As filed with the Securities and Exchange Commission on January 2, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 6035 Applied For
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
52 North Main Street, Gloversville, New York 12078-3084 (518) 725-6335
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-------------
Lewis E. Kolar
President and Chief Executive Officer
Adirondack Financial Services Bancorp, Inc.
52 North Main Street
Gloversville, New York 12078-3084
(518) 725-6335
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------
Please send copies of all communications to:
Kip A. Weissman, P.C.
Daniel L. Torbenson, Esq.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability partnership including professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005
(202) 414-6100
-------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
======================================================================================================
Title of Each Amount Proposed Maximum Proposed Maximum
Class of Securities to be Offering Price Aggregate Offering Amount of
to be Registered Registered (1) Per Share (1) Price (1) Registration Fee
- ------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value 661,250 shares $10.00 $6,612,500 $1,951
======================================================================================================
- -----------
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
Prospectus
[LOGO]
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
(Proposed Holding Company for Gloversville Federal Savings and Loan Association)
$10.00 Per Share
575,000 Shares of Common Stock
(Anticipated Maximum)
Adirondack Financial Services Bancorp, Inc. (the "Holding Company") is
offering up to 575,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), in connection with the conversion of Gloversville Federal
Savings and Loan Association ("Gloversville Federal" or the "Association") from
a federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association and the issuance of all of
Gloversville Federal outstanding stock to the Holding Company (the
"Conversion"). Pursuant to the Association's plan of conversion (the "Plan of
Conversion" or the "Plan"), non-transferable rights to subscribe for the Common
Stock ("Subscription Rights") have been given to (i) Gloversville Federal's
depositors with account balances of $50 or more as of September 30, 1996
("Eligible Account Holders"), (ii) tax-qualified employee plans of Gloversville
Federal and the Holding Company ("Tax-Qualified Employee Plans"), provided,
however, that the Tax-Qualified Employee Plans shall have first priority
Subscription Rights to the extent that the total number of shares of Common
Stock sold in the Conversion exceeds the maximum of the Estimated Valuation
Range as defined below, (iii) Gloversville Federal's depositors with account
balances of $50 or more as of ___________, 1998 ("Supplemental Eligible Account
Holders"), (iv) certain of its other members ("Other Members"), and (v) its
employees, officers and directors (the "Subscription Offering.) (continued on
next page)
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE STOCK
INFORMATION CENTER AT (518) ___-____.
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED, SEE "RISK
FACTORS" AT PAGE __.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR THE FEDERAL DEPOSIT
INSURANCE CORPORATION, NOR HAS SUCH COMMISSION, OFFICE OR CORPORATION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
Estimated Underwriting Fees,
Commissions and Other Estimated Net
Purchase Price(1) Expenses(2) Conversion Proceeds(3)
----------------- ----------- ----------------------
Per Share(4).................................... $10.00 $1.02 $8.98
Minimum Total................................... $4,250,000 $508,000 $3,742,000
Midpoint Total.................................. $5,000,000 $508,000 $4,492,000
Maximum Total................................... $5,750,000 $508,000 $5,242,000
Maximum Total, As Adjusted(5)................... $6,612,500 $508,000 $6,104,500
(1) Determined on the basis of an appraisal prepared by RP Financial, Inc. ("RP
Financial) dated [Appraisal Date], which states that the estimated pro
forma market value of the Common Stock ranged from $4,250,000 to $5,750,000
or between 425,000 shares and 575,000 shares, of Common Stock at $10.00 per
share. See "The Conversion - Stock Pricing and Number of Shares to be
Issued."
(2) Consists of the estimated costs to the Association and the Holding Company
arising from the Conversion, including the payment to Capital Resources,
Inc. ("Capital Resources") of a fee of $90,000 and estimated expenses of
$418,000 in connection with the sale of shares in the Offering. Such fees
may be deemed to be underwriting fees. The Holding Company has agreed to
indemnify Capital Resources against certain liabilities, including
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). See "The Conversion - Marketing Arrangements" for a more
detailed description of underwriting fees and expenses.
(3) Net Conversion proceeds may vary from the estimated amounts, depending on
the Purchase Price and the number of shares issued. The Purchase Price and
the actual number of shares of Common Stock to be issued in the Conversion
will not be determined until after the close of the Offering.
(4) Assumes the sale of the midpoint number of shares. If the minimum, maximum
or 15% above the maximum number of shares are sold, estimated expenses per
share would be $1.20, $0.88 or $0.77, respectively, resulting in estimated
net Conversion proceeds per share of $8.80, $9.12 or $9.23, respectively.
(5) As adjusted to give effect to the sale of up to an additional 86,250 shares
(15% above the maximum of the Estimated Valuation Range) which may be
offered in the Conversion without the resolicitation of subscribers or any
right of cancellation, to reflect changes in market and financial
conditions following the commencement of the Offering. See "Pro Forma
Data," and "The Conversion - Stock Pricing and Number of Shares to be
Issued."
Capital Resources, Inc.
The date of this Prospectus is February __, 1998
(continued from prior page)
Subscription Rights are non-transferrable. Persons found to be selling or
otherwise transferring their right to purchase stock in the Subscription
Offering or purchasing Common Stock on behalf of another person will be subject
to forfeiture of such rights and possible further sanctions and penalties
imposed by the Office of Thrift Supervision (the "OTS"), an agency of the United
States Government. Subject to the prior rights of holders of Subscription Rights
and to market conditions at or near the completion of the Subscription Offering,
the Holding Company may also offer the Common Stock for sale through Capital
Resources on a best efforts basis in a public offering to selected persons to
whom this prospectus is delivered (the "Public Offering" and when referred to
together with the Subscription Offering, the "Offering"). Depending on market
conditions and availability of shares, the shares of Common Stock may be offered
for sale in the Public Offering on a best-efforts basis by a selling group of
selected broker-dealers to be managed by Capital Resources. The Association and
the Holding Company reserve the right, in their absolute discretion, to accept
or reject, in whole or in part, any or all orders in the Public Offering.
The total number of shares to be issued in the Conversion will be based upon an
appraised valuation of the estimated aggregate pro forma market value of the
Holding Company and the Association as converted. The purchase price per share
("Purchase Price") has been fixed at $10.00. Based on the current aggregate
valuation range of $4,250,000 to $5,750,000 (the "Estimated Valuation Range"),
the Holding Company is offering up to 575,000 shares. Depending upon the market
and financial conditions at the time of the completion of the Subscription
Offering and the Public Offering, if any, the total number of shares to be
issued in the Conversion may be increased or decreased from the 575,000 shares
offered hereby, provided that the product of the total number of shares
multiplied by the price per share remains within, or does not exceed by more
than 15% the maximum of the Estimated Valuation Range. If the aggregate Purchase
Price of the Common Stock sold in the Conversion is below $4,250,000 or above
$6,612,500 , or if the Offering is extended beyond , 1998, subscribers will be
permitted to modify or cancel their subscriptions and to have their subscription
funds returned promptly with interest. Under such circumstances, if subscribers
take no action, their subscription funds will be promptly returned to them with
interest. In all other circumstances, subscriptions are irrevocable by
subscribers. See "The Conversion - Offering of Holding Company Common Stock."
With the exception of the Tax-Qualified Employee Plans, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member may purchase in
their capacity as such in the Subscription Offering more than $150,000 of Common
Stock; no person, together with associates of and persons acting in concert with
such person, may purchase more than $150,000 of Common Stock in the Public
Offering and no person, together with associates of and persons acting in
concert with such person, may purchase more than $150,000 of Common Stock
offered in the Conversion based on the Estimated Valuation Range (as calculated
without giving effect to any increase in the Estimated Valuation Range
subsequent to the date hereof). Under certain circumstances, the maximum
purchase limitations may be increased or decreased at the sole discretion of the
Association and the Holding Company up to 9.99% of the total number of shares of
Common Stock sold in the Conversion or to one percent of shares of Common Stock
offered in the Conversion. The minimum purchase is 25 shares. See "The
Conversion - Additional Purchase Restrictions." The Association and the Holding
Company have engaged Capital Resources as financial advisor and agent to
consult, advise and assist in the distribution of shares of Common Stock, on a
best-efforts basis in the Offering including, if necessary, managing selected
broker-dealers to assist in selling stock in the Public Offering. For such
services, Capital Resources will receive a marketing fee of $90,000. If selected
dealers are used, the selected dealers will receive a fee estimated to be up to
% of the aggregate Purchase Price for all shares of Common Stock sold in the
Offering through such selected dealers. Such fees may be deemed to be
underwriting commissions. Capital Resources and the selected dealers may be
deemed to be underwriters. See "The Conversion - Marketing Arrangements" and
"The Conversion - Offering of Holding Company Common Stock."
To subscribe for shares of Common Stock in the Subscription Offering, the
Holding Company must receive a stock order form ("Order Form") and certification
form, together with full payment at $10.00 per share (or appropriate
instructions authorizing a withdrawal from a deposit account at the Association)
for all shares for which subscription is made, at any office of the Association,
by noon, Gloversville, New York time, on _______, 1998, unless the Subscription
Offering is extended, at the discretion of the Board of Directors, up to an
additional 45 days with the approval of the OTS, if necessary, but without
additional notice to subscribers (the "Expiration Date"). The date by which
orders must be received in the Public Offering, if any, will be set by the
Holding Company at the time of such offering provided that, if the Offering is
extended beyond _________, 1998, each subscriber will have the right to modify
or rescind his or her subscription. Subscription funds will be returned promptly
with interest to each subscriber unless he or she affirmatively indicates
otherwise. See "The Conversion Offering of Holding Company Common Stock."
Subscriptions paid by check, bank draft or money order will be placed in a
segregated account at the Association and will earn interest at the
Association's passbook rate from the date of receipt until completion or
termination of the Conversion. Payments authorized by withdrawal from deposit
accounts at the Association will continue to earn interest at the contractual
rate until the Conversion is completed or terminated; these funds will be
otherwise unavailable to the depositor until such time. Authorized withdrawals
from time accounts for the purchase of Common Stock will be permitted without
the imposition of early withdrawal penalties or loss of interest.
2
The Holding Company has never issued capital stock. Consequently, there is no
existing market for the Holding Company Common Stock at this time. Therefore, no
assurance can be given that an established and liquid trading market for the
Holding Company Common Stock will develop or that resales of the Common Stock
can be made at or above the Purchase Price. Following the Conversion the Holding
Company Common Stock will be traded in the over-the-counter market. Although it
has no obligation to do so, Capital Resources intends to make a market for the
Holding Company Common Stock, depending upon the volume of trading activity in
the common stock. See "Market for Common Stock" and "The Conversion - Stock
Pricing and Number of Shares to be Issued."
3
[MAP OMITTED]
4
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the detailed information and financial statements appearing
elsewhere herein.
Adirondack Financial Services Bancorp, Inc.
The Holding Company, Adirondack Financial Services Bancorp, Inc. was
recently formed by Gloversville Federal under the laws of Delaware for the
purpose of becoming a savings and loan holding company which will own all of the
outstanding capital stock that Gloversville Federal will issue in connection
with the Conversion. Immediately following the Conversion, the only significant
assets of the Holding Company will be the capital stock of Gloversville Federal,
a note evidencing the Holding Company's loan to the ESOP and up to approximately
50% of the net proceeds from the Conversion. See "Use of Proceeds." Upon
completion of the Conversion, the Holding Company's business initially will
consist only of the business of Gloversville Federal. See "Adirondack Financial
Services Bancorp, Inc."
Gloversville Federal
General. Gloversville Federal is a federally chartered mutual savings
and loan association headquartered in Gloversville, New York. Gloversville
Federal was originally chartered in 1923. Gloversville Federal currently serves
the financial needs of communities in its market area through its main office
located in Gloversville and its branch office located in the city of Saratoga
Springs, New York. Its deposits are insured up to applicable limits by the
Federal Deposit Insurance Corporation ("FDIC"). At September 30, 1997,
Gloversville Federal had total assets of $61.0 million, deposits of $56.1
million and equity of $3.3 million. See "Business - Market Area" and "
Competition."
Gloversville Federal's business has historically involved attracting
deposits from the general public and using such deposits, together with other
funds, to originate primarily one- to four-family residential mortgages and, to
a lesser extent, multi-family and commercial real estate, commercial business,
home equity and other loans in its market area. The Association also invests in
securities and other permissible investments. See "Business - Investment
Activities - Securities." The Association has suffered significant losses in
recent years on its residential lending program, in part due to loan
underwriting and monitoring deficiencies. In order to address these issues, the
Board of Directors has revised the Association's loan underwriting and
monitoring procedures and hired new personnel to perform such functions. In
addition, in fiscal 1995, the Association hired a new President and Chief
Executive Officer experienced in residential mortgage lending, income producing
property and business lending and determined to expand the Association's
multi-family and commercial real estate and commercial business lending. See
"Business - Lending Activities -Multi-family and Commercial Real Estate Lending"
and "- Commercial Business Lending." However, loan losses continued in the
residential loan portfolio into fiscal 1997 and there can be no assurance that
any of these new programs can successfully address the Association's loan
problems.
5
Financial and operational highlights of the Association include the
following:
o Capital Strength. At September 30, 1997, the Association had total equity
of $3.3 million and exceeded all of the applicable regulatory capital
requirements with tangible, core and total risk-based capital ratios of
5.41%, 5.41% and 10.01%, respectively. Assuming on a pro forma basis that
$____ million, the midpoint of the Estimated Valuation Range, of shares
were sold in the Conversion and approximately 50% of the net proceeds were
retained by the Holding Company, as of September 30, 1997, the
Association's tangible capital would have been $____ million (____% of
assets). See "Pro Forma Regulatory Capital Analysis."
o Losses from Operations. The Association has recorded a net loss from
operations in three out of its last five fiscal years, primarily due to
significant additions to its allowance for loan losses as well as, in 1996,
a significant charge to operations for delinquent property taxes on certain
non-performing residential loans and a special FDIC assessment. The
Association's income (loss) was ($583,000), ($1.0 million), $251,000,
$272,000 and ($239,000) for the years ended September 30, 1997, 1996, 1995,
1994 and 1993, respectively. While the Board believes that it has addressed
most of the problems which have caused these losses, the Association
continues to have significant credit risk in its loan portfolio and its
general and administrative expenses have increased as a result of new
lending procedures and personnel. Accordingly, there can be no assurance
that the Association's results of operations will reach favorable levels in
the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
o Income Producing Property and Business Lending Activities. In order to
increase the yield and interest rate sensitivity of the Association's loan
portfolio, the Association recently has increased its multi-family and
commercial real estate and commercial business lending. While no such loans
were delinquent at September 30, 1997, a number of underwriting,
documentation and monitoring deficiencies have been noted. As a result,
while no multi- family and commercial real estate or commercial business
loans have been classified as non- performing, $1.1 million of such loans
have been classified as "of concern" as of September 30, 1997. Based on the
above and in view of the higher level of credit risk generally associated
with such loans, there can be no assurance that such new lending programs
will be successful. See "Risk Factors - Non-Residential Lending
Activities."
o Asset Quality. As a result of residential loan underwriting and monitoring
deficiencies which the Board believes have now been addressed, as well as
the relatively weak economy and weak real estate market in the
Association's market area, the Association has experienced significant
delinquencies and loan losses on its one- to four-family residential loans.
In addition, since fiscal 1995, the Association has significantly increased
its multi- family and commercial real estate and commercial business
lending. At September 30, 1997, the Association's non-performing loans, all
of which were one- to four- family residential loans, stood at $3.8 million
or 7.4% of gross loans, while "other loans of concern" stood at $1.1
million. On the same date, the Association's loan loss reserves stood at
$1.6 million or 3.1% of gross loans and 42.5% of non-performing loans and
33.0% of non-performing
6
loans and other loans of concern. At September 30, 1997, the Association's
total non-performing assets stood at $4.1 million or 6.7% of assets.
While the Association currently believes that its current allowance for
loan losses is adequate, there can be no assurance that the Association
will not continue to experience significant loan delinquencies and losses
in the future. See "Business - Delinquencies and Non-Performing Assets."
o Interest Rate Sensitivity. The Association's profitability, like that of
most financial institutions, is dependent to a large extent upon its net
interest income, which is the difference between its interest income and
interest expense. In managing its asset/liability mix, Gloversville Federal
generally, depending on the relationship between long and short- term
interest rates, market conditions and consumer preference, places greater
emphasis on maximizing its net interest margin than on matching the
interest rate sensitivity of its assets and liabilities. At September 30,
1997, the net value of the Association's portfolio equity was projected to
decline by 22.9% and 53.5% if there were instantaneous increases in
interest rates of 200 and 400 basis points, respectively. See "Risk Factors
- Interest Rate Risk Exposure" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability
Management."
The Conversion
The Offering is being made in connection with the conversion of
Gloversville Federal from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association and the
formation of Adirondack Financial Services Bancorp, Inc. as the holding company
of Gloversville Federal. The Conversion is subject to certain conditions,
including the prior approval of the Plan by the Association's members at a
Special Meeting to be held on January 21, 1998. After the Conversion, the
Association's current voting members (who include certain deposit account
holders and borrowers) will have no voting rights in Gloversville Federal and
will have no voting rights in the Holding Company unless they become Holding
Company stockholders. Eligible Account Holders and Supplemental Eligible Account
Holders, however, will have certain liquidation rights in the Association. See
"The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association - Liquidation Rights."
The Offering. The shares of Common Stock to be issued in the Conversion
are being offered at a Purchase Price of $10.00 per share in the Subscription
Offering pursuant to nontransferable Subscription Rights in the following order
of priority: (i) Eligible Account Holders (i.e., depositors whose accounts in
the Association totaled $50.00 or more on September 30, 1996); (ii)
Tax-Qualified Employee Plans; provided, however, that the Tax Qualified Employee
Plans shall have first priority Subscription Rights to the extent that the total
number of shares of Common Stock sold in the Conversion exceeds the maximum of
the Estimated Valuation Range; (iii) Supplemental Eligible Account Holders
(i.e., depositors whose accounts in the Association totaled $50.00 or more on
___________, 1998); (iv) Other Members (i.e., depositors as of ___________ __,
1998 and certain borrowers of the Association as of ________ __, ____ and
_______ __, 1998); and (v) employees, officers and directors of the Association.
Subscription Rights received in any of the
7
foregoing categories will be subordinated to the Subscription Rights received by
those in a prior category. Subscription Rights will expire if not exercised by
noon, Gloversville, New York time, on ____________ __, 1998, unless extended
(the "Expiration Date").
Subject to the prior rights of holders of Subscription Rights and
market conditions at or near the completion of the Subscription Offering, any
shares of Common Stock not subscribed for in the Subscription Offering may be
offered at the same price in a Public Offering and/or Direct Community Offering
through Capital Resources on a best efforts basis to selected persons to whom
this prospectus is delivered. To order Common Stock in connection with the
Public Offering and/or Direct Community Offering, if any, an executed stock
order form and account withdrawal authorization and certification must be
received by Capital Resources prior to the termination of such offerings. The
date by which orders must be received in the Public Offering and/or Direct
Community Offering, if any, will be set by the Holding Company at the time of
such offering provided that if the Offering is extended beyond __________ __,
1998, each subscriber will have the right to modify or rescind his or her
subscription. The Holding Company and the Association reserve the absolute right
to accept or reject any orders in the Public Offering and Direct Community
Offering, if any, in whole or in part.
If necessary, shares of Common Stock may also be offered in connection
with the Public Offering for sale on a best-efforts basis by selected dealers
managed by Capital Resources. See "The Conversion - Public Offering and Direct
Community Offering."
The Association and the Holding Company have engaged Capital Resources
to consult with and advise the Holding Company and the Association with respect
to the Offering, and Capital Resources has agreed to solicit subscriptions and
purchase orders for shares of Common Stock in the Offering. Neither Capital
Resources nor any selected broker-dealers will have any obligation to purchase
shares of Common Stock in the Offering. Capital Resources will receive for its
services a marketing fee of $90,000. To the extent selected broker-dealers are
utilized in connection with the sale of shares in the Public Offering, the
selected dealers will receive a fee of up to _____% and Capital Resources will
receive a fee of _____% of the aggregate Purchase Price for all shares of Common
Stock sold through such broker-dealers. Capital Resources will also receive
reimbursement for certain expenses incurred in connection with the Offering. The
Holding Company has agreed to indemnify Capital Resources against certain
liabilities, including certain liabilities under the Securities Act of 1933, as
amended ("Securities Act"). See "The Conversion Marketing Arrangements."
The Association has established a Stock Information Center, which will
be managed by Capital Resources, to coordinate the Offering, and answer
questions about the Offering received by telephone. All subscribers will be
instructed to mail payment to the Stock Information Center or deliver payment
directly to the Association's office. Payment for shares of Common Stock may be
made by cash (if delivered in person), check or money order or by authorization
of withdrawal from deposit accounts maintained with the Association. Such funds
will not be available for withdrawal and will not be released until the
Conversion is completed or terminated. See "The Conversion - Method of Payment
for Subscriptions."
8
Purchase Limitations. The Plan of Conversion places limitations on the
number of shares which may be purchased in the Conversion by various categories
of persons. With the exception of the Tax-Qualified Employee Plans, no Eligible
Account Holder, Supplemental Eligible Account Holder, Other Member or director,
officer or employee may purchase in their capacity as such in the Subscription
Offering more than $150,000 of Common Stock; no person, together with associates
of and persons acting in concert with such person, may purchase more than
$150,000 of Common Stock in the Public Offering; and no person or group of
persons acting in concert (other than the Tax-Qualified Employee Plans) may
purchase more than $150,000 of Common Stock in the Conversion. The minimum
purchase limitation is 25 shares of Common Stock. These purchase limits may be
increased or decreased consistent with the Office of Thrift Supervision ("OTS")
regulations at the sole discretion of the Holding Company and the Association.
See "The Conversion - Offering of Holding Company Common Stock."
Restrictions on Transfer of Subscription Rights. Prior to the
completion of the Conversion, no person may transfer or enter into any agreement
or understanding to transfer the legal or beneficial ownership of the
subscription rights issued under the Plan or the shares of Common Stock to be
issued upon their exercise. Persons found to be selling or otherwise
transferring their right to purchase stock in the Subscription Offering or
purchasing Common Stock on behalf of another person will be subject to
forfeiture of such rights and possible federal penalties and sanctions. See "The
Conversion - Restrictions on Transfer of Subscription Rights and Shares."
Stock Pricing and Number of Shares of Common Stock to be Issued in the
Conversion. The Purchase Price of the Common Stock is $10.00 per share and is
the same for all purchasers. The aggregate pro forma market value of the Holding
Company and Gloversville Federal, as converted, was estimated by RP Financial,
which is experienced in appraising converting thrift institutions, to be the
Estimated Valuation Range. The Board of Directors has reviewed the Estimated
Valuation Range as stated in the appraisal and compared it with recent stock
trading prices as well as other recent pro forma market value estimates. The
Board of Directors has also reviewed the appraisal report, including the
assumptions and methodology utilized therein, and determined that it was not
unreasonable.
Depending on market and financial conditions at the time of the
completion of the Offering, the total number of shares of Common Stock to be
issued in the Conversion may be increased or decreased significantly from the
575,000 shares offered hereby and the Purchase Price may be decreased. However,
subscribers will be permitted to modify or rescind their subscriptions if the
product of the total number of shares to be issued multiplied by the price per
share is less than $4,250,000 or more than $6,612,500. The appraisal is not
intended to be, and must not be interpreted as, a recommendation of any kind as
to the advisability of voting to approve the Conversion or of purchasing shares
of Common Stock. The appraisal considers Gloversville Federal and the Holding
Company only as going concerns and should not be considered as any indication of
the liquidation value of Gloversville Federal or the Holding Company. Moreover,
the appraisal is necessarily based on many factors which change from time to
time. There can be no assurance that persons who purchase shares in the
Conversion will be able to sell such shares at prices at or above the Purchase
Price. See "Pro Forma Data" and "The Conversion - Stock Pricing and Number
9
of Shares to be Issued" for a description of the manner in which such valuation
was made and the limitations on its use.
Purchases by Directors and Executive Officers
The directors and executive officers of Gloversville Federal intend to
purchase, for investment purposes and at the same price as the shares are sold
to other investors in the Conversion, approximately $385,500 of Common Stock, or
9.1%, 7.7% or 6.7% of the shares to be sold in the Conversion at the minimum,
midpoint and maximum of the Estimated Valuation Range, respectively. In
addition, an amount of shares equal to an aggregate of 8% of the shares to be
issued in the Conversion is anticipated to be purchased by the ESOP. See "The
Conversion - Participation by the Board and Executive Officers."
Potential Benefits of Conversion to Directors and Executive Officers
Employee Stock Ownership Plan. The Board of Directors of the
Association has adopted an ESOP, a tax-qualified employee benefit plan for
officers and employees of the Holding Company and the Association. All employees
of the Association are eligible to participate in the ESOP after they attain age
21 and complete one year of service. The Association's contribution to the ESOP
is allocated among participants on the basis of their relative compensation.
Each participant's account will be credited with cash and shares of Holding
Company Common Stock based upon compensation earned during the year with respect
to which the contribution is made. The ESOP intends to buy up to 8% of the
Common Stock issued in the Conversion (approximately $340,000 to $460,000 of the
Common Stock based on the issuance of the minimum and the maximum of the
Estimated Valuation Range and the $10.00 per share Purchase Price). The ESOP
will purchase the shares with funds borrowed from the Holding Company, and it is
anticipated that the ESOP will repay the loans through periodic tax-deductible
contributions from the Association over a ten-year period. These contributions
will increase the compensation expense of the Association. See "Management
Benefit Plans - Employee Stock Ownership Plan" for a description of this plan.
Stock Option and Incentive Plan and Recognition and Retention Plan. The
Board of Directors of the Holding Company intends to adopt a Stock Option and
Incentive Plan (the "Stock Option Plan") and a Recognition and Retention Plan
("RRP") to become effective upon ratification by stockholders following the
Conversion. Certain of the directors and executive officers of the Holding
Company and the Association will receive awards under these plans. It is
currently anticipated that an amount of shares equal to 10% and 4% of the shares
sold in the Conversion will be reserved for issuance under the Stock Option Plan
and RRP, respectively. Depending upon market conditions in the future, the
Holding Company may purchase shares in the open market to fund these plans. See
"Management - Benefit Plans" for a description of these plans.
Under the proposed Stock Option Plan, it is presently intended that the
directors and executive officers be granted options to purchase, in addition to
the shares to be issued in the Conversion, an amount of shares equal to __% of
the shares sold in the Conversion (or ______ and ______ shares, respectively, of
Common Stock based on the minimum and maximum of the Estimated Valuation Range)
at an exercise price equal to the market value per share of the Common
10
Stock on the date of grant. Such options will be awarded at no expense to the
recipients and pose no financial risk to the recipients until exercised. It is
presently anticipated that Lewis Kolar, President and Menzo Case, Executive Vice
President will each receive an option to purchase an amount of shares equal to
2.0% of the shares sold in the Conversion (or 8,500 and 11,500 shares, assuming
the minimum and maximum of the Estimated Valuation Range, respectively). See
"Management - Benefit Plans - Stock Option and Incentive Plan."
The award and exercise of options pursuant to the Stock Option Plan
will not result in any expense to the Holding Company; however, when the options
are exercised (or, depending on market conditions, potentially prior to
exercise) , the per share earnings and book value of existing stockholders will
likely be diluted.
It is also intended that directors and executive officers be granted
(without any requirement of payment by the grantee) an amount of shares of
restricted stock awards equal to ___% of the shares sold in the Conversion (or
_________ and ________ shares, respectively, based on the minimum and maximum of
the Estimated Valuation Range) which will vest over five years commencing one
year from stockholder ratification and which will have a total value of
$________ and $__________ based on the Purchase Price of $10.00 per share at the
minimum and maximum of the Estimated Valuation Range, respectively. It is
presently anticipated that President Kolar will receive a restricted stock award
equal to 1.0% of the shares sold in the Conversion (or 4,250 and 5,750 shares,
assuming the minimum and maximum of the Estimated Valuation Range) and that
Executive Vice President Case will receive a restricted stock award equal to .6%
of the conversion shares. The restricted stock award to President Kolar and
Executive Vice President Case would have an aggregate value ranging from $42,500
and $57,500, and $25,500 and $34,500, respectively, (at the minimum and maximum
of the Estimated Valuation Range) based upon the original Purchase Price of
$10.00 per share. See "Risk Factors - Takeover Defensive Provisions" and
"Management Benefit Plans - Recognition and Retention Plan."
Following stockholder ratification of the RRP, the RRP will be funded
either with shares purchased in the open market or with authorized but unissued
shares. Based upon the Purchase Price of $10.00 per share, the amount required
to fund the RRP through open-market purchases would range from approximately
$170,000 (based upon the sale of shares at the minimum of the Estimated
Valuation Range) to approximately $230,000 (based upon the sale of shares at the
maximum of the Estimated Valuation Range). In the event that the per share price
of the Common Stock increases above the $10.00 per share Purchase Price
following completion of the Offering, the amount necessary to fund the RRP would
also increase. The expense related to the cost of the RRP will be recognized
over the five-year vesting period of the awards made pursuant to such plan. The
use of authorized but unissued shares to fund the RRP would dilute the holdings
of stockholders who purchase Common Stock in the Conversion. See "Management -
Benefit Plans - Recognition and Retention Plan."
The Holding Company intends to submit the RRP and the Stock Option Plan
to stockholders for ratification following completion of the Offering, but in no
event prior to six months following the completion of the Conversion. These
plans will only be effective if ratified by the stockholders. In the event the
Stock Option Plan and the RRP are not ratified by stockholders, management may
11
consider the adoption of alternate incentive plans, although no such plans are
currently contemplated. While the Association believes that the RRP and the
Stock Option Plan will provide important incentives for the performance and
retention of management, the Association has no reason to believe that the
failure to obtain shareholder ratification of such plans would result in the
departure of any members of senior management.
Change in Control Severance Agreements. The Association intends to
enter into change in control agreements with President Kolar and Executive Vice
President Case. It is anticipated that such agreements will have initial terms
of 24 and 12 months, respectively, and become effective upon completion of the
Conversion. In the event that President Kolar or Executive Vice President Case
is terminated following a "change in control" (as defined in the agreements),
such officer will be entitled to a severance payment of 200% and 100%,
respectively, of his current compensation. See "Management - Executive
Compensation - Change in Control Severance Agreements" for the definition of
"change in control" and a more detailed description of these agreements.
Use of Proceeds
The net proceeds from the sale of Common Stock in the Conversion
(estimated at $3.7 million, $4.5 million, $5.2 million and $6.1 million based on
sales at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively) will substantially increase the capital
of Gloversville Federal. See "Pro Forma Data." The Holding Company will utilize
approximately 50% of the net proceeds from the issuance of the Common Stock to
purchase all of the common stock of Gloversville Federal to be issued upon
Conversion and will retain approximately 50% of the net proceeds; provided that
the amount retained by the Holding Company will be reduced to the extent
required that, upon the completion of the transaction, the Association's ratio
of capital to assets is at least 10%. The proceeds retained by the Holding
Company will be invested initially in short-term investments. Such proceeds will
subsequently be invested in _______________ and investment securities and will
be available for general corporate purposes, including the possible repurchase
of shares of the Common Stock, as permitted by the OTS. The Holding Company
currently has no specific plans to make any such repurchases of any of its
Common Stock. In addition, the Holding Company intends to provide the funding
for the ESOP loan. Based upon the initial Purchase Price of $10.00 per share,
the dollar amount of the ESOP loan would range from $340,000 (based upon the
sale of shares at the minimum of the Estimated Valuation Range) to $460,000
(based upon the sale of shares at the maximum of the Estimated Valuation Range).
It is anticipated that the ESOP will repay the loan through periodic
tax-deductible contributions from the Association over a ten-year period. The
interest rate to be charged by the Holding Company on the ESOP loan will be
based upon the Internal Revenue Service ("IRS") prescribed applicable federal
rate at the time of origination.
Finally, the Holding Company currently intends to use a portion of the
proceeds to fund a Recognition and Retention Plan ("RRP"), subject to
stockholder ratification. Compensation expense related to the RRP will be
recognized as share awards vest. See "Pro Forma Data." Following stockholder
ratification of the RRP, the RRP will be funded either with shares purchased in
the open market or with authorized but unissued shares. Based upon the Purchase
Price of $10.00 per share, the amount required to fund the RRP through
open-market purchases would range from
12
approximately $170,000 (based upon the sale of shares at the minimum of the
Estimated Valuation Range) to approximately $230,000 (based upon the sale of
shares at the maximum of the Estimated Valuation Range). In the event that the
per share price of the Common Stock increases above the $10.00 per share
Purchase Price following completion of the Offering, the amount necessary to
fund the RRP would also increase. The use of authorized but unissued shares to
fund the RRP could dilute the holdings of stockholders who purchase Common Stock
in the Conversion. See "Management - Benefit Plans - Recognition and Retention
Plan."
The net proceeds received by Gloversville Federal will become part of
Gloversville Federal's general funds for use in its business and will be used to
support the Association's existing operations, subject to applicable regulatory
restrictions. Immediately upon the completion of the Conversion, it is
anticipated that the Association will invest such proceeds into short-term
assets. Subsequently, the Association intends to redirect the net proceeds to
the origination of residential loans and, to a lesser extent, multi-family and
commercial real estate, commercial business and home equity loans, subject to
market conditions. In addition, such proceeds may also be utilized to repay
borrowings.
See "Use of Proceeds" for additional information on the utilization of
the offering proceeds as well as OTS restrictions on repurchases of the Holding
Company's stock.
Dividends
The declaration and payment of dividends are subject to, among other
things, the Holding Company's financial condition and results of operations,
Gloversville Federal's compliance with its regulatory capital requirements,
including the fully phased-in capital requirements, tax considerations, industry
standards, economic conditions, regulatory restrictions, general business
practices and other factors. There can be no assurance as to whether or when the
Holding Company will pay a dividend. See "Dividends."
Market for Common Stock
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. Following the
completion of the offering, it is anticipated that the Common Stock will be
traded on the over-the-counter market with quotations available through the OTC
Bulletin Board. Capital Resources has indicated its intention to make a market
in the Common Stock. If the Common Stock cannot be quoted and traded on the OTC
Bulletin Board it is expected that transactions in the Common Stock will be
reported in the pink sheets published by the National Quotation Bureau, Inc.
Making a market may include the solicitation of potential buyers and sellers in
order to match buy and sell orders. However, Capital Resources will not be
subject to any obligation with respect to such efforts.
There can be no assurance that an active or liquid trading market will
develop for the Common Stock, or if a market develops, that it will continue. A
public market having the desirable characteristics of depth, liquidity and
orderliness depends upon the presence in the marketplace of both willing buyers
and sellers of the Common Stock at any given time, which is not within the
control of the Holding Company or any market maker. Accordingly, there can be no
assurance that
13
purchasers will be able to sell their shares at or above the Purchase Price. See
"Market for Common Stock."
Risk Factors
See "Risk Factors" for information regarding certain factors which
should be considered by prospective investors, including the Association's
recent operating results, market area, income producing property and business
lending activities, interest rate risk exposure, competition, takeover defensive
provisions contained in the Holding Company's certificate of incorporation and
bylaws, post-conversion overhead expenses, regulatory oversight, the risk of a
delayed offering, the absence of an active market for the Common Stock, possible
increase in estimated valuation range and number of shares issued and the
possible consequences of amendment of the Plan of Conversion.
14
SELECTED FINANCIAL INFORMATION
Set forth below are selected financial and other data of the
Association. The financial data is derived in part from, and should be read in
conjunction with, the Financial Statements and Notes of the Association
presented elsewhere in this Prospectus.
Selected Financial Information
At September 30,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data:
- ----------------------------------
Total assets..................................... $61,022 $61,006 $63,073 $69,597 $61,894
Cash and cash equivalents........................ 1,922 1,198 3,181 6,509 18,184
Loans receivable, net............................ 49,526 49,636 48,239 45,645 40,896
Mortgage-backed securities available for sale.... 3,562 4,044 993 3,968 --
Other securities available for sale.............. 3,455 3,395 4,138 5,781 581
-------- -------- -------- -------- ---------
Total securities available for sale........... 7,017 7,439 5,131 9,749 581
-------- -------- -------- -------- ---------
Investment securities held to maturity........... -- -- 4,402 5,459 --
Deposits......................................... 56,117 55,716 57,866 64,703 57,346
Borrowings....................................... 1,300 300 -- -- --
Total equity..................................... 3,280 3,790 4,854 4,705 4,397
For the Years Ended September 30,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Selected Operations Data:
- -------------------------
Interest income.................................. 4,905 4,733 4,816 4,805 4,853
Interest expense................................. 2,447 2,416 2,527 2,148 2,586
-------- -------- -------- -------- --------
Net interest income.............................. 2,458 2,317 2,289 2,657 2,267
Provision for loan losses........................ 792 714 129 211 843
--------- --------- --------- --------- ---------
Net interest income after provision for loan
losses......................................... 1,666 1,603 2,160 2,446 1,424
-------- -------- ------- -------- --------
Net gain on sale of securities................... -- -- 204 -- --
Other non-interest income........................ 155 109 188 69 30
-------- --------- --------- ---------- ----------
Total non-interest income........................ 155 109 392 69 30
-------- --------- --------- ---------- ----------
Non-interest expense............................. 2,319 2,970 2,199 2,119 1,755
------- ------- ------- ------- -------
(Loss) income before income tax expense
(benefit) .................................... (498) (1,258) 353 396 (301)
Income tax expense (benefit)..................... 85 (222) 102 124 (62)
--------- --------- -------- -------- ---------
Net (loss) income................................ $ (583) $(1,036) $ 251 $ 272 $ (239)
======== ======= ======== ======== ========
15
Selected Financial Ratios and Other Data
September 30,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Performance ratios:
- -------------------
Return (Loss) on average assets.................... (0.94)% (1.69)% 0.38% 0.42% (0.37)%
Return (Loss) on average equity.................... (16.30) (22.22) 5.30 5.97 (5.11)
Interest rate spread information:
- ---------------------------------
Average during period.............................. 3.96 3.68 3.35 4.43 3.87
End of period...................................... 4.19 4.21 3.61 4.05 4.18
Net interest margin.............................. 4.11 3.91 3.55 4.42 3.82
Other Operating ratios:
- -----------------------
Ratio of operating expenses to average total
assets(1)......................................... 3.63 3.61 3.11 3.17 2.63
Efficiency ratio(2)................................ 85.94 91.10 86.67 75.85 74.46
Ratio of average interest-earning assets to
average interest-bearing liabilities.............. 103.76 105.53 105.01 99.70 98.73
Asset Quality ratios:
- ---------------------
Non-performing assets to total assets
at end of period................................... 6.73 3.74 4.38 5.53 4.22
Allowance for loan loss to non-performing loans
at end of period................................... 42.53 56.53 30.20 24.34 41.63
Allowance for loan losses to gross loans
receivable at end of period........................ 3.14 2.45 1.58 1.83 2.08
Capital ratios:
- ---------------
Equity to total assets at end of period............ 5.38 6.21 7.70 6.76 7.10
Average equity to average assets................... 5.78 7.62 7.11 6.99 7.17
Other data:
- -----------
Number of full service offices....................... 2 2 2 2 2
(1) Operating expenses exclude OREO expenses of $73,000, $27,000, $127,000,
$52,000 and $44,000 for years ended September 30, 1997, 1996, 1995, 1994
and 1993, respectively. In addition, operating expenses for the year ended
September 30, 1996 exclude expenses incurred by the Association for
delinquent property taxes on collateral secured by certain nonperforming
one- to four-family residential loans paid on behalf of borrowers of
$318,000 and the special one-time SAIF assessment of $415,000.
(2) The efficiency ratio represents operating expenses (as defined in footnote
1 above) divided by the sum of net interest income and other operating
income (excluding a gain on sale of building of $86,000 and net gains from
security transactions of $204,000 for the year ended September 30, 1995).
16
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered in the Offering.
Recent Operating Losses
The Association has recorded significant losses from operations over
the last several years due primarily to losses related to loans (including
additions to the allowance for loan losses, a charge to operations for past due
property taxes on certain non-performing residential loans on which tax payments
were not effectively monitored and valuation adjustments and expenses related to
foreclosed real estate). In addition in 1996, the Association recorded a
$415,000 pre tax accrual for a special FDIC assessment. The Association's net
income (loss) was ($583,000), ($1.0 million) and $251,000 for the years ended
September 30, 1997, 1996 and 1995, respectively. The Association has attempted
to address these losses through increased loan monitoring (including the hiring
of an internal auditor and credit analyst), tightened loan underwriting
standards and enhanced collection procedures. In addition, in fiscal 1995, the
Association began to focus a portion of its lending on multi-family and
commercial real estate, and commercial business loans. However, in view of (i)
the higher level of credit risk inherent in the Association's new multi-family
and commercial real estate and commercial business lending activities, (ii) the
relatively low level of loan demand and high level of competition in much of the
Association's market area, (iii) the decline in real estate values in much of
the Association's market area, (iv) the higher level of expense required for the
increased monitoring of the portfolio and the expansion of the types of lending
products offered and (v) the Association's continued vulnerability to changes in
interest rates, there can be no assurance that the Association's results of
operations will return to satisfactory levels in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Comparison of Operating Results for the Years Ended September 30, 1997 and
1996."
Market Area
The Association maintains an office in Fulton County, New York, which
is located approximately 50 miles northwest of Albany, and in Saratoga County,
New York, which is located approximately 30 miles north of Albany. The
Association considers its primary market area to include Fulton and Saratoga
counties as well as portions of the surrounding counties of Montgomery and
Hamilton, New York. As a result of a decline in the local manufacturing base
over the last 15 years, the employment and economic growth rates of much of the
Association's market area (with the partial exception of Saratoga County) have
been less favorable than the United States and New York State averages. As a
result of these conditions, the Association believes that real estate values
have declined through much of its market area. Based in part on the above, the
Association has experienced a significant level of losses related to its lending
activities. In addition, there can be no assurance that such conditions will not
contribute to losses related to its lending activities in the future. See
"Business - Market Area."
17
Income Producing Property and Business Lending Activities
In fiscal 1995, the Board of Directors hired a new President and Chief
Executive Officer with a commercial banking background as well as a residential
lending background, and directed him to develop a new strategy to improve the
Association's operations. After due consideration and consultation with the new
President, in order to increase the yield and interest rate sensitivity of the
Association's loan portfolio and in view of the relatively low demand for
residential loans in the Association's market area, the Board determined to
expand the Association's multi-family and commercial real estate and commercial
business lending activities. Later that year, the Association hired a commercial
lending officer with experience in multi-family and commercial real estate and
commercial business lending. The Association's multi-family and commercial real
estate loans, and its commercial business loans, have increased from $878,000
and $0 at September 30, 1994, respectively, to $8.0 million and $1.4 million at
September 30, 1997, respectively.
A number of financial weaknesses as well as underwriting, documentation
and monitoring deficiencies have been discovered in the Association's
multi-family and commercial real estate and commercial business loans.
Accordingly, while no multi-family and commercial real estate or commercial
business loans were classified as non-performing at September 30, 1997, the
Association determined to classify $1.1 million of such loans as "of concern" as
of such date. See "Business Lending Activities - Other Loans of Concern."
Multifamily and commercial real estate and commercial business lending
is generally believed to involve a higher degree of credit risk than one- to
four-family residential lending. This higher risk is due to several factors,
including the greater concentration of principal and the smaller number of loans
and borrowers, the effects of general economic conditions on income-producing
ventures and properties and the increased difficulty of evaluating and
monitoring these types of loans. In addition, the Association's multi-family,
commercial real estate and commercial business loans, particularly those
originated when the Association first expanded these product lines, may be
subject to an additional level of risk related to the Association's relative
inexperience with this type of lending. Accordingly, while none of the
Association's multi-family and commercial real estate and commercial business
loans were 60 days or more delinquent as of the date hereof, there can be no
assurance that the Association will not experience significant losses on such
loans in the future. See "Business - Lending Activities - Multi-family and
Commercial Real Estate Lending" and "Commercial Business Lending."
Interest Rate Risk Exposure
The Association's profitability is dependent to a large extent upon its
net interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. When interest
rates rise, the Association's net interest income tends to be adversely impacted
since its liabilities tend to reprice more quickly than its assets. Conversely,
in a declining rate environment the Association's net interest income is
generally positively impacted since its assets tend to reprice more slowly than
its liabilities. Changes in the level of interest rates also affect the amount
of loans originated by the Association and, thus, the amount of loan and
commitment fees, as well as the
18
market value of the Association's interest-earning assets. Moreover, increases
in interest rates also can result in disintermediation, which is the flow of
funds away from savings institutions into direct investments, such as corporate
securities and other investment vehicles, which generally pay higher rates of
return than savings institutions. Finally, a flattening of the "yield curve"
(i.e., a decline in the difference between long and short term interest rates),
could adversely impact net interest income to the extent that the Association's
assets have a longer average term than its liabilities.
In managing its asset/liability mix, the Association generally,
depending on the relationship between long- and short-term interest rates,
market conditions and consumer preference, places more emphasis on managing net
interest margin than on better matching the interest rate sensitivity of its
assets and liabilities in an effort to enhance net interest income. As a result,
the Association will continue to be significantly vulnerable to changes in
interest rates and to decreases in the difference between long and short term
interest rates.
At September 30, 1997, the Association's net portfolio value would have
declined by 23% and 53%, respectively, in the event of a 200 and a 400 basis
point increase in general interest rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -Asset/Liability
Management."
Competition
Gloversville Federal experiences significant competition in its local
market area in both originating real estate and other loans and attracting
deposits. This competition arises from other savings institutions as well as
commercial banks, mortgage banks, credit unions and national and local
securities firms. The Association's competitors include many significantly
larger banks, including several large regional banks with offices in
Gloversville Federal's primary market area. Due to their size, these large banks
can achieve certain economies of scale and as a result offer a broader range of
products and services than are currently available at the Association. The
Association attempts to mitigate the effect of such factors by emphasizing
customer service. Such competition may limit Gloversville Federal's growth in
the future. See "Business - Competition."
In view of the increasing cost and complexity of operating a financial
institution, the Board of Directors believes that moderate growth of the
Association's assets and liabilities is important for maintaining profitability.
In addition, the Board of Directors believes that growth will be needed in the
future to leverage the new capital raised by the Conversion. See "Use of
Proceeds."
Unfortunately, as a result of competition from both depository as well
as non-depository firms (such as mutual funds), the Association has found it
very difficult to increase its deposits on a cost effective basis. Based on the
above, the Board believes that future internal growth can be effectively
sustained only at modest levels. See "Pro Forma Data" and "Use of Proceeds."
Takeover Defensive Provisions
Holding Company and Association Governing Instruments. Certain
provisions of the Holding Company's Certificate of Incorporation and Bylaws
assist the Holding Company in
19
maintaining its status as an independent publicly owned corporation. However,
such provisions may also block stockholders from approving a potential takeover
of the Holding Company which a majority of such stockholders believe to be in
their best interests. These provisions provide for, among other things, limiting
voting rights of beneficial owners of more than 10% of the Common Stock,
staggered terms for directors, noncumulative voting for directors, limits on the
calling of special meetings, a fair price/supermajority vote requirement for
certain business combinations and certain notice requirements. The 10% vote
limitation would not affect the ability of an individual who is not the
beneficial owner of more than 10% of the Common Stock to solicit revocable
proxies in a public solicitation for proxies for a particular meeting of
stockholders and to vote such proxies. In addition, provisions in the
Association's federal stock Charter that have an anti-takeover effect could also
be applicable to changes in control of the Holding Company as the sole
shareholder of the Association. The Association's Charter includes a provision
applicable for five years which prohibits acquisitions and offers to acquire,
directly or indirectly, the beneficial ownership of more than 10% of the
Association's securities. Any person violating this restriction may not vote the
Association's securities in excess of 10%. Any or all of these provisions may
discourage potential proxy contests and other takeover attempts, particularly
those which have not been negotiated with the Board of Directors. In addition,
the Holding Company's certificate of incorporation also authorizes preferred
stock with terms to be established by the Board of Directors which may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both, may have full or limited voting rights and may have a dilutive effect on
the ownership interests of holders of the Common Stock. See "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions."
Regulatory and Statutory Provisions. Federal regulations prohibit, for
a period of three years following the completion of the Conversion, any person
from offering to acquire or acquiring the beneficial ownership of more than 10%
of the stock of a converted savings institution or its holding company without
prior OTS approval. Federal law also requires OTS approval prior to the
acquisition of "control" (as defined in OTS regulations) of an insured
institution, including a holding company thereof. See "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions."
Change in Control Severance Agreements and Other Benefit Plans. The
change in control severance agreements, the proposed Stock Option Plan and the
proposed RRP also contain provisions that could have the effect of discouraging
takeover attempts of the Holding Company.
The Association intends to enter into change in control severance
agreements with President Kolar and Executive Vice President Case. Such
agreements become effective upon completion of the Conversion and have initial
terms of 24 and 12 months, respectively. In the event the applicable officer is
terminated following a change in control (as defined in the agreements), such
officer will be entitled to a severance payment equal to 200% and 100%,
respectively, of his annual compensation. For more information regarding these
agreements, see "Management - Change in Control - Severance Agreements."
Possible Dilutive Effects. The issuance of additional shares pursuant
to the proposed Stock Option Plan and RRP will result in a dilution in the
percentage of ownership of the Holding
20
Company of those persons purchasing Common Stock in the Conversion, assuming
that the shares utilized to fund the proposed Stock Option Plan and RRP awards
come from authorized but unissued shares. Assuming the exercise of all options
available under the Stock Option Plan and the award of all shares available
under the RRP, and assuming the use of authorized but unissued shares, the
interest of stockholders will be diluted by approximately 9.1% and 3.8%,
respectively. See "Pro Forma Data," "Management - Benefit Plans - Stock Option
and Incentive Plan," and "- Recognition and Retention Plan" and "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions." For financial
accounting purposes, certain incentive grants under the proposed RRP will result
in the recording of compensation expense over the vesting period. See "Pro Forma
Data."
Voting Control of Directors and Executive Officers. The directors and
executive officers (8 persons) of the Association are anticipated to purchase an
aggregate of approximately $385,000 or approximately .90% of the shares offered
in the Conversion at the minimum of the Estimated Valuation Range, or .67% of
the shares offered in the Conversion at the maximum of the Estimated Valuation
Range. Directors and executive officers will also receive awards under the
proposed Stock Option Plan and the proposed RRP. Assuming the purchase of
$385,500 of Common Stock in the Conversion by directors and executive officers
in the aggregate, the full vesting of the restricted stock to be awarded under
the proposed RRP and the issuance of shares from authorized but unissued shares
in connection with the exercise of all options intended to be awarded under the
proposed Stock Option Plan the Conversion and approval of the Stock Option Plan
and the RRP by the stockholders, the shares owned by the directors and executive
officers in the aggregate would be between ____% (at the maximum of the
Estimated Valuation Range) and ____% (at the minimum of the Estimated Valuation
Range) of the outstanding shares. In addition, the ESOP is expected to purchase
8% of the shares sold in the Conversion. This stock ownership, if voted as a
block, could defeat takeover attempts favored by other stockholders.
Post Conversion Overhead Expense
After completion of the Conversion, the Holding Company's noninterest
expense is likely to increase as a result of the financial accounting, legal and
tax expenses usually associated with operating as a public company. See
"Regulation - Federal and State Taxation" and "Additional Information." In
addition, it is currently anticipated that the Holding Company will record
additional expense based on the proposed RRP. See "Pro Forma Data" and
"Management - Benefit Plans Recognition and Retention Plan." Finally, the
Holding Company will also record additional expense as a result of the adoption
of the ESOP. See "Management - Benefit Plans - Employee Stock Ownership Plan."
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" ("SOP 93-6") requires an employer to record compensation
expense in an amount equal to the fair value of shares committed to be released
to employees from an employee stock ownership plan. Assuming shares of Common
Stock appreciate in value over time, the adoption of SOP 93-6 may increase
compensation expense relating to the ESOP to be established in connection with
the Conversion as compared with prior guidance which required the recognition of
compensation expense based on the cost of shares acquired by the ESOP. It is
impossible to determine at this time the extent of such impact on future net
income. See "Management's Discussion and Analysis of
21
Financial Condition and Results of Operations - Impact of New Accounting
Standards" and "Pro Forma Data."
Regulatory Oversight
The Association is subject to extensive regulation, supervision and
examination by the OTS as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
The Association is a member of the Federal Home Loan Bank (the "FHLB") of New
York and is subject to certain limited regulation by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of the Association, the Holding Company will be subject to
regulation and oversight by the OTS. See "Regulation." Such regulation and
supervision governs the activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors.
Regulatory authorities have been granted extensive discretion in connection with
their supervisory and enforcement activities which are intended to strengthen
the financial condition of the banking industry, including the imposition of
restrictions on the operation of an institution, the classification of assets by
the institution and the adequacy of an institution's allowance for loan losses.
See "Regulation - Federal Regulation of Savings Associations" and "- Regulatory
Capital Requirements." Any change in such regulation and oversight, whether by
the OTS, the Federal Reserve Board, the FDIC or Congress, could have a material
impact on the Holding Company, the Association and their respective operations.
Risk of Delayed Offering
The Subscription Offering will expire at noon, Gloversville, New York
time, on ___________ __, 1998 unless extended by the Association and the Holding
Company. Depending on the availability of shares and market conditions at or
near the completion of the Subscription Offering, the Holding Company may
conduct a Public Offering through Capital Resources. If the Offering is extended
beyond __________ __, 1998, all subscribers will have the right to modify or
rescind their subscriptions and to have their subscription funds returned with
interest. There can be no assurance that the Offering will not be extended as
set forth above.
A material delay in the completion of the sale of all unsubscribed
shares in the Public Offering or otherwise may result in a significant increase
in the costs in completing the Conversion. Significant changes in the
Association's operations and financial condition, the aggregate market value of
the shares to be issued in the Conversion and general market conditions may
occur during such material delay. In the event the Conversion is not consummated
within 24 months after the date of the Special Meeting, OTS regulations would
require the Association to charge accrued Conversion costs to then-current
period operations. See "The Conversion - Risk of Delayed Offering."
Absence of Active Market for the Common Stock
The Holding Company has never issued capital stock. Consequently, there
is no existing market for the Holding Company Common Stock at this time.
Therefore, no assurance can be given that an established and liquid trading
market for the Holding Company Common Stock will develop
22
or that resales of the Common Stock can be made at or above the Purchase Price.
Following the Conversion the Holding Company Common Stock will be traded in the
over-the-counter market. Although it has no obligation to do so, Capital
Resources intends to make a market for the Holding Company Common Stock,
depending upon the volume of trading activity in the common stock. See "Market
for Common Stock."
Possible Increase in Estimated Valuation Range and Number of Shares Issued
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the maximum of the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Subscription Offering. An increase in the number of shares
issued would decrease the pro forma net earnings per share and stockholders'
equity per share but would increase the Company's pro forma consolidated
stockholders' equity and net earnings. See "Pro Forma Data."
Possible Consequences of Amendment to Plan of Conversion
The Plan of Conversion provides that, if deemed necessary or desirable
by the Boards of Directors of the Association and the Holding Company, the Plan
of Conversion may be substantively amended by a two-thirds vote of the
respective Boards of Directors of the Association and the Holding Company, as a
result of comments from regulatory authorities or otherwise, at any time with
the concurrence of the Securities and Exchange Commission ("SEC") and the OTS.
Moreover, if the Plan of Conversion is amended, subscriptions which have been
received prior to such amendment will not be refunded unless otherwise required
by the SEC or the OTS. If the Plan of Conversion is amended in a manner that is
deemed to be material to the subscribers by the Holding Company, subscription
funds will be returned to subscribers with interest unless they affirmatively
elect to increase, decrease or maintain their subscriptions. No such amendments
are currently contemplated, although the Association reserves the right to
increase or decrease purchase limitations without a subscriber resolicitation.
See "The Conversion - Approval, Interpretation, Amendment and Termination."
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
The Holding Company was formed at the direction of Gloversville Federal
in December 1997 for the purpose of becoming a savings and loan holding company
and owning all of the outstanding stock of the Association issued in the
Conversion. The Holding Company is incorporated under the laws of the State of
Delaware. The Holding Company is authorized to do business in the State of New
York, and generally is authorized to engage in any activity that is permitted by
the Delaware General Corporation Law. The business of the Holding Company
initially will consist only of the business of Gloversville Federal. The holding
company structure will, however, provide the Holding Company with greater
flexibility than the Association has to diversify its business activities,
through existing or newly formed subsidiaries, or through acquisitions or
mergers of stock financial institutions, as well as, other companies. Although
there are no current arrangements, understandings or agreements regarding any
such activity or acquisition, the Holding
23
Company will be in a position after the Conversion, subject to regulatory
restrictions, to take advantage of any favorable acquisition opportunities that
may arise.
The assets of the Holding Company will consist initially of the stock
of Gloversville Federal, a note evidencing the Holding Company's loan to the
ESOP and up to 50% of the net proceeds from the Conversion (less the amount used
to fund the ESOP loan). See "Use of Proceeds." Initially, any activities of the
Holding Company are anticipated to be funded by such retained proceeds and the
income thereon and dividends from Gloversville Federal, if any. See "Dividends"
and "Regulation Holding Company Regulation." Thereafter, activities of the
Holding Company may also be funded through sales of additional securities,
through borrowings and through income generated by other activities of the
Holding Company. At this time, there are no plans regarding such other
activities other than the intended loan to the ESOP to facilitate its purchase
of Common Stock in the Conversion. See "Management - Benefit Plans - Employee
Stock Ownership Plan."
The executive office of the Holding Company is located at 52 North Main
Street, Gloversville, New York. Its telephone number at that address is (518)
725-6331.
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Gloversville Federal serves the financial needs of communities in its
market area through its main office located at 52 North Main Street,
Gloversville, New York and its branch office located at 295 Broadway, Saratoga
Springs, New York. Its deposits are insured up to applicable limits by the
Federal Deposit Insurance Corporation ("FDIC"). At September 30, 1997
Gloversville Federal had total assets of $61.0 million, deposits of $56.1
million and equity of $3.3 million (or 5.4% of total assets).
Gloversville Federal has been, and intends to continue to be, an
independent, community oriented, financial institution. Gloversville Federal's
business involves attracting deposits from the general public and using such
deposits, together with other funds, to originate one- to four-family
residential mortgage loans and, to a lesser extent, multi-family and commercial
real estate, commercial business, and home equity and other loans primarily in
its market area. The Association also invests in securities and other
permissible investments. See "Business - Investment Activities - Securities."
The executive office of the Association is located at 52 North Main
Street, Gloversville, New York. Its telephone number at that address is (518)
725-6331.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that such net proceeds will be between $3.2 million and $4.6 million
(or up to $5.3 million in the event of an increase in the aggregate pro forma
market value of the Common Stock of up to 15% above the maximum of the Estimated
24
Valuation Range). See "Pro Forma Data" and "The Conversion - Stock Pricing and
Number of Shares to be Issued" as to the assumptions used to arrive at such
amounts.
In exchange for all of the common stock of Gloversville Federal issued
upon conversion, the Holding Company will contribute approximately 50% of the
net proceeds from the sale of the Holding Company's Common Stock to Gloversville
Federal; provided that the amount retained by the Holding Company will be
reduced to the extent required, so that, upon the completion of the transaction,
the Association's ratio of capital to assets is at least 10%. On an interim
basis, the proceeds will be invested by the Holding Company in short-term
investments. The specific types and amounts of short-term assets will be
determined based on market conditions at the time of the completion of the
Conversion. In addition, the Holding Company intends to provide the funding for
the ESOP loan. Based upon the initial Purchase Price of $10.00 per share, the
dollar amount of the ESOP loan would range from $____ million (based upon the
sale of shares at the minimum of the Estimated Valuation Range) to $____ million
(based upon the sale of shares at the maximum of the Estimated Valuation Range).
The interest rate to be charged by the Holding Company on the ESOP loan will be
based upon the IRS prescribed applicable federal rate at the time of
origination. It is anticipated that the ESOP will repay the loan through
periodic tax-deductible contributions from the Association over a ten-year
period.
The net proceeds received by Gloversville Federal will become part of
Gloversville Federal's general funds for use in its business and will be used to
support the Association's existing operations, subject to applicable regulatory
restrictions. Immediately upon the completion of the Conversion, it is
anticipated that the Association will invest such proceeds into short-term
assets. Subsequently, the Association will redirect the net proceeds to the
origination of loans, subject to market conditions. In addition, a portion of
the net proceeds may also be utilized to pay down borrowings, subject to future
market conditions.
After the completion of the Conversion, the Holding Company will
redirect the net proceeds invested by it in short-term assets into a variety of
mortgage-backed securities and other securities similar to those already held by
the Association. Also, the Holding Company may use a portion of the proceeds to
fund the RRP, subject to shareholder approval of such plan. Compensation expense
related to the RRP will be recognized as share awards vest. See "Pro Forma
Data." Following stockholder ratification of the RRP, the RRP will be funded
either with shares purchased in the open market or with authorized but unissued
shares. Based upon the initial Purchase Price of $10.00 per share, the amount
required to fund the RRP through open-market purchases would range from
approximately $________ (based upon the sale of shares at the minimum of the
Estimated Valuation Range) to approximately $________ (based upon the sale of
shares at the maximum of the Estimated Valuation Range). In the event that the
per share price of the Common Stock increases above the $10.00 per share
Purchase Price following completion of the Offering, the amount necessary to
fund the RRP would also increase. The use of authorized but unissued shares to
fund the RRP could dilute the holdings of stockholders who purchase Common Stock
in the Conversion. See "Business Lending Activities" and " - Investment
Activities" and "Management - Benefit Plans - Employee Stock Ownership Plan" and
"- Recognition and Retention Plan."
25
The proceeds may also be utilized by the Holding Company to repurchase
(at prices which may be above or below the initial offering price) shares of the
Common Stock through an open market repurchase program subject to limitations
contained in OTS regulations, although the Holding Company currently has no
specific plan to repurchase any of its stock. In the future, the Board of
Directors of the Holding Company will make decisions on the repurchase of the
Common Stock based on its view of the appropriateness of the price of the Common
Stock as well as the Holding Company's and the Association's investment
opportunities and capital needs. Under current OTS regulations, no repurchases
may be made within the first year following Conversion except with OTS approval
under "exceptional circumstances." During the second and third years following
Conversion, OTS regulations permit, subject to certain limitations, the
repurchase of up to five percent of the outstanding shares of stock during each
twelve-month period with a greater amount permitted with OTS approval. In
general, the OTS regulations do not restrict repurchases thereafter, other than
limits on the Association's ability to pay dividends to the Holding Company to
fund the repurchase. For a description of the restrictions on the Association's
ability to provide the Holding Company with funds through dividends or other
distributions, see "Dividends" and "The Conversion - Restrictions on Repurchase
of Stock."
DIVIDENDS
The Board of Directors of the Holding Company may consider a policy of
paying cash dividends on the Common Stock. Dividends, when and if paid, will be
subject to determination and declaration by the Board of Directors at its
discretion. They will take into account the Holding Company's consolidated
financial condition, the Association's regulatory capital requirements,
including the fully phased-in capital requirements, tax considerations, industry
standards, economic conditions, regulatory restrictions, general business
practices and other factors. The Holding Company may also consider making a one
time only special dividend or distribution (including a tax-free return of
capital) provided that the Holding Company will take no steps toward making such
a distribution for at least one year following the completion of the Conversion.
It is not presently anticipated that the Holding Company will conduct
significant operations independent of those of Gloversville Federal for some
time following the Conversion. As such, the Holding Company does not expect to
have any significant source of income other than earnings on the net proceeds
from the Conversion retained by the Holding Company (which proceeds are
currently estimated to range from $___ million to $___ million based on the
minimum and the maximum of the Estimated Valuation Range, respectively) and
dividends from Gloversville Federal, if any. Consequently, the ability of the
Holding Company to pay cash dividends to its stockholders will be dependent upon
such retained proceeds and earnings thereon, and upon the ability of
Gloversville Federal to pay dividends to the Holding Company. See "Description
of Capital Stock Holding Company Capital Stock - Dividends." Gloversville
Federal, like all savings associations regulated by the OTS, is subject to
certain restrictions on the payment of dividends based on its net income, its
capital in excess of the regulatory capital requirements and the amount of
regulatory capital required for the liquidation account to be established in
connection with the Conversion. See "The Conversion - Effects of Conversion to
Stock Form on Depositors and Borrowers of the Association - Liquidation Rights"
and "Regulation - Regulatory Capital Requirements" and
26
"- Limitations on Dividends and Other Capital Distributions." Earnings allocated
to Gloversville Federal's "excess" bad debt reserves and deducted for federal
income tax purposes cannot be used by Gloversville Federal to pay cash dividends
to the Holding Company without adverse tax consequences. See "Regulation -
Federal and State Taxation."
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. Following the
completion of the Conversion, it is anticipated that the Common Stock will be
traded on the over-the-counter market with quotations available through the OTC
Bulletin Board. Capital Resources has indicated its intention to make a market
in the Common Stock. If the Common Stock cannot be quoted and traded on the OTC
Bulletin Board it is expected that transactions in the Common Stock will be
reported in the pink sheets published by the National Quotation Bureau, Inc.
Making a market may include the solicitation of potential buyers and sellers in
order to match buy and sell orders. However, Capital Resources will not be
subject to any obligation with respect to such efforts.
There can be no assurance that an active or liquid trading market will
develop for the Common Stock, or if a market develops, that it will continue. A
public market having the desirable characteristics of depth, liquidity and
orderliness depends upon the presence in the marketplace of both willing buyers
and sellers of the Common Stock at any given time, which is not within the
control of the Holding Company or any market maker. Accordingly, there can be no
assurance that purchasers will be able to sell their shares at or above the
Purchase Price.
PRO FORMA DATA
The following table sets forth the historical net loss, equity and per
share data of Gloversville Federal at and for the fiscal year ended September
30, 1997, and after giving effect to the Conversion, the pro forma net loss,
capital stock and stockholders' equity and per share data of the Holding Company
at and for the fiscal year ended September 30, 1997. The pro forma data has been
computed on the assumptions that (i) the specified number of shares of Common
Stock was sold at the beginning of the specified period and yielded net proceeds
to the Holding Company as indicated, (ii) 50% of such net proceeds were retained
by the Holding Company and the remainder were used to purchase all of the stock
of Gloversville Federal, and (iii) such net proceeds, less the amount of the
ESOP and RRP funding, were invested by the Association and Holding Company at
the beginning of the period to yield a pre-tax return of 5.44% for the fiscal
year ended September 30, 1997. The after-tax rate of return is 3.26% assuming a
combined state and federal tax rate of 40%. The assumed return is based upon the
market yield rate of one-year U.S. Government Treasury Securities as of
September 30, 1997. The use of this current rate is viewed to be more relevant
in the current interest rate environment than the use of an arithmetic average
of the weighted average yield earned by the Association on its interest-earning
assets and the weighted average rate paid on its deposits during such periods.
Expenses (including the Capital Resources marketing fee) are estimated to be
$508,200. The pro forma net loss amounts derived from the assumptions set forth
herein should not be considered indicative of the actual results of operations
of the Holding
27
Company that would have been attained for any period if the Conversion had been
actually consummated at the beginning of such period, and the assumptions
regarding investment yields should not be considered indicative of the actual
yields expected to be achieved during any future period.
The total number of shares to be issued in the Conversion may be
increased or decreased significantly, or the price per share decreased, to
reflect changes in market and financial conditions prior to the close of the
Offering. However, if the aggregate Purchase Price of the Common Stock sold in
the Conversion is below $4,250,000 (the minimum of the Estimated Valuation
Range) or more than $6,612,500 (15% above the maximum of the Estimated Valuation
Range), subscribers will be offered the opportunity to modify or cancel their
subscriptions. See "The Conversion - Stock Pricing and Number of Shares to be
Issued."
28
At or For the Year Ended September 30, 1997
---------------------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
425,000 500,000 575,000 661,250
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
-------------- --------------- --------------- ----------------
(Dollars in Thousands, Except Share Amounts)
Gross proceeds................................................ $ 4,250 $ 5,000 $ 5,750 $ 6,613
Less offering expenses and commissions........................ 508 508 508 508
Estimated net conversion proceeds............................ 3,742 4,492 5,242 6,105
Less ESOP shares.............................................. (340) (400) (460) (529)
Less RRP shares............................................... (170) (200) (230) (265)
---------- --------- ---------- ---------
Estimated proceeds available for investment(1)............... $ 3,232 $ 3,892 $ 4,552 $ 5,311
======== ======== ========= ========
Net Loss:
Historical................................................. (583) (583) (583) (583)
Pro Forma Adjustments:
Net earnings from proceeds(2).............................. 105 127 149 173
ESOP(3).................................................... (20) (24) (28) (32)
RRP(4)..................................................... (20) (24) (28) (32)
----------- --------- ----------- -----------
Pro forma net loss(5).................................... $ (518) $ (504) $ (490) $ (474)
========= ======== ========= ==========
Net Loss Per Share:
Historical(6)............................................. $ (1.48) $ (1.26) $ (1.10) $ (0.95)
Pro forma Adjustments:
Net earnings from proceeds................................ 0.27 0.27 0.28 0.28
ESOP(3)................................................... (0.05) (0.05) (0.05) (0.05)
RRP(4).................................................... (0.05) (0.05) (0.05) (0.05)
---------- --------- ---------- ----------
Pro forma net loss per share(4)......................... $ (1.31) $ (1.09) $ (0.92) $ (0.77)
========= ========= ========= =========
Number of shares using SOP 93-6(3)................. 392,700 462,000 531,300 610,995
Stockholders' Equity (Book Value)(7):
Historical.................................................. $ 3,280 $ 3,280 $ 3,280 $ 3,280
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 3,742 4,492 5,242 6,105
Less common stock acquired by:
ESOP(3).................................................... (340) (400) (460) (529)
RRP(4)..................................................... (170) (200) (230) (265)
---------- ---------- ---------- ----------
Pro forma book value(4)................................ $ 6,512 $ 7,172 $ 7,832 $ 8,591
========= ========= ======== =========
Stockholders' Equity (Book Value)(7):
Per Share(6):
Historical.................................................. 7.72 6.56 5.70 4.96
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 8.80 8.98 9.12 9.23
Less common stock acquired by:
ESOP(3).................................................... (0.80) (0.80) (0.80) (0.80)
RRP(4)..................................................... (0.40) (0.40) (0.40) (0.40)
------ ------ ---------- -----------
Pro forma book value per share(5)...................... 15.32 14.34 13.62 12.99
====== ===== ========= ===========
Offering Price per share as a percentage of Pro Forma
Stockholders' equity per share............................. 65.27% 69.74% 73.42% 76.98%
====== ====== ========= ==========
Offering price per share as a percentage of Pro Forma net
loss per share............................................. (7.63)% (9.17) (10.87) (12.99)
====== ====== ========= ==========
Number of shares.............................................. 425,000 500,000 575,000 661,250
29
(1) Reflects a reduction to net proceeds for the cost of the ESOP and the RRP
(which is subject to shareholder ratification) which it is assumed will be
funded from the net proceeds retained by the Holding Company.
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by the
ESOP and RRP, which purchases are to be funded by the Holding Company and
the Association, have been deducted from net proceeds.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP from the net proceeds from the
Conversion retained by the Holding Company. The Association intends to make
contributions to the ESOP in amounts at least equal to the principal and
interest requirement of the debt. The Association's payment of the ESOP
debt is based upon equal installments of principal and interest over a
ten-year period. However, assuming the Holding Company makes the ESOP loan,
interest income earned by the Holding Company on the ESOP debt will offset
the interest paid by the Association. Accordingly, only the principal
payments on the ESOP debt are recorded as an expense (tax-effected) to the
Holding Company on a consolidated basis. The amount of ESOP debt is
reflected as a reduction of stockholders' equity. In the event that the
ESOP were to receive a loan from an independent third party, both ESOP
expense and earnings on the proceeds retained by the Holding Company would
be expected to increase.
(4) Adjustments to both book value and net earnings have been made to give
effect to the proposed open market purchase (based upon an assumed purchase
price of $10.00 per share) following Conversion by the RRP (subject to
stockholder ratification of such plan) of an amount of shares equal to 4%
of the shares of Common Stock sold in the Conversion for the benefit of
certain directors, officers and employees. Funds used by the RRP to
purchase the shares will be contributed to the RRP by the Holding Company
if the RRP is ratified by stockholders following the Conversion. Therefore,
this funding is assumed to reduce the proceeds available for reinvestment.
For financial accounting purposes, the amount of the contribution will be
recorded as a compensation expense (although not an actual expenditure of
funds) over the period of vesting. These grants are scheduled to vest in
equal annual installments over the five years following stockholder
ratification of the RRP. However, all unvested grants will be forfeited in
the case of recipients who fail to maintain continuous service with the
Holding Company or its subsidiaries. In the event the RRP is unable to
purchase a sufficient number of shares of Common Stock to fund the RRP, the
RRP may issue authorized but unissued shares of Common Stock from the
Holding Company to fund the remaining balance. In the event the RRP is
funded by the issuance of authorized but unissued shares in an amount equal
to 4% of the shares sold in the Conversion, the interests of existing
stockholders would be diluted by approximately 3.8%.
In the event that the RRP is funded through authorized but unissued shares,
for the year ended September 30, 1997, pro forma net income per share would
be $(1.25), $(1.03), $(0.87) and $(0.72), respectively, and pro forma
stockholders' equity per share would be $15.12, $14.18, $13.48 and $12.88,
respectively, in each case at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range.
(5) No effect has been given to the shares to be reserved for issuance under
the proposed Stock Option Plan which is expected to be adopted by the
Holding Company following the Conversion, subject to stockholder approval.
In the event the Stock Option Plan is funded by the issuance of authorized
but unissued shares in an amount equal to 10% of the shares sold in the
Conversion, at $10.00 per share and all options are vested and exercised
immediately, the interests of existing stockholders would be diluted as
follows: pro forma net income per share for the year ended September 30,
1997 would be $(1.17), $(0.96), $(0.81) and $(0.67), respectively, and pro
forma stockholders' equity per share would be $14.84, $13.95, $13.30 and
$12.72 , respectively, in each case at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range. In the alternative,
the Holding Company may purchase shares in the open market to fund the
Stock Option Plan following stockholder approval of such plan. To the
extent, the entire 10% of the shares to be reserved for issuance under the
Stock Option Plan were funded through open market purchases at the Purchase
Price of $10.00 per share, proceeds available for reinvestment would be
reduced by $425,000, $500,000, $575,000 and $661,250 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range. See "Management - Benefit Plans - Stock Option and Incentive Plan."
(6) Historical pro forma per share amounts have been computed as if the shares
of Common Stock indicated had been outstanding at the beginning of the
periods or on the dates shown, but without any adjustment of historical net
income or historical equity to reflect the investment of the estimated net
proceeds of the sale of shares in the Conversion as described above. All
ESOP shares have been considered outstanding for purposes of computing book
value per share. Pro forma share amounts have been computed by dividing the
pro forma net income or stockholders' equity (book value) by the number of
shares indicated as outstanding under SOP 93-6.
(7) "Book value" represents the difference between the stated amounts of the
Association's assets and liabilities computed in accordance with generally
accepted accounting principles. The amounts shown do not reflect the effect
of the Liquidation Account which will be established for the benefit of
Eligible and Supplemental Eligible Account Holders in the Conversion, or
the federal income tax consequences of the restoration to income of the
Association's special bad debt reserves for income tax purposes which would
be required in the unlikely event of liquidation. See "The Conversion -
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association" and "Regulation - Federal and State Taxation." The amounts
shown for book value do not represent fair market values or amounts, if
any, distributable to stockholders in the unlikely event of liquidation.
30
PRO FORMA REGULATORY CAPITAL ANALYSIS
At September 30, 1997, the Association would have exceeded each of the OTS
capital requirements on both a current and a fully phased-in basis. Set forth
below is a summary of the Association's compliance with the OTS capital
standards as of September 30, 1997 based on historical capital and also assuming
that the indicated number of shares were sold as of such date using the
assumptions contained under the caption "Pro Forma Data."
Pro Forma at September 30, 1997
-------------------------------------------------------------------------------------
661,750 Shares
425,000 Shares 500,000 Shares 575,000 Shares 15% above
Historical Minimum Midpoint Maximum Maximum
------------------- ------------------- -------------------- -------------------- -----------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- ---------- --------- ---------- --------- -------------
(Dollars in Thousands)
GAAP Capital(2)........... $3,301 5.41% $5,923 9.23% $6,480 10.00% $6,490 10.00% $6,502 10.00%
====== ==== ====== ==== ====== ===== ====== ===== ====== =====
Tangible Capital(3):
Capital level........... $3,301 5.41% $5,923 9.23% $6,480 10.00% $6,490 10.00% $6,502 10.00%
Requirement............. 915 1.50 962 1.50 972 1.50 974 1.50 975 1.50
-------- ---- ------- ---- ------- ------ -------- ------ ------
Excess.................. $2,386 3.91% $4,961 7.73% $5,508 8.50% $5,516 8.50% $5,527 8.50%
====== ==== ====== ==== ====== ==== ====== ====== ====== ======
Core Capital(3):
Capital level........... $3,301 5.41% $5,923 9.23% $6,480 10.00% $6,490 10.00% $6,502 10.00%
Requirement(4).......... 1,830 3.00 1,924 3.00 1,944 3.00 1,947 3.00 1,950 3.00
------- ---- ------ ---- ------ ------ ------- ------ ------- ------
Excess.................. $1,471 2.41% $3,999 6.23% $4,536 7.00% $4,543 7.00% $4,552 7.00%
====== ==== ====== ==== ====== ====== ====== ====== ====== ======
Risk-Based Capital(3):
Capital level(5)........ $3,788 10.01% $6,410 16.66% $6,966 18.05% $6,976 18.07% $6,988 18.09%
Requirement(1).......... 3,027 8.00 3,077 8.00 3,088 8.00 3,089 8.00 3,091 8.00
------ ------ ------ ------ ----- ------ ------- ------ ------- ------
Excess.................. $ 761 2.01% $3,333 8.66% $3,878 10.05% $3,887 10.07% $3,897 10.09%
======= ====== ====== ====== ====== ===== ====== ===== ====== =====
(1) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weight, such as short-term interest-bearing
deposits.
(2) Total retained earnings as calculated under generally accepted accounting
principles ("GAAP"). Assumes that the Association receives 50% of the net
proceeds or such amount as will give the Association, upon completion of
the transaction, a capital to assets ratio of 10% when possible, offset in
part, by the aggregate Purchase Price of Common Stock acquired at a price
of $10.00 per share by the ESOP in the Conversion and the RRP (assuming
stockholder ratification of such plan following completion of the
Conversion).
(3) Tangible and core capital figures are determined as a percentage of
adjusted total assets; risk-based capital figures are determined as a
percentage of risk-weighted assets. Unrealized gains and losses on debt
securities available for sale are excluded from tangible, core and
risk-based capital.
(4) In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective on November 30, 1990. This proposed core capital ratio is 3% of
total adjusted assets for thrifts that receive the highest supervisory
rating for safety and soundness ("CAMEL" rating), with a 4% to 5% core
capital requirement for all other thrifts. See "Regulation - Regulatory
Capital Requirements."
(5) Includes $486,000 of the allowance for loan losses which qualifies as
supplementary capital. See "Regulation - Regulatory Capital Requirements."
31
CAPITALIZATION
Set forth below is the capitalization, including deposits, of
Gloversville Federal as of September 30, 1997, and the pro forma capitalization
of the Holding Company at the minimum, the midpoint, the maximum and 15% above
the maximum of the Estimated Valuation Range, after giving effect to the
Conversion and based on other assumptions set forth in the table and under the
caption "Pro Forma Data."
Holding Company - Pro Forma Based
Upon Sale at $10.00 per share
---------------------------------------------------------
Maximum
Actual, As of Minimum Midpoint Maximum as adjusted
September 30, 425,000 500,000 575,000 661,250
1997 Shares Shares Shares Shares
--------------- ------------- ------------ -------------- ---------------
(In Thousands, Except Share Amounts)
Deposits(1)................................. $56,117 $56,117 $56,117 $56,117 $56,117
Borrowings.................................. 1,300 1,300 1,300 1,300 1,300
--------- --------- --------- --------- ---------
Total deposits and borrowed funds....... $57,417 $57,417 $57,417 $57,417 $57,417
======= ======= ======= ======= =======
Stockholders' Equity:
Common Stock ($0.01 par value)
5,000,000 shares authorized; shares to be
Issued as reflected(2)................... -- 4 5 6 7
Additional paid-in capital................ -- 3,738 4,487 5,236 6,098
Retained earnings, substantially
restricted(3)............................. 3,301 3,301 3,301 3,301 3,301
Net unrealized loss on securities available
for sale............................... (21) (21) (21) (21) (21)
Preferred Stock.............................
Less:
Common Stock acquired by ESOP(4).......... -- (340) (400) (460) (529)
Common Stock acquired by RRP(4)........... -- (170) (200) (230) (265)
----------- -------- --------- --------- ---------
Total Stockholders' Equity.............. $ 3,280 $ 6,512 $ 7,172 $ 7,832 $ 8,591
======= ======= ======= ======= =======
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) Does not reflect the shares of Common Stock that may be reserved for
issuance pursuant to the Stock Option Plan.
(3) See "Dividends" and "Regulation - Limitations on Dividends and Other
Capital Distributions" regarding restrictions on future dividend payments
and "The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association" regarding the liquidation account to be
established upon Conversion.
(4) Assumes that 8% of the shares sold in the Conversion will be purchased by
the ESOP. The funds used to acquire the ESOP shares will be borrowed from
the Holding Company. The Association intends to make contributions to the
ESOP sufficient to service and ultimately retire the ESOP's debt over a
ten-year period. Also assumes that an amount of shares equal to 4% of the
amount of shares sold in the Conversion will be acquired by the RRP,
following shareholder ratification of such plan after completion of the
Conversion. In the event that the RRP is funded by the issuance of
authorized but unissued shares in an amount equal to 4% of the shares sold
in the Conversion, the interest of existing stockholders would be diluted
by approximately 3.8%. The amount to be borrowed by the ESOP and the Common
Stock acquired by the RRP is reflected as a reduction of stockholders'
equity. See "Management - Benefit Plans - Employee Stock Ownership Plan"
and "- Recognition and Retention Plan."
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Association's financial statements and related notes and with the
statistical information and financial data included in this document.
32
When used in this document, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project", or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties-including, changes in
economic conditions in the Association's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Association's market area, and competition that could cause actual results to
differ materially from historical results and those presently anticipated or
projected. The Association wishes to caution readers not to place undue reliance
on any such forward looking statements, which speak only as of the date made.
The Association wishes to advise readers that the factors listed above could
affect the Association's financial performance and could cause the Association's
actual results for future periods to materially differ from any opinions or
statements expressed with respect to future periods in any current statements.
The Association does not undertake- and specifically disclaims any
obligation- to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
General
The Company has only recently been formed and, accordingly, has no
results of operations at this time. Therefore, the following discussion
principally reflects the operations of the Association. The Association's
results of operations are predominantly dependent on its net interest income,
which is the difference between the interest income earned on its
interest-earning assets, primarily loans and securities available for sale, and
the interest expense on its interest-bearing liabilities, primarily deposits and
borrowings. Net interest income may be affected significantly by general
economic and competitive conditions and policies of regulatory agencies,
particularly those with respect to market interest rates. The results of
operations are also significantly influenced by the level of non-interest
expenses, such as employee compensation and benefits, non-interest income, such
as fees and service charges, and the Association's provision for loan losses.
The Association operates as a community-oriented financial
institution, obtaining deposits from its local community and investing those
deposits principally in residential one-to-four-family mortgage loans, and, to a
lesser extent, multi-family and commercial real estate, commercial business,
home equity and other loans. In addition, the Association invests excess funds
not used for loan originations in securities issued by the United States
government or its agencies, and mortgage backed securities.
Asset/Liability Management
The Association's net interest income is sensitive to changes in
interest rates, as the rates paid on its interest-bearing liabilities generally
change faster than the rates earned on its interest-earning assets. As a result,
net interest income will frequently decline in periods of rising interest rates
and increase in periods of decreasing interest rates.
33
In managing its asset/liability mix, Gloversville Federal, depending
on the relationship between long- and short-term interest rates, market
conditions and consumer preference, often places more emphasis on managing short
term net interest margin than on better matching the interest rate sensitivity
of its assets and liabilities. Management believes that the increased net
interest income resulting from a mismatch in the maturity of its asset and
liability portfolios can, during periods of declining or stable interest rates,
provide high enough returns to justify the increased exposure to sudden and
unexpected increases in interest rates.
The Board has taken a number of steps to manage the Association's
vulnerability to changes in interest rates. First, in connection with the
Association's decision to increase the Association's multi-family and commercial
real estate and commercial business lending as well as its increased emphasis in
home equity lending, the Association has increased its interest rate sensitive
lending (which includes all loans which reprice in five years or less). The
Association's interest rate sensitive loans have increased from none at
September 30, 1993 to $15.4 million or 30.0% of the portfolio at September 30,
1997. Second, the Association has used community outreach, customer service and
marketing efforts to acquire the proportion of its deposits consisting of money
market and other transaction accounts. These deposits are believed to be less
interest rate sensitive than other types of deposit accounts. The Association's
money market and transaction accounts have increased from $23.9 million or 41.3%
of deposits at September 30, 1995 to $28.1 million or 50.1% of deposits at
September 30, 1997. Finally, the Association has focused a significant portion
of its investment activities on securities with adjustable interest rates or
terms of five years or less. At September 30, 1997, $3.6 million or 100% of the
Association's mortgage-backed securities had adjustable interest rates or terms
to maturity of five years or less and $2.0 million or 67.0% of the Association's
other securities had adjustable interest rates or terms to maturity of five
years or less based on their amortized cost.
The asset and liability strategies are implemented by the
Association's asset/liability management committee that meets periodically to
determine the rates of interest for loans and deposits and consists of the
President, the Executive Vice President, and the Vice President of Lending.
Interest rates on loans in the short-term are primarily based on the interest
rates offered by other financial institutions in the Association's market area
as well as on the availability of funds. Rates on deposits in the short-term are
primarily based on the Association's need for funds and on a review of rates
offered by other financial institutions in the Association's market area.
Ultimately, the customer plays a significant role in the establishment of both
loan and deposit rates, as it is necessary to remain competitive in both loan
and deposit markets in order to maintain or further expand the customer base.
The Committee develops longer-term pricing strategies based on review
of interest rate sensitivity reports produced quarterly. The Committee also
monitors the impact of the interest rate risk and earnings consequences of such
strategies for consistency with the Association's liquidity needs, growth, and
capital adequacy. The Board of Directors receive and review the Association's
estimated interest rate sensitivity report every quarter.
In order to encourage savings associations to reduce their interest
rate risk, the OTS adopted a rule incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. For various technical reasons, the
OTS has delayed the effectiveness of the rule. Under the rule, the IRR
34
component is measured in terms of the sensitivity of the net portfolio value
("NPV") to changes in interest rates. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities, and off-balance sheet
contracts. An institution's IRR is measured as the change to its NPV as a result
of a hypothetical 200 basis point ("bp") change in market interest rates. When
the rule becomes effective, 50% of any resulting change in NPV as a percentage
of the present value of total assets of more than 2% of the estimated present
value of total assets ("PV") must be deducted from capital. If this rule had
been in effect at September 30, 1997, the Association would have been required
to deduct $44,000 from its capital in determining its risk-based capital.
The following table presents the Association's NPV at September 30,
1997, as calculated by the OTS, based on quarterly information provided to the
OTS by the Association.
NPV
Estimated to
Assumed Change NPV PV of Change % Change
in Interest Rates Amount Total Assets in NPV in NPV
- ----------------------------------------------------------------------------
(Basis Points)
(In Thousands)
+400 $2,762 4.62% $(3,176) (53.49)%
+300 3,676 6.04% (2,262) (38.09)%
+200 4,578 7.39% (1,360) (22.90)%
+100 5,378 8.55% (560) (9.43)%
--- 5,938 9.33% -- --
-100 6,179 9.65% 241 4.06%
-200 6,441 9.99% 503 8.47%
-300 6,802 10.46% 864 14.55%
-400 7,388 11.23% 1,450 24.42%
Certain assumptions utilized by the OTS in assessing the interest rate
risk of savings associations were employed in preparing the previous table.
These assumptions related to interest rates, loan prepayment rates, deposit
decay rates, and the market values of certain assets under the various interest
rate scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Association's assets and liabilities would perform
as set forth above.
Financial Condition
Comparison of Financial Condition at September 30, 1997 and September
30, 1996. Total assets were $61.0 million at both September 30, 1997 and 1996. A
$724,000 or 60.5% increase in cash and cash equivalents and a $243,000 increase
in other real estate owned, from September 30, 1996 to September 30, 1997, were
offset by a decrease during these same periods in securities available for sale
of $422,000 or 5.7%, a net decrease in premises and equipment of $255,000 or
14.2% and a decrease in prepaid expenses and other assets of $167,000 or 30.9%.
While gross loans receivable increased by only $204,000, there were
substantial changes in the composition of the loan portfolio. Residential one-
to four-family loans declined by $3.4 million
35
or 8.4% from September 30, 1996 to September 30, 1997. Multi-family and
commercial real estate loans increased $3.3 million or 71.5% from September 30,
1996 to September 30, 1997. Construction loans declined $399,000 or 42.5%, and
home equity loans increased by $511,000 or 17.8% from September 30, 1996 to
September 30, 1997. Commercial business loans increased by $192,000 or 15.6%
while other consumer loans decreased by $43,000 or 3.7%. The loan composition
change reflected the Association's efforts to improve the yield earned on the
loan portfolio and increase the percentage of adjustable rate loans in the loan
portfolio. See "Business Lending Activities."
Securities available for sale decreased primarily from principal
payments received on mortgage-backed securities. There were no securities held
to maturity at September 30, 1997 or 1996.
Prepaid expenses and other assets decreased $167,000 or 30.9%
primarily from tax refunds received and a decline in the Association's net
deferred tax assets. Net premises and equipment decreased $255,000 or 14.2%
through normal depreciation.
Cash and cash equivalents increased $724,000 or 60.5% from $1.2
million at September 30, 1996 to $1.9 million at September 30, 1997 primarily as
a result of a new requirement to maintain a $500,000 compensating balance at a
correspondent bank.
The Association's total deposits showed little change from September
30, 1996 to September 30, 1997, increasing by $401,000, or approximately 1.0%,
to $56.1 million from $55.7 million. Within the various deposit classifications,
from September 30, 1996 to September 30, 1997, time deposit increases of $1.0
million or 3.7%, and money market account increases of $558,000 or 5.4% were
partially offset by a $1.1 million or 8.6% decrease in savings account balances.
Borrowings increased from $300,000 at September 30, 1996 to $1.3
million at September 30, 1997. The increase in borrowings was the result of the
Association taking advantage of alternative funding sources whose maturity and
pricing were more closely aligned with the Association's funding needs.
Accrued expenses and other liabilities declined by $875,000 or 72.9%
from September 30, 1996 to September 30, 1997. Approximately $415,000 of the
accrued expenses and other liabilities at September 30, 1996 was the special
one-time assessment levied by the FDIC to recapitalize the Savings Association
Insurance Fund ("SAIF") which was paid during fiscal year ended September 30,
1997. See Note 11 to the Financial Statements. In addition, $210,000 of the
accrued expenses and other liabilities at September 30, 1996, which related to
the Association's computer conversion and the newly constructed Gloversville
office drive-thru, was also paid in fiscal 1997. Lastly, approximately $318,000
was expensed, of which $249,000 remained unpaid at September 30, 1996, for past
due property taxes on collateral securing certain one- to four-family
residential non-performing loans. These past due taxes were subsequently paid
during the fiscal year ended September 30, 1997.
The Association's equity decreased $510,000 or 13.5% from $3.8 million
at September 30, 1996 to $3.3 million at September 30, 1997. The decrease was
primarily the result of the
36
Association's net loss for fiscal 1997 offset by a reduction in the net
unrealized loss on its portfolio of securities available for sale.
Comparison of Operating Results for the Years Ended September 30, 1997 and 1996.
Net Loss. The Association's fiscal 1997 net loss of $583,000 was
$453,000 or 43.8% less than the fiscal 1996 net loss of $1.0 million. The net
loss for fiscal 1997 was reduced from fiscal 1996 primarily as a result of an
increase of $141,000 or 6.1% in net-interest income, and a $652,000 or 21.9%
reduction in other expenses consisting primarily of $415,000 related to the
one-time SAIF assessment and $318,000 expense related to past due property taxes
on certain non-performing one-to four-family residential loans, partially offset
by a decrease in income tax benefit of $307,000 or 138%.
Interest income. Interest and fees on loans increased by approximately
$277,000 or 6.7% to $4.4 million for fiscal 1997, from $4.1 million for fiscal
1996. The increase for fiscal 1997 was largely the result of an increase of $2.1
million or 4.2% in the average balance of loans outstanding during fiscal 1997,
to $51.3 million, as compared to $49.2 million in fiscal 1996. This increase was
primarily in the area of multi-family and commercial real estate, home equity
and commercial business loans offset by decreases in the average balance of
residential one-to-four-family loans. At September 30, 1997, multi-family and
commercial real estate, home equity and commercial business loans totaled $12.8
million as compared to $8.7 million at September 30, 1996. This increase
reflects management's plan to diversify the loan portfolio, increase portfolio
yield, and increase the amount of adjustable rate loans. Originated with various
terms and repricing schedules, these loans generally provide reduced interest
rate risk due to their shorter terms and provide higher yields compared to
longer term, fixed rate residential one-to-four-family loans. However,
multi-family and commercial real estate and commercial business loans generally
have higher outstanding loan balances and increased credit risk relative to
residential one-to-four-family loans. In addition to the increase in the average
balance of loans, the yield earned on the average balance of loans receivable
increased by 20 basis points to 8.59% in fiscal 1997 as compared to 1996 due in
part to the higher yielding nature of multi-family and commercial real estate
and commercial business loans. See "Business - Lending Activities."
Interest income on securities available for sale decreased by $8,000
or 1.7%. There were no investment purchases or sales during fiscal 1997.
Accordingly, the reduction in interest income on securities available for sale
is solely attributable to reduced average balances as a result of principal
repayments. The average balance decreased $427,000 or 5.5% during fiscal 1997.
Interest income on interest-bearing deposits decreased $98,000 or
72.7% as a result of reduced average balances, coupled with lower contracted
rates. Periodically in fiscal 1996, interest-bearing deposits were invested on a
longer term basis, resulting in a higher yielding investment in 1996 as compared
to 1997. Interest-bearing deposits were primarily invested on an overnight basis
in fiscal 1997.
The yield on the average balance of interest-earning assets was 8.21%
and 7.98% for fiscal 1997 and 1996, respectively.
37
Interest Expense. Interest expense of $2.4 million remained relatively
consistent for the years ended September 30, 1997 and 1996, increasing only
$30,000 or 1.3% in 1997. While total interest expense did not change
dramatically from year to year, the components of interest expense reflected
management's progress in increasing the level of lower costing money market
accounts. While the amount of year-end deposits only increased $401,000, or
1.0%, the average balance of money market accounts increased $3.4 million or
46.5% to $10.7 million while the average balance of time deposits decreased $1.7
million or 5.4% to $28.7 million. The average cost on money market accounts was
4.09% in 1997 as compared to 3.39% in fiscal 1996, and the average cost of time
deposits was 5.30% in fiscal 1997 versus 5.49% in fiscal 1996. Overall money
market rates increased due to the introduction in 1996 of a tiered money market
account with checking which proved popular with consumers but carried a somewhat
higher cost than the Association's other money market products. The changes in
the average balances of savings, demand, and NOW accounts and the related rates
paid were not significant from fiscal 1996 to 1997.
Interest expense on borrowings increased to $22,000 in fiscal 1997, as
the average amount of borrowed funds increased from $6,000 for fiscal 1996 to
$391,000 in fiscal 1997. Fiscal 1996 interest expense on borrowed funds was less
than $1,000.
The rate paid on the average balance of interest-bearing liabilities
was 4.25% and 4.30% for fiscal 1997 and 1996, respectively.
Net Interest Income. Net interest income increased by approximately
$141,000 or 6.1% to $2.5 million for fiscal 1997 from $2.3 million for fiscal
1996. The average interest rate spread increased to 3.96% for fiscal 1997 from
3.68% for fiscal 1996. The increase in interest rate spread is primarily the
result of an increase in higher yielding multi-family and commercial real estate
loans and the repricing of home equity loans.
Provision for Loan Losses. The Association continually monitors and
adjusts its allowance for loan losses based upon its analysis of the loan
portfolio. The allowance is increased by the recording of a provision for loan
losses, the amount of which depends on an analysis of the changing risks
inherent in the Association's loan portfolio. The provision for loan losses
increased $78,000 or 10.9% to $792,000 for fiscal year 1997 from $714,000 for
fiscal year 1996. The increase in the amount of the provision for fiscal 1997
was based on management's evaluation of the inherent risk in the Association's
loan portfolio; a $1.6 million or 71.4% increase in non-performing loans to $3.8
million at September 30, 1997 as compared to $2.2 million at September 30, 1996;
significantly increased net loan charge offs amounting to $430,000 in fiscal
1997, $187,000 or 77.0% greater than in 1996; continued expansion of commercial
business and multi-family and commercial real estate lending; the continued
economic weakness in the Association's market area; declining real estate values
collateralizing much of the Association's loan portfolio; as well as
management's evaluation of the prospects in the Association's market areas.
For a discussion of the factors considered by the Association in
determining the provision for loan losses, see "Business - Delinquencies and
Non-Performing Assets."
Other Income. Other income increased by $46,000 or 42.0% to $155,000
during fiscal year 1997 from $109,000 for fiscal year 1996. This increase was
primarily due to increases in fees and
38
service charges of $22,000 or 18.4% as well as the inclusion in fiscal 1996 of a
$15,000 loss on the writedown of premises and equipment.
Other Expense. Other expenses decreased $652,000 or 21.9% to $2.3
million in fiscal year 1997 from $3.0 million in fiscal year 1996. Compensation
and benefits expenses increased by $66,000 or 8.0% to $892,000 for fiscal year
1997 from $826,000 for fiscal year 1996. The increase in compensation and
benefits expenses in fiscal year 1997 was primarily the result of the general
cost of living and merit raises to Association employees, coupled with increased
pension and health insurance expenses. Director's fees increased by $27,000 or
34.9% from $76,000 in fiscal year 1996 to $103,000 in fiscal year 1997,
reflecting increased meeting frequency and an increase in per meeting fees.
Other real estate expenses increased $46,000 or 170% to $73,000 reflecting
increased costs associated with foreclosures and disposition of other real
estate owned. See "Business Delinquencies and Non-Performing Assets."
More than offsetting these increases were reductions in the special
one-time FDIC assessment, federal deposit insurance premiums, advertising
expenses and other operating expenses. In fiscal 1996 the Association accrued a
special assessment to recapitalize the SAIF in the amount of $415,000. As a
result of the recapitalization, the Federal deposit insurance premiums decreased
in fiscal 1997 by $74,000 or 56.6 % to $57,000. Advertising expenses decreased
in fiscal 1997 by $29,000 or 21.0% to $111,000. This decrease is due to the
inclusion in fiscal 1996 of significant costs associated with the implementation
of a new logo and brochures and initial use of television advertising which was
not repeated in fiscal 1997. Occupancy expenses and equipment and data
processing expenses were slightly greater in fiscal 1997 as compared to fiscal
1996 with increases of $13,000 or 5.9% and $9,000 or 2.9%, respectively.
As of the end of fiscal 1996, the Association first became aware that,
as of such date, a number of one- to four-family residential loans which were
delinquent as to principal and interest were also delinquent as to the payment
of property taxes. Because some of the related borrowers were unable or
unwilling to pay promptly these taxes, the Association incurred approximately
$318,000 in expenses for the purpose of paying such taxes in order to preserve
its collateral interest in these loans, many of which were subsequently
foreclosed upon. The decline in other expense in 1997 was based on the
non-reoccurrence in 1997 of this expense.
As a result of the above, during 1997, the Association performed an in
depth review of all loans without a tax escrow requirement. This review
indicated that a number of loans which were current as to principal and interest
were delinquent as to the payment of property taxes. The Association contacted
all of the borrowers on these loans. Where the borrowers promptly brought the
real estate taxes current, no actions were taken with respect to the loan terms.
However, where the borrowers were unable to promptly bring real estate taxes
current, the Association restructured the loans or otherwise advanced additional
funds (which advances were added to the loan principal) in order to pay the
delinquent property taxes. As a result, all restructured or rewritten loans were
classified as non-performing as of September 30, 1997. To date, all such loans
have performed in accordance with their revised terms. See "Business - Lending
Activities" and "- Delinquencies and Non-Performing Assets."
39
Income Taxes. The provision for income taxes increased $307,000 from a
fiscal year 1996 benefit of $222,000 to a fiscal year 1997 expense of $85,000.
The increase in tax expense for fiscal year 1997 as compared to fiscal year 1996
was primarily the result of a $760,000 decrease in the loss before income taxes,
coupled with a $25,000 increase in the change in the valuation allowance for
deferred tax assets. In assessing whether the deferred tax assets will more
likely than not be realized, the Association considers the historical level of
taxable income, the time period over which the temporary differences are
expected to reverse, as well as estimates of future taxable income. In 1997, as
a result of the Association experiencing a second year of significant losses
before taxes (loss before taxes of $498,000 and $1.3 million in fiscal 1997 and
1996, respectively), continued economic weakness in the Association's market
area, including declining real estate values collateralizing much of the
Association's loan portfolio, and reduced expectations of earnings in the
future, as well as a reduction in the amount of historical taxes available for
carryback in 1997, the Association increased its deferred tax valuation
allowance by $274,000 to $625,000 at September 30, 1997. As of September 30,
1997, the net deferred tax asset is considered to be more likely than not
realizable based upon the remaining amount of historical taxes available for
carryback, amounting to approximately $50,000, the reversal of temporary taxable
items and reliance on future taxable income amounting to approximately $175,000.
Comparison of Operating Results for the Years Ended September 30, 1996 and 1995.
Net Income. The 1995 net income of $251,000 decreased by $1.3 million
to a fiscal year 1996 net loss of $1.0 million. The net loss for fiscal year
1996 is primarily the result of a $585,000 increase in the provision for loan
losses, the above referenced $415,000 one-time SAIF assessment, and the above
mentioned expense of approximately $318,000 related to delinquent property taxes
on property collateralizing certain non-performing loans. Additionally, fiscal
1995 included a $204,000 net gain on sales of securities and a $86,000 gain on
the sale of premises and equipment.
There were no such gains in fiscal 1996.
Interest Income. Interest and fees on loans increased by approximately
$203,000 or 5.2% to $4.1 million for fiscal year 1996 from $3.9 million for
fiscal year 1995. The increase for fiscal year 1996 was partially the result of
an increase of $514,000 or 1.0% in the average balance of loans outstanding, to
$49.2 million, as compared to $48.7 million in fiscal year 1995. This increase
was primarily in the area of multi-family and commercial real estate loans.
During fiscal year 1996 the Association continued to increase the multi-family
and commercial real estate as well as commercial business portfolios. At
September 30, 1996 multi-family and commercial real estate loans totaled $4.6
million as compared to $1.7 million at September 30, 1995 and commercial
business loans grew to $1.2 million at September 30, 1996 compared to $1.1 at
September 30, 1995. Offsetting these increases was a decrease in residential
one-to-four-family loans. In addition to the increase in the average balance of
loans, the yield earned on the average balance of loans receivable increased by
33 basis points to 8.39% in fiscal year 1996 as compared to 8.06% in fiscal year
1995 due in part to the higher yielding nature of multi-family and commercial
real estate, home equity and commercial business loans.
Interest income on securities available for sale decreased by $234,000
or 33.3% to $467,000 in fiscal year 1996 from $701,000 in fiscal year 1995.
During fiscal year 1995, the Association sold securities with an amortized cost
of approximately $13.4 million. Accordingly, the reduction in
40
interest income is largely attributable to reduced average balances as a result
of the fiscal year 1995 sales. The average balance in securities available for
sale decreased $4.9 million or 38.5% from $12.6 million in fiscal 1995 to $7.8
million in fiscal year 1996. Interest income on interest-bearing time deposits
decreased $53,000 or 28.0% primarily as a result of a $832,000 or 26.6% decrease
in the average balance.
The yield on the average balance of interest-earning assets was 7.98%
and 7.47% for fiscal years 1996 and 1995, respectively.
Interest Expense. Interest expense on deposits and borrowings
decreased by approximately $111,000 or 4.4% to $2.4 million for fiscal year 1996
as compared to $2.5 million for fiscal year 1995. This decrease was primarily
the result of a $5.5 million or 15.3% decrease in the average balance of time
deposits, offset by an increase in the cost of time deposits in fiscal year 1996
because the cost of time deposit accounts maintained or acquired carried a
higher rate than time deposits maturing. The average cost on time deposits was
5.49% in 1996 versus 5.01% in fiscal year 1995.
The rate paid on the average balance of interest-bearing liabilities
was 4.30% and 4.12%, for fiscal years 1996 and 1995, respectively.
Net Interest Income. In fiscal 1996 net interest income increased from
fiscal 1995 by approximately $28,000 or 1.2%, to $2.3 million. The average
interest rate spread increased to 3.68% for fiscal year 1996 from 3.35% for
fiscal year 1995. The increase in interest rate spread is primarily the result
of an increase in higher yielding multi-family and commercial real estate loans,
and a reduction in the average balance in of certain lower yielding securities
available for sale offset by an increase in the rate on interest bearing
liabilities.
Provision for Loan Losses. The provision for loan losses increased
$585,000 to $714,000 for fiscal year 1996 from $129,000 for fiscal year 1995.
The significant increase in the amount of the provision for fiscal year 1996 was
based on management's evaluation of the inherent risk in the Association's loan
portfolio, the continued expansion of commercial business and multi-family and
commercial real estate lending, a 18.0% increase in net loan charge offs in
fiscal 1996 compared to fiscal 1995, increased delinquencies, continued economic
weakness in the Association's market area, declining real estate values
collateralizing much of the Association's loan portfolio, and management's
evaluation of the prospects in the Association's market areas. In addition, as
noted above, the Association became aware that as of the end of fiscal 1996 a
significant number of its non-performing residential one- to four- family loans
were past due on the payment of property taxes collateralizing its loans. For a
discussion of the factors considered by the Association in determining the
provision for loan losses, see "Business - Delinquencies and Non-Performing
Assets."
Other Income. Other income decreased by $282,000 or 72.1% to $109,000
in fiscal year 1996 from $392,000 for fiscal year 1995. This decrease was
primarily due to fiscal year 1995 including net gains on sales of securities
available for sale of $204,000 and a gain on the sale of premises and equipment
of $86,000.
Other Expense. Other expenses increased $772,000 or 35.1% to $3.0
million in fiscal year 1996 from $2.2 million in fiscal year 1995. Compensation
and benefits expenses decreased by
41
$42,000 or 4.8% to $826,000 for fiscal year 1996 from $868,000 for fiscal year
1995. The decrease in compensation and benefits expenses in fiscal year 1996 was
the result of the fiscal year 1995 expense including an expense of approximately
$64,000 related to the termination of the Association's defined benefit pension
plan. Special one-time FDIC assessment increased $415,000 due to the previously
mention SAIF recapitalization. Advertising expense increased $48,000 or 52.2% to
$140,000 in fiscal year 1996 from $92,000 in fiscal year 1995 associated with
the implementation of a new logo and brochures and initial use of television
advertising in fiscal year 1996. Directors fees increased $34,000 or 82.3% from
$42,000 in fiscal year 1995 to $76,000 in fiscal year 1996 due to increases in
per meeting fees and meeting frequency. Other real estate expenses decreased
$100,000 or 78.6% to $27,000 as fiscal year 1995 included several large Other
Real Estate Owned ("OREO") writedowns. Occupancy expense increased $55,000 or
35.3% in fiscal 1996, which is the result of additional depreciation and
expenses related to the Gloversville drive-thru. Equipment and data processing
expenses increased $28,000 or 9.9% in fiscal 1996 as the result of additional
costs incurred attributable to the Association's system conversion. As
previously mentioned, included in the fiscal year 1996 other operating expenses
was an expense of approximately $318,000 for delinquent property taxes on the
property securing certain non-performing residential one-to-four-family loans.
Accordingly, other operating expenses increased $346,000 or 71.1% in fiscal year
1996 from $487,000 in fiscal year 1995 to $833,000 in fiscal year 1996.
Income Taxes. The provision for income taxes decreased $325,000 from a
fiscal year 1995 expense of $102,000 to a fiscal year 1996 benefit of $222,000
which was primarily the result of a $1.6 million increase in the loss before
income taxes, offset by a $248,000 increase in the valuation allowance for
deferred tax assets. In 1996, as a result of experiencing a significant loss
before taxes of $1.3 million, combined with the significant reduction in the
amount of historical taxes available for carryback, the Association increased
its deferred tax valuation allowance by $248,000 to $352,000. As of September
30, 1996, the net deferred tax asset is considered to be more likely than not
realizable based upon the remaining amount of historical taxes available for
carryback, amounting to $90,000, the reversal of temporary taxable items, and
reliance on future taxable income amounting to approximately $380,000.
42
The following table presents, for the periods indicated, the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made. All average balances are monthly average balances. Non-accruing loans
have been included in the average loan amounts.
Year Ended September 30,
-----------------------------------------------------------------------------------
1997 1996 1995
-------------------------- --------------------------- ----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
------- ---- ---------- ------- ---- ---------- ------- ---- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net of deferred loan fees.. $51,303 $4,409 8.59% $49,222 $4,132 8.39% $48,708 $3,928 8.06%
Securities at amortized cost ................ 7,337 459 6.26 7,764 467 6.01 12,616 701 5.56
Interest-earning deposits.................... 1,113 37 3.32 2,298 134 5.83 3,130 187 5.97
-------- -------- -------- -------- -------- -------
Total earning assets....................... 59,753 4,905 8.21 59,284 4,733 7.98 64,454 4,816 7.47
------- ------- -------
Non-interest earning assets.................. 1,954 1,866 2,158
-------- -------- --------
Total assets............................... $61,707 $61,150 $66,612
======= ======= =======
Interest-earning liabilities:
Savings deposits............................. $12,503 401 3.21 $13,724 433 3.16 $13,655 413 3.02
Demand and NOW............................... 5,316 65 1.22 4,805 69 1.44 4,520 85 1.88
MMDA......................................... 10,676 437 4.09 7,287 247 3.39 7,353 232 3.16
Time deposits................................ 28,704 1,522 5.30 30,358 1,667 5.49 35,848 1,797 5.01
Borrowings................................... 391 22 5.63 6 -- 5.56 -- -- --
--------- -------- -------- --------- -------- --------
Total interest-bearing liabilities......... 57,590 2,447 4.25% 56,180 2,416 4.30% 61,376 2,527 4.12%
------- ------- -------
Non-interest-bearing liabilities............. 541 306 499
--------- -------- --------
Total liabilities.......................... 58,131 56,486 61,875
Total equity............................... 3,576 4,664 4,737
--------- -------- --------
Total liabilities and equity............... $61,707 $61,150 $66,612
======= ======= =======
Net interest/spread............................ $2,458 3.96% $2,317 3.68% $2,289 3.35%
====== ==== ====== ==== ====== ====
Margin......................................... 4.11% 3.91% 3.55%
==== ==== ====
Assets to liabilities.......................... 103.76% 105.53% 105.01%
====== ====== ======
43
The following table presents the weighted average contractual yields
earned on loans and securities, the combined weighted average yield on
interest-earning assets, the weighted average rates paid on deposits and
borrowings, the combined weighted average rate paid on interest-bearing
liabilities and the resultant interest rate spreads at the date indicated.
Weighted Average Yields Earned/Rates Paid
September 30, 1997
- --------------------------------------------------------------------------------
Weighted average yield on:
Loans receivable, net of deferred fees.................. 8.73%
Securities at amortized cost............................ 6.18
Combined weighed average yield on interest-earning
assets.............................................. 8.43
Weighted average rate paid on:
Savings ................................................ 3.24
Demand and NOW.......................................... 1.35
MMDA.................................................... 4.03
Time deposits........................................... 5.46
Borrowings.............................................. 5.80
Combined weighted average rate paid
on interest-bearing liabilities...................... 4.24
----
Spread..................................................... 4.19%
44
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and that due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Year Ended September 30, Year Ended September 30,
1997 vs. 1996 1996 vs. 1995
-------------------------------------- -----------------------------------
Increase Total Increase Total
(Decrease) Increase (Decrease) Increase
Due to (Decrease) Due to (Decrease)
------------------------ ---------- ----------------------- ----------
Volume Rate Volume Rate
------------- ---------- ----------- -----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net of deferred loan fees $ 178 $ 99 $277 $41 $163 $ 204
Securities at amortized cost............... (27) 19 (8) (288) 54 (234)
Interest-bearing deposits................... (44) (53) (97) (50) (3) (53)
----- ----- ----- ------ ------ ------
Total interest-earning assets............ 107 65 172 (297) 214 (83)
----- ---- ---- ----- ---- ------
Interest-bearing liabilities:
Savings deposits.......................... (39) 7 (32) 2 18 20
Demand and NOW............................ 7 (11) (4) 5 (21) (16)
MMDA...................................... 132 58 190 (2) 17 15
Time Deposits.............................. (89) (56) (145) (291) 161 (130)
Borrowings................................. 22 --- 22 --- --- ---
------ ----- ----- ------- ------ -------
Total interest-bearing liabilities....... 33 (2) 31 (286) 175 (111)
------ ----- ----- ----- ---- -----
Net interest income......................... $ 74 $ 67 $141 $(11) $ 39 $ 28
====== ==== ==== ==== ===== =====
45
Liquidity and Capital Funds
The Association's primary sources of funds are deposits, principal and
interest payments on loans and securities, and to a lesser extent, borrowings.
While maturities and scheduled amortization of loans and securities provide an
indication of the timing of the receipt of funds, other sources of funds such as
loan prepayments and deposit inflows are less predictable due to the effects of
changes in interest rates, economic conditions and competition.
Liquidity may be adversely affected by the unexpected deposit outflows,
higher interest rates paid by competitors and similar matters. Further, the
disparity in insurance premiums as described herein could result in the
Association losing deposits to BIF members that have lower cost of funds and
therefore are able to pay higher rates of interest on deposits. See
"Regulation." Management monitors projected liquidity needs and determines the
level desirable, based in part on the Association's commitments to make loans
and management's assessment of the Association's ability to generate funds.
The primary investing activities of the Association are the origination
of real estate and other loans and the purchase of securities. During the years
ended September 30, 1997, 1996 and 1995, the Association's disbursements for
loan originations totaled $8.9 million, $8.8 million and $10.2 million,
respectively. The Association did not purchase any securities during the year
ended September 30, 1997. For the years ended September 30, 1996 and 1995,
purchases of securities totaled $4.6 million and $11.0 million, respectively.
These activities were funded primarily by net deposit inflows, borrowings and
principal repayments on loans and securities.
For years ended September 30, 1997, 1996 and 1995, net deposit inflows
(outflows) (including the effect of interest credited) were $401,000, ($2.2)
million and ($6.8) million. The increase in fiscal 1997 reflects the net effect
of a $1.1 million and $26,000 decline in savings and demand and NOW accounts,
respectively, offset by increases of $558,000 and $1.0 million for money market
accounts and time deposits, respectively. The decline in savings accounts is the
result of a general increase in market interest rates which made passbook
savings less attractive investment alternatives for the Association's customers.
Conversely, the increased market interest rates made deposit products, such as
money market accounts and shorter term time deposits, more attractive to the
Association's customers. During fiscal 1996, the net decrease of $2.2 million in
deposits was primarily driven by management's attempts to reduce the dependence
of funding with time deposits. During fiscal 1996, time deposits declined $6.9
million while non-time deposits increased $4.8 million. The non-time deposit
increase in fiscal 1996 was primarily the result of the introduction of new
deposit products such as a tiered money market account. During fiscal 1995,
deposit levels declined overall by $6.8 million. The decline was the result of
efforts by management to price deposit products to reduce overall cost of funds.
Short-term borrowings under repurchase agreements were $1.3 million at
September 30, 1997. The repurchase agreements were entered into to provide a
less expensive short-term funding source to meet immediate liquidity needs.
There were no outstanding repurchase agreement balances at September 30, 1996
and 1995.
46
The Association may borrow funds from the FHLB of New York subject to
certain limitations. Based on the level of qualifying collateral available to
secure advances at September 30, 1997, the Association's borrowing limit from
the FHLB of New York was approximately $9.2 million, with no advances
outstanding at that date. Proceeds from FHLB advances were $300,000 at September
30, 1996. There were no FHLB borrowings made in fiscal year 1995 (See note 7 of
the financial statements.).
The Association is required by OTS regulations to maintain an average
daily balance of liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings. The minimum required liquidity ratio is
currently 4.0%. The liquidity requirement may be changed from time to time by
the OTS to any amount within the range of 4% to 10%. The Association's liquidity
ratio at September 30, 1997 was 10.3%.
The Association's most liquid assets are cash and cash equivalents,
which include interest-bearing deposits and short-term highly liquid investments
(such as federal funds) with original maturities of less than three months that
are readily convertible to known amounts of cash. The level of these assets is
dependent on the Association's operating, financing and investing activities
during any given period. At September 30, 1997, 1996 and 1995, cash and cash
equivalents totaled $1.9 million, $1.2 million and $3.2 million, respectively.
The Association is required to maintain a compensating balance of
$500,000 at one of its correspondent banks at September 30, 1997. There were no
compensating balance requirements in prior fiscal years.
At September 30, 1997, the Association had outstanding loan origination
commitments, undisbursed construction loans in process and unadvanced lines of
credit of $3.1 million. The Association anticipates that it will have sufficient
funds available to meet its current loan origination and other commitments. Time
deposits scheduled to mature in one year or less from September 30, 1997 totaled
$23.3 million. Based on the Association's most recent experience and pricing
strategy, management believes that a significant portion of such deposits will
remain with the Association.
The Association is subject to federal regulations that impose certain
minimum capital requirements. At September 30, 1997, the Association had
tangible and core capital of $3.3 million compared to required levels of
$900,000 and $1.8 million, respectively. Total risk-based capital was $3.8
million compared to a required level of $3.0 million. See "Historical and Pro
Forma Capital Compliance" for a discussion of the Association's compliance with
OTS capital requirements.
Year 2000
The Association is aware of the issues associated with the programming
code in existing computer systems as the millennium (year 2000) approaches. The
"year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two digit year
value to 00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
47
Since the Association recently converted to a year 2000 compliant core
system, the Association does not anticipate significant additional year 2000
costs. It is anticipated that any additional reprogramming efforts will be
complete by December 31, 1998, allowing adequate time for testing. To date,
confirmations have been received from the Company's primary processing vendors
that plans are being developed to address processing of transactions in the year
2000.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
generally require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of the Association is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
Impact of New Accounting Standards
FASB Statement on Accounting for Mortgage Servicing Rights. In May,
1995, FASB issued SFAS No. 122, which became effective on a prospective basis,
for fiscal years beginning after December 31, 1995. This Statement requires
mortgage banking enterprises to recognize as separate assets rights to service
mortgage loans, however those servicing rights are acquired. When mortgage
loans, acquired either through a purchase transaction or by origination, are
sold or securitized with servicing rights retained, an allocation of the total
cost of the mortgage loans should be made between the mortgage servicing rights
and the loans based upon their relative fair values. In Subsequent periods, all
mortgage servicing rights capitalized must be periodically evaluated for
impairment based on the fair value of those rights, and any impairments
recognized through a valuation allowance. The impact of adopting this Statement
was not material to the Association's financial statements. Effective January 1,
1997, this Statement was superseded by SFAS No. 125, which is discussed below.
FASB Statement on Accounting for Stock Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB encouraged all entities to adopt the fair value
based method, however it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Under the intrinsic value based method, compensation cost is the
excess of the market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue the use 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. The Association expects to utilize the "intrinsic value based method"
as
48
prescribed by APB Opinion No. 25. Accordingly, the impact of adopting this
Statement will not be material to the Association's financial statements.
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. In June 1996, FASB issued SFAS No.
125, which became effective on a prospective basis for fiscal years beginning
after December 31, 1996. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends the "available for sale" and
"trading" approach of SFAS No. 115 to non-security financial assets that can be
contractually prepaid or otherwise settled in such a way that the holder of the
asset would not recover substantially all of its recorded investment. In
addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from being
classified as held to maturity if the security can be prepaid or settled in such
a manner that the holder of the security would not recover substantially all of
its recorded investment. The extension of the SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 are effective
for financial assets held on or acquired after January 1, 1997. Effective
January 1, 1997, SFAS No. 125 superseded SFAS No. 122, which is discussed above.
The impact of adopting this Statement was not material to the Association's
financial statements.
In November 1993, the American Institute of Certified Public
Accountants ("AICPA"), issued SOP 93-6 Employers' Accounting for Employee Stock
Ownership Plans. SOP 93-6 addresses accounting for shares of stock issued to
employees by an employee stock ownership plan. SOP 93-6 requires that the
employer record compensation in an amount equal to the fair value of the shares
committed to be released from the ESOP to employees. SOP 93-6 is effective for
fiscal years beginning after December 15, 1993 and relates to shares purchased
by an ESOP after December 31, 1992. Management has determined that, assuming the
Common Stock appreciates over time, the adoption of SOP 93-6 will likely
increase compensation expense relative to the ESOP, as compared with prior
guidance that required recognition of compensation expense based on the cost of
the shares acquired by the ESOP. The amount of any such increase, however,
cannot be determined at this time because the expense will be based on the fair
value of the shares committed to be released to employees, which amount is not
determinable.
FASB Statement on Earnings Per Share. In February 1997, the FASB issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for
computing and presenting earnings per share and applies to all entities with
publicly held common stock or potential common stock. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. Management does not believe that the impact of
adopting this Statement will be material to the Association's financial
statements.
FASB Statement on Capital Structure. In February 1997, the FASB issued
SFAS No. 129, "Disclosure of Information About Capital Structure" which
establishes standards for disclosure about a company's capital structure. In
accordance with SFAS No. 129, companies will be required to provide in the
financial statements a complete description of all aspects of their capital
structure, including call and put features, redemption requirements and
conversion options. The disclosure required by SFAS No. 129 are for financial
statements for periods ending after December 15, 1997.
49
Management does not believe that the impact of adopting this Statement will be
material to the Association's financial statements.
FASB Statement on Comprehensive Income. In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 states that
comprehensive income includes the reported net income of a company adjusted for
items that are currently accounted for as direct entries to equity, such as the
mark to market adjustment on securities available for sale, foreign currency
items and minimum pension liability adjustments. This statement is effective for
fiscal years beginning after December 15, 1997. Management does not believe that
the impact of adopting this Statement will be material to the Association's
financial statements.
FASB Statement on Segment Reporting In June 1997, the FASB issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 131 establishes standards for reporting by public companies about
operating segments of their business. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement is effective for periods beginning after December 15,
1997. Management does not believe that the impact of adopting this Statement
will be material to the Association's financial statements.
BUSINESS
General
As a community-oriented financial institution, Gloversville Federal
seeks to serve the financial needs of the communities in its market area.
Gloversville Federal's business involves attracting deposits from the general
public and using such deposits, together with other funds, to originate
primarily one- to four-family residential mortgage loans, and, to a lesser
extent, multi-family and commercial real estate, commercial business, home
equity and other loans in its market area. The Association also invests in
mortgage-backed and other securities and other permissible investments. See
"Risk Factors."
The Association offers a variety of accounts having a range of interest
rates and terms. The Association's deposits include passbook, statement savings,
demand and NOW accounts, money market accounts and time deposit accounts with
terms of six months to five years. The Association solicits deposits only in its
primary market area.
Market Area
The Association conducts business through its main office located at 52
North Main Street, Gloversville, New York and a branch office located at 295
Broadway, Saratoga Springs, New York. The Association's market area for deposits
consists primarily of Fulton and Saratoga Counties. The Association's primary
market area for lending activities consist of communities within Fulton and
Saratoga Counties, as well as portions of Hamilton and Montgomery Counties, New
York.
50
Gloversville, New York is located in Fulton County approximately 50
miles northwest of Albany, New York. Gloversville and the surrounding
communities include a population of low- and moderate-income neighborhoods.
Gloversville has undergone significant economic hardships as the major leather
industries that were once the focal point of industrial strength for the region
have relocated to other parts of the world. Gloversville, with its neighboring
city Johnstown, have recently experienced some revitalization as a number of
manufacturing entities have opened plants in the area, capitalizing on the
region's lower labor and operating costs. The housing in the Gloversville area
consists mainly of one- to four-family residences within the city limits.
Outside Gloversville, in the rural areas leading into the Adirondack Mountains,
there are many nonconforming properties which are generally used as summer homes
and camps. Real estate values in much of these areas have experienced a
significant decline in recent years.
Saratoga Springs, New York is located in Saratoga County approximately
30 miles north of Albany, New York. Saratoga Springs and the surrounding
communities include a diverse population of low income neighborhoods, as well as
middle class and more affluent neighborhoods. The housing market has been
relatively strong in much of Saratoga County. This part of the Association's
market also includes commercial areas supporting manufacturing, industrial and
professional service companies.
Lending Activities
General. Historically, the Association originated 30-year, fixed-rate
mortgage loans secured by one- to four-family residences. In fiscal 1995, the
Association began to diversify its portfolio by more actively originating
multi-family and commercial real estate and commercial business loans.
Currently, all loans originated by the Association are held as portfolio loans.
At September 30, 1997, the Association's loans receivable, net, totaled $49.5
million. See "- Origination of Loans" and "Use of Proceeds."
Under federal law, the aggregate amount of loans that the Association
is permitted to make to any one borrower is generally limited to the greater of
15% of unimpaired capital and surplus (25% if the security for such loan has a
"readily ascertainable" value or 30% for certain residential development loans)
or $500,000. At September 30, 1997, based on the above, the Association's
regulatory loans-to-one borrower limit was approximately $737,000. On the same
date, the Association had no borrowers with outstanding balances in excess of
this amount. As of September 30, 1997, the largest dollar amount outstanding or
committed to be lent to one borrower, or group of related borrowers, related to
a commercial real estate loan totaling $539,000 secured by a warehouse located
in Saratoga County, and food preparation and related equipment used by the
borrower. The Association's next largest loan as of September 30, 1997 totaled
$527,000 and was secured by an office building located in Saratoga Springs, New
York. At September 30, 1997, both of these loans were performing in accordance
with their terms. The Association has obtained personal guarantees (or direct
personal liability) from the principals in both these loans. As of the same
date, there were 11 other multi-family and commercial real estate or commercial
business loans with carrying values in excess of $300,000.
The Association has incurred significant problems in recent years on
its residential lending portfolio, in part due to inadequate loan underwriting
and monitoring procedures and policies. In
51
order to address these issues, the Board of Directors revised the Association's
procedures and policies and hired new personnel to perform such functions. The
Association has also undertaken a review of its residential loan portfolio in
order to determine the full extent of the problems and is currently taking
action to address and work out these problems. All of the Association's current
lending is subject to its revised written underwriting standards and to loan
origination procedures.
Decisions on loan applications are made on the basis of detailed
applications and property valuations (consistent with the Association's
appraisal policy) by independent appraisers. Under the Association's loan
policy, the individual processing an application is responsible for ensuring
that all documentation is obtained prior to the submission of the application to
a loan officer for approval. In addition, the loan officer verifies that the
application meets the Association's underwriting guidelines described below.
Also, each application file is reviewed to assure its accuracy and completeness.
The President and the Vice President of Lending have been given lending
authority, and their lending limit authority has been defined, by the Board of
Directors of the Association. The lending authority limits are applied based on
aggregate loan balances due the Association, including any pending loan
requests. The approval of the Association's Board of Directors is required for
any loans where aggregate borrowings of the subject entity or individual exceed
$250,000. Loan Committee approval is required for all loans where the aggregate
borrowings of the subject entity or individual exceed $150,000 but are less than
$250,000. The Loan Committee includes the President and Chief Executive Officer,
the Vice President of Lending, two outside Board members and two other
Association officers.
For multi-family and commercial real estate and commercial business
loans, the President and Vice President of Lending each have the authority to
approve secured loans of up to $100,000 and unsecured loans of up to $50,000.
Joint approval by the President and Vice President of Lending is required for
multi-family and commercial real estate and commercial business loans greater
than $100,000 ($50,000 for unsecured loans) but not exceeding $150,000.
The President or the Vice President of Lending have the authority to
approve residential mortgages of up to $150,000. The President also has the
authority to approve secured consumer loans up to $150,000 and unsecured
consumer loans of up to $50,000. The Vice President of Lending has the authority
to approve secured consumer loans of up to $50,000 and unsecured consumer loans
of up to $10,000.
The Association requires title insurance on its mortgage loans, as well
as fire and extended coverage casualty insurance in amounts at least equal to
the principal amount of the loan or the value of improvements on the property,
depending on the type of loan. The Association also requires flood insurance to
protect the property securing its interest when the property is located in a
flood plain.
Since May 1995, the Association has required escrow for property taxes,
insurance and flood insurance (if required) on its one- to four-family mortgage
loans and multi-family and commercial real estate loans.
52
The following table shows the composition of the Association's loan
portfolio by loan type at the dates indicated.
September 30,
--------------------------------------------------------------------------
1997 1996 1995
----------------------- ------------------------ -------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family....................... $36,891 71.92% $40,262 78.80% $42,578 86.41%
Multi-family and commercial............... 7,950 15.50 4,635 9.07 1,712 3.47
One- to four-family construction.......... 539 1.05 938 1.84 742 1.51
------- -------- -------- -------- -------- --------
Total real estate loans................ 45,380 88.47 45,835 89.71 45,032 91.39
------ -------- ------ ------- ------ ------
Other loans:
Commercial business....................... 1,422 2.77 1,230 2.41 1,052 2.14
Home equity............................... 3,379 6.59 2,869 5.62 2,265 4.60
Other consumer............................ 1,111 2.17 1,154 2.26 920 1.87
------- -------- -------- -------- --------- --------
Total loans............................ 5,912 11.53 5,253 10.29 4,237 8.61
------- ------- -------- ------- -------- --------
Gross loans 51,292 100.00% 51,088 100.00% 49,269 100.00%
====== ====== ======
Less:
Net deferred loan fees.................... (153) (201) (251)
Allowance for loan losses................. (1,613) (1,251) (779)
-------- -------- --------
Total loans receivable, net............. $49,526 $49,636 $48,239
======= ======= =======
September 30,
-----------------------------------------------
1994 1993
----------------------- -----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family............ $42,973 91.89% $40,633 96.64%
Multi-family and commercial.... 878 1.88 -- --
One- to four-family
construction................. 701 1.50 139 0.33
-------- -------- --------- --------
Total real estate loans..... 44,552 95.27 40,772 96.97
------ ------- ------- -------
Other loans:
Commercial business............ -- -- -- --
Home equity.................... 1,352 2.89 -- --
Other consumer................. 861 1.84 1,276 3.03
-------- -------- -------- --------
Total loans................. 2,213 4.73 1,276 3.03
------- -------- -------- --------
Gross loans 46,765 100.00% 42,048 100.00%
====== ======
Less:
Net deferred loan fees......... (264) (277)
Allowance for loan losses...... (856) (875)
-------- --------
Total loans receivable, net.. $45,645 $40,896
======= =======
53
The following table shows the composition of the Association's loan
portfolio by fixed and adjustable-rate at the dates indicated.
September 30,
-----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ------------------------ ------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family.................. $31,732 61.86% $34,929 68.37% $37,356 75.82%
Multi-family and commercial.......... 1,206 2.35 924 1.81 1,527 3.10
One- to four-family construction..... 392 0.76 423 0.83 293 0.59
--------- -------- --------- -------- --------- --------
Total real estate loans............ 33,330 64.97 36,276 71.01 39,176 79.51
Commercial business.................... 283 0.55 23 0.05 -- --
Home equity............................ 1,244 2.43 645 1.26 14 0.03
Other consumer......................... 1,056 2.06 1,058 2.07 916 1.86
-------- -------- -------- -------- --------- --------
Total fixed-rate loans............. 35,913 70.01 38,002 74.39 40,106 81.40
Adjustable-Rate Loans
Real estate:
One-to four-family................... 5,159 10.06 5,333 10.44 5,222 10.60
Multi-family and commercial.......... 6,744 13.15 3,711 7.26 1,052 2.14
One- to four-family construction..... 147 0.29 515 1.01 449 0.91
--------- -------- --------- -------- --------- --------
Total real estate loans.......... 12,050 23.50 9,559 18.71 6,723 13.65
Commercial business.................... 1,139 2.22 1,207 2.36 185 0.38
Home equity............................ 2,135 4.16 2,224 4.35 2,251 4.56
Other consumer......................... 55 0.11 96 0.19 4 0.01
---------- -------- --------- ------- ---------- ---------
Total adjustable rate loans 15,379 29.99 13,086 25.61 9,163 18.60
Gross loans 51,292 100.00% 51,088 100.00% 49,269 100.00%
====== ====== ======
Less:
Net deferred loan fees............... (153) (201) (251)
Allowance for loan losses............ (1,613) (1,251) (779)
-------- --------- ---------
Total loans receivable, net....... $49,526 $49,636 $48,239
======= ======= =======
September 30,
-----------------------------------------------
1994 1993
------------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family............ $39,632 84.75% $40,633 96.64%
Multi-family and commercial.... 878 1.88 -- --
One- to four-family
construction................. 485 1.04 139 0.33
---------- -------- --------- --------
Total real estate loans...... 40,995 87.67 40,772 96.97
Commercial business.............. -- -- -- --
Home equity...................... -- -- -- --
Other consumer................... 861 1.84 1,276 3.03
--------- -------- -------- --------
Total fixed-rate loans....... 41,856 89.51 42,048 100.00%
Adjustable-Rate Loans
Real estate:
One-to four-family............. 3,341 7.14 -- --
Multi-family and commercial.... -- -- -- --
One- to four-family
construction................. 216 0.46 -- --
--------- -------- ---------- --------
Total real estate loans.... 3,557 7.60 -- --
Commercial business.............. -- -- -- --
Home equity...................... 1,352 2.89 -- --
Other consumer................... -- -- -- --
---------- --------- ---------- --------
Total adjustable rate loans 4,909 10.49 -- --
Gross loans 46,765 100.00% 42,048 100.00%
====== ======
Less:
Net deferred loan fees......... (264) (277)
Allowance for loan losses...... (856) (875)
--------- ---------
Total loans receivable, net. $45,645 $40,896
======= =======
54
The following schedule illustrates the interest rate sensitivity of the
Association's loan portfolio at September 30, 1997. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contracts are due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
Real Estate
--------------------------------------------------------------
Multi-family One- to four-family Home Equity and
One- to four-family and Commercial Construction Commercial Business Other Consumer
------------------- ------------------- ------------------ ------------------- ------------------
Due During Weighted Weighted Weighted Weighted Weighted
Years Ending Average Average Average Average Average
September 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------------- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
1998................. $ 710 8.59% $ -- -- $539 8.34% $ 173 9.15% $ 184 7.88%
1999................. 732 7.18 -- -- -- -- 367 9.76 127 10.26
2000................. 237 9.45 -- -- -- -- 56 10.00 192 10.46
2001 to 2002......... 1,072 8.79 11 8.50 -- -- 81 10.50 427 8.94
2003 to 2007......... 3,959 8.81 2,278 9.87 -- -- 656 9.86 420 8.77
2008 to 2022......... 22,158 8.51 5,661 9.42 -- -- 14 10.50 3,119 9.11
2023 and following... 8,023 8.09 -- -- -- -- 75 10.16 21 7.23
-------- --------- ------- -------- --------
Total............. $36,891 $7,950 $539 $1,422 $4,490
======= ====== ==== ====== ======
The total amount of loans due after September 30, 1997 which have
predetermined interest rates is $35.9 million while the total amount of loans
due after such dates which have floating or adjustable interest rates is $15.4
million.
55
One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Association's lending program has historically been the origination of loans
secured by mortgages on owner-occupied one- to four-family residences. At
September 30, 1997, $36.9 million, or 71.9%, of the Association's total loan
portfolio consisted of mortgage loans secured by one- to four- family
residences. Until recently, the Association focused its residential lending
activities on fixed rate loans. with 30 year terms. Beginning in fiscal 1994,
the Association began to originate adjustable rate loans. Substantially all of
the Association's one- to four-family residential mortgage originations are
secured by properties located in its market area. All mortgage loans currently
originated by the Association are retained and serviced by it.
The Association currently offers conventional fixed-rate mortgage loans
with maturities up to 30 years. Interest rates and fees charged on these
fixed-rate loans are established on a regular basis according to market
conditions. The Association underwrites its fixed-rate one- to four-family loans
in accordance with Federal Home Loan Mortgage Corporation ("FHLMC") and Federal
National Mortgage Association ("FNMA") standards. As of September 30, 1997, the
Association had $31.7 million of fixed rate loans secured by one- to four-family
residential properties. During fiscal 1997, the Association began to accept
fixed and adjustable rate Federal Home Authority ("FHA") guaranteed loan
applications; however, at September 30, 1997, the Association had no FHA loans
outstanding. See "- Originations of Loans."
The Association also offers ARMs which carry interest rates which
adjust annually at a margin (generally 275 basis points) over the yield on the
One Year Average Monthly U.S. Treasury Constant Maturity Index ("one year CMT").
Such loans may carry terms to maturity of up to 30 years. The ARM loans
currently offered by the Association provide for up to 200 basis point annual
interest rate change cap and a lifetime cap generally 600 basis points over the
initial rate. Initial interest rates offered on the Association's ARMs may be
100 to 350 basis points below the fully indexed rate, although borrowers are
generally qualified at the fully indexed rate. As a result, the risk of default
on these loans may increase as interest rates increase. In addition, the
Association's ARMs typically do not adjust below the initial rate. At September
30, 1997, one- to four-family ARMs totaled $5.2 million or 10.1% of the
Association's total loan portfolio.
The Association also originates loans secured by non-conforming second
homes and vacation homes. The rates charged for these loans are generally higher
than that offered for conventional one-to four-family loans. Generally, the same
underwriting criteria is used when evaluating applications made for mortgages on
second homes and vacation homes as used for applications taken for mortgages on
one- to four-family residences.
Gloversville Federal will generally lend up to 97% of the lesser of the
sales price or appraised value of the security property on owner occupied one-
to four-family loans. For loans exceeding an 80% loan-to-value ratio, the
Association requires private mortgage insurance in amounts intended to reduce
the Association's exposure to 80% or less. Borrowers are required to purchase
the mortgage insurance protection provided by the FHA for FHA mortgages where
loan-to-value ratios exceed 80%. The maximum loan-to-value ratio for non-owner
occupied one-to four-family residences is 75% (65% where there is a cash out
refinancing). For mortgages on second homes and vacation homes, the
loan-to-value ratio cannot exceed 80% for one-family residences and 75% for two-
to four-family residences. Mortgages on non-owner occupied second homes and
vacation
56
homes cannot exceed 70% loan-to-value and non-owner occupied cash out refinances
for non-conforming second homes and vacation homes cannot exceed 50%
loan-to-value.
In underwriting one- to four-family residential real estate loans, the
Association currently evaluates the borrower's ability to make principal,
interest, and escrow payments, and the value of the property that will secure
the loan.
Residential loans do not currently include prepayment penalties, are
non-assumable and do not produce negative amortization. Although the Association
currently originates mortgage loans only for its portfolio, the Association's
loans are now generally underwritten according to secondary market standards.
While the Association seeks to originate most of its one- to
four-family residential loans in amounts which are less than or equal to the
applicable FHLMC maximum, the Association may, on an exception basis, make one-
to four-family residential loans in amounts in excess of such maximum.
The Association's residential mortgage loans customarily include
due-on-sale clauses giving the Association the right to declare the loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the property subject to the mortgage.
Multi-family and Commercial Real Estate Lending. In order to increase
the yield of its loan portfolio and to complement residential lending
opportunities, since fiscal 1995, the Association has significantly increased
its originations of permanent multi-family and commercial real estate loans
secured by properties in its primary market area. At September 30, 1997, the
Association had multi-family and commercial real estate loans totaling $8.0
million, or 15.5% of the Association's total loan portfolio. See Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
Liability Management."
The Association's multi-family and commercial real estate loan
portfolio includes loans secured by apartment buildings, office buildings,
warehouses and other income producing properties located in its market area. In
addition, at September 30, 1997, the Association had $891,000 of commercial
construction loans.
The Association's multi-family and commercial real estate loans
generally carry a maximum term of 20 years and, more often than not, have
interest rates which are fixed for three to five years and adjust periodically
thereafter.
The Association's multi-family and commercial real estate loans are
generally made in amounts up to 75% of the lesser of the appraised value or the
purchase price of the property, with a projected debt service coverage ratio
generally of at least 120%. The Association's current multi-family and
commercial real estate loan originations generally include operating covenants
requiring the borrower to maintain specified debt coverage, liquidity and other
ratios, although most multi-family and commercial real estate loans originated
in prior years did not have such operating covenants, which could reduce the
Association's leverage in the event of delinquency.
57
Appraisals on properties securing multi-family and commercial real
estate loans are performed by independent appraisers designated by the
Association at the time the loan is made. All appraisals on multi-family and
commercial real estate loans are reviewed by the Association's management. In
addition, the Association's underwriting procedures require verification of the
borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property. Where
feasible, the Association seeks to obtain personal guarantees on these loans and
key man life insurance on individuals critical to the success of the borrower's
business.
58
Set forth below is a summary of the Association's multi-family and
commercial real estate loans which had an outstanding principal balance in
excess of $300,000 at September 30, 1997.
Date of Collateral Interest Rate Maturity Personal Balance at
Origination Description Terms Date Guarantee September 30, 1997 Status
----------- ----------- ----- ---- --------- ------------------ ------
July 1996 Warehouse located Interest rate July 2016 Yes 538,955 Current; $250,000 second lien on
in Saratoga County. adjusts every same collateral.
five years.
July 1996 Office building Interest rate July 2016 Yes 526,889 Current; new business commenced
located in Saratoga adjusts every March 1997; building fully
County. year. occupied with assignment of leases
to Association.
April 1997 Land located in Interest rate April 2017 Yes 448,848 Current; $760,000 mortgage on
Albany County. adjusts every building subordinated to
year. Association loan; direct
assignment of monthly rental
income, which is double amount
required for debt service.
July 1995 Trooper barracks in Interest rate July 2010 Yes 438,625 Current; loan represents a
Saratoga County adjusts every refinance of subject properties to
and 12 unit five years fund new venture which is not
residential complex subject to the Association's lien.
in Saratoga County
October 1996 Restaurant/marina Interest rate October 2008 Yes 432,179 Current; borrower prepaying
located in Fulton adjusts every principle; exclusive location on
County five years major lake.
June 1997 Warehouse/office Fixed interest Construction: Yes 411,000 Current; SBA second mortgage
located in Saratoga during June 1998 anticipated to reduce Association's
County and construction; Permanent: exposure $205,000 by the end of
warehouse in interest rate June 2018 March 1998.
Albany county adjusts every
three years,
thereafter
April 1996 3 story, 16 unit Interest rate April 2016 Yes 390,394 Current; "Of concern" due to
apartment complex adjusts every inadequate cash flow by subject
in Saratoga County five years property.
May 1996 Newly renovated Fixed Interest Construction: Yes 383,786 Current, "Of concern" due to
takeout restaurant during May 1997 collateral value concern and new
in Saratoga County construction, Permanent: venture; SBA second mortgage
interest rate May 2017 anticipated to reduce Association's
adjusts every exposure $160,000 by the end of
year thereafter March 1998.
January 1971 25+ residential Interest rate April 2003 No 363,200 Repaid in December 1997.
rental units located fixed
in Saratoga County
April 1994 Three residential Interest rate is April 2009 Yes 339,922 Current; full occupancy at
rental units located fixed September 30, 1997.
in Saratoga County
59
Multi-family and commercial real estate loans are generally believed to
present a higher level of risk than loans secured by one- to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions (which are not particularly favorable in
much of the Association's market areas) 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 and commercial real
estate is dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed), the borrower's ability to repay the loan may be
impaired. In addition, the Association's multi-family and commercial real estate
and commercial business loans, particularly those originated when the
Association first expanded this product line, may be subject to additional risks
related to the Association's relative inexperience with this type of lending.
While the Association has not experienced any significant losses on its
multi-family and commercial real estate loans in recent years, this portfolio is
relatively unseasoned and no assurance can be given that it will continue to
perform as it has, especially based on the Association's intention to continue
to emphasize growth in this portfolio in the future. As a result of the above as
well as financial concerns with respect to the borrowers, the Association rated
$1.1 million of its multi-family and commercial real estate loans as "of
concern" as of September 30, 1997. See " - Market Area."
One- to Four-Family Residential Construction Lending. The Association
offers residential single family construction loans to persons who intend to
occupy the property upon completion of construction. Upon completion of
construction, these loans are automatically converted into permanent residential
mortgage loans and are classified as such. The proceeds of the construction loan
are advanced in stages on a percentage of completion basis as construction
progresses. The loans generally provide for a construction period of not more
than twelve months during which the borrower pays interest only. Loan terms and
underwriting criteria for construction loans are consistent with those for one-
to four-family residential mortgage loans. In recognition of the risks involved
with such loans, the Association carefully monitors construction through regular
inspections and the borrower must qualify for the permanent mortgage loan before
the construction loan is made. At September 30, 1997, the Association had
$539,000 in construction loans outstanding, or 1.1% of gross loans. There were
no nonperforming construction loans at September 30, 1997.
Construction lending is generally considered to involve a higher level
of credit risk than permanent one- to four-family residential lending. The
nature of these loans is such that they are more difficult to evaluate and
monitor. The Association's risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value upon
completion of the project and the essential cost (including interest) of the
project. If the cost estimate proves to be inaccurate, the Association may be
required to advance funds beyond the amount originally committed in order to
permit completion of the project.
Commercial Business Lending. Subject to the restrictions contained in
federal laws and regulations, the Association is authorized to make secured and
unsecured commercial business loans. At September 30, 1997, $1.4 million, or
2.8%, of the Association's total loan portfolio consisted of commercial business
loans. The Association has recently begun to emphasize commercial business
60
lending to qualified individuals as part of its policy of servicing customers
and consolidating banking relationships, and also to further its asset/liability
management goals.
The Association's commercial business loans are generally structured as
short-term time notes and term loans. Time notes generally have terms of less
than one year to accommodate seasonal peaks and valleys in the borrower's
business cycle. Commercial business term loans generally have terms of ten years
or less and, more often than not, have adjustable interest rates.
The Association's commercial business loans generally are secured by
equipment, machinery or other corporate assets including real estate and
inventory. Like the multi-family and commercial real estate loans discussed
above, the Association's current commercial business loan originations generally
have covenants requiring the borrowers to maintain certain financial ratios,
although many loans originated in past years do not have such covenants, which
could reduce the Association's leverage in the event of a credit deterioration.
In addition, the Association generally obtains personal guarantees from the
principals of the borrower with respect to all commercial business loans.
Generally, the Association's commercial business lending has been limited to
borrowers headquartered, or doing business, in the Association's market area.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself, which in turn may be dependent on the local
economy, which is currently not performing at a high level. Further, the
collateral securing the loans, if any, may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business. In addition, commercial business lending generally requires
substantially greater oversight efforts compared to residential real estate
lending. At September 30, 1997, all commercial business loans were performing
and none were rated "of concern."
Set forth below is a description of the Association's only commercial
business loan which had an outstanding principal balance in excess of $300,000
at September 30, 1997.
Date of Collateral Interest Rate Maturity Personal Balance at
Origination Description Terms Date Guarantee September 30, 1997 Status
- ----------- ----------- ----- ---- --------- ------------------ ------
May 1997 11 fully equipped Interest adjusts May 1998 Yes $352,198 Current; insurance on vehicles
1998 29-foot daily based on with Association as beneficiary;
Coachman established quarterly inspections performed
Pathfinder RVs index on collateral by Association
Consumer Lending. Management believes that offering consumer loan
products helps to expand the Association's customer base and to create stronger
ties to its existing customer base. In addition, because consumer loans
generally have shorter terms to maturity and carry higher rates of interest than
do residential mortgage loans, they can be valuable asset/liability management
tools. The Association originates a variety of different types of consumer
loans, including home equity
61
loans and lines of credit, automobile and deposit account loans for household
and personal purposes. The Association has focused its recent consumer lending
activities on home equity lending. At September 30, 1997 consumer loans totaled
$4.4 million or 8.7% of total loans outstanding.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The Association's
consumer loans are made with fixed or adjustable interest rates, with terms of
up to 25 years.
The Association has offered home equity loans since fiscal year 1994.
Home equity loans are secured by second mortgages on one- to four-family
owner-occupied residences. The Association's home equity loans are written so
that the total commitment amount, when combined with the balance of the first
mortgage lien, may not exceed 80% of the appraised value of the property or
$50,000. These loans are written with fixed terms of up to 15 years and carry
fixed interest rates. Home equity lines of credit ("HELOCS") are written so that
the total commitment amount, when combined with the balance of the first
mortgage lien, may not exceed 80% of the appraised value of the property, with a
maximum of $100,000. HELOCs are written for terms up to 25 years (with the first
5 year period requiring only interest payments and the last 20 year period being
fully amortized) and carry a prime-based floating rate of interest after the
first year. At September 30, 1997, the Association's home equity loans and
HELOCS totaled $3.4 million, or 6.6% of the Association's total loan portfolio.
The Association also makes short-term, fixed-rate and adjustable-rate
consumer loans either unsecured or secured by savings and time accounts,
automobiles, or other consumer assets. These loans generally have an average
term of not more than five years and have interest rates higher than mortgage
loans. The shorter terms to maturity are helpful in managing the Association's
interest rate risk.
The underwriting standards employed by the Association for consumer
loans include a determination of the applicant's payment history on other debts
and ability to meet existing obligations and payments on the proposed loan.
Although creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount. Consumer loans may entail greater
credit risk than do residential mortgage loans, particularly in the case of
consumer loans which are unsecured or are secured by rapidly depreciable assets,
such as automobiles. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan balance as a result of the greater likelihood of damage, loss or
depreciation. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans.
Originations of Loans
The lending activities of the Association are subject to written,
non-discriminatory, underwriting standards and loan origination procedures
established by the Association's Board of Directors and management. Loan
originations come from a number of sources. Residential loan
62
originations can be attributed to depositors, retail customers, telephone
inquiries, advertising, the efforts of the Association's loan officers and
referrals from other borrowers, real estate brokers and builders. The
Association originates loans through its own efforts and does not compensate
mortgage brokers, mortgage bankers or other loan finders. However the
Association frequently obtains multi-family, commercial real estate and
commercial business loans through commercial loan brokers paid by the borrower.
Beginning with fiscal 1998, an Association employee will be assigned the sole
task of originating residential mortgages and home equity loans.
All loans held in portfolio at September 30, 1997 were originated by
the Association. The Association does not purchase whole loans. There have been
no loan sales made by the Association, and it is the Association's intention
that all loans originated be held in portfolio.
While the Association originates both fixed and adjustable rate loans,
its ability to originate loans is dependent upon the relative customer demand
for loans in its market. Demand is affected by the local economy and the
interest rate environment. From time to time, in order to supplement loan demand
in the Association's market area, the Association has acquired mortgage-backed
securities which are held in the "available for sale" portfolio. See "-
Investment Activities -Mortgage-Backed Securities" and Note 2 of the Notes to
Financial Statements.
63
The following table shows the loan origination and repayment activities
of the Association for the periods indicated.
Year Ended September 30,
-------------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Originations by type:
Fixed rate:
Real estate: One- to four-family......................... $1,577 $2,140 $1,900
Multi-family and commercial................. 978 955 923
One- to four-family construction............ 683 428 447
Non-real estate:Commercial business......................... 436 76 218
Home equity................................. 215 865 14
Other consumer.............................. 348 449 257
------- ------- ---------
Total fixed rate............................ 4,237 4,913 3,759
------ ------ --------
Adjustable rate:
Real estate: One- to four-family......................... 24 243 2,409
Multi-family and commercial................. 3,115 1,795 112
One- to four-family construction............ 40 125 527
Non-real estate: Commercial business........................ 456 1,078 1,493
Home equity................................. 773 530 1,906
Other consumer.............................. 206 97 4
------- -------- -----------
Total adjustable rate....................... 4,614 3,868 6,451
------ ------ --------
Total loans originated...................... 8,851 8,781 10,210
Principal repayments.......................................... (7,670) (6,173) (7,315)
Decrease in other terms, net.................................. (977) (552) (391)
------- ------- ---------
Net increase................................ $ 204 $2,056 $ 2,504
======= ====== =======
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Association attempts to cause the deficiency to be cured
by contacting the borrower. Late notices are generally sent when a payment on a
residential or consumer loan is more than 15 days past due and a late charge is
generally assessed at that time. For multi-family and commercial real estate
loans and commercial business loans, the Association sends a late notice on the
11th day after payment is due and a late fee is assessed at that time. For
residential and consumer loans, the Association's asset review officer attempts
to contact personally any borrower who is more than 30 days past due. For
multi-family and commercial real estate loans and commercial business loans, the
Vice President of Lending telephones the borrower when payment is 15 days
delinquent. For all loans past due 60 days or more principal and interest, and,
beginning in July 1997, for all loans where the borrower is delinquent in the
payment of real estate taxes regardless of payment status, the asset review
officer or the Vice President of Lending contacts the borrower on a regular
basis to seek to cure the delinquency. If a loan becomes past due 90 days, the
Association refers the matter to an attorney, who first seeks to obtain payment
without litigation and, if unsuccessful, generally commences a foreclosure
action and other appropriate legal action to collect the loan. The Association
also seeks to recover any shortfall by pursuing the borrower on the note. A
foreclosure
64
action, if the default is not cured, typically leads to a judicial sale of the
mortgaged real estate. The judicial sale is normally delayed if the borrower
files a bankruptcy petition because the foreclosure action cannot be continued
unless the Association first obtains relief from the automatic stay provided by
the Bankruptcy Code.
If the Association acquires the mortgaged property at foreclosure sale
or accepts a voluntary deed in lieu of foreclosure, the acquired property is
then classified as OREO until it is sold. When OREO is acquired, the property is
recorded at the lower of cost (defined as fair value of the foreclosed property
at initial foreclosure) or fair value of the asset acquired less estimated costs
to sell the property. The shortfall (if any) between the fair value of the
property and the carrying value of the loan is charged to the allowance for loan
losses. The Association also seeks to recover any shortfall by pursuing the
borrower on the note. Thereafter, changes in the value of the OREO are taken as
current expenses.
The Association is permitted to finance sales of OREO by "loans to
facilitate," which may involve a lower down payment or a longer repayment term
or other more favorable features than generally would be granted under the
Association's underwriting guidelines. At September 30, 1997, there was one
"loan to facilitate" outstanding for $128,000 which was classified as
substandard and non-accruing at September 30, 1997, as the new borrower was more
than 90 days delinquent as to payments. The "loan to facilitate" was originated
in December 1993 and has been classified as substandard since that time.
It is the Association's policy to discontinue accruing interest on a
loan when it becomes 90 days or more delinquent, regardless of the collateral
supporting the loan or sooner if management believes it is prudent to do so.
Once the accrual of interest is discontinued, the Association generally records
interest as and when received until the loan is restored to accruing status. The
loan generally remains on nonaccrual until such time that the borrower has
repaid all delinquency and has maintained the loan in a current status for at
least three consecutive months, provided management concludes that full payment
of principal and interest is reasonably assured in the future.
65
The following table sets forth the Association's loan delinquencies as
to principal and interest payments by type, by number, amount and by percentage
of type at September 30, 1997.
Loans Delinquencies at September 30, 1997
-------------------------------------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
-------------------------- --------------------------------- ------------------------------------
% of % of % of
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family............... 5 $215 0.58% 17 $993 2.69% 22 $1,208 3.27
Multi-family and commercial....... -- -- -- -- -- -- -- -- --
One- to four-family construction.. -- -- -- -- -- -- -- -- --
Other:
Commercial business............... -- -- -- -- -- -- -- -- --
Home equity -- -- -- 2 54 1.60 2 54 1.60
Other consumer.................... 2 18 1.63 -- -- -- 2 18 1.63
---- ----- ---- ----- ------ ---- -------
Total........................... 7 $233 0.45% 19 $1,047 2.04% 26 $1,280 2.49%
== ==== == ====== == ======
66
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. The Association classifies all of its loans monthly based on
delinquency status. Multi-family and commercial real estate and commercial
business loans are reviewed annually regardless of delinquency status. There are
three classifications for problem assets: Substandard, Doubtful and Loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the Association will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss allowance. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS. As of September 30, 1997, the Association had $2.6 million
of loans secured by one-to four-family residential property classified as
substandard. At that time, the Association also had $1.1 million of loans
secured by one- to four-family residential properties and $1.1 million of loans
secured by commercial real estate classified as "special mention." As of the
same date, the Association had no assets classified as doubtful or loss.
Non-Performing Assets. The table below sets forth the amounts and
categories of Association's non-performing assets. Foreclosed assets include
assets acquired in settlement of loans.
September 30,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Non-accruing loans:
One- to four-family....................... $3,730(1) $2,212 $2,576 $3,438 $2,034
Home equity............................... 63 -- -- -- --
Other consumer............................ -- -- 5 80 69
---------- --------- --------- --------- --------
Total non-performing loans(2)........ 3,793 2,212 2,581 3,518 2,103
Foreclosed assets:
One- to four-family...................... 313 70 182 334 507
-------- --------- -------- -------- --------
Total non-performing assets................. $4,106 $2,282 $2,763 $3,852 $2,610
====== ====== ====== ====== ======
Total non-performing assets as a
percentage of total assets................ 6.73% 3.74% 4.38% 5.53% 4.22%
===== ==== ==== ==== ====
(1) Includes $2.7 million of restructured or rewritten loans as to which real
estate taxes were previously delinquent but which were not otherwise
delinquent.
(2) There are no loans past due greater than 90 days and accruing interest or
restructured loans accruing interest.
67
For the year ended September 30, 1997 gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $343,000. The amount that was included in
interest income on such loans was $304,000.
At September 30, 1997, the Association's non-performing loans portfolio
consisted of 78 loans secured by one- to four-family residences located in the
Association's market area which totaled $3.8 million. Four of these loans were
secured solely by second mortgages while the remaining 74 loans were secured, at
a minimum, by a first mortgage on the collateral. At September 30, 1997, there
were seven one- to four-family properties held as OREO with a net carrying value
of $313,000. All of these OREO properties were either sold or under contract for
sale by December 31, 1997 without material loss.
As indicated under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Comparison of Operating Results
for the Years Ended September 30, 1997 and 1996 - Other Expense," as of the end
of fiscal 1996, the Association discovered that the real estate taxes were
delinquent on a number of its delinquent one- to four-family residential loans.
Since all such loans were already classified as non-performing, this information
did not result in a change in non-performing assets. However, in fiscal 1997,
the Association noted delinquent real estate taxes on a number of loans which
were not previously classified as non-performing. The Association contacted all
of the borrowers of such loans and, in cases where the taxes were not promptly
paid by the borrower, advanced funds for the payment of the taxes and rewrote
such loans to add the advanced funds to the loan principal and to include tax
escrow provisions. Such rewritten loans were classified as troubled debt
structurings where deemed appropriate based on the financial position of the
borrower. As of September 30, 1997, the Association's troubled debt
restructurings were $1.6 million and the other loans rewritten for delinquent
taxes were $1.1 million. While all such loans were classified as non-performing
at September 30, 1997, none were 90 days or more delinquent as of such date.
Since these loans were written at market interest rates, it is anticipated that,
provided that these loans continue to perform in accordance with their new
terms, they will become performing loans in fiscal 1998, generally after one
year of performance. All current originations by the Association provide for tax
escrows.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of September 30, 1997, there were $1.1 million of
other loans, all of which were multi-family and commercial real estate or
commercial business loans, with respect to which known information about the
possible credit problems of the borrowers or the cash flows of the security
properties have caused management to have concerns as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset categories. While
none of these loans were 60 days or more delinquent as of the date hereof, weak
or negative cash flows, failure to attain budgeted income projections or
declines in collateral values have been the primary reasons which have caused
the Association to monitor such loans more carefully. Set forth below is a
description of each of the Association's loans of concern at September 30, 1997
which had a net book value in excess of $300,000.
Apartment Loan, Saratoga Springs. This Loan represents a $390,000
commercial real estate loan made to an S-Corp secured by a 3-story, 16 unit
apartment complex. Although this loan has experienced no delinquency since
originated in April 1996, the Association has classified it as "of
68
concern" because of its declining cash flow. The loan is guaranteed by the
S-Corp's principal shareholder.
Takeout Restaurant, Saragota County. This $384,000 loan, originated in
September 1997, is classified as "of concern" due to concerns regarding sales
projections, collateral value and the start-up nature of the business. The
borrower paid 15% of the cost of renovations made to the takeout restaurant
directly from personal funds, and there is a $160,000 SBA second mortgage
commitment, the proceeds of which will reduce the Association's exposure, to be
funded the first quarter of calendar year 1998. The loan is current at September
30, 1997.
Other loans of concern at September 30, 1997 consisted of two
multi-family and commercial real estate loans totaling $318,000. All the other
loans of concern were current at September 30, 1997 but were classified because
of lower than expected debt service coverage. The Association's loans of concern
have been considered by management in conjunction with the analysis of the
adequacy of the allowance for loan losses.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for
loan losses charged to earnings based on the Association's evaluation of the
risk inherent in its entire loan portfolio. Such evaluation, which includes a
review of all loans for which full collectibility may not be reasonably assured,
considers the market value of the underlying collateral, growth and composition
of the loan portfolio, delinquency trends, adverse situations that may affect
the borrower's ability to repay, prevailing and projected economic conditions
and other factors that warrant recognition in providing for an adequate
allowance for loan losses.
While the Association believes that it uses the best information
available to determine the allowance for loan losses, unforeseen economic and
market conditions could result in adjustments to the allowance for loan losses,
and net earnings could be significantly affected, if circumstances differ
substantially from the assumptions used in making the final determination.
Management believes its allowance for loan losses is adequate at September 30,
1997; however, future adjustments could be necessary and net income could be
adversely affected if circumstances differ substantially from the assumptions
used in the determination of allowance for loan losses.
69
The following table sets forth an analysis of the Association's
allowance for loan losses.
Years Ended September 30,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period....................... $1,251 $ 779 $ 856 $ 875 $ 258
Charge-offs:
One- to four-family................................ (417) (218) (160) (115) (199)
Commercial business................................ (7) (4) -- -- --
Home equity........................................ (10) -- -- -- --
Other consumer..................................... (32) (32) (50) (142) (70)
------- ------- ------ ------ ------
Total charge-offs................................ (466) (254) (210) (257) (269)
------ ------ ----- ------ -----
Recoveries:
One- to four-family................................ 21 3 1 13 34
Other consumer..................................... 15 9 3 14 9
------ --------- ------ ------ ------
Total recoveries................................ 36 12 4 27 43
------- -------- ------ ------ -----
Net charge-offs...................................... (430) (242) (206) (230) (226)
Provisions charged to operations..................... 792 714 129 211 843
------- -------- ----- ----- -----
Balance at end of period............................. $1,613 $1,251 $779 $856 $875
====== ====== ==== ==== ====
Ratio of net charge-offs during the period to
average gross loans outstanding during the period.. 0.84% 0.49% 0.42% 0.53% 0.52%
==== ==== ==== ==== ====
Ratio of net charge-offs during the period to
average non-performing assets...................... 13.46% 9.64% 6.23% 7.11% 7.16%
===== ==== ==== ==== ====
Ratio of allowance to gross loans outstanding at
end of period...................................... 3.14% 2.45% 1.58% 1.83% 2.08%
==== ==== ==== ==== ====
Allowance as a percentage of non-performing loans
(end of period).................................... 42.53% 56.53% 30.20% 24.34% 41.63%
===== ===== ===== ===== =====
70
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses by category as prepared by the Association. This allocation is based on
management's assessment as of a given point in time of the risk characteristics
of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The
allocation is not indicative of either the specific amounts or the loan
categories in which future charge-offs maybe taken, nor should it be taken as an
indicator of future loss trends. The allocation of the allowance to each
category does not restrict the use of the allowance to absorb losses in any
category.
September 30,
--------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- --------------------------------- -----------------------------------
Percent Percent Percent
of loans of loans of loans
Amount Loan in Each Amount Loan in Each Amount Loan in Each
of loan Amounts Category of loan Amounts Category of loan Amounts Category
loss by of Total loss by of Total loss by of Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
------------ ---------- ---------- ----------- ----------- --------- ----------- ---------- ------------
(In Thousands)
One- to four-family......... $ 932 $36,891 71.92% $ 770 $40,262 78.80% $ 592 $42,578 86.41%
Multi-family and commercial. 238 7,950 15.50 93 4,635 9.07 52 2,579 5.23
One- to four-family
construction.............. 3 539 1.05 4 938 1.84 3 742 1.51
Commercial business......... 43 1,422 2.77 27 1,230 2.41 4 185 .38
Home equity................. 36 3,379 6.59 19 2,869 5.62 9 2,265 4.60
Other consumer.............. 87 1,111 2.17 84 1,154 2.26 72 920 1.87
Unallocated................. 274 -- --- 254 -- -- 47 -- --
-------- -------- -------- -------- -------- ------- ------- -------- ---------
Total.................. $1,613 $51,292 100.00% $1,251 $51,088 100.00% $ 779 $49,269 100.00%
====== ======= ====== ====== ======= ====== ===== ======= ======
September 30,
-----------------------------------------------------------------------------
1994 1993
-------------------------------------- --------------------------------------
Percent Percent
of loans of loans
Amount Loan in Each Amount Loan in Each
of loan Amounts Category of loan Amounts Category
loss by of Total loss by of Total
Allowance Category Loans Allowance Category Loans
------------ ---------- -------------- ----------- ----------- --------------
(In Thousands)
One- to four-family......... $706 $42,973 91.89% $685 $40,633 96.64%
Multi-family and commercial. 18 878 1.88 -- -- --
One- to four-family
construction.............. 3 701 1.50 1 139 .33
Commercial business......... -- -- 2.89 -- -- --
Home equity................. 5 1,352 --- -- -- --
Other consumer.............. 108 861 1.84 101 1,276 3.03
Unallocated................. 16 -- --- 88 -- --
------ -------- -------- ----- --------- -------
Total.................. $856 $46,765 100.00% $875 $42,048 100.00%
==== ======= ====== ==== ======= ======
71
Investment Activities
Generally, the investment policy of Gloversville Federal is to invest
funds among categories of investments and maturities based upon the
Association's asset/liability management policies, investment quality, loan and
deposit volume, liquidity needs and performance objectives. The Association's
securities must be classified into any of three categories: trading, held to
maturity and available for sale. Securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and are reported at fair value with unrealized gains and losses
included in trading account activities in the statement of operations.
Securities that Gloversville Federal has the positive intent and ability to hold
to maturity are classified as held to maturity and reported at amortized cost.
All other securities not classified as trading or held to maturity are
classified as available for sale. At September 30, 1997, Gloversville Federal
had no securities which were classified as trading or held to maturity.
Available for sale securities are reported at fair value with unrealized gains
and losses included, on an after-tax basis, in a separate component of total
equity. At September 30, 1997, all of the Association's mortgage-backed and
other securities (totaling $7.0 million, including FHLB stock) were classified
as available for sale.
General. Gloversville Federal must maintain minimum levels of
investments and other assets that qualify as liquid assets under OTS
regulations. Liquidity may increase or decrease depending upon the availability
of funds and comparative yields on investments in relation to the return on
loans. At September 30, 1997, Gloversville Federal's liquidity ratio for
regulatory purposes was 10.3%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management" and
"- Liquidity and Capital Resources."
72
The following table sets forth the composition of the Association's
securities, and other earning assets at the dates indicated.
September 30,
---------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ----------------------------- ----------------------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
---- ----- ---- ----- ---- -----
(Dollars in Thousands)
Securities held to maturity:
U.S. Government agency obligations... $ -- --% $ -- --% $4,500 100.00%
---------- ---------- ---------- --------- ------ -------
Total securities held to maturity... -- -- -- -- 4,500 100.00
---------- ---------- ---------- --------- ------- -------
Securities available for sale:
US Government agency obligations...... 2,998 42.50 2,998 39.43 3,696 72.00
------ ------- ------- -------- ------- --------
Mortgage-backed securities
FNMA............................... 753 10.66 766 10.07 -- --
FHLMC.............................. 2,843 40.30 3,379 44.44 993 19.35
------ ------- ------- -------- -------- --------
Total mortgage-backed securities
available for sale............ 3,596 50.96 4,145 54.51 993 19.35
------ ------- ------- -------- -------- --------
FHLB Stock...................... 461 6.54 461 6.06 444 8.65
------- -------- -------- --------- -------- ---------
Total securities available for sale..... $7,054 100.00% $7,604 100.00% $5,133 100.00%
====== ====== ====== ====== ====== =======
Average remaining contractual life
of securities: 10.88 years 12.03 years 1.95 years
=========== =========== ==========
Other interest-earning assets:
Term deposit with FHLB................ $ -- -- $ -- -- $ 1,000 37.04
Federal funds sold.................... -- -- 100 100.00 1,700 62.96
-------------- ------------ ------------ ----------- ------------ ----------
Total............................... $ -- --% $ 100 100.00% $ 2,700 100.00%
============= ============ =========== =========== =========== =========
73
The following table sets forth the contractual maturities of the
Association's securities (excluding FHLB stock) at September 30, 1997.
At September 30, 1997
------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
----------- ----------- ----------- ------------ -----------------------
Amortized Amortized Amortized Amortized Amortized Market
Cost Cost Cost Cost Cost Value
---- ---- ---- ---- ---- -----
(In Thousands)
U.S. government agency obligations................ $ -- $2,000 $ -- $ 998 $2,998 $2,994
Mortgage-backed securities........................ 694 998 -- 1,904 3,596 3,562
----- -------- ---- ------ ------ ------
Total securities available for sale............... $694 $2,998 $ -- $2,902 $6,594 $6,556
==== ====== ==== ====== ====== ======
Weighted average yield............................ 5.90% 5.93% --% 6.65% 6.14%
Mortgage-Backed Securities. In order to supplement its lending
activities and achieve its asset/liability management goals, the Association
from time to time invests in mortgage-backed securities. As of September 30,
1997, all of the mortgage-backed securities owned by the Association were
issued, insured or guaranteed either directly or indirectly by a federal agency.
However, it should be noted that, while a (direct or indirect) federal guarantee
may indicate a high degree of protection against default, they do not indicate
that the securities will be protected from declines in value based on changes in
interest rates or prepayment speeds.
The Association primarily invests in fixed rate mortgage-backed
securities with lives of seven years or less and variable rate mortgage-backed
securities with rate reset intervals not to exceed three years and average lives
of seven years or less. The average lives of the Association's mortgage-backed
securities are determined by reference to industry standard tables which take
into account historical prepayments on mortgage loans with specified interest
rates and terms to maturity. At September 30, 1997, the Association's
mortgage-backed securities portfolio totaled $3.6 million. At September 30,
1997, all of the Association's mortgage-backed securities were issued or
guaranteed by FHLMC or FNMA and all were pass- through securities. On such date,
$1.7 million of the mortgage-backed securities had fixed interest rates with a
weighted average rate of 5.79% and a weighted average life of 2.3 years. The
remaining $1.9 million of mortgage-backed securities had adjustable rates with a
weighted average rate of 6.33% and weighted average period to repricing of one
year.
Mortgage-backed securities generally have higher yields than investment
securities because of the longer terms and the uncertainties associated with the
timing of mortgage repayments. In addition, mortgage-backed securities are more
liquid than individual mortgage loans and may be used to collateralize
borrowings of the Association. However, these securities generally yield less
than the loans that underlie them because of the cost of payment guarantees or
credit enhancements that reduce credit risk. For information regarding the
Association's mortgage-backed securities portfolio, see Note 2 of the Notes to
the Financial Statements.
74
To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of mortgage derivative securities. This policy, which has been
adopted by the OTS, requires the Association to annually test its CMOs and other
mortgage-related securities to determine whether they are high-risk or
nonhigh-risk securities. Mortgage derivative products with an average life or
price volatility in excess of a benchmark 30-year, mortgage-backed, pass-through
security are considered high-risk mortgage securities. Under the policy, savings
institutions may generally only invest in low-risk mortgage securities in order
to reduce interest rate risk. In addition, all high-risk mortgage securities
acquired after February 9, 1992 which are classified as high risk at the time of
purchase must be carried in the institution's trading account or as securities
available for sale. At September 30, 1997, none of the Association's
mortgage-backed securities were classified as "high-risk."
As of September 30, 1997, the Association did not have any
mortgage-backed securities of a single issuer in excess of 10% of retained
earnings except for FNMA and FHLMC issues, amounting to $752,000 and $2.8
million, respectively.
75
The following table shows mortgage-backed securities purchase, sale and
repayment activities of the Association for the periods indicated.
Years Ended September 30,
---------------------------------------
1997 1996 1995
---------- ------------- --------------
(In Thousands)
Purchases:
Adjustable-rate.................. $ -- $2,281 $ --
Fixed-rate....................... -- 1,301 993
--------- ------ ------
Total purchases............... -- 3,582 993
Sales:
Adjustable-rate.................. -- -- --
Fixed-rate....................... -- -- --
--------- -------- --------
Total sales.............. -- -- --
Principal repayments............. (551) (431) --
Discount/premium
Accretion/amortization......... 1 2 --
Fair value net change............ 67 (101) --
------- ----- --------
Net increase (decrease)... $ (483) $3,052 $993
===== ====== ====
The Association will evaluate mortgage-backed securities purchases in
the future based on its asset/liability objectives, market conditions and
alternative investment opportunities.
Investment Securities. Federally chartered savings institutions have
the authority to invest in various types of liquid assets, including United
States Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federally chartered savings institutions may also invest
their assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly.
In order to complement its lending and mortgage-backed securities
investment activities and to increase its holdings of short and medium term
assets, the Association invests in liquidity investments and in high-quality
investments, such as U.S. Treasury and agency obligations. At September 30,
1997, the Association's securities portfolio totaled $3.0 million. At September
30, 1997, the Association did not own any investment securities of a single
issuer which exceeded 10% of the Association's retained earnings, other than
federal agency obligations. See Note 2 of the Notes to the Financial Statements
for additional information regarding the Association's securities portfolio.
76
Sources of Funds
General. The Association's primary source of funds are deposits. In
addition, the Association derives funds for loans and investments from loan and
security repayments and prepayments, from cash flows from operations and, to a
lesser extent, from borrowings. Scheduled payments on loans and mortgage-backed
and investment securities are a relatively stable source of funds, while savings
inflows and outflows and loan and mortgage-backed and investment securities
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowings are occasionally used to compensate for reductions
in other sources of funds and to take advantage of lower funding costs that
better match the Association's short-term needs.
Deposits. The Association offers a variety of deposit programs to its
customers, including money market deposit accounts, passbook and statement
savings accounts, NOW accounts, checking accounts and time deposits. Deposit
account terms vary according to the minimum balance required, the time periods
the funds must remain on deposit and the interest rate, among other factors. The
Association's deposits are obtained predominantly from its Fulton and Saratoga
County market area. The Association relies primarily on customer service and
long-standing relationships with customers to attract and retain deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Association's ability to attract and
retain deposits. The Association does not generally pay premium rates for time
deposits in excess of $100,000, and for the last three years, the Association
generally has not used brokers to obtain deposits.
The Association prices its deposit offerings based upon market and
competitive conditions in its market area. Since fiscal 1995, the Association
has attempted to build core deposits by focusing its marketing efforts in money
market accounts. During the same period, the Association introduced improved
non-time deposit products, such as statement savings, tiered money market
accounts with checking and commercial checking accounts. Finally, in an effort
to reduce its cost of funds, over the same period of time, the Association has
priced its time deposit accounts less aggressively.
The following table indicates the amount of the Association's time
deposit and other deposits by time remaining until maturity as of September 30,
1997.
Maturity
----------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------------ ------------ ----------- ----------
(In Thousands)
Time deposits less than $100,00 $ 8,552 $3,761 $8,697 $4,512 $25,522
Time deposits $100,000 or more 1,753 432 100 208 2,493
------- ------- -------- ------- --------
Total time deposits $10,305 $4,193 $8,797 $4,720 $28,015
======= ====== ====== ====== =======
77
The following table sets forth the deposit flows at the Association
during the periods indicated.
Year Ended September 30,
-------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars In Thousands)
Opening balance............... $ 55,716 $ 57,866 $ 64,703
Deposits...................... 143,875 116,344 87,068
Withdrawals................... (145,899) (120,910) (96,432)
Interest credited............. 2,425 2,416 2,527
----------- ----------- ----------
Ending balance.............. $ 56,117 $ 55,716 $ 57,866
========== ========= ========
Net increase (decrease)....... $ 401 $ (2,150) $ (6,837)
=========== =========== =========
Percent increase (decrease)... 0.72% (3.72)% (10.57)%
==== ===== ======
78
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Association as of the dates
indicated.
At September 30,
-------------------------------------------------------------------
1997 1996 1995
--------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transaction and savings accounts
- --------------------------------
Passbook and statement savings ....................... $12,004 21.40% $13,140 23.58% $13,833 23.90%
Demand and NOW accounts .............................. 5,148 9.17 5,174 9.29 4,374 7.56
Money market accounts ................................ 10,950 19.51 10,392 18.65 5,709 9.87
------- ------ ------- ------ ------- ------
Total transaction and savings accounts ............... 28,102 50.08 28,706 51.52 23,916 41.33
------- ------ ------- ------ ------- ------
Time Deposits
- -------------
Under 4.00% .......................................... 3 0.01 -- -- 48 0.08
4.00 - 4.99% ......................................... 3,994 7.12 11,357 20.38 4,685 8.10
5.00 - 5.99% ......................................... 21,942 39.10 11,101 19.92 18,923 32.70
6.00 - 6.99% ......................................... 2,046 3.64 4,525 8.12 10,219 17.66
7.00 - 7.99% ......................................... -- -- -- -- 50 0.09
8.00 - and over ...................................... 30 0.05 27 0.05 25 0.04
------- ------ ------- ------ ------- ------
Total time deposits .................................. 28,015 49.92 27,010 48.48 33,950 58.67
------- ------ ------- ------ ------- ------
Total deposits ....................................... $56,117 100.00% $55,716 100.00% $57,866 100.00%
======= ====== ======= ====== ======= ======
79
The following table shows rate and maturity information for the
Association's time deposits as of September 30, 1997.
Under 4.00 - 5.00 - 6.00 - 7.00 - 8.00 - Percent
4.00% 4.99% 5.99% 6.99% 7.99% 8.99% Total of Total
----- ----- ----- ----- ----- ----- ----- --------
(Dollars in Thousands)
Time deposit accounts maturing
in quarter ending:
December 31, 1997............ $ -- $2,504 $ 7,287 $ 514 $-- $ -- $10,305 36.78%
March 31, 1998............... 3 1,485 2,278 427 -- -- 4,193 14.97
June 30, 1998................ -- 5 3,236 100 -- -- 3,341 11.93
September 30, 1998........... -- -- 5,440 16 -- -- 5,456 19.48
December 31, 1998............ -- -- 1,180 92 -- -- 1,272 4.54
March 31, 1999............... -- -- 882 -- -- -- 882 3.15
June 30, 1999................ -- -- 689 -- -- -- 689 2.46
September 30, 1999........... -- -- 418 -- -- -- 418 1.49
December 31, 1999............ -- -- 44 247 -- -- 291 1.04
March 31, 2000............... -- -- 84 142 -- -- 226 0.81
June 30, 2000................ -- -- 40 173 -- -- 213 0.76
September 30, 2000........... -- -- -- 301 -- -- 301 1.07
December 31, 2000............ -- -- 85 34 -- -- 119 0.42
Thereafter................... -- -- 279 -- -- 30 309 1.10
------ ---------- --------- ---------- ---- ---- ---------- --------
Total.................... $ 3 $3,994 $21,942 $2,046 $-- $30 $28,015 100.00%
===== ====== ======= ====== === === ======= ======
Percent of total......... 0.01% 14.26% 78.32% 7.30% --% 0.11% 100.00%
For additional information regarding the composition of the
Association's deposits, see Note 6 of the Notes to the Financial Statements.
80
Borrowings. Although deposits are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes, the Association has occasionally relied upon borrowed funds or
repurchase agreements to supplement them. The Association has borrowed funds,
either through direct borrowings or through the sale of securities under
agreements to repurchase, when the cost of borrowings was attractive when
compared to the rate required to be paid on deposits plus the deposit insurance
premium required to be paid. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital."
The Association may borrow under a line of credit agreement with the
FHLB of New York. FHLB advances typically are collateralized by all of the
assets of the Association. There were no FHLB advances outstanding at September
30, 1997.
Under an agreement with the Association's investment portfolio
safekeeping agent, the Association may from time to time enter into security
repurchase agreements brokered through such agent whereby the Association
obtains funds from the sale of securities held in the securities portfolio with
an agreement to repurchase the securities either the next day or a set number of
days following the sale. Total borrowings represented by repurchase agreements
at September 30, 1997 were $1.3 million. The Association undertook this
borrowing in order to provide needed funds at a time when the Association did
not want to increase the rates paid on time deposits to attract funds.
The following table sets forth the maximum month-end balance and
average balance of the Association's borrowings for the periods indicated.
Year Ended September 30,
------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Maximum Balance:
FHLB borrowings........................ $ 850 $ 300 $ --
Securities sold under agreements
to purchase.......................... 1,300 -- --
Average Balance:
FHLB borrowings........................ $ 273 $ 6 $ --
Securities sold under agreements
to repurchase....................... 118 -- --
81
The following table sets forth the amount and rate of the Association's
borrowings at the dates indicated.
September 30,
----------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
FHLB borrowings.......................... $ -- $ 300 $ --
Securities sold under agreements
to repurchase............................ 1,300 -- --
------ --------- ---
Total borrowings...................... $1,300 $ 300 $--
====== ====== ===
Weighted average interest rate of
FHLB borrowings........................ -- 5.88% --
Weighted average interest rate of
securities sold under agreements
to repurchase......................... 5.80% -- --
Subsidiary Activities
As a federally chartered savings and loan association, Gloversville
Federal is permitted by OTS regulations to invest up to 2% of its assets in the
stock of, or loans to, service corporation subsidiaries, and may invest an
additional 1% of its assets in service corporations where such additional funds
are used for inner-city or community development purposes. In addition to
investments in service corporations, federal institutions are permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal savings association may engage in directly. At
September 30, 1996, Gloversville Federal did not have any subsidiaries.
Competition
Gloversville Federal faces strong competition both in originating real
estate loans and in attracting deposits. Competition in originating loans comes
primarily from commercial banks, credit unions, mortgage bankers and other
savings institutions, which also make loans secured by real estate located in
the Association's market area. Gloversville Federal competes for loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it originates and the quality of services it provides to
borrowers.
Competition for those deposits is principally from commercial banks,
credit unions, mutual funds, securities firms and other savings institutions
located in the same communities. The ability of the Association to attract and
retain deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk,
convenient locations and other factors. The Association competes for these
deposits by offering competitive rates, maintaining close ties with its local
community, advertising and marketing programs, convenient business hours and a
customer-oriented staff.
The Association is subject to competition from other financial
institutions which may have much greater financial and marketing resources.
However, the Association believes that it benefits from its community
orientation.
82
Employees
At September 30, 1997, the Association had a total of 28 employees
including 2 part-time employees. None of the Association's employees are
represented by any collective bargaining agreement. Management considers its
employee relations to be good.
Properties
The following table sets forth information concerning the main office
and the branch office of the Association at September 30, 1997. At September 30,
1997, the Association's premises had an aggregate net book value of
approximately $839,000.
Year Owned or Net Book Value at
Location Acquired Leased September 30, 1997
- --------------------------------------------------------------------------------
(In Thousands)
Main Office:
52 North Main Street 1962 own 593,000
Gloversville, New York 12078
Full Service Branch:
295 Broadway 1983 own 246,000
Saratoga Springs, New York 12866
The Association believes that its current facilities are adequate to
meet the present and foreseeable future needs of the Association and the Holding
Company.
The Association's depositor and borrower customer files are maintained
in-house. The net book value of the data processing and computer equipment
utilized by the Association at September 30, 1997 was approximately $359,000.
Legal Proceedings
From time to time, Gloversville Federal is involved as plaintiff or
defendant in various legal proceedings arising in the normal course of its
business. While the ultimate outcome of these various legal proceedings cannot
be predicted with certainty, it is the opinion of management that the resolution
of these legal actions should not have a material effect on the Holding
Company's and Gloversville Federal's financial position or results of
operations.
83
REGULATION
General
Gloversville Federal is a federally chartered savings and loan
association, the deposits of which are federally insured and backed by the full
faith and credit of the United States Government. Accordingly, Gloversville
Federal is subject to broad federal regulation and oversight extending to all
its operations. Gloversville Federal is a member of the FHLB of New York and is
subject to certain limited regulation by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"). As the savings and loan holding
company of Gloversville Federal, the Holding Company also is subject to federal
regulation and oversight. The purpose of the regulation of the Holding Company
and other holding companies is to protect subsidiary savings associations.
Gloversville Federal is a member of the Savings Association Insurance Fund
("SAIF") and the deposits of Gloversville Federal are insured by the FDIC. As a
result, the FDIC has certain regulatory and examination authority over
Gloversville Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Gloversville Federal is required to
file periodic reports with the OTS and is subject to periodic examinations by
the OTS. The last regular OTS examination of Gloversville Federal was as of
February 1997. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS, the examiners may require Gloversville Federal to provide
for higher general or specific loan loss reserves. All savings associations are
subject to a semi-annual assessment, based upon the savings association's total
assets, to fund the operations of the OTS. Gloversville Federal's OTS assessment
for the fiscal year ended September 30, 1997 was $16,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Gloversville Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of
Gloversville Federal is prescribed by federal laws and it is prohibited from
engaging in any activities not permitted by such laws. For instance, no savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal associations in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the
84
OTS. Federal savings associations are also generally authorized to branch
nationwide. Gloversville Federal is in compliance with the noted restrictions.
Gloversville Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At September 30, 1997, Gloversville Federal's
lending limit under this restriction was $737,000. Assuming the sale of the
minimum number of shares in the Conversion at September 30, 1997, that limit
would be increased to $___ million. Gloversville Federal is in compliance with
the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action. The OTS and the other federal banking agencies have also proposed
additional guidelines on asset quality and earnings standards. No assurance can
be given as to whether or in what form the proposed regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
Gloversville Federal is a member of the SAIF, which is administered by
the FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve
85
ratio to that designated reserve level, or such higher reserve ratio as
established by the FDIC. The FDIC may also impose special assessments on SAIF
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally subject
to higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attains its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of deposits by the FDIC and the resulting assessment of
$415,000 was paid in November 1996. This special assessment significantly
increased non-interest expense and adversely affected the Association's results
of operations for the year ended September 30, 1996. As a result of the special
assessment, Gloversville Federal's deposit insurance premiums was reduced to
.03% based upon its current risk classification and the new assessment schedule
for SAIF insured institutions. These premiums are subject to change in future
periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions remain subject to a FICO assessment as a result
of this continuing obligation. Although the legislation also now requires
assessments to be made on BIF-assessable deposits for this purpose, effective
January 1, 1997, that assessment was limited to 20% of the rate imposed on SAIF
assessable deposits until the earlier of December 31, 1999 or when no savings
association continues to exist, thereby imposing a greater burden on SAIF member
institutions such as Gloversville Federal. Thereafter, however, assessments on
BIF-member institutions will be made on the same basis as SAIF-member
institutions. The rates established by the FDIC to implement this requirement
for all FDIC-insured institutions are a 6.5 basis points assessment on SAIF
deposits and 1.5 basis points on BIF deposits until BIF insured institutions
participate fully in the assessment.
86
Regulatory Capital Requirements
Federally insured savings associations, such as Gloversville Federal,
are required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At September 30, 1997, Gloversville Federal did not have any
intangible assets recorded as assets on its financial statements. [CONFIRM]
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At September 30, 1997, Gloversville Federal had tangible capital of
$3.3 million, or 5.4% of adjusted total assets, which is approximately $2.4
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date. On a pro forma basis, after giving effect to the sale of the
minimum, midpoint and maximum number of shares of Common Stock offered in the
Conversion and investment of 50% of the net proceeds in assets not excluded for
tangible capital purposes, Gloversville Federal would have had tangible capital
equal to ____%, ____% and ____%, respectively, of adjusted total assets at
September 30, 1997, which is $____ million, $____ million and $____ million,
respectively, above the requirement.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1997,
Gloversville Federal had no intangibles which were subject to these tests.
[CONFIRM/REVISE]
At September 30, 1997, Gloversville Federal had core capital equal to
$3.3 million, or 5.4% of adjusted total assets, which is $___ million above the
minimum leverage ratio requirement of 3% as in effect on that date. On a pro
forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
87
investment of 50% of the net proceeds in assets not excluded from core capital,
Gloversville Federal would have had core capital equal to ____%, ____% and
____%, respectively, of adjusted total assets at September 30, 1997, which is
$____ million, $____ million and $____ million, respectively, above the
requirement.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At September 30, 1997, Gloversville
Federal had $486,000 of allowance for loan losses that qualify as supplementary
capital, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Gloversville Federal had
no such exclusions from capital and assets at September 30, 1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise. Based upon its capital level and assets size at
September 30, 1997, Gloversville Federal is subject to these requirements;
however the OTS has not required implementation of this regulation.
88
On September 30, 1997, Gloversville Federal had total capital of $3.8
million (including $3.3 million in core capital and $486,000 in qualifying
supplementary capital) and risk-weighted assets of $37.8 million; or total
capital of 10.0% of risk-weighted assets. This amount was $762,000 above the 8%
requirement in effect on that date. On a pro forma basis, after giving effect to
the sale of the minimum, midpoint and maximum number of shares of Common Stock
offered in the Conversion, the infusion to Gloversville Federal of ___% of the
net Conversion proceeds and the investment of those proceeds to Gloversville
Federal in 20% risk-weighted government securities, Gloversville Federal would
have had total capital of ___%, ___% and ____%, respectively, of risk-weighted
assets, which is above the current 8% requirement by $___ million, $____ million
and $____ million, respectively.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Gloversville Federal may have a substantial adverse effect on Gloversville
Federal's operations and profitability and the value of the Common Stock
purchased in the Conversion. Holding Company stockholders do not have preemptive
rights, and therefore, if the Holding Company is directed by the OTS or the FDIC
to issue additional shares of Common Stock, such issuance may result in the
dilution in the
89
percentage of ownership of the Holding Company of those persons purchasing
shares in the Conversion.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. See "The
Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of
the Association" and "- Restrictions on Repurchase of Stock."
Generally, savings associations, such as Gloversville Federal, that
before and after the proposed distribution meet their capital requirements, may
make capital distributions during any calendar year equal to the greater of 100%
of net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. Gloversville
Federal may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association that is a
subsidiary of a holding company may make a capital distribution with notice to
the OTS provided that it has a CAMEL 1 or 2 rating, is not of supervisory
concern, and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution but do not meet the other noted requirements must notify the OTS 30
days prior to declaring a capital distribution. The OTS stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income to date
during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
90
Liquidity
All savings associations, including Gloversville Federal, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
Gloversville Federal includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." This liquid asset ratio requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. At the present time, the minimum liquid asset ratio
is 5%.
Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At September 30, 1997, Gloversville Federal was in
compliance with this requirement, with an overall liquid asset ratio of 10.3%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held-to-maturity,
available-for-sale or trading) with appropriate documentation. Gloversville
Federal is in compliance with these amended rules.
OTS regulations, which may be made more stringent than GAAP by the OTS,
require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including Gloversville Federal, are required
to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. As an alternative, the savings association may maintain 60% of its assets
specified in Section 7701(a)(19) of the Internal Revenue Code. Under either
test, such assets primarily consist of residential housing related loans and
investments. At September 30, 1997, Gloversville Federal met the test with 93.7%
of its portfolio assets in qualified thrift investments and has always met the
test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings
91
association and a national bank, and it is limited to national bank branching
rights in its home state. In addition, the association is immediately ineligible
to receive any new FHLB borrowings and is subject to national bank limits for
payment of dividends. If such association has not requalified or converted to a
national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding FHLB borrowings, which may
result in prepayment penalties. If any association that fails the QTL test is
controlled by a holding company, then within one year after the failure, the
holding company must register as a bank holding company and become subject to
all restrictions on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Gloversville Federal, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch, by
Gloversville Federal. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, Gloversville Federal may be required to devote additional
funds for investment and lending in its local community. Gloversville Federal
was examined for CRA compliance in March 1995 and received a rating of
satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Gloversville Federal include the
Holding Company and any company which is under common control with Gloversville
Federal. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
92
Holding Company Regulation
The Holding Company will be a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than Gloversville Federal
or any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If Gloversville Federal fails the QTL test, the Holding Company must
obtain the approval of the OTS prior to continuing after such failure, directly
or through its other subsidiaries, any business activity other than those
approved for multiple savings and loan holding companies or their subsidiaries.
In addition, within one year of such failure the Holding Company must register
as, and will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple savings and loan
holding company. See "- Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
93
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At September 30, 1997, Gloversville Federal was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Association "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Association.
Federal Home Loan Bank System
Gloversville Federal is a member of the FHLB of New York, which is one
of 12 regional FHLBs, that administers the home financing credit function of
savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, Gloversville Federal is required to purchase and maintain
stock in the FHLB of New York. At September 30, 1997, Gloversville Federal had
$461,000 in FHLB stock, which was in compliance with this requirement. In past
years, Gloversville Federal has received substantial dividends on its FHLB
stock. Over the past five calendar years such dividends have averaged 8.1% and
were 6.46% for calendar year 1996. As a result of their holdings, the
Association could borrow up to $9.2 million from the FHLB.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Gloversville Federal's FHLB stock may result in a
corresponding reduction in Gloversville Federal's capital.
For the year ended December 31, 1996, dividends paid by the FHLB of New
York to Gloversville Federal totaled $22,000, which constitute a $4,000 increase
from the amount of dividends received in calendar year 1995. The $29,000
dividend received for the nine months ended September 30, 1997 reflects an
annualized rate of 8.4%, which is 30.0% greater than the rate for calendar 1996.
94
Federal and State Taxation
In August 1996, legislation was enacted that repeals the reserve method
of accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes. As a result, small thrifts such as the Association
must recapture that portion of the reserve that exceeds the amount that could
have been taken under the experience method for post-1987 tax years. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. The management of the Company does not believe that the
legislation will have a material impact on the Company or the Association.
In addition to the regular income tax, corporations, including savings
associations such as Gloversville Federal, generally are subject to a minimum
tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's regular
taxable income (with certain adjustments) and tax preference items, less any
available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income. For taxable years
beginning after 1986 and before 1996, corporations, including savings
associations such as Gloversville Federal, were also subject to an environmental
tax equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1995, Gloversville Federal's Excess for tax purposes
totaled approximately $3.1 million.
Gloversville Federal files its federal and New York income tax returns
on a calendar year basis using the accrual method of accounting. The Holding
Company may file a consolidated federal income tax return with Gloversville
Federal.
Gloversville Federal was audited by the IRS with respect to
consolidated federal income tax returns in 1994, 1995 and 1996. With respect to
years examined by the IRS, all deficiencies have been satisfied.
New York Taxation. For New York income tax purposes, the Association is
taxed at an effective rate equal to 9.0% of New York taxable income. For these
purposes, "New York Taxable
95
Income" generally means federal taxable income, subject to certain adjustments
(including the addition of interest income on state and municipal obligations
and the partial exclusion of interest income on United States Treasury as well
as New York and certain of its political subdivisions obligations).
Delaware Taxation. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
MANAGEMENT
Directors and Executive Officers of the Holding Company and of the Association
Directors and Executive Officers of the Holding Company. The Board of
Directors of the Holding Company currently consists of six members. The
directors of the Holding Company are currently comprised of the directors of the
Association. See "- Board of Directors of the Association." Directors of the
Holding Company will serve three-year staggered terms so that one-third of the
directors will be elected at each annual meeting of stockholders. The terms of
the current directors of the Holding Company are the same as that of the
Association's board. The Holding Company does not intend to pay directors a fee
for board service. For information regarding stock options and restricted stock
proposed to be awarded to directors following stockholder ratification of such
plans, see "- Benefit Plans."
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The following
table sets forth information regarding executive officers of the Holding
Company. Each executive officer of the Holding Company has held his or her
position since the incorporation of the Holding Company.
Name Title
---- -----
Lewis E. Kolar President and Chief Executive Officer
Menzo D. Case Executive Vice-President, Chief Financial Officer and
Secretary
The Holding Company does not initially intend to pay executive officers
any fees in addition to fees payable to such persons as executive officers of
the Association. For information regarding compensation of directors and
executive officers of the Association, see "Management - Director Compensation"
and "- Executive Compensation." For information regarding stock options and
restricted stock proposed to be awarded to directors and executive officers
following stockholder ratification of the Holding Company's stock-based plans,
see "- Benefit Plans."
96
Board of Directors of the Association. Prior to the Conversion, the
direction and control of the Association, as a mutual savings institution, was
vested in its Board of Directors. Upon conversion of the Association to stock
form, each of the directors of the Association will continue to serve as a
director of the converted Association. The Board of Directors of the Association
currently consists of six members. Each Director of the Association has served
as such at least since January, 1995, except for Priscilla J. Bell, who was
elected in January, 1996. The directors serve three-year staggered terms so that
approximately one-third of the directors are elected at each annual meeting of
members. Because the Holding Company will own all of the issued and outstanding
shares of capital stock of the Association after the Conversion, directors of
the Holding Company will elect the directors of the Association.
The following table sets forth certain information regarding the
directors of the Association.
Director Term
Name Position(s) Held With the Association Age(1) Since Expires
- -----------------------------------------------------------------------------------------------------------
Priscilla J. Bell Director 48 1996 1999
Timothy E. Delaney Director 35 1993 1998
Lewis E. Kolar Director, President and Chief Executive 59 1995 1998
Officer
Donald I. Lee Director and Recording Secretary 70 1971 2000
Richard D. Ruby Chairman of the Board 48 1975 2000
Robert J. Sofarelli Director 52 1993 1998
(1) At December 31, 1997.
The business experience of each director of the Holding Company and of
the Association for at least the past five years is set forth below.
Dr. Priscilla J. Bell. Dr. Bell has served as the President of Fulton
Montgomery Community College since 1995. From 1978 to 1995, Dr. Bell worked at
the Tacoma Community College, Tacoma, Washington, where she was Dean of Student
Services.
Timothy E. Delaney. Mr. Delaney is the President and Chief Financial
Officer of Delaney Construction Corporation, a company specializing in heavy
highway construction, which he founded in 1982.
Lewis E. Kolar. Mr. Kolar is the President and Chief Executive Officer
of the Association, a position he has held since October 1994. Mr. Kolar has
more than 20 years of commercial banking experience including service as a
Senior Vice-President and Regional Executive Officer at the National Bank &
Trust Company, Norwich, New York, from 1989 to 1994.
97
Donald I. Lee. Mr. Lee is the President of Lee & Lee Associates,
Saratoga Springs, New York, and a partner in Lee's Deer Run Bed & Breakfast,
Stillwater, New York.
Richard D. Ruby. Mr. Ruby has been the owner and President of Ruby &
Quiri, Inc., a home furnishings center, located in Gloversville, New York, since
1969.
Dr. Robert J. Sofarelli. Dr. Sofarelli has been a veterinarian since
1971, and is the owner of Saratoga Veterinary Hospital, Planned Pets, a Saratoga
veterinary hospital and Paws & Claws, a distributor of pet foods located in
Wilton, New York.
Executive Officers Who Are Not Directors. Each of the executive
officers of the Association will retain his or her office in the converted
Association. Officers are elected annually by the Board of Directors of the
Association. The business experience of the executive officers who are not also
directors is set forth below.
Menzo D. Case, age 34. Mr. Case is a certified public accountant and
has served as the Association's Treasurer since December 1993. Mr. Case was
promoted to Executive Vice President and Chief Operating Officer in July 1994.
Previously, Mr. Case was an accountant with KPMG Peat Marwick from 1989 to 1993.
Michael J. Pepe, age 39. Mr. Pepe currently serves as the Association's
Vice-President of Lending, a position he has held since 1995. Mr. Pepe was an
Assistant Vice-President and Commercial Loan Officer for Amsterdam Savings Bank,
FSB from 1987 until he joined the Association.
Indemnification
The Certificate of Incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Holding Company. Delaware law
requires that such director, officer, employee or agent, in order to be
indemnified, must have acted in good faith and in a manner reasonably believed
to be not opposed to the best interests of the Holding Company, and, with
respect to any criminal action or proceeding, did not have reasonable cause to
believe his or her conduct was unlawful.
The Certificate of Incorporation and Delaware law also provide that the
indemnification provisions of such Certificate and the statute are not exclusive
of any other right which a person seeking indemnification may have or later
acquire under any statute, provision of the Certificate of Incorporation, Bylaws
of the Holding Company, agreement, vote of stockholders or disinterested
directors or otherwise.
98
These provisions may have the effect of deterring shareholder
derivative actions, since the Holding Company may ultimately be responsible for
expenses for both parties to the action. A similar effect would not be expected
for third-party claims.
In addition, the Certificate of Incorporation and Delaware law also
provide that the Holding Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Holding
Company or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the Holding
Company has the power to indemnify such person against such expense, liability
or loss under the Delaware General Corporation Law. The Holding Company may
obtain such insurance.
Meetings and Committees of Board of Directors
The Association. The Association's Board of Directors meets on a
monthly basis. The Board of Directors met 15 times during the year ended
September 30, 1997. During fiscal 1997, no director of the Association attended
fewer than 75% of the aggregate of the total number of Board meetings and the
total number of meetings held by the committees of the Board of Directors on
which he or she served.
The Association has standing Executive, Audit, Asset Liability, Loan,
Investment, Strategic Planning, Nomination and Community Reinvestment
Committees.
The Executive Committee provides oversight of Board-related matters
in-between regularly scheduled Board Meetings, provides informal counsel to the
President and is available to handle emergency or time critical situations. The
Executive Committee is comprised of Directors Richard D. Ruby, Donald I. Lee and
Timothy Delaney. This committee met approximately 15 times during fiscal year
1997.
The Audit Committee is comprised of four outside directors: Richard D.
Ruby, Donald I. Lee, Priscilla J. Bell and Timothy Delaney. This Committee
oversees and reviews the Association's financial and internal control matters.
The Audit Committee also reviews the Audited Financial Report with the
Association's outside auditors and the Report of the Examination with the OTS
examiners, either separately or with the full Board. This committee met four
times in fiscal 1997.
The Asset/Liability Management Committee is composed of Directors
Richard D. Ruby, and Priscilla J. Bell. This committee meets quarterly to handle
the investments for the Association and the implementation of the strategic and
business plans as they relate to interest rate risk and reinvestment options.
This committee also reviewed liquidity, interest rate risk and product pricing.
This committee met four times in fiscal 1997.
The Loan Committee reviews and approves loans which require the
committee's approval. This committee is composed of any two non-employee
directors and, met eight times in fiscal 1997.
The Investment Committee consists of Directors Richard D. Ruby and
Donald I. Lee. This committee reviews investments and assesses the current
investment portfolio. This committee did not meet in fiscal 1997.
99
The Nominating Committee, composed of Directors Richard D. Ruby, Donald
I. Lee and Priscilla J. Bell, meets annually to select the nominees for the
Board of Directors and Board Committees.
The Community Reinvestment Committee consists of the entire Board and
reviews the Association's compliance with the Community Reinvestment Act. This
Committee met once during fiscal 1997.
The Holding Company. In ________ 1998, the Board of Directors of the
Holding Company established standing executive, audit and nominating Committees.
These committees did not meet during fiscal 1997.
Director Compensation
Directors of the Association are paid a monthly fee of $950 for service
on the Board of Directors, and the Chairman of the Board is paid a monthly fee
of $1,050. These fees are paid only to Board members, not to employees.
Directors do not receive any additional compensation for committee meetings
attended.
Executive Compensation
The following table sets forth information concerning the compensation
accrued for services in all capacities to Gloversville Federal for the fiscal
year ended September 30, 1997 for the Association's President and Chief
Executive Officer. No other executive officer's aggregate annual compensation
(salary plus bonus) exceeded $100,000 in fiscal 1997.
Summary Compensation Table
--------------------------
Long Term Compensation
Annual Compensation(1) Awards
------------------------------------- -------------------------------
Other Annual Restricted Stock Options/ All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Award ($) SARs (#) Compensation($)
- --------------------------- ---- --------- -------- --------------- --------- -------- ---------------
Lewis E. Kolar 1997 $83,077 $8,400 -- N/A N/A $11,731(2)
(1) In accordance with the transitional provisions applicable to the revised
rules on executive officer and director compensation disclosure adopted by
the SEC, as informally interpreted by the SEC's Staff, Summary Compensation
information is excluded for the fiscal years ended December 31, 1996 and
1995.
(2) Consists of use of a vehicle valued at $1,441, life insurance payments of
$1,998 and contributions to Mr. Kolar's 401(k) of $8,292.
Change in Control Severance Agreements
The Association intends to enter into change in control severance
agreements with Messrs. Kolar and Case. The agreements become effective upon
completion of the Conversion and provide for an initial term of 24 months and 12
months, respectively. The agreements provide for extensions of one year, on each
anniversary of the effective date of the agreement, subject to a formal
100
performance evaluation performed by disinterested members of the Board of
Directors of the Association. The agreement provides for termination for cause
or in certain events specified by OTS regulations.
The agreements provide for a lump sum payment to Mr. Kolar and Mr. Case
200% and 100% of their respective annual base compensation and the continued
payment for the remaining term of the contract of life and health insurance
coverage maintained by the Association in the event there is a "change in
control" of the Association where employment terminates involuntarily following
such change in control. This termination payment is subject to reduction to the
extent non-deductible for federal income tax purposes. For the purposes of the
agreements, a "change in control" is defined as any event which would require
the filing of an application for acquisition of control or notice of change in
control pursuant to 12 C.F.R. ss. 574.3 or 4 or any successor regulation. Such
events are generally triggered prior to the acquisition of control of 10% of the
Company's Common Stock. See "Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions."
Benefit Plans
General. Gloversville Federal Savings and Loan Association currently
provides insurance benefits to its employees, including health and life
insurance, subject to certain deductibles and copayments.
Employee Severance Compensation Plan. The Association's Board of
Directors has established the Gloversville Federal Employee Severance
Compensation Plan ("Severance Compensation Plan") which will provide certain
employees with severance pay benefits in the event of a change in control of the
Association or the Holding Company following Conversion. Management personnel
with change in control severance agreements are not eligible to participate in
the Severance Compensation Plan. The purpose of the Severance Compensation Plan
is to recognize the valuable services and contributions of the Association's
employees and the uncertainties relating to continuing employment, reduced
employee benefits, management changes and relocations in the event of a change
in control. The Association believes that the Severance Compensation Plan will
assist it in attracting and retaining highly qualified individuals and reduce
the distractions and other adverse effects on the employees' performance in the
event of a change in control. The Severance Compensation Plan vests in each
participant a contractual right to the benefits such participant is entitled to
thereunder. Under the Severance Compensation Plan, in the event of a change in
control as defined in the Severance Compensation Plan, eligible employees who
are terminated or who voluntarily terminate employment (for reasons specified
under the Severance Compensation Plan), within one year of a change in control
will be entitled to receive a severance payment. Payments pursuant to the
Severance Compensation Plan are equal to the product of two weeks Annual
Compensation (as defined) times the number of years of service up to a maximum
of twelve years in the case of officers or seven years in the case of other
employees. Such payments may tend to discourage takeover attempts by increasing
costs to be incurred by the Association in the event of a takeover. As it is
management's belief that substantially all of the Association's employees would
be retained in the event of a change in control, and that any amount payable
under the Severance Compensation Plan, therefore, would be considerably less
than the total amount that could possibly be paid under the Severance
Compensation Plan, management cannot estimate the
101
potential effect of the Severance Compensation Plan. The Severance Compensation
Plan may be amended or terminated by the Board of Directors by a majority vote
at any time prior to a change in control but may not be amended or terminated
thereafter.
Employee Stock Ownership Plan. The Boards of Directors of Gloversville
Federal Savings and Loan Association and the Holding Company have approved the
adoption of an ESOP for the benefit of employees of Gloversville Federal Savings
and Loan Association. The ESOP is also designed to meet the requirements of an
employee stock ownership plan as described at Section 4975(e)(7) of the Code and
Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and, as such, the ESOP is empowered to borrow in order to
finance purchases of the Common Stock.
It is anticipated that the ESOP will be funded with a loan from the
Holding Company (not to exceed an amount equal to 8% of the gross Conversion
proceeds). The interest rate of the ESOP loan will be equal to the applicable
federal interest rate as determined by the Internal Revenue Service for the
month in which the loan is made, as calculated pursuant to Section 1274(d) of
the Code.
GAAP generally requires that any borrowing by the ESOP from an
unaffiliated lender be reflected as a liability in the Holding Company's
Financial Statements, whether or not such borrowing is guaranteed by, or
constitutes a legally binding contribution commitment of, the Holding Company or
the Association. The funds used to acquire the ESOP shares will be borrowed from
the Holding Company. Since the Holding Company will finance the ESOP debt, the
ESOP debt will be eliminated through consolidation and no liability will be
reflected on the Holding Company's financial statements. In addition, shares
purchased with borrowed funds will, to the extent of the borrowings, be excluded
from stockholders' equity, representing unearned compensation to employees for
future services not yet performed. Consequently, if the ESOP purchases
already-issued shares in the open market, the Holding Company's consolidated
liabilities will increase to the extent of the ESOP's borrowings, and total and
per share stockholders' equity will be reduced to reflect such borrowings. If
the ESOP purchases newly issued shares from the Holding Company, total
stockholders' equity would neither increase nor decrease, but per share
stockholders' equity and per share net income would decrease because of the
increase in the number of outstanding shares. In either case, as the borrowings
used to fund ESOP purchases are repaid, total stockholders' equity will
correspondingly increase.
All employees of the Association are eligible to participate in the
ESOP after they attain age 21 and complete one year of service. The
Association's contribution to the ESOP is allocated among participants on the
basis of their relative compensation. Each participant's account will be
credited with cash and shares of Holding Company Common Stock based upon
compensation earned during the year with respect to which the contribution is
made. Contributions credited to a participant's account become fully vested upon
such participant's completing five years of service. Credit will be given for
prior years of service for vesting purposes. ESOP participants are entitled to
receive distributions from their ESOP accounts only upon termination of service.
Distributions will be made in cash and in whole shares of the Holding Company's
Common Stock. Fractional shares will be paid in cash. Participants will not
incur a tax liability until a distribution is made.
102
Each participating employee is entitled to instruct the trustee of the
ESOP as to how to vote the shares allocated to his or her account. The trustee
will not be affiliated with the Holding Company or Gloversville Federal Savings
and Loan Association.
The ESOP may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
ESOP trust fund or divert any of the assets of the ESOP trust fund for purposes
other than the benefit of participants or their beneficiaries.
401(k) Savings Plan. The Association has a qualified, tax-exempt
savings plan with a cash or deferred feature qualifying under Section 401(k)
(the "401(k) Plan") of the Internal Revenue Code of 1986, as amended (the
"Code"). All employees who have completed the service requirement, during which
they worked at least 1,000 hours, are eligible to participate.
Participants are permitted to make salary reduction contributions to
the 401(k) Plan of up to 5% of the participant's annual salary up to a maximum
of $10,000 for calendar year 1997 and the Association contributes 10% of the
employees salary, regardless of the employee's contribution. Employee
contributions are fully and immediately vested; contributions by the Association
vest 20% the third year, 50% the fourth year, and 100% the fifth year of
service. However, in the event of normal retirement, permanent disability or
death, a participant will automatically become 100% vested in the value of all
Association contributions and earnings thereon.
The Association intends to reduce its contribution under the 401(k)
Plan in order to offset in part the ESOP expense. In addition, the 401(k) Plan
is being amended to permit self-directed investments by participants into
Holding Company stock.
Stock Option and Incentive Plan. Among the benefits to the Association
anticipated from the Conversion is the ability to attract and retain personnel
through the prudent use of stock options and other stock-related incentive
programs. The Board of Directors of the Holding Company intends to adopt a Stock
Option and Incentive Plan (the "Stock Option Plan"), subject to ratification by
stockholders of the Holding Company at a meeting to be held not earlier than six
months after completion of the Conversion. Under the terms of the proposed Stock
Option Plan, stock options covering shares representing an aggregate of up to
10% of the shares of Common Stock issued in the Conversion may be granted to
directors, officers and employees of the Holding Company or its subsidiaries
under the Stock Option Plan.
Options granted under the Stock Option Plan may be either options that
qualify under the Code as "incentive stock options" (options that afford
preferable tax treatment to recipients upon compliance with certain restrictions
and that do not normally result in tax deductions to the employer) or options
that do not so qualify. The exercise price of stock options granted under the
Stock Option Plan is required to be at least equal to the fair market value per
share of the stock on the date of grant. All grants are made in consideration of
past and future services rendered to the Association, and in an amount deemed
necessary to encourage the continued retention of the officers and directors who
are considered necessary for the continued success of the Association. In this
regard, all options are intended to vest in five equal annual installments
commencing one year from the date of grant, subject to the continued service of
the holder of such option.
103
The proposed Stock Option Plan provides for the grant of stock
appreciation rights ("SARs") at any time, whether or not the participant then
holds stock options, granting the right to receive the excess of the market
value of the shares represented by the SARs on the date exercised over the
exercise price. SARs generally will be subject to the same terms and conditions
and exercisable to the same extent as stock options.
Limited SARs may be granted at the time of, and must be related to, the
grant of a stock option or SAR. The exercise of one will reduce to that extent
the number of shares represented by the other. Limited SARs will be exercisable
only for the 45 days following the expiration of the tender or exchange offer,
during which period the related stock option or SAR will be exercisable.
However, no SAR or Limited SAR will be exercisable by a 10% beneficial owner,
director or senior officer within six months of the date of its grant. The
Holding Company has no present intention to grant any SARs or Limited SARs.
The proposed Stock Option Plan will be administered by Stock Plan
Committee of the Holding Company which will consist of at least two
disinterested directors. The Stock Plan Committee will select the recipients and
terms of awards made pursuant to the Stock Option Plan. OTS regulations limit
the amount of shares that may be awarded pursuant to stock-based plans to each
individual officer, each non-employee director and all non-employee directors as
a group to 25%, 5% and 30%, respectively, of the total shares reserved for
issuance under each such stock-based plan.
The Stock Plan Committee, presently consisting of non-employee
Directors _______________ and ________________, intends to grant options in
amounts expressed as a percentage of the shares issued in the Conversion, as
follows: President Kolar - 2.0%, Officer Case - 2.0%, and to all executive
officers as a group (_ persons) - 6.6%. In addition, under the terms of the
Stock Option Plan, each non-employee director of the Holding Company at the time
of stockholder ratification of the Stock Option Plan will be granted an option
to purchase shares of Common Stock equal to .5% of the shares sold in the
Conversion. The remaining balance of the available awards is unallocated and
reserved for future use. All options will expire 10 years after the date such
option was granted, which, for the option grants listed above, is expected to be
the date of stockholder ratification of the Stock Option Plan. All proposed
option grants to officers are subject to modification by the Stock Plan
Committee based upon its performance evaluation of the option recipients at the
time of stockholder ratification of the Stock Option Plan following completion
of the Conversion.
After stockholder ratification, the Stock Option Plan will be funded
either with shares purchased in the open market or with authorized but unissued
shares of Common Stock. The use of authorized but unissued shares to fund the
Stock Option Plan could dilute the holdings of stockholders who purchased Common
Stock in the Conversion. See "Pro Forma Data." In no event will the Stock Option
Plan acquire an amount of shares, which, in the aggregate, represent more than
10% of the shares issued in the Conversion.
Under SEC regulations, so long as certain criteria are met, an optionee
may be able to exercise the option at the Purchase Price and immediately sell
the underlying shares at the then-current market price without incurring
short-swing profit liability. This ability to exercise and
104
immediately resell, which under the SEC regulations applies to stock option
plans in general, allows the optionee to realize the benefit of an increase in
the market price for the stock without the market risk which would be associated
with a required holding period for the stock after payment of the exercise
price. Under SEC regulations, the short-swing liability period now runs for six
months before and after the option grant. All grants are subject to ratification
of the Stock Option Plan by stockholders of the Holding Company following
completion of the Conversion.
Recognition and Retention Plan. The Holding Company intends to
establish the RRP in order to provide employees with a proprietary interest in
the Holding Company in a manner designed to encourage such persons to remain
with the Holding Company and the Association. The RRP will be subject to
ratification by stockholders at a meeting to be held not earlier than six months
after the completion of the Conversion. The Holding Company will contribute
funds to the RRP to enable it to acquire in the open market or from authorized
but unissued shares (with the decision between open market or authorized but
unissued shares based on the Holding Company's future stock price, alternate
investment opportunities and capital needs), following stockholder ratification
of such plan, an amount of stock equal to 4.0% of the shares of Common Stock
issued in the Conversion.
The Stock Plan Committee of the Board of Directors of the Holding
Company will administer the proposed RRP. Under the terms of the proposed RRP,
awards ("Awards") can be granted to key employees in the form of shares of
Common Stock held by the RRP. Awards are non-transferable and non-assignable.
OTS regulations limit the amount of shares that may be awarded pursuant to
stock-based plans to each individual officer, each non-employee director and all
non-employee directors as a group to 25%, 5% and 30%, respectively, of the total
shares reserved for issuance under each such stock-based plan.
Recipients will earn (i.e., become vested in), over a period of time,
the shares of Common Stock covered by the Award. Awards made pursuant to the RRP
will vest in five equal annual installments commencing one year from the date of
grant. Awards will be 100% vested upon termination of employment due to death or
disability. When shares become vested and are actually distributed in accordance
with the RRP, but in no event prior to such time, the participants will also
receive amounts equal to any accrued dividends with respect thereto. Earned
shares are distributed to recipients as soon as practicable following the date
on which they are earned.
The Stock Plan Committee presently intends to grant restricted stock
awards at the Purchase Price, in amounts expressed as a percentage of the shares
sold in the Conversion, as follows: to President Kolar - 1.0%, Executive Vice
President Case - .6%, and to all executive officers as a group (_ persons) -
2.4%. Pursuant to the terms of the proposed RRP, each non-employee director of
the Holding Company at the time of stockholder ratification of the RRP will be
awarded an amount of shares equal to .1% of the shares sold in the Conversion.
All proposed RRP awards to officers of the Association are subject to
modification by the Stock Plan Committee based upon its performance evaluation
of the award recipients at the time of stockholder ratification of the RRP
following completion of the Conversion.
After stockholder ratification, the RRP will be funded either with
shares purchased in the open market or with authorized but unissued shares of
Common Stock issued to the RRP by the Holding Company. The use of authorized but
unissued shares to fund the RRP could dilute the holdings of stockholders who
had purchased Common Stock in the Conversion. In the event the
105
RRP purchases stock in the open market at prices above the initial Purchase
Price, the total RRP expense may be above that disclosed under the caption "Pro
Forma Data." In no event will the RRP acquire an amount of shares which, in the
aggregate, represent more than 4.0% of the shares issued in the Conversion.
Certain Transactions
The Association follows a policy of granting loans to the Association's
directors, officers and employees. The loans to executive officers and directors
are made in the ordinary course of business and on the same terms and conditions
as those of comparable transactions prevailing at the time, in accordance with
the Association's underwriting guidelines and do not involve more than the
normal risk of collectibility or present other unfavorable features. Loans to
all directors and executive officers and their associates, including outstanding
balances and commitments totaled $382,000 at September 30, 1997, which was 11.6%
of the Association's retained earnings at that date.
106
THE CONVERSION
The Board of Directors of the Association and the OTS have approved the
Plan of Conversion. OTS approval does not constitute a recommendation or
endorsement of the Plan of Conversion. Certain terms used in the following
summary of the material terms of the Conversion are defined in the Plan of
Conversion, a copy of which may be obtained by contacting Gloversville Federal.
General
The Board of Directors of the Association unanimously adopted the Plan,
subject to approval by the OTS and the members of the Association. Pursuant to
the Plan, the Association will convert from a federally chartered mutual savings
loan and association to a federally chartered stock savings and loan
association, with the concurrent formation of a holding company.
The Conversion will be accomplished through amendment of the
Association's federal charter to authorize capital stock, at which time the
Association will become a wholly owned subsidiary of the Holding Company. The
Conversion will be accounted for as a pooling of interests.
Subscription Rights have been granted to the Eligible Account Holders
as of September 30, 1996, Tax-Qualified Employee Plans of the Association and
Holding Company, Supplemental Eligible Account Holders as of ___________, 1998,
Other Members, and directors, officers, and employees of the Association.
Additionally, subject to the availability of shares and market conditions at or
near the completion of the Subscription Offering, the Common Stock may be
offered for sale in a Public Offering and Direct Community Offering to selected
persons on a best-efforts basis through Capital Resources. See "- Offering of
Holding Company Common Stock." Subscriptions for shares will be subject to the
maximum and minimum purchase limitations set forth in the Plan of Conversion.
Business Purposes
Gloversville Federal has several business purposes for the Conversion.
The sale of Holding Company Common Stock will have the immediate result of
providing the Association with additional equity capital in order to support the
expansion of its existing operations, subject to market conditions. See
"Business." The sale of the Common Stock is the most effective means of
increasing the Association's permanent capital and does not involve the high
interest cost and repayment obligation of subordinated debt. In addition,
investment of that part of the net Conversion proceeds paid by the Holding
Company to the Association is expected to provide additional operating income to
further increase the Association's capital on a continuing basis.
The Board of Directors of the Association believes that a holding
company structure could facilitate the acquisition of both mutual and stock
savings institutions in the future as well as other companies. If a multiple
holding company structure is utilized in a future acquisition, the acquired
savings institution would be able to operate on a more autonomous basis as a
wholly owned subsidiary of the Holding Company rather than as a division of the
Association. For example, the acquired savings institution could retain its own
directors, officers and corporate name as well as
107
having representation on the Board of Directors of the Holding Company. As of
the date hereof, there are no plans or understandings regarding the acquisition
of any other institutions.
The Board of Directors of the Association also believes that a holding
company structure can facilitate the diversification of the Association's
business activities. While diversification will be maximized if a unitary
holding company structure is utilized because the types of business activities
permitted to a unitary holding company are broader than those of a multiple
holding company, either type of holding company may engage in a broader range of
activities than may a thrift institution directly. Currently, there are no plans
that the Holding Company engage in any material activities apart from holding
the shares of the Association and investing the remaining net proceeds from the
sale of Common Stock in the Conversion.
The preferred stock and additional common stock of the Holding Company
being authorized in the Conversion will be available for future acquisitions and
for issuance and sale to raise additional equity capital, generally without
stockholder approval or ratification, but subject to market conditions. Although
the Holding Company currently has no plans with respect to future issuances of
equity securities, the more flexible operating structure provided by the Holding
Company and the stock form of ownership is expected to assist the Association in
competing more aggressively with other financial institutions in its principal
market area.
The Conversion will structure the Association in the stock form used in
the United States by all commercial banks, most major business corporations and
an increasing number of savings institutions. The Conversion will permit the
Association's members to become stockholders of the Holding Company, thereby
allowing members to own stock in the financial organization in which they
maintain deposit accounts or with which they have a borrowing relationship. Such
ownership should encourage stockholders to promote the Association to potential
customers, thereby further contributing to the Association's earnings potential.
The Association is also expected to benefit from its management and
employees owning stock, because stock ownership is viewed as an effective
performance incentive and a means of attracting, retaining and compensating
personnel.
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association
Voting Rights. Deposit account holders will have no voting rights in
the converted Association or the Holding Company and will therefore not be able
to elect directors of either entity or to control their affairs. These rights
are currently accorded to deposit account holders with regard to the
Association. Subsequent to Conversion, voting rights will be vested exclusively
in the Holding Company as the sole stockholder of the Association. Voting rights
as to the Holding Company will be held exclusively by its stockholders. Each
purchaser of Holding Company Common Stock shall be entitled to vote on any
matters to be considered by the Holding Company stockholders. A stockholder will
be entitled to one vote for each share of Common Stock owned, subject to certain
limitations applicable to holders of 10% or more of the shares of the Common
Stock. See "Description of Capital Stock."
108
Deposit Accounts and Loans. The general terms of the Association's
deposit accounts, the balances of the individual accounts and the existing FDIC
insurance coverage will not be affected by the Conversion. Furthermore, the
Conversion will not affect the loan accounts, the balances of these accounts, or
the obligations of the borrowers under their individual contractual arrangements
with the Association.
Tax Effects. The Association has received an opinion from Silver,
Freedman & Taff, L.L.P. with regard to federal income taxation, and an opinion
from KPMG Peat Marwick LLP with regard to New York taxation, to the effect that
the adoption and implementation of the Plan of Conversion set forth herein will
not be taxable for federal or New York tax purposes to the Association or the
Holding Company. See "- Income Tax Consequences."
Liquidation Rights. The Association has no plans to liquidate, either
before or subsequent to the completion of the Conversion. However, if there
should ever be a complete liquidation, either before or after Conversion,
deposit account holders would receive the protection of insurance by the FDIC up
to applicable limits. Subject thereto, liquidation rights before and after
Conversion would be as follows:
Liquidation Rights in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of a
complete liquidation of the Association, each holder of a deposit account
in the Association in its present mutual form would receive his or her pro
rata share of any assets of the Association remaining after payment of
claims of all creditors (including the claims of all depositors in the
amount of the withdrawal value of their accounts). Such holder's pro rata
share of such remaining assets, if any, would be in the same proportion of
such assets as the balance in his or her deposit account was to the
aggregate balance in all deposit accounts in the Association at the time of
liquidation.
Liquidation Rights in Proposed Converted Institution. After Conversion,
each deposit account holder, in the event of a complete liquidation of the
Association, would have a claim of the same general priority as the claims
of all other general creditors of the Association in addition to the
protection of FDIC insurance up to applicable limits. Therefore, except as
described below, the deposit account holder's claim would be solely in the
amount of the balance in his or her deposit account plus accrued interest.
The holder would have no interest in the assets of the Association above
that amount.
The Plan of Conversion provides that there shall be established, upon the
completion of the Conversion, a special "liquidation account" for the
benefit of Eligible Account Holders (i.e., eligible depositors at September
30, 1996) and Supplemental Account Holders (eligible depositors at
___________, 1998) in an amount equal to the net worth of the Association
as of the date of its latest consolidated statement of financial condition
contained in the final prospectus relating to the sale of shares of Holding
Company Common Stock in the Conversion. Each Eligible Account Holder and
Supplemental Eligible Account Holder would have an initial interest in such
liquidation account for each deposit account held in the Association on the
qualifying
109
date. An Eligible Account Holder and Supplemental Eligible Account Holder's
interest as to each deposit account would be in the same proportion of the
total liquidation account as the balance in his or her account on September
30, 1996 and ___________, 1998, respectively, was to the aggregate balance
in all deposit accounts of Eligible Account Holders and Supplemental
Eligible Account Holders on such dates. However, if the amount in the
deposit account of an Eligible Account Holder or Supplemental Eligible
Account Holder on any annual closing date of the Association is less than
the lowest amount in such account on September 30, 1996 or ___________,
1998 and on any subsequent closing date, then the account holder's interest
in this special liquidation account would be reduced by an amount
proportionate to any such reduction, and the account holder's interest
would cease to exist if such deposit account were closed.
In addition, the interest in the special liquidation account would never be
increased despite any increase in the balance of the account holders'
related accounts after Conversion, and would only decrease.
Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders were satisfied would be
distributed to the Holding Company as the sole stockholder of the
Association.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether the
Association, as converted, or another SAIF-insured institution is the
surviving institution, is deemed to be a complete liquidation for purposes
of distribution of the liquidation account and, in any such transaction,
the liquidation account would be assumed to the full extent authorized by
regulations of the OTS as then in effect. The OTS has stated that the
consummation of a transaction of the type described in the preceding
sentence in which the surviving entity is not a SAIF-insured institution
would be reviewed on a case-by-case basis to determine whether the
transaction should constitute a "complete liquidation" requiring
distribution of any then remaining balance in the liquidation account.
While the Association believes that such a transaction should not
constitute a complete liquidation, there can be no assurance that the OTS
will not adopt a contrary position.
Common Stock. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Dividends" and
"Description of Capital Stock." Common Stock issued under the Plan of Conversion
cannot, and will not, be insured by the FDIC or any other governmental agency.
The Association will continue, immediately after completion of the
Conversion, to provide its services to depositors and borrowers pursuant to its
existing policies and will maintain the existing management and employees of the
Association. Other than for payment of certain expenses incident to the
Conversion, no assets of the Association will be distributed in the Conversion.
Gloversville Federal will continue to be a member of the FHLB System,
110
and its deposit accounts will continue to be insured by the FDIC. The affairs of
Gloversville Federal will continue to be directed by the existing Board of
Directors and management.
Offering of Holding Company Common Stock
Under the Plan of Conversion, up to 575,000 shares of Holding Company
Common Stock will be offered for sale, subject to certain restrictions described
below, initially through the Offering. Federal conversion regulations require,
with certain exceptions, that all shares offered in a conversion be sold in
order for the conversion to become effective.
The Subscription Offering will expire at noon, Gloversville, New York
time, on ______ __, 1998 (the "Subscription Expiration Date") unless extended by
the Association and the Holding Company. Depending on the availability of shares
and market conditions at or near the completion of the Subscription Offering,
the Holding Company may effect a Public Offering of shares to selected persons
through Capital Resources. To order Common Stock in connection with the Public
Offering and Direct Community Offering, if any, an executed stock order and
account withdrawal authorization and certification must be received by Capital
Resources prior to the termination of the Public Offering and Direct Community
Offering. The date by which orders must be received in the Public Offering, if
any, will be set by the Holding Company at the time of such offering. OTS
regulations require that all shares to be offered in the Conversion be sold
within a period ending not more than 45 days after the Subscription Expiration
Date (or such longer period as may be approved by the OTS) or, despite approval
of the Plan of Conversion by members, the Conversion will not be effected and
Gloversville Federal will remain in mutual form. This period expires on _______
__, 1998, unless extended with the approval of the OTS. In addition, if the
Offering is extended beyond ________ __, 1998, all subscribers will have the
right to modify or rescind their subscriptions and to have their subscription
funds returned promptly with interest. In the event that the Conversion is not
effected, all funds submitted and not previously refunded pursuant to the
Offering will be promptly refunded to subscribers with interest at the
Association's current passbook rate and all withdrawal authorizations will be
terminated.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted
(i.e., taking into account the expected receipt of proceeds from the sale of the
securities in the conversion), as determined by an independent valuation. RP
Financial, which is experienced in the valuation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by the Association to prepare an appraisal of the estimated pro forma
market value of the Association and the Holding Company upon Conversion.
RP Financial will receive a fee of approximately $12,500 for its
appraisal in addition to its reasonable out-of-pocket expenses incurred in
connection with the appraisal. RP Financial has also agreed to assist in the
preparation of the Association's business plan for a separate fee of $2,500. The
Association has agreed to indemnify RP Financial under certain circumstances
against liabilities and expenses (including legal fees) arising out of, related
to, or based upon the Conversion.
111
RP Financial has prepared an appraisal of the estimated pro forma
market value of the Association as converted. The RP Financial appraisal
concluded that, at ________ __, 1997, an appropriate range for the estimated pro
forma market value of the Association and the Holding Company was from a minimum
of $4.3 million to a maximum of $5.8 million with a midpoint of $5.0 million.
Assuming that the shares are sold at $10.00 per share in the Conversion, the
estimated number of shares to be issued in the Conversion is expected to be
between 425,000 and 575,000. The Purchase Price of $10.00 was determined by
discussion among the Boards of Directors of the Association, the Holding Company
and RP Financial, taking into account, among other factors, (i) the requirement
under OTS regulations that the Common Stock be offered on a manner that would
achieve the widest distribution of shares and (ii) liquidity in the Common Stock
subsequent to the Conversion.
The appraisal involved a comparative evaluation of the operating and
financial statistics of the Association with those of other thrift institutions.
The appraisal also took into account such other factors as the market for thrift
institution stocks generally, prevailing economic conditions, both nationally
and in New York, which affect the operations of thrift institutions, the
competitive environment within which the Association operates and the effect of
the Association becoming a subsidiary of the Holding Company. No detailed
individual analysis of the separate components of the Holding Company's and the
Association's assets and liabilities was performed in connection with the
evaluation. The Plan of Conversion requires that all of the shares subscribed
for in the Offering be sold at the same price per share. The Board of Directors
reviewed the appraisal, including the methodology and the appropriateness of the
assumptions utilized by RP Financial and determined that in its opinion the
appraisal was not unreasonable. The Estimated Valuation Range may be amended
with the approval of the OTS in connection with changes in the financial
condition or operating results of the Association or market conditions
generally. As described below, an amendment to the Estimated Valuation Range
above $6,612,500 would not be made without a resolicitation of subscriptions
and/or proxies except in limited circumstances.
If, upon completion of the Offering, at least the minimum number of
shares are subscribed for, RP Financial, after taking into account factors
similar to those involved in its prior appraisal, will determine its estimate of
the pro forma market value of the Association and the Holding Company upon
Conversion, as of the close of the Offering.
If, based on the estimate of RP Financial, the aggregate pro forma
market value is not within the Estimated Valuation Range, RP Financial, upon the
consent of the OTS, will determine a new Estimated Valuation Range ("Amended
Valuation Range"). If the aggregate pro forma market value of the Association as
converted and the Holding Company has increased in the Amended Valuation Range
to an amount that does not exceed $6,612,500 (i.e., 15% above the maximum of the
Estimated Valuation Range), then the number of shares to be issued may be
increased to accommodate such increase in value without a resolicitation of
subscriptions and/or proxies. In such event the Association and the Holding
Company do not intend to resolicit subscriptions and/or proxies unless the
Association and the Holding Company then determine, after consultation with the
OTS, that circumstances otherwise require such a resolicitation. If, however,
the aggregate pro forma market value of the Holding Company and the Association,
as converted, at that time is less than $4,250,000 or more than $6,612,500, a
resolicitation of subscribers and/or proxies may be made, the Plan of Conversion
may be terminated or such other actions as the OTS may permit may be taken. In
the
112
event that upon completion of the Offering, the pro forma market value of the
Holding Company and Association, as converted, is below $4,250,000 or above
$6,612,500 (15% above the maximum of the Estimated Valuation Range), the Holding
Company intends to file the revised appraisal with the SEC by post-effective
amendment to its Registration Statement on Form SB-2. See "Additional
Information." If the Plan of Conversion is terminated, all funds would be
returned promptly with interest at the rate of the Association's current
passbook rate, and holds on funds authorized for withdrawal from deposit
accounts would be released. If there is a resolicitation of subscriptions,
subscribers will be given the opportunity to cancel or change their
subscriptions and to the extent subscriptions are so canceled or reduced, funds
will be returned with interest at the Association's current passbook rate and
holds on funds authorized for withdrawal from deposit accounts will be released
or reduced. Stock subscriptions received by the Holding Company and the
Association may not be withdrawn by the subscriber and, if accepted by the
Holding Company and the Association, are final. If the Conversion is not
completed prior to ________ __, 2000 (two years after the date of the Special
Meeting), the Plan of Conversion will automatically terminate.
Any increase in the total number of shares of Common Stock to be
offered in the Conversion will dilute a subscriber's percentage ownership
interest and will reduce the pro forma net income and net worth on a per share
basis. A decrease in the number of shares to be issued in the Conversion will
increase a subscriber's proportionate ownership interest and will increase both
pro forma net income and net worth on a per share basis while decreasing that
amount on an aggregate basis.
No sale of the shares will take place unless, prior thereto, RP
Financial confirms to the OTS that, to the best of RP Financial's knowledge and
judgment, nothing of a material nature has occurred which would cause RP
Financial to conclude that the actual Purchase Price on an aggregate basis is
incompatible with its estimate of the aggregate pro forma market value of the
Holding Company and the Association as converted at the time of the sale. If,
however, the facts do not justify such a statement, the Offering or other sale
may be canceled, a new Estimated Valuation Range set and new offering held.
In preparing its valuation of the pro forma market value of the
Association and the Holding Company upon Conversion, RP Financial relied upon
and assumed the accuracy and completeness of all financial and statistical
information provided by the Association and the Holding Company. RP Financial
also considered information based upon other publicly available sources which it
believes are reliable. However, RP Financial does not guarantee the accuracy and
completeness of such information and did not independently verify the financial
statements and other data provided by the Association and the Holding Company or
independently value the assets or liabilities of the Association and the Holding
Company. The appraisal is not intended to be, and must not be interpreted as, a
recommendation of any kind as to the advisability of voting to approve the
Conversion or of purchasing shares of Common Stock. The appraisal considers
Gloversville Federal and the Holding Company only as going concerns and should
not be considered as any indication of the liquidation value of Gloversville
Federal or the Holding Company. Moreover, the appraisal is necessarily based on
many factors which change from time to time. There can be no assurance that
persons who purchase shares in the Conversion will be able to sell such shares
at prices at or above the Purchase Price.
113
Subscription Offering
In accordance with OTS regulations, non-transferable Subscription
Rights have been granted under the Plan of Conversion to the following persons
in the following order of priority: (1) Eligible Account Holders (deposit
account holders of the Association maintaining an aggregate balance of $50 or
more as of September 30, 1996), (2) the Holding Company and the Association's
Tax-Qualified Employee Plans; provided, however, that the Tax-Qualified Employee
Plans shall have first priority Subscription Rights to the extent that the total
number of shares of Common Stock sold in the Conversion exceeds the maximum of
the Estimated Valuation Range; (3) Supplemental Eligible Accounts Holders
(deposit account holders of the Association maintaining a balance of $50 or more
as of ___________, 1998), (4) Other Members (depositors of the Association at
the close of business on _______ __, 1998 and Borrowers of the Association on
________ __, 198_ and _______ __, 1998, the voting record date for the Special
Meeting) and (5) officers, directors and employees of the Association. All
subscriptions received will be subject to the availability of Holding Company
Common Stock after satisfaction of all subscriptions of all persons having prior
rights in the Subscription Offering, and to the maximum and minimum purchase
limitations set forth in the Plan of Conversion.
Category No. 1 is reserved for the Association's Eligible Account
Holders. Subscription Rights to purchase shares under this category will be
allocated among Eligible Account Holders to permit each such depositor to
purchase shares in this Category in an amount equal to the greater of $150,000
of Common Stock, one-tenth of one percent (.10%) of the total shares offered in
the Conversion, or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of the qualifying deposits of
the Eligible Account Holder and the denominator is the total amount of the
qualifying deposit of the Eligible Account Holders in the Association, in each
case on the Eligibility Record Date. To the extent shares are oversubscribed in
this category, shares shall be allocated first to permit each subscribing
Eligible Account Holder to purchase, to the extent possible, 100 shares and
thereafter among each subscribing Eligible Account Holder pro rata in the same
proportion that his Qualifying Deposit bears to the total Qualifying Deposits of
all subscribing Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 2 provides for the issuance of Subscription Rights to
Tax-Qualified Employee Plans to purchase up to 10% of the total amount of shares
of Common Stock issued in the Subscription Offering on a second priority basis.
However, such plans shall not, in the aggregate, purchase more than 10% of the
Holding Company Common Stock issued. The ESOP intends to purchase a total of 8%
of the Common Stock issued in the Conversion under this category. Subscription
Rights received pursuant to this category shall be subordinated to all rights
received by Eligible Account Holders to purchase shares pursuant to Category No.
1; provided, however, that notwithstanding any provision of the Plan of
Conversion to the contrary, the Tax-Qualified Employee Plans shall have first
priority Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range.
114
Category No. 3 is reserved for the Association's Supplemental Eligible
Account Holders. Subscription Rights to purchase shares under this category will
be allocated among Supplemental Eligible Account Holders to permit each such
depositor to purchase shares in this Category in an amount equal to the greater
of $150,000 of Common Stock, one-tenth of one percent (.10%) of the total shares
of Common Stock offered in the Conversion, or 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the amount of
the qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the qualifying deposit of the Supplemental
Eligible Account Holders in the converting Association in each case on
___________, 199_ (the "Supplemental Eligibility Record Date"), subject to the
overall purchase limitation after satisfying the subscriptions of Eligible
Account Holders and Tax Qualified Employee Plans. Any non-transferable
Subscription Rights received by an Eligible Account Holder shall reduce, to the
extent thereof, the subscription rights to be distributed to such person as a
Supplemental Eligible Account Holder. In the event of an oversubscription for
shares, the shares available shall be allocated first to permit each subscribing
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his total allocation (including the number
of shares, if any, allocated in accordance with Category No. 1) equal to 100
shares, and thereafter among each subscribing Supplemental Eligible Account
Holder pro rata in the same proportion that his Qualifying Deposit bears to the
total Qualifying Deposits of all subscribing Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied.
Category No. 4 provides, to the extent that shares are then available
after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders, for the issuance of
Subscription Rights to Other Members to purchase in this Category up to the
greater of $150,000 of Common Stock, or one-tenth of one percent (.10%) of the
Common Stock offered in the Conversion. In the event of an oversubscription, the
shares available shall be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the Voting Record Date bears
to the total number of votes on the Voting Record Date of all subscribing Other
Members on such date. Such number of votes shall be determined based on the
Association's mutual charter and bylaws in effect on the date of approval by
members of this Plan of Conversion.
Each depositor (including individual retirement accounts ("IRAs") and
Keogh account beneficiaries) as of __________ __, 1998 and Borrower as of
________ __, 199_ and _______ __, 1998 and the date of the Special Meeting is
entitled at the Special Meeting to cast one vote for each $100 or fraction
thereof, of the aggregate withdrawal value of all of such depositor's savings
accounts in the Association as of the applicable voting record date, up to a
maximum of 1,000 votes. However, no member may vote more than 1,000 votes. In
general, accounts held in different ownership capacities will be treated as
separate memberships for purposes of applying the 1,000 vote limitation. For
example, if two persons hold a $100,000 account in their joint names and each of
the persons also holds a separate account for $100,000 in his own name, each
person would be entitled to 1,000 votes for each separate account and they would
together be entitled to cast 1,000 votes on the basis of the joint account for a
total of 3,000 votes.
Category No. 5 provides for the issuance of Subscription Rights to
officers, directors and employees of the Association, to purchase in this
Category up to $150,000 of the Common Stock
115
to the extent that shares are available after satisfying the subscriptions of
eligible subscribers in preference Categories 1, 2, 3 and 4. The total number of
shares which may be purchased in the conversion under this Category may not
exceed 24% of the number of shares of Holding Company Common Stock. In the event
of an oversubscription, the available shares will be allocated pro rata among
all subscribers in this category based on the number of shares ordered by each
subscriber.
Public Offering and Direct Community Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the Subscription Offering, the Holding
Company may offer shares pursuant to the Plan to selected persons in a Public
Offering and/or Direct Community Offering on a best-efforts basis through
Capital Resources in such a manner as to promote a wide distribution of the
Common Stock. Any orders received in connection with the Public Offering and
Direct Community Offerings if any, will receive a lower priority than orders
properly made in the Subscription Offering by persons properly exercising
Subscription Rights. In addition depending on market conditions, Capital
Resources may utilize selected broker-dealers ("Selected Dealers") in connection
with the sale of shares in the Public Offering, if any. Common Stock sold in the
Public Offering and Direct Community Offerings will be sold at $10.00 per share
and hence will be sold at the same price as all other shares in the Conversion.
The Holding Company and the Association have the right to reject orders, in
whole or in part, in their sole discretion in the Public Offering and Direct
Community Offering.
No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than $150,000 of Common Stock in the
Public Offering and Direct Community Offering. To order Common Stock in
connection with the Public Offering or Direct Community Offering, if any, an
executed stock order and account withdrawal authorization and certification must
be received by Capital Resources prior to the termination of such Offering. The
date by which orders must be received in the Public Offering and Direct
Community Offering will be set by the Holding Company at the time of
commencement of such offering; provided however, if the Offering is extended
beyond __________ __, 1998, each subscriber will have the opportunity to
maintain, modify or rescind his or her subscription. In such event, all
subscription funds will be promptly returned with interest to each subscriber
unless he or she affirmatively indicates otherwise.
Capital Resources may enter into agreements with Selected Dealers to
assist in the sale of shares in the Public Offering. Selected Dealers may only
solicit indications of interest from their customers to place orders with the
Holding Company as of a certain date ("Order Date") for the purchase of shares
of Conversion Stock with the authorization of Capital Resources. When and if
Capital Resources and the Holding Company believe that enough indications of
interest and orders have been received to consummate the Conversion, Capital
Resources will request, as of the Order Date, Selected Dealers to submit orders
to purchase shares for which they have received indications of interest from
their customers. Selected Dealers will send confirmation of the orders to such
customers on the next business day after the Order Date. Customers who authorize
Selected Dealers to debit their brokerage accounts are required to have the
funds for payment in their account on but not before the closing date of the
Conversion. On the closing date, Selected Dealers will remit funds to the
account that the Holding Company established for each Selected Dealer. Each
customer's funds so forwarded to the Holding Company, along with all other
accounts held in the same title, will
116
be insured up to the applicable legal limit. After payment has been received by
the Holding Company from Selected Dealers, funds will earn interest at the
Association's passbook rate until the completion of the Offering. In the event
the Conversion is not consummated as described above, funds with interest will
be returned promptly to the Selected Dealers, who, in turn, will promptly credit
their customers' brokerage account.
In the event the Holding Company determines to conduct a Public
Offering and/or Direct Community Offering, persons to whom a prospectus is
delivered may subscribe for shares of Common Stock by submitting a completed
stock order and account withdrawal authorization (provided by Capital Resources)
and an executed certification along with immediately available funds (which may
be obtained by debiting a Capital Resources account) to Capital Resources by not
later than the public offering expiration date (as established by the Holding
Company). Promptly upon receipt of available funds, together with a properly
executed stock order and account withdrawal authorization and certification,
Capital Resources will forward such funds to Gloversville Federal to be
deposited in a subscription escrow account.
If a subscription in the Public Offering and/or Direct Community
Offering is accepted, promptly after the completion of the Conversion, a
certificate for the appropriate amount of shares will be forwarded to Capital
Resources as nominee for the beneficial owner. In the event that a subscription
is not accepted or the Conversion is not consummated, the Association will
promptly refund with interest the subscription funds to Capital Resources which
will then return the funds to subscribers' accounts. If the aggregate pro forma
market value of the Company and the Association, as converted, is less than
$4,250,000 or more than $6,612,500, each subscriber will have the right to
modify or rescind his or her subscription.
The opportunity to subscribe for shares of Common Stock in the Public
Offering and/or Direct Community Offering is subject to the right of the
Association and the Holding Company, in their sole discretion, to accept or
reject any such orders in whole or in part.
Additional Purchase Restrictions
The Plan also provides for certain additional limitations to be placed
upon the purchase of shares in the Conversion. Specifically, no person (other
than a Tax-Qualified Employee Plan) by himself or herself or with an associate,
and no group of persons acting in concert, may subscribe for or purchase more
than $150,000 of Common Stock. For purposes of this limitation, an associate of
a person does not include a Tax-Qualified Employee Plan or Non-Tax Qualified
Employee Plan in which the person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity. Moreover, for purposes
of this paragraph, shares held by one or more Tax Qualified or Non-Tax Qualified
Employee Plans attributed to a person shall not be aggregated with shares
purchased directly by or otherwise attributable to that person except for that
portion of a plan which is self-directed by a person. See "- Stock Pricing and
Number of Shares to be Issued" regarding potential changes in Subscription
Rights in the event of a decrease in the number of shares to be issued in the
Conversion. Officers and directors and their associates may not purchase, in the
aggregate, more than 34% of the shares to be sold in the Conversion. For
purposes of the Plan, the members of the Board of Directors are not deemed to be
acting in concert solely by reason of their Board membership. For purposes of
this limitation, an associate of an officer or director does not
117
include a Tax-Qualified Employee Plan. Moreover, any shares attributable to the
officers and directors and their associates, but held by a Tax-Qualified
Employee Plan (other than that portion of a plan which is self-directed) shall
not be included in calculating the number of shares which may be purchased under
the limitations in this paragraph. Shares purchased by employees who are not
officers or directors of the Association, or their associates, are not subject
to this limitation. The term "associate" is used above to indicate any of the
following relationships with a person: (i) any corporation or organization
(other than the Holding Company or the Association or a majority-owned
subsidiary of the Holding Company or the Association) of which a person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity security; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity; and (iii) any relative or
spouse of such person or any relative of such spouse who has the same home as
such person or who is a director or officer of the Holding Company or the
Association or any subsidiary of the Holding Company or the Association.
The Boards of Directors of the Holding Company and the Association, in
their sole discretion, may increase the maximum purchase limitations referred to
above up to 9.99% of the total shares to be offered in the Offering, provided
that orders for shares exceeding 5.0% of the shares being offered in the
Offering shall not exceed, in the aggregate, 10% of the shares being offered in
the Offering or decrease the maximum purchase limitation to one percent of the
Common Stock offered in the Conversion. Requests to purchase additional shares
of Common Stock under this provision will be allocated by the Boards of
Directors on a pro rata basis giving priority in accordance with the priority
rights set forth above. Depending on market and financial conditions, the Boards
of Directors of the Holding Company and the Association, with the approval of
the OTS and without further approval of the members, may increase or decrease
any of the above purchase limitations.
To the extent that shares are available, each subscriber must subscribe
for a minimum of 25 shares. In computing the number of shares to be allocated,
all numbers will be rounded down to the next whole number.
Common Stock purchased in the Conversion will be freely transferable
except for shares purchased by executive officers and directors of the
Association or the Holding Company. See "- Restrictions on Transfer of
Subscription Rights and Shares."
Marketing Arrangements
Gloversville Federal has retained Capital Resources, 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"), to consult
with and advise the Association and to assist in the distribution of shares in
the Offering on a best-efforts basis. Capital Resources is headquartered in
Washington, D.C. and its phone number is (202) 466-5685. Among the services
Capital Resources will perform are (i) training and educating Gloversville
Federal employees, who will be performing certain ministerial functions in the
Offering, regarding the mechanics and regulatory requirements of the stock sale
process, (ii) keeping records of orders for shares of Common Stock, (iii)
targeting Gloversville Federal's sales efforts including preparation of
marketing materials, (iv) assisting in the
118
collection of proxies from Members for use at the Special Meeting, and (v)
providing its registered stock representatives to staff the Stock Information
Center and meeting with and assisting potential subscribers. For its services,
Capital Resources will receive a fee of $90,000.
To the extent registered broker-dealers are utilized, the Holding
Company will pay a fee, to be negotiated, to such Selected Dealers, including
any sponsoring dealer fees. Fees paid to Capital Resources and to any other
broker-dealer may be deemed to be underwriting fees, and Capital Resources and
such other broker-dealers may be deemed to be underwriters. The Holding Company
has agreed to reimburse Capital Resources for its reasonable out-of-pocket
expenses (not to exceed $15,000 without management approval), and its legal fees
and expenses (not to exceed $20,000 without management approval) and to
indemnify Capital Resources against certain claims or liabilities, including
certain liabilities under the Securities Act.
In the event there is a Public Offering or Direct Community Offering,
procedures may be implemented to permit a purchaser to pay for his or her shares
with funds held by or deposited with Capital Resources or a "Selected Dealer."
See "- Public Offering and Direct Community Offering."
Directors and executive officers of the Holding Company and the
Association may, to a limited extent, participate in the solicitation of offers
to purchase Common Stock. Sales will be made from a Stock Information Center
located away from the publicly accessible areas (including teller windows) of
the Association's office. Other employees of the Association may participate in
the Offering in administrative capacities, providing clerical work in effecting
a sales transaction or answering questions of a potential purchaser provided
that the content of the employee's responses is limited to information contained
in this Prospectus or other offering document. Other questions of prospective
purchasers will be directed to executive officers or registered representatives
of Capital Resources. Such other employees have been instructed not to solicit
offers to purchase Common Stock or provide advice regarding the purchase of
Common Stock. To the extent permitted under applicable law, directors and
executive officers of the Holding Company and the Association may participate in
the solicitation of offers to purchase Common Stock, except in the State of
Texas where only a representative of Capital Resources will be able to offer and
sell securities to Texas residents. The Holding Company will rely on Rule 3a4-1
under the Exchange Act and sales of Common Stock will be conducted within the
requirements of Rule 3a4-1, so as to permit officers, directors and employees to
participate in the sale of Common Stock. No officer, director or employee of the
Holding Company or the Association will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.
A conversion center will be established at the Association's office, in
an area separated from the Association's banking operations. No sales activities
will be conducted in the public areas of the Association's offices, but persons
will be able to obtain a Prospectus and sales information at such places, and
employees will inform prospective purchasers to direct their questions to the
conversion center and will provide such persons with the telephone number of the
conversion center. Completed stock orders will be accepted at such places, and
will be promptly forwarded to the conversion center for processing.
119
The Association and the Holding Company will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for shares, pursuant to the Plan of Conversion,
reside. However, no shares will be offered or sold under the Plan of Conversion
to any such person who (1) resides in a foreign country or (2) resides in a
state of the United States in which a small number of persons otherwise eligible
to subscribe for shares under the Plan of Conversion reside or as to which the
Association and the Holding Company determine that compliance with the
securities law of such state would be impracticable for reasons of cost or
otherwise, including, but not limited to, a requirement that the Association or
the Holding Company or any of their officers, directors or employees register,
under the securities laws of such state, as a broker, dealer, salesmen or agent.
No payments will be made in lieu of the granting of Subscription Rights to any
such person.
Method of Payment for Subscriptions
To purchase shares in the Subscription Offering, an executed order form
and certification form with the required payment for each share subscribed for,
or with appropriate authorization for withdrawal from the Association's deposit
account (which may be given by completing the appropriate blanks in the order
form), must be received by the Association by noon, Gloversville, New York time,
on ________ __, 1998. Order forms which are not received by such time or are
executed defectively or are received without full payment (or appropriate
withdrawal instructions) are not required to be accepted.
To order Common Stock in connection with the Public Offering and/or
Direct Community Offering, if any, an executed stock order and account
withdrawal authorization and certification must be received by Capital Resources
prior to the termination of such offering. The date by which orders must be
received in the Public Offering and Direct Community Offering will be set by the
Holding Company at the time of commencement of such offerings, if any; provided
however, if the Offering is extended beyond ________ __, 1998, each subscriber
will have the opportunity to maintain, modify or rescind his or her
subscription. In such event, all subscription funds will be promptly returned
with interest to each subscriber unless he or she affirmatively indicates
otherwise. In addition, the Holding Company and the Association are not
obligated to accept orders submitted on photocopies or facsimile order forms.
The Holding Company and the Association have the right to waive or
permit the correction of incomplete or improperly executed forms, but do not
represent that they will do so. Once received, an executed order form or stock
order and account withdrawal authorization may not be modified, amended or
rescinded without the consent of the Holding Company and the Association unless
the Conversion has not been completed by _________ __, 1998.
Payment for subscriptions in the Subscription Offering, may be made (i)
in cash if delivered in person at the office of the Association, (ii) by check
or money order or (iii) by authorization of withdrawal from deposit accounts
maintained with the Association. Interest will be paid on payments made by cash,
check, bank draft or money order, whether or not the Conversion is complete or
terminated, at the Association's current passbook rate from the date payment is
received until the completion or termination of the Conversion. If payment is
made by authorization of withdrawal from deposit or time accounts, the funds
authorized to be withdrawn from such account
120
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion. Such funds will be unavailable to the depositor
until completion or termination of the Conversion.
If a subscriber authorizes the Association to withdraw the amount of
the Purchase Price from his certificate account, the Association will do so as
of the effective date of Conversion. The Association will waive any applicable
penalties for early withdrawal from time accounts at Gloversville Federal for
the purpose of purchasing Common Stock. If the remaining balance in a
certificate account is reduced below the applicable minimum balance requirement
at the time that the funds actually are transferred under the authorization, the
rate paid on the remaining balance of the certificate will earn interest at the
then-current passbook rate.
Owners of self-directed IRAs may under certain circumstances use the
assets of such IRAs to purchase shares of Common Stock in the Offering, provided
that such IRAs are self-directed and are not maintained at the Association.
Persons with IRAs maintained at the Association must have their accounts
transferred to an unaffiliated institution or broker to purