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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1998
REGISTRATION NO. 333-43591
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Pre-effective Amendment No. 2 to
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(2)
per share
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- ------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
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
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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
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SELECTED FINANCIAL AND OTHER DATA OF ATLANTIC LIBERTY SAVINGS, F.A. . . . . . . . . . . . . . . . . . . . . . . . 9
RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ATLANTIC LIBERTY, MHC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
BROOKLYN HEIGHTS BANCORP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ATLANTIC LIBERTY SAVINGS, F.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SUMMARY DESCRIPTION OF THE REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
MARKET AREA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
MARKET FOR THE COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PRO FORMA DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
THE REORGANIZATION AND OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ATLANTIC LIBERTY SAVINGS, F.A. STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 45
BUSINESS OF ATLANTIC LIBERTY SAVINGS, F.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
MANAGEMENT OF BROOKLYN HEIGHTS BANCORP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
MANAGEMENT OF ATLANTIC LIBERTY SAVINGS, F.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF THE ASSOCIATION . . . . . . . . . . . . . . . . . . . . . . 71
REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
REGISTRATION REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
LEGAL AND TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
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.
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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. Members of the Association currently
have voting rights in the Association. Following the Reorganization,
members will no longer have voting rights in the Association and all
of the current membership and voting rights of the Association's
members will be transferred to the Mutual Holding Company. The former
members of the Association who controlled 100% of the votes eligible
to be cast by the Association's members prior to the Reorganization
will, through the Mutual Holding Company, control 54% of the votes
eligible to be cast by the Company's stockholders following the
Reorganization.
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: WHY IS THE ASSOCIATION FORMING A TWO-TIER MUTUAL HOLDING COMPANY AND
CONDUCTING A MINORITY STOCK OFFERING INSTEAD OF UNDERGOING A FULL
CONVERSION TO STOCK FORM?
A: The Association's Board of Directors determined that the two-tier
mutual holding company structure was in the best interests of the
Association, its members and the communities served by the
Association. A savings institution that converts from the mutual to
stock form of organization using the mutual holding company structure
sells a minority of its shares to the public. By doing so, the
converting institution raises less than half the proceeds than would
be obtained in a full conversion. Consequently, the Company and the
Association will not be as overcapitalized as if the Association had
fully converted. In addition, because the Mutual Holding Company
controls a majority of the Company's Common Stock, the Board of
Directors believes that the Reorganization will permit the Association
to achieve the benefits of being a stock company without the loss of
control that often follows a full conversion.
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.
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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:
- 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 January 30, 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
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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 question and answer section highlights
selected information and may not contain all of the information that
is important to you. In addition, you may contact:
STOCK 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 REORGANIZATION AND OFFERING
The Reorganization involves a number of steps, including the
following:
- The Association will establish the Company and the Mutual
Holding Company, neither of which will have any assets prior
to the completion of the reorganization.
- The Association will convert from the mutual form of
organization to the capital stock form of organization and
issue 100% of its capital stock to the Company.
- The Company will issue between 850,000 and 1,150,000 shares of
its common stock in the Reorganization; 54% of these shares
(or between 459,000 shares and 621,000 shares) will be issued
to the Mutual Holding Company, and 46% (or between 391,000
shares and 529,000 shares) will be sold to depositors in the
Offering.
- Membership interests that depositors had in the Association
will become membership interests in the Mutual Holding
Company. As a result, former members of the Association who
controlled 100% of the votes eligible to be cast by the
Association's members prior to the reorganization will,
through the Mutual Holding Company, control 54% of the votes
eligible to be cast by the Company's stockholders immediately
following the reorganization.
DESCRIPTION OF THE MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure differs in significant respects
from the savings and loan holding company structure that is used in a standard
mutual to stock conversion. A savings institution that converts from the
mutual to stock form of organization using the mutual holding company structure
sells only a minority of its shares at the time of the reorganization and
offering. By doing so, a converting institution will raise less than half the
proceeds that would be raised in a traditional mutual to stock conversion.
Because less than half the proceeds are raised in the Offering, the Company and
the Association will not be as overcapitalized as if the Association had
converted in a standard conversion. The shares that are issued to the Mutual
Holding Company may be subsequently
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sold to the Association's depositors if the mutual holding company converts
from the mutual to the stock form of organization. See "Conversion of the
Mutual Holding Company to the Stock Form of Organization." In addition,
because the Mutual Holding Company controls a majority of the Company's Common
Stock, the Reorganization and Offering will permit the Association to achieve
the benefits of a stock company without a loss of control that often follows a
standard conversion from mutual to stock form. Sales of locally based,
independent savings institutions to larger, regional financial institutions can
result in closed branches, fewer choices for consumers, employee layoffs and
the loss of community support for and involvement by financial institutions.
Because the Mutual Holding Company is a mutual corporation, its
actions will not necessarily always be in the interests of the Company's
stockholders. In making business decisions, the Mutual Holding Company's Board
of Directors will consider a variety of constituencies, including the
depositors of the Association, the employees of the Company and the
Association, and the communities in which the Association operates. As the
majority stockholder of the Company, the Mutual Holding Company is also
interested in the continued success and profitability of the Association and
the Company. Consequently, the Mutual Holding Company will act in a manner
which furthers the general interest of all of its constituencies, including,
but not limited to, the interest of the stockholders of the Company. The
Mutual Holding Company believes that the interests of the stockholders of the
Company, and those of the Mutual Holding Company's other constituencies, are in
many circumstances the same, such as the increased profitability of the Company
and Association and continued service to the communities in which the
Association operates.
