Company. In addition, during those five years, all shares
beneficially owned in violation of the 10% limit shall not be counted as shares
entitled to vote, shall not be voted by any person or counted as voting shares
in connection with any matter
100
submitted to stockholders for a vote, and shall not be counted as outstanding
for purposes of determining a quorum or the affirmative vote necessary to
approve any matter submitted to the stockholders for a vote.
Special Meeting of Stockholders. The Company's Charter provides that for
five years after the effective date of the Charter, special meetings of
stockholders relating to changes in control of the Company or amendments to the
Charter may be called only by the Board of Directors.
Preemptive Rights. The Company's charter provides that its stockholders
will not have preemptive rights to acquire any shares of stock of the Company
that may be issued in the future. This means that the Company is not required to
offer newly issued stock first to existing stockholders. OTS regulations
generally require that if the Company issues any voting stock, that stock must
be first offered to depositors of the Bank.
CHANGE IN BANK CONTROL ACT AND SAVINGS AND LOAN HOLDING COMPANY PROVISIONS
OF THE HOLA
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings and loan holding company unless the OTS has been given 60
days' prior written notice. The HOLA provides that no company may acquire
"control" of a savings and loan holding company without the prior approval of
the OTS. Any company that acquires such control becomes a "savings and loan
holding company" subject to registration, examination, and regulation by the
OTS. Pursuant to federal regulations, control of a savings and loan holding
company is conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of the institution or
the ability to control the election of a majority of the directors of the
institution. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock, of a savings and loan holding company,
where certain enumerated "control factors" are also present in the acquisition.
The OTS may prohibit an acquisition of control if (i) it would result in a
monopoly or substantially lessen competition, (ii) the financial condition of
the acquiring person might jeopardize the financial stability of the
institution, or (iii) the competence, experience, or integrity of the acquiring
person indicates that it would not be in the interest of the depositors or of
the public to permit the acquisition of control by such person. The foregoing
restrictions do not apply to the acquisition of the Company's capital stock by
one or more tax-qualified employee stock benefit plans, provided that the plan
or plans do not have beneficial ownership in the aggregate of more than 25% of
any class of equity security of the Company.
ANTI-TAKEOVER EFFECTS OF COMPENSATION ARRANGEMENTS
Under present OTS policy, the Stock Option Plan and the Restricted Stock
Plan may not provide for accelerated benefits to participants in the event of a
change in control of the Company or the Bank. However, if OTS policy changes, or
if the plans are either not implemented for at least one year after the
Reorganization or stockholder approval of an amendment of the plans is obtained
at least one year after the Reorganization, then accelerated vesting in the
event of a change in control could be added to those plans. See "Management of
the Bank - Benefits - Stock Option Plan," and "-Restricted Stock Plan." The
addition of accelerated vesting in the event of a change in control deter offers
to acquire the outstanding shares of the Company which might be viewed by
stockholders to be in their best interests.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 9,000,00 shares of Common Stock having
a par value of $.01 per share and 1,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). The Company currently
expects to issue up to 4,893,250 shares of Common Stock and no shares of
Preferred Stock in the Reorganization, including shares issued to the Mutual
Holding Company. Except for shares issued in connection with the Reorganization,
the Company presently does not have plans to issue Common Stock. However,
authorized but unissued shares of Common Stock could be used to fund the Stock
Option Plan or the Restricted Stock Plan.
Each share of the Company's Common Stock will have the same relative
rights as, and will be identical in all respects with, each other share of
Common Stock, except to the extent that OTS policy or regulations require the
affirmative vote of the Public Stockholders before certain actions are taken.
Upon payment of the purchase
101
price for the Common Stock, in accordance with the Plan of Reorganization, all
such stock will be duly authorized, fully paid and nonassessable.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the FDIC
or any other government agency.
Under OTS policy and regulations, no voting stock of the Company may be
issued unless it is first offered to the depositors of the Bank in a
subscription offering comparable to the subscription offering made by this
Prospectus. The OTS has the authority to waive this restriction.
COMMON STOCK
Dividends. The Company is not subject to OTS regulations on the amount of
dividends that it may pay. However, OTS regulations put limits on the ability of
the Mutual Holding Company to waive any dividend from the Company. A waiver
might result in an adjustment in the pro rata shares of the Mutual Holding
Company versus the Public Stockholders if there is a future conversion of the
Mutual Holding Company to the stock form of organization. See "Dividend Policy"
and "Regulation--Holding Company Regulation--Waivers of Dividends by the Mutual
Holding Company." The holders of Common Stock of the Company will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available to pay dividends. If the
Company issues preferred stock, the holders of it may have a priority over the
holders of the Common Stock with respect to dividends.
Voting Rights. Upon the Reorganization, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under federal law or as are otherwise presented to them by the
Board of Directors. Except as discussed in "Restrictions on Acquisition of the
Company and the Bank," each holder of Common Stock will be entitled to one vote
per share. Stockholders will not have any right to cumulate votes in the
election of Directors. If the Company issues Preferred Stock, holders of the
Preferred Stock may also possess voting rights. The Mutual Holding Company will
have the power to vote a majority of the outstanding Common Stock, and thus will
be able to control the outcome of most matters that will come before the
stockholders of the Company for a vote. However, OTS policy currently requires
that the Stock Option Plan, the Restricted Stock Plan, and any full conversion
of the Mutual Holding Company must be approved by a majority of the Public
Stockholders of the Company, excluding the stock owned by the Mutual Holding
Company.
As a mutual savings and loan association, corporate powers and control of
the Bank are vested in its Board of Directors, who elect the officers of the
Bank and who fill any vacancies on the Board of Directors. Subsequent to
Reorganization, voting rights will be vested exclusively in the Company as the
sole owner of the shares of capital stock of the Bank, and voting rights will be
exercised at the direction of the Company's Board of Directors. Consequently,
the holders of the Common Stock will not have direct control of the Bank.
