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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31, 1997
REGISTRATION NO. 333-[ ]
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BROOKLYN HEIGHTS BANCORP
(Name of Small Business Issuer in Its Charter )
FEDERAL 6712 (TO BE APPLIED FOR)
(State or Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Code Identification No.)
Organization) Number)
186 MONTAGUE STREET
BROOKLYN, NEW YORK 11201
(718) 855-3555
(Address and Telephone Number of Principal Executive Offices)
186 MONTAGUE STREET
BROOKLYN, NEW YORK 11201
(Address of Principal Place of Business or Intended Principal Place of Business)
STEPHEN IRVING
186 MONTAGUE STREET
BROOKLYN, NEW YORK 11201
(718) 855-3555
(Name, Address and Telephone Number of Agent for Service)
COPIES TO:
ERIC LUSE, ESQ.
ALAN SCHICK, ESQ.
LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.
5335 WISCONSIN AVENUE, N.W., SUITE 400
(202) 274-2000
WASHINGTON, D.C. 20015
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
this registration statement becomes effective.
If this Form is filed to register additional shares for an offering pursuant to
Rule 462(b) under the Securities Act please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
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CALCULATION OF REGISTRATION FEE
======================================================================================================================
PROPOSED PROPOSED
AMOUNT TO BE MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF REGISTERED OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED PER SHARE OFFERING REGISTRATION FEE
PRICE (1)
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $1.00 par value 608,350 $10.00 $6,083,500 $1,800.00
per share
======================================================================================================================
- ------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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PROSPECTUS
UP TO 608,350 SHARES OF COMMON STOCK
BROOKLYN HEIGHTS BANCORP
186 MONTAGUE STREET
BROOKLYN, NEW YORK 11201
================================================================================
Atlantic Liberty Savings, F.A., a federally-chartered mutual savings
association (the "Association"), is reorganizing to form a federally-chartered
mutual holding company (the "Reorganization"). As part of the Reorganization,
the Association will convert to a stock savings association and will become a
wholly-owned subsidiary of Brooklyn Heights Bancorp, a federal stock corporation
(the "Company"). The Company will become the majority-owned subsidiary of
Atlantic Liberty, MHC (the "Mutual Holding Company"), a federal mutual holding
company. Concurrently with the Reorganization, the Company is offering for sale
between 391,000 and 529,000 shares of its common stock, par value $1.00 per
share (the "Common Stock"), in a subscription offering to qualifying depositors
and borrowers, the Association's employee stock ownership plan and to employees,
officers and directors of the Association. Any unsubscribed shares may be
offered for sale to the public in a community offering or syndicated community
offering (the subscription and community offerings are referred to collectively
as the "Offering"). The Common Stock offered for sale in the Offering will
represent a minority ownership interest of 46% of the Company's total
outstanding shares of Common Stock. The Reorganization and Offering are being
made pursuant to the terms of a plan of reorganization which must be approved by
a majority of the eligible votes of members of the Association and by the Office
of Thrift Supervision (the "OTS"). The Reorganization will not go forward if the
Association does not receive these approvals and the Company does not sell at
least 391,000 shares of Common Stock.
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OFFERING TERMS
An independent appraiser has estimated that as of December 11, 1997,
the pro forma market value of the Common Stock of the Company was between $8.5
million and $11.5 million, with a midpoint of $10 million. The 391,000 to
529,000 shares of Common Stock being sold in the Offering represent a minority
ownership interest in the Company equal to 46% of the minimum and maximum of the
estimated pro forma value of the Common Stock of the Company. Subject to OTS
approval, up to 608,350 shares of Common Stock will be offered for sale in the
Offering in the event of an increase in the pro forma market value of the Common
Stock. Based on these estimates, the Company is making the following Offering of
shares of Common Stock.
- Price Per Share: $10
- Number of Shares
Minimum/Maximum/Adjusted Maximum: 391,000/529,000/608,350
- Reorganization Expenses
Minimum/Maximum/Adjusted Maximum: $500,000/$521,000/$534,000
- Net Proceeds to Brooklyn Heights Bancorp
Minimum/Maximum/Adjusted Maximum: $3,410,000/$4,769,000/$5,549,500
- Net Proceeds per share to Brooklyn Heights Bancorp
Minimum/Maximum/Adjusted Maximum: $8.73/$9.03/$9.13
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE _____ OF THIS DOCUMENT.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, NOR ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Ryan, Beck & Co. will use its best efforts to assist the Company in selling at
least the minimum number of shares, but does not guarantee that this number will
be sold. All funds received from subscribers will be held in an interest bearing
account at the Association until the completion or termination of the
Reorganization.
For information on how to subscribe, call the Stock Information Center at
(718) ___________.
RYAN, BECK & CO.
PROSPECTUS DATED FEBRUARY ___, 1998
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TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING...................................... 1
SUMMARY ........................................................................... 4
SELECTED FINANCIAL AND OTHER DATA OF
ATLANTIC LIBERTY SAVINGS, F.A.............................................. 8
RISK FACTORS........................................................................10
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS..............................14
ATLANTIC LIBERTY, MHC...............................................................15
BROOKLYN HEIGHTS BANCORP............................................................15
ATLANTIC LIBERTY SAVINGS, F.A.......................................................15
SUMMARY DESCRIPTION OF THE REORGANIZATION...........................................16
MARKET AREA.........................................................................16
USE OF PROCEEDS.....................................................................17
DIVIDENDS...........................................................................17
MARKET FOR THE COMMON STOCK.........................................................18
COMPETITION.........................................................................18
CAPITALIZATION......................................................................19
PRO FORMA DATA......................................................................20
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE..............................25
ATLANTIC LIBERTY SAVINGS, F.A.
STATEMENTS OF OPERATIONS...................................................26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................27
BUSINESS OF ATLANTIC LIBERTY SAVINGS, F.A...........................................38
MANAGEMENT OF BROOKLYN HEIGHTS BANCORP..............................................49
MANAGEMENT OF ATLANTIC LIBERTY SAVINGS, F.A.........................................50
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF THE ASSOCIATION..................51
REGULATION..........................................................................57
TAXATION ...........................................................................64
THE REORGANIZATION AND OFFERING.....................................................65
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY......................................79
DESCRIPTION OF CAPITAL STOCK........................................................81
TRANSFER AGENT......................................................................82
REGISTRATION REQUIREMENTS...........................................................82
LEGAL AND TAX MATTERS...............................................................82
EXPERTS ...........................................................................82
ADDITIONAL INFORMATION..............................................................83
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
"RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
PLEASE SEE THE GLOSSARY BEGINNING ON PAGE G-L FOR THE MEANING OF CAPITALIZED
TERMS THAT ARE USED IN THIS PROSPECTUS.
(i)
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: WHAT IS THE MUTUAL HOLDING COMPANY?
A: Atlantic Liberty, MHC (the "Mutual Holding Company") is a
mutually-owned federal corporation that is being established in
connection with the mutual holding company reorganization (the
"Reorganization") of Atlantic Liberty Savings, F.A. (the
"Association"). The Mutual Holding Company will be chartered under the
laws of the United States and will be regulated by the Office of Thrift
Supervision ("OTS"). The Mutual Holding Company will own 54% of the
outstanding Common Stock of Brooklyn Heights Bancorp (the "Company"),
or 540,000 shares at the midpoint of the valuation range established by
the independent appraisal. The remaining 46% of the Common Stock of the
Company will be owned by persons who purchase Common Stock in the
Offering. As part of the Reorganization, all of the current membership
and voting rights of the Association's members will be transferred to
the Mutual Holding Company.
Q: WHO WILL BE THE MINORITY STOCKHOLDERS OF THE COMPANY?
A: All persons who purchase Common Stock in the Offering, including the
employee stock ownership plan ("ESOP") of the Association, will be the
minority stockholders (the "Minority Stockholders") of the Company, and
will own 46% of its Common Stock upon completion of the Offering. The
Mutual Holding Company will own 54% of the Common Stock of the Company,
and will remain its majority stockholder as long as the Mutual Holding
Company remains in existence.
Q: WHAT IS THE PURPOSE OF THE REORGANIZATION AND OFFERING?
A: The primary purpose of the Reorganization and Offering is to raise
additional equity capital for the Association. The increased capital
will be used in part to expand the Association's lending activities.
The Reorganization also is intended to create a holding company and a
stock charter, which is the corporate form used by all commercial banks
and an increasing number of savings institutions. The holding company
structure will expand the investment and operating authority currently
available to the Association. The Offering also will provide you with
the opportunity to become a stockholder of the Company.
Q: HOW DO I ORDER THE COMMON STOCK?
A: You must complete and return the Stock Order Form to the Association,
together with your payment, on or before March ___, 1998. Please review
the Stock Order Form carefully before sending us any payment.
Q: HOW MUCH STOCK MAY I ORDER?
A: The minimum order is 25 shares (or $250). The maximum order in the
Offering is 5,000 shares (or $50,000). For purposes of these
limitations, joint account holders may not collectively exceed the
5,000 share limit. In certain instances, your order may be grouped
together with orders by other persons who are associated with you (such
as your spouse, child or relative living in your home), or with whom
you are acting in concert, and, in that event, the aggregate order may
not exceed 5,000 shares. The maximum purchase limitation may be
decreased or increased without notifying you. However, if the maximum
purchase limitation is increased, and you previously subscribed for the
maximum number of shares, you will be notified of the increase, as well
as the opportunity to subscribe for additional shares.
Q: WHO HAS SUBSCRIPTION RIGHTS AND WHAT ARE THE SUBSCRIPTION PRIORITIES?
A: Subscription rights to purchase Common Stock will be offered on a
priority basis to the following classes of persons:
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- First, to persons who had one or more deposit accounts with
the Association aggregating at least $50 on June 30, 1996.
(The Association's ESOP will have priority over such persons
if more than 529,000 shares are sold).
- Second, to the Association's ESOP.
- Third, to persons who had one or more deposit accounts with
the Association aggregating at least $50 on December 31, 1997.
- Fourth, to depositors (who are not eligible depositors as of
June 30, 1996 or December 31, 1997) and borrowers of the
Association as of ____________, 1998.
- Fifth, to employees, officers and directors of the
Association.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A: If the Offering is oversubscribed, you may not receive any or all of
the shares you wish to purchase. Shares will be allocated based upon a
formula set forth in the Plan of Reorganization and in accordance with
OTS regulations.
Q: WILL SHARES BE OFFERED TO ANYONE OTHER THAN PERSONS WITH SUBSCRIPTION
RIGHTS?
A: If persons with subscription rights do not subscribe for all of the
shares offered, the remaining shares will be offered to certain members
of the general public in a community offering, with a preference for
natural persons residing in Brooklyn.
Q: WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER OR NOT
TO BUY COMMON STOCK?
A: Before you decide to purchase Common Stock, you should read the entire
Prospectus, including the Risk Factors section on pages _____ of the
Prospectus.
Q: AS A DEPOSITOR OR BORROWER OF THE ASSOCIATION, WHAT WILL HAPPEN IF I DO
NOT ORDER ANY COMMON STOCK?
A: You presently have membership rights in the Association, which include
the right to elect directors and vote on certain other matters.
However, once the Reorganization is completed these membership rights
in the Association will be converted into membership rights in the
Mutual Holding Company, regardless of whether or not you purchase
Common Stock. You will retain your membership rights in the Mutual
Holding Company so long as your existing borrowings from the
Association remain outstanding or so long as you remain a depositor of
the Association. If you purchase Common Stock, you will also have
voting rights in the Company, but such rights will depend on the amount
of Common Stock that you own and not on your deposit account or lending
relationship at the Association YOU ARE NOT REQUIRED TO PURCHASE COMMON
STOCK. YOUR DEPOSIT ACCOUNT, CERTIFICATE ACCOUNTS AND ANY LOANS YOU MAY
HAVE WITH THE ASSOCIATION WILL NOT BE AFFECTED BY THE REORGANIZATION.
Q: WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE OFFERING?
A: In order to make an informed investment decision, you should read this
entire Prospectus. This section highlights selected information and may
not contain all of the information that is important to you. In
addition, you may contact:
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STOCK INFORMATION CENTER
ATLANTIC LIBERTY SAVINGS, F.A.
186 MONTAGUE STREET
BROOKLYN, NEW YORK 11201
(718) ________
SELLING OR ASSIGNING YOUR SUBSCRIPTION RIGHTS IS ILLEGAL. ALL PERSONS
EXERCISING THEIR SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT THEY ARE
PURCHASING SHARES SOLELY FOR THEIR OWN ACCOUNT AND THAT THEY HAVE NO AGREEMENT
OR UNDERSTANDING REGARDING THE SALE OR TRANSFER OF SUCH SHARES. THE ASSOCIATION
INTENDS TO PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT IT
BECOMES AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS. ORDERS KNOWN TO INVOLVE
THE TRANSFER OF SUBSCRIPTION RIGHTS WILL NOT BE HONORED. IN ADDITION, PERSONS
WHO VIOLATE THE PURCHASE LIMITATIONS MAY BE SUBJECT TO SANCTIONS AND PENALTIES
IMPOSED BY THE OFFICE OF THRIFT SUPERVISION.
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SUMMARY
This summary highlights selected information from this Prospectus and
does not contain all the information that you need to know before making an
informed investment decision. To understand the Offering fully, you should read
the entire Prospectus carefully, including the financial statements and the
notes to the financial statements of Atlantic Liberty Savings, F.A. Financial
information contained in the Prospectus at and for the two years ended March 31,
1997 is derived in part from the audited financial statements of Atlantic
Liberty Savings, F.A. All financial information contained in the Prospectus at
and for the six months ended September 30, 1997 and 1996 is derived from
unaudited financial statements.
You should note as you read this Prospectus that at times capitalized
terms are used. These capitalized terms are generally defined in the glossary
that is at the end of this Prospectus. Defined terms are used to help you
differentiate between the various components of the transaction, to simplify the
discussion and to avoid unnecessary repetition by not having to define or
describe a term each time it is used. For example, to avoid confusion, all of
the steps that are part of the transactions described in this Prospectus are
referred to as the "Reorganization," and the issuance of 46% of the Company's
Common Stock is referred to as the Offering. References to the "Association"
refer to Atlantic Liberty Savings, F.A. References to "the Company" refer to
Brooklyn Heights Bancorp, and references to the "Mutual Holding Company" refer
to Atlantic Liberty, MHC. To further assist you in reading this Prospectus, in
addition to including a glossary, each term defined in the glossary is also
defined the first time that it is used in the Prospectus.
THE COMPANIES
Atlantic Liberty, MHC
186 Montague Street
Brooklyn, New York 11201
(718) 855-3555
The Mutual Holding Company is not an operating company and has not
engaged in any business to date. Upon completion of the Reorganization, the
Mutual Holding Company will be chartered under Federal law and will own 54% of
the outstanding Common Stock of the Company. So long as the Mutual Holding
Company exists, it will own at least 50.1% of the Company's voting stock.
Following completion of the Reorganization, persons who were members of the
Association will become members of the Mutual Holding Company so long as their
existing borrowings from the Association remain oustanding or they continue to
maintain a deposit account with the Association.
Brooklyn Heights Bancorp
186 Montague Street
Brooklyn, New York 11201
(718) 855-3555
The Company is not an operating company and has not engaged in any
business to date. The Company will be chartered under Federal law and will own
100% of the common stock of the Association. The Company will sell 46% of its
Common Stock in the Offering, and the remaining 54% of the Common Stock will be
issued to the Mutual Holding Company.
Atlantic Liberty Savings, F.A.
186 Montague Street
Brooklyn, New York 11201
(718) 855-3555
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The Association is a community-oriented federal mutual savings
association, providing banking and financial services to individuals, families
and small businesses from its two offices in Brooklyn, New York. Historically,
the Association has emphasized residential mortgage lending. At September 30,
1997, the Association had total assets of $110 million, total deposits of $101
million, and retained earnings of $7.2 million. See pages _____ to _____.
THE OFFERING
The Company is offering for sale between 391,000 and 529,000 shares of
its Common Stock, par value $1.00 per share (the "Common Stock"), at a price of
$10.00 per share. The Offering may be increased to 608,350 shares without
further notice to you if the estimated pro forma market value of the Common
Stock (the "Independent Valuation") is increased as a result of changes in
market or financial conditions prior to the completion of the Offering. The
shares sold in the Offering will represent a minority ownership interest of 46%
of the shares of Common Stock of the Company (the "Minority Ownership
Interest"). The remaining 54% of the shares of Common Stock of the Company will
be issued to the Mutual Holding Company.
STOCK PURCHASE PRIORITIES
The Common Stock is being offered for sale in the following order of
priority in a Subscription Offering:
(i) the Association's Eligible Account Holders (holders of deposit
accounts totaling $50 or more as of June 30, 1996);
(ii) the Association's ESOP;
(iii) the Association's Supplemental Eligible Account Holders
(holders of deposit accounts totaling $50 or more as of
December 31, 1997);
(iv) other members (depositors and borrowers of the Association as
of the Voting Record Date who are not Eligible Account Holders
or Supplemental Eligible Account Holders); and
(v) employees, officers and directors of the Association.
Any shares of Common Stock not subscribed for in the Subscription
Offering may be offered for sale in a Community Offering and Syndicated
Community Offering. See pages _____ to _____. Ryan, Beck & Co. will assist in
selling the Common Stock on a best efforts basis.
THE OFFERING RANGE AND OFFERING PRICE PER SHARE
Feldman Financial Advisors, Inc. ("Feldman Financial"), an appraisal
firm independent of the Association and experienced in appraisals of savings
associations, has estimated that in its opinion, as of December 11, 1997, the
aggregate pro forma market value of the Company and the Association ranged from
$8.5 million to $11.5 million (the "Estimated Valuation Range") with a midpoint
of $10 million. The Company is offering to sell only 46% of its Common Stock in
the Offering and, based on the Independent Valuation, 46% of the Common Stock
ranged in value from $3.9 million to $5.3 million, with a midpoint of $4.6
million (the "Offering Range"). The Company is offering its Common Stock for
sale at $10.00 per share, representing 391,000 shares and 529,000 shares at the
minimum and maximum of the Offering Range, respectively, with a midpoint of
460,000 shares. The Independent Valuation was based in part upon the
Association's financial condition and operations and the effect of the
additional capital raised by the sale of Common Stock in the Offering. In
addition to the 391,000 to 529,000 shares to be sold in the Offering, between
459,000 and 621,000 shares will be issued to the Mutual Holding Company, which
will represent 54% of the outstanding shares of Common Stock of the Company. The
Independent Valuation will be updated prior to the completion of the Offering.
If the Independent Valuation increases, there will be a corresponding change in
the total
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number of shares issued to the Mutual Holding Company in the Reorganization and
sold to subscribers in the Offering, but the percentage of shares of the
Company's Common Stock owned by the Mutual Holding Company and the Minority
Stockholders will not change as a result of a change in the Independent
Valuation. If the Independent Valuation increases by 15%, or up to $13,225,000,
the number of shares sold in the Offering will increase to 608,350 shares and
the number of shares issued to the Mutual Holding Company will increase to
714,150 shares. Prospective purchasers will be given the opportunity to change
or withdraw their purchase orders only if the Estimated Valuation Range
decreases below the minimum or increases by more than 15% above the maximum of
such range, or if fewer than 391,000 shares or more than 608,350 shares are sold
in the Offering. See pages _____ to _____.
TERMINATION OF THE OFFERING
The Subscription Offering will terminate at ___________, New York time,
on ___________, 1998. The Community Offering, if one is held, is expected to
begin immediately after the termination of the Subscription Offering, but may
begin at any time during the Subscription Offering. The Community Offering may
terminate on or after __________, 1998, but in any event, no later than
__________, 1998, without OTS approval.
BENEFITS TO MANAGEMENT AND EMPLOYEES FROM THE OFFERING
Full-time employees of the Association will participate in an ESOP,
which is a form of retirement plan, that will purchase shares of Common Stock.
The Association also intends to implement a stock award plan (the "Stock Award
Plan") and a stock option plan (the "Stock Option Plan") following completion of
the Reorganization. The Stock Award Plan would award up to 4% of the Common
Stock issued in the Offering to executive officers and directors of the
Association at no cost to them. The Stock Option Plan would grant options for up
to 10% of the Common Stock issued in the Offering to employees, officers and
directors of the Association. Stock awards and stock options would be granted at
fair market value. The Stock Award Plan and Stock Option Plan may not be adopted
until at least six months after the completion of the Reorganization, and are
subject to shareholder approval and compliance with OTS regulations. See pages
_____ to _____.
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
The Company will retain up to 50% of the net proceeds from the Offering
and will contribute the remainder of the net proceeds to the Association. The
Company intends to use part of the net proceeds to make a loan to the ESOP to
fund its purchase of up to 8% of the Common Stock sold in the Offering. The
remainder of the net proceeds will be used for general corporate purposes, and
initially are expected to be invested in U.S. government securities and other
federal agency securities. See pages _____ to _____.
DIVIDENDS
Management of the Company does not initially intend to pay an annual
dividend. Later decisions as to whether or not to declare dividends by the
Company will depend upon a number of factors, including the amount of net
proceeds retained by the Company, investment opportunities available to the
Company or the Association and the Company's financial condition and results of
operations. If the Company decides to pay dividends on the Common Stock, the
Mutual Holding Company may waive its receipt of cash dividends, subject to
regulatory approval. See page _____.
MARKET FOR THE COMMON STOCK
The Company has never issued capital stock. The Company expects that
the Common Stock will be quoted on the OTC Electronic Bulletin Board, but there
can be no assurance that an active and liquid trading market in the Common Stock
will develop or be maintained. Ryan, Beck & Co. has indicated its intention to
make a market in the
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Common Stock, subject to compliance with applicable provisions of federal and
state securities laws and other regulatory requirements, although Ryan, Beck &
Co. is not required to do so. If you purchase shares, you may not be able to
sell them when you want to at a price that is equal to or more than the price
you paid. See pages _____ to _____.
PROHIBITION ON TRANSFER OF SUBSCRIPTION RIGHTS
SELLING OR ASSIGNING YOUR SUBSCRIPTION RIGHTS IS ILLEGAL. IF YOU
EXERCISE YOUR SUBSCRIPTION RIGHTS YOU WILL BE REQUIRED TO CERTIFY THAT YOU ARE
PURCHASING SHARES SOLELY FOR YOUR OWN ACCOUNT AND THAT YOU HAVE NO AGREEMENT OR
UNDERSTANDING REGARDING THE SALE OR TRANSFER OF SUCH SHARES. THE ASSOCIATION
INTENDS TO PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT THE
ASSOCIATION BECOMES AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS, AND THE
ASSOCIATION WILL NOT HONOR ORDERS KNOWN TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
IN ADDITION, PERSONS WHO VIOLATE THE PURCHASE LIMITATIONS MAY BE SUBJECT TO
SANCTIONS AND PENALTIES IMPOSED BY THE OTS.
IMPORTANT RISKS IN PURCHASING AND OWNING THE COMMON STOCK
Before you decide to purchase Common Stock in the Offering, you should
read the Risk Factors section on pages _____ of this Prospectus, in addition to
the other sections of this Prospectus.
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SELECTED FINANCIAL AND OTHER DATA OF
ATLANTIC LIBERTY SAVINGS, F.A.
The following selected historical financial data at March 31, 1997 and
1996 and for the two years then ended is derived in part from the audited
financial statements of the Association. The historical financial information at
and for the six months ended September 30, 1997 and 1996 is derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals. The operating data for the
six months ended September 30, 1997 may not be indicative of results that can be
expected for the full year. The following selected financial data of the
Association is qualified in its entirety by, and should be read in conjunction
with, the financial statements, including notes thereto, included elsewhere in
this Prospectus.
(UNAUDITED)
AT OR FOR THE
SIX MONTHS ENDED AT OR FOR THE
SEPTEMBER 30, YEAR ENDED MARCH 31,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets .................................... $ 109,887 $ 105,297 $ 109,794 $ 105,742
Loans receivable, net ........................... 65,486 57,321 60,059 54,505
Mortgage-backed securities held for investment .. 19,017 18,152 19,030 19,226
Investments securities held for investment ...... 13,150 18,880 17,258 16,155
Deposits ........................................ 100,539 95,728 100,798 97,396
Retained earnings--substantially restricted ..... 7,208 7,397 6,873 6,750
SELECTED OPERATING DATA:
Total interest income ........................... $ 4,065 $ 3,615 $ 7,248 $ 7,151
Total interest expense .......................... 2,304 2,189 4,363 4,149
--------- --------- --------- ---------
Net interest income ........................... 1,761 1,426 2,885 3,002
Provision for loan losses ....................... 105 65 771 275
--------- --------- --------- ---------
Net interest income after provision for loan
losses ........................................ 1,656 1,361 2,114 2,727
--------- --------- --------- ---------
Gain (loss) on disposal of foreclosed real estate 28 123 148 (135)
Other non-interest income ....................... 168 743 1,105 340
--------- --------- --------- ---------
Total non-interest income ....................... 196 866 1,253 205
--------- --------- --------- ---------
Total non-interest expense ...................... 1,267 1,819 3,391 2,596
--------- --------- --------- ---------
Income (loss) before taxes ...................... 585 408 (24) 336
Income tax (expense) benefit .................... (250) 240 147 (140)
--------- --------- --------- ---------
Net income ...................................... $ 335 $ 648 $ 123 $ 196
========= ========= ========= =========
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At or for the
Six Months Ended At or for the
September 30, Year Ended March 31,
------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
SELECTED OPERATIONS DATA:
PERFORMANCE RATIOS:
Return on average assets (ratio of net income to
average total assets) (1) ........................... 0.62% 1.24% 0.37% 0.05%
Return on average equity (ratio of net
income to average equity) (1) ....................... 9.12% 18.45% 5.98% 0.76%
Net interest margin (1) (2) ........................... 3.40% 2.87% 2.81% 3.10%
Interest rate spread (3) .............................. 3.21% 2.75% 2.71% 2.97%
Ratio of operating expense to average total assets (1) 2.34% 3.48% 3.21% 2.56%
Ratio of average interest-earning assets to
average interest-bearing liabilities ................ 103.81% 102.85% 103.61% 103.26%
ASSET QUALITY RATIOS:
Non-performing loans to total assets at end of period . 1.80% 3.24% 1.89% 2.92%
Allowance for loan losses to non-performing loans ..... 54.97% 15.92% 47.10% 24.17%
Allowance for loan losses to loans receivable, net .... 1.65% 1.18% 1.63% 1.37%
CAPITAL RATIOS:
Retained earnings to total assets at end of period .... 6.57% 7.02% 6.26% 6.38%
Average retained earnings to average assets ........... 6.78% 6.72% 6.47% 6.69%
OTHER DATA:
Number of full-service offices ........................ 2 2 2 2
- -------------------------
(1) Annualized
(2) Net income divided by average interest earning assets.
(3) Net interest rate spread represents the difference between the average
yield on interest earning assets and the average cost of interest bearing
liabilities.
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RISK FACTORS
In addition to the other information in this Prospectus, you should
consider carefully the following risk factors in evaluating an investment in the
Common Stock.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT
The Association's profitability, like that of most financial
institutions, substantially depends on its net interest income, which is the
difference between the interest income earned on interest earning-assets (such
as mortgage loans) and the interest expense paid on interest-bearing liabilities
(such as deposits). The Association's net interest income is affected primarily
by market interest rates and the amount, maturity and yield on the Association's
interest earning assets relative to the amount, maturity and cost of its
interest-bearing liabilities. Approximately 53.4% of the Association's mortgage
loans have terms of up to 15 years and fixed rates of interest, while deposit
accounts have significantly shorter terms to maturity. Because the Association's
interest-earning assets generally have fixed rates of interest and have longer
effective maturities than interest-bearing liabilities, the yield on
interest-earning assets generally will adjust more slowly to changes in market
interest rates than the cost of the Association's interest-bearing liabilities.
Savings institutions, such as the Association, often use interest rate
"gap" analysis as a measure of interest rate risk. This technique measures the
relative dollar amounts of interest-earning assets and interest-bearing
liabilities that reprice within a specific time period, either through maturity
or interest rate adjustment. Interest rate "gap" analysis is a common, though
imperfect, measure of interest rate risk. The "gap" is the difference between
the amounts of such assets and liabilities that are subject to repricing within
a specific time period, expressed as a percentage of total assets. A negative
gap for a given period means that the amount of interest-bearing liabilities
maturing or otherwise repricing within that period exceeds the amount of
interest-earning assets maturing or otherwise repricing within the same period.
A positive gap for a given period means that the amount of interest-earning
assets maturing or other repricing within that period exceeds the amount of
interest-bearing liabilities maturing or otherwise repricing within the same
period. At September 30, 1997, the dollar amount of the Association's
interest-bearing liabilities maturing or repricing within one year exceeded the
amount of the Association's interest earning assets maturing or repricing within
the same period by $15.2 million, resulting in a negative one year interest rate
gap of 13.79%. As a result, based on the model, the Association's net interest
income would be adversely affected by material and prolonged increases in
interest rates. In addition, rising interest rates may adversely affect earnings
because the demand for loans typically decreases in a higher interest rate
environment. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Interest Rate Risk."
Management also monitors the Association's interest rate risk exposure
with a model that estimates the change in the Association's net portfolio value
("NPV") in response to a range of assumed changes in market interest rates. NPV
is the present value of expected cash flows from assets, liabilities and
off-balance sheet items. Under the model, assuming an instantaneous 200 basis
point increase in market interest rates, the Association's NPV as of September
30, 1997 would decrease by $2.2 million or 24%.
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. The relatively lower interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-backed
securities, as borrowers have refinanced their mortgages to reduce their
borrowing costs. Under these circumstances, the Association is subject to
reinvestment risk to the extent that it is not able to reinvest such prepayments
at rates which are comparable to the rates on the prepaid loans or securities.
Moreover, volatility in interest rates also can result in the flow of funds away
from the Association into other investments such as U.S. Government and
corporate securities and investments which generally pay higher rates of return
than the rates paid on deposits by savings institutions.
10
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RISKS ASSOCIATED WITH MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING
At September 30, 1997, $13 million, or 19.8%, of the Association's loan
portfolio consisted of multi-family real estate loans and $11.9 million, or
18.1% of the Association's loan portfolio, consisted of commercial real estate
loans. The Association's primary lending area includes a significant number of
multi-family dwellings and apartment buildings. As a result, the Association
will continue to originate multi-family and commercial real estate loans to meet
the financing needs of its community. Loans secured by multi-family or
commercial real estate typically have higher interest rates than the interest
rates on one-to-four family loans because of the higher credit risks involved in
such loans. The repayment of loans secured by multi-family and commercial real
estate properties typically depends on the successful operation or management of
the property securing the loan, as well as the conditions in the real estate
market or the local economy. If the cash flow from the property is reduced, the
borrower's ability to repay the loan may be impaired. Moreover, multi-family and
commercial real estate loans are also more difficult to monitor and evaluate
than loans secured by one-to-four family properties. See "Business of Atlantic
Liberty Savings, F.A.--Lending Activities."
POSSIBLE INCREASE IN INDEPENDENT VALUATION AND NUMBER OF SHARES SOLD
As a result of changes in market and economic conditions, the
Independent Valuation may increase when it is updated at the conclusion of the
Offering, and, in such event, the number of shares to be sold in the Offering
will increase. INVESTORS WILL NOT BE RESOLICITED UNLESS THE INDEPENDENT
VALUATION INCREASES BY MORE THAN 15%, OR TO MORE THAN $13,225,000, OR THE NUMBER
OF SHARES SOLD IN THE OFFERING INCREASES BY MORE THAN 15%, OR TO MORE THAN
608,350 SHARES. If the Independent Valuation increases, then the interests of
those who purchase shares in the Offering will be diluted because more shares
will be outstanding at the conclusion of the Offering. See "Pro Forma Data" and
"The Reorganization and Stock Offering--Stock Pricing and Number of Shares to be
Offered in the Offering."
CONTROL BY THE MUTUAL HOLDING COMPANY
As the majority stockholder of the Company, the Mutual Holding Company
will be able to elect all of the directors of the Company and direct its
business and affairs. The Company will be controlled by its Board of Directors
which will consist initially of those persons who currently are directors of the
Association. After the Reorganization, the initial Board of Directors of the
Mutual Holding Company will also consist of those persons who currently are
members of the Board of Directors of the Association. As a result, it is
expected that the Board of Directors of the Mutual Holding Company will exercise
control over the Mutual Holding Company and, consequently, may be capable of
perpetuating the Board of Directors and management of the Mutual Holding
Company, the Company and the Association. THE PURCHASERS OF THE COMMON STOCK IN
THE OFFERING WILL BE MINORITY STOCKHOLDERS OF THE COMPANY AND WILL HAVE LIMITED
INFLUENCE IN ELECTING DIRECTORS OR OTHERWISE DIRECTING THE AFFAIRS OF THE
COMPANY AS LONG AS THE MUTUAL HOLDING COMPANY REMAINS IN EXISTENCE. THE
COMPANY'S FEDERAL CHARTER WILL PROHIBIT CUMULATIVE VOTING. THEREFORE, THE MUTUAL
HOLDING COMPANY WILL HAVE THE POWER TO ELECT ALL THE DIRECTORS OF THE COMPANY.
NO ASSURANCES CAN BE GIVEN THAT THE MUTUAL HOLDING COMPANY WILL NOT TAKE ACTION
THAT THE MINORITY STOCKHOLDERS BELIEVE TO BE CONTRARY TO THEIR INTERESTS.
WAIVER OF DIVIDENDS BY THE MUTUAL HOLDING COMPANY
The Company does not initially intend to pay dividends on its Common
Stock. However, in the event the Company pays cash dividends, the Mutual Holding
Company may, if permitted by regulatory authorities, waive the receipt of such
dividends if the Mutual Holding Company's board of directors determines that
such waiver is in the best interests of the Mutual Holding Company. The Board of
Directors of the Association, which will be the initial Board of Directors of
the Mutual Holding Company, currently believes that it will be in the best
interests of the Mutual Holding Company to waive the receipt of cash dividends,
and currently intends to have the Mutual Holding Company waive all or part of
its share of any cash dividends declared on the Common Stock. A waiver of cash
dividends by the Mutual Holding Company will result in a greater likelihood that
dividends will be paid to Minority
11
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Stockholders. There is no assurance that the Mutual Holding Company will waive
the receipt of cash dividends, and any dividend waiver by the Mutual Holding
Company will require the prior approval of the OTS. Pursuant to OTS policy and
the Association's Plan of Reorganization, the benefit to Minority Stockholders
of any dividends waived by the Mutual Holding Company must be taken into account
in any conversion of the Mutual Holding Company to stock form (a "Conversion
Transaction"), and would likely reduce the percentage of Common Stock of the
Company owned by Minority Stockholders following a Conversion Transaction.
CONVERSION OF MUTUAL HOLDING COMPANY TO STOCK FORM
OTS regulations permit a mutual holding company to convert to stock
form. The Plan provides that in a Conversion Transaction, the Mutual Holding
Company may merge into the Company or the Association, with either the Company
or the Association as the surviving entity, and depositors of the Association
will have the right to subscribe for shares of Common Stock of the Company or
its successor. The additional shares of Common Stock would be sold at their
aggregate pro forma market value as determined by an independent appraisal at
the time of the Conversion Transaction. Pursuant to the Plan, in any Conversion
Transaction, the Minority Stockholders will be entitled to maintain the same
percentage ownership interest in the Company after the Conversion Transaction as
their percentage ownership interest in the Company immediately before the
Conversion Transaction (the "Minority Ownership Interest"), subject only to the
following adjustments if required by federal law, regulation or policy to
reflect: (i) the cumulative effect of the aggregate amount of dividends waived
by the Mutual Holding Company, and (ii) the market value of the Mutual Holding
Company's assets other than its Common Stock of the Company.