CONVERSION OF THE MUTUAL HOLDING COMPANY TO THE STOCK FORM OF ORGANIZATION
Office of Thrift Supervision regulations and the Plan of
Reorganization permit the Mutual Holding Company to convert from the mutual to
the capital stock form of organization. There can be no assurance that such a
transaction will ever occur, and the Board of Directors has no current
intention or plan to undertake such a transaction. If the Mutual Holding
Company were to convert to the capital stock form of organization, certain
depositors would receive the right to subscribe for additional shares of the
new stock holding company that would be formed in the transaction. In such a
transaction, each share of Common Stock outstanding and held by persons other
than the Mutual Holding Company would be automatically converted into shares of
common stock of the new stock holding company. The number of shares that each
stockholder would receive would be determined pursuant an exchange ratio that
ensures that after the transaction, subject to an adjustment to reflect any
dividends that the Mutual Holding Company may have waived and any assets that
the Mutual Holding Company may have other than common stock of the Company, the
percentage of the to-be outstanding shares of the new stock holding company
issued to such stockholders in exchange for their Common Stock would be equal
to the percentage of the outstanding shares of Common Stock held by such
stockholders immediately prior to the transaction.
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.
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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
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 $109.9 million, total deposits of
$100.5 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.
6
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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 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 $10.00 per share offering price was determined in
consultation with Ryan, Beck & Co., Inc. and represents the price most commonly
used in initial public stock offerings involving financial institutions. 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 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, subject to OTS approval, 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 10:00 a.m., 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 _____.
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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. Future decisions as to whether or not to declare dividends by the
Company will depend upon a number of factors excluding 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 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.
8
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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 to maturity . . . 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% 0.12% 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% 2.87% 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 1.60% 4.44% 3.04% 4.55%
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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RECENT DEVELOPMENTS
Set forth below are selected financial and other data of the
Association at and for the periods indicated. Information at December 31, 1997
and for the nine months ended December 31, 1997 and 1996 were derived from
unaudited financial statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair statement
of results for or as of the periods indicated, have been included. The results
of operations and other data for the nine month period ended December 31, 1997
are not necessarily indicative of the results of operations for the full fiscal
year. The selected financial and other data does not purport to be complete
and is qualified in its entirety by reference to the detailed information and
Financial Statements and Notes thereto presented elsewhere in this Prospectus.
AT AT
DECEMBER 31, MARCH 31,
1997 1997
------------- -------------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets . . . . . . . . . . . . . . . . . . $ 112,881 $ 109,794
Loans receivable, net . . . . . . . . . . . . . . 67,687 60,059
Mortgage-backed securities:
Held for investment . . . . . . . . . . . . 18,223 19,030
Investment securities:
Held for investment . . . . . . . . . . . . 14,946 17,258
Deposits . . . . . . . . . . . . . . . . . . . . 103,495 100,798
Retained earnings-substantially restricted . . . 7,189 6,873
NINE MONTHS ENDED
DECEMBER 31,
----------------------------------
1997 1996
-------- ---------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Total interest income . . . . . . . . . . . . . . $ 5,968 $ 5,400
Total interest expense . . . . . . . . . . . . . 3,491 3,264
-------- --------
Net interest income . . . . . . . . . . . . 2,477 2,136
-------- --------
Provision for loan losses . . . . . . . . . . . . 121 80
Net interest income after provision for
loan losses . . . . . . . . . . . . . . . . 2,356 2,056
-------- --------
Gain on the disposal of foreclosed real estate . 31 116
Other noninterest income . . . . . . . . . . . . 340 1,097
-------- --------
Total noninterest income . . . . . . . . . . . . 371 1,213
-------- --------
Total noninterest expense . . . . . . . . . . . . 2,076 2,793
-------- --------
Income before taxes and
extraordinary items . . . . . . . . . . . . 651 476
Income tax (expense) benefit . . . . . . . . . . (335) 228
-------- --------
Net income . . . . . . . . . . . . . . . . . . . $ 316 $ 704
======== ========
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AT OR FOR THE NINE MONTHS
ENDED DECEMBER 31,
----------------------------------
1997 1996
-------- ---------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on assets (ratio of net income
to average total assets) . . . . . . . . . 0.39% 0.90%
Return on retained earnings (ratio of
net income to average equity) . . . . . . 5.78% 13.96%
Interest rate spread . . . . . . . . . . . . 3.02% 2.70%
Net interest margin (2) . . . . . . . . . . 3.18% 2.85%
Ratio of operating expense to average
total assets . . . . . . . . . . . . . . . 2.55% 3.55%
Ratio of average interest-earning assets
to average interest-bearing liabilities . 103.56% 103.51%
ASSET QUALITY RATIOS:
Non-performing assets to total assets
at end of period . . . . . . . . . . . . . 1.45% 2.01%
Allowance for loan losses to
non-performing loans . . . . . . . . . . . 39.47% 23.48%
Allowance for loan losses to
loans receivable, net . . . . . . . . . . 0.96% 0.87%
CAPITAL RATIOS:
Retained earnings to total assets at
end of period . . . . . . . . . . . . . . 6.37% 6.87%
Average retained earnings to
average assets . . . . . . . . . . . . . . 6.70% 6.41%
OTHER DATA:
Number of full-service offices . . . . . . . 2 2
- -------------------------
(1) Ratios annualized where appropriate.
(2) Net interest income divided by average interest earning assets.
12
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FINANCIAL CONDITION
The Association's assets increased $3.1 million, or 2.8%, to $112.9
million at December 31, 1997 from $109.8 million at March 31, 1997. The
increase in total assets resulted from an increase in loans receivable, net to
$67.7 million from $60.1 million, which was partially offset by decreases in
investment securities to $14.9 million from $17.3 million and mortgage-backed
securities to $18.2 million from $19.0 million. Asset growth was primarily
funded by an increase in deposits to $103.5 million from $100.8 million.