Liquidation. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all of its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the Common Stock of the Company
will not be entitled to preemptive rights with respect to any shares which may
be issued. However, under OTS regulations, the depositors of the Bank will have
the priority right to subscribe to purchase Common Stock or other voting stock
of the Company in most circumstances. The Common Stock is not subject to
redemption.
PREFERRED STOCK
None of the shares of the Company's authorized preferred stock will be
issued in the Reorganization. Such stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from
102
time to time determine, subject to OTS regulation. The Board of Directors can,
without stockholder approval, issue preferred stock with certain preferred
rights. However, OTS regulations prohibit the issuance of such stock, if it has
voting rights, unless either it is first offered to the depositors of the Bank
or the issuance otherwise receives the approval of the OTS. The Company
presently does not have plans to issue preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
EXPERTS
The financial statements of Gouverneur Savings and Loan Association as of
September 30, 1997 and 1996, and for each of the years in the three-year period
ended September 30, 1997, have been included herein and in the registration
statement filed with the SEC in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
Keller and Company, Inc. has consented to the publication herein of the
summary of its report to the Bank and Company setting forth its opinion as to
the estimated pro forma market value of the Common Stock upon Reorganization and
its opinion with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences
of the Reorganization will be passed upon for the Bank and Company by Serchuk &
Zelermyer, LLP, White Plains, New York, counsel to the Bank and Company. Certain
legal matters will be passed upon for First Albany Corporation by Gallagher,
Callahan and Gartrell, P.A., Concord, New Hampshire.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information, including
the appraisal of Keller and Company, Inc., which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http: //www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company. The
Appraisal may also be inspected by Eligible Account Holders and Supplemental
Eligible Account Holders at the offices of the Bank during normal business
hours. The statements contained in this Prospectus as to the contents of any
contract or other document filed as an exhibit to the registration statement
address the material provisions of those contracts or other documents but,
of necessity, are 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 with the OTS for approval of the
Reorganization. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in that application. The
application may be examined at Ten Exchange Place, Jersey City, New Jersey.
In connection with the Reorganization, the Company will register its
Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, the Company and the holders of its stock will become subject
to the proxy solicitation rules, reporting requirements and restrictions on
stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other
103
requirements of the Exchange Act. Under the Plan of Reorganization, the Company
has undertaken that it will not terminate such registration for a period of at
least three years following the Reorganization.
Copies of the charter and the bylaws of the Company and the Bank are
available without charge from the Bank upon written or oral request.
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GOUVERNEUR SAVINGS AND LOAN ASSOCIATION
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report ................................................F-2
Statements of Financial Condition at September 30, 1997 and 1996
and at March 31, 1998 (unaudited)..........................................F-3
Statements of Income for the Years Ended September 30, 1997,
1996 and 1995 and for the six months ended March 31, 1998 and 1997
(unaudited)................................................................29
Statements of Net Worth for the Years Ended September 30, 1997,
1996 and 1995 and the six months ended March 31, 1998 (unaudited)..........F-4
Statements of Cash Flows for the Years Ended September 30, 1997,
1996 and 1995 and the six months ended March 31, 1998 and 1997
(unaudited)................................................................F-5
Notes to Financial Statements................................................F-9
All data as of and for the six month periods ended March 31, 1998 and 1997 are
unaudited
All financial statement schedules are omitted because the required information
is not applicable or is included in the Financial Statements or related Notes.
The Financial Statements of the Company have been omitted because the Company
has not yet issued any stock, has no assets, no liabilities and has not
conducted any business other than of an organizational nature.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gouverneur Savings & Loan Association:
We have audited the accompanying statements of financial condition of Gouverneur
Savings & Loan Association as of September 30, 1997 and 1996, and the related
statements of income, net worth and cash flows for each of the years in the
three-year period ended September 30, 1997. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gouverneur Savings & Loan
Association as of September 30, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended
September 30, 1997 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Syracuse, New York
May 21, 1998
F-2
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Statements of Financial Condition
March 31, 1998 and September 30, 1997 and 1996
(In thousands)
September 30,
March 31, -----------------
ASSETS 1998 1997 1996
----------- ------ ------
(unaudited)
Cash and due from banks ....................... $ 1,055 1,283 1,159
Interest-bearing deposits with other banks .... 2,763 1,203 2,280
Time deposits with other banks ............... -- -- 500
Securities available-for-sale, at fair value .. 8,632 7,903 10,817
Securities held-to-maturity (fair value of
$7,147 (unaudited) in 1998, $8,636 in
1997 and $5,309 in 1996) .................. 7,121 8,660 5,416
Loans, net of deferred fees ................... 34,756 35,253 33,438
Less allowance for loan losses .......... (464) (403) (479)
-------- ------ ------
Net loans .......................... 34,292 34,850 32,959
Premises and equipment, net ................... 288 268 294
Federal Home Loan Bank stock, at cost ......... 379 375 338
Accrued interest receivable ................... 301 295 313
Real estate owned ............................. 176 157 149
Other assets .................................. 85 178 122
-------- ------ ------
Total assets........................ $ 55,092 55,172 54,347
======== ====== ======
LIABILITIES AND NET WORTH
Liabilities:
Deposits:
Demand accounts ......................... $ 142 113 43
Savings and club accounts ............... 15,022 14,878 15,158
Time certificates ....................... 22,562 22,843 23,241
NOW and money market accounts ........... 5,197 5,742 5,060
-------- ------ ------
Total deposits ..................... 42,923 43,576 43,502
Advance payments by borrowers for
property taxes and insurance ............ 116 45 74
Other liabilities ......................... 930 862 778
-------- ------ ------
Total liabilities .................. 43,969 44,483 44,354
------ ------ ------
Commitments and contingencies (note 10)
Net worth:
Retained earnings--substantially
restricted .............................. 10,615 10,309 9,772
Net unrealized gain on securities,
net of taxes ............................ 508 380 221
-------- ------ ------
Total net worth .................... 11,123 10,689 9,993
-------- ------ ------
Total liabilities and net worth..... $ 55,092 55,172 54,347
======== ====== ======
See accompanying notes to financial statements
F-3
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Statements of Net Worth
Six-months ended March 31, 1998 and
years ended September 30, 1997, 1996 and 1995
(In thousands)
Net Unrealized
Retained Gain (Loss) on
Earnings Securities Total
-------- -------------- ------
Balance at September 30, 1994 ................... 8,726 16 8,742
Net income ...................................... 594 -- 594
Changes in net unrealized gain (loss)
on securities, net of taxes of $89 ............ -- 130 130
------ --- ------
Balance at September 30, 1995 ................... 9,320 146 9,466
Net income ...................................... 452 -- 452
Changes in net unrealized gain (loss) on
securities, net of taxes of $50 ............... -- 75 75
------ --- ------
Balance at September 30, 1996 ................... 9,772 221 9,993
Net income ...................................... 537 -- 537
Changes in net unrealized gain (loss) on
securities, net of taxes of $109 .............. -- 159 159
------ --- ------
Balance at September 30, 1997 ................... 10,309 380 10,689
------ --- ------
Net income (unaudited) .......................... 306 -- 306
Changes in net unrealized gain (loss) on
securities, net of taxes of $83 (unaudited) ... -- 128 128
------ --- ------
Balance at March 31, 1998 (unaudited) ........... 10,615 508 11,123
====== === ======
See accompanying notes to financial statements.
F-4
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Statements of Cash Flows
Six-months ended March 31, 1998 and 1997 and
years ended September 30, 1997, 1996 and 1995
(In thousands)
Six-months
ended
March 31, Years ended September 30,
------------------ ---------------------------
1998 1997 1997 1996 1995
------- ----- ----- ----- -----
(unaudited)
Cash flows from operating activities:
Net income ....................................... $ 306 296 537 452 594
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................ 29 34 58 66 59
(Increase) decrease in accrued interest
receivable ................................. (6) 37 18 (8) (50)
Provision for loan losses .................... 85 70 250 -- 190
Net losses on sales of securities ........... -- 5 23 -- 17
Net losses (gains) on sale of real
estate owned ............................... 2 38 41 -- (12)
Net amortization (accretion) of
premiums/discounts ......................... 3 (1) 3 (24) (22)
Increase (decrease) in other liabilities ..... (7) (758) (104) 338 315
Deferred income taxes ........................ (3) 170 134 (57) (8)
Decrease (increase) in other assets .......... 93 7 (110) 7 (12)
------- ----- ----- ----- -----
Net cash provided by operating
activities .............................. 502 (102) 850 774 1,071
------- ----- ----- ----- -----
Cash flows from investing activities:
Decrease (increase) in time deposits with
other banks .................................... -- (500) 500 2,800 (3,300)
Net increase (decrease) in loans ................. 405 (371) (2,350) (772) 756
Proceeds from sales of securities available-
for-sale ....................................... 836 1,860 3,431 1,182 2,090
Proceeds from maturities and principle
reductions of securities available-for-sale .... 1,000 1,500 2,500 3,000 500
Purchases of securities available-for-sale ....... (2,353) (947) (2,767) (4,301) (2,705)
Purchases of securities held-to-maturity ......... (714) (3,206) (4,738) (1,773) (607)
Proceeds from maturities and principle
reductions of securities held-to-maturity ...... 2,249 510 1,486 853 578
Proceeds from sale of real estate owned .......... 47 102 160 303 500
Additions to premises and equipment .............. (49) (6) (32) (68) (16)
(Purchase) sale of FHLB stock .................... (4) (37) (37) 10 22
------- ----- ----- ----- -----
Net cash provided (used) by
investing activities ................... 1,417 (1,095) (1,847) 1,234 (2,182)
------- ----- ----- ----- -----
Cash flows from financing activities:
(Decrease) increase in deposits .................. (658) 109 73 (692) 447
Increase (decrease) in advance payments by
borrowers for property taxes and insurance ..... 71 22 (29) (100) (40)
------- ----- ----- ----- -----
Net cash provided (used) by
financing activities ................... (587) 131 44 (792) 407
------- ----- ----- ----- -----
Net increase (decrease) in cash and cash equivalents 1,332 (1,066) (953) 1,216 (704)
Cash and cash equivalents at beginning of period ... 2,486 3,439 3,439 2,223 2,927
------- ----- ----- ----- -----
Cash and cash equivalents at end of period ......... $ 3,818 2,373 2,486 3,439 2,223
======= ===== ===== ===== =====
F-5
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Statements of Cash Flows, Continued
Six-months ended March 31, 1998 and 1997 and
years ended September 30, 1997, 1996 and 1995
(In thousands)
Six-months
ended
March 31, Years ended September 30,
------------ -------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Non-cash investing activities:
Additions to real estate owned .. $ 68 142 208 322 320
Cash paid during the year for:
Interest ........................ 936 945 1,896 1,980 1,823
Income taxes .................... -- 193 384 355 361
==== === ===== ===== =====
See accompanying notes to consolidated financial statements.
F-6
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements
Six-Months Ended March 31, 1998 and 1997 (unaudited)
and years ended September 30, 1997 and 1996
(1) Business
Gouverneur Savings & Loan Association (the "Bank") is organized under the
laws of New York. The Bank is subject to regulation by the New York State
Banking Department and the Office of Thrift Supervision (OTS) as a mutual
savings and loan association. The Bank's lending activity is concentrated in
St. Lawrence County and surrounding areas.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The statements of financial condition as of March 31, 1998 and the
related statements of income and cash flows for the six month periods
ended March 31, 1998 and 1997 and changes in net worth for the six month
period ended March 31, 1998 are unaudited and, in the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation as of March 31, 1998 and for the
results for the unaudited periods have been made.
The financial statements have been prepared in conformity with generally
accepted accounting principles. Certain prior year amounts have been
reclassified to conform to the current year's classifications. A
description of the significant accounting policies is presented below.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period.
Actual results could differ from those estimates.
(b) Cash and Cash Equivalents
Cash and cash equivalents include vault cash, amounts due from banks
which represents short-term highly liquid investments, and time deposits
with other banks.
(c) Securities
The Bank classifies its debt securities as either available-for-sale or
held-to-maturity as the Bank does not hold any securities considered to
be trading. Equity securities are classified as available-for-sale.
Held-to-maturity securities are those debt securities the Association
has the ability and intent to hold until maturity. All other debt
securities are classified as available-for-sale.
Available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and reported as
a separate component of net worth until realized. Transfers of
securities between categories are recorded at fair value at the date of
transfer.
A decline in the fair value of an available-for-sale or held-to-maturity
security that is deemed to be other than temporary results in a charge
to earnings resulting in the establishment of a new cost basis for the
security.
F-7
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(2) Summary of Significant Accounting Policies, Continued
(c) Securities, Continued
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the interest method.
Dividend and interest income are recognized when earned. Realized gains
and losses on securities are included in earnings and are calculated
using the specific identification method, for determining the cost of
the securities sold.
(d) Loans
Loans are reported at the principal amount outstanding, net of deferred
fees. Fees and certain direct origination costs related to lending
activities are recognized using the interest method over the contractual
lives of the loans. Management has the ability and intent to hold its
loans to maturity.
Interest on loans is accrued and included in income at contractual rates
applied to the principal outstanding. The accrual of interest on loans
(including impaired loans) is generally discontinued and previously
accrued interest is reversed or an allowance is established when loan
payments are 90 days or more past due or when, by the judgment of
management, collectibility becomes uncertain. The allowance is
established by a charge to interest income equal to all interest
previously accrued. Subsequent recognition of income occurs only to the
extent that payment is received. Loans are returned to an accrual status
when both principal and interest are current and the loan is determined
to be performing in accordance with the applicable loan terms.
(e) Allowance for Loan Losses
The allowance for loan losses consists of the provision charged to
operations based upon past loan loss experience, management's evaluation
of the loan portfolio under current economic conditions and such other
factors that require current recognition in estimating loan losses. Loan
losses and recoveries of loans previously written-off are charged or
credited to the allowance as incurred or realized, respectively.
Management believes that the allowance for loan losses is adequate.
Management uses presently available information to recognize losses on
loans; however, future additions to the allowance may be necessary based
on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses and may require the Bank to
recognize additions to the allowance based on their judgment of
information available to them at the time of their examination.
F-8
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(2) Summary of Significant Accounting Policies, Continued
(e) Allowance for Loan Losses, Continued
The Bank estimates losses on impaired loans based on the present value
of expected future cash flows (discounted at the loan's effective
interest rate) or the fair value of the underlying collateral if the
loan is collateral dependent. An impairment loss exists if the
recorded investment in a loan exceeds the value of the loan as
measured by the aforementioned methods. A loan is considered impaired
when it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
Generally, all commercial mortgage loans and commercial loans in a
delinquent payment status (90 days or more delinquent) are considered
impaired. Residential mortgage loans, consumer loans, home equity
lines of credit and education loans are evaluated collectively since
they are homogenous and generally carry smaller individual balances.
Impairment losses are included as a component of the allowance for
loan losses. The Bank recognizes interest income on impaired loans
using the cash basis of income recognition. Cash receipts on impaired
loans are generally applied according to the terms of the loan
agreement, or as a reduction of principal, based upon management
judgment and the related factors discussed above.
(f) Real Estate Owned
Real estate acquired in settlement of loans is carried at the lower of
the unpaid loan balance or fair value less estimated costs to sell.
Write-downs from the unpaid loan balance to fair value at the time of
foreclosure are charged to the allowance for loan losses. Subsequent
write-downs to fair value, net of disposal costs, are charged to other
expenses.
(g) Premises and Equipment
Land is carried at cost and buildings and improvements and furniture
and equipment are carried at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the
estimated useful lives of the assets (3-39 years for building and
improvements; 3-7 years for furniture and equipment).
(h) Employee Benefit Plans
The Bank has a defined contribution 401(k) Retirement Plan (the Plan)
for all eligible salaried employees. Employees are permitted to
contribute up to 15% of base pay to the Retirement Plan, subject to
certain limitations. The Bank contributes 2% of each eligible
employee's salary. Additional Bank contributions to the Plan are
determined annually by the Board of Directors.
(i) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
F-9
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(2) Summary of Significant Accounting Policies, Continued
(j) Financial Instruments With Off-Balance Sheet Risk
The Bank does not engage in the use of derivative financial
instruments. The Bank's off-balance sheet financial instruments are
limited to commitments to extend credit.
(3) Securities
Securities are summarized as follows (in thousands):
March 31, 1998
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
(unaudited)
Available-for-sale:
U.S. Government securities $3,999 13 2 4,010
Other 257 1 -- 258
------ --- -- -----
Total debt securities 4,256 14 2 4,268
Corporate equity securities 17 832 -- 849
Mutual funds 3,513 2 -- 3,515
------ --- -- -----
$7,786 848 2 8,632
====== === == =====
Held-to-maturity:
Mortgage-backed securities:
FHLMC 3,418 21 6 3,433
FNMA 2,323 4 11 2,316
GNMA 1,370 9 -- 1,379
Other securities 10 9 -- 19
------ --- -- -----
$7,121 43 17 7,147
====== === == =====
September 30, 1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
Available-for-sale:
U.S. Government securities $2,998 9 -- 3,007
Corporate equity securities 17 614 -- 631
Mutual funds 4,253 12 -- 4,265
------ --- -- -----
$7,268 635 -- 7,903
====== === == =====
Held-to-maturity:
Mortgage-backed securities:
FHLMC 5,375 1 14 5,362
FNMA 2,547 1 22 2,526
GNMA 728 1 -- 729
Other securities 10 9 -- 19
------ --- -- -----
$8,660 12 36 8,636
====== === == =====
F-10
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(3) Securities, Continued
September 30, 1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
Available-for-sale:
U.S. Government securities $ 4,972 18 -- 4,990
Corporate equity securities 17 419 -- 436
Mutual funds 5,461 -- 70 5,391
------- --- --- ------
$10,450 437 70 10,817
======= === === ======
Held-to-maturity:
Mortgage-backed securities:
FHLMC 3,114 -- 52 3,062
FNMA 1,426 -- 50 1,376
GNMA 866 2 14 854
Other securities 10 7 -- 17
------- --- --- ------
$5,416 9 116 5,309
====== = === ======
The following table presents the carrying value and fair value of securities
based on the earlier of call or maturity date at March 31, 1998 (unaudited):
Amortized Fair
Cost Value
--------- -----
(In thousands)
Available-for-sale:
Due within one year $ -- --
Due after one year through five years 2,499 2,507
Due after five years through ten years 1,500 1,503
Due after ten years 257 258
------ -----
$4,256 4,268
====== =====
Held-to-maturity:
Due within one year 10 19
Due after one year through five years 3,993 3,986
Due after five years through ten years 1,791 1,806
Due after ten years 1,327 1,336
------ -----
$7,121 7,147
====== =====
F-11
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Consolidated Financial Statements, Continued
(3) Securities, Continued
The following table presents the carrying value and fair value of
securities based on the earlier of call or maturity date at September 30,
1997:
Amortized Fair
Cost Value
--------- -----
(In thousands)
Available-for-sale:
Due within one year $ 499 500
Due after one year through five years 1,499 1,508
Due after five years through ten years 1,000 999
------ -----
$2,998 3,007
====== =====
Held-to-maturity:
Due within one year 1,657 1,666
Due after one year through five years 3,525 3,488
Due after five years through ten years 2,843 2,842
Due after ten years 635 640
------ -----
$8,660 8,636
====== =====
The amortized cost and fair value of mortgage-backed securities are presented by
contractual maturity in the preceding table. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties.
Gross gains of $0 were realized on sales of securities during the six months
ended March 31, 1998 and 1997 (unaudited). Gross losses of $0 and $5,000 were
realized on sales of securities during the six months ended March 31, 1998 and
1997 (unaudited), respectively. Gross gains of $20,000 were realized on sales of
securities in 1997 and $0 in 1996 and 1995, and gross losses of $43,000, $400
and $17,000 were realized on sales of securities in 1997, 1996, and 1995,
respectively.
F-12
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(4) Loans Receivable
Loans are summarized as follows (in thousands):
September 30,
March 31, ------------------------
1998 1997 1996
------- ------ ------
(unaudited)
First mortgage loans:
One to four family
residential $28,840 28,896 28,378
Commercial 1,697 1,825 2,079
Construction 171 308 142
------- ------ ------
30,708 31,029 30,599
------- ------ ------
Other loans:
Commercial 101 81 --
Automobile 1,422 1,283 426
Home equity 783 823 473
Passbook 476 475 439
Other 1,310 1,613 1,603
------- ------ ------
4,092 4,275 2,941
------- ------ ------
Total loans 34,800 35,304 33,540
Less:
Net deferred fees 44 51 102
------- ------ ------
$34,756 35,253 33,438
======= ====== ======
Changes in the allowance for loan losses are summarized as follows (in
thousands):
Six-months ended Years ended
March 31, September 30,
-------------- ----------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
Balance at beginning of period $403 479 479 602 466
Provision charged to
operations 85 70 250 -- 190
Recoveries 63 23 40 48 181
Loans charged off (87) (256) (366) (171) (235)
---- ---- ---- ---- ----
Balance at end of period $464 316 403 479 602
==== ==== ==== ==== ====
Management believes it has no impaired loans at March 31, 1998 (unaudited) and
September 30, 1997 and 1996.
The principal balances of loans not accruing interest amounted to approximately
$348,000 (unaudited) and $565,000 and $697,000 at March 31, 1998, September 30,
1997 and 1996, respectively. The interest income foregone for non-accruing loans
was approximately $12,000 and $10,000 during the six months ended March 31, 1998
and 1997 (unaudited), respectively and $24,000, $36,000 and $37,000 during the
years ended September 30, 1997, 1996 and 1995, respectively.
F-13
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(4) Loans Receivable, Continued
In the ordinary course of business, the Bank has and expects to continue to
have transactions, including borrowings, with its officers and directors.
In the opinion of management, such transactions were on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time of comparable transactions with other persons and did not involve
more than a normal risk of collectibility or present any other unfavorable
features to the Bank. Loans to such borrowers at March 31, 1998, September
30, 1997 and 1996 were $321,000 (unaudited), $390,000 and $399,000,
respectively.
(5) Premises and Equipment
Premises and equipment are summarized as follows (in thousands):
March 31,
1998 1997 1996
---- ---- ----
(unaudited)
Land $ 30 30 30
Buildings and improvements 465 465 465
Furniture and equipment 381 336 314
---- --- ---
876 831 809
Less accumulated depreciation and
amortization 588 563 515
---- --- ---
$288 268 294
==== === ===
Depreciation and amortization expense amounted to $29,000 and $34,000
during the six months ended March 31, 1998 and 1997 (unaudited),
respectively and $58,000, $66,000 and $59,000 during the years ended
September 30, 1997, 1996 and 1995, respectively.
(6) Accrued Interest Receivable
Accrued interest receivable is summarized as follows (in thousands):
March 31,
1998 1997 1996
---- ---- ----
(unaudited)
Loans $213 235 244
Securities 106 80 120
Reserve for uncollected interest (18) (20) (51)
---- --- ---
$301 295 313
==== === ===
F-14
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(7) Deposits
At March 31, 1998, September 30, 1997 and 1996, the aggregate amounts of
time deposits in denominations of $100,000 or more were approximately
$2,357,000 (unaudited), $3,054,000 and $2,760,000, respectively. Deposit
balances in excess of $100,000 are not insured by the FDIC.
Contractual maturities of time certificates are summarized as follows (in
thousands):
March 31, September 30,
1998 1997
------- ------
(unaudited)
Within one year $15,386 17,014
One through two years 5,894 4,699
Two through three years 1,166 853
Three through four years 116 277
------- ------
Total time certificates $22,562 22,843
======= ======
Interest expense on deposits is summarized as follows (in thousands):
Six-months ended Years ended
March 31, September 30,
--------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
Savings and club accounts $254 261 527 544 655
Time certificates 628 632 1,265 1,314 1,024
NOW accounts and money
market accounts 54 52 104 122 144
---- --- ----- ----- -----
$936 945 1,896 1,980 1,823
==== === ===== ===== =====
(8) Income Taxes
Income taxes were allocated as follows (in thousands):
Six-months ended Years ended
March 31, September 30,
--------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
Income before income tax
expense $208 201 335 297 416
Changes in net worth, for
changes in unrealized
gains on securities 83 24 109 50 89
---- --- ----- ----- -----
$291 225 444 347 505
==== === ===== ===== =====
F-15
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(8) Income Taxes, Continued
The components of income tax expense attributable to income from operations
are (in thousands):
March 31, September 30,
--------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
Current:
Federal $173 29 168 290 337
State 38 2 33 64 87
---- --- --- --- ---
211 31 201 354 424
---- --- --- --- ---
Deferred:
Federal (5) 134 106 (46) (4)
State 2 36 28 (11) (4)
---- --- --- --- ---
(3) 170 134 (57) (8)
---- --- --- --- ---
$208 201 335 297 416
==== === === === ===
Actual tax expense attributable to income before income taxes differed from
"expected" tax expense, computed by applying the U.S. Federal statutory tax
rate of 34% to income before income tax as follows (in thousands):
Six-months ended Years ended
March 31, September 30,
--------------- ------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
Computed "expected" tax
expense $174 169 296 255 343
Increase (decrease) in
income taxes resulting
from:
State taxes, net of
Federal tax benefits 27 25 40 35 55
Other items, net 7 7 (1) 7 18
---- --- --- --- ---
$208 201 335 297 416
==== === === === ===
Effective tax rate 40.47% 40.44% 38.42% 39.65% 41.19%
F-16
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(8) Income Taxes, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are (in
thousands):
September 30,
March 31, ----------------
1998 1997 1996
---- ---- ----
(unaudited)
Deferred tax assets:
Allowance for loan losses $ 186 161 191
Net deferred loan fees 18 21 41
Accrued expenses 33 54 156
Other 9 9 --
----- ---- ---
Total gross deferred tax assets 246 245 388
----- ---- ---
Deferred tax liabilities:
Accumulated depreciation on premises
and equipment 22 26 34
Accrued interest receivable 120 118 125
Unrealized gains on available-for-sale
securities 338 255 146
Prepaid expenses 35 35 29
----- ---- ---
Total gross deferred tax liabilities 515 434 334
----- ---- ---
Net deferred tax assets (liabilities) $(269) (189) 54
===== ==== ==
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income within
the carryback period. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax assets will not be
realized. In assessing the need for a valuation allowance, management
considers the scheduled reversal of the deferred tax liabilities, the level
of historical taxable income and projected future taxable income over the
periods in which the temporary differences comprising the deferred tax
assets will be deductible. Management believes that no valuation allowance
is necessary.
Included in retained earnings at March 31, 1998 (unaudited) and September
30, 1997 is approximately $1,274,000 representing aggregate provisions for
loan losses taken under the Internal Revenue Code. Use of these reserves to
pay dividends in excess of earnings and profits or to redeem stock, or if
the institution fails to qualify as a bank for Federal income tax purposes,
would result in taxable income to the Bank.
F-17
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(9) Retirement Plan
The Bank adopted a 401(k) Retirement Plan (the Plan) effective July 1,
1997. The Plan covers all employees who are at least 21 years of age with
one or more years of service. The Bank's basic monthly contribution to the
plan is 2% of employees salary. Additional Bank contributions to the plan
are determined annually by the Board of Directors. Participants may make
voluntary contributions to the Plan up to 15% of their compensation.
Effective August 1, 1997, the Board of Directors of the Bank voted to
convert the existing profit sharing plan into the new 401(k) plan. The
profit sharing plan covered substantially all of the Bank's employees and
contributions were made at the Bank's discretion.
Costs charged to expense for the 401(k) Retirement Plan and Profit Sharing
Plan are as follows (in thousands):
Six-months ended Years ended
March 31, September 30,
--------------- --------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
401(k) Retirement Plan 20 - 7 - -
Profit Sharing Plan - 26 34 51 36
-- -- -- -- --
20 26 41 51 36
== == == == ==
(10) Commitments and Contingencies
The Bank is a party to 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 and
involve, to varying degrees, elements of credit, market and interest rate
risk in excess of the amounts recognized in the consolidated balance sheet.
Credit risk represents the accounting loss that would be recognized at the
reporting date if obligated counterparties failed completely to perform as
contracted. Market risk represents risk that future changes in market
prices make financial instruments less valuable.
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 some of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's evaluation of the customer's financial
position. Collateral held varies, but may include real estate, accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties. Substantially all commitments to extent credit, if
exercised, will represent loans secured by real estate.
Commitments to originate fixed and adjustable rate loans are as follows
(in thousands):
March 31, September 30,
1998 1997
---- ----
(unaudited)
Fixed rate
6.00- 6.99% 55 -
8.00- 8.99% 127 571
9.00- 9.99% 20 -
11.00-11.99% 26 -
--- ---
Total fixed rate 228 571
Adjustable rate 127 -
--- ---
Total commitments to originate loans 355 571
=== ===
Unused lines of credit, which includes home equity, consumer and
commercial, amounted to $269,000 (unaudited) and $257,000 at March 31, 1998
and September 30, 1997, respectively.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments is represented
by the contractual or notional amount of these instruments. The Bank uses
the same credit policies in making commitments as it does for on-balance
sheet instruments. The Bank controls its credit risk through credit
approvals, limits, and monitoring procedures.
F-18
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(10) Commitments and Contingencies, Continued
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, the aggregate amount involved in
such proceedings is not material to the financial condition or results of
operations of the Bank.
(11) Concentrations of Credit
A substantial portion of the Bank's loans are mortgages in Central New York
State. Accordingly, the ultimate collectibility of a substantial portion of
the Bank's loan portfolio is susceptible to changes in market conditions in
this area. A majority of the Bank's loan portfolio is secured by real
estate.
The Bank's concentrations of credit risk are disclosed in the schedule of
loan classifications. Other than general economic risks, management is not
aware of any material concentrations of credit risk to any industry or
individual borrower.
(12) Regulatory Matters
In 1996 the Government mandated a one-time assessment related to the
recapitalization of the SAIF insurance fund. Of the total deposit insurance
premium in 1996, the SAIF assessment amounted to $275,000.
The Bank is subject to various regulatory capital requirements administered
by its primary federal regulator, the Office of Thrift Supervision (OTS).
Failure to meet the minimum regulatory capital requirements can initiate
certain mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material affect on the
Bank and the financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines involving quantitative measures
of the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification under the prompt corrective action guidelines
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total
risk-based capital and Tier I capital to risk-weighted assets (as defined
in the regulations), Tier I capital to adjusted tangible assets (as
defined), and tangible capital to tangible assets (as defined). As
discussed in greater detail below, as of September 30, 1997, the Bank met
all of the capital adequacy requirements to which it is subject.
As of October 27, 1997, the most recent notification from the OTS, the Bank
was categorized as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
has to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in the table below. There are no conditions or
events since the most recent notification that management believes have
changed the Bank's prompt corrective action category.
F-19
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(12) Regulatory Matters, Continued
The following is a reconcillation of the Bank's GAAP and Regulatory capital at
March 31, 1998 (unaudited), September 30, 1997 and September 30, 1996 (in
thousands):
GAAP Tangible Core Risk-based
capital capital % capital % capital %
------- -------- ----- ------- ----- ----------- -----
March 31, 1998 (unaudited) 11,123 11,123 11,123 11,123
- -------------------------
Regulatory capital adjustments
Allowance for loan losses (up to
1.25% of risk weighted assets)
301
Net unrealized gain on
securities available for sale (508) (508) (508)
------ ------ ------
Total regulatory capital 10,615 19.6% 10,615 19.6% 10,916 45.3%
Regulatory capital requirement 814 1.5% 1,627 3.0% 1,927 8.0%
------ ------ ------
Regulatory capital excess 9,801 8,988 8,989
====== ====== ======
GAAP Tangible Core Risk-based
capital capital % capital % capital %
------- -------- ----- ------- ----- ----------- -----
September 30, 1997 10,689 10,689 10,689 10,689
- ------------------
Regulatory capital adjustments
Allowance for loan losses (up to
1.25% of risk weighted assets)
301
Net unrealized gain on
securities available for sale (380) (380) (380)
------ ------ ------
Total regulatory capital 10,309 18.9% 10,309 18.9% 10,615 43.4%
Regulatory capital requirement 818 1.5% 1,636 3.0% 1,956 8.0%
------ ------ ------
Regulatory capital excess 9,491 8,673 8,659
====== ====== ======
GAAP Tangible Core Risk-based
capital capital % capital % capital %
------- -------- ----- ------- ----- ----------- -----
September 30, 1996 9,993 9,993 9,993 9,993
- ------------------
Regulatory capital adjustments
Allowance for loan losses (up to
1.25% of risk weighted assets)
301
Net unrealized gain on
securities available for sale (221) (221) (221)
------ ------ ------
Total regulatory capital 9,772 18.1% 9,772 18.1% 10,055 44.4%
Regulatory capital requirement 810 1.5% 1,619 3.0% 1,812 8.0%
------ ------ ------
Regulatory capital excess 8,962 8,153 8,243
====== ====== ======
The following is a summary of the Bank's actual capital amounts and ratios
compared to the OTS minimum capital adequacy requirements and the OTS
requirements for classification as a well capitalized institution under
prompt corrective action provisions (in thousands):
To be classified as
well-capitalized under
Minimum capital prompt corrective
Actual adequacy requirements action provisions
----------------- ----------------------------------- ------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ------------------------- ------ --------------------------
As of March 31, 1998
(unaudited)
Total capital (to risk
weighted assets) $10,916 45.3% 1,927 greater than/equal to 8.0% 2,397 greater than/equal to 10.0%
Tier 1 Capital (to risk
weighted assets) 10,615 44.1 964 greater than/equal to 4.0 1,438 greater than/equal to 6.0
Tier 1 Capital (to adjusted
tangible assets) 10,615 19.6 1,627 greater than/equal to 3.0 2,712 greater than/equal to 5.0
Tangible Capital (to
tangible assets) 10,615 19.6 814 greater than/equal to 1.5 -- NA
As of September 30, 1997
Total capital (to risk
weighted assets) $10,615 43.4% 1,956 greater than/equal to 8.0% 2,446 greater than/equal to 10.0%
Tier 1 Capital (to risk
weighted assets) 10,309 42.2 978 greater than/equal to 4.0 1,467 greater than/equal to 6.0
Tier 1 Capital (to adjusted
tangible assets) 10,309 18.9 1,636 greater than/equal to 3.0 2,727 greater than/equal to 5.0
Tangible Capital (to
tangible assets) 10,309 18.9 818 greater than/equal to 1.5 -- NA
As of September 30, 1996
Total capital (to risk
weighted assets) $10,055 44.4% 1,812 greater than/equal to 8.0% 2,265 greater than/equal to 10.0%
Tier 1 Capital (to risk
weighted assets) 9,772 43.1 906 greater than/equal to 4.0 1,359 greater than/equal to 6.0
Tier 1 Capital (to adjusted
tangible assets) 9,772 18.1 1,619 greater than/equal to 3.0 2,699 greater than/equal to 5.0
Tangible Capital (to
tangible assets) 9,772 18.1 810 greater than/equal to 1.5 -- NA
F-20
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(13) Fair Value of Financial Instruments
The following methods and assumptions were used by the Bank in estimating
fair values of financial instruments:
Cash and cash equivalents: The fair values are considered to approximate
the carrying values, as reported in the balance sheet.
Securities: Fair values of securities are based on exchange quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of similar instruments.
Loans: For variable rate loans that reprice frequently and loans due on
demand with no significant change in credit risk, fair values are
considered to approximate carrying values. The fair values for certain
mortgage loans (e.g., one-to-four family residential) and other consumer
loans are based on quoted market prices of similar loans sold on the
secondary market, adjusted for differences in loan characteristics. The
fair values for other loans (e.g., commercial real estate and rental
property mortgage loans) are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit rating. The carrying amount
of accrued interest approximates its fair value.
FHLB Stock: The carrying value of this instrument, which is redeemable at
par, approximates fair value.
Off-balance-sheet instruments: Fair values for the Bank's
off-balance-sheet instruments (lines of credit and commitments to fund
loans) are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standing. The fair value of these financial
instruments is immaterial and has therefore been excluded from the table
below.
Deposits: The fair values of demand, savings, club, NOW and money market
accounts are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for fixed-rate
time certificates are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on these products to
a schedule of aggregated expected monthly maturities on time deposits.
F-21
GOUVERNEUR SAVINGS & LOAN ASSOCIATION
Notes to Financial Statements, Continued
(13) Fair Value of Financial Instruments, Continued
The estimated carrying values and fair values of the Bank's financial
instruments are as follows (in thousands):
September 30,
March 31, -------------------------------------------
1998 1997 1996
-------------------- ------------------- --------------------
(unaudited)
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------- ------- -------- ------ -------- ------
Financial assets:
Cash, cash equivalents $ 3,818 3,818 2,486 2,486 3,939 3,939
Securities 15,753 15,779 16,563 16,539 16,233 16,126
Loans, net 34,292 35,031 34,850 35,464 32,959 33,591
FHLB stock 379 379 375 375 338 338
Financial liabilities:
Deposits:
Demand accounts 142 142 113 113 43 43
Savings and club
accounts 15,022 15,022 14,883 14,883 15,158 15,158
Time certificates 22,562 22,648 22,843 22,906 23,241 23,289
NOW and money
market accounts 5,197 5,197 5,742 5,742 5,060 5,060
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(14) Plan of Reorganization and Stock Issuance
On April 20, 1998, the Board of Directors of Gouverneur Savings and Loan
Association (the "Bank") unanimously adopted a plan of reorganization
pursuant to which the Bank will reorganize so that it becomes a direct or
indirect subsidiary of a federally-chartered mutual holding company. It is
anticipated that upon consummation of the reorganization, the federal
mutual holding company will own a majority of the stock of a business
corporation which will itself own 100% of the stock of the Bank. It is
contemplated that a minority interest in the business corporation will be
offered to certain depositors of the Bank, an employee stock ownership plan
for the Bank and, if shares remain unsold, to the general public with a
preference to persons residing in St. Lawrence County, New York.
Upon consummation of the reorganization, each depositor of the Bank will
have a deposit account in the resulting reorganized Bank and any membership
interest of such depositor in the Bank will be converted into a membership
interest in the mutual holding company. It is intended that the
reorganization transaction be structured, for the purpose of Federal and
state taxation, as one or more tax-free reorganizations or tax-free
contributions of capital.
The costs of the reorganization will be deferred and reduce the proceeds
from the sale of the minority interest. If the reorganization is not
completed, all costs will be charged to expense. Deferred reorganization
expenses at March 31, 1998 were $26,000 (unaudited).
F-22
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by Gouverneur Bancorp, Inc. or Gouverneur Savings and Loan
Association. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of Gouverneur Bancorp, Inc. or Gouverneur Savings
and Loan Association since any of the dates as of which information is furnished
herein or since the date hereof.
GOUVERNEUR BANCORP, INC.
(Proposed Holding Company for Gouverneur Savings and Loan Association)
1,914,750 Shares
Common Stock
PROSPECTUS
First Albany Corporation
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
August 12, 1998
Until the later of September 18, 1998, or 25 days after the commencement of the
Subscription Offering, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.