The adjustment referred to in clause (i) of the preceding paragraph
would require that the Minority Ownership Interest be adjusted by multiplying
the Minority Ownership Interest by the following fraction:
(Company stockholders' equity immediately prior to Conversion Transaction) -
(aggregate amount of dividends waived by Mutual Holding Company)
----------------------------------------------------------------------------
Company stockholders' equity immediately prior to Conversion Transaction
The adjustment referred to in clause (ii) above would further adjust
the Minority Ownership Interest by multiplying it by the following fraction:
(pro forma market value of Company) - (market value of assets of Mutual Holding
Company other than Company Common Stock)
- -------------------------------------------------------------------------------
pro forma market value of Company
At the sole discretion of the Board of Directors of the Mutual Holding
Company and the Company, a Conversion Transaction may be effected in any other
manner necessary to qualify the Conversion Transaction as a tax-free
reorganization under applicable federal and state tax laws, provided such
Conversion Transaction does not diminish the rights and ownership interest of
Minority Stockholders. Management of the Association has no current intention to
conduct a Conversion Transaction. A Conversion Transaction would require the
approval of applicable federal regulators and a majority of the eligible votes
of the members of the Mutual Holding Company.
COMPETITION
Numerous commercial banks and savings banks have branches in the
immediate vicinity of the Association. There is strong competition from
financial institutions in the Association's local market in both originating
loans and attracting deposits. The Association's primary competitors are other
savings banks, commercial banks, mortgage banking companies and credit unions.
Such competition may have an adverse effect on the Association's growth and
profitability in the future. See "Competition."
GEOGRAPHIC CONCENTRATION OF LOANS
The Association's real estate mortgage loans are secured by properties
located primarily in Brooklyn, New York. A weakening in the local real estate
market or in the local economy could increase the number of delinquent
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17
or non-performing loans and reduce the value of the collateral securing such
loans, which would reduce the Association's net income.
INTENT TO REMAIN INDEPENDENT
The Association has operated as an independent community-oriented
savings association since 1888. The Association intends to continue to operate
as an independent community-oriented savings association following the
Reorganization. The Association and the Company will be controlled by the Mutual
Holding Company, and, under current OTS policy, control of the Mutual Holding
Company may not be sold to a third party. Accordingly, you are urged not to
subscribe for shares of Common Stock if you are anticipating a sale of control
of the Association or the Company. See "Business of Atlantic Liberty Savings,
F.A."
LACK OF ACTIVE MARKET FOR THE COMMON STOCK
The Company has never issued capital stock to the public, and due to
the relatively small size of the Offering there can be no assurance that an
active and liquid trading market for the Common Stock will develop or be
maintained. It is anticipated that the Common Stock will be quoted on the OTC
Electronic Bulletin Board. Ryan, Beck & Co. has indicated its intention to make
a market in the Common Stock, subject to compliance with applicable provisions
of federal and state securities laws and other regulatory requirements, although
Ryan, Beck & Co. is not required to do so. If you purchase shares of Common
Stock, you may not be able to sell them when you want to at a price that equals
or exceeds the price you paid for the Common Stock.
EXPENSES ASSOCIATED WITH ESOP AND STOCK AWARD PLAN
The Association will recognize material employee compensation and
benefit expenses assuming the ESOP and the Stock Award Plan are implemented. The
actual aggregate amount of these new expenses cannot be predicted at the present
time because applicable accounting practices require that they be based on the
fair market value of the shares of Common Stock when the expenses are
recognized, which would occur when shares are committed to be released in the
case of the ESOP, and over the vesting period of awards made to recipients in
the case of the Stock Award Plan. These expenses have been reflected in the pro
forma financial information under "Pro Forma Data" assuming the Purchase Price
($10.00 per share) as fair market value. Actual expenses, however, will be based
on the fair market value of the Common Stock at the time of recognition, which
may be higher or lower than the Purchase Price. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Impact of New
Accounting Standards--FASB Statement on Accounting for Stock-Based
Compensation," "Management of The Association--Benefits--Employee Stock
Ownership Plan" and "--Benefits--Stock Award Plan."
POSSIBLE DILUTIVE EFFECT OF STOCK AWARD PLAN AND STOCK OPTION PLAN
If the Reorganization and Offering are completed and stockholders
approve the Stock Award Plan and Stock Option Plan, the Company intends to issue
shares of Common Stock to officers and directors of the Association through
these plans. If the shares for these plans are issued from the Company's
authorized but unissued Common Stock, the book value and earnings per share of
minority stockholders would be diluted, and the trading price of the Company's
Common Stock may be reduced. See "Pro Forma Data" and "Executive Compensation
and Related Transactions of the Association."
FINANCIAL INSTITUTION REGULATION AND FUTURE OF THE THRIFT INDUSTRY
The Association is subject to extensive regulation, supervision, and
examination by the OTS and the FDIC. Legislation has been introduced in Congress
that would consolidate the OTS with the Office of the Comptroller of the
Currency. If this legislation is enacted into law, the Association may be
required to become a state or national commercial bank, and may become regulated
by a different government agency. It is not possible to predict at this
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18
time whether such legislation will be enacted into law, or the impact of any
such legislation on the operations of the Association, the Company or the Mutual
Holding Company. See "Regulation."
RISK OF DELAYED OFFERING
Although the Reorganization and Offering are expected to be completed
within the time periods indicated in this Prospectus, it is possible that
adverse market, economic or other factors may significantly delay the completion
of the Reorganization and Offering, which could significantly increase the costs
of the Reorganization and Offering. See "The Reorganization."
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the approximate purchases of Common
Stock by each director and executive officer and their Associates in the
Offering. All shares will be purchased for investment purposes and not for
purposes of resale. The table assumes that 460,000 shares (the midpoint of the
Offering Range) of Common Stock will be sold at $10.00 per share and that
sufficient shares will be available to satisfy subscriptions.
TOTAL SHARES
PROPOSED TO BE AGGREGATE PRICE OF
NAME POSITION SUBSCRIBED FOR(1) INTENDED PURCHASES PERCENT OF SHARES %
- ----------------------------------------------------------------------------------------------------------------------------------
John A. Maher Chairman of the Board 5,000 $ 50,000 1.1%
and Secretary
Stephen Irving President, Chief Executive 2,500 25,000 .5
Officer and Director
Nunzio D'Addona Director 5,000 50,000 1.1
Eugene F. O'Connor Director 5,000 50,000 1.1
Edward W. Kelle Director and Vice 2,500 25,000 .5
Chairman of the Board
Fred W. McPhilliamy Director 2,500 25,000 .5
Martin D. Dehler Director 5,000 50,000 1.1
Barry Donohue 1,000 10,000 .2
Steven Parisi 1,000 10,000 .2
----- ------ --
All directors and officers
as a group (9 persons) (2) 29,500 $295,000 6.4%
====== ======== ====
- ---------------------------
(1) Does not include shares subject to stock options which may be granted under
the Stock Option Plan, or shares which may be awarded under the Stock Award
Plan.
(2) Assuming (i) that all shares awarded under the Stock Award Plan are
purchased on the open market upon the full vesting of the restricted stock
awards to directors and officers contemplated under the Stock Award Plan
and (ii) the exercise in full of all options expected to be granted to
directors and officers under the Stock Option Plan, all directors and
officers as a group would beneficially own 84,240 shares (19.6%), 93,900
shares (18.6%), 103,560 shares (17.7%), and 114,669 shares (17.1%) at the
minimum, midpoint, maximum, and 15% above the maximum of the Offering
Range, respectively. See "Executive Compensation and Related Transactions
of Atlantic Liberty -- Stock Award Plan," "--Stock Option Plan."
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ATLANTIC LIBERTY, MHC
The Mutual Holding Company will at all times own a majority of the
outstanding shares of Common Stock. Each member of the Association immediately
prior to the Reorganization will receive the same membership rights in the
Mutual Holding Company after the Reorganization that such person had in the
Association before the Reorganization so long as such member continues to
maintain a deposit account with the Association after the Reorganization, or, in
the case of a borrower member, such member's borrowings from the Association, as
of the effective date of the Reorganization, remain outstanding. Borrowers will
not receive membership rights for any new borrowings from the Stock Association
after the completion of the Reorganization. The Mutual Holding Company will be
chartered as a federal mutual holding company and will be subject to regulation
by the OTS.
Immediately after the Reorganization, it is expected that the only
business activity of the Mutual Holding Company will be to own a majority of the
Common Stock. The Mutual Holding Company, however, will be authorized to engage
in any other business activities that are permissible for mutual holding
companies under federal law, including investing in loans and securities.
The office of the Mutual Holding Company is located at 186 Montague
Street, Brooklyn, New York 11201. The telephone number is (718) 855-3555.
BROOKLYN HEIGHTS BANCORP
The Company will be formed as a federal corporation and will own 100%
of the Association's common stock. The Company has not engaged in any business
to date and, for that reason, its financial statements are not included in this
Prospectus. The Company has received approval from the OTS to become a savings
and loan holding company through the acquisition of all of the capital stock of
the Association to be issued and outstanding upon completion of the
Reorganization. The Company will have all of the powers set forth in its Federal
charter and under Federal law. The Company will be subject to the same
restrictions on its permissible business activities under federal law that are
applicable to the Mutual Holding Company.
The Company will retain up to 50% of the net proceeds of the Offering.
Part of the net proceeds will be used to fund a loan to the ESOP, which is
expected to purchase up to 8% of the Common Stock in the Offering. The remainder
of the net proceeds will be used for general corporate purposes. The Company has
no present plans regarding diversification, acquisitions or expansion. The
Company initially will not conduct any active business and does not intend to
employ any persons other than its officers, although it may utilize the
Association's support staff from time to time.
The office of the Company is located at 186 Montague Street, Brooklyn,
New York 11201. The telephone number is (718) 855-3555.
ATLANTIC LIBERTY SAVINGS, F.A.
Originally organized in 1888 as a New York building and loan
association, the Association converted to a Federal savings association in 1983.
The Association currently conducts its business from its main office and one
full-service branch office, both of which are located in Brooklyn, New York. At
September 30, 1997, the Association had total assets of $110 million, deposits
of $101 million and retained earnings of $7.2 million, or 6.54% of assets. For
the six months ended September 30, 1997 and the year ended March 31, 1997, the
Association had net income of $335,000 and $123,000, respectively. For the same
period it had a return on average assets of 0.62% and 0.12%, respectively, and a
return on average equity of 9.12% and 5.98%, respectively.
The Association is primarily engaged in the business of offering
savings and certificates of deposit to the general public, and using the funds
from such deposits to make mortgage loans secured by one-to-four family
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20
residential real estate. The Association also makes loans secured by
multi-family and commercial real estate. The Association has no outstanding
borrowings.
SUMMARY DESCRIPTION OF THE REORGANIZATION
Pursuant to the Plan, the Association will reorganize into a two-tier
mutual holding company structure by forming: (i) the Mutual Holding Company as a
federally-chartered mutual holding company; (ii) the Company as a
federally-chartered stock holding company that will sell 46% of its Common Stock
in the Offering and issue the remaining 54% of its Common Stock to the Mutual
Holding Company; and (iii) the Stock Association as a federally-chartered stock
savings association which will be the successor to the Association in its
current mutual form, and which will be wholly-owned by the Company.
------------------- -------------------
Atlantic Liberty, Public
MHC Stockholders
(Including ESOP)
------------------- -------------------
54% of the 46% of the
Common Common
Stock Stock
----------------------------------------------------------------
Brooklyn Heights Bancorp
----------------------------------------------------------------
100% of the
Common Stock
----------------------------------------------------------------
Atlantic Liberty Savings, F.A.
----------------------------------------------------------------
The Reorganization will structure the Association in the stock form of
ownership, which is the corporate form used by commercial banks, most major
businesses and a large number of savings institutions. The primary purpose of
the Reorganization is to raise equity capital and establish a holding company to
enable the Association to compete more effectively in the financial services
marketplace. See "The Reorganization and Offering--Reasons for the
Reorganization."
MARKET AREA
The Association is a community-oriented savings institution that offers
a variety of financial products and services from its main office and one branch
office located in Brooklyn, New York. The Association's primary lending area is
concentrated in the neighborhoods surrounding both of the Association's office
locations. One-to-four family residential real estate in the Association's
market area is characterized by a large number of attached and semi-detached
houses, including a number of two- and three-family homes and cooperative
apartments. Most of the Association's deposit customers are residents of the
greater New York metropolitan area.
The Association has significant competition in originating loans from
savings and loan associations, savings banks, mortgage banking companies,
insurance companies and commercial banks, many of which have greater financial
and marketing resources than the Association. The Association also faces
significant competition in attracting deposits from savings and loan
associations, savings banks, commercial banks and credit unions. The Association
faces additional competition for deposits from money market funds and other
corporate and government securities funds, and from other financial service
providers such as brokerage firms and insurance companies.
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USE OF PROCEEDS
The Company will retain up to 50% of the net proceeds from the
Offering, and will use the balance of the net proceeds to purchase all of the
Common Stock issued by the Association. A portion of the net proceeds retained
by the Company will be loaned to the ESOP to fund its purchase of up to 8% of
the Common Stock sold in the Offering. On a short-term basis, the remaining net
proceeds retained by the Company may be invested in U.S. Government securities
and other federal agency securities. On a longer-term basis, the Company will
use the net proceeds for general corporate purposes. The Company may also use a
portion of the net proceeds to fund the purchase of Common Stock equal to 4% of
the shares sold in the Offering for the Stock Award Plan. The Stock Award Plan
may not be adopted by the Company's Board of Directors earlier than six months
following the completion of the Reorganization, and is subject to the approval
of stockholders.
The Association intends to use a portion of the net proceeds that it
receives from the Company to make one-to-four family mortgage loans,
multi-family real estate loans and commercial real estate loans, subject to
market conditions. On an interim basis, a portion of the net proceeds may be
invested in U.S. Government securities and other Federal agency securities. See
"Business of Atlantic Liberty Savings, F.A.--Investments."
The following table shows estimated gross and net proceeds based on the
sale of Common Stock at the minimum, midpoint, maximum and 15% above the
maximum, of the Offering Range.
15% ABOVE
MINIMUM, MIDPOINT, MAXIMUM, MAXIMUM,
391,000 460,000 529,000 608,350
SHARES SOLD AT PRICE SHARES SOLD AT PRICE SHARES SOLD AT PRICE SHARES SOLD AT PRICE
OF $10.00 OF $10.00 OF $10.00 OF $10.00(2)
- -------------------------------------------------------------------------------------------------------------------------------
Gross proceeds............. $ 3,910,000 $ 4,600,000 $ 5,290,000 $ 6,083,500
Less:
Estimated underwriting
commissions and other
expenses(1)............. 500,000 510,000 521,000 534,000
------------- -------------- ------------- -------------
Estimated net proceeds(1).. $ 3,410,000 $ 4,090,000 $ 4,769,000 $ 5,549,500
============= ============== ============= =============
- -------------------------
(1) In calculating estimated net proceeds it has been assumed that no sales
will be made through selected dealers and that the ESOP acquires 8% of the
shares of Common Stock issued in the Offering.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% to
reflect changes in market and financial conditions following the
commencement of the Subscription Offering and the Community Offering, if
any, as well as to reflect the demand for the Common Stock.
The actual net proceeds may differ from the estimated net proceeds
calculated above for various reasons, including variances in the actual amount
of legal and accounting expenses incurred in connection with the Reorganization
and Offering, commissions paid for sales made through other dealers, and the
actual number of shares of Common Stock sold in the Offering. Any variance in
the actual net proceeds from the estimates provided in the table above is not
expected to be material.
DIVIDENDS
The Company has no present plans to pay a dividend on the Common Stock.
Dividends will be subject to determination and declaration by the Board of
Directors in its discretion, which will take into account the Company's
consolidated financial condition and results of operations, tax considerations,
industry standards, economic conditions, capital levels, regulatory restrictions
on dividend payments by the Association to the Company, general business
practices and other factors. See "Regulation--Savings Association Regulatory
Capital" and "--Dividend Limitations."
The Company will not be subject to OTS regulatory restrictions on the
payment of dividends, although its ability to pay dividends will depend in part
upon the receipt of dividends from the Association. The Association must
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provide the OTS with 30 days prior notice of its intention to pay a dividend or
other capital distribution to the Company. Additional limits on the dollar
amount of any capital distribution by the Association to the Company are set
forth in OTS regulations. See "Regulation--Dividend Limitations."
If permitted by regulatory authorities, the Mutual Holding Company may
waive the receipt of any cash dividends declared on the Common Stock if the
Mutual Holding Company's Board of Directors determines that such waiver is in
the best interests of the Mutual Holding Company. The Board of Directors may
conclude that such waiver, which permits retention of capital by the Company, is
in the best interest of the Mutual Holding Company because, among other reasons,
(i) the Mutual Holding Company has no need for the dividend considering its
current business operations, and (ii) the cash that would be received could be
invested by the Company at a more favorable rate of return. The Board of
Directors may consider other factors in determining whether such waiver is
consistent with its fiduciary duties to the Mutual Holding Company. A waiver of
dividends by the Mutual Holding Company will result in a greater likelihood that
dividends will be paid to stockholders other than the Mutual Holding Company.
There is no assurance that the Mutual Holding Company will waive the receipt of
dividends.
In addition to the foregoing, the portion of the Association's earnings
which has been appropriated for bad debt reserves and deducted for federal
income tax purposes cannot be used by the Association to pay cash dividends to
the Company without the payment of federal income taxes by the Association at
the then current income tax rate on the amount deemed distributed, which would
include the amount of any federal income taxes attributable to the distribution.
See "Taxation-- Federal Taxation" and Note 9 to the Financial Statements. The
Company does not contemplate any distribution by the Association that would
result in a recapture of the Association's bad debt reserve or otherwise create
federal tax liabilities.
MARKET FOR THE COMMON STOCK
The Company has never issued Common Stock to the public. Consequently,
there is no established market for the Common Stock. The Company intends to have
the Common Stock traded on the OTC Electronic Bulletin Board, an electronic
communications network that provides brokers and dealers with quotation
information. Ryan, Beck & Co. has advised the Association that it intends to act
as a market maker for the Common Stock, subject to compliance with applicable
provisions of federal and state securities laws and other regulatory
requirements, but it is under no obligation to do so.
The existence of a public trading market will depend upon the presence
in the market of both willing buyers and willing sellers at any given time. The
presence of a sufficient number of buyers and sellers at any given time is a
factor over which neither the Company nor any broker or dealer has control. The
absence of an active and liquid trading market may make it difficult to sell the
Common Stock and may have an adverse effect on the price of the Common Stock.
Purchasers should consider the potentially illiquid and long-term nature of
their investment in the Common Stock.
COMPETITION
Numerous financial institutions that provide similar services operate
in the Association's market area, including commercial banks, savings
associations, credit unions and certain nonbanking consumer lenders. The
Association also competes with money market funds with respect to deposit
accounts and with insurance companies with respect to individual retirement
accounts. The Association's office locations are in close proximity to many
competing financial institutions.
The Association attracts and retains deposits by offering personalized
service, convenient office locations and competitive interest rates. Loan
originations are obtained primarily through (i) direct contacts by employees
with individuals, businesses and attorneys in the Association's community, (ii)
personalized service that the Association provides borrowers, and (iii)
competitive pricing. Competition is affected by, among other things, the general
18
23
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors that management cannot readily predict.
CAPITALIZATION
The following table presents the Association's historical
capitalization at September 30, 1997, and the pro forma consolidated
capitalization of the Company as of that date, giving effect to the sale of
Common Stock offered by this Prospectus based on the number of shares indicated
in the table, and subject to the other assumptions set forth below. The pro
forma data set forth below may change significantly at the time the Company
completes the Reorganization and Offering due to, among other factors, a change
in the Independent Valuation or a change in the current estimated expenses of
the Reorganization and Offering. If the Offering Range changes so that between
391,000 and 608,350 shares are not sold in the Offering, subscriptions will be
returned to subscribers who do not affirmatively elect to continue their
subscriptions at the revised Offering Range.
AT SEPTEMBER 30, 1997
PRO FORMA COMPANY
CAPITALIZATION BASED ON SALE OF
------------------------------------------------------
391,000 460,000 529,000 608,350
SHARES SHARES SHARES SHARES
ATLANTIC SOLD AT SOLD AT SOLD AT SOLD AT
LIBERTY PRICE OF PRICE OF PRICE OF PRICE OF
HISTORICAL $10.00 $10.00 $10.00 $10.00(8)
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Deposits(1) .................................. $ 100,539 $ 100,539 $ 100,539 $ 100,539 $ 100,539
--------- --------- --------- --------- ---------
Total deposits .......................... $ 100,539 $ 100,539 $ 100,539 $ 100,539 $ 100,539
========= ========= ========= ========= =========
Stockholders equity (2):
Preferred Stock, $1.00 par value per share:
authorized - 10,000,000 shares; assumed
outstanding - none ......................... $ -- $ -- $ -- $ -- $ --
Common stock, $1.00 par value per share
20,000,000 authorized shares; shares to be
outstanding as shown(3)(4) ................. -- 391 460 529 608
Paid-in capital(3) ........................... -- 3,019 3,630 4,240 4,942
Less: Common stock acquired by ESOP(5) ....... -- (313) (368) (423) (487)
Common stock to be acquired by SAP(6) .. -- (156) (184) (212) (243)
Retained earnings, substantially restricted(7) 7,208 7,208 7,208 7,208 7,208
--------- --------- --------- --------- ---------
Total stockholders' equity ................... $ 7,208 $ 10,149 $ 10,746 $ 11,342 $ 12,028
========= ========= ========= ========= =========
- ---------
(1) Excludes withdrawals from deposit accounts for the purchase of Common Stock.
Such withdrawals will reduce pro forma deposits by the amount thereof.
(2) Pro forma stockholders' equity is not intended to represent the fair market
value of the Common Stock, the net fair market value of the Company's assets
and liabilities or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro forma
data may be affected by a change in the number of shares to be sold in the
Offering and by other factors.
(3) The number of shares to be issued in the Offering may be increased or
decreased based on market and financial conditions prior to the completion
of the Offering. Assumes estimated expenses of $500,000, $510,000, $521,000
and $534,000 at the minimum, midpoint, maximum and adjusted maximum of the
Offering Range, respectively. See "Use of Proceeds."
(4) Does not reflect additional shares of Common Stock that could be purchased
pursuant to the Stock Option Plan, if implemented, under which directors,
executive officers and other employees of the Company would be granted
options to purchase an aggregate amount of Common Stock equal to 10% of the
shares issued in the Offering (54,000 shares at the midpoint of the
19
24
Offering Range). Implementation of the Stock Option Plan requires
shareholder approval, which is expected to be sought at the first annual
meeting of stockholders to be held no earlier than six months following the
Reorganization.
(5) Assumes purchases by the ESOP of a number of shares equal to 8% of the
shares sold to the public in the Offering. The funds used to acquire the
ESOP shares will be borrowed from the Company. See "Use of Proceeds." The
Association intends to make contributions to the ESOP sufficient to service
and ultimately retire its debt. The Common Stock acquired by the ESOP is
reflected as a reduction of shareholders' equity. As the ESOP debt is
repaid, shares will be released and allocated to participants' accounts, and
a corresponding reduction in the charge against stockholders' equity will
occur. See "Executive Compensation and Related Transactions of Atlantic
Liberty-- Employee Stock Ownership Plan and Trust."
(6) Assuming the receipt of shareholder approval, the Company intends to
implement the Stock Award Plan . Assuming such implementation, the Stock
Award Plan will purchase an amount of shares equal to 4% of the Common Stock
sold in the Offering. Such shares may be purchased from authorized but
unissued shares or in the open market. Under the terms of the Stock Award
Plan, assuming it is adopted within one year of the Reorganization, shares
awarded to officers and directors will vest at the rate of 20% per year. The
Common Stock to be purchased by the Stock Award Plan represents unearned
compensation and is, accordingly, reflected as a reduction to pro forma
stockholders' equity. As shares of the Common Stock granted pursuant to the
Stock Award Plan vest, a corresponding reduction in the charge against
capital will occur. In the event that authorized but unissued shares are
acquired, the interests of existing stockholders will be diluted. Assuming
that 460,000 shares of Common Stock, the midpoint of the Offering Range, are
issued in the Reorganization, and that all awards under the Stock Award Plan
are from authorized but unissued shares, the Company estimates that the per
share book value for the Common Stock would be diluted by $.92 per share, or
3.9% on a pro forma basis as of September 30, 1997. The dilution would be
$1.02 per share (3.87%) and $.84 per share (3.95%) at the minimum and
maximum levels, respectively, of the Offering Range on a pro forma basis at
September 30, 1997.
(7) Retained earnings are substantially restricted, see "Financial Statements."
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription Offering and Community Offering, if any.
PRO FORMA DATA
The following tables set forth the pro forma combined consolidated net
income of the Company for the year ended March 31, 1997 and the six-months ended
September 30, 1997, as though the Offering had been consummated at the beginning
of the year and the six month period, and the investable net proceeds had been
invested at 6.0% for the year ended March 31, 1997 which was the one year
treasury bill rate at March 31, 1997, and at 5.36% for the six months ended
September 30, 1997, which was the one year treasury bill rate at September 30,
1997, respectfully. The pro forma after-tax return for the Company on a
consolidated basis is assumed to be 3.84% for the year ended March 31, 1997 and
3.43% for the six months ended September 30, 1997, after giving effect to (i)
the yield on investable net proceeds from the Offering and (ii) adjusting for
taxes using a combined federal and state income tax rate of 36%. Historical and
per share amounts have been calculated by dividing historical amounts and pro
forma amounts by the indicated number of shares of Common Stock, assuming that
such number of shares had been outstanding during each of the entire periods.
The 391,000, 460,000, 529,000 and 608,350 shares represent 46% of minimum,
midpoint, maximum and adjusted maximum, respectively of the Estimated Valuation
Range.
Book value represents the difference between the stated amount of
consolidated assets and consolidated liabilities of the Company computed in
accordance with generally accepted accounting principles. Book value does not
necessarily reflect current market value of assets and liabilities, or the
amounts, if any, that would be available for distribution to shareholders in the
event of liquidation. See "The Reorganization--Principal Effects of
Reorganization--Effect on Liquidation Rights." Book value also does not reflect
the federal income tax consequences of the restoration to income of the
Association's bad debt reserve for income tax purposes, which would be required
in the unlikely event of liquidation or if a substantial portion of retained
earnings were otherwise used for a purpose other than absorption of bad debt
losses. See "Taxation--Federal Taxation." Pro forma book value includes only net
proceeds from the Offering as though it occurred as of the indicated date and
does not include earnings on the proceeds for the period then ended.
The pro forma net income derived from the assumptions set forth above
should not be considered indicative of the actual results of operations of the
Company that would have been attained for the year ended March 31, 1997 and the
six months ended September 30, 1997 if the Offering had been actually
consummated at the beginning of such
20
25
year and six month period, and the assumptions regarding investment yields
should not be considered indicative of the actual yield expected to be achieved
during any future period. The pro forma book values at the date indicated should
not be considered as reflecting the potential trading value of the Common Stock.
There can be no assurance that an investor will be able to sell the Common Stock
purchased in the Offering at prices within the range of the pro forma book
values of the Common Stock or at or above the Purchase Price. The pro forma data
may not total due to rounding differences.
21
26
At or for the Six Months Ended September 30, 1997
Based on the sale of common stock for $10.00 per share
------------------------------------------------------
391,000 460,000 529,000 608,350
Shares Shares Shares Shares
Sold Sold Sold Sold (1)
--------- --------- -------- ---------
(Dollars in Thousands, Except Per Share Data)
Gross proceeds................................................ $ 3,910 $ 4,600 $ 5,290 $ 6,084
Less Offering expenses........................................ 500 510 521 534
--------- --------- -------- ---------
Estimated net proceeds...................................... $ 3,410 $ 4,090 $ 4,769 $ 5,550
========= ========= ======== =========
Net earnings:
Historical.................................................. $ 335 $ 335 $ 335 $ 335
Pro forma income on net proceeds (2)........................ 50 61 71 83
Pro forma ESOP adjustment (3)............................... (10) (12) (14) (16)
Pro forma Stock Award Plan adjustment (4)................... (10) (12) (14) (16)
---------- ---------- --------- ----------
Pro forma net earnings................................... $ 365 $ 372 $ 379 $ 387
========= ========= ======== =========
Per share net earnings: (5) (6)
Historical.................................................. $ .41 $ .35 $ .30 $ .26
Pro forma income on net proceeds (2)........................ .06 .06 .06 .06
Pro forma ESOP adjustment (3)............................... (.01) (.01) (.01) (.01)
Pro forma Stock Award Plan adjustment (4)................ (.01) (.01) (.01) (.01)
---------- ---------- --------- ----------
Pro forma net earnings per share (5) (7)................. $ .44 $ .39 $ .34 $ .30
========= ========= ======== =========
Stockholders' equity:
Historical (8).............................................. $ 7,208 $ 7,208 $ 7,208 $ 7,208
Estimated adjusted net proceeds (9)......................... 3,411 4,091 4,771 5,552
Common stock acquired by ESOP (3)........................... (313) (368) (423) (487)
Common stock acquired by Stock Award Plan (4)............... (156) (184) (212) (243)
---------- ---------- --------- ----------
Pro forma stockholders' equity.............................. $ 10,150 $ 10,747 $ 11,344 $ 12,030
========= ========= ======== =========
Stockholders' equity per share: (5) (8)
Historical.................................................. $ 8.36 $ 7.11 $ 6.18 $ 5.37
Estimated adjusted net proceeds (9)......................... 4.01 4.09 4.16 4.20
Common stock acquired by ESOP (3)........................... (.37) (.37) (.37) (.37)
Common stock acquired by Stock Award Plan (4)............... (.18) (.18) (.18) (.18)
---------- ---------- --------- ----------
Pro forma stockholders' equity per share (5) (7)............ $ 11.82 $ 10.65 $ 9.78 $ 9.02
========= ========= ======== =========
Offering price to pro forma stockholders' equity.............. 84.58% 93.92% 102.28% 110.85%
======== ======== ======= ========
Offering price to pro forma net earnings per share (5)........ 11.05x 12.73x 14.34x 16.12x
========= ========= ======== =========
Minority Ownership Interest (10).............................. 46.00% 46.00% 46.00% 46.00%
========= ========= ======== =========
(footnotes on second following page)
22
27
At or for the Year Ended March 31, 1997
Based on the Sale of common stock for $10.00 Per Share
------------------------------------------------------
391,000 460,000 529,000 608,350
Shares Shares Shares Shares
Sold Sold Sold Sold (1)
--------- --------- -------- ---------
(Dollars in Thousands, Except Per Share Data)
Gross proceeds................................................ $ 3,910 $ 4,600 $ 5,290 $ 6,084
Less Offering expenses........................................ 500 510 521 534
--------- --------- --------- ---------
Estimated net proceeds...................................... $ 3,410 $ 4,090 $ 4,769 $ 5,550
========= ========= ========= =========
Net earnings:
Historical.................................................. $ 123 $ 123 $ 123 $ 123
Pro forma income on net proceeds (2)........................ 113 136 159 185
Pro forma ESOP adjustment (3)............................... (20) (24) (27) (31)
Pro forma stock award plan adjustment (4)................... (20) (24) (27) (31)
---------- --------- --------- ----------
Pro forma net earnings.................................... $ 196 $ 212 $ 228 $ 246
========= ========= ========= =========
Per share net earnings: (5) (6)
Historical.................................................. $ .15 $ .13 $ .11 $ .10
Pro forma income on net proceeds (2)........................ .14 .14 .14 .14
Pro forma ESOP adjustment (3)............................... (.02) (.02) (.02) (.02)
Pro forma stock award plan adjustment (4)................... (.02) (.02) (.02) (.02)
---------- --------- ---------- ---------
Pro forma net earnings per share (5) (7).................. $ .24 $ .22 $ .20 $ 0.19
========= ========= ========= =========
Stockholders' equity:
Historical (8).............................................. $ 6,773 $ 6,773 $ 6,773 $ 6,773
Estimated adjusted net proceeds (9)......................... 3,411 4,091 4,771 5,552
Common stock acquired by ESOP (3)........................... (313) (368) (423) (487)
Common stock acquired by stock award plan (4)............... (156) (184) (212) (243)
---------- ---------- ---------- ----------
Pro forma stockholders' equity.............................. $ 9,715 $ 10,312 $ 10.909 $ 11,595
========= ========= ========= =========
Stockholders' equity per share: (5) (8)
Historical.................................................. $ 7.97 $ 6.77 $ 5.89 $ 5.12
Estimated adjusted net proceeds (9)......................... 4.01 4.09 4.15 4.20
Common stock acquired by ESOP (3)........................... (.37) (.37) (.37) (.37)
Common stock acquired by stock award plan (4)............... (.18) (.18) (.18) (.18)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share (5) (7)............ $ 11.43 $ 10.31 $ 9.49 $ 8.77
========= ========= ========= =========
Offering price to pro forma stockholders' equity.............. 87.49% 96.97% 105.42% 114.06%
========= ========= ========= =========
Offering price to pro forma net earnings per share (5)........ 41.91x 45.62x 48.81x 51.97x
========= ========= ========= =========
Minority Ownership Interest (10).............................. 46.00% 46.00% 46.00% 46.00%
========= ========= ========= =========
(footnotes on following page)
23
28
(1) Assumes that at the conclusion of the Offering the Independent Valuation
increases by 15% to $13,225,000 and that the Association increases the
number of shares sold in the Offering to 608,350.
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock. Since funds on deposit at the
Association may be withdrawn to purchase shares of Common Stock (which will
reduce deposits by the amount of such purchases), the net amount of funds
available to the Association for investment following receipt of the net
proceeds of the Offering will be reduced by the amount of such withdrawals.
(3) Assumes that 8% of the shares of Common Stock sold in the Offering will be
purchased by the ESOP. The funds used to acquire such shares will be
borrowed by the ESOP from the Company. The Association intends to make
annual contributions to the ESOP in an amount at least equal to the
principal and interest requirements of the debt, which is expected to have a
maturity of 10 years. The pro forma net earnings assume that: (i) the
Association's total annual contribution is equivalent to the debt service
requirement for the six months ended September 30, 1997, and the year ended
March 31, 1997, and was made at the end of each period; (ii) the interest
rate applicable to the debt was 8.5% for each period; and (iii) the marginal
statutory tax rate applicable to the debt was 36% for each period. The
amount borrowed is reflected as a contra equity account and as a reduction
of stockholders' equity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of New Accounting
Standards." To the extent that insufficient shares are available in the
Offering to satisfy the purchases of the ESOP, the ESOP may, following the
Offering, purchase such number of shares in the open market.
(4) Subsequent to the completion of the Offering, and subject to the approval by
stockholders other than the Mutual Holding Company at the first annual
meeting of stockholders if established within the first year following
completion of the Reorganization, the Stock Award Plan intends to purchase
an aggregate number of shares of common stock equal to 4.0% of the shares to
be issued in the Offering. The shares may be acquired directly from the
Company from authorized but unissued shares, or through open market
purchases. The funds to be used by the Stock Award Plan to purchase the
shares will be provided by the Company or the Association. Assumes that the
Stock Award Plan acquires the shares from the Company at the Purchase Price
with funds contributed by the Company, and that 20% of the amount
contributed to the Stock Award Plan is amortized as an expense in the year
ended March 31, 1997 and 10% is amortized as an expense for the six months
ended September 30, 1997.
(5) Assumes 850,000 shares, 1,000,000 shares, 1,150,000 shares, and 1,322,500
shares are outstanding at the minimum, midpoint, maximum, and adjusted
maximum of the Valuation Range. Such number of shares includes shares sold
in the Offering, shares issued to the Mutual Holding Company in the
Reorganization, and shares assumed to be issued by the Company pursuant to
the Stock Award Plan (which will not be established within the first year
after the conclusion of the Offering unless approved by Minority
Stockholders) in an amount equal to 4% of the number of shares issued in
the Offering. No effect has been given to the issuance of additional shares
of Common Stock pursuant to the Company's stock option plans (which will
not be established within the first year after the conclusion of the
Offering unless approved by Minority Stockholders.
(6) Annualized where appropriate.
(7) If the Stock Award Plan purchases 18,400 shares of Common Stock in the open
market after the Offering (i.e., 4% of the number of shares issued at the
midpoint of the Offering Range) at an assumed fair market value of $10.00
per share, the pro forma stockholders' equity and earnings per share before
the cumulative effect of accounting change would be $9.49 and $.20,
respectively, at and for the six months ended September 30, 1997, and $9.78
and $.35, respectively, at and for the fiscal year ended March 31, 1997.
(8) Stockholders' equity represents the excess of the carrying value of the
assets of the Association over its liabilities. The amounts shown do not
reflect the federal income tax consequences of the potential restoration to
income of the bad debt reserves for income tax purposes, which would be
required in the event of liquidation. See Note 1 of Notes to the Financial
Statements.
(9) Includes assumed proceeds from sale to the Stock Award Plans for $10.00 per
share of a number of authorized but unissued shares equal to 4% of the
number of shares sold in the Offering. Purchases by the Stock Award Plans
will be made at the fair market value of such shares at the time of
purchase, which may be more or less than $10.00.
(10) "Minority Ownership Interest" represents the aggregate of the number of
shares of common stock sold in the Offering and intended to be awarded
pursuant to the Stock Award Plans, as a percentage of 391,000 shares,
460,000 shares, 529,000 shares, and 608,350 shares at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range.
24
29
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table compares the Association's historical and pro forma
regulatory capital levels as of September 30, 1997 to the OTS' capital
requirements after giving effect to the Offering.
PRO FORMA BASED UPON SALE OF
---------------------------------------------------
MINIMUM OF MIDPOINT OF
OFFERING OFFERING
RANGE OF RANGE OF
HISTORICAL AT 391,000 SHARES 460,000 SHARES
SEPTEMBER 30, 1997 AT $10.00 PER SHARE AT $10.00 PER SHARE
------------------------- ------------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ---------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
ATLANTIC LIBERTY
- ----------------
Capital under generally
accepted accounting
principles........................ $ 7,208 6.6% $ 8,600 7.8% $ 8,884 7.9%
========= =========
Tangible capital(2)................ $ 7,208 6.6% 8,600 7.8% 8,884 7.9%
Tangible capital requirement(3).... 1,645 1.5% 1,666 1.5% 1,670 1.5%
--------- --------- --------- --------- --------- --------
Excess........................... $ 5,563 5.1% $ 6,934 6.3% $ 7,214 6.4%
========= ========= ========= ========= ========= ========
Core capital(2).................... $ 7,208 6.6% 8,600 7.8% 8,884 7.9%
Core capital requirement(2) (4).... 3,289 3.0% 3,331 3.0% 3,340 3.0%
--------- --------- --------- --------- --------- --------
Excess........................... $ 3,919 3.6% $ 5,269 4.8% $ 5,544 4.9%
========= ========= ========= ========= ========= ========
Risk-based capital(2)(3)........... $ 7,822 15.7% 9,214 18.4% 9,498 18.9%
Risk-based capital
requirement....................... 3,977 8.0% 4,000 8.0% 4,004 8.0%
--------- --------- --------- --------- --------- --------
Excess........................... $ 3,845 7.7% $ 5,214 10.4% $ 5,494 10.9%
========= ========= ========= ========= ========= ========
PRO FORMA BASED UPON SALE OF
-----------------------------------------------------
MAXIMUM OF MAXIMUM, AS ADJUSTED,
OFFERING OF OFFERING
RANGE OF RANGE OF
529,000 SHARES 608,350 SHARES
AT $10.00 PER SHARE AT $10.00 PER SHARE(1)
---------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ---------
(DOLLARS
IN THOUSANDS)
ATLANTIC LIBERTY
- ----------------
Capital under generally
accepted accounting
principles........................ $ 9,169 8.2% $ 9,496 8.5%
Tangible capital(2)................ 9,169 8.2% 9,496 8.5%
Tangible capital requirement(3).... 1,674 1.5% 1,679 1.5%
--------- -------- --------- --------
Excess........................... $ 7,495 6.7% $ 7,817 7.0%
========= ======== ========= ========
Core capital(2).................... 9,169 8.2% 9,496 8.5%
Core capital requirement(2) (4).... 3,348 3.0% 3,358 3.0%
--------- -------- --------- --------
Excess........................... $ 5,821 5.2% $ 6,138 5.0%
========= ======== ========= ========
Risk-based capital(2)(3)........... 9,783 19.5% 10,110 20.1%
Risk-based capital
requirement....................... 4,009 8.0% 4,014 8.0%
--------- -------- --------- --------
Excess........................... $ 5,774 11.5% $ 6,096 12.1%
========= ======== ========= ========
- ----------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% to reflect
changes in market and financial conditions following commencement of the
Subscription Offering and the Community Offering, if any, as well as to
reflect demand for the Common Stock.
(2) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted assets.
(3) Pro forma risk-based capital amounts and percentages assume net proceeds
have been invested in 20% risk-weighted assets.
(4) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and soundness
and a core capital ratio of 4% to 5% for all other thrifts.
25
30
ATLANTIC LIBERTY SAVINGS, F.A.
STATEMENTS OF OPERATIONS
The following Statements of Operations of the Association for the
fiscal years ended March 31, 1997 and 1996 have been audited by Sol Masch &
Company, independent certified public accountants, whose report on the financial
statements appears elsewhere in this Prospectus. The Statements of Operations
for the six months ended September 30, 1997 and 1996 were not audited by
independent public accountants but in the opinion of management reflect all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of operations for those periods. Operating results
at and for the six months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for any other interim period or
for the fiscal year ending March 31, 1998. These Statements of Operations should
be read in conjunction with the Financial Statements of the Association and the
Notes thereto included elsewhere in the Prospectus.
(UNAUDITED)
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, MARCH 31,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Interest income:
Loans receivable
First mortgage loans.................................. $ 2,799,995 $ 2,319,224 $ 4,676,981 $ 4,628,730
Consumer and other loans.............................. 7,856 -- -- 50,660
Investment securities................................... 646,827 718,795 1,433,772 1,341,263
Mortgage-backed and related securities.................. 610,276 576,740 1,137,225 1,130,330
----------- ----------- ----------- -----------
Total interest income................................. 4,064,954 3,614,759 7,247,978 7,150,983
----------- ----------- ----------- -----------
Interest expense:
Deposits................................................ 2,300,345 2,185,940 4,356,710 4,143,186
Borrowed funds.......................................... 3,585 3,265 6,668 6,257
----------- ----------- ----------- -----------
Total interest expense................................ 2,303,930 2,189,205 4,363,378 4,149,443
----------- ----------- ----------- -----------
Net interest income................................... 1,761,024 1,425,554 2,884,600 3,001,540
Provision for loan losses.................................. 105,473 65,643 771,178 274,980
----------- ----------- ----------- -----------
Net interest income after provision for loan losses... 1,655,551 1,359,911 2,113,422 2,726,560
----------- ----------- ----------- -----------
Noninterest income:
Loan servicing fees..................................... 72 260 373 590
Income from real estate operations...................... 80,165 57,129 154,212 173,157
Gain (loss) on disposal of foreclosed real estate....... 28,838 123,089 148,394 (135,247)
Other................................................... 87,712 686,617 950,607 166,896
----------- ----------- ----------- -----------
Total noninterest income.............................. 196,787 867,095 1,253,586 205,396
----------- ----------- ----------- -----------
Noninterest expense:
General and administrative:
Compensation and benefits............................. 747,473 699,737 1,667,416 1,435,244
Occupancy and equipment............................... 135,627 130,724 276,019 266,342
SAIF deposit insurance premium........................ 31,318 703,515 762,696 208,903
Other................................................. 352,606 285,023 684,677 684,828
----------- ----------- ----------- -----------
Total noninterest expense........................... 1,267,024 1,818,999 3,390,808 2,595,317
----------- ----------- ----------- -----------
Income (loss) before income taxes..................... 585,314 408,007 (23,800) 336,639
Income tax (expense) benefit............................ (249,922) 239,584 147,325 (140,551)
----------- ----------- ----------- -----------
Net income............................................ $ 335,392 $ 647,591 $ 123,525 $ 196,088
=========== =========== =========== ===========
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31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Brooklyn Heights Bancorp will be formed as a federal corporation for
the purpose of issuing the Common Stock and owning all of the capital stock of
the Association issued in the Reorganization. Consequently, the Company has no
operating history. All information in this section should be read in conjunction
with the financial statements and notes thereto included in this Prospectus.
The Association's principal business has historically consisted of
offering savings and other deposits to the general public and using the funds
from such deposits to make loans secured by residential real estate. The primary
goals of management are to increase the Association's profitability, enhance its
banking franchise and monitor its capital position. The Association's results of
operations depend primarily upon its net interest income, which is the
difference between income earned on interest earning assets, such as loans and
investments, and the interest expense paid on deposits. The Association's
operations are affected to a much lesser degree by noninterest income, such as
loan origination and commitment fees, gain (loss) from the sale of foreclosed
real estate and other sources of income. The Association's net income is also
affected by, among other things, provisions for loan losses and noninterest
expenses. The Association's principal operating expenses, aside from interest
expense, consist of compensation and benefits, occupancy and equipment, SAIF
deposit insurance premiums and other expenses. The Association's results of
operations also are affected significantly by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation and policies affecting fiscal affairs, housing and financial
institutions, monetary policies of the Federal Reserve System, and the actions
of bank regulatory authorities.
Like many financial institutions, the Association relies upon computers
for the daily conduct of its business and for data processing generally. There
is concern that on January 1, 2000 computers will be unable to "read" the new
year and as a consequence, there may be widespread computer malfunctions.
Management has reviewed this issue and has been advised by the Association's
data processing service center that they have addressed this issue and that it
should not affect the Association's external data processing. In addition,
management has concluded that no computer malfunctions are expected to occur
with the Association's computer systems on January 1, 2000. To the best of
management's knowledge, no significant additional costs will be incurred in
connection with the year 2000 issue.
OPERATING STRATEGY
In guiding the Association's operations, management has implemented
various strategies designed to continue the institution's profitability
consistent with safety and soundness. These strategies include: (i) emphasizing
one-to-four family residential real estate lending; (ii) monitoring and
improving asset quality; (iii) managing interest-rate risk and (iv) controlling
operating expenses. It is anticipated, subject to market conditions, that the
strategies presently in place will be continued following completion of the
Reorganization.
EMPHASIS ON RESIDENTIAL REAL ESTATE LENDING. Historically, the
Association has emphasized one-to-four family residential lending within the
Borough of Brooklyn. As of September 30, 1997, approximately 61.2% of the loan
portfolio consisted of one-to-four family residential real estate loans. As of
such date, 19.8% of the loan portfolio consisted of multi-family real estate
loans, and 18.1% of the loan portfolio consisted of commercial real estate
loans. During the six months ended September 30, 1997 and the year ended March
31, 1997, the Association originated $5.3 million and $12.7 million,
respectively, of loans secured by real estate. The Association uses various
methods to increase loan originations, including advertising and establishing
relationships with realtors, homebuilders and customers.
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32
MONITORING ASSET QUALITY. At September 30, 1997, the Association's
ratio of nonperforming loans to total assets was 1.60%. At March 31, 1997 and
1996, the Association's ratio of nonperforming loans to total assets was 1.89%
and 2.92%, respectively. The Association has reduced its level of nonperforming
loans by emphasizing sound underwriting and collection procedures, and by
selling nonperforming and foreclosed assets.
MANAGING INTEREST-RATE RISK. Interest rate "gap" analysis is a common,
though imperfect, measure of interest rate risk, which measures the relative
dollar amounts of interest-earning assets and interest-bearing liabilities that
reprice within a specific time period, either through maturity or interest rate
adjustment. The "gap" is the difference, expressed as a percentage of total
interest earning assets, between the amounts of such assets and liabilities that
are subject to repricing. At September 30, 1997, the Association had a negative
one year "gap" of 13.79%. A negative "gap" for a given period means that the
amount of interest-bearing liabilities maturing or otherwise repricing within
that period exceeds the amount of interest-earning assets maturing or otherwise
repricing within the same period. Consequently, the Association's net interest
income likely would be impacted negatively by an increase in market interest
rates. See "--Interest Rate Risk."
CONTROL OF GENERAL AND ADMINISTRATIVE EXPENSES. The Association closely
monitors its general and administrative expenses and seeks to control such
expenses while maintaining the necessary personnel to properly serve its
customers. For the six months ended September 30, 1997 and the years ended March
31, 1997 and 1996, the Association's ratio of operating expenses (exclusive of
the SAIF special assessment), as a percentage of average assets, was 2.28%,
3.10% and 2.66%, respectively.
INTEREST RATE RISK
The Association's interest rate risk management program focuses
primarily on evaluating and managing the composition of the Association's assets
and liabilities in the context of various interest rate scenarios. Factors
beyond management's control, such as market interest rates and competition, also
have an impact on interest income and interest expense.
In the absence of other factors, the yield or return on the
Association's interest-earning assets generally will increase from existing
levels when interest rates rise over an extended period of time, and conversely
interest income will decrease when interest rates decrease. In general, interest
expense will increase when interest rates rise over an extended period of time,
and conversely interest expense will decrease when interest rates decrease. The
cost of funds for an institution with a negative "gap" would generally be
expected to increase more quickly than the yield on its interest-earnings assets
in a rising interest rate environment, and such institution's net interest
income generally would be expected to be adversely affected by rising interest
rates. Changes in market interest rates generally would have the opposite effect
on an institution with a positive "gap."
The Association's one-year interest sensitivity "gap" as a percentage
of total interest-earning assets at September 30, 1997 was a negative 13.79%
using various assumptions described below. The Association's interest rate
sensitivity is moderated by the relatively short terms offered on its mortgage
loans, as well as its investment in ARM loan mutual funds. The Association
generally does not originate fixed rate residential mortgage loans for terms
that exceed 15 years. Multi-family and commercial real estate loans are
originated for terms of up to 10 years. In addition, at September 30, 1997,
$13.6 million, or 13.6% of total deposits consisted of medium- and longer-term
certificates of deposits which have been opened with the Association at the
direction of the local county and surrogate courts for the benefit of minor
children or persons judged to be incompetent. In most cases such funds must be
maintained at the Association until the beneficiary becomes 18 or is deemed
competent by a court, as the case may be.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1997 which are
projected to reprice or mature in each of the future time periods specified.
Adjustable rate loans are assumed to reprice at a rate of 32.5% per year. Fixed
rate loans are assumed to mature at
28
33
a rate of 12.8% per year, non-residential fixed rate mortgage loans are assumed
to mature at a rate of 11.1% per year, and non-residential adjustable rate loans
are assumed to mature at a rate of 16.3% per year. Investments and adjustable
rate mortgage-backed securities are assumed to reprice at an annual rate of
25.5% and 29.4%, respectively. Passbook accounts and money market deposit
accounts are assumed to decay at a rate of 33% annually. The excess (deficiency)
of interest-earning assets over interest-bearing liabilities which are expected
to mature or reprice during a given period is referred to as the "gap"
associated with that period. In making the gap computations, none of the
assumptions made regarding prepayment rates and deposit decay rates have been
used for any other interest-earning assets or interest-bearing liabilities. In
addition, the table reflects expected principal payments assuming that interest
rates do not change the scheduled terms of the loans. The interest rate
sensitivity of the Association's assets and liabilities illustrated in the
following table would vary substantially if different assumptions were used or
if actual experience differs from that indicated by such assumptions.
TERMS TO REPRICING AT SEPTEMBER 30, 1997
---------------------------------------------------
MORE THAN
1 YEAR 1 YEAR TO MORE THAN
OR LESS 5 YEARS 5 YEARS TOTAL
-------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Loans:
Adjustable rate .......................... $ 22,457 $ 10,231 -- $ 32,688
Fixed rate ............................... 3,645 10,102 $ 8,918 22,665
Non-residential mortgage (adjustable rate) 5,959 6,921 -- 12,880
Non-residential mortgage (fixed rate) .... 1,912 7,621 1,424 10,957
Investments:
Investment securities .................... 583 12,567 -- 13,150
Mortgage securities ...................... 4,622 55 635 5,312
-------- -------- -------- --------
Total rate sensitive assets ............ $ 39,178 $ 47,497 $ 10,977 $ 97,652
======== ======== ======== ========
Liabilities:
Money market deposits .................... $ 2,227 $ 3,611 $ 911 $ 6,749
Certificates of deposit .................. 41,145 19,429 12 60,586
Passbook accounts ........................ 7,114 11,534 2,911 21,559
NOW accounts ............................. 1,414 2,291 579 4,284
Other savings ............................ 2,429 3,938 994 7,361
-------- -------- -------- --------
Total rate sensitive liabilities ....... $ 54,329 $ 40,803 $ 5,407 $100,539
======== ======== ======== ========
Periodic/Cumulative Gap ..................... (15,151) 6,694 5,570
Gap as a percentage of total assets ...... (13.79)% 6.09% 5.07%
NET PORTFOLIO VALUE. Management monitors the Association's interest
rate sensitivity through the use of a model which estimates the change in net
portfolio value ("NPV") in response to a range of assumed changes in market
interest rates. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet items. The model estimates the effect on the
Association's NPV of instantaneous and permanent 100 to 400 basis point
increases and decreases in market interest rates with no effect given to any
steps that management might take to counter the effect of interest rate
movements.
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34
The table below sets forth as of June 30, 1997, the latest date for
which such information is available, the estimated changes in (i) the
Association's NPV, and (ii) the Association's net interest income that would
result from the designated instantaneous changes in the U.S. Treasury yield
curve, as calculated by the Risk Management Division of the OTS.
Net Portfolio Value
-------------------------------------------------
Changes in
Interest Rates Estimated Amount of NPV as % of
(basis points) $NPV $ Change(1) Percent Change Portfolio Value of Assets
-------------- --------- ----------- -------------- ----------------------------
(Dollars in Thousands) NPV Ratio(2) Change(3)
------------ ---------
+400 4,154 -4,805 -54% 4.04% -416 bp
+300 5,483 -3,476 -39% 5.24% -296 bp
+200 6,769 -2,190 -24% 6.37% -183 bp
+100 7,928 -1,031 -12% 7.35% -85 bp
0 8,959 8.20%
-100 9,418 459 +5% 8.55% +35 bp
-200 9,465 506 +6% 8.53% +34 bp
-300 9,963 1,004 +11% 8.89% +69 bp
-400 10,870 1,911 +21% 9.57% +137 bp
- --------------------
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in interest
rates.
(2) Calculated as the estimated NPV divided by the portfolio value of total
assets ("PV").
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions including relative levels of market
interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results. Further, the computations do not reflect
any actions management may undertake in response to changes in interest rates.
The tables set forth above indicate that, in the event of a 200 basis
point decrease in interest rates, the Association would be expected to
experience a 6% increase in NPV. In the event of a 200 basis point increase in
interest rates, the Association would be expected to experience a 24% decrease
in NPV.
Certain shortcomings are inherent in the method of analysis presented
in the NPV computations and in the "gap" computations presented in the tables
above. Although certain assets and liabilities may have similar maturities or
periods within which they will reprice, they may react differently to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, adjustable-rate mortgages have interest rate caps which restrict
changes in interest rates on a short-term basis and over the life of the assets.
The proportion of adjustable-rate loans could be reduced in future periods if
market interest rates decline and remain at lower levels for a sustained period
due to increased refinancing activity. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the tables. Finally, the ability of many
borrowers to service their adjustable-rate debt may decrease in the event of a
sustained increase in market interest rates. However, management does not view
the Association's interest rate sensitivity position at September 30, 1997 to be
unacceptable in view of current and foreseeable interest rate trends.
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35
AVERAGE BALANCE SHEET
The following tables sets forth information relating to average
balances of the Association's assets and liabilities for the six months ended
September 30, 1997 and 1996 and the years ended March 31, 1997 and 1996. For the
periods indicated, the table reflects the average yield on interest-earning
assets and the average cost of interest-bearing liabilities (derived by dividing
income or expense by the monthly average balance of interest-earning assets or
interest-bearing liabilities, respectively) as well as the net yield on
interest-earning assets. Nonaccruing loans were included in the computation of
average balances.
FOR THE SIX MONTHS ENDED SEPTEMBER 30, (4)
-------------------------------------------------------------------
AT SEPTEMBER 30, 1997 1997 1996
--------------------- --------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------- ---------- ------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans.......................... $ 65,486 8.58% $ 62,238 $ 2,808 9.02% $ 54,366 $ 2,319 8.53%
Mortgage-backed securities..... 19,017 6.42% 19,472 610 6.27% 18,623 577 6.19%
Investment securities.......... 13,150 7.09% 15,317 466 6.09% 17,943 482 5.37%
Interest bearing cash balances. 6,413 5.63% 6,617 181 5.46% 8,270 237 5.74%
-------- -------- ------- -------- -------
Total interest-earning assets 104,066 7.79% 103,644 4,065 7.84% 99,202 3,615 7.29%
------- -------
Other assets................... 5,811 4,700 5,276
-------- -------- --------
Total assets................. $109,877 $108,344 $104,478
======== ======== ========
Interest bearing liabilities:
Deposits...................... $100,539 4.58% $ 99,074 2,300 4.65% $ 95,729 2,186 4.57%
Advance payments by
borrowers(1)................. 763 0.94% 767 4 0.94% 726 3 0.90%
-------- -------- ------- -------- -------
Total interest-bearing
liabilities................. 101,302 4.55% 99,841 2,304 4.63% 96,455 2,189 4.54%
------- -------
Other liabilities.............. 1,367 1,155 999
Retained earnings............. 7,208 7,348 7,024
-------- -------- --------
Total liabilities and
retained earnings........... $109,877 $108,344 $104,478
======== ======== ========
Net interest income and
interest rate spread(2)....... 3.24% $ 1,761 3.21% $ 1,426 2.75%
======= ======= ====== ======= =======
Net yield on average
interest-earning assets(3).... 3.36% 3.40% 2.87%
Ratio of interest-earning
assets to interest-bearing
liabilities................... 102.73% 103.81% 102.85%
======= ====== =======
- -----------------
(1) Advance payments by borrowers balances includes noninterest bearing and
interest-bearing escrow deposits.
(2) Net interest rate spread represents the difference between the average yield
on interest earning assets and the average cost of interest bearing
liabilities.
(3) Net yield on interest earnings assets represents net interest income as a
percentage of average interest earnings assets.
(4) Annualized where appropriate.
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36
FOR THE YEARS ENDED MARCH 31,
-------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans ................................................ $ 56,004 $ 4,677 8.35% $ 53,821 $ 4,679 8.69%
Mortgaged-backed securities .......................... 18,537 1,137 6.10% 17,905 1,131 6.31%
Investment securities ................................ 17,774 1,004 5.65% 14,795 792 5.35%
Interest bearing cash balances ....................... 8,224 430 5.23% 10,351 549 5.31%
-------- -------- -------- --------
Total interest-earning assets ...................... 100,539 7,248 7.21% 96,872 7,151 7.39%
-------- --------
Other assets ......................................... 4,894 4,423
-------- --------
Total assets ....................................... $105,433 $101,295
======== ========
Interest bearing liabilities:
Deposits ............................................ $96,250 4,356 4.53% $ 93,201 4,143 4.45%
Advance payments by borrowers(1) .................... 790 7 0.84% 616 6 1.02%
-------- -------- -------- --------
Total interest-bearing liabilities ................. 97,040 4,363 4.50% 93,817 4,149 4.42%
-------- --------
Other liabilities .................................... 1,562 705
Retained earnings .................................... 6,831 6,773
-------- --------
Total liabilities and retained earnings ............ $105,433 $101,295
======== ========
Net interest income and interest rate spread(2) ...... $ 2,885 2.71% $ 3,002 2.97%
======== ======= ======== =======
Net yield on average interest-earning assets(3) ...... 2.81% 3.10%
Ratio of interest-earning assets to interest-bearing
liabilities ......................................... 103.61% 103.26%
======= =======
- ---------------
(1) Advance payments by borrowers balances includes noninterest bearing and
interest-bearing escrow deposits.
(2) Net interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest earnings assets represents net interest income as a
percentage of average interest earnings assets.
RATE/VOLUME ANALYSIS
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) the net or total change (the sum of the
previous columns). The change attributable to both rate and volume (changes in
rate multiplied by changes in volume) has been allocated equally to both the
changes attributable to volume and the changes attributable to rate.
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37
SIX MONTHS ENDED
SEPTEMBER 30, 1997 VS. 1996 YEAR ENDED MARCH 31, 1997 VS. 1996
----------------------------------- ----------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------- ----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- -------- --------- -------- -------- --------
(IN THOUSANDS)
Interest Income:
Investments....................... $ (171) $ 99 $ (72) $ 92 $ 1 $ 93
Mortgage Securities............... 27 6 33 (12) 19 7
Loans............................. 319 170 489 473 (471) 2
-------- -------- -------- ------- ------- ------
Total interest income.......... 175 275 450 553 (451) 102
-------- -------- -------- ------- ------- ------
Interest expense:
Deposits.......................... 104 10 114 145 68 213
Borrowings........................ -- 1 1 1 -- 1
-------- -------- -------- ------- ------- ------
Total interest expense......... 104 11 115 146 68 214
-------- -------- -------- ------- ------- ------
Net interest income................... $ 71 $ 265 $ 336 $ 407 $ (519) $ (112)
======== ======== ======== ======= ======= ======
COMPARISON OF FINANCIAL CONDITION
At September 30, 1997, the Association's assets totaled $109.9 million
as compared to $109.8 million at March 31, 1997, an increase of $93,000 or .09%.
Loans receivable, net, increased by $5.4 million, while investment and mortgage
backed securities decreased by $4.1 million and $13,000, respectively. Deposits
decreased to $100.5 million at September 30, 1997 from $100.8 million at March
31, 1997. Total retained earnings increased $335,000 to $7.2 million at
September 30, 1997 from $6.9 million at March 31, 1997, as a result of net
income for the six months ended September 30, 1997. At September 30, 1997, the
Association continued to exceed all applicable regulatory capital requirements
with tangible, core and risk based capital ratios to total assets of 6.6%, 6.6%
and 15.7%, respectively.
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. The Association had net income of $335,000 and $648,000 for
the six months ended September 30, 1997 and 1996, respectively. The decrease in
net income was primarily attributable to a $670,000 decrease in noninterest
income and an income tax expense of $250,000 for the six months ended September
30, 1997, as compared to an income tax benefit of $240,000 for the comparable
period in 1996, which were partially offset by a $335,000 increase in net
interest income and a $552,000 decrease in noninterest expense.
Net income totalled $124,000 and $196,000 for the years ended March 31,
1997 and 1996, respectively. The decrease in net income was attributable to an
increase of noninterest expense to $3.4 million from $2.6 million which was
primarily attributable to a special SAIF premium paid in September 1996 of
$596,000 before taxes. In addition, net interest income decreased to $2.9
million from $3.0 million and the provision for loan losses increased to
$771,000 from $275,000. The increase in the provision for loan losses reflected
updated financial information regarding six pools of loans in which the
Association is a participant as well as management's assessment of the need to
increase the provision for loan losses on a commercial loan that was
subsequently sold. Noninterest income increased to $1.3 million from $205,000.
The increase in noninterest income was mainly the result of the Association
recognizing a one time benefit of $791,000 from the proceeds of a life insurance
policy and the proceeds received in settlement of a lawsuit, as well as an
income tax benefit of $147,000 for the year ended March 31, 1997 resulting from
the special SAIF assessment.
INTEREST INCOME. Interest income increased $450,000 or 11.1%, to $4.1
million from $3.6 million for the six months ended September 30, 1997 and 1996,
respectively. The average yield on interest earning assets increased to 7.84%
from 7.29%. This was partially attributable to a one-time recapture of interest
due on a nonperforming
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38
loan. In addition, the average balance of interest earning assets increased to
$103.6 million for the six months ended September 30, 1997 from $99.2 million
for the six months ended September 30, 1996.
Interest income on loans receivable increased by $489,000, or 21.1%, to
$2.8 million for the six months ended September 30, 1997 from $2.3 million for
the six months ended September 30, 1996. The increase in interest income on
loans receivable was attributable to an increase in the average balance of loans
receivable to $62.2 million from $54.3 million, as well as an increase in the
average yield on loans receivable to 9.02% from 8.53%. The increase in the yield
on loans receivable was attributable in large part to the payment of interest
due on a nonperforming loan. Interest income on mortgage-backed securities
increased $34,000, or 5.9%, to $610,000 from $576,000. The increase in interest
income on mortgage-backed securities was attributable to an increase in the
average balance of mortgage-backed securities to $19.5 million from $18.6
million, as well as an increase in the average yield on mortgage-backed
securities to 6.27% from 6.19%. Interest income on interest bearing cash
balances decreased $56,000, or 23.6%, to $181,000 for the six months ended
September 30, 1997 from $237,000 for the six months ended September 30, 1996.
The decrease in interest income from interest bearing cash balances was
attributable to a decrease in the average balance of interest bearing cash
balances to $6.6 million from $8.3 million, as well as a decrease in the average
yield to 5.46% from 5.74%. Interest income from investment securities decreased
to $466,000 from $482,000. The decrease in interest income from investment
securities was attributable to a decrease in the average balance of investment
securities to $15.3 million from $17.9 million, which was partially offset by an
increase in the average yield to 6.09% from 5.37%.
Interest income increased $97,000, or 1.4%, to $7.2 million for the
year ended March 31, 1997 from $7.1 million for the year ended March 31, 1996.
The increase in interest income was attributable to an increase in the average
balance of interest earning assets to $100.5 million from $96.9 million,
partially offset by a decrease in the average yield on interest earning assets
to 7.21% from 7.39%. The increase in the average balance of interest earning
assets resulted from the increases in the average balance of investments,
mortgage-backed securities and loans. The decrease in the average yield
reflected an increase in nonperforming assets during fiscal 1997, one of which
was a loan that was subsequently sold, and the other was an investment security
pool of loans on which the Association is now receiving monthly interest
payments.
Interest income on loans receivable decreased $2,000 for the year ended
March 31, 1997 compared to the year ended March 31, 1996. The slight decrease
was attributable to a decrease in the average yield to 8.35% from 8.69%,
partially offset by a $2.2 million increase in the average balance of loans
receivable to $56.0 million from $53.8 million. Interest income on
mortgage-backed securities remained the same at $1.1 million for each of the
years ended March 31, 1997 and 1996. Interest income on interest-bearing cash
balances decreased by $119,000, or 21.7%, to $430,000 from $549,000. The
decrease in interest income on interest bearing cash balances was attributable
to a decrease in the average balance to $8.2 million from $10.4 million as a
result of investing cash from federal funds to real estate mortgages. Interest
income from investment securities increased $212,000 due to increased yields on
the reinvestment of maturing securities and an increase in the average balance
of investment securities by $3.0 million, or 20.1%.
INTEREST EXPENSE. Interest expense increased by $115,000, or 5.3%, to
$2.3 million for the six months ended September 30, 1997. The increase in
interest expense resulted primarily from an increase in the average balance of
interest bearing liabilities to $99.8 million for the six months ended September
30, 1997 from $96.5 million for the six months ended September 30, 1996. The
average cost of interest bearing liabilities increased slightly to 4.63% from
4.54%. The increase in the average balance of interest bearing liabilities was
attributable almost entirely to an increase in the balance of deposits.
Total interest expense increased $214,000 or 5.2% to $4.4 million for
the year ended March 31, 1997 from $4.1 million for the year ended March 31,
1996. The increase in interest expense for the year ended March 31, 1997 was
attributable to an increase in the average balance of deposits to $96.3 million
from $93.2 million, as well as an increase in the average cost of such deposits
to 4.53% from 4.45%.
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39
NET INTEREST INCOME. For the six months ended September 30, 1997 and
1996 net interest income before the provision for loan losses was $1.8 million
and $1.4 million, respectively. The ratio of interest earning assets to interest
bearing liabilities increased to 103.85% from 102.85%. The Association's net
interest rate spread increased to 3.21% from 2.75%.
For the years ended March 31, 1997 and 1996, net interest income before
the provision for loan losses was $2.9 million and $3.0 million respectively.
The ratio of interest earning assets to interest bearing liabilities increased
to 103.61% from 103.26%. The net interest rate spread decreased to 2.69% from
2.92%.
PROVISION FOR LOAN LOSSES. For the six months ended September 30, 1997
and 1996, the Association added $105,000 and $65,000 to its allowance for loan
losses. For the years ended March 31, 1997 and 1996, the Association's provision
for loan losses was $771,000 and $275,000 respectively. The increase in the
allowance for the year ended March 31, 1997 was based on management's decision
to increase the provision to reflect the risks inherent in the Association's
participation in six pools of loans, a commercial real estate loan upon which
the Association commenced foreclosure proceedings and a loan on a commercial
condominium unit that was subsequently sold. Management regularly reviews its
loan portfolio to determine whether any loans require classification or the
establishment of reserves. At September 30, 1997 the Association had loans with
aggregate principal balances of $610,000 which were 60 to 89 days delinquent,
and total nonperforming loans including loans greater than 90 days delinquent of
$1.8 million which represented 1.60% of total assets.
NONINTEREST INCOME. Noninterest income for the six months ended
September 30, 1997 and 1996 was $197,000 and $867,000. The decrease in
noninterest income was primarily attributable to nonrecurring income during the
six months ended September 30, 1996 consisting of insurance proceeds of
$556,000, and the settlement of a lawsuit totaling $195,000. These decreases
were partially offset by an increase in income from real estate operations to
$80,000 from $57,000.
Noninterest income for the years ended March 31, 1997 and 1996 totaled
$1.3 million and $205,000, respectively. The $1.0 million, or 430%, increase in
noninterest income was primarily attributable to nonrecurring income consisting
of insurance proceeds of $556,000 and the settlement of a lawsuit totaling
$195,000. In addition, gain on disposal of foreclosed real estate was $148,000
compared to a loss on the sale of foreclosed real estate of $135,000 in 1996.
Income from real estate operations decreased $19,000, or 11%, to $154,000 from
$172,000.
NONINTEREST EXPENSE. Noninterest expense for the six months ended
September 30, 1997 and 1996 was $1.3 million and $1.8 million, respectively.
Noninterest expense consists of compensation and benefits which increased
slightly to $747,000 from $700,000, deposit insurance premiums which decreased
$673,000, or 95.6%, to $31,000 from $704,000, and other noninterest expense
(consisting of postage, professional fees, audits and examinations, data
processing, office supplies and insurance and surety bond premiums) which
increased $67,000, or 23.5%, to $353,000 from $285,000. The increase in other
noninterest expense was primarily attributable to the Association increasing its
advertising expense by $60,000.
Noninterest expense for the years ended March 31, 1997 and 1996 was
$3.4 million and $2.6 million respectively, an increase of $800,000, or 30.7%.
The increase in noninterest expense in fiscal 1997 as compared to fiscal 1996
was primarily due to an increase in deposit insurance premiums to $763,000 from
$209,000. The increased deposit premiums include the special one-time SAIF
assessment of $594,000. In addition, compensation and benefits expense increased
$232,000, or 16.2%, due to a restating of the directors deferred compensation
plan. There was also a $10,000, or 3.6%, increase in occupancy and equipment
expense.
INCOME TAXES. The provision for federal income taxes was $250,000 for
the six months ended September 30, 1997 compared to a federal income tax benefit
of $240,000 for the six months ended September 30, 1996. The federal income tax
benefit for the six months ended September 30, 1996 was attributable to the tax
benefit resulting from the special SAIF assessment. The Association had an
income tax benefit of $147,000 and income tax expense
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of $140,000 for the years ended March 31, 1997 and 1996, respectively. The
income tax benefit was attributable to the effect of the payment of the special
SAIF assessment in 1996.
CAPITAL RESOURCES AND LIQUIDITY
The objective of the Association's liquidity management is to ensure
the availability of sufficient cash flows to meet all financial commitments and
to capitalize on opportunities for expansion. Liquidity management addresses the
Association's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Association's primary sources of internally generated funds are
principal and interest payments on loans receivable, cash flows generated from
operations, and cash flows generated by investments. External sources of funds
include increases in deposits and advances from the FHLB of New York.
The Association is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five years
of less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
At September 30, 1997, the Association's liquidity, as measured for regulatory
purposes, was 28%, or $25 million in excess of the minimum OTS requirement.
At September 30, 1997, the Association had outstanding $4.4 million in
commitments to originate mortgage loans. If the Association requires funds
beyond its internal funding capabilities, advances from the FHLB of New York are
available. At September 30, 1997, approximately $41 million in certificates of
deposit were scheduled to mature within a year.
Following the Reorganization, the Company will initially conduct no
business other than holding the capital stock of the Association and the loan it
will make to the ESOP. The Company expects to retain up to 50% of the net
proceeds of the Offering. See "Use of Proceeds." In the future, the Company's
primary source of funds, other than income from its investments and principal
and interest payments received on the ESOP loan, is expected to be capital
distributions from the Stock Association. As a stock savings association, the
Stock Association may not declare or pay a cash dividend on or repurchase any of
its capital stock if the effect of such transaction would be to reduce its net
worth to an amount which is less than the minimum amount required by applicable
federal regulations. At September 30, 1997, the Association was in compliance
with all applicable capital requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and related Notes have been prepared in
accordance with generally accepted accounting principles, which generally
requires the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Association's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Association are
financial. As a result, the Association's net income is directly impacted by
changes in interest rates, which are indirectly influenced by inflationary
expectations. The Association's ability to match the interest sensitivity of its
financial assets to the interest sensitivity of its financial liabilities as
part of its interest rate risk management program, may reduce the effect of
changes in interest rates on the Association's net income. Changes in interest
rates do not necessarily move to the same extent as changes in the price of
goods and services. In the current interest rate environment, liquidity and the
maturity structure of the Association's assets and liabilities are critical to
the maintenance of acceptable levels of net income.
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IMPACT OF NEW ACCOUNTING STANDARDS
FASB STATEMENT ON EARNINGS PER SHARE. In March 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128. The Statement establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. This Statement simplifies the standards
for computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share" ("EPS"), and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
the presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures, and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This Statement
supersedes Opinion 15 and AICPA Accounting Interpretation 1.102 of Opinion 15.
This Statement will be effective for the Association's fiscal year ending March
31, 1998. Management does not believe the impact of adopting SFAS No. 128 will
be material to the Association's financial statements.
FASB STATEMENT ON ACCOUNTING FOR STOCK-BASED COMPENSATION. In November
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB has encouraged all entities to adopt the fair
value based method; however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by APB Opinion No. 25. Under the
intrinsic value based method, compensation cost is the excess of the market
price of the stock at the grant date over the amount an employee must pay to
acquire the stock. However, most stock option plans have no intrinsic value at
the grant date and, as such, no compensation cost is recognized under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma disclosures as if the fair value
based method had been applied. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years beginning after December
15, 1995. Pro forma disclosures must include the effects of all awards granted
in fiscal years beginning after December 15, 1994. The Association expects to
use the "intrinsic value based method" as prescribed by APB Opinion No. 25.
Accordingly, management does not believe the impact of adopting SFAS No. 123
will be material to the Association's financial statements.
FASB STATEMENT ON TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. In June 1996, the FASB issued SFAS No. 125. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer control and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with
pledge of collateral. This Statement is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. The effective date for certain
provisions of this Statement have been postponed for one year. Management
anticipates that the adoption of the Statement should have no material impact on
its financial statements.
FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the
FASB issued SFAS No. 130. This Statement establishes standards of reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. This Statement will be effective for the
Association's fiscal year ending March 31, 1999, and the Association does not
intend to early adopt. Had the Association early-adopted this
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Statement, it would have reported comprehensive income in the same amounts as
reported net income for the years ended March 31, 1997 and 1996, respectively.
BUSINESS OF ATLANTIC LIBERTY SAVINGS, F.A.
GENERAL
The Association was organized in 1888 and became a state-chartered
savings and loan association in 1935 and a federal association in 1983. Since
then, the Association has conducted its business from its main office and branch
office, both of which are located in Brooklyn, New York. The Association is
primarily engaged in the business of offering savings and other deposits to the
general public, and using the funds from such deposits to make one-to-four
family mortgage loans secured by properties in Brooklyn, New York. The
Association also makes multi-family residential real estate loans and commercial
real estate loans primarily in Brooklyn, New York. The Association's deposit
accounts are insured up to applicable limits by the FDIC.
LENDING ACTIVITIES
Historically, the Association's principal lending activity has been the
origination of first mortgage loans for the purchase or refinancing of
one-to-four family residential real property. Generally, the Association retains
all loans that it originates. One-to-four family residential real estate
mortgage loans represented $40.0 million, or 61.18%, of the Association's loan
portfolio at September 30, 1997. The Association also offers multi-family and
commercial real estate loans. Multi-family real estate loans totaled $13.0
million, or 19.8%, of the loan portfolio at September 30, 1997. Commercial real
estate totaled approximately $11.9 million, or 18.1% of the loan portfolio at
September 30, 1997. Subsequent to September 30, 1997, the Association began
offering home equity loans to existing customers.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Association's loan portfolio by type of loan type and
security as of the dates indicated, including a reconciliation of gross loans
receivable after consideration of the allowance for loan losses and loans in
process.
AT SEPTEMBER 30, AT MARCH 31,
--------------------- -----------------------------------------------
1997 1997 1996
--------------------- --------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Real estate loans:
- ------------------
One-to-four family................. $40,064 61.18% $36,862 61.38% $30,605 56.15%
Multi-family....................... 12,974 19.81 10,555 17.57 11,166 20.49
Commercial......................... 11,861 18.11 11,917 19.84 12,784 23.45
------- ------- ------- ------ ------- ------
Total real estate loans.......... 64,899 99.10 59,334 98.79 54,555 100.09%
Other loans:
- ------------
Deposit accounts................... 1,828 2.79 1,830 3.05 816 1.50
Less:
- -----
Deferred fees and discounts........ (158) (0.24) (127) (0.21) (121) (0.22)
Allowance for losses............... (1,083) (1.65) (978) (1.63) (745) (1.37)
------- ------- ------- ------ ------- ------
Total loans receivable, net...... $65,486 100.00% $60,059 100.00% $54,505 100.00%
======= ======= ======= ====== ======= ======
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The following table shows the composition of the Association's loan
portfolio by fixed and adjustable rates at the dates indicated.
AT SEPTEMBER 30, AT MARCH 31,
------------------------ ---------------------------------------------------
1997 1997 1996
------------------------ ------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Fixed-Rate Loans:
- -----------------
Real estate:
One-to-four family ................ $ 21,932 33.49% $ 18,270 30.42% $ 12,750 23.39%
Multi-family ...................... 6,487 9.91 7,230 12.04 7,792 14.30
Commercial ........................ 5,682 8.68 5,697 9.49 7,815 14.34
-------- ------ -------- ------ -------- ------
Total real estate loans ....... 34,101 52.08 31,197 51.95 28,357 52.03
-------- ------ -------- ------ -------- ------
Adjustable Rate Loans:
- ----------------------
Real estate:
One-to-four family ................ 18,132 27.69 18,592 30.95 17,855 32.76
Multi-family ...................... 6,487 9.91 3,325 5.53 3,374 6.19
Commercial ........................ 6,179 9.43 6,220 10.36 4,969 9.11
-------- ------ -------- ------ -------- ------
Total real estate loans ....... 30,798 47.03 28,137 46.84 26,198 48.06
-------- ------ -------- ------ -------- ------
Deposit accounts .................... 1,828 2.79 1,830 3.05 816 1.50
-------- ------ -------- ------ -------- ------
Total loans ....................... 66,727 101.90 61,164 101.84 55,371 101.59
Less:
- -----
Deferred fees and discounts ......... (158) (0.25) (127) (0.21) (121) (0.22)
Allowance for loan losses ........... (1,083) (1.65) (978) (1.63) (745) (1.37)
-------- ------ -------- ------ -------- ------
Total loans receivable, net ....... $ 65,486 100.00% $ 60,059 100.00% $ 54,505 100.00%
======== ====== ======== ====== ======== ======
LOAN MATURITY AND REPRICING SCHEDULE. The following table illustrates
the interest rate sensitivity and contractual amortization of the Association's
mortgage loan portfolio at September 30, 1997. Mortgage loans with adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
MULTI-FAMILY AND
ONE-TO-FOUR FAMILY COMMERCIAL TOTAL
--------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
Due during the twelve months
- ----------------------------
ending September 30,
- --------------------
1998 (1)....................................... $ 299 9.82% $ 2,870 9.42% $ 3,169 9.46%
1999........................................... 13 7.78 304 9.67 317 9.61
2000........................................... 1,317 7.86 203 10.00 1,520 8.26
2001 and 2002.................................. 676 8.96 993 9.50 1,669 9.28
2003 to 2007................................... 2,302 8.51 5,112 9.09 7,414 8.92
2008 to 2022................................... 32,952 7.73 15,353 9.02 48,305 8.13
2023 and following............................. 2,505 7.40 -- -- 2,505 7.40
------- ------- -------
Total....................................... $40,064 $24,835 $64,899
======= ======= =======
- --------------------------
(1) Includes demand loans having no stated maturity.
The total amount of loans due after September 30, 1998 which have
predetermined interest rates is $30,943, while the total amount of loans due
after such dates which have floating or adjustable interest rates is $30,787.
ONE-TO-FOUR FAMILY RESIDENTIAL LOANS. The Association's primary lending
activity consists of the origination of one-to-four family residential mortgage
loans secured by property located in the Association's primary lending area.
Generally one-to-four family residential mortgage loans are originated in
amounts up to 75% of the lesser of the
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appraised value or purchase price of the property, with private mortgage
insurance required on loans with a loan-to-value ratio in excess of 80%.
Generally fixed rate loans are originated for terms of up to 15-years. The
Association does not sell the loans that it originates.
The Association also offers adjustable-rate mortgage ("ARM") loans with
one, three and five year adjustment periods. The interest rate on ARM loans is
indexed to the corresponding 1, 3 and 5 year Treasury constant maturity rates. A
substantial portion of the ARM loans in the Association's portfolio at September
30, 1997 provide for maximum rate adjustments of 2% per year and 5% over the
term of the loan. Residential ARM loans amortize over terms of up to 25 years.
The Association has sought to increase its origination of ARM loans; however, in
the current low interest rate environment borrowers have shown a preference for
fixed rate loans.
ARM loans decrease the risk associated with changes in market interest
rates by periodically repricing, but involve other risks because as interest
rates increase, the underlying payments by the borrower increase, thus
increasing the potential for default by the borrower. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustment permitted
by the loan documents, and, therefore, is potentially limited in effectiveness
during periods of rapidly rising interest rates. At September 30, 1997, 45.3% of
the Association's one-to-four family residential loans had adjustable rates of
interest.
All one-to-four family residential mortgage loans originated by the
Association include "due-on-sale" clauses, which give the Association the right
to declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid. However, the Association occasionally
permits assumptions of existing residential mortgage loans on a case-by-case
basis.
At September 30, 1997, approximately $40 million, or 61.2% of the
Association's loan portfolio, consisted of one-to-four family residential loans.
Approximately $598,000 (which were comprised of four loans secured by
one-to-four family properties), were included in non-performing loans as of that
date. See "--Non-Performing and Problem Assets."
MULTI-FAMILY REAL ESTATE LOANS. Loans secured by multi-family real
estate totaled approximately $13 million, or 19.8%, of the total loan portfolio
at September 30, 1997. Multi-family real estate loans generally are secured by
multi-family rental properties (including walk-up apartments and mixed-use
properties). Substantially all multi-family real estate loans were secured by
properties located within the Association's primary lending area. At September
30, 1997, the Association's multi-family real estate loans had an average
principal balance of approximately $232,000 and the largest multi-family real
estate loan had a principal balance of $594,000. Multi-family real estate loans
generally are offered with both fixed and adjustable interest rates.
Multi-family loans are originated for terms of up to 10 years with a fixed rate
of interest for the initial five year period and with a five year renewal
option. At the time of renewal, the loan's interest rate will adjust to either
the prevailing prime rate plus 200 basis points or to the 5 year Treasury Note
rate plus 250 basis points, at the borrower's option. Multi-family real estate
loans are underwritten to mature between 5 and 10 years, and to amortize over a
period of up to 20 years.
In underwriting multi-family real estate loans, the Association reviews
the expected net operating income generated by the real estate to ensure that it
is at least 125% of the amount of the monthly debt service, the age and
condition of the collateral, the financial resources and income level of the
borrower, and the borrower's experience in owning or managing similar
properties. Multi-family real estate loans are originated in amounts up to 65%
of the appraised value of the property securing the loan. Personal guarantees
are generally obtained from all multi-family real estate borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to-four family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
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factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate typically depends upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
COMMERCIAL REAL ESTATE LOANS. At September 30, 1997, $11.9 million, or
18.1% of the total loan portfolio consisted of commercial real estate loans.
Commercial real estate loans are secured by office buildings, private schools,
religious facilities and other commercial properties. The Association generally
originates fixed rate and adjustable rate commercial real estate loans with
maximum terms of up to 10 years. The maximum loan-to-value ratio of commercial
real estate loans is 65%. At September 30, 1997, the largest commercial loan had
a principal balance of $1.1 million and was secured by commercial condominium
units. This loan was sold subsequent to September 30, 1997 and resulted in no
gain or loss to the Association. As of September 30, 1997, non-performing loans
included one commercial real estate loan totalling $549,000.
In underwriting commercial real estate loans, the Association reviews
the expected net operating income generated by the real estate to ensure that it
is at least 125% of the amount of the monthly debt service, the age and
condition of the collateral, the financial resources and income level of the
borrower and the borrower's business experience. Personal guarantees are
generally obtained from all commercial real estate borrowers.
Loans secured by commercial real estate generally are larger than
one-to-four family residential loans and involve a greater degree of risk.
Commercial real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties or
underlying businesses, and may be affected to a greater extent by adverse
conditions in the real estate market or the economy in general. Accordingly, the
nature of the loans makes them more difficult for management to monitor and
evaluate.
ORIGINATION, PURCHASE AND SALE OF LOANS. Historically, the Association
has originated mortgage loans pursuant to underwriting standards that generally
conform with the FNMA guidelines. Loan origination activities are primarily
concentrated in Brooklyn, New York. New loans are generated primarily from
customer referrals, brokers and other parties with whom the Association does
business, and from the efforts of employees and advertising. Loan applications
are underwritten and processed at the Association's main office.
The loan approval process is intended to assess the borrower's ability
to repay the loan, the viability of the loan, and the adequacy of the value of
the property that will secure the loan. To assess the borrower's ability to
repay, the Association reviews the employment and credit history and information
on the historical and projected income and expenses of mortgagors. Loans up to
$350,000 may be approved by management. All other one- to-four family
residential mortgage loans in excess of $350,000 must be approved by the Board
of Directors. All multi-family and commercial real estate loans must be approved
by the Board of Directors. In addition, the Board of Directors ratifies all loan
commitments.
The Association requires appraisals of all real property securing
loans. Appraisals are performed by independent appraisers who are licensed by
the state, and who are approved by the Board of Directors annually. The
Association requires fire and extended coverage insurance in amounts at least
equal to the principal amount of the loan. Where appropriate, flood insurance is
also required. Private mortgage insurance for all residential mortgage loans
with loan-to-value ratios of greater than 80% is also required.
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The following table shows the loan origination and repayment activities
of the Association for the periods indicated. The Association did not purchase
or sell any loans during the periods indicated.
SIX MONTHS ENDED YEARS ENDED
SEPTEMBER 30, MARCH 31,
-------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
(IN THOUSANDS)
Originations by Type:
- ---------------------
Adjustable rate:
Real estate:
One-to four-family..................................... $ 772 $ 138 $ 703 $ 352
Multi-family........................................... 2,279 460 810 450
Commercial............................................. 2,244 1,132 3,093 3,051
Non-real estate:
Consumer............................................... N/A N/A N/A N/A
------- ------- ------- -------
Total adjustable rate................................ 5,295 1,730 4,606 3,853
------- ------- ------- -------
Fixed rate:
Real estate:
One-to four-family..................................... 4,422 3,385 7,368 1,704
Multi-family........................................... -- -- 60 --
Commercial............................................. -- -- 650 --
Construction........................................... -- -- N/A N/A
------- ------- ------- -------
Total fixed-rate..................................... 4,422 3,385 8,078 1,704
------- ------- ------- -------
Total loans originated............................... 9,717 5,115 12,684 5,557
Principal Repayments:
- ---------------------
Total reductions......................................... 4,534 2,299 7,904 5,936
------- ------- ------- -------
Net increase (decrease).............................. $ 5,183 $ 2,816 $ 4,780 $ (379)
======= ======= ======= =======
LATE FEES. The Association realizes income from late charges. Late
charges are generally assessed if payment is not received within a specified
number of days after it is due. The Association currently does not charge loan
origination fees.
NONPERFORMING AND PROBLEM ASSETS
After a mortgage loan becomes eight days past due, the Association
delivers a computer generated delinquency notice to the borrower. A second
delinquency notice is sent once the loan becomes 16 days past due. When loans
become 30 days past due, the Association sends an additional delinquency notice
and attempts to make personal contact by letter or telephone with the borrower
to establish acceptable repayment schedules. In addition, with respect to a loan
secured by a one-to-four family residence, after 45 days the Association will
attempt to assist the borrower in obtaining credit counseling. When a mortgage
loan is 90 days delinquent and no acceptable resolution has been reached, the
Association will send the borrower a five day demand letter. If the delinquency
is not cured within 120 days, the Association will generally refer the matter to
its attorney. Management is authorized to begin foreclosure proceedings on any
loan after determining that it is prudent to do so.
Mortgage loans are reviewed on a regular basis and such loans are
placed on non-accrual status when they are specifically determined to be
impaired or when they become 90 days delinquent. When loans are placed on a
non-accrual status, unpaid accrued interest is fully reserved, and further
income is recognized only to the extent received.
NONPERFORMING LOANS. At September 30, 1997, $1.8 million or 1.60% of
the Association's total assets were nonperforming (nonperforming loans and
non-accruing loans). Real estate owned ("REO") properties totaled $274,000 as of
September 30, 1997.
The table below sets forth the amounts and categories of the
Association's nonperforming loans as of September 30, 1997 and March 31, 1997
and 1996. Foreclosed assets include assets acquired in settlement of loans.
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The Association's policy is to review monthly all earned but uncollected
interest on all loans to determine if any portion thereof should be classified
as uncollectible for any loan that is more than 90 days past due. Delinquent
loans that are 90 days or more past due are considered nonperforming assets.
During the periods presented, the Association did not have any troubled debt
restructurings.
SEPTEMBER 30, MARCH 31,
------------- --------------------
1997 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
Non-accruing loans
One-to-four family.................................................... $ 1,203 $ 1,894 $ 1,898
Multi-family.......................................................... -- 1,217 1,758
Commercial real estate................................................ 549 230 1,147
------- ------- -------
Total............................................................... 1,752 3,341 4,803
------- ------- -------
Total nonperforming loans................................................ $ 1,752 $ 3,341 $ 4,803
======= ======= =======
Total as a percentage of total assets.................................... 1.60% 3.04% 4.55%
For the six months ended September 30, 1997 and the year ended March
31, 1997, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms amounted
to $21,000 and $269,000, respectively. Interest income on such loans for the six
months ended September 30, 1997 and the year ended March 31, 1997 was $43,000
and $20,000, respectively. Interest income received during the six months ended
September 30, 1997 included interest for prior periods.
At September 30, 1997, loans delinquent from 60 to 89 days totaled
approximately $662,000.
LOANS DELINQUENT FOR:
------------------------------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL
---------------------------- ---------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
------ ------ -------- ------ ------ -------- ------ ------ --------
Real Estate:
One-to-four family....... 4 $469,119 1.17% 60 (1) $1,203,198 3.00% 64 $1,672,317 4.17%
Commercial............... 2 141,000 1.19% 1 549,000 4.63% 3 690,000 5.82%
- -------- -- ---------- -- ----------
Total................. 6 $610,119 61 $1,752,198 67 $2,362,317
= ======== == ========== == ==========
- -------------------------
(1) Includes 59 loans totalling $1.1 million which are included in six pools of
loans in which the Association is a participant.
CLASSIFIED ASSETS. Federal regulations and the Association's Asset
Classification Policy provide for the classification of loans and other assets,
such as debt and equity securities, considered by the OTS to be of lesser
quality as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obliger or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. The Association will
classify an asset as "Special Mention" if the asset has a potential weakness
that warrants management's close attention. While such assets are not impaired,
management has concluded that if the potential weakness in the asset is not
addressed the value of the asset may deteriorate, adversely affecting the
repayment of the asset.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities,
43
48
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies problem assets as "loss,"
it is required either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS which can
order the establishment of additional general or specific loss allowances.
On the basis of management's review of its assets, at September 30,
1997, the Association had classified a total of $5.5 million of its loans and
other assets as follows:
SEPTEMBER 30, 1997
------------------
(IN THOUSANDS)
Special Mention.......................................... $ 665
Substandard.............................................. 2,262
Doubtful assets(1)....................................... 2,560
Loss assets.............................................. 23
---------
Total........................................... $ 5,510
=========
General loss allowance................................... $ 174
Specific loss allowance.................................. 909
Charge-offs.............................................. --
- ------------
(1) Doubtful assets includes a loan with a principal amount of $1.1 million
which was sold subsequent to September 30, 1997.
The loan portfolio is reviewed on a regular basis to determine whether
any loans require classification in accordance with applicable regulations. Not
all classified assets constitute non-performing assets.
ALLOWANCE FOR LOAN LOSSES
The Association provides for loan losses on the allowance method.
Accordingly, all loan losses are charged to the related allowance and all
recoveries are credited to it. Additions to the allowance for loan losses are
provided by charges to operations based on various factors which, in
management's judgment, deserve current recognition in estimating possible
losses. Such factors considered by management include the market value of the
underlying collateral, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans, delinquency
trends, and economic conditions. The carrying value of loans are periodically
evaluated and the allowance is adjusted accordingly. While management uses the
best information available to make evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Association's allowance for loan
losses. Such agencies may require the Association to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination.
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49
SUMMARY OF LOAN LOSS EXPERIENCE. The following table analyzes changes
in the allowance for the periods presented.
SIX MONTHS ENDED YEARS ENDED
SEPTEMBER 30, MARCH 31,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Balance at beginning of period ............................ $ 978 $ 745 $ 745 $ 619
------ ------ ------ ------
Charge-offs:
One-to-four family ..................................... -- 90 318 58
Commercial real estate ................................. -- 47 220 91
------ ------ ------ ------
Total Charge-offs .................................... -- 137 538 149
------ ------ ------ ------
Net charge-offs ........................................ -- 137 538 149
------ ------ ------ ------
Provisions for loan losses ............................. 105 66 771 275
------ ------ ------ ------
Balance at end of period ............................... $1,083 $ 674 $ 978 $ 745
====== ====== ====== ======
Ratio of net charge-offs during the period to average loans
outstanding during the period ........................... 0.00% 0.25% 0.96% 0.28%
====== ====== ====== ======
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table presents
an analysis of the allocation of the allowance for loan losses at the dates
indicated. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict the
use of the allowance to absorb losses in other categories.
SEPTEMBER 30, MARCH 31,
------------------------------ --------------------------------------------------------------
1997 1997 1996
------------------------------ ------------------------------ ------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
LOAN IN EACH LOAN IN EACH LOAN IN EACH
AMOUNT OF AMOUNTS CATEGORY AMOUNT OF AMOUNTS CATEGORY AMOUNT OF AMOUNTS CATEGORY
LOAN LOSS BY TO NET LOAN LOSS BY TO NET LOAN LOSS BY TO NET
ALLOWANCES CATEGORY LOANS ALLOWANCES CATEGORY LOANS ALLOWANCES CATEGORY LOANS
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
(DOLLARS IN THOUSANDS)
One-to-four family..... $ 289 $40,064 61.18% $ 126 $36,862 61.38% $ 187 $30,605 56.15%
Multi-family........... 465 12,974 19.81 314 10,555 17.57 317 11,166 20.49
Commercial real estate. 155 11,861 18.11 78 11,917 19.84 228 12,784 23.45
Unallocated............ 174 -- 70 -- 13 --
------ ------- ------- ------- ------- -------
Total............. $1,083 $64,899 $ 978 $59,334 $ 745 $54,555
====== ======= ======= ======= ======= =======
INVESTMENTS
INVESTMENTS AND MORTGAGE-BACKED SECURITIES. The Association's
investment portfolio consists of short-term U.S. Treasury and federal agency
securities, interest earning deposits in other financial institutions, federal
funds sold, and FHLB stock. The maturity on government agency securities is
generally less than five years. At September 30, 1997, approximately $12.6
million, or 11.50%, of the Association's total assets consisted of such
investments.
The Association also invests in mortgage-backed securities, all of
which are guaranteed by the U.S. Government or agencies thereof, and all of
which are held for investment. At September 30, 1997 mortgage-backed securities
totaled $19.0 million, or 17.34% of total assets.
45
50
The following table sets forth the carrying value of the Association's
investment portfolio at the dates indicated.
AT SEPTEMBER 30, AT MARCH 31,
---------------------- ------------------------------------------------
1997 1997 1996
---------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Investment securities held for investment:
U.S. Government securities........... $ -- -- $ 3,604 13.93% $ 3,604 13.46%
Federal agency obligations........... 12,567 64.24% 13,071 50.51 12,023 44.89
------- ------- ------- ------ ------- -------
Subtotal........................... 12,567 64.24 16,675 64.44 15,627 58.35
FHLB stock........................... 583 2.98 583 2.25 528 1.97
------- ------- ------- ------ ------- -------
Total investment securities........ 13,150 67.22 17,258 66.69 16,155 60.32
Other interest-earning deposits with banks 6,413 32.78 8,618 33.31 10,626 39.68
------- ------- ------- ------ ------- -------
Total.............................. $19,563 100.00% $25,876 100.00% $26,781 100.00%
======= ======= ======= ====== ======= =======
The following table sets forth the composition of the Association's
mortgage-backed securities at the dates indicated.
AT SEPTEMBER 30, AT MARCH 31,
---------------------- --------------------------------------------------
1997 1997 1996
---------------------- ---------------------- -----------------------
BOOK VALUE % OF TOTAL BOOK VALUE % OF TOTAL BOOK VALUE % OF TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Mortgage-backed securities held for investment
GNMA ................................ $ 559 2.94% $ 611 3.21% $ 728 3.79%
FNMA................................. 6,468 34.02 6,894 36.23 7,823 40.68
FHLMC................................ 3,905 20.53 4,291 22.55 5,051 26.27
CMOs/REMICS.......................... 3,880 20.40 4,155 21.83 4,437 23.08
Other (1)............................ 4,205 22.11 3,079 16.18 1,187 6.18
-------- ------- -------- ------ ------- -------
Total mortgage-backed securities... $ 19,017 100.00% $ 19,030 100.00% $19,226 100.00%
======== ======= ======== ====== ======= =======
- ------------------------
(1) Consists of a mutual fund which invests primarily in adjustable rate
mortgage loans.
The composition and maturities of the investment securities portfolio
at September 30, 1997, excluding FHLB stock, are indicated in the following
table.
LESS THAN 1 TO 5 5 TO 10 OVER
1 YEAR YEARS YEARS 10 YEARS TOTAL INVESTMENT SECURITIES
------ ----- ----- -------- ---------------------------
BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE MARKET VALUE
---------- ---------- ---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
Federal agency obligations................... $ 3,100 $ 9,467 -- -- $ 12,567 $ 12,450
Mortgage-backed securities................... -- 4,205 -- $14,812 19,017 19,157
------- ------- ------- -------- --------
Total investment securities.................. $ 3,100 $13,672 -- $14,812 $ 31,584 $ 31,607
======= ======= ======= ======== ========
Weighted average yield....................... 4.43% 6.18% -- 6.39% 6.11%
SOURCES OF FUNDS
GENERAL. Deposits have traditionally been the primary source of funds
for use in lending and investment activities. In addition to deposits, funds are
derived from scheduled loan payments, investment maturities, loan prepayments,
retained earnings, income on earning assets and borrowings. While scheduled loan
payments and income on earning assets are relatively stable sources of funds,
deposit inflows and outflows can vary widely and are influenced by prevailing
interest rates, market conditions and levels of competition. Borrowings from the
FHLB of New York may be used in the short-term to compensate for reductions in
deposits and to fund loan growth, although the Association has not had to borrow
funds in recent periods.
46
51
DEPOSITS. Deposits are obtained primarily from customers who live or
work in the New York City metropolitan area. The Association offers a selection
of deposit instruments, including passbook savings accounts, money market
accounts, fixed-term certificates of deposit, and individual retirement
accounts. Deposits are not actively solicited outside of the New York City
metropolitan area, and most of the Association's depositors are residents of
Brooklyn. Deposit account terms vary, with the principal differences being the
minimum balance required, the amount of time the funds must remain on deposit
and the interest rate. The Association does not pay broker fees for any
deposits.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established on a periodic basis. Deposit rates and terms are based
primarily on current operating strategies and market rates, liquidity
requirements, rates paid by competitors and growth goals. Personalized customer
service and long-standing relationships with customers are relied upon to
attract and retain deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts offered allows the Association to
be competitive in obtaining funds and responding to changes in consumer demand.
In recent years, the Association has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. Deposits are priced to reflect the Association interest rate risk
management and profitability objectives. Based on experience, management
believes that passbook accounts and money market accounts are relatively stable
sources of deposits. However, the ability to attract and maintain certificates
of deposit, and the rates paid on these deposits, have been and will continue to
be significantly affected by market conditions. At September 30, 1997, $60.6
million, or 60.26% of the Association's deposit accounts were certificates of
deposit, of which $41.1 million have maturities of one year or less. A
significant portion of the certificates of deposit consist of accounts that were
opened at the direction of the county or surrogate court for the benefit of
minors or others who are deemed to be incompetent to handle their affairs. At
September 30, 1997, $13.6 million of the certificates of deposit consisted of
such court-directed deposits. Court-directed deposits must remain at the
Association until the intended beneficiary attains his or her majority or is
deemed competent to handle his or her own affairs.
AT SEPTEMBER 30, AT MARCH 31,
---------------------- -----------------------------------------------
1997 1997 1996
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
Transaction and savings deposit accounts: (DOLLARS IN THOUSANDS)
- -----------------------------------------
Savings accounts ........................ $ 21,556 21.4% $ 21,593 21.4% $ 23,585 24.2%
NOW accounts ............................ 4,285 4.3 4,723 4.7 3,974 4.1
Money market accounts ................... 6,749 6.7 6,999 6.9 8,240 8.5
Money market statement savings .......... 7,360 7.3 6,785 6.7 3,498 3.6
-------- ------ -------- ------ -------- ------
Total non-certificates ............... $ 39,950 39.7 $ 40,100 39.7 $ 39,297 40.4
-------- ------ -------- ------ -------- ------
Certificates of deposits:
- -------------------------
4.00 - 5.99% ............................ 41,532 41.3 44,449 44.1 30,974 31.8
6.00 - 7.99% ............................ 18,551 18.5 15,752 15.6 26,721 27.4
8.00 - 9.99% ............................ 506 .5 497 0.5 404 0.4
-------- ------ -------- ------ -------- ------
Total certificates ................... 60,589 60.3 60,698 60.3 58,099 59.7
-------- ------ -------- ------ -------- ------
Total deposits ....................... $100,539 100.00% $100,798 100.00% $ 97,396 100.00%
======== ====== ======== ====== ======== ======
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52
The following table shows weighted average rate and maturity information
regarding certificates of deposit as of
September 30, 1997.
WEIGHTED
TOTAL AVERAGE PERCENT OF
BALANCE RATE TOTAL
----------- -------------------- --------------
(DOLLARS IN THOUSANDS)
Certificate accounts maturing in quarter ending:
December 31, 1997......................... $ 12,983 5.42% 21.43%
March 31, 1998............................ 12,921 5.44% 21.33%
June 30, 1998............................. 7,968 5.66% 13.15%
September 30, 1998........................ 7,274 5.60% 12.01%
December 31, 1998......................... 2,733 5.50% 4.51%
March 31, 1999............................ 2,277 5.68% 3.76%
June 30, 1999............................. 1,724 6.22% 2.84%
September 30, 1999........................ 1,373 6.08% 2.27%
December 31, 1999......................... 1,522 6.21% 2.51%
March 31, 2000............................ 1,569 6.57% 2.59%
June 30, 2000............................. 1,091 7.06% 1.80%
September 30, 2000........................ 710 6.30% 1.17%
Thereafter................................ 6,444 6.03% 10.63%
--------- --------
Total............................ $ 60,589 5.68% 100.00%
========= ========
The following table sets forth the deposit activities of the Bank for
the periods indicated.
SIX MONTHS ENDED AT OR FOR THE
SEPTEMBER 30, YEAR ENDED MARCH 31,
------------------------- ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Dollars in Thousands)
Opening balance...................................... $ 100,798 $ 97,396 $ 97,396 $ 90,537
Deposits............................................. 57,223 45,629 98,186 84,269
Withdrawals.......................................... 59,784 49,483 99,141 81,554
Interest credited.................................... 2,302 2,186 4,357 4,144
--------- --------- --------- ---------
Ending balance....................................... $ 100,539 $ 95,728 $ 100,798 $ 97,396
========= ========= ========= =========
Net increase (decrease).............................. $ (259) $ (1,668) $ 3,402 $ 6,859
========= ========= ========= =========
Percent increase (decrease).......................... (.25)% (1.71)% 3.49% 7.58%
The following table indicates the amount of the Association's
certificates of deposit and other deposits by time remaining until maturity as
of September 30, 1997. Of the amounts set forth below, $13.6 million is consists
of court-directed deposits.
Maturity
--------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
---------- -------- ------- --------- ---------
(In Thousands)
Certificates of deposit less than $100,000... $ 9,916 $ 10,374 $ 12,611 $ 17,020 $ 49,921
Certificates of deposit of $100,000 or more.. 3,067 2,547 2,631 2,423 10,668
--------- -------- --------- --------- ---------
Total certificates of deposit................ $ 12,983 $ 12,921 $ 15,242 $ 19,443 $ 60,589
========= ======== ========= ========= =========
Total deposits at September 30, 1997 were approximately $100.5 million
compared to deposits at September 30, 1996 of $95.7 million.
BORROWINGS. The Association had no borrowings outstanding at September
30, 1997.
48
53
PROPERTIES
The following table provides certain information with respect to the
Association's offices as of September 30, 1997:
YEAR LEASED OR NET BOOK VALUE OF REAL
LOCATION LEASED OR OWNED ACQUIRED PROPERTY
- -------------------------------------------------------------------------------------------------------------------
Main Office Owned 1983 $594,026
186 Montague Street
Brooklyn, NY 11201
Branch Office Owned 1978 $523,364
1402 Avenue J
Brooklyn, NY 11230
The net book value of the Association's premises, land and equipment
was approximately $1,526,558 at September 30, 1997.
SERVICE CORPORATION SUBSIDIARY
The Association does not have any subsidiary corporations. However, OTS
regulations permit federal savings associations to invest in the capital stock,
obligations or other specified types of securities of subsidiaries (referred to
as "service corporations") and to make loans to such subsidiaries and joint
ventures in which such subsidiaries are participants in an aggregate amount not
exceeding 2% of the association's assets, plus an additional 1% of assets if the
amount over 2% is used for specified community or inner-city development
purposes. In addition, federal regulations permit associations to make specified
types of loans to such subsidiaries (other than special purpose finance
subsidiaries) in which the association owns more than 10% of the stock, in an
aggregate amount not exceeding 50% of the association's regulatory capital if
the association's regulatory capital is in compliance with applicable
regulations.
EMPLOYEES
As of September 30, 1997, the Association employed 24 persons on a
full-time basis and six persons on a part-time basis. None of the Association's
employees is represented by a collective bargaining group and management
considers employee relations to be good.
LEGAL PROCEEDINGS
Although the Association is involved, from time to time, in various
legal proceedings in the normal course of business, there are no material legal
proceedings to which the Association presently is a party or to which any of its
property is subject.
MANAGEMENT OF BROOKLYN HEIGHTS BANCORP
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of the same individuals
who serve as directors of the Association. The Company's Federal charter and
bylaws require that directors be divided into three classes with each class of
directors to serve for a three-year period. Approximately one-third of the
directors will be elected each year. The Company's officers will be elected
annually by its Board of Directors and will serve at the Board's discretion.
49
54
The Company's President and Chief Executive Officer will be Stephen Irving, the
Chairman of the Board and Corporate Secretary will be John A. Maher and the
Treasurer will be Stephen Parisi. For information regarding the directors and
officers, See "Management of Atlantic Liberty Savings, F.A."
MANAGEMENT OF ATLANTIC LIBERTY SAVINGS, F.A.
DIRECTORS AND OFFICERS OF THE ASSOCIATION
The Board of Directors currently consists of seven persons. Each
director holds office for a term of three years, and one-third of the Board is
elected at each annual meeting of members.
The Board of Directors met 13 times during the fiscal year ended March
31, 1997. No director attended fewer than 75% of the aggregate number of
meetings of the Board of Directors and the Board's committees in the past 12
months.
Listed below are the current directors and officers of the Association:
AGE AT CURRENT TERM
NAME SEPTEMBER 30, 1997 POSITION DIRECTOR SINCE EXPIRES
- --------------------------------------------------------------------------------------------------------------------
John A. Maher 66 Chairman of the Board 1961 2000
and Secretary
Stephen Irving 45 President, Chief 1996 1998
Executive Officer and
Director
Nunzio D'Addona 73 Director 1965 2000
Martin D. Dehler 56 Director 1996 1999
Edward W. Kelle 61 Vice Chairman of the 1962 1999
Board
Fred W. McPhilliamy 66 Director 1986 1998
Eugene F. O'Connor 79 Director 1972 1999
Barry M. Donohue 56 Vice President
Stephen Parisi 49 Vice President
The business experience for the past five years for each of the
Association's directors and officers is as follows:
John A. Maher has been a professor at The Dickinson School of Law since
1973. Mr. Maher has also served as a consultant and arbitrator for various
businesses and nonprofit organizations. In 1997 Mr. Maher was named a
Commissioner of the Pennsylvania Securities Commission.
Stephen Irving has been the President and Chief Executive Officer of
the Association since 1996. He joined the Association in 1980 as a Vice
President. In 1983 Mr. Irving was elected Senior Vice President in charge of
operations.
Nunzio D'Addona is President of Home Abstract Co., a title insurance
company.
50
55
Martin D. Dehler, Esq. is an attorney and bank consultant. He is the
former Chairman and Chief Executive Officer of New York Bancorp, and its
subsidiary Home Federal Savings Bank.
Edward W. Kelle is the President of K&L Brokerage, Inc., an insurance
agency. Mr. Kelle is also the Secretary and Treasurer of John J. Kelle, Inc., an
insurance agency.
Fred W. McPhilliamy is the President of The Helen Keller Services for
the Blind, a not-for-profit organization.
Eugene F. O'Connor, Esq. is a retired attorney. Prior to his retirement
in 1993, Mr. O'Connor was Chief Calendar Clerk of the Supreme Court, Kings
County, and thereafter Bankruptcy Clerk, U.S. District Court (Southern District
of New York).
Barry M. Donohue is the Vice President of Mortgage Lending at the
Association. Mr. Donohue previously was Senior Vice President of Crossland
Savings Bank until 1992 when he joined the Association.
Stephen Parisi is a Vice President and Treasurer of the Association. He
joined the Association in 1983.
COMMITTEES OF THE BOARDS OF DIRECTORS OF THE ASSOCIATION AND THE COMPANY
The Board of Directors of the Association has the following committees:
The Audit Committee meets quarterly to review audit reports. It also recommends
to the Board of Directors the appointment of the independent auditors for the
upcoming fiscal year.
The Management and Compensation Committee acts as the Association's
Compensation Committee. No employee director is a member of the Management and
Compensation Committee. The Association has no nominating committee.
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF THE ASSOCIATION
REMUNERATION OF NAMED EXECUTIVE OFFICER
The following table sets forth information as to annual, and other
compensation for services in all capacities to the President and Chief Executive
Officer for the fiscal year ended March 31, 1997. No other executive officer
earned over $100,000 in salary and bonuses during fiscal year 1997.
==================================================================================================================================
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
- ------------------------------------------------------------------------------------------------------------------
OTHER RESTRICTED OPTIONS/
NAME AND PRINCIPAL FISCAL ANNUAL STOCK SARS ALL OTHER
POSITION YEAR(1) SALARY BONUS COMPENSATION AWARD (#) COMPENSATION
- ----------------------------------------------------------------------------------------------------------------------------------
Stephen Irving 1997 $114,623 $15,000 $13,602(2) -- -- $1,471
==================================================================================================================================
- ----------
51
56
(1) In accordance with the rules on executive officer and director
compensation disclosure adopted by the SEC, Summary Compensation
information is excluded for the fiscal years ended March 31, 1996 and
1995, as the Association was not a public company during such periods.
(2) Includes $8,700 of director fees.
COMPENSATION OF DIRECTORS
Nonemployee Directors of the Association receive $500 for each regular
meeting of the Board of Directors and $500 for each committee meeting of the
Board of Directors. Each committee chairman receives an additional $100 for each
committee meeting. In addition, each outside director receives an annual
retainer of $12,000. Mr. Irving receives an annual retainer of $6,000.
Directors of the Company are not currently paid directors' fees. The
Company may, if it believes it is necessary to attract qualified directors or is
otherwise beneficial to the Company, adopt a policy of paying directors' fees.
DEFERRED COMPENSATION PLAN. The Association provides directors with a
non-qualified deferred compensation plan ("Deferred Compensation Plan") under
which directors of the Association may elect to defer on a pre-tax basis, all or
a portion of their monthly directors' fees and/or annual retainer. The Deferred
Compensation Plan is an amendment of a deferred compensation plan that was
effective until December 31, 1996. Under the amended Deferred Compensation Plan,
a director's deferred fees and/or annual retainer will be credited to a deferred
compensation account. Each deferred compensation account will earn simple
interest at the rate of 8% per annum. Upon retirement, a director's benefit will
be paid over 10 years with interest on the unpaid balance accruing at the rate
of 8% per annum.
Under the prior deferred compensation plan, benefits will be paid over
15 years (9 years with respect to one director and 10 years with respect to
another). The deferred compensation benefits payable under the prior plan range
from $675 to $1,622 per month. The Association has accrued $460,000 toward its
obligation under the prior plan. The Association has purchased life insurance
policies on the lives of the individual directors with an aggregate face value
of $410,000, with the Association as the named beneficiary. The Association is
the owner and beneficiary of the life insurance policies. For calendar year
1996, under the prior plan four directors deferred a total of $16,800 of their
fees and retainers; for the period January 1, 1997 through September 30, 1997,
four directors elected to defer $28,000 of their fees and annual retainers paid
under the Deferred Compensation Plan. Mr. Stephen Irving did not elect to defer
any portion of his annual retainer. All future obligations payable under the
Deferred Compensation Plan are payable from the general assets of the
Association.
BENEFITS
INSURANCE PLANS. The Association's officers and employees are covered
by a contributory medical insurance plan.
DEFINED BENEFIT PENSION PLAN. The Association maintains a qualified
noncontributory defined benefit plan ("Retirement Plan") for employees. All
employees age 21 or older who have worked at the Association for a period of one
year and who have been credited with 1,000 or more hours of employment with the
Association during the year are eligible to accrue benefits under the Retirement
Plan. The Association annually contributes an amount to the Retirement Plan
necessary to satisfy the actuarially determined minimum funding requirements in
accordance with the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
At the normal retirement age of 65, the plan is designed to provide a
single life annuity with no ancillary benefits. For a married participant, the
normal form of benefit is an actuarially reduced joint and survivor annuity
where, upon the participant's death, the participant's spouse is entitled to
receive a benefit equal to 50% of the amount paid during the participant's
lifetime. The joint and survivor annuity will be actuarially equivalent to the
single life
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annuity. The monthly retirement benefit provided is an amount equal to (i) 2% of
a participant's average monthly compensation based on the average of the five
consecutive years of the last 10 calendar years providing the highest monthly
average compensation, multiplied by (ii) the participant's years of credited
service to the normal retirement date. For years beginning after December 31,
1992, the amount of monthly retirement benefit provided is an amount equal to 2%
of a participant's average monthly compensation reduced by 1/15 for each year of
service that such participant's years of service at normal retirement date are
less than 15. Retirement benefits are also payable upon retirement due to early
and late retirement, disability or death. A reduced benefit is payable upon
early retirement at or after age 55 and the completion of 10 years of service
with the Association. Upon termination of employment other than as specified
above, a participant who has a vested benefit under the Retirement Plan is
eligible to receive his or her accrued benefit reduced for early retirement or a
deferred retirement benefit commencing on such participant's normal retirement
date. Benefits are payable in various annuity forms as well as in the form of a
single lump sum payment. At December 31, 1996, the market value of the
Retirement Plan trust fund equaled approximately $1.1 million. For the plan year
ended December 31, 1996, the Association made a contribution of $151,000 to the
Retirement Plan.
The following table indicates the annual retirement benefit that would
be payable under the Retirement Plan upon retirement at age 65 in calendar year
1997, expressed in the form of a single life annuity for the final average
salary and benefit service classification specified below.
========================================================================================================================
YEARS OF BENEFIT SERVICE AT RETIREMENT
- ------------------------------------------------------------------------------------------------------------------------
FINAL
AVERAGE 15 20 25 30 35 40
COMPENSATION
- ------------------------------------------------------------------------------------------------------------------------
$25,000 $7,500 $10,000 $12,800 $15,000 $17,500 $20,000
- ------------------------------------------------------------------------------------------------------------------------
$50,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000
- ------------------------------------------------------------------------------------------------------------------------
$75,000 $22,500 $30,000 $37,500 $45,000 $52,500 $60,000
- ------------------------------------------------------------------------------------------------------------------------
$100,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000
- ------------------------------------------------------------------------------------------------------------------------
$150,000 $45,000 $60,000 $75,000 $90,000 $105,000 $120,000
- ------------------------------------------------------------------------------------------------------------------------
$160,000 and above $48,000 $64,000 $80,000 $96,000 $112,000 $125,000
========================================================================================================================
As of December 31, 1996, Mr. Irving had 16 years of credited service
under the plan.
SALARY REDUCTION PLAN. The Association maintains a Salary Reduction
Plan for employees, which is a qualified, tax-exempt profit sharing plan with a
cash-or-deferred feature under Section 401(k) of the Internal Revenue Code (the
"401(k) Plan"). All employees who have attained age 21 1/2 and have completed
six months of employment are eligible to participate on the date that such
requirements are first satisfied.
Under the 401(k) Plan, participants are permitted to make salary
reduction contributions to the plan from their compensation up to the maximum
amount permitted under certain Internal Revenue Code (the "Code"). For these
purposes, "compensation" includes regular salary, wages and bonuses, including
any salary reduction contributions made under the 401(k) Plan, but does not
include overtime and commissions, or compensation in excess of the Code Section
401(a)(17) limits. The participants' salary reduction contribution will be
matched by the Association, in the amount of $.60 per $1.00 up to a maximum of
10% of the participants' salary. All employee contributions and earnings thereon
are fully and immediately vested. All employer matching contributions vest at
the rate of 20% per
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year beginning in the second year until a participant is 100% vested after six
years of service. Participants will also vest in employer matching contributions
upon the attainment of their normal retirement date (i.e., age 65), death or
disability regardless of their years of service. A participant may also withdraw
salary reduction contributions in the event the participant suffers a financial
hardship.
The 401(k) Plan permits employees to direct the investment of their own
accounts into various investment options.
Plan benefits will be paid to each participant in a lump sum payment.
At December 31, 1996, the market value of the 401(k) Plan trust fund equaled
approximately $833,000. The contribution to the 401(k) Plan for the Plan year
ended December 31, 1996 was $81,916. During the year ended December 31, 1996,
the Association contributed $5,100 to the 401(k) plan for the account of Mr.
Irving.
EMPLOYMENT AGREEMENTS. The Association intends to enter into employment
agreements with Messrs. Irving, Donohue and Parisi each for a term of up to 36
months. If the agreement is not renewed, each agreement will expire within 36
months following the anniversary date of the agreement. Under each agreement,
the executive will be entitled to receive his salary in effect on the
commencement date of the agreement, as increased from time to time (but not
decreased), discretionary bonuses, and other fringe and employee benefits which
are or may become applicable to executive personnel. Each agreement provides for
termination by the Association for cause at any time. In the event the
Association terminates the executive's employment for reasons other than for
cause or in connection with or within 12 months following a change in control of
the Association or the Company, the Association will pay the executive's salary
during the remaining term of the agreement and will also provide the executive
with health benefits during such period which are substantially the same as
those provided to the executive during employment. In the event of executive's
termination of employment in connection with or within 12 months following a
change in control, the Association will pay the executive a lump sum cash
payment equal to 299% of the average of the executive's taxable compensation
paid over the last five calendar years before the year in which the change in
control occurs (the executive's "base amount"). In addition, the Association
will provide the executive during the remaining term of the agreement with
substantially the same health benefits as he had during employment.
In the event of the executive's disability during the term of the
agreement, the agreement will continue in effect, but any payments under the
agreement will be reduced by payments made to the executive under any disability
plan maintained by the Association. In the event of the executive's death during
the term of the agreement, the Association will pay the executive's salary to
the executive's beneficiary or to his estate.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Association has established an ESOP for eligible employees
effective in January 1998, subject to the completion of the Offering. Employees
with at least one year of employment with the Association and who have attained
age 21 are eligible to participate. As part of the Offering, the ESOP intends to
borrow funds from the Company and use those funds to purchase a number of shares
equal to up to 8.0% of the Common Stock to be sold in the Offering. Collateral
for the loan will be the Common Stock purchased by the ESOP. The loan will be
repaid principally from the Association's discretionary contributions to the
ESOP and dividends on unallocated shares over a period of no more than 10 years.
It is anticipated that the interest rate for the loan will be a floating rate
equal to the prime rate published in The Wall Street Journal from time to time.
Shares purchased by the ESOP will be held in a suspense account for allocation
among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense
accounts in an amount proportional to the repayment of the ESOP loan will be
allocated among ESOP participants on the basis of compensation in the year of
allocation. Participants in the ESOP will receive credit for service prior to
the effective date of the ESOP. Benefits generally vest over a seven year
period. A participant will vest in 20% of his or her account balance after 2
years of credited service and will vest in an additional 20% for each subsequent
year of credited service until a participant
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is 100% vested after seven years. A participant who terminates employment for
reasons other than death, retirement, disability or following a change in
control prior to seven years of credited serve will forfeit the nonvested
portion of his or her benefits under the ESOP. Benefits will be payable in the
form of Common Stock and cash upon death, retirement, early retirement,
disability or separation from service. Contributions by the Association to the
ESOP are discretionary, subject to the loan terms and tax law limits, and,
therefore, benefits payable under the ESOP cannot be estimated. In November
1993, the American Institute of Certified Public Accountants (the "AICPA")
issued Statement of Position ("SOP") 93-6, which requires the Association to
record compensation expense in an amount equal to the fair market value of the
shares released from the suspense account.
In connection with the establishment of the ESOP, the Association will
establish a committee of non-employee directors to administer the ESOP. The
Association will either appoint its non-employee directors or an independent
financial institution to serve as trustee of the ESOP. The ESOP committee may
instruct the trustee regarding investment of funds contributed to the ESOP. The
ESOP trustee, subject to its fiduciary duty, must vote all allocated shares held
in the ESOP in accordance with the instructions of participating employees.
Under the ESOP, nondirected shares, and shares held in the suspense account,
will be voted in a manner calculated to most accurately reflect the instructions
it has received from participants regarding the allocated stock so long as such
vote is in accordance with the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
STOCK OPTION PLAN
At a meeting of the Company's shareholders to be held no earlier than
six months after the completion of the Reorganization, the Board of Directors
intends to submit for shareholder approval the Stock Option Plan for directors
and officers of the Association and of the Company. If approved by the
shareholders, Common Stock in an aggregate amount equal to 10% of the shares
sold in the Offering would be reserved for issuance by the Company upon the
exercise of the stock options granted under the Stock Option Plan. Ten percent
of the shares sold in the Offering would amount to 39,100 shares, 46,000 shares,
52,900 shares or 60,835 shares at the minimum, mid-point, maximum and 15% above
the maximum of the Offering Range, respectively. No options would be granted
under the Stock Option Plan until the date on which shareholder approval is
received.
It is anticipated that options would be granted for terms of 10 years
(in the case of incentive options) or 10 years and one day (in the case of
non-qualified options), and at an option price per share equal to the fair
market value of the shares on the date of grant of the stock options. If the
Stock Option Plan is adopted within one year following the Reorganization,
options will become exercisable at a rate of 20% at the end of each 12 months of
service with the Association after the date of grant, subject to early vesting
in the event of death or disability. Options granted under the Stock Option Plan
would be adjusted for capital changes such as stock splits and stock dividends.
Notwithstanding the foregoing, awards will be 100% vested upon termination of
employment due to death or disability, and if the Stock Option Plan is adopted
more than 12 months after the Reorganization, awards would be 100% vested upon
normal retirement or a change in control of the Association or the Company.
Unless the Company decides to call an earlier special meeting of shareholders,
the date of grant of these options is expected to be the date of the Company's
annual meeting of shareholders to be held at least six months after the
Reorganization. Under OTS rules, if the Stock Option Plan is adopted within the
first 12 months after the Reorganization, no individual officer can receive more
than 25% of the awards under the plan, no outside director can receive more than
5% of the awards under the plan, and all outside directors as a group can
receive no more than 30% of the awards under the plan in the aggregate.
The Stock Option Plan would be administered by a committee of
non-employee members of the Company's Board of Directors. Options granted under
the Stock Option Plan to employees may be treated as "incentive" stock options
which offer beneficial tax treatment to the employee but no tax deduction to the
Company. Non-qualified stock options may also be granted under the Stock Option
Plan, and will be granted to the non-employee directors who receive grants of
stock options. In the event an option recipient terminates his or her employment
or service as an employee or director, the options would terminate during
certain specified periods.
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STOCK AWARD PLAN
At a meeting of the Company's shareholders to be held no earlier than
six months after the completion of the Reorganization, the Board of Directors
also intends to submit a Stock Award Plan for shareholder approval. The Stock
Award Plan will grant directors and officers an ownership interest in the
Company in a manner designed to encourage their continued service with the
Association. The Association will contribute funds to the Stock Award Plan from
time to time to enable it to acquire an aggregate amount of Common Stock equal
to up to 4% of the shares of common stock sold in the Offering, either directly
from the Company or in open market purchases. Four percent of the shares sold in
the Offering would amount to 15,640 shares, 18,400 shares, 21,160 or 24,334
shares at the minimum, midpoint, maximum and 15% above the maximum of the
Offering Range, respectively. In the event that additional authorized but
unissued shares would be acquired by the Stock Award Plan after the
Reorganization, the interests of existing shareholders would be diluted.
Executive officers and directors will be awarded Common Stock under the Stock
Award Plan without having to pay cash for the shares. No awards under the Stock
Award Plan would be made until the date the Stock Award Plan is approved by the
Company's shareholders.
Awards would be nontransferable and nonassignable, and during the
lifetime of the recipient could only be earned by him or her. If the Stock Award
Plan is adopted within one year following the Reorganization, the shares which
are subject to an award would vest and be earned by the recipient at a rate of
20% of the shares awarded at the end of each full 12 months of service with the
Association after the date of grant of the award. Any Common Stock purchased by
the Stock Award Plan will represent unearned compensation and, accordingly, will
be reflected on the Company's financial statement as a reduction to
stockholders' equity. As shares of the Common Stock awarded under the Stock
Award Plan vest, a corresponding reduction in the charge to capital will occur.
Awards would be adjusted for capital changes such as stock dividends and stock
splits. Notwithstanding the foregoing, awards would be 100% vested upon
termination of employment or service due to death or disability, and if the
Stock Award Plan is adopted more than 12 months after the Reorganization, awards
would be 100% vested upon normal retirement or a change in control of the
Association or the Company. If employment or service were to terminate for other
reasons, the award recipient would forfeit any nonvested award. If employment or
service is terminated for cause (as would be defined in the Stock Award Plan),
shares not already delivered under the Stock Award Plan would be forfeited.
Under OTS rules, if the Stock Award Plan is adopted within the first 12 months
after the Reorganization, no individual officer may receive more than 25% of the
awards under the plan, no outside director may receive more than 5% of the
awards under the plan, and all outside directors as a group may receive no more
than 30% of the awards under the plan in the aggregate.
When shares become vested under the Stock Award Plan, the participant
will recognize income equal to the fair market value of the common stock earned,
determined as of the date of vesting, unless the recipient makes an election
under Section 83(b) of the Code to be taxed earlier. The amount of income
recognized by the participant would be a deductible expense for tax purposes for
the Company. If the Stock Award Plan is adopted within one year following the
Reorganization, dividends and other earnings will accrue and be payable to the
award recipient when the shares vest. Shares not yet vested under the Stock
Award Plan will be voted by the Trustee of the Stock Award Plan, taking into
account the best interests of the recipients of the awards under the plan.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Association offers to directors, officers, and employees real
estate mortgage loans secured by their principal residence. All loans to the
Association's directors, officers and employees are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions, and do not involve more than minimal risk of
collectibility.
Directors Maher and Dehler, in addition to their duties as directors of
the Association, provide consulting services to the Association. Mr. Maher
receives $30,000 in annual consulting fees from the Association for providing
advice regarding regulatory compliance, development of new products and
representation before government and
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businesses. Mr. Dehler receives $12,000 in annual consulting fees from the
Association for providing advice on strategic planning in order to enhance the
Association's franchise.
REGULATION
GENERAL
As a federally chartered, SAIF-insured savings association, the
Association is subject to extensive regulation by the OTS and the FDIC. For
example, the Association must obtain OTS approval before it may engage in
certain activities and must file reports with the OTS regarding its activities
and financial condition. The OTS periodically examines the Association's books
and records and, in conjunction with the FDIC in certain situations, has
examination and enforcement powers. This supervision and regulation are intended
primarily for the protection of depositors and the FDIC insurance funds. The
Association's semi- annual assessment owed to the OTS, which is based upon a
specified percentage of assets, is approximately $31,187.
The Association is also subject to federal and state regulation as to
such matters as loans to officers, directors, or principal shareholders,
required reserves, limitations as to the nature and amount of its loans and
investments, regulatory approval of any merger or consolidation, and the
issuance or retirements of its securities. In addition, the Association's
activities and operations are subject to a number of additional detailed,
complex and sometimes overlapping federal and state laws and regulations. These
include state usury and consumer credit laws, state laws relating to
fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal
Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act,
the Community Reinvestment Act, anti-redlining legislation and antitrust laws.
The United States Congress is considering legislation that would
require all federal savings associations, such as the Association, to either
convert to a national bank or a state-chartered bank by a specified date to be
determined. In addition, under the legislation, the Mutual Holding Company and
the Company likely would not be regulated as savings and loan holding companies
but rather as bank holding companies. This proposed legislation would abolish
the OTS and transfer its functions to other federal banking regulators. No
assurance can be given as to whether or in what form the legislation will be
enacted or its effect on the Company and the Association.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
Upon completion of the Reorganization, the Mutual Holding Company and
the Company will be regulated as savings and loan holding companies under the
Home Owners' Loan Act (the "HOLA"). As such, the Mutual Holding Company and the
Company will register with and will be subject to OTS regulation and examination
and supervision as well as certain reporting requirements. The OTS has indicated
that the Company will be regulated in the same manner as a mutual holding
company pursuant to Section 10(o) of the HOLA. As a federally-insured subsidiary
of a savings and loan holding company, the Company will be subject to certain
restrictions in dealing with the Mutual Holding Company and with other persons
affiliated with the Mutual Holding Company and the Company, and will continue to
be subject to examination and supervision by the OTS.
Pursuant to Section 10(o) of the HOLA, and OTS regulations and policy,
a mutual holding company and a federally chartered mid-tier holding company may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
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(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest of any non-conforming
investments.
HOLA prohibits a savings and loan holding company, including the
Company and the Mutual Holding Company, directly or indirectly, or through one
or more subsidiaries, from acquiring another savings institution or holding
company thereof, without prior written approval of the OTS. It also prohibits
the acquisition or retention of, with certain exceptions, more than 5% of a
non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies; and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
In addition, OTS regulations require the Mutual Holding Company to
notify the OTS of any proposed waiver of its right to receive dividends. The OTS
reviews dividend waiver notices on a case-by-case basis, and, in general, does
not object to a waiver if: (i) the mutual holding company's board of directors
determines that waiver is consistent with its fiduciary duties to the mutual
holding company's members; (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company is considered as a restriction in
the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with SFAS 5,
where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; (iv) the amount of any waived dividend is considered as having
been paid by the savings association in evaluating any proposed dividend under
OTS capital distribution regulations; and (v) in the event the mutual holding
company converts to stock form, the appraisal submitted to the OTS in connection
with the conversion application takes into account the aggregate amount of the
dividends waived by the mutual holding company.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB of New York, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from funds deposited
by savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members ("FHLB advances") in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the
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FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System, including the FHLB of New York.
As a member, the Association is required to purchase and maintain stock
in the FHLB of New York in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts, or similar
obligations at the beginning of each year. At September 30, 1997, the
Association's investment in stock of the FHLB of New York was $582,000. The FHLB
imposes various limitations on advances such as limiting the amount of certain
types of real estate-related collateral to 30% of a member's capital and
limiting total advances to a member. Interest rates charged for advances vary
depending upon maturity, the cost of funds to the FHLB of New York and the
purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended March 31, 1997, dividends paid by the
FHLB of New York to the Association totaled approximately $33,755 for an annual
rate of 5.79%.
INSURANCE OF DEPOSITS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures deposits of banks and thrift institutions up to certain specified limits
and regulates such institutions for safety and soundness. The FDIC administers
two separate insurance funds, the BIF for commercial banks and state savings
banks, and the SAIF for savings associations such as the Association and banks
that have acquired deposits from savings associations. The FDIC is required to
maintain designated levels of reserves in each fund.
ASSESSMENTS. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time, and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital levels, and the FDIC's level of supervisory
concern about the institution.
In 1996, federal legislation was enacted to recapitalize the SAIF and
eliminate the significant premium disparity between the BIF and the SAIF. Under
the new law, the Association was charged a one-time special assessment equal to
$.657 per $100 of assessable deposits at March 31,1995. The Association
recognized this one-time assessment as a non-recurring operating expense of
$594,000 ($238,000 after tax) during the three-month period ending September 30,
1996. The assessment was fully deductible for both federal and state income tax
purposes. Beginning January 1,1997, the Association's annual deposit insurance
premium was reduced from .23% to .0644% of total assessable deposits. BIF
institutions pay lower assessments than comparable SAIF institutions because BIF
institutions pay only 20% of the rate paid by SAIF institutions on their
deposits with respect to obligations issued by the Financing Corporation
("FICO") which provided some of the financing to resolve failing thrift
institutions in the 1980's. The 1996 law also provides for the merger of the
SAIF and the BIF by 1999, but not until such time as bank and thrift charters
are combined. Until the charters are combined, savings associations with SAIF
deposits may not transfer deposits to the BIF without paying various exit and
entrance fees, and SAIF institutions will continue to pay higher FICO
assessments. Such exit and entrance fees need not be paid if a SAIF institution
converts to a bank charter or merges with a bank, as long as the resulting bank
continues to pay applicable insurance assessments to the SAIF, and as long as
certain other conditions are met.
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SAVINGS ASSOCIATION REGULATORY CAPITAL
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
Under the tangible capital requirement, a savings association must maintain
tangible capital (core capital less all intangible assets except purchased
mortgage servicing rights which may be included after making the above-noted
adjustment in an amount up to 100% of tangible capital) of at least 1.5% of
total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings association to account for the relative
risks inherent in the type and amount of assets held by the savings association.
The risk-based capital requirement requires a savings association to maintain
capital (defined generally for these purposes as core capital plus general
valuation allowances and permanent or maturing capital instruments such as
preferred stock and subordinated debt, less assets required to be deducted)
equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of
four categories (0-100%). A credit risk-free asset, such as cash, requires no
risk-based capital, while an asset with a significant credit risk, such as a
non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At September 30, 1997, the Association was in compliance
with all capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, the
Association would be exempt from its provisions because it has less than $300
million in assets and a risk-based capital ratio in excess of 12%. The
Association nevertheless measure its interest rate risk in conformity with the
OTS regulation. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Asset Liability Management."
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations and
activities of the association, imposing a capital directive, cease and desist
order, or civil money penalties, or imposing harsher measures such as appointing
a receiver or conservator or forcing the association to merge into another
institution.
PROMPT CORRECTIVE REGULATORY ACTION
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, federal law
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At September 30, 1997, the Association was categorized as
"well capitalized," meaning that the Association's total risk-based capital
ratio exceeded 10%, Tier I risk-based capital ratio exceeded 6%, leverage
capital ratio exceeded 5%, and the Association was not subject to a regulatory
order, agreement or directive to meet and maintain a specific capital level for
any capital measure.
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The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
DIVIDEND LIMITATIONS
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility given to well-capitalized associations. A savings
association which has total capital (immediately prior to and after giving
effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An association that has total capital at least equal to its
minimum capital requirements, but less than its capital requirements, would be a
Tier 2 institution ("Tier 2 Institution"). An institution having total capital
that is less than its minimum capital requirements would be a Tier 3 institution
("Tier 3 Institution"). However, an institution which otherwise qualifies as a
Tier 1 Institution may be designated by the OTS as a Tier 2 or Tier 3
Institution if the OTS determines that the institution is "in need of more than
normal supervision." The Association is currently a Tier 1 Institution.
A Tier 1 Institution may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of (a) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" at the beginning of
the calendar year (the smallest excess over its capital requirements), or (b)
75% of its net income over the most recent four-quarter period. Any additional
amount of capital distributions would require prior regulatory approval.
Accordingly, at September 30, 1997, the Association had available approximately
$2.0 million for distribution, without consideration of any capital infusion
from the Reorganization.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
LIMITATIONS ON RATES PAID FOR DEPOSITS
FDIC regulations place limitations on the ability of insured depository
institutions to accept, renew or roll over deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions having the same type
of charter in the institution's normal market area. Under these regulations,
"well-capitalized" depository institutions may accept, renew or roll such
deposits over without restriction, "adequately capitalized" depository
institutions may accept, renew or roll such deposits over with a waiver from the
FDIC (subject to certain restrictions on payments of rates), and
"undercapitalized" depository institutions may not accept, renew or roll such
deposits over. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definition adopted by the agencies to implement the corrective action
provisions of federal law. Management does do not believe that these regulations
will have a materially adverse effect on the Association's current operations.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have also adopted safety and soundness
standards for all insured depository institutions. The standards, which were
issued in the form of guidelines rather than regulations, relate to internal
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controls, information systems, internal audit systems, loan underwriting and
documentation, compensation and interest rate exposure. In general, the
standards are designed to assist the federal banking agencies in identifying and
addressing problems at insured depository institutions before capital becomes
impaired. If an institution fails to meet these standards, the appropriate
federal banking agency may require the institution to submit a compliance plan.
Failure to submit a compliance plan may result in enforcement proceedings. On
August 27, 1996, the federal banking agencies added asset quality and earning
standards to the safety and soundness guidelines.
LOANS TO ONE BORROWER
Under OTS regulations, a savings association may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of
unimpaired capital and surplus. Additional amounts may be lent, not in excess of
10% of unimpaired capital and surplus, if such loans or extensions of credit are
fully secured by readily marketable collateral, including certain debt and
equity securities, but not including real estate. In some cases, a savings
association may lend up to 30% of unimpaired capital and surplus to one borrower
for purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At September 30, 1997, the
Association had one loan to a single or related group of borrowers in excess of
its lending limits. Subsequently, this loan was sold. Management does not
believe that the loans-to-one-borrower limits will have a significant impact on
the Association's business operations or earnings following the Reorganization.
QUALIFIED THRIFT LENDER
Savings associations must meet a QTL test. If the Association maintains
an appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualify as a QTL, it may exercise
full borrowing privileges from the FHLB of New York. The required percentage of
QTIs is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the association in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with
the QTL test is determined on a monthly basis in nine out of every twelve
months.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and education loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10% of total assets, plus an additional 10%
for small business loans. Loans for personal, family and household purposes
(other than credit card, small business and educational loans) are now included
without limit with other assets that, in the aggregate, may account for up to
20% of total assets. At September 30, 1997, under the expanded QTL test,
approximately 87.6% of the Association's portfolio assets were qualified thrift
investments.
A savings association that fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to the SAIF) or be subject to the following penalties: (i) it
may not enter into any new activity except for those permissible for a national
bank and for a savings association; (ii) its branching activities will be
limited to those of a national bank; (iii) it will not be eligible for any new
FHLB advances; and (iv) it will be bound by regulations applicable to national
banks regarding the payment of dividends. Three years after failing the QTL test
the association must (i) dispose of any investment or activity not permissible
for a national bank and a savings association, and (ii) repay all outstanding
FHLB advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
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ACQUISITIONS AND BRANCHING
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in Section 7701(a)(19) of the Code or the asset
composition test of Section 7701(c) of the Code. Branching that would result in
the formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion.
TRANSACTIONS WITH AFFILIATES
The Association is subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies. The statute limits credit transactions between a bank or
savings association and its executive officers and its affiliates, prescribes
terms and conditions for bank affiliate transactions deemed to be consistent
with safe and sound banking practices, and restricts the types of collateral
security permitted in connection with a bank's extension of credit to an
affiliate.
FEDERAL SECURITIES LAW
The shares of Common Stock of the Company will be registered with the
SEC under the Securities Exchange Act of 1934 (the "1934 Act"). The Company will
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements the 1934 Act and the rules of the SEC thereunder. After
three years following the reorganization to stock form, if the Company has fewer
than 300 shareholders, it may deregister its shares under the 1934 Act and cease
to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Company meets the
current public information requirements under Rule 144, each affiliate of the
Company that complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Company or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks.
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COMMUNITY REINVESTMENT ACT MATTERS
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating--outstanding, satisfactory, needs to
improve, and substantial noncompliance--and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first time home
buyers. The OTS has designated the Association's record of meeting community
credit needs as "satisfactory."
TAXATION
FEDERAL TAXATION
Historically, savings associations, such as the Association, have been
permitted to compute bad debt deductions using either the experience method or
the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using either the experience method or the specific charge off method.
As a result of the repeal of the percentage of taxable income method, reserves
taken after 1987 using the percentage of taxable income method generally must be
included in future taxable income over a six-year period, although a two-year
delay may be permitted for associations meeting a residential mortgage loan
origination test. In addition, the pre-1988 reserve, for which no deferred taxes
have been recorded, need not be recaptured into income unless (i) the savings
association no longer qualifies as a bank under the Code, or (ii) the savings
association pays out excess dividends contributions.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax on the amount (if any) by which
20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption
varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable
income increased or decreased by certain tax preferences and adjustments,
including depreciation deductions in excess of that allowable for alternative
minimum tax purposes, tax-exempt interest on most private activity bonds issued
after August 7, 1986 (reduced by any related interest expense disallowed for
regular tax purposes), the amount of the bad debt reserve deduction claimed in
excess of the deduction based on the experience method and 75% of the excess of
adjusted current earnings over AMTI (before this adjustment and before any
alternative tax net operating loss). AMTI may be reduced only up to 90% by net
operating loss carryovers, but alternative minimum tax paid can be credited
against regular tax due in later years.
For federal income tax purposes, the Association has been reporting its
income and expenses on the accrual method of accounting. The Association's
federal income tax returns have not been audited during the past five years.
STATE TAXATION
NEW YORK STATE AND NEW YORK CITY TAXATION. The Company and the
Association will report income on a combined calendar year basis to both New
York State and New York City. New York State Franchise Tax on corporations is
imposed in an amount equal to the greater of (a) 9% of "entire new income"
allocable to New York State, (b) 3% of "alternative entire net income" allocable
to New York State, (c) 0.01% of the average value of assets allocable to New
York State or (d) nominal minimum tax. Entire net income is based on federal
taxable income, subject to certain modifications. Alternative entire net income
is equal to entire net income without certain modifications. The New York City
Corporation Tax is imposed using similar alternative taxable income methods and
rates.
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A temporary Metropolitan Transportation Business Tax Surcharge on
banking corporations doing business in the Metropolitan District has been
applied since 1982. The Association transacts a significant portion of its
business within this District and is subject to this surcharge. For the tax year
ended December 31, 1996, the surcharge rate is 17% of the State franchise tax
liability. For 1996, an additional 2.5% tax surcharge on the New York State
Franchise Tax was imposed on the Company. New York City does not impose
surcharges applicable to the Company.
For further information relating to the tax consequences of the
Reorganization, see "The Reorganization--Principal Effects of Reorganization --
Tax Effects."
THE REORGANIZATION AND OFFERING
THE BOARD OF DIRECTORS OF THE ASSOCIATION AND THE OTS HAVE APPROVED THE
PLAN SUBJECT TO THE PLAN'S APPROVAL BY MEMBERS AT A SPECIAL MEETING OF MEMBERS,
AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS
IN ITS APPROVAL. OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN BY THE OTS.
GENERAL
On August 19, 1997 the Board of Directors unanimously adopted the Plan,
pursuant to which the Association will reorganize from a federally chartered
mutual savings and loan association into a two-tier federal mutual holding
company structure. The Plan has been approved by the OTS subject to, among other
things, approval of the Plan by the Association's members as of the Voting
Record Date. A special meeting of members has been called for this purpose, to
be held on __________, 1998, (the "Special Meeting"). The Reorganization will be
completed as follows:
(i) the Association will organize an interim stock savings bank as
a wholly-owned subsidiary ("Interim One");
(ii) Interim One will organize an interim stock savings bank as a
wholly-owned subsidiary ("Interim Two");
(iii) Interim One will organize the Company as a wholly-owned
subsidiary;
(iv) the Association will amend its charter to read in the form of
a federal stock savings association charter at which time the
Association will become the Stock Association, and Interim One
will exchange its charter for a federal mutual holding company
charter to become the Mutual Holding Company;
(v) simultaneously with step (vi), Interim Two will merge with and
into the Stock Association, and the Stock Association will be
the surviving institution;
(vi) all of the stock constructively issued by the Stock
Association will be transferred to the Mutual Holding Company
in exchange for membership interests in the Mutual Holding
Company; and
(vii) the Mutual Holding Company will contribute the Stock
Association's stock to the Company, and the Stock Association
will become a wholly-owned subsidiary of the Company.
Concurrently with the Reorganization the Company will offer for sale
46% of its Common Stock representing 46% of the pro forma market value of the
Company and the Association.
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The Association has mailed to each person eligible to vote at the
Special Meeting a proxy statement (the "Proxy Statement") containing information
concerning the business purposes of the Reorganization and the effects of the
Plan and the Reorganization on voting rights, liquidation rights, the
continuation of the Association's business and existing savings accounts, FDIC
insurance and loans. The Proxy Statement also describes the manner in which the
Plan may be amended or terminated. Included with the Proxy Statement is a proxy
card which should be used to vote on the Plan.
The following is a summary of the material aspects of the Plan, the
Subscription Offering, and the Community Offering. The Plan should be consulted
for a more detailed description of its terms.
REASONS FOR REORGANIZATION
In order to secure equity financing, the Reorganization will structure
the Association in the stock form of ownership, which is the corporate form used
by commercial banks, most major businesses and a large number of savings
institutions. The primary purpose of the Reorganization is to establish a
holding company and to convert the Association to the stock form of ownership in
order to compete and expand more effectively in the financial services
marketplace. The Reorganization also will enable customers, employees,
management and directors to have an equity ownership interest in the
Association, which management believes will enhance the long-term growth and
performance of the Association and the Company by enabling the Association to
attract and retain qualified employees who have a direct interest in the
financial success of the Association. The Reorganization will permit the Company
to issue capital stock, which is a source of capital not available to mutual
savings associations. Since the Company will not be offering all of its Common
Stock for sale in the Offering, the Reorganization will result in less capital
raised in comparison to a standard mutual-to-stock conversion. The
Reorganization, however, also will allow the Association to raise additional
capital in the future because a majority of the Company's Common Stock will be
available for sale in the event of a conversion of the Mutual Holding Company to
stock form. The Reorganization also will provide the Bank with greater
flexibility to structure and finance the expansion of its operations, both
directly and through the Company, including the potential acquisition of other
financial institutions, and to diversify into other financial services, to the
extent permissible by applicable law and regulation. Although there are no
current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. Lastly, the Reorganization
will enable the Association to better manage its capital by providing broader
investment opportunities through the holding company structure and by enabling
the Company to repurchase its common stock as market conditions permit. Although
the Reorganization and Offering will create a stock savings Association and
stock holding company, only a minority of the Common Stock will be offered for
sale in the Offering. As a result, the Association's mutual form of ownership
and its ability to provide community-oriented financial services will be
preserved through the mutual holding company structure.
The Board of Directors believes that these advantages outweigh the
potential disadvantages of the mutual holding company structure to Minority
Stockholders, which may include: (i) the inability of stockholders other than
the Mutual Holding Company to obtain majority ownership of the Company and the
Stock Association, which may result in the perpetuation of the management and
Board of Directors of the Stock Association and the Company; and (ii) that the
mutual holding company structure is a relatively new form of corporate
ownership, and new regulatory policies relating to the mutual interest in the
Mutual Holding Company that may be adopted from time-to-time may have an adverse
impact on Minority Stockholders. A majority of the voting stock of the Company
will be owned by the Mutual Holding Company, which will be controlled by its
Board of Directors. While this structure will permit management to focus on the
Company's and the Association's long-term business strategy for growth and
capital redeployment without undue pressure from stockholders, it will also
serve to perpetuate the existing management and directors of the Association.
The Mutual Holding Company will be able to elect all members of the Board of
Directors of the Company, and will be able to control the outcome of all matters
presented to the stockholders of the Company for resolution by vote except for
certain matters, such as the approval of the stock plans and the stock option
plans, that, if established within the first year after the conclusion of the
Offering, must be approved by a majority
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of the votes of the Minority Stockholders of the Company. No assurance can be
given that the Mutual Holding Company will not take action adverse to the
interests of the Minority Stockholders. For example, the Mutual Holding Company
could revise the dividend policy, prevent the sale of control of the Company, or
defeat a candidate for the Board of Directors of the Company or other proposals
put forth by the Minority Stockholders.
The Reorganization does not preclude the conversion of the Mutual
Holding Company from the mutual to stock form of organization following the
reorganization. No assurance can be given when, if ever, the Mutual Holding
Company will convert to stock form or what conditions the OTS or other
regulatory agencies may impose on such a transaction.
Following the completion of the Reorganization, all depositors who had
liquidation rights with respect to the Association as of the Effective date of
the Reorganization will continue to have such rights solely with respect to the
Mutual Holding Company so long as they continue to hold deposit accounts with
the Association. In addition, all persons who become depositors of the
Association subsequent to the Reorganization will have such liquidation rights
with respect to the Mutual Holding Company.
All insured deposit accounts of the Association that are transferred to
the Stock Association will continue to be federally insured by the FDIC and the
SAIF up to the legal maximum limit in the same manner as deposit accounts
existing in the Association immediately prior to the Reorganization. Upon
completion of the Reorganization, the Association may exercise any and all
powers, rights and privileges of, and shall be subject to all limitations
applicable to, capital stock savings associations under Federal law and OTS
regulations. Although the Company will have the power to issue shares of capital
stock to persons other than the Mutual Holding Company, as long as the Mutual
Holding Company is in existence, the Mutual Holding Company will be required to
own a majority of the voting stock of the Company. The Company may issue any
amount of non-voting stock to persons other than the Mutual Holding Company, and
the Company must own 100% of the voting stock of the Association. The
Association and the Company may issue any amount of non-voting stock or debt to
persons other than the Mutual Holding Company.
TAX EFFECTS OF THE REORGANIZATION. The Association intends to proceed
with the Reorganization on the basis of an opinion from its special counsel,
Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C., as to certain tax
matters that are material to the Reorganization. The opinion is based, among
other things, on certain representations made by the Association, including the
representation that the exercise price of the subscription rights to purchase
the Common Stock will be approximately equal to the fair market value of the
stock at the time of the completion of the Reorganization. With respect to the
subscription rights, the Association has received an opinion of Feldman
Financial which, based on certain assumptions, concludes that the subscription
rights to be received by Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members do not have any economic value at the time of
distribution or the time the subscription rights are exercised, whether or not a
Community Offering takes place, and Luse Lehman Gorman Pomerenk & Schick, P.C.'s
opinion is given in reliance thereon. Luse Lehman Gorman Pomerenk & Schick,
P.C.'s opinion provides substantially as follows:
1. The change in the Association's form from a mutual savings
association to a stock savings association (the "Stock
Association") will qualify as a reorganization under Section
368(a)(1)(F) of the Internal Revenue Code, as amended
("Code"), and no gain or loss will be recognized to the
Association in either its mutual form or stock form by reason
of the Reorganization.
2. No gain or loss will be recognized by the Association or the
Stock Association upon the transfer of the Association's
assets to the Stock Association solely in exchange for shares
of Stock Association stock and the assumption by the Stock
Association of the liabilities of the Association.
3. Stock Association's holding period in the assets received from
the Association will include the period during which such
assets were held by the Association.
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4. Stock Association's basis in the assets of the Association
will be the same as the basis of such assets in the
Association immediately prior to the Reorganization.
5. The Stock Association will succeed to and take into account
the Association's earnings and profits or deficit in earnings
and profits, as of the date of the Reorganization.
6. The Stock Association's depositors will recognize no gain or
loss solely by reason of the Reorganization.
7. The Mutual Holding Company and the Minority Stockholders will
recognize no gain or loss upon the transfer of Stock
Association stock and cash, respectively, to the Company in
exchange for Common Stock of the Company.
8. The Company will recognize no gain or loss upon its receipt of
property from the Mutual Holding Company and Minority
Stockholders in exchange for Common Stock of the Company.
9. The basis of the Company Common Stock to the Minority
Stockholders will be the actual purchase price thereof, and
the holding period for Common Stock acquired through the
exercise of subscription rights will begin on the date the
rights are exercised.
The opinions of Luse Lehman Gorman Pomerenk & Schick, P.C., unlike a
letter ruling issued by the Internal Revenue Service, are not binding on the
Service and the conclusions expressed herein may be challenged at a future date.
The Service has issued favorable rulings for transactions substantially similar
to the proposed Reorganization, but any such ruling may not be cited as
precedent by any taxpayer other than the taxpayer to whom the ruling is
addressed. The Association does not plan to apply for a letter ruling concerning
the transactions described herein.
The Association has also received an opinion from O'Reilly, Marsh,
Kearney & Corteselli, P.C. that implementation of the Plan will not result in
any New York income tax liability to the Association, its depositors and
borrowers, the Company or the Mutual Holding Company.
OFFERING OF COMMON STOCK
Under the Plan, up to 529,000 shares of common stock are being offered
for sale, initially through the Subscription Offering (subject to a possible
increase to 608,350 shares). See "--Subscription Offering." The Plan requires,
with certain exceptions, that a number of shares equal to at least 391,000
shares be sold in order for the Reorganization to be effective.
The Subscription Offering expires at __________, New York time, on
__________, 1998. OTS regulations and the Plan require that the sale of Common
Stock be completed within 45 days after the close of the Subscription Offering.
This 45-day period expires on ____________, 1998. In the event the Association
is unable to complete the sale of common stock within this 45-day period, the
Association may request an extension of this time period from the OTS. No single
extension granted by the OTS, however, may exceed 90 days. No assurance can be
given that an extension would be granted if requested. The OTS, however, has
granted extensions due to the inability of mutual financial institutions to
complete a stock offering as a result of the development of adverse conditions
in the stock market. If an extension is granted, the Association would promptly
notify subscribers of the granting of the extension of time and would promptly
return subscriptions unless subscribers affirmatively elect to continue their
subscriptions during the period of extension. Such extensions may not be made
beyond _____________, 2001.
Shares may also be offered to the public in a Community Offering, if
one is to be held. In the event a Community Offering is held, it may begin
immediately after the Subscription Offering, or any time during the Subscription
Offering. The Community Offering may end on or after the Subscription Offering,
but not later than
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February __, 1998, unless further extended with the approval of the OTS. The
actual number of shares to be sold in the Offering will depend upon market and
financial conditions at the time of the Offering, provided that no fewer than
391,000 shares or more than 608,350 shares are sold in the Offering. The per
share price to be paid by prospective purchasers in the Community Offering, if
any, for any remaining shares will be $10.00, the same price paid by subscribers
in the Subscription Offering. See "- Stock Pricing."
As permitted by OTS regulations, the Plan provides that if, for any
reason, purchasers cannot be found for an insignificant numbers of unsubscribed
shares of the common stock, the Board of Directors will seek to make other
arrangements for the sale of the remaining shares. Such other arrangements will
be subject to the approval of the OTS. If such other purchase arrangements
cannot be made, the Plan will terminate. In the event that the Offering is not
completed, the Association will remain a mutual savings association, all
subscription funds will be promptly returned to subscribers with interest earned
thereon at the passbook rate, which is currently _____% per annum (except for
payments to have been made through withdrawal authorizations which will have
continued to earn interest at the contractual account rates), and all withdrawal
authorizations will be canceled.
SUBSCRIPTION OFFERING
In accordance with OTS regulations, nontransferable rights to subscribe
for the purchase of the Company's Common Stock have been granted under the Plan
to the following persons in the following order of priority: (1) Eligible
Account Holders; (2) the ESOP; (3) Supplemental Eligible Account Holders; (4)
depositors and borrowers other than Eligible Account Holders and Supplemental
Eligible Account Holders, at the close of business on ____________, 1998, the
voting record date for the Special Meeting ("Other Members"), and (5), and
employees, officers and directors. All subscriptions received will be subject to
the availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering, and to the maximum and
minimum purchase limitations set forth in the Plan (and described below). The
June 30, 1996 date for determining who qualifies as Eligible Account Holders,
and the December 31, 1997 date for determining who qualifies as Supplemental
Eligible Account Holders, were selected in accordance with federal regulations
applicable to the Reorganization.
CATEGORY I: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without cost to him or her, nontransferable subscription rights to
subscribe for up to 5,000 shares of the Common Stock; provided, however, that no
Eligible Account Holder may purchase alone or with his or her Associates (as
defined in this Prospectus) and persons acting in concert, more than 5,000
shares of Common Stock. The Company may, in its sole discretion and without
further notice to, or solicitation of, subscribers or other prospective
purchasers, increase the maximum purchase limitation up to 5% of the maximum
number of shares offered in the Offering, or decrease the maximum purchase
limitation to as low as .5% of the maximum number of shares offered in the
Offering.
If sufficient shares are not available in this Category I, the
Association will allocate shares in a manner that will allow each Eligible
Account Holder purchase the lesser of 100 shares or the amount subscribed for.
Thereafter, unallocated shares will be allocated to subscribing Eligible Account
Holders in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all subscribing
Eligible Account Holders. To ensure a proper allocation of Common Stock, each
Eligible Account Holder must list on the Stock Order Form all accounts in which
he and she has an ownership interest as of June 30, 1996. Failure to list all
such qualifying deposit accounts may result in the inability of the Company or
the Association to fill all or part of a subscription order. Neither the
Company, the Association nor any of their agents shall be responsible for orders
on which all qualifying deposit accounts have not been fully and accurately
disclosed.
The "qualifying deposits" of an Eligible Account Holder is the
aggregate amount of the deposit balances (provided such aggregate balance is not
less than $50.00) in his or her deposit accounts, including money market
accounts, as of the close of business on June 30, 1996. Subscription rights
received by directors and officers in this category based upon their increased
deposits in the Association during the year preceding June 30, 1996, are
subordinated to the subscription rights of other Eligible Account Holders.
Notwithstanding the foregoing, shares of
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Common Stock with a value in excess of $50,000, may be sold to the ESOP before
satisfying the subscriptions of Eligible Account Holders in the event the number
of shares sold in the Offering is increased by more than 529,000 shares. For
allocation purposes, qualifying deposits will be divided in the case of multiple
orders.
CATEGORY II: THE EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP"). The ESOP will
receive nontransferable subscription rights to purchase up to 10% of the total
number of shares of Common Stock offered in the Offering, provided that shares
remain available after satisfying the subscription rights of Eligible Account
Holders. The ESOP currently intends to purchase 8% of the shares sold in the
Offering. If the ESOP is unable to purchase all or part of the shares of Common
Stock for which it subscribes, the ESOP may purchase such shares on the open
market or may purchase authorized but unissued shares of the Company. Any
purchase by the ESOP of authorized but unissued shares would dilute the
interests of the Company's shareholders.
CATEGORY III: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, nontransferable
subscription rights to subscribe for up to 5,000 shares of the Common Stock;
provided, however, that no Supplemental Eligible Account Holder may purchase
alone or with his or her Associates and persons acting in concert, more than
5,000 shares of common stock. Such subscription rights will be applicable only
to shares that remain available after the subscriptions of Eligible Account
Holders and the ESOP have been satisfied. The Company may, in its sole
discretion, and without further notice to, or solicitation of, subscribers or
other prospective purchasers, increase the maximum purchase limitation to up to
5% of the maximum number of shares offered in the Offering or decrease the
maximum purchase limitation to as low as .5% of the maximum number of shares
offered in the Offering.
If sufficient shares are not available in this Category III, the
Association will allocate shares in a manner that will allow each Supplemental
Eligible Account Holder to purchase the lesser of 100 shares or the amount
subscribed for. Thereafter, unallocated shares will be allocated to subscribing
Supplemental Eligible Account Holders in the proportion that the amounts of
their respective qualifying deposits bear to the total amount of qualifying
deposits of all subscribing Supplemental Eligible Account Holders. To ensure a
proper allocation of Common Stock, each Supplemental Eligible Account Holder
must list on the Stock Order Form all accounts in which he or she has an
ownership interest as of December 31, 1997. Failure to list all such qualifying
deposit accounts may result in the inability of the Company or the Association
to fill all or part of a subscription order. Neither the Company, the
Association nor any of their agents shall be responsible for orders on which all
qualifying deposit accounts have not been fully and accurately disclosed.
The "qualifying deposits" of a Supplemental Eligible Account Holder is
the aggregate amount of the deposit balances (provided such aggregate balance is
not less than $50.00) in his or her deposit accounts, including money market
accounts, as of the close of business on December 31, 1997.
CATEGORY IV: OTHER MEMBERS. Each Other Member will receive, without
cost to him or her, nontransferable subscription rights to subscribe for up to
5,000 shares of the Common Stock; provided, however, that no Other Member may
purchase alone or with his or her Associates and persons acting in concert, more
than 5,000 shares of Common Stock. Such subscription rights will be applicable
only shares that remain available after the subscriptions of Eligible Account
Holders, the ESOP, and Supplemental Eligible Account Holders have been
satisfied. The Company may in its sole discretion increase the maximum purchase
limitation to up to 5% of the maximum number of shares offered in the Offering
or decrease the maximum purchase limitation to as low as.5% of the maximum
number of shares offered in the Offering.
If sufficient shares are not available in this Category IV, shares will
be allocated pro rata among subscribing Other Members in the same proportion
that the number of shares subscribed for by each Other Member bears to the total
number of shares subscribed for by all Other Members.
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CATEGORY V: EMPLOYEES, OFFICERS AND DIRECTORS. Employees, officers and
directors of the Association will receive, without cost to them, nontransferable
subscription rights to subscribe for up to 5,000 shares of the Common Stock;
provided that no employee, officer or director may purchase alone or with his or
her Associates and persons acting in concert more than 5,000 shares of common
stock. For purposes of the Plan directors, officers and employees are not
Associates of one another, nor are they acting in concert solely as a result of
their positions as directors, officers or employees of the Association. Such
subscription rights will only be awarded after subscriptions of Eligible Account
holders, the ESOP, Supplemental Eligible Account Holders and other Members have
been satisfied. If sufficient shares are not available in this Category V,
shares will be allocated among directors, officers and employees on a pro rata
basis based on the size of each person's order.
TIMING OF OFFERING AND METHOD OF PAYMENT. The Subscription Offering
will expire at __________, New York time, on ___________, 1998 (the "Expiration
Date"). The Expiration Date may be extended by the Association and the Company
for successive 90-day periods, subject to OTS approval, to ___________, 2000. If
the Offering is extended beyond ______________, 2000, subscribers will be given
the right to increase, decrease, confirm or modify their orders.
Before the Expiration Date, or any extension of such date, each
subscriber must return the Order Forms to the Association, properly completed,
together with checks or money orders in an amount equal to the Purchase Price
multiplied by the number of shares for which subscription is made. Payment for
stock purchases can also be accomplished through authorization on the order form
of withdrawals from accounts with the Association (including a certificate of
deposit). The Association has the right to reject any orders transmitted by
facsimile and any payments made by wire transfer.
Until completion or termination of the Reorganization, subscribers who
elect to make payment through authorization of withdrawal from accounts with the
Association will not be permitted to reduce the deposit balance in any such
accounts below the amount required to purchase the shares for which they
subscribed. In such cases interest will continue to be credited on deposits
authorized for withdrawal until the completion of the Reorganization. Interest
at the passbook rate, which is currently _____ per annum, will be paid on
amounts submitted by check. Authorized withdrawals from certificate accounts for
the purchase of Common Stock will be permitted without the imposition of early
withdrawal penalties or loss of interest. However, withdrawals from certificate
accounts that reduce the balance of such accounts below the required minimum for
specific interest rate qualification will cause the cancellation of the
certificate accounts at the effective date of the Reorganization, and the
remaining balance will earn interest at the passbook savings rate or will be
returned to the depositor. Stock subscriptions received and accepted by the
Association are final. Subscriptions may be withdrawn only in the event that the
Reorganization is not completed by __________, 1998.
MEMBERS IN NON-QUALIFIED STATES OR FOREIGN COUNTRIES. The Association
will make reasonable efforts to comply with the securities laws of all states in
the United States in which persons entitled to subscribe for stock pursuant to
the Plan reside. However, no person will be offered or sold any stock in the
Subscription Offering if such person resides in a foreign country or resides in
a state in the United States with respect to which all of the following apply:
(i) a small number of persons otherwise eligible to subscribe for shares of
Common Stock reside in such state; (ii) the granting of subscription rights or
the offer or sale of Common Stock to such persons would require the Association
or the Company or its respective officers and directors, under the securities
laws of such state, to register as a broker, dealer, salesman or selling agent,
or to register or otherwise qualify the Common Stock for sale in such state; and
(iii) such registration, qualification or filing in its judgment or in the
judgment of the Company would be impracticable or unduly burdensome for reasons
of cost or otherwise.
To assist in the Offering, the Association has established a Stock
Information Center that you may contact at (718) _________ . Callers to the
Stock Information Center will be able to request a Prospectus and other
information relating to the Offering.
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COMMUNITY OFFERING
To the extent shares remain available for purchase after filling all
orders received in the Subscription Offering, the Company may offer shares of
the common stock in a Community Offering to the general public, with preference
given to residents in Brooklyn, the borough where the Association maintains its
offices. The right of any person to purchase shares in the Community Offering is
subject to the Association's right to accept or reject such purchase in whole or
in part. The Association may terminate the Community Offering as soon as it has
received orders for at least the minimum number of shares available for purchase
in the Offering.
Persons wishing to purchase stock in the Community Offering, if
conducted, should return the Order Form to the Association, properly completed,
together with a check or money order in the amount equal to the Purchase Price
multiplied by the number of shares which that person desires to purchase. Order
Forms will be accepted until the completion of the Community Offering. However,
the Association may terminate the Community Offering as soon as orders are
received for at least the minimum number of shares available for purchase in the
Offering.
The maximum number of shares of Common Stock which may be purchased in
the Community Offering by any person (including such person's Associates) or
persons acting in concert is 5,000 in the aggregate. A member who, together with
his Associates and persons acting in concert, has subscribed for shares in the
Subscription Offering may subscribe for a number of additional shares in the
Community Offering that does not exceed the lesser of (i) 5,000 shares or (ii)
the number of shares which, when added to the number of shares subscribed for by
the member (and his Associates and persons acting in concert) in the
Subscription Offering, would not exceed 5,000. The Association reserves the
right to reject any orders received in the Community Offering in whole or in
part.
If all the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Community
Offering. In the event of an oversubscription, purchase orders received during
the Community Offering will be filled up to a maximum of 1,000 shares of Common
Stock issued in the Offering, with any remaining unfilled purchase orders to be
allocated on a pro rata basis based on the amount of their respective
subscriptions. If the Community Offering continues for more than 45 days after
the expiration of the Subscription Offering, subscribers will have the right to
increase, decrease or rescind subscriptions for stock previously submitted. All
sales of Common Stock in the Community Offering will be at the same price per
share as the sales of Common Stock in the Subscription Offering.
Cash and checks received in the Community Offering will be placed in an
interest bearing account with the Association, and will earn interest at the
passbook rate, which is currently _____% per annum, from the date of deposit
until completion or termination of the Reorganization. In the event that the
Reorganization is not consummated for any reason, all funds submitted pursuant
to the Community Offering will be promptly refunded with interest as described
above.
SYNDICATED COMMUNITY OFFERING
Any shares of Common Stock not sold in the Subscription Offering or in
the Community Offering, if any, may be offered for sale to the general public by
a selling group of broker-dealers to be managed by Ryan Beck & Co. in a
Syndicated Community Offering, subject to terms, conditions and procedures as
may be determined by the Association and the Company in a manner that is
intended to achieve the widest distribution of the Common Stock subject to the
rights of the Company to accept or reject in whole or in part all orders in the
Syndicated Community Offering. It is expected that the Syndicated Community
Offering will commence as soon as practicable after termination of the
Subscription Offering and the Community Offering, if any. The Syndicated
Community Offering shall be completed within 45 days after the termination of
the Subscription Offering, unless such period is extended as provided herein.
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If for any reason a Syndicated Community Offering of unsubscribed
shares of Common Stock cannot be effected and any shares remain unsold after the
Subscription Offering and any Community Offering, the Boards of Directors of the
Company and the Association will seek to make other arrangements to sell the
remaining shares. Such other arrangements will be subject to OTS approval and to
compliance with applicable state and federal securities laws.
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON STOCK
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the end of the Offering, in accordance with Rule 15c2-8 under the
Securities Exchange Act of 1934, no Prospectus will be mailed later than five
days or hand delivered any later than two days prior to the end of the Offering.
Execution of the Order Form will confirm receipt or delivery of a Prospectus in
accordance with Rule 15c2-8. Order Forms will be distributed only with a
Prospectus. Neither the Company, the Association, nor Ryan, Beck & Co. is
obligated to deliver a Prospectus and an Order From by any means other than the
U.S. Postal Service.
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts, or in the case of other
members who are borrowers only, loans held at the Association, on the Order Form
giving all names on each deposit account and/or loan and the account and/or loan
numbers at the applicable eligibility date.
Full payment by check, cash (except by mail), money order, bank draft
or withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original Order Form. THE COMPANY IS NOT OBLIGATED TO ACCEPT AN
ORDER SUBMITTED ON PHOTOCOPIED OR TELECOPIED ORDER FORMS. ORDERS CANNOT AND WILL
NOT BE ACCEPTED WITHOUT THE EXECUTION OF THE CERTIFICATION APPEARING ON THE
ORDER FORM.
If the ESOP purchases shares of Common Stock, it will not be required
to pay for such shares until consummation of the Offering, provided that there
is in force from the time the order is received a loan commitment to lend to the
ESOP the amount of funds necessary to purchase the number of shares ordered.
DELIVERY OF CERTIFICATES
Certificates representing shares issued in the Subscription Offering
and in the Community Offering, if any, pursuant to Order Forms will be mailed to
the persons entitled to them at the last addresses of such persons appearing on
the books of the Association or to such other addresses as may be specified in
properly completed Order Forms as soon as practicable following consummation of
the Reorganization. The Company will not accept orders registered "in care of"
or instructed to be mailed to a third party. Any certificates returned as
undeliverable will be held by the Company until claimed by the person legally
entitled to them or otherwise disposed of in accordance with applicable law.
Purchasers may not be able to sell the shares of Common Stock which they
purchase until certificates for the common stock are available and delivered to
them, even though trading of the common stock may have commenced. Shares sold
prior to receipt of a stock certificate are the responsibility of the purchaser.
MARKETING AGENT
To assist the Association and the Company in marketing the Common
Stock, Ryan, Beck & Co. has been retained as the Association's financial
advisor. Ryan, Beck & Co. is a broker-dealer registered with the Securities and
Exchange Commission (the "SEC") and a member of the National Association of
Securities Dealers, Inc. (the "NASD"). Ryan, Beck & Co. will assist the Company
and the Association in the Offering by providing advisory assistance to the
Association, helping with the supervision and administration of the Stock
Information Center and assisting in the marketing of the Common Stock in the
Offering. For providing these services, Ryan, Beck & Co. will be paid an
advisory and marketing fee of $120,000. Ryan, Beck & Co. will also be reimbursed
for out-of-pocket expenses, which are not to exceed $10,000 without the
Association's consent (excluding certain reimbursable
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expenses), and for legal fees, which are not to exceed $30,000 without the
Association's consent. Offers and sales in the Community Offering will be on a
best efforts basis and, as a result, Ryan, Beck & Co. is not obligated to
purchase any shares of the Common Stock. Ryan, Beck & Co. intends to make a
market in the Common Stock, although it is under no obligation to do so.
The Association has also agreed to indemnify Ryan, Beck & Co., under
certain circumstances, against liabilities and expenses (including legal fees)
arising out of Ryan, Beck & Co.'s engagement , including liabilities under the
Securities Act of 1933 (the"1933 Act").
SELECTED DEALERS
Depending on market conditions, the Common Stock may be offered for
sale to the general public on a best efforts basis in the Syndicated Community
Offering by a selling group of broker-dealers ("Selected Dealers") to be managed
by Ryan Beck & Co. Selected Dealers, which may include Ryan, Beck & Co. will
receive commissions at an agreed upon rate for all shares sold by such Selected
Dealers. During the Community Offering, Selected Dealers may only solicit
indications of interest from their customers to place orders with us as of a
certain date (the "Order Date") for the purchase of shares of Common Stock. When
and if the Company, the Association and Ryan, Beck & Co. believe that enough
indications of interest and orders have been received in the Subscription
Offering and the Community Offering, if any, to consummate the Offering, Ryan,
Beck & Co. will request, as of the Order Date, Selected Dealers to submit orders
to purchase shares for which they have previously received indications of
interest from the customers. Selected Dealers will send confirmations of the
orders to such customers on the next business day after the Order Date. Selected
Dealers will debit the accounts of their customers on the date which will be
three business days from the Order Date (the "Settlement Date"). On the
Settlement Date, funds received by Selected Dealers will be remitted to the
Association. The Association will pay a fee equal to 5.5% of the total dollar
amount of common stock sold by Selected Dealers. It is anticipated that the
Reorganization and Offering will be consummated on the Settlement Date. However,
if consummation is delayed after payment has been received by the Association
from Selected Dealers, funds will earn interest at the passbook rate, which is
currently _____% per annum until the completion of the offering. Funds will be
returned promptly in the event the Reorganization and Offering is not
consummated.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes a number of limitations on the number of shares of
Common Stock which may be purchased in the Offering. These are summarized below:
1. The aggregate amount of outstanding Common Stock owned or
controlled by persons other than the Mutual Holding Company at
the close of the Offering shall be less than 50% of the total
outstanding Common Stock.
2. No Person, Associate thereof, or group of persons acting in
concert, may purchase more than $50,000 of Common Stock
offered in the Offering to persons other than the Mutual
Holding Company except that: (i) the Company may, in its sole
discretion and without further notice to or solicitation of
subscribers or other prospective purchasers, increase the
maximum purchase limitation to up to 5% of the number of
shares offered in the Offering; (ii) Tax-Qualified Employee
Plans may purchase up to 10% of the shares offered in the
Offering; and (iii) shares held by any Tax-Qualified Employee
Plan and attributable to a person will not be aggregated with
other shares purchased directly by or otherwise attributable
to such person.
3. The aggregate amount of Common Stock acquired in the Offering
by all officers and directors of the Association or any
affiliate of the Association, and any person acting in concert
with such officer or director and their Associates, exclusive
of any stock acquired by such persons in the secondary
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market, may not exceed 34% of the outstanding shares of Common
Stock held by persons other than the Mutual Holding Company at
the close of the Offering. In calculating the number of shares
held by officers or directors of the Association or any
Affiliate of the Association and any person acting in concert
with any such officer or director and their Associates under
this paragraph or under the provisions of Section 4 of this
section, shares held by any Tax-Qualified Employee Benefit
Plans of the Association that are attributable to such persons
shall not be counted.
4. The aggregate amount of Common Stock acquired in the Offering
by all officers and directors of the Association or any
affiliate of the Association and any person acting in concert
with any such officer or director and their Associates,
exclusive of any Common Stock acquired by such plans or
persons in the secondary market, may not exceed 34% of the
stockholders' equity of the Company other than the Mutual
Holding Company at the close of the Offering.
5. The Boards of Directors of the Association and the Company
may, in their sole discretion, increase the maximum purchase
limitation to up to 9.9%, provided that the percentage amount
by which any order for Common Stock exceeds 5% of the total
number of shares of Common Stock offered in the Offering shall
not, when aggregated with the percentage amount by which any
other order exceeds 5% of the total number of shares of Common
Stock offered in the Offering, exceed 10% of the total shares
of Common Stock offered in the Offering (except that this
limitation shall not apply to purchases by Tax-Qualified
Employee Plans). If such 5% limitation is increased,
subscribers for the maximum amount will be, and certain other
large subscribers in the sole discretion of the Company and
the Association may be, given the opportunity to increase
their subscriptions up to the then applicable limit. Requests
to purchase additional shares of Common Stock under this
provision will be determined by the Board of Directors of the
Company, in its sole discretion.
6. Notwithstanding any other provision of this Plan, no person
shall be entitled to purchase any Common Stock to the extent
such purchase would be illegal under any federal law or state
law or regulation or would violate regulations or policies of
the National Association of Securities Dealers, Inc.,
particularly those regarding free riding and withholding. The
Company and/or its agents may ask for an acceptable legal
opinion from any purchaser as to the legality of such purchase
and may refuse to honor any purchase order if such opinion is
not timely furnished.
7. The Board of Directors of the Company has the right in its
sole discretion to reject any order submitted by a person
whose representations the Board of Directors believes to be
false or who it otherwise believes, either alone or acting in
concert with others, is violating, circumventing, or intends
to violate, evade or circumvent the terms and conditions of
this Plan.
OTS regulations define "acting in concert" as (i) knowing participation
in a joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. THE ASSOCIATION WILL PRESUME
THAT CERTAIN PERSONS ARE ACTING IN CONCERT BASED UPON VARIOUS FACTS, INCLUDING
THE FACT THAT PERSONS HAVE JOINT ACCOUNT RELATIONSHIPS OR THE FACT THAT SUCH
PERSONS HAVE FILED JOINT SCHEDULES 13D WITH THE SEC WITH RESPECT TO OTHER
COMPANIES.
Directors are not treated as Associates of one another solely because
of their board membership. Compliance with the foregoing limitations does not
necessarily constitute compliance with other regulatory restrictions on
acquisitions of the Common Stock. For a further discussion of limitations on
purchases of the Common Stock during and subsequent to Reorganization, see
"--Restrictions on Sale of Stock by Directors and Officers," "--Restrictions
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on Purchase of Stock by Directors and Officers Following Reorganization," and
"Restrictions on Acquisition of the Company."
RESTRICTIONS ON REPURCHASE OF STOCK BY THE COMPANY
Repurchases of its shares by the Company will be restricted for a
period of three years from the date of the completion of Reorganization. OTS
regulations currently prohibit the Company from repurchasing any of its shares
within three years following the Reorganization except in exceptional
circumstances. The Company may not, for a period of three years from the date of
the Reorganization, repurchase any of its capital stock from any person, except
in the event of an offer to purchase by the Company on a pro rata basis from all
of its shareholders (excluding the Mutual Holding Company) which is approved in
advance by the OTS, the repurchasing of qualifying shares of a director or
purchases of shares required to fund a tax qualified or non-tax qualified plan.
RESTRICTIONS ON SALE OF STOCK BY DIRECTORS AND OFFICERS
Any shares of the Common Stock purchased in the Offering by directors
and officers of the Association or the Company may not be sold or otherwise
disposed of for value for a period of one year following the date of purchase,
except for any disposition of such shares (i) following the death of the
original purchaser or (ii) by reason of an exchange of securities in connection
with a merger or acquisition approved by the applicable regulatory authorities.
Sales of shares of the Common Stock by the Company's directors and officers will
also be subject to certain insider trading and other transfer restrictions under
the federal securities laws. See "Regulation -- Federal Securities Laws" and
"Description of Capital Stock."
Each certificate for such restricted shares will bear a legend
prominently stamped on its face giving notice of the restrictions on transfer,
and instructions will be issued to the Company's transfer agent to the effect
that any transfer within such time period of any certificate or record ownership
of such shares other than as provided above is a violation of the restriction.
Any shares of Common Stock issued pursuant to a stock dividend, stock split or
otherwise with respect to restricted shares will be subject to the same
restrictions on sale.
RESTRICTIONS ON PURCHASE OF STOCK BY DIRECTORS AND OFFICERS IN THE
REORGANIZATION AND OFFERING
OTS regulations provide that for a period of three years following the
Reorganization, without prior written approval of the OTS, neither directors or
officers of the Association or the Company, nor their Associates, may purchase
the Common Stock of the Company except from a dealer registered with the SEC.
This restriction, however, does not apply to negotiated transactions involving
more than 1% of the Company's outstanding Common Stock, to shares purchased
pursuant to stock option or other incentive stock plans approved by the
Company's shareholders, or to shares purchased by employee benefit plans
maintained by the Company which may be attributable to individual officers or
directors.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND COMMON STOCK
Prior to the completion of the Reorganization, OTS regulations and the
Plan prohibit any person with subscription rights, including Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members and directors,
officers and employees from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his or her account. Each person exercising such
subscription rights will be required to certify that he or she is purchasing
shares solely for his or her own account and that there is no agreement or
understanding regarding the sale or transfer of such shares. The regulations
also prohibit any person from offering or making an announcement of an offer or
intent to make an offer to purchase such subscription rights or shares of Common
Stock prior to the completion of the Reorganization and Offering. THE
ASSOCIATION INTENDS TO PURSUE ANY AND ALL LEGAL AND EQUITABLE
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REMEDIES IN THE EVENT IT BECOMES AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS
AND WILL NOT HONOR ORDERS KNOWN TO INVOLVE THE TRANSFER OF SUCH RIGHTS. IN
ADDITION, PERSONS WHO VIOLATE THE PURCHASE LIMITATIONS MAY BE SUBJECT TO
SANCTIONS AND PENALTIES IMPOSED BY THE OTS.
STOCK PRICING
The aggregate purchase price of the Company common stock being sold in
the Reorganization will be based on the appraised aggregate pro forma market
value of the Common Stock, as determined by the Independent Valuation. Feldman
Financial, which is experienced in the valuation and appraisal of financial
institutions, including savings associations forming mutual holding companies,
has been retained to prepare the Independent Valuation. Feldman Financial will
receive a fee of $14,000 for its appraisal and business plan services, including
out-of-pocket expenses. The Association has agreed to indemnify Feldman
Financial, under certain circumstances, against liabilities and expenses
(including legal fees) arising out of Feldman Financial's engagement.
The Independent Valuation states that the pro forma market value of the
Common Stock was $10 million as of December 11, 1997. A copy of the appraisal is
on file and available for inspection at the offices of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and the Northeast Regional Office of the OTS, 10
Exchange Place, Jersey City, New Jersey. The Independent Valuation has also been
filed as an exhibit to the Company's Registration Statement with the SEC, and
may be reviewed at the SEC's public reference facilities. See "Additional
Information." The Independent Valuation involved a comparative valuation of the
Association's operating and financial statistics with those of other financial
institutions. The Independent Valuation also took into account such other
factors as the market for savings associations generally, prevailing economic
conditions, both nationally and in New York, which affect the operations of
savings associations, the competitive environment within which the Association
operates, and the effect of the Association becoming a subsidiary of the
Company. No detailed individual analysis of the separate components of the
Association's and the Company's assets and liabilities was performed in
connection with the valuation. The Board of Directors reviewed with management
Feldman Financial's methods and assumptions, and accepted Feldman Financial's
appraisal as reasonable and adequate. The Association has determined to
establish an Offering Range of 391,000 shares to 529,000 shares at the minimum
and maximum of the Estimated Valuation Range. Notwithstanding any change in the
number of shares sold in the Offering due to a change to the Independent
Valuation, the Minority Ownership Interest sold in the Offering will remain 46%.
The Association, in consultation with Ryan, Beck & Co., has determined to offer
the Common Stock in the Offering at a price of $10.00 per share. The
Association's decision regarding the Purchase Price was based solely on its
determination that $10.00 per share is a customary purchase price in initial
public offerings for mutual savings associations converting to stock form. The
Offering Range may be increased or decreased to reflect market and financial
conditions prior to the completion of the Offering.
Promptly after the completion of the Subscription Offering and the
Community Offering, if any, Feldman Financial will confirm to the Association
that, to the best of its knowledge and judgment, nothing of a material nature
has occurred which would cause it to conclude that the amount of the aggregate
proceeds received from the sale of the Common Stock in the Offering was
incompatible with Feldman Financial's estimate of the Company's total pro forma
market value at the time of the sale. If, however, the facts do not justify such
a statement, a new Offering Range and price per share may be set. Under such
circumstances, the Company will be required to resolicit subscriptions. In that
event, subscribers would have the right to modify or rescind their subscriptions
and to have their subscription funds returned promptly with interest and holds
on funds authorized for withdrawal from deposit accounts would be released or
reduced; provided that if the Association's pro forma market value upon
reorganization has increased to an amount which does not exceed $13,225,000 (15%
above the maximum of the Independent Valuation), the Company and the Association
do not intend to resolicit subscriptions unless it is determined after
consultation with the OTS that a resolicitation is required.
Depending upon market and financial conditions, the number of shares
issued may be more or less than the range in number of shares shown above. In
the event of an increase in the maximum number of shares being offered,
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persons who exercise their maximum subscription rights will be notified of such
increase and of their right to purchase additional shares. Conversely, in the
event of a decrease in the maximum number of shares being offered, persons who
exercise their maximum subscription rights will be notified of such decrease and
of the concomitant reduction in the number of shares for which subscriptions may
be made. In the event of a resolicitation, subscribers will be afforded the
opportunity to increase, decrease or maintain their previously submitted order.
The Company will be required to resolicit if the price per share is changed such
that the total aggregate purchase price is not within the minimum and 15% above
the maximum of the Offering Range.
THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE
REORGANIZATION OR OF PURCHASING THE SHARES OF THE COMMON STOCK. MOREOVER,
BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A
NUMBER OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE AMOUNT OF NET
PROCEEDS AND THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME
TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN THE
OFFERING WILL THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES RELATED TO THE
FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE.
NUMBER OF SHARES TO BE ISSUED
It is anticipated that the total offering of Common Stock (the number
of shares of Common Stock issued in the Offering multiplied by the Purchase
Price of $10.00 per share) will be within the current minimum and 15% above the
maximum of the Offering Range. Unless otherwise required by the OTS, no
resolicitation of subscribers will be made and subscribers will not be permitted
to modify or cancel their subscriptions so long as the change in the number of
shares to be issued in the Offering, in combination with the Purchase Price,
results in an offering of at least the minimum and no more than 15% above the
maximum of the Offering Range.
Any increase in the total number of shares of Common Stock to be issued
in the Offering would decrease both an individual subscriber's ownership
interest and the Company's pro forma net worth and net income on a per share
basis while increasing (assuming no change in the per share price) pro forma net
income and net worth on an aggregate basis. A decrease in the number of shares
to be issued in the Offering would increase both an individual subscriber's
ownership interest and the Company's pro forma net worth and net income on a per
share basis while decreasing (assuming no change in the per share price) pro
forma net income and net worth on an aggregate basis. For a presentation of the
effects of such changes, see "Pro Forma Data."
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Association and the Company will be final. The Plan provides that, if deemed
necessary or desirable by the Boards of Directors of the Company and the
Association, the Plan may be substantively amended by the Boards of Directors,
as a result of comments from regulatory authorities or otherwise, with the
concurrence of the OTS. Moreover, if the Plan is so amended, subscriptions which
have been received prior to such amendment will not be refunded unless otherwise
required by the OTS.
CONDITIONS AND TERMINATION
Completion of the Reorganization requires the approval of the Plan by
the affirmative vote of not less than a majority of the total number of votes of
members eligible to be cast at the Special Meeting and the sale of all shares of
the Common Stock within 24 months following approval of the Plan by the members.
If these conditions are not satisfied, the Plan will be terminated and the
Association will continue business in the mutual form of organization. The Plan
may be terminated by the Board of Directors of the Association at any time prior
to the Special Meeting and,
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with the approval of the OTS, by such Board of Directors at any time thereafter.
Furthermore, OTS regulations and the Plan require that the Company complete the
sale of Common Stock within 45 days after the close of the Subscription
Offering. The OTS may grant an extension of this time period if necessary, but
no assurance can be given that an extension would be granted. See "-- Offering
of common stock."
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY
GENERAL
The following discussion is a general summary of regulatory and other
restrictions on the acquisition of the Common Stock. In addition, the following
discussion generally summarizes certain provisions of the Company's Federal
Charter ("Charter") and Bylaws and certain regulatory provisions that may be
deemed to have an "anti-takeover" effect.
MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure restricts the ability of
stockholders of the Company to effect a change of control of management because
the Mutual Holding Company, as long as it remains in existence, will control a
majority of the voting stock of the Company. In addition, the Mutual Holding
Company will be owned by members of the Association (i.e., depositors) and such
members have granted proxies to the Board of Directors of the Association. In
the future proxies will be granted to the Mutual Holding Company. As such, the
Board of Directors of the Mutual Holding Company will be able to exert voting
control over the Company.
CHANGE IN BANK CONTROL ACT AND SAVINGS AND LOAN HOLDING COMPANY PROVISIONS OF
THE HOLA
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings association unless the OTS has been given 60 days'
prior written notice. The Home Owners' Loan Act provides that no company may
acquire "control" of a savings association without the prior approval of the
OTS. Any company that acquires such control becomes a "savings and loan holding
company" subject to registration, examination, and regulation by the OTS.
Pursuant to federal regulations, control of a savings association is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of an association or
the ability to control the election of a majority of the directors of an
association. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock, of a savings association, where certain
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit an acquisition of control if (i) it would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or (iii) the
competence, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or of the public to permit the
acquisition of control by such person. The foregoing restrictions do not apply
to the acquisition of the Company's capital stock by one or more tax-qualified
employee stock benefit plans, provided that the plan or plans do not have
beneficial ownership in the aggregate of more than 25% of any class of equity
security of the Company.
THE COMPANY'S CHARTER AND BYLAWS
The Company's Charter and Bylaws contain provisions that affect
corporate governance as well as the voting and ownership rights of stockholders.
The following discussion is a general summary of certain provisions of the
Company's Charter and Bylaws relating to provisions which may be deemed to have
an "anti-takeover" effect. The description of these provisions is necessarily
general, and reference should be made in each case to the Charter and Bylaws of
the Company.
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CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS
The Company's Charter provides that the Board of Directors is to be
divided into three classes which shall be as nearly equal in number as possible.
The initial directors in each class will hold office for terms either of one
year, two years or three years, and, upon reelection, will serve for terms of
three years and until their successors are elected and qualified. Each director
serves until his successor is elected and qualified. The Bylaws provide that a
director may be removed only by the affirmative vote of the holders of at least
a majority of the outstanding shares entitled to vote.
A classified board of directors may make it more difficult for
stockholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the Board of
Directors. Because the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the stockholders to
change a majority, whereas a majority of a non-classified board may be changed
in one year. In the absence of provisions in the Company's Charter or Bylaws
that classify the Board of Directors, all of the directors would be elected each
year.
Management of the Company believes that the staggered election of
directors tends to promote continuity of management, although continuity of
management has not been a problem in the past, because only one-third of the
Board of Directors is subject to election each year. Staggered terms guarantee
that in the ordinary course approximately two-thirds of the directors at any one
time have had at least one year's experience as directors of the Company, and
moderate the pace of changes in the Board of Directors by extending the minimum
time required to elect a majority of directors from one to two years.
ABSENCE OF CUMULATIVE VOTING
The Company's Charter provides that there shall be no cumulative voting
for the election of directors.
AUTHORIZATION OF PREFERRED STOCK
The Federal Charter authorizes 10,000,000 shares of serial preferred
stock, 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 (which could be multiple or as a separate
class). In the event of a proposed merger, tender offer or other attempt to gain
control of the Company that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of preferred stock,
therefore, may be to deter a future takeover attempt. The Board of Directors has
no present plans or understandings for the issuance of any preferred stock but
it may issue any preferred stock on terms which the Board deems to be in the
best interests of the Company and its stockholders.
INSIDER VOTING CONTROL
Directors and executive officers are expected to purchase up to 29,500
shares of Common Stock in the Offering and are expected to control the voting of
6.4% of the shares of Common Stock sold in the Offering, assuming the sale of
460,000 shares, and may control the voting of an additional 8% of the shares of
Common Stock sold in the Offering through the ESOP. In addition, current
officers and directors of the Association will be officers and directors of the
Mutual Holding Company which, after the Reorganization and Stock Offering, will
own 54% of the total number of shares outstanding. The Company intends to adopt
a Stock Option Plan which may award options to purchase shares of Common Stock
in an amount equal to up to 10% of the shares sold in the Offering and a Stock
Award Plan which may award shares of Common Stock in an amount equal to 4% of
the shares sold in the Offering.
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DESCRIPTION OF CAPITAL STOCK
COMPANY CAPITAL STOCK
The 30,000,000 shares of capital stock authorized by the Company's
Federal Charter are divided into two classes, consisting of 20,000,000 shares of
common stock ($1.00 par value) and 10,000,000 shares of serial preferred stock.
The Company currently expects to issue between 391,000 and 529,000 shares, with
an adjusted maximum of 608,350 shares, of Common Stock in the Offering. The
aggregate stated value of the issued shares will constitute the capital account
of the Company on a consolidated basis. The balance of the Purchase Price of
Common Stock, less expenses of the Reorganization and Offering, will be
reflected as paid-in capital on a consolidated basis. See "Capitalization." Upon
payment of the Purchase Price for the Common Stock, all such stock will be duly
authorized, fully paid, validly issued and nonassessable.
COMMON STOCK. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with each other share of
the Common Stock. THE COMMON STOCK OF THE COMPANY WILL REPRESENT
NON-WITHDRAWABLE CAPITAL, WILL NOT BE OF AN INSURABLE TYPE AND WILL NOT BE
INSURED BY THE FDIC.
The holders of the Common Stock will possess exclusive voting power in
the Company. Each stockholder will be entitled to one vote for each share held
on all matters voted upon by stockholders. If the Company issues preferred stock
subsequent to the Reorganization, holders of the preferred stock may also
possess voting powers.
LIQUIDATION OR DISSOLUTION. In the unlikely event of the complete
liquidation or dissolution of the Association, the holders of the Common Stock
will be entitled to receive all the assets of the Association available for
distribution in or in kind, after payment or provision for payment of (i) all
debts and liabilities of the Association, (ii) any accrued dividend claims, and
(iii) the liquidation preference of any serial preferred stock that may be
issued in the future.
NO PREEMPTIVE RIGHTS. Holders of the Common Stock will not be entitled
to preemptive rights with respect to any shares which may be issued. The Common
Stock may not be redeemed at the option of the stockholders and, upon receipt by
the Company of the full purchase price for the stock, each share of the Common
Stock will be fully paid and nonassessable.
PREFERRED STOCK. After the Reorganization, the Board of Directors of
the Company will be authorized to issue preferred stock in series and to fix and
state the voting powers, designations, preferences and relative, participating,
optional or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. Preferred stock may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both, and may have full or limited voting rights. The holders of preferred stock
will be entitled to vote as a separate class or series under certain
circumstances, regardless of any other voting rights which such holders may
have.
Except as discussed in this Prospectus, the Company has no present
plans for the issuance of the additional authorized shares of Common Stock or
for the issuance of any shares of preferred stock. In the future, the authorized
but unissued and unreserved shares of Common Stock will be available for general
corporate purposes including but not limited to possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering or under an employee stock ownership plan, stock option or
restricted stock plan. The authorized but unissued shares of preferred stock
will similarly be available for issuance in future mergers or acquisitions, in a
future underwritten public offering or private placement or for other general
corporate purposes. Except as described above or as otherwise required to
approve the transaction in which the additional authorized shares of Common
Stock or authorized shares of preferred stock would be issued, no stockholder
approval will be required for the issuance of these shares. Accordingly, the
Board
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of Directors of the Company, without stockholder approval, can issue preferred
stock with voting and conversion rights which could adversely affect the voting
power of the holders of Common Stock.
DIVIDENDS. When the Reorganization is completed, the Company's only
asset will be the common stock of the Association and up to 50% of the net
proceeds of the Offering. As a result, dividends from the Association will be an
important source of future income for the Company. Should the Association elect
to retain its income, the ability of the Company to pay dividends to its own
shareholders may be adversely affected. Furthermore, if at any time in the
future the Company owns less than 100% of the outstanding stock of the
Association, certain tax benefits under the Code as to inter-company
distributions would not be fully available to the Company and it would be
required to pay federal income tax on a portion of the dividends received from
the Association, thereby reducing the amount of income available for
distribution to the shareholders of the Company.
TRANSFER AGENT
________________________ will act as transfer agent and registrar for
the Common Stock. __________________'s phone number is (_____) ________________
or (800) __________________.
REGISTRATION REQUIREMENTS
The Company's Common Stock will be registered pursuant to Section 12(g)
of the 1934 Act and may not be deregistered for a period of at least three years
following the Reorganization. As a result of the registration under the 1934
Act, certain holders of Common Stock will be subject to certain reporting and
other requirements imposed by the 1934 Act. For example, beneficial owners of
more than 5% of the outstanding Common Stock will be required to file reports
pursuant to Section 13(d) or Section 13(g) of the 1934 Act, and officers,
directors and 10% shareholders of the Company will generally be subject to
reporting requirements of Section 16(a) and to the liability provisions for
profits derived from purchases and sales of Company Common Stock occurring
within a six-month period pursuant to Section 16(b) of the 1934 Act. In
addition, certain transactions in Common Stock, such as proxy solicitations and
tender offers, will be subject to the disclosure and filing requirements imposed
by Section 14 of the 1934 Act and the regulations promulgated thereunder.
LEGAL AND TAX MATTERS
Luse Lehman Gorman Pomerenk & Schick, P.C., 5335 Wisconsin Avenue,
N.W., Suite 400, Washington, D.C. 20015, special counsel to the Association,
will pass upon the legality and validity of the shares of Common Stock being
issued in the Offering. Luse Lehman Gorman Pomerenk & Schick, P.C. has issued an
opinion concerning certain federal income tax aspects of the Reorganization and
that the Reorganization, as proposed, constitutes a tax-free reorganization
under federal law. O'Reilly, Marsh & Corteselli, P.C., 1000 Franklin Avenue,
Garden City, New York 11530, has issued an opinion concerning certain state
income tax aspects of the Reorganization. Luse Lehman Gorman Pomerenk & Schick,
P.C. and O'Reilly, Marsh & Corteselli, P.C. have consented to the references
herein to their opinions. Certain legal matters related to the Offering will be
passed upon for Ryan, Beck & Co. by Stevens & Lee, P.C., 1275 Drummers Lane,
Wayne, Pennsylvania 19087.
EXPERTS
The Association's financial statements at March 31,1997 and 1996, and
for each of the two years in the period ended March 31, 1997 appearing in this
Prospectus and Registration Statement have been audited by Sol Masch & Co.
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
Feldman Financial has consented to the publication of the summary
herein of its appraisal report as to the estimated pro forma market value of the
Common Stock of the Company to be issued in the Offering, to the reference
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to its opinion relating to the value of the subscription rights, and to the
filing of the Independent Valuation as an exhibit to the registration statement
filed by the Company under the 1933 Act.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
1933 Act with respect to the Common Stock offered hereby. As permitted by the
rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
inspected and copied at the SEC's public reference facilities located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional Office in
New York (Seven World Trade Center, 13th Floor, New York, New York 10048) and
Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511) and copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. This information can also be found on the SEC's
website, located at http://www.sec.gov.
In connection with the Reorganization, the Association filed with the
OTS a notice of its intent to reorganize into a mutual holding company and to
conduct a minority stock issuance, and the Company filed with the OTS an
application to become a savings and loan holding company. This Prospectus omits
certain information contained in such applications. The applications may be
inspected at the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552
and at the Northeast Regional Office of the OTS, 10 Exchange Place, Jersey City,
New Jersey 07302.
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GLOSSARY
- --------
1933 Act Securities Act of 1933, as amended.
1934 Act Securities Exchange Act of 1934, as amended.
Associate The term "Associate" of a person means:
(i) any corporation or organization (other
than the Association or its subsidiaries or
the Company) of which such person is a
director, officer, partner or 10%
shareholder;
(ii) any trust or other estate in which such
person has a substantial beneficial interest
or serves as trustee or in a similar
fiduciary capacity; provided, however that
such term shall not include any employee
stock benefit plan of the Company or the
Association in which such a person has a
substantial beneficial interest or serves as
a trustee or in a similar fiduciary
capacity, and
(iii) any relative or spouse of such person,
or relative of such spouse, who either has
the same home as such person or who is a
director or officer of the Association or
its subsidiaries or the Company.
Association Atlantic Liberty Savings, F.A. in its
pre-Reorganization mutual form
ATM Automated Teller Machine
BIF Bank Insurance Fund of the FDIC
Code The Internal Revenue Code of 1986, as
amended
Common Stock The shares of Common Stock, par value of
$1.00 per share, issued by Brooklyn Heights
Bancorp in connection with the
Reorganization and Offering
Community Offering The offering for sale to members of the
general public of any shares of Common
Stock not subscribed for in the Subscription
Offering
Company Brooklyn Heights Bancorp
Eligible Account Holders Deposit account holders of the Association
with aggregate account balances of at least
$50 as of the close of business on June 30,
1996
ERISA Employee Retirement Income Security Act of
1974, as amended
ESOP The Atlantic Liberty Savings, F.A. Employee
Stock Ownership Plan and Trust
Estimated Valuation Range The range of the estimated pro forma market
value of the total number of shares of
Common Stock to be issued by the Company to
the Mutual Holding Company and to Minority
Stockholders, as determined by Feldman
Financial.
Expiration Date ______________, New York Time,
on __________,1998
G-1
89
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Feldman Financial Feldman Financial Advisors, Inc.
FHLB Federal Home Loan Bank
FNMA Federal National Mortgage Association
Independent Valuation The estimated pro forma market value of the
Company and the Association prepared by
Feldman Financial
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Minority Ownership Interest The shares of Common Stock of the Company
owned by persons other than the Mutual
Holding Company
Mutual Holding Company Atlantic Liberty, MHC, a federal mutual
holding company and majority stockholder of
the Company
NASD National Association of Securities Dealers,
Inc.
NPV Net portfolio value
Offering The Subscription Offering and to the extent
shares remain available for subscription,
the Community Offering and Syndicated
Community Offering.
Offering Range The offering of the Common Stock in the
Offering at an aggregate Purchase Price
ranging from $3,910,000 to $5,290,000,
subject to adjustment up to $6,083,500
Order Form The form for ordering stock accompanied by a
certification concerning certain matters
Other Members Persons holding a deposit account at the
Association (other than Eligible Account
Holders and Supplemental Eligible Account
Holders) on the Voting Record Date or who
have borrowings outstanding from the
Association on the Voting Record Date, and
who are entitled to vote at the Special
Meeting
OTS Office of Thrift Supervision
Plan or Plan of Reorganization The Atlantic Liberty Savings, F.A. Plan of
Reorganization from a Mutual Savings
Association to a Mutual Holding Company and
Stock Issuance Plan, which will (i)
reorganize the Association from a
federally-chartered mutual savings
association to a federally chartered mutual
holding company and (ii) establish the
Company as a mid-tier stock holding company
which will own all of the outstanding
capital stock of the Association.
Purchase Price $10.00 per share price of the Common Stock
G-2
90
QTI Qualified thrift investment
QTL Qualified thrift lender
REO Real Estate Owned
Reorganization The simultaneous (i) reorganization of the
Association into the mutual holding company
form of ownership, (ii) offering of 46% of
the Common Stock of the Company to
qualifying depositors, the ESOP and the
public, and (iii) issuance of the remaining
54% of the Common Stock of the Company to
the Mutual Holding Company. The
Reorganization will create (i) the Mutual
Holding Company as a federal mutual holding
company, (ii) the Company as a federal stock
holding company that is majority-owned by
the Mutual Holding Company and (iii) the
Stock Association, as a federal stock
savings association wholly-owned by the
Company.
SAIF Savings Association Insurance Fund of the
FDIC
SEC Securities and Exchange Commission
Special Meeting Special Meeting of members of the
Association called for the purpose of
approving the Plan
Stock Association Atlantic Liberty Savings, F.A., in its
post-Reorganization stock form.
Stock Award Plan The stock award plan that will grant Common
Stock to certain officers and directors of
the Association, that will be submitted for
approval of the Company's stockholders no
earlier than six months after the completion
of the Reorganization
Stock Option Plan The stock option plan that will grant
options to purchase up to 10% of the Common
Stock issued in the Stock Offering to
certain officers and directors, which will
be submitted for approval at a meeting of
the Company's stockholders no earlier than
six months after the completion of the
Reorganization
Subscription Offering The offering of non-transferable rights to
subscribe for the Common Stock, in order of
priority, to Eligible Account Holders, the
ESOP, Supplemental Eligible Account Holders,
Other Members and employees, officers and
directors of the Association
Supplemental Eligible
Account Holders Depositor account holders of the Association
with aggregate account balances of at least
$50 as of the close of business on December
31, 1997, who are not Eligible Account
Holders or Supplemental Eligible Account
Holders
Voting Record Date The close of business on _____________,
1998, the date for determining members
entitled to vote at the Special Meeting
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ATLANTIC LIBERTY SAVINGS, F.A.
INDEX TO FINANCIAL STATEMENTS
PAGE
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Independent Auditor's Report.............................................................................F-1
Balance Sheets...........................................................................................F-2
Statements of Operations .................................................................................26
Statements of Retained Earnings ........................................................................F-3
Statements of Cash Flows.................................................................................F-4
Notes to Financial Statements............................................................................F-5
######
All schedules are omitted as they are not required or are not applicable, or
required information is shown in the applicable financial statements or notes
thereto.
Financial statements are not provided for the Company because to date the
Company has not engaged in any operations.
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ATLANTIC LIBERTY SAVINGS, F.A.
FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
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SOL MASCH & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
P.O. BOX 670
CROTON-ON-HUDSON, NEW YORK 10520-0670
------
(914) 734-2300
FAX: (914) 734-2470
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Atlantic Liberty Savings, F.A.
We have audited the accompanying statements of financial condition of Atlantic
Liberty Savings, F.A. as of March 31, 1997 and 1996, and the related statements
of operations, retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic Liberty Savings, F.A.
as of March 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As more fully described in note 17, subsequent to the issuance of the
Association's 1997 financial statements and our report thereon dated August 5,
1997, we became aware that those financial statements did not reflect all items
applicable to the period's transactions involving the Association's allowance
for loan losses and its deferred tax accounts. In our original report we
expressed unqualified opinions on the 1997 and 1996 financial statements, and
our opinion on the revised statements, as expressed herein, remains unqualified.
/S/ SOL MASCH & COMPANY
Croton-on-Hudson, New York
August 5, 1997, except for note 17, as
to which date is November 14, 1997
F-1
94
ATLANTIC LIBERTY SAVINGS, F.A.
BALANCE SHEETS
SEPTEMBER 30, MARCH 31,
1997 1996 1997 1996
---- ---- ---- ----
UNAUDITED
---------
Assets
Cash and cash equivalents $9,440,915 $7,587,021 $10,285,364 $11,225,391
Investment securities, held-to-maturity (estimated market
value of $32,190,133 $36,630,451, $35,599,705, and $34,955,723
(Note 2) 32,167,166 37,031,695 36,288,248 35,381,278
Loans receivable, net (Notes 3 and 4) 65,485,670 57,320,968 60,058,821 54,504,599
Accrued interest receivable (Note 5) 194,795 232,007 222,810 216,026
Foreclosed real estate, net of allowance for losses of $6,979,
$29,258, $21,979, and $143,222)(Note 6) 274,253 390,596 384,753 1,313,595
Real estate held for investment (Note 6) 78,468 78,468 78,468 78,468
Premises and equipment (Note 7) 1,526,558 1,572,428 1,544,083 1,631,916
Other assets 719,076 1,083,323 931,285 1,390,356
------- --------- ------- ---------
Total assets $109,886,901 $105,296,506 $109,793,832 $105,741,629
------------ ------------ ------------ ------------
Liabilities and Retained Earnings
Deposits (Note 8) $100,539,486 $95,728,403 $100,797,875 $97,395,595
Advances from borrowers for taxes and insurance 763,195 785,687 993,965 802,200
Income taxes payable (Note 9) 28,179 0 0 0
Other liabilities 1,347,529 1,385,230 1,128,872 794,239
--------- --------- --------- -------
Total liabilities 102,678,389 97,899,320 102,920,712 98,992,034
Commitments and contingencies (Note 13)
Retained earnings (Note 16) 7,208,512 7,397,186 6,873,120 6,749,595
--------- --------- --------- ---------
Total liabilities and retained earnings $109,886,901 $105,296,506 $109,793,832 $105,741,629
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-2
95
ATLANTIC LIBERTY SAVINGS, F.A.
STATEMENTS OF RETAINED EARNINGS
SIX MONTHS ENDED YEARS ENDED
SEPTEMBER 30, MARCH 31,
1997 1996 1997 1996
---- ---- ---- ----
Balance at beginning of period $6,873,120 $6,749,595 $6,749,595 $6,553,507
Net income 335,392 647,591 123,525 196,088
------- ------- ------- -------
Balance at end of period $7,208,512 $7,397,186 $6,873,120 $6,749,595
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
F-3
96
ATLANTIC LIBERTY SAVINGS, F.A.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEARS ENDED
SEPTEMBER 30, MARCH 31,
1997 1996 1997 1996
---- ---- ---- ----
UNAUDITED
---------
Cash flows from operating activities:
Net income $335,392 $647,591 $123,525 $196,088
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of:
Deferred loan origination fees (13,691) (10,242) (19,879) (31,470)
Premiums and discounts on investment securities,
mortgage-backed and related securities, and loans 1,684 11,950 18,106 1,456
Provision for loan losses 105,473 65,643 771,178 274,981
Net gain (loss) on sale of foreclosed real estate (28,838) (123,089) (148,394) 135,247
Depreciation of premises and equipment 48,249 59,488 119,847 111,202
Decrease (Increase) in other assets 212,209 307,032 459,071 (704,977)
Increase in accrued expenses and other liabilities 218,657 590,992 334,633 317,992
Decrease (Increase) in accrued interest receivable 28,015 (15,981) (6,784) 56,274
Increase (Decrease) in income taxes payable 28,179 0 0 (44,500)
------ - - -------
Total adjustments 599,937 885,793 1,527,778 116,205
------- ------- --------- -------
Net cash provided by operating activities 935,329 1,533,384 1,651,303 312,293
------- --------- --------- -------
Cash flows from investing activities:
Net increase in loan originations less principal
payment on loans (5,274,945) (2,910,853) (6,468,988) (2,010,562)
Proceeds from maturities and principal reductions of
investment securities 5,244,659 1,372,516 5,994,079 7,126,404
Purchases of marketable securities (1,125,261) (3,034,882) (6,864,555) (10,585,696)
Purchase of Federal Home Loan Bank stock 0 0 (54,600) 0
Proceeds from sales of foreclosed real estate 139,338 1,085,171 1,240,703 1,119,050
Purchases of premises and equipment (30,724) 0 (32,014) (229,885)
------- - -------- ---------
Net cash used by investing activities (1,046,933) (3,488,048) (6,185,375) (4,580,689)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposit accounts (502,075) (1,667,192) 3,402,280 6,932,728
Net increase in advance payments from borrowers for
taxes and insurance (230,770) (16,513) 191,765 29,664
-------- ------- ------- ------
Net cash provided by financing activities (732,845) (1,683,705) 3,594,045 6,962,392
-------- ---------- --------- ---------
Net increase (decrease) in cash/equivalents (844,449) (3,638,369) (940,027) 2,693,996
Cash/Equivalents at beginning of period 10,285,364 11,225,391 11,225,391 8,531,395
---------- ---------- ---------- ---------
Cash/Equivalents at end of period $9,440,915 $7,587,022 $10,285,364 $11,225,391
---------- ---------- ----------- -----------
Supplemental Disclosures
Cash paid for:
Interest on deposits $2,302,380 $2,187,048 $4,363,127 $4,150,258
Income taxes $0 $48,000 $48,000 $207,969
Transfers from loans to real estate acquired
through foreclosure $0 $39,083 $163,467 $1,317,963
The accompanying notes are an integral part of these financial statements.
F-4
97
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Atlantic Liberty Savings, F.A.'s primary business activities include attracting
deposits from the general public and originating residential property loans
(one-to-four family home mortgage, cooperative apartment and multi-family
property loans). The Association also makes commercial real estate and consumer
loans. The Association is subject to competition from other financial
institutions. Deposits at the Association are insured up to the applicable
limits by the Savings Association Insurance Fund, (SAIF), administered by the
Federal Deposit Insurance Corporation, (FDIC).
(b) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Association considers all
highly liquid debt instruments with original maturities when purchased of three
months or less to be cash equivalents.
(c) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
A majority of the Association's loan portfolio consists of single-family
residential loans. Accordingly, the ultimate collectibility of a substantial
portion of the Association's loan portfolio and the recovery of a substantial
portion of the carrying amount of foreclosed real estate are susceptible to
changes in market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Association's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Association to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change materially
in the near term.
(d) INVESTMENT SECURITIES
Bonds, notes, debentures, and mortgage-backed securities are carried at cost,
adjusted for premiums and discounts that are recognized in interest income using
the interest method over the period to maturity. The Association has the
positive intent and ability to hold such investments to maturity. Should any be
sold, gains and losses will be recognized based on the specific identification
method.
Premiums and discounts are amortized to expense or accreted to income over the
term of the related securities using the interest method, adjusted for
prepayments.
Federal law requires a member institution of the Federal Home Loan Bank,
(FHLB), system to hold stock of its district FHLB according to a predetermined
formula. This stock is recorded at cost and is classified as held-to-maturity.
F-5
98
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
(e) LOANS RECEIVABLE
Loans receivable that Management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at unpaid principal
balances, less the allowance for loan losses, and net deferred loan-origination
fees and discounts.
Discounts on consumer and other loans are recognized over the lives of the loans
using the interest method.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Association's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Uncollectible interest on loans that are in excess of ninety days past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
(f) LOAN-ORIGINATION FEES AND RELATED COSTS
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income over the
contractual life of the loans, adjusted for prepayments based on the
Association's prepayment experience.
(g) REAL ESTATE HELD FOR INVESTMENT AND FORECLOSED REAL ESTATE
Real estate properties acquired through loan foreclosure are initially recorded
at fair value at the date of foreclosure. Thereafter, they are carried at the
lower of carrying value or fair value, less costs to sell. Real estate
properties held for investment are carried at the lower of cost, including cost
of improvements and amenities incurred subsequent to acquisition, or net
realizable value. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property are expensed.
Valuations are periodically performed by independent appraisers, and an
allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its fair value less estimated costs to sell.
Profit on real estate sales transactions is not recognized by the full accrual
method until a sale is consummated, the buyer's initial and continuing
investments are adequate to demonstrate a commitment to pay for the property,
the Association's receivable is not subject to future subordination, and the
Association has transferred to the buyer the usual risks and rewards of
ownership.
(h) PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and furniture, fixtures, and equipment are
carried at cost, less accumulated depreciation. Buildings and furniture,
fixtures, and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets.
(i) FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, (SFAS 107), requires
F-6
99
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
disclosure of fair value information about financial instruments, whether or
not recognized in the balance sheet. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Association.
The following methods and assumptions were used by the Association in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement of
financial condition for cash and cash equivalents approximate those assets' fair
values.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available, from securities dealers.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans (for example, fixed rate commercial real estate and
rental property mortgage loans) are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
The carrying amount of accrued interest receivable approximates its fair value.
Deposits and advances from borrowers for taxes and insurance: The fair values
disclosed for deposits with no stated maturity, (for example, interest-bearing
checking accounts and passbook accounts) are equal to the amount payable on
demand at the reporting date (that is, their carrying amounts). The fair values
for certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated contractual maturities on such time deposits. The
fair value of advances from borrowers for taxes and insurance, which has no
stated maturity, is equal to the amount on deposit.
Limitations: Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Association's entire holdings or of a
particular financial instrument. Because no market exists for a significant
portion of the Association's financial instruments, fair value estimates are
based on judgements regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Management is concerned that reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and the estimates and assumptions that must be made.
(j) INTERIM FINANCIAL STATEMENTS
The accompanying financial statements and related information contained in these
footnotes as of September 30, 1997 and September 30, 1996 and for the six months
ended September 30, 1997 and September 30, 1996 are unaudited but, in
management's opinion, reflect all adjustments, consisting only of normal
recurring accruals, necessary for fair presentation.
F-7
100
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
(2) INVESTMENT SECURITIES
Investment securities at September 30, 1997 is summarized as follows:
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
HELD-TO-MATURITY:
U.S. Government and agencies $12,567,585 $4,919 122,169 $12,450,335
Federal Home Loan Bank Stock 582,700 0 0 582,700
Asset Management fund, Inc. adjustable rate mortgage portfolio 4,204,511 160,000 0 4,364,511
Mortgage-backed securities:
FNMA certificates 6,468,038 12,572 30,290 6,450,320
FHLMC certificates 3,904,801 94,082 25,913 3,972,970
GNMA certificates 559,032 29,206 0 588,238
FNMA CMO's 1,859,314 0 97,692 1,761,622
FHLMC CMO's 2,021,185 11,245 12,993 2,019,437
--------- ------ ------ ---------
Total mortgage-backed securities 14,812,370 147,105 166,888 14,792,587
---------- ------- ------- ----------
Total securities held-to-maturity $32,167,166 $312,024 $289,057 $32,190,133
----------- -------- -------- -----------
Investment securities at March 31,1997 are summarized as follows:
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
HELD-TO-MATURITY:
U.S. Government and agencies $16,675,255 $630 311,293 $16,364,592
Federal Home Loan Bank Stock 582,700 0 0 582,700
Asset Management fund, Inc. adjustable rate mortgage portfolio 3,079,250 0 2,338 3,076,912
Mortgage-backed securities:
FNMA certificates 6,894,345 15,477 42,814 6,867,009
FHLMC certificates 4,290,911 50,912 27,743 4,314,080
GNMA certificates 610,700 16,295 0 626,995
FNMA CMO's 1,859,410 0 136,117 1,723,293
FHLMC CMO's 2,295,677 18,889 270,442 2,044,124
--------- ------ ------- ---------
Total mortgage-backed securities 15,951,043 101,573 477,115 15,575,501
---------- ------- ------- ----------
Total securities held-to-maturity $36,288,248 $102,203 $790,746 $35,599,705
----------- -------- -------- -----------
F-8
101
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 and 1996
Investment securities at March 31, 1996 are summarized as follows:
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
HELD-TO-MATURITY:
U.S. Government and agencies $15,627,252 $2,073 286,244 $15,343,081
Federal Home Loan Bank Stock 528,100 0 0 528,100
Asset Management fund, Inc. adjustable rate mortgage portfolio 1,187,408 0 9,560 1,177,848
Mortgage-backed securities:
FNMA certificates 7,821,925 27,206 23,150 7,825,981
FHLMC certificates 5,050,837 81,545 19,966 5,112,416
GNMA certificates 728,477 14,264 0 742,741
FNMA CMO's 1,859,746 0 82,897 1,776,849
FHLMC CMO's 2,577,533 6,250 135,076 2,448,707
--------- ----- ------- ---------
Total mortgage-backed securities 18,038,518 129,265 261,089 17,906,694
---------- ------- ------- ----------
Total securities held-to-maturity $35,381,278 $131,338 $556,893 $34,955,723
----------- -------- -------- -----------
The amortized cost and fair value of investment securities are shown below.
SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1996
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED
COST VALUE COST VALUE COST
---- ----- ---- ----- ----
HELD-TO-MATURITY:
Due in one year or less $3,100,856 $3,074,805 $3,101,712 $3,074,514 $3,909,503
Due after one year through five years 9,466,728 9,375,530 11,573,543 11,311,948 7,707,749
Due after five years through ten years 0 0 2,000,000 1,978,130 4,000,000
Federal Home Loan Bank Stock 582,700 582,700 582,700 582,700 528,100
Mortgage-backed securities 19,016,882 19,157,098 19,030,293 18,652,413 19,225,926
---------- ---------- ---------- ----------- -----------
$32,167,166 $32,190,133 $36,288,248 $35,599,705 $35,371,278
----------- ----------- ----------- ------------ -----------
(3) LOANS RECEIVABLE, NET
Loans receivable are summarized as follows:
SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1996
------------------ -------------- --------------
First mortgage loans (principally conventional):
Principal balances:
Secured by one-to-four family residences $40,064,269 $36,862,365 $30,604,762
Secured by other residential properties 12,973,968 10,554,762 11,166,411
Commercial mortgages 11,860,580 11,917,073 12,784,146
---------- ---------- ----------
64,898,817 59,334,200 54,555,319
Less:
Net deferred loan-origination fees 157,061 127,444 120,782
------- ------- -------
Total first mortgage loans 64,741,756 59,206,756 54,434,537
---------- ---------- ----------
Consumer loans:
Principal balances:
Secured 243,686 0 0
Unsecured 1,583,534 1,829,894 815,278
--------- --------- -------
Total consumer loans 1,827,220 1,829,894 815,278
Less: Allowances for loan and lease losses 1,083,302 977,829 745,216
--------- ------- -------
$65,485,674 $60,058,821 $54,504,599
----------- ----------- -----------
F-9
102
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
Activity in the allowance for loan losses is summarized as follows:
SIX MONTHS ENDED YEARS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 MARCH 31, 1997 MARCH 31, 1996
------------------ ------------------ -------------- --------------
Balance at beginning of year $977,829 $745,216 $ 745,216 $619,611
Provision charged to income 105,473 65,643 771,178 274,981
Charge-offs and recoveries, net 0 (136,987) (538,566) (149,376)
- --------- --------- ---------
$1,083,302 $673,873 $ 977,829 $745,216
---------- --------- ---------- ---------
Loans having carrying values of $5,158,662, $5,999,134, $5,073,887, and
$6,290,620 at September 30, 1997 and 1996 and March 31, 1997 and 1996,
respectively, are considered to be impaired. A loan is impaired when, based on
current information and events, it is probable that the Association will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Included in impaired loans are loans aggregating $4,341,129,
$4,344,764, $3,739,472, and $4,529,916 at September 30, 1997 and 1996 and March
31, 1997 and 1996, respectively, for which there is a specific allowance for
credit losses of $709,681, $665,337, $515,130, and $727,975 at September 30,
1997 and 1996 and March 31, 1997 and 1996, respectively. The average recorded
investment in impaired loans was $4,760,827, $6,056,567, $5,498,004, and
$5,869,763 at September 30, 1997 and 1996 and March 31, 1997 and 1996,
respectively. No interest income is recognized on impaired loans which are on
nonaccrual. Had interest income on nonaccrual loans been recorded at the
contractual rates and due dates, the Association would have recorded additional
interest income of $21,034, $253,147, $323,615, and $228,989, for the periods
ended September 30, 1997 and 1996 and March 31, 1997 and 1996, respectively.
(4) LOAN SERVICING
Mortgage loans serviced for others arc not included in the accompanying balance
sheets. The unpaid principal balances of these loans are summarized as follow:
SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1996
------------------ -------------- --------------
Mortgage loan serviced for:
Agency of the City of New York $25,693 $31,473 $42,947
Private lender 0 0 65,080
- - ------
$25,693 $31,473 $108,027
------- ------- --------
The Association does not maintain custodial escrow accounts for these loans.
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1996
------------------ -------------- --------------
U.S. Government and agency securities $45,126 $95,877 $63,943
Mortgage-backed securities 102,894 106,804 125,944
Loans receivable, net of valuation allowances totaling
$21,034, $458,256, and $448,745 as of September 30,
1997, and March 31, 1997 and 1996, respectively 46,775 20,129 26,139
------ ------ ------
$194,795 $222,810 $216,026
-------- -------- --------
F-10
103
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
(6) REAL ESTATE
Income from real estate operations is summarized as folows:
SIX MONTHS ENDED YEARS ENDED MARCH 31,
SEPTEMBER 30, 1997 1997 1996
------------------ ---- ----
Real estate held for investment $2,187 $ 5,327 ($287)
Property used in the Association's business 80,557 192,064 186,870
Foreclosed real estate (2,579) (43,179) (13,426)
$80,165 $154,212 $173,157
------- -------- --------
Gain (Loss) on disposal of real estate owned is summarized as follws:
SIX MONTHS ENDED YEARS ENDED MARCH 31,
SEPTEMBER 30, 1997 1997 1996
------------------ ---- ----
Real estate sales $139,338 $1,240,703 $1,119,050
Cost of sales (110,500) (1,389,097) (983,803)
--------- ---------- ---------
$28,838 ($148,394) $135,247
------- ---------- --------
Activity in the allowance for losses on real estate owned is summarized as
follows:
SIX MONTHS ENDED YEARS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 MARCH 31, 1997 MARCH 31 1996
------------------ ------------------ -------------- -------------
Balance at beginning of year $21,979 $143,222 $143,222 $93,811
Provision charged to income 0 (541) (7,220) 152,709
Charge-offs and recoveries, net (15,000) (113,423) (114,023) (103,298)
-------- --------- --------- ---------
$6,979 $29,258 $21,979 $143,222
------ ------- ------- --------
(7) PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1996
------------------ -------------- --------------
Land $400,000 $400,000 $400,000
Buildings 1,819,848 1,792,590 1,772,294
Furniture, fixtures, and equipment 458,634 446,183 480,375
------- ------- -------
2,678,482 2,638,773 2,652,669
Less: Accumulated depreciation 1,151,924 1,094,690 1,020,753
--------- --------- ---------
$1,526,558 $1,544,083 $1,631,916
---------- ---------- ----------
F-11
104
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
(8) DEPOSITS
Deposit account balances are summarized as follows:
SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1996
WEIGHTED WEIGHTED WEIGHTED
TYPE OF ACCOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
- --------------- ------------ ------ ------------ ------ ------------ ------
Savings accounts 2.50% $21,359,393 2.50% $21,492,808 2.50% $23,485,774
Certificates of deposit 5.68% 60,589,308 5.56% 60,697,580 5.77% 58,098,921
NOWaccounts 2.50% 4,285,253 2.50% 4,722,508 2.50% 3,974,160
Money market accounts 3.00% 6,749,003 3.00% 6,998,669 3.00% 8,239,909
Money market statement savings 5.00% 7,360,086 5.00% 6,784,612 5.00% 3,497,955
Holiday clubs 2.50% 196,443 2.50% 101,697 2.50% 98,875
------- ------- ------
$100,539,486 $100,797,875 $97,395,595
------------ ------------ -----------
Scheduled maturities of certificates of deposit are as follows:
SEPTEMBER 30, 1997
WEIGHTED
AVERAGE RATE AMOUNT PERCENT
------------ ------ -------
(DOLLARS IN THOUSANDS)
1 year or less 5.50% $41,148 67.91%
Greater than 1 year through 2 years 5.79% 8,107 13.38%
Greater than 2 years through 3 years 6.52% 4,892 8.07%
Greater than 3 years through 4 years 5.90% 2,533 4.18%
Greater than 4 years through 5 years 6.10% 3,897 6.43%
Over 5 years 6.63% 12 0.02%
-- -----
$60,589 100.00%
------- -------
MARCH 31, 1997
WEIGHTED
AVERAGE RATE AMOUNT PERCENT
------------ ------ -------
(DOLLARS IN THOUSANDS)
1 year or less 5.36% $40,763 67.16%
Greater than 1 year through 2 years 5.66% 9,406 15.50%
Greater than 2 years through 3 years 6.38% 4,241 6.99%
Greater than 3 years through 4 years 6.45% 2,639 4.35%
Greater than 4 years through 5 years 5.97% 3,558 5.86%
Over 5 years 6.01% 91 0.15%
-- -----
$60,698 100.00%
------- -------
F-12
105
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
MARCH 31, 1996
WEIGHTED
AVERAGE RATE AMOUNT PERCENT
------------ ------ -------
(DOLLARS IN THOUSANDS)
1 year or less 5.66% $40,282 69.33%
Greater than I year through 2 years 6.01% 8,103 13.95%
Greater than 2 years through 3 years 5.60% 4,810 8.28%
Greater than 3 years through 4 years 6.57% 2,420 4.17%
Greater than 4 years through 5 years 6.42% 2,482 4.27%
Over 5 years 6.50% 2 0.00%
- -----
$58,099 100.00%
------- -------
Certificates of deposit in excess of $100,000 were approximately $10.7 million,
$13.3 million and $11.3 million at September 30, 1997 and at March 31, 1997 and
1996, respectively.
Interest expense on deposit balances is summarized as follows:
SIX MONTHS ENDED YEARS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 MARCH 31, 1997 MARCH 31 1996
------------------ ------------------ -------------- -------------
NOW, money market, passbook
savings, and holiday clubs $596,905 $557,488 $1,129,447 $1,008,836
Certificates of deposit 1,706,440 1,628,453 3,227,262 3,134,350
--------- --------- --------- ---------
$2,303,345 $2,185,940 $4,356,710 $4,143,186
---------- ---------- ---------- ----------
(9) INCOME TAXES
The Association files federal income tax returns on a calendar year basis. In
calculating tax liability, the Association is allowed a special bad debt
deduction based on specified experience formulas.
Income tax expense is summarized as follows:
SIX MONTHS ENDED YEARS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 MARCH 31, 1997 MARCH 31 1996
------------------ ------------------ -------------- -------------
Federal:
Current $150,635 ($97,926) ($61,669) $ 147,357
Deferred 7,745 (24,944) (20,040) (62,443)
----- -------- -------- --------
158,380 (122,870) (81,709) 84,914
State and local:
Current $57,404 ($72,301) ($45,397) $92,830
Deferred 34,138 (44,413) (20,219) (37,193)
------ -------- -------- --------
$249,922 ($239,584) ($147,325) $140,551
-------- ---------- ---------- --------
F-13
106
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
The total tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income tax expense as a result
of the following:
SIX MONTHS ENDED YEARS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 MARCH 31, 1997 MARCH 31 1996
------------------ ------------------ -------------- --------------
Expected income tax expense at federal
tax rate $199,007 $138,722 ($8,092) $114,457
State and local tax (benefit) expense,
net of federal income tax benefit 81,016 (116,564) (88,525) 61,267
Deferred directors' compensation (8,500) (1,050) 98,743 (135,835)
Other nondeductible expenses (21,602) (51,559) 53,076 100,662
Life insurance death benefit 0 (209,133) (202,527) 0
- --------- --------- -
$249,921 ($239,584) ($147,325) $140,551
-------- ---------- ---------- --------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1997,
March 31, 1997 and 1996 are presented below:
SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1996
------------------ -------------- --------------
Deferred tax assets:
Deferred directors' compensation $232,228 $218,176 $255,204
Deferred loan fees 13,704 17,971 33,480
Net operating loss carryforward 0 93,212 0
Allowance for loan losses 51,428 22,304 0
------ ------ -
Total gross deferred tax assets 297,360 351,663 288,684
Deferred tax liabilities:
Depreciation (18,742) (31,163) (8,443)
-------- -------- -------
(18,742) (31,163) (8,443)
-------- -------- -------
Net deferred tax asset $278,618 $320,500 $280,241
-------- -------- --------
Management has determined that it is not required to establish a valuation
reserve for its gross deferred tax assets since it is more likely than not that
the deferred tax assets will be realized through future reversals of existing
temporary differences.
(10) EMPLOYEE BENEFITS
The Association has a qualified noncontributory, defined benefit pension plan.
Eligibility is based on a minimum age of twenty-one with twelve months of
service. Normal retirement age is at sixty-five with early retirement at age
fifty-five.
The components of net pension expense are summarized as follows:
SIX MONTHS ENDED YEARS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 MARCH 31, 1997 MARCH 31 1996
------------------ ------------------ -------------- -------------
Service cost $50,391 $44,188 $88,376 $105,645
Interest cost 88,810 100,148 100,148 98,490
Expected return on assets (102,659) (100,231) (101,881) (80,433)
Amortization of unrecognized transition asset (8,677) 10,171 10,171 10,171
Amortization of unrecognized loss 0 0 0 0
Amortization of unrecognized past service liability 0 0 0 0
- - - -
$27,865 $54,276 $96,814 $133,873
------- ------- ------- --------
F-14
107
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
The following sets forth the plan's funded status at September 30, 1997, 1996,
and at March 31, 1997 and 1996, as determined by the plan's actuary:
SEPTEMBER 30, SEPTEMBER 30, MARCH 31, MARCH 31
1997 1996 1997 1996
------------- ------------- --------- ---------
Actuarial present value of benefit obligations:
Accumulated benefit obligation for services rendered, including
vested benefits of $845,056, $1,070,724, $1,070,724,
and $964,905 at September 30, l997, 1996 and March 31,
1997 and 1996, respectively $1,005,521 $827,756 $861,656 $1,169,085
---------- -------- -------- ----------
Projected benefit obligation $1,407,915 $1,165,686 $1,209,874 $1,611,142
Market value of plan assets 1,757,432 1,229,268 1,466,562 1,472,934
--------- --------- --------- ---------
Plan assets greater (less) than projected benefit obligation 349,517 63,582 256,688 (138,208)
Unrecognized net transition asset being amortized over 22.8 years,
25.36 years, 25.36 years, and 25.36 years at September 30, 1997,
1996 and March 31,1997 and 1996, respectively (189,169) 237,615 237,615 247,787
Unrecognized net loss (188,213) (338,786) (485,683) (92,891)
Unrecognized past service liability 0 0 0 0
- - - -
Prepaid (Accrued) pension expense ($27,865) ($37,589) $8,620 $16,688
--------- --------- ------ -------
Assumed long-term rate 7.00% 7.00% 7.00% 7.00%
Assumed rate of compensation increase 4.00% 4.00% 4.00% 4.00%
Assumed discount rate 7.00% 7.00% 7.00% 7.00%
The Association also has a defined contribution plan under Section 401(k) of the
U.S. Internal Revenue Code. All employees of at least 20-1/2 years of age and
with at least six months of service are eligible for voluntary participation.
Under this plan, the participant may contribute up to 10% of his/her base pay.
The Association will then contribute up to 60% of the amount of the
participant's contribution, the benefits from which vest over a five year
vesting program at 20% per year. The Association has contributed $15,375,
$14,634, $30,152, and $33,146 for the periods ended September 30, 1997 and 1996
and March 31, 1997 and 1996, respectively.
(11) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
A financial instrument is defined in SFAS 107 as cash, evidence of an ownership
interest in an entity or a contract that creates a contractual obligation or
right to deliver or receive cash or another financial instrument from a second
entity on potentially favorable or unfavorable terms. SFAS 107 defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
The following table represents the carrying amounts and fair values of the
Association's financial instruments:
SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1996
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------ ----- ------ ----- ------ -----
Financial assets:
Cash and cash equivalents $9,441 $9,441 $10,285 $10,285 $11,225 $11,225
Investment securities 32,167 32,190 36,288 35,600 35,381 34,956
Loans 65,486 66,044 60,059 59,933 54,505 55,038
Accrued interest receivable 195 195 223 223 216 216
Financial liabiities:
Deposits 100,539 100,611 100,798 100,514 97,396 98,190
Advance payments by borrowers for taxes
and insurance 763 763 994 994 802 802
F-15
108
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
COMMITMENTS TO ORIGINATE LOANS: The fair value of commitments to originate loans
is estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and present
creditworthiness of the parties.
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
CONTRACT CARRYING ESTIMATED CONTRACT CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE AMOUNT AMOUNT FAIR VALUE
------ ------ ---------- ------ ------ ----------
Commitments to originate loans $4,422 $19 $19 $4,925 $18 $18
------ --- --- ------ --- ---
MARCH 31, 1997 MARCH 31, 1996
CONTRACT CARRYING ESTIMATED CONTRACT CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE AMOUNT AMOUNT FAIR VALUE
------ ------ ---------- ------ ------ ----------
Commitments to originate loans $6,635 $34 $34 $2,203 $4 $4
------ --- --- ------ -- --
The amounts shown under "carrrying amount" represent deferred income arising
from these unrecognized financial instruments.
(12) RELATED PARTIES
The Association has entered into transactions with its directors and officers as
follows:
As of and for the six months ended September 30, 1997: The aggregate amount of
loans to such related parties amounted to $817,611. During the six months, new
loans were made amounting to $200,000. Repayments during the period amounted to
$13,703. The aggregate amount of deposit accounts to such related parties
amounted to $718,171.
As of and for the year ended March 31, 1997: The aggregate amount of loans to
such related parties amounted to $631,303. During the fiscal year, new loans
were made amounting to $130,000. Repayments during the fiscal year amounted to
$31,871. The aggregate amount of deposit accounts to such related parties
amounted to $736,565.
As of and for the year ended March 31, 1996: The aggregate amount of loans to
such related parties amounted to $617,892. During the fiscal year, no new loans
were made. Repayments during the fiscal year amounted to $232,666. The aggregate
amount of deposit accounts to such related parties amounted to $570,378.
(13) DIRECTORS' DEFERRED COMPENSATION
The Association provides directors with a deferred compensation plan under which
directors may elect to defer, for the calendar year on a pre-tax basis, all or a
portion of their monthly directors' fees and/or annual retainer, until death,
retirement, or other termination of service. The plan is a restatement of a
deferred compensation plan that was effective until December 31, 1996. Under the
plan, a director's deferred fees and/or annual retainer will be credited to a
deferred compensation account. Each deferred compensation account will earn
simple interest at the rate of 8% per annum. Upon retirement, a director's
benefit will be paid over 10 years.
Under the prior plan, benefits will be paid over 15 years, (10 years with
respect to two directors, based on their life expectancies). The deferred
compensation benefits payable under the prior plan range from between $675 and
$1,622 per month. The Association has accrued $470,000 toward this benefit and
has purchased life insurance policies on the lives of the individual directors
with an aggregate face value of $410,000, to assist it in meeting its benefit
obligations under the prior plan. For calendar year 1996, under the
F-16
109
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
prior plan, 4 directors elected to defer $16,800 of the directors' fees and
annual retainers paid, for the period January 1, 1997 through August 31, 1997.
Under the restated plan, 4 directors elected to defer $44,000 of the directors'
fees and annual retainers paid. The Association's president did not elect to
defer any portion of the annual retainer.
(13) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Association has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. In addition, the Association is defendant in
certain claims and legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with counsel, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the financial position of the Association.
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. Commitments
to originate loans amounted to $4,422,000, $6,635,000, and $2,202,750 at
September 30, 1997, and March 31, 1997 and 1996, respectively.
(14) SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Association's business activity is with customers located within New
York State. Generally, the loans are secured by one-to-four family residences.
The loans are expected to be repaid from the borrowers' cash flows.
(15) SAIF PREMIUM
The Association pays deposit insurance premiums to the Savings Association
Insurance Fund, (SAIF), of the Federal Deposit Insurance Corporation, (FDIC).
The Association's deposit insurance premium rate through September 30, 1997 was
.23% of its assess deposit base, resulting in total premiums assessed amounting
to $31,318, $703,515, $762,696, and $208,903, for the periods ended September
30, 1997, 1996, and March 31, 1997 and 1996, respectively. In addition, on
September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 to recapitalize the SAIF administered by the FDIC and to provide for
repayment of the Financial Institution Collateral Obligation bonds issued by the
United States Treasury Department. The FDIC levied a one-time special assessment
on SAIF deposit equal to 65.7 cents per $100 of the SAIF-assessable deposit base
as of March 31, 1995. The one-time special assessment amounted to an expense to
the Association of $594,447, which amount is included in the September 30, 1996
and March 31, 1997 amounts referred to above.
F-17
110
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
(16) REGULATORY STRUCTURE
The Association is subject to various regulatory capital requirements
administered by the federal Office of Thrift Supervision. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Association's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Association must meet specific capital guidelines that involve
quantitative measures of the Association's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Association's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation require the Association to
maintain minimum amounts and ratios (set forth in the table below) of total and
Tier I capital (as defined in the regulations). Management believes, as of
September 30, 1997, the Association meets all capital adequacy requirements to
which it is subject.
As of September 30, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Association as satisfactorily capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Association's actual capital amounts and ratios are also presented in the
table.
ASSOCIATION'S ACTUAL MINIMUM CAPITAL ADEQUACY
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
AS OF SEPTEMBER 30, 1997:
Tangible capital $7,209 6.56% $1,648 1.50%
Tier I (Core) capital 7,209 6.56% 3,297 3.00%
Total risk-based capital 7,830 15.75% 3,977 8.00%
AS OF SEPTEMBER 30, 1996:
Tangible capital 7,397 7.03% 1,579 1.50%
Tier I (Core) capital 7,397 7.03% 3,159 3.00%
Total risk-based capital 8,001 16.56% 3,865 8.00%
AS OF MARCH 31, 1997:
Tangible capital 6,873 6.26% 1,647 1.50%
Tier I (Core) capital 6,873 6.26% 3,294 3.00%
Total risk-based capital 7,482 15.36% 3,897 8.00%
AS OF MARCH 31, 1996:
Tangible capital 6,750 6.38% 1,586 1.50%
Tier I (Core) capital 6,750 6.38% 3,172 3.00%
Total risk-based capital 7,352 15.25% 3,857 8.00%
The following provides a reconciliation of the Association's capital to
regulatory capital:
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 MARCH 31, 1997 MARCH 31 1996
------------------ ------------------ -------------- -------------
(AMOUNTS IN THOUSANDS)
Association's capital $7,209 $7,397 $6,873 $6,750
Add: Allowance for loan losses 621 604 609 603
--- --- --- ---
Total risk-based capital $7,830 $8,001 $7,482 $7,352
------ ------ ------ ------
F-18
111
ATLANTIC LIBERTY SAVINGS, F.A.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
(17) SUBSEQUENT ITEMS
Subsequent to the issuance of the Association's 1997 financial statements,
management became aware that certain transactions applicable to the period's
and prior periods' allowance for loan losses and its deferred tax accounts had
not been recorded. The inclusion of these items in the revised financial
statements has the effect of decreasing retained earnings as of April 1, 1995
by $296,758, decreasing assets by $230,372 at March 31, 1996, by $350,422 at
March 31, 1997, and increasing net income for 1996 by $66,386 and decreasing
net income for 1997 by $120,070.
F-19
112
113
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ATLANTIC LIBERTY SAVINGS, F.A. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY TO ANY PERSON IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
BROOKLYN HEIGHTS BANCORP
(Proposed Holding Company for
Atlantic Liberty Savings, F.A.)
UP TO 608,350 SHARES
Common Stock
($1.00 par value per share)
PROSPECTUS
RYAN, BECK & CO.
________________ __, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until _____________, or 25 days after the commencement of the offering of
Common Stock, all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
================================================================================
114
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF ATLANTIC LIBERTY
SAVINGS, F.A., AND BROOKLYN HEIGHTS BANCORP
Generally, federal regulations define areas for indemnity coverage for federal
savings associations, and proposed federal regulations define areas for
indemnity coverage for federal MHC subsidiary holding companies, as follows:
(a) Any person against whom any action is brought by
reason of the fact that such person is or was a director or officer of the
savings association shall be indemnified by the savings association for:
(i) Reasonable costs and expenses, including
reasonable attorneys' fees, actually paid or incurred by such
person in connection with proceedings related to the defense
or settlement of such action;
(ii) Any amount for which such person becomes
liable by reason of any judgment in such action;
(iii) Reasonable costs and expenses, including
reasonable attorneys' fees, actually paid or incurred in any
action to enforce his rights under this section, if the person
attains a final judgment in favor of such person in such
enforcement action.
(b) Indemnification provided for in subparagraph (a)
shall be made to such officer or director only if the
requirements of this subsection are met:
(i) The savings association shall make the
indemnification provided by subparagraph (a) in connection
with any such action which results in a final judgment on the
merits in favor of such officer or director.
(ii) The savings association shall make the
indemnification provided by subparagraph (a) in case of
settlement of such action, final judgment against such
director or officer or final judgment in favor of such
director or officer other than on the merits except in
relation to matters as to which he shall be adjudged to be
liable for negligence or misconduct in the performance of
duty, only if a majority of the directors of the savings
association determines that such a director or officer was
acting in good faith within what he was reasonably entitled to
believe under the circumstances was the scope of his
employment or authority and for a purpose which he was
reasonably entitled to believe under the circumstances was in
the best interest of the savings association or its members.
(c) As used in this paragraph:
(i) "Action" means any action, suit or other
judicial or administrative proceeding, or threatened
proceeding, whether civil, criminal, or otherwise, including
any appeal or other proceeding for review;
(ii) "Court" includes, without limitation, any
court to which or in which any appeal or any proceeding for
review is brought;
(iii) "Final Judgment" means a judgment, decree, or
order which is appealable and as to which the period for
appeal has expired and no appeal has been taken;
(iv) "Settlement" includes the entry of a judgment
by consent or by confession or upon a plea of guilty or of
nolo contendere.
115
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Amount
------
* Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . $ 120,000
* Printing, Postage and Mailing . . . . . . . . . . . . . . . . 80,000
* Appraisal and Business Plan Fees and Expenses . . . . . . . . 14,000
* Accounting Fees and Expenses . . . . . . . . . . . . . . . . . 25,000
** Underwriter's Fees and Expenses . . . . . . . . . . . . . . . 160,000
* Filing Fees (NASD, OTS and SEC) . . . . . . . . . . . . . . . 18,000
* Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . 15,000
----------
* Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 432,000
==========
- ------------------
* Estimated
** Brooklyn Heights Bancorp has retained Ryan, Beck & Co. ("Ryan Beck")
to assist in the sale of common stock on best efforts basis in the
Offerings. Ryan Beck will receive fees of $120,000, exclusive of
estimated expenses of $40,000.
116
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 27. EXHIBITS:
The exhibits filed as part of this registration statement are
as follows:
(a) LIST OF EXHIBITS
1.1 Engagement Letter between Atlantic Liberty Savings, F.A. and Ryan,
Beck & Co.
1.2 Agency Agreement among Brooklyn Heights Bancorp, Atlantic Liberty
Savings, F.A. and Ryan, Beck & Co.*
2 Plan of Reorganization from Mutual Savings Association to Mutual
Holding Company and Stock Issuance Plan
3.1 Proposed Federal Holding Company Charter of Brooklyn Heights Bancorp
3.2 Proposed Bylaws of Brooklyn Heights Bancorp
4 Form of Common Stock Certificate of Brooklyn Heights Bancorp
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding
legality of securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.
8.2 Form of State Tax Opinion*
8.3 Opinion of Feldman Financial Advisors, Inc. with respect to
Subscription Rights
10.1 Form of Employment Agreement
10.2 Form of Employee Stock Ownership Plan
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
Opinions included on Exhibits 5 and 8.1)
23.2 Consent of Sol Masch & Co.
23.3 Consent of Feldman Financial Advisors, Inc.
24 Power of Attorney (set forth on signature page)
27.1 EDGAR Financial Data Schedule
99.1 Appraisal Agreement between Atlantic Liberty Savings, F.A. and Feldman
Financial Advisors, Inc.
99.2 Appraisal Report of Feldman Financial Advisors, Inc.*
99.3 Proxy Statement
99.4 Marketing Materials
117
99.5 Order and Acknowledgment Form and Certification Form
- ----------------------------------------------
* To be filed supplementally or by amendment
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any duration from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the
closing specified in the Underwriting Agreement certificates in such
documentation and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Brooklyn, New York on
December 30, 1997.
BROOKLYN HEIGHTS BANCORP (IN FORMATION)
By: /s/ Stephen Irving
--------------------------
Stephen Irving
President, Chief Executive Officer and Director
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Brooklyn Heights
Bancorp (the "Company") hereby severally constitute and appoint Stephen Irving
as our true and lawful attorney and agent, to do any and all things in our
names in the capacities indicated below which said Stephen Irving may deem
necessary or advisable to enable the Company to comply with the Securities Act
of 1933, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the registration statement on Form SB-2
relating to the offering of the Company's Common Stock, including specifically,
but not limited to, power and authority to sign for us in our names in the
capacities indicated below the registration statement and any and all
amendments (including post-effective amendments) thereto; and we hereby
approve, ratify and confirm all that said Stephen Irving shall do or cause to
be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Stephen Irving President, Chief Executive December 30, 1997
- ------------------------- Officer and Director
Stephen Irving (Principal Executive Officer)
/s/ Stephen Parisi Vice President and Treasurer December 30, 1997
- ------------------------- (Principal Financial and
Stephen Parisi Accounting Officer)
/s/ John A. Maher Chairman of the Board December 30, 1997
- -------------------------
John A. Maher
/s/ Nunzio D'Addona Director December 30, 1997
- -------------------------
Nunzio D'Addona
/s/ Martin D. Dehler Director December 30, 1997
- -------------------------
Martin D. Dehler
/s/ Edward W. Kelle Director December 30, 1997
- -------------------------
Edward W. Kelle
/s/ Fred W. McPhilliamy Director December 30, 1997
- -------------------------
Fred W. McPhilliamy
/s/ Eugene F. O'Connor Director December 30, 1997
- -------------------------
Eugene F. O'Connor
119
EXHIBIT INDEX
1.1 Engagement Letter between Atlantic Liberty Savings, F.A. and Ryan,
Beck & Co.
1.2 Agency Agreement among Brooklyn Heights Bancorp, Atlantic Liberty
Savings, F.A. and Ryan, Beck & Co.*
2 Plan of Reorganization from Mutual Savings Association to Mutual
Holding Company and Stock Issuance Plan
3.1 Proposed Federal Holding Company Charter of Brooklyn Heights Bancorp
3.2 Proposed Bylaws of Brooklyn Heights Bancorp
4 Form of Common Stock Certificate of Brooklyn Heights Bancorp
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding
legality of securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.
8.2 Form of State Tax Opinion*
8.3 Opinion of Feldman Financial Advisors, Inc. with respect to
Subscription Rights
10.1 Form of Employment Agreement
10.2 Form of Employee Stock Ownership Plan
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
Opinions included on Exhibits 5 and 8.1)
23.2 Consent of Sol Masch & Co.
23.3 Consent of Feldman Financial Advisors, Inc.
24 Power of Attorney (set forth on signature page)
27.1 EDGAR Financial Data Schedule
99.1 Appraisal Agreement between Atlantic Liberty Savings, F.A. and Feldman
Financial Advisors, Inc.
99.2 Appraisal Report of Feldman Financial Advisors, Inc.*
99.3 Proxy Statement
99.4 Marketing Materials
99.5 Order and Acknowledgment Form and Certification Form
- --------------------------
* To be filed supplementally or by amendment.