Retained earnings increased to $7.2 million from $6.9 million. The increase in
retained earnings was attributable to net income of $316,000 for the nine
months ended December 31, 1997. At December 31, 1997 the Association exceeded
all regulatory capital requirements. At December 31, 1997 tangible, core and
risk based capital ratios were 6.55%, 7.12% and 15.45%, respectively. At
December 31, 1997, the Association's ratio of retained earnings to total assets
was 6.37%, as compared to 6.87% at March 31, 1997.
RESULTS OF OPERATIONS
GENERAL. The Association had net income of $316,000 for the nine
months ended December 31, 1997, compared to net income of $704,000 for the nine
months ended December 31, 1996. The decrease in net income was primarily
attributable to a decrease in noninterest income to $340,000 for the nine
months ended December 31, 1997 from $1.2 million for the comparable period in
1996, and an income tax expense of $335,000 for the nine months ended December
31, 1997 as compared to income tax benefit of $228,000 resulting from the
Association's payment of a special SAIF assessment for the comparable period
ended December 31, 1996.
INTEREST INCOME. Interest income for the nine months ended December
31, 1997 increased by $568,000, or 10.5% to $6.0 million from $5.4 million.
The increase in interest income was due primarily to increased loan
originations during the nine months ended December 31, 1997, as compared to the
same period in 1996, as well as approximately $200,000 received as interest on
a mortgage loan previously classified as a nonperforming loan.
INTEREST EXPENSE. Interest expense for the nine months ended December
31, 1997 increased by $227,000, or 7.0%, to $3.5 million from $3.3 million.
The increase in interest expense was attributable primarily to an increase in
deposits.
NET INTEREST INCOME. Net interest income increased by $341,000, or
16.0% to $2.5 million for the nine months ended December 31, 1997 from $2.1
million for the nine months ended December 31, 1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the nine
months ended December 31, 1997 was $121,000, as compared to $80,000 for the
nine months ended December 31, 1996. Management increased the provision for
loan losses in order to reflect the risks inherent in the Association's
participation in six pools of loans and a commercial real estate loan upon
which the Association began foreclosure proceedings.
NONINTEREST INCOME. Noninterest income decreased $842,000, or 69.4%
to $371,000 for the nine months ended December 31, 1997 from $1.2 million for
the comparative nine month period. The decrease in noninterest income
primarily resulted from nonrecurring income during the nine months ended
December 31, 1996 consisting of insurance proceeds of $556,000, and the
settlement of a lawsuit totaling $195,000.
NONINTEREST EXPENSE. Noninterest expense decreased $717,000, or
25.7%, to $2.1 million from $2.8 million. Noninterest expense consists of
compensation and benefits, deposit insurance premiums and other expenses. The
decrease in noninterest expense was primarily attributable to a decrease in
deposit insurance premiums resulting from the recapitalization of the SAIF.
INCOME TAXES. The Association had an income tax expense of $335,000
for the nine months ended December 31, 1997 compared to a tax benefit of
$228,000 for the comparable nine months period in 1996. The income tax benefit
was attributable to the effect of the special SAIF assessment in 1996.
13
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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.
14
19
RISKS ASSOCIATED WITH MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING
At September 30, 1997, $13.0 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 - DILUTION
OF OWNERSHIP INTERESTS OF PURCHASERS
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 Issued."
REDUCED RETURN ON EQUITY AFTER REORGANIZATION
Return on equity (net income for a given period divided by average
equity during that period) is a ratio used by many investors to compare the
performance of a particular financial institution to its peers. The
Association's return on equity for the year ended March 31, 1997 and six months
ended September 30, 1997 was, and the Company's post-Reorganization return on
equity is expected to be less than the average return on equity for publicly
traded thrift institutions and their holding companies. See "Selected
Financial and Other Data of Atlantic Liberty Savings, F.A." for numerical
information regarding the Association's historical return on equity and
"Capitalization" for a discussion of the Company's estimated pro forma
consolidated capitalization as a result of the Reorganization. In addition,
the expenses associated with the ESOP and the Stock Award Plan (see "Pro Forma
Data"), along with other post-Reorganization expenses, are expected to
contribute initially to reduced earnings. In the short-term, the Association
will have difficulty in improving its interest rate spread and thus the return
on equity to stockholders. Consequently, for the foreseeable future, investors
should not expect a return on equity that will meet or exceed the average
return on equity for publicly traded thrift institutions, and no assurances can
be given that this goal can be attained.
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
15
20
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. A waiver of cash dividends by the Mutual Holding Company will
result in a greater likelihood that dividends will be paid to Minority
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.
CONVERSION OF MUTUAL HOLDING COMPANY TO STOCK FORM - IMPACT OF WAIVED DIVIDENDS
ON MINORITY STOCKHOLDERS
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.
Pursuant to OTS policy and the Association's Plan, 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.
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
16
21
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. The median household income in the
borough of Brooklyn is below the median household income nationally, as well as
for the State of New York. In addition, the unemployment rates in the markets
served by the Association are higher than the surrounding suburbs. A weakening
in the local real estate market or in the local economy could increase the
number of delinquent 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 the
Common Stock cannot be quoted and traded on the OTC Bulletin Board, it is
expected that the transactions in the Common Stock will be reported in Pink
Sheets of the National Quotation Bureau, Inc. 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
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22
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 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 AGGREGATE PRICE
PROPOSED TO BE OF INTENDED PERCENT OF
NAME POSITION SUBSCRIBED FOR(1) PURCHASES SHARES %
- -------------------------------------------------------------------------------------------------------------------
John A. Maher Chairman of the Board 5,000(3) $ 50,000 1.1%
and Secretary
Stephen Irving President, Chief Executive 2,500 25,000 0.5%
Officer and Director
Nunzio D'Addona Director 5,000(3) 50,000 1.1%
Eugene F. O'Connor Director 5,000(3) 50,000 1.1%
Edward W. Kelle Director and Vice 2,500 25,000 0.5%
Chairman of the Board
Fred W. McPhilliamy Director 2,500 25,000 0.5%
Martin D. Dehler Director 5,000(3) 50,000 1.1%
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23
Barry Donohue Vice President 1,000 10,000 0.2%
Steven Parisi Vice President 1,000 10,000 0.2%
------ -------- ----
All directors and officers 29,500 $295,000 6.4%
as a group (9 persons) (2)
- ---------------------------
(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."
(3) Represents the maximum number of shares that may be subscribed for in the
Offering.
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.
Although many federal mutual holding companies waive the receipt of
cash dividends declared by their subsidiaries, the Mutual Holding Company
intends to make such a determination at the time the Company declares a
dividend. OTS regulations require the Mutual Holding Company to give the OTS
prior written notice of any such waiver, and the conditions pursuant to which
the OTS generally approves dividend waivers are described in
"Regulation--Holding Company Regulation." The Mutual Holding Company's Board
of Directors will waive dividends paid by the Company if the Board determines
that such a waiver is in the Mutual Holding Company's members' best interest
because, among other reasons: (i) the Mutual Holding Company has no need for
the dividend considering its business operations; (ii) the cash that would be
received could be invested by the Company or the Association at a more
favorable rate of return; (iii) such waiver may increase the capital of the
Association and enhance its business so that members will continue to have
access to the services of the Association; and (iv) such waiver preserves the
net worth of the Mutual Holding Company through its principal asset (the
Company, and indirectly, the Association), which would be available for
distribution in the unlikely event of a voluntary liquidation of the Company
and the Association after satisfaction of claims of depositors and creditors.
The Board of Directors may consider other factors in determining whether such
waiver is consistent with its fiduciary duties to members of the Mutual Holding
Company. Any waiver of dividends by the Mutual Holding Company is likely to
result in an adjustment to the ratio pursuant to which shares of Common Stock
are exchanged for shares of the resulting company in a Conversion Transaction.
The Mutual Holding Company's Board of Directors may accept dividends
paid by the Company in an amount necessary to pay the Mutual Holding Company's
expenses, and will accept additional dividends if it determines that accepting
such dividends is in the Mutual Holding Company's members' best interest
because, among other reasons: (i) the Mutual Holding Company may increase its
direct ownership of the Company, and indirect ownership of the Association, by
using cash dividends to purchase additional shares of Common Stock in the open
market from time to time; and (ii) such dividends may be used to promote
activities that are in the interest of members and the members'
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community. Any purchases of Common Stock by the Mutual Holding Company will
increase the percentage of the Company's Common Stock held by the Mutual
Holding Company and, in a Conversion Transaction, will decrease the aggregate
number of shares of the resulting company issued to Minority Stockholders in
exchange for their shares of Common Stock.
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 $109.9
million, deposits of $100.5 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 periods 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
residential real estate. The Association also makes loans secured by
multi-family and commercial real estate. At September 30, 1997, the
Association had 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
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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 economy of the
Association's market area is characterized by the large number of small retail
establishments. The Association's customer base is comprised of middle-income
households, and to a lesser extent low-to moderate-income households. The
median household income for Brooklyn is below the median household income
nationally, and in the State of New York. In addition, the unemployment rate
in the market served by the Association is higher than in the surrounding
suburbs.
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 (or $2.0 million at the midpoint), 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
(assuming such amount of shares can be purchased in the Offering, the ESOP loan
would be $368,600 at the midpoint). 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.
MINIMUM, MIDPOINT, MAXIMUM, 15% ABOVE 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.
(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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27
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. The Company will not undertake any action within a
year from the completion of the Reorganization towards the furtherance of a
return of capital. 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
23
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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
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; minority
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 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.
24
29
(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 Independent Valuation and 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 one year treasury bill rate was used to
calculate the reinvestment of net proceeds because it more appropriately
reflects a market rate of return than the arithmetic average yield of the
Association's interest earning assets and cost of deposits. Management
believes the difference in income that would be generated by using the one year
Treasury Bill rate as opposed to the arithmetic average yield of the
Association's interest earning assets and cost of deposits to be immaterial.
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 45%. 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.
25
30
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 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.
26
31
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
======== ======== ========= =========
Common Stock Purchased by ESOP . . . . . . . . . . . . . (313) (368) (423) (487)
Common Stock Purchased by Stock Award Plan . . . . . . . (156) (184) (212) (243)
-------- -------- --------- ---------
Estimated Investable Proceeds . . . . . . . . . . . . . $ 2,941 $ 3,538 $ 4,134 $ 4,820
======== ======== ========= =========
Net earnings:
Historical . . . . . . . . . . . . . . . . . . . . . . $ 335 $ 335 $ 335 $ 335
Pro forma income on net proceeds (2) . . . . . . . . . 43 52 61 71
Pro forma ESOP adjustment (3) . . . . . . . . . . . . . (9) (10) (12) (13)
Pro forma Stock Award Plan adjustment (4) . . . . . . . (9) (10) (12) (13)
-------- -------- --------- ---------
Pro forma net earnings . . . . . . . . . . . . . . . $ 361 $ 367 $ 373 $ 379
======== ======== ========= =========
Per share net earnings: (5) (6)
Historical . . . . . . . . . . . . . . . . . . . . . . $ .41 $ .35 $ .30 $ .26
Pro forma income on net proceeds (2) . . . . . . . . . .05 .05 .05 .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 $ .38 $ .34 $ .30
======== ======== ========= =========
Stockholders' equity:
Historical (8) . . . . . . . . . . . . . . . . . . . . $ 7,158 $ 7,158 $ 7,158 $ 7,158
Estimated adjusted net proceeds (9) . . . . . . . . . . 3,410 4,090 4,769 5,550
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 . . . . . . . . . . . . $ 10,099 $ 10,696 $ 11,292 $ 11,977
======== ======== ========= =========
Stockholders' equity per share: (5) (8)
Historical . . . . . . . . . . . . . . . . . . . . . . $ 8.42 $ 7.161 $ 6.22 $ 5.41
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) . . . $ 11.88 $ 10.70 $ 9.82 $ 9.06
======== ======== ========= =========
Offering price to pro forma stockholders' equity . . . . 84.17% 93.49% 101.84% 110.42%
======== ======== ========= =========
Offering price to pro forma net earnings per share (5) . 11.37x 13.18x 14.91x 16.84x
======== ======== ========= =========
Minority Ownership Interest (10) . . . . . . . . . . . . 46.00% 46.00% 46.00% 46.00%
======== ======== ========= =========
(footnotes on second following page)
27
32
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
========= ======== ======== =========
Common Stock Purchased by ESOP . . . . . . . . . . . . . (313) (368) (423) (487)
Common Stock Purchased by Stock Option Plan . . . . . . . (156) (184) (212) (243)
--------- -------- -------- ---------
Estimated Investable Proceeds . . . . . . . . . . . . . $ 2,941 $ 3,538 $ 4,134 $ 4,820
========= ======== ======== =========
Net earnings:
Historical . . . . . . . . . . . . . . . . . . . . . . $ 123 $ 123 $ 123 $ 123
Pro forma income on net proceeds (2) . . . . . . . . . 87 104 122 142
Pro forma ESOP adjustment (3) . . . . . . . . . . . . . (17) (20) (23) (27)
Pro forma stock award plan adjustment (4) . . . . . . . (17) (20) (23) (27)
--------- -------- -------- ---------
Pro forma net earnings . . . . . . . . . . . . . . . $ 175 $ 187 $ 198 $ 212
========= ======== ======== =========
Per share net earnings: (5) (6)
Historical . . . . . . . . . . . . . . . . . . . . . . $ .15 $ .13 $ .11 $ .10
Pro forma income on net proceeds (2) . . . . . . . . . .11 .11 .11 .11
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) . . . . . . $ .21 $ .19 $ .18 $ 0.17
========= ======== ======== =========
Stockholders' equity:
Historical (8) . . . . . . . . . . . . . . . . . . . . $ 6,823 $ 6,823 $ 6,823 $ 6,823
Estimated adjusted net proceeds (9) . . . . . . . . . . 3,410 4,090 4,769 5,550
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 . . . . . . . . . . . . $ 9,764 $ 10,361 $ 10.957 $ 11,642
========= ======== ======== =========
Stockholders' equity per share: (5) (8)
Historical . . . . . . . . . . . . . . . . . . . . . . $ 8.03 $ 6.82 $ 5.93 $ 5.16
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) . . . $ 11.49 $ 10.36 $ 9.53 $ 8.80
========= ======== ======== =========
Offering price to pro forma stockholders' equity . . . . 87.06% 96.52% 104.95% 113.59%
========= ======== ======== =========
Offering price to pro forma net earnings per share (5) . 46.85x 51.72x 56.02x 60.40x
========= ======== ======== =========
Minority Ownership Interest (10) . . . . . . . . . . . . 46.00% 46.00% 46.00% 46.00%
========= ======== ======== =========
(footnotes on following page)
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33
(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 45% 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 16 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.
29
34
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% $ 8,678 7.8% $ 8,977 8.0%
======== ========= ========= ========= ======== ========
Tangible capital(2) . . . . . . . . . $ 7,208 6.6% 8,678 7.8% 8,977 8.0%
Tangible capital requirement(3) . . . 1,645 1.5% 1,670 1.5% 1,675 1.5%
-------- --------- --------- --------- -------- --------
Excess . . . . . . . . . . . . . . $ 5,563 5.1% $ 7,008 6.3% $ 7,302 6.5%
======== ========= ========= ========= ======== ========
Core capital(2) . . . . . . . . . . . $ 7,208 6.6% 8,678 7.8% 8,977 8.0%
Core capital requirement(2) (4) . . . 3,289 3.0% 3,341 3.0% 3,350 3.0%
-------- --------- --------- --------- -------- --------
Excess . . . . . . . . . . . . . . $ 3,919 3.6% $ 5,338 4.8% $ 5,627 5.0%
======== ========= ========= ========= ======== ========
Risk-based capital(2)(3) . . . . . . $ 7,822 15.7% 9,292 18.5% 9,591 19.1%
Risk-based capital
requirement . . . . . . . . . . . . 3,977 8.0% 4,009 8.0% 4,014 8.0%
-------- --------- --------- --------- -------- --------
Excess . . . . . . . . . . . . . . $ 3,845 7.7% $ 5,283 10.5% $ 5,577 11.1%
======== ========= ========= ========= ======== ========
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 . . . . . . . . . . . . . $ 9,275 8.3% $ 9,618 8.6%
========= ======== ========= ========
Tangible capital(2) . . . . . . . . . 9,275 8.3% 9,618 8.6%
Tangible capital requirement(3) . . . 1,679 1.5% 1,684 1.5%
--------- -------- --------- --------
Excess . . . . . . . . . . . . . . $ 7,596 6.8% $ 7,933 7.1%
========= ======== ========= ========
Core capital(2) . . . . . . . . . . . 9,275 8.3% 9,616 8.6%
Core capital requirement(2) (4) . . . 3,359 3.0% 3,369 3.0%
--------- -------- --------- --------
Excess . . . . . . . . . . . . . . $ 5,916 5.3% $ 6,249 5.6%
========= ======== ========= ========
Risk-based capital(2)(3) . . . . . . 9,889 19.7% 10,232 20.3%
Risk-based capital
requirement . . . . . . . . . . . . 4,019 8.0% 4,024 8.0%
--------- -------- --------- --------
Excess . . . . . . . . . . . . . . $ 5,870 11.7% $ 6,207 12.3%
========= ======== ========= ========
- ----------------------
(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.
30
35
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.
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
31
36
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 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
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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.
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.
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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 April __, 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 January 30, 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
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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 1.0% 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 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 1.0% 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
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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 1.0% 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.
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.
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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.
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 a fair and equitable manner. 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.
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.
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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 Form 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 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").
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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 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
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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 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."
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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 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,
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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, 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."
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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, 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."
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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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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.
Management intends to initially invest the net proceeds from the Offering in
interest earning assets and believes that the Company and the Association will
derive additional interest income from such sources.
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 assessed the electronic system programs,
applications and other electronic components used in the operations of the
Association and has concluded that no computer malfunctions are expected to
occur with the Association's computer systems on January 1, 2000. The
Association has tested its computer applications and hardware to ensure that
they will be able to read the year 2000. The Association has contacted each of
its vendors to ensure that they will be able to provide service in light of the
year 2000 issue. Most vendors have represented to management that they have
addressed the year 2000 issue and they will be able to provide the services for
which the Association has contracted. Management will continue to monitor this
issue and report to the Board of Directors on a quarterly basis until full
compliance is obtained from all vendors. 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
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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 $9.7 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.
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 3.04%
and 4.55%, 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 2.34%, 3.21% and 2.56%, respectively.
Following the completion of the Reorganization and Offering,
noninterest expenses are likely to increase as a result of added expenses
associated with being a public company and complying with the financial and
business reports required to be filed with regulatory agencies. In addition,
compensation expense will increase as a result of the implementation of the
ESOP and Stock Award Plan. See "Risk Factors - Expenses Associated with ESOP
and Stock Award Plan."
MANAGEMENT OF MARKET RISK - INTEREST RATE RISK
The Association's most significant form of market risk is interest
rate risk, as the majority of the Association's assets and liabilities are
sensitive to changes in interest rates. 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."
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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 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
--------------------------------------------------------
1 YEAR 1 YEAR TO MORE THAN
OR LESS 5 YEARS 5 YEARS TOTAL
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Loans:
Adjustable rate . . . . . . . . . . . . $ 8,752 $ 10,231 -- $ 18,983
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 . . . . . . . . . . 18,327 55 635 19,017
-------- --------- -------- ----------
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%
47
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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.
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
48
53
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.
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 . . . . . . . . . . 5,821 4,700 5,276
--------- -------- --------
Total assets . . . . . . . . . $ 109,887 $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 . . . . . . . . 1,377 1,155 999
Retained earnings . . . . . . . 7,208 7,348 7,024
--------- -------- --------
Total liabilities and retained
earnings . . . . . . . . . . $ 109,887 $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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54
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%
Mortgage-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) . . . . . . . . . . . . . . . 2.87% 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.
50
55
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) 18 6
Loans . . . . . . . . . . . . . 319 170 489 473 (475) (2)
-------- ------- ------- ------- -------- ------
Total interest income . . . 175 275 450 553 (456) (97)
-------- ------- ------- ------- -------- ------
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 $ 264 $ 335 $ 407 $ (524) $ (117)
======== ======= ======= ======= ======== ======
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.
The increase in loans receivable, net resulted primarily from $5.2 million in
loan originations (net of principal repayments) during the six months ended
September 30, 1997, which were funded from maturing investment and mortgage
securities. Deposits decreased to $100.5 million at September 30, 1997 from
$100.8 million at March 31, 1997. The decrease in deposits was the result of
withdrawals in excess of deposits plus interest credited. 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.
Retained earnings are substantially restricted as a result of OTS and FDIC
regulations requiring the maintenance of minimum capital ratios as a percentage
of assets, and OTS regulations limiting capital distributions.
At March 31, 1997, the Association's assets totaled $109.8 million as
compared to $105.7 million at March 31, 1996, an increase of $4.1 million, or
3.8%. Loans receivable, net increased $5.5 million, investment securities
increased $1.1 million and mortgage-backed securities decreased $196,000. The
increase in loans receivable, net resulted primarily from the origination of
$4.8 million in loans (net of principal repayments). Deposits increased to
$100.8 million at March 31, 1997 from $97.4 million at March 31, 1996. The
increases in loans receivable, net and investment securities was funded from
increased deposits and interest received from loans and investments. Total
retained earnings increased to $6.9 million from $6.8 million reflecting net
income of $123,000 for the year ended March 31, 1997.
As a result of the Offering, the Association's total assets will
increase immediately and the additional capital will enable the Association to
increase its asset size more than would the case be if the Offering did not
occur. In addition, the Offering will result in an increase in the Company's
equity, as compared to the Association's equity prior to the Offering, in an
amount equal to the net proceeds of the Offering less (i) $50,000 to capitalize
the Mutual Holding Company and (ii) the cost of the shares purchased by the
ESOP. A portion of the Company's increased equity will also be used to fund
the Stock Award Plan's purchase of shares, subject to the approval of the Stock
Award Plan by shareholders.
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56
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
$594,000 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 .
INTEREST INCOME. Interest income increased $450,000 or 12.5%, 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 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%.
Following the Offering, management intends to invest the net proceeds in
interest earning assets and consequently management believes that the Company
and Association will derive additional interest income from such sources,
although there can be no assurances that interest income will be higher than in
the past.
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
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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 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%.
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 103.81% 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 2.71% from 2.97%.
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 (consisting of single family
adjustable rate 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 for cash. The Association's
participation in the six pools of loans originally occurred in 1986 in the
amount of $4.0 million. The payment of principal and interest on the
underlying loans was guaranteed by the Thrift Association Security Corp., a
service corporation owned by savings and loans throughout New York State. The
loans underlying the participation eventually were serviced by the Resolution
Trust Corporation, and upon its dissolution, by the FDIC. The FDIC determined
not to honor the original guarantee of principal and interest, and consequently
the Association receives payments on its participation interest only to the
extent that the FDIC receives payments from the mortgagors of the underlying
loans. At September 30, 1997, the principal balance outstanding on the
Association's participation interest was $1.1 million. The commercial real
estate loan was originated in 1986 in a principal amount of $618,000. The
owner of the commercial property rented it to two tenants. One tenant
subsequently discontinued payments of monthly rents and the borrower was
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58
unable to meet its monthly obligations to the Association. The Association is
unable at this time to determine whether it will incur a loss on the sale of
this property. 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 other noninterest
income during the six months ended September 30, 1996 consisting of primarily
insurance proceeds of $615,000, $22,000 received from fees for safe deposit
box rentals and $29,000 in other service fees. Gain on the disposal of
foreclosed real estate decreased to $29,000 from $123,000. 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 $1.1 million, or 510%, increase
in noninterest income was primarily attributable to nonrecurring other
noninterest income consisting primarily of insurance proceeds of $596,000, the
settlement of a lawsuit totaling $195,000, $46,000 in safe deposit box rental
fees and $33,000 in other service fees. 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 $173,000. Income from loan
servicing fees decreased to $373 from $590.
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.
Following the completion of the Reorganization and Offering,
noninterest expenses are likely to increase as a result of added expenses
associated with being a public company and complying with the financial and
business reports required to be filed with regulatory agencies. In addition,
compensation expense will increase as a result of the implementation of the
ESOP and Stock Award Plan. See "Risk Factors - Expenses Associated with ESOP
and Stock Award Plan."
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 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.
At September 30, 1997 and March 31, 1997, the Association's return on
average assets was 0.67% and 0.12%, respectively. At September 30, 1997 and
March 31, 1997, the return on average equity was 9.12% and
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5.98%, respectively. The return on average assets and return on average equity
for the Association were significantly below the average of financial
institutions in the Association's market area and nationally and reflect the
Association's below average net income during the periods presented. See "Risk
Factors - Reduced Return on Equity after Reorganization."
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.
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. The
Association's experience has been that virtually all of its maturing
certificate of deposit accounts are renewed.
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.
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
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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.
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.
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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 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.
FASB STATEMENT ON SEGMENT AND RELATED INFORMATION. In June 1997, the
FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which changes the way public companies report information
about segments of their business on their annual financial statements and
requires them to report selected segment information in their quarterly reports
issued to shareholders. It also requires entity wide disclosures about the
products and services an entity provides, the foreign countries in which it
holds assets and reports revenues, and its major customers. This statement is
effective for fiscal years beginning after December 15, 1997. This statement
is not expected to have an impact on the Association.
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.
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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 deferred fees
and discounts.
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) (0.25) (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%
======= ====== ======= ====== ======= ======
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%
======= ====== ======= ====== ======= ======
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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 $30.9 million and the total amount of loans
due after such dates which have floating or adjustable interest rates is $30.8
million.
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 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.
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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 $1.2 million (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
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
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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.
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)
====== ======= ====== ======
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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.
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.
62
67
At September 30, 1997, loans delinquent from 60 to 89 days totaled
approximately $610,000.
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 4.63% 3 5.82%
- -------- --- ---------- --- ----------
549,000 6,900,000
---------- ----------
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, 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.
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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.
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
------- ------- ------ ------
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%
======= ======= ====== ======
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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
ALLOWANCESCATEGORY 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 $13.2
million, or 11.97%, 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 $19.1 million, or 17.31% of total assets.
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 to maturity:
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%
======= ====== ======= ======= ======= ======
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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
to maturity:
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 TOTAL INVESTMENTS AND
1 YEAR YEARS YEARS 10 YEARS MORTGAGE-BACKED 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.
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.
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71
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%
========= ====== ======== ======= ======== ======
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%
======== =======
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The following table sets forth the deposit activities of the
Association 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 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.
PROPERTIES
The following table provides certain information with respect to the
Association's offices as of September 30, 1997:
NET BOOK VALUE OF REAL
LOCATION LEASED OR OWNED YEAR LEASED OR 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.
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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.
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:
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AGE AT CURRENT TERM
NAME SEPTEMBER 30, 1997 POSITION DIRECTOR SINCE EXPIRES
- -----------------------------------------------------------------------------------------------------------
John A. Maher 66 Chairman of the 1961 2000
Board 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 1962 1999
the 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.
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.
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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(3)
==========================================================================================================================
- -------------------------
(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.
(3) Represents life insurance premiums paid by the Association.
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
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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 owner and beneficiary of
the life insurance policy. 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 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.
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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 COMPENSATION 15 20 25 30 35 40
- -------------------------------------------------------------------------------------------------------------
$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 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.
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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 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
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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.
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
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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 a set fee of $30,000 which represents annual consulting fees from the
Association for providing advice regarding regulatory compliance, development
of new products and representation before government and businesses. Mr.
Dehler receives a set fee of $12,000 which represents 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
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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; (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.
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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 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
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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.
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,
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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.
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
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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
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
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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).
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.
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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.
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."
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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.
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."
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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.
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 of
either one year, two years or three years, and, upon reelection, will serve
for terms of three years and until their successors are
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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
88
93
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.
89
94
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
95
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
96
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
G-3
97
ATLANTIC LIBERTY SAVINGS, F.A.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
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.
98
ATLANTIC LIBERTY SAVINGS, F.A.
FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED MARCH 31, 1997 AND 1996
99
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
100
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
101
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
102
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
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
(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
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
(e) LOANS RECEIVABLE
Loans receivable that Management has the intent and ability to hold 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, which lives range between 5 and 30 years.
(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
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
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
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
(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
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
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 FAIR
COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- -----
HELD-TO-MATURITY:
Due in one year or less $3,100,856 $3,074,805 $3,101,712 $3,074,514 $3,909,503 $3,891,069
Due after one year through five years 9,466,728 9,375,530 11,573,543 11,311,948 7,707,749 7,560,121
Due after five years through ten years 0 0 2,000,000 1,978,130 4,000,000 3,891,890
Federal Home Loan Bank Stock 582,700 582,700 582,700 582,700 528,100 528,100
Mortgage-backed securities 19,016,882 19,157,098 19,030,293 18,652,413 19,225,926 19,084,542
---------- ---------- ---------- ----------- ----------- -----------
$32,167,166 $32,190,133 $36,288,248 $35,599,705 $35,371,278 $34,955,722
----------- ----------- ----------- ------------ ----------- -----------
(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
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
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
Recoveries 0 0 0 0
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
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
(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
Recoveries 0 0 0 0
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
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
(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
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
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
112
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 Association's effective tax rate 43% 0% 0% 42%
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
113
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
------ ----- ------ ----- ------ -----
(In thousands)
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
114
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
------ ------ ---------- ------ ------ ----------
(In thousands)
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
------ ------ ---------- ------ ------ ----------
(In thousands)
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, (9 years with respect
to one director, and 10 years with respect to another director, 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
$460,000 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
115
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 ninety days subsequent to issuance 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 of the amount of commitments at September 30,
1997 referred to above, commitments to originate fixed-rate loans amounted to
$1,188,000 with interest rates ranging from 7 1/2% to 9%.
(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
116
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
117
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.
(18) ADOPTION OF PLAN OF CONVERSION
On August 19, 1997, the Board of Directors of Atlantic Liberty Savings, F.A., a
federally chartered mutual savings association (the "Association") adopted the
Plan, pursuant to which the Association will form a federally chartered mutual
holding company (the "Reorganization"). As part of the Reorganization, the
Association will convert to a stock savings and loan association and will
become a wholly-owned subsidiary of Brooklyn Heights Bankcorp, a federal stock
corporation (the "Company"). The Company will become a majority-owned
subsidiary of Atlantic Liberty, MHC, (the "Mutual Holding Company"), owning 54%
thereof. Concurrently with the Reorganization, the Company will offer for sale
46% of its shares of its 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. The retained earnings
of the Association will be substantially restricted after the Reorganization by
OTS regulations limiting capital distributions. Costs incurred in the
Reorganization approximated $80,000 at September 30, 1997. Additional costs
are expected to be incurred in subsequent months. Costs incurred in the
Reorganization will be offset against proceeds if the Reorganization is
completed as planned, or charged to expense in the event the Reorganization is
not completed.
The Association plans to establish an Employee Stock Ownership Plan (ESOP) for
the benefit of eligible employees, to become effective upon consummation of the
Reorganization. The ESOP intends to purchase up to 8% of the Company's common
stock issued in the Reorganization utilizing the proceeds of a loan from the
Company. The loan will be repaid over a period of 10 years and the collateral
for the loan will be the common stock purchased by the ESOP. The Association
also plans to establish a stock award plan and would award up to 4% of the
common stock issued in the offering to executive officers and directors the
Association at no cost to them. The stock award 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.
F-19
118
================================================================================
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.
================================================================================
119
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.
120
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.
121
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 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*
- --------------------------
* Previously filed
122
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.
123
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Brooklyn, New York on February 9, 1998.
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 February 9, 1998
- ------------------------- Officer and Director
Stephen Irving (Principal Executive Officer)
/s/ Stephen Parisi Vice President and Treasurer February 9, 1998
- ------------------------- (Principal Financial and
Stephen Parisi Accounting Officer)
/s/ John A. Maher Chairman of the Board February 9, 1998
- -------------------------
John A. Maher
/s/ Nunzio D'Addona Director February 9, 1998
- -------------------------
Nunzio D'Addona
/s/ Martin D. Dehler Director February 9, 1998
- -------------------------
Martin D. Dehler
/s/ Edward W. Kelle Director February 9, 1998
- -------------------------
Edward W. Kelle
/s/ Fred W. McPhilliamy Director February 9, 1998
- -------------------------
Fred W. McPhilliamy
/s/ Eugene F. O'Connor Director February 9, 1998
- -------------------------
Eugene F. O'Connor
124
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 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*
- --------------------------
* Previously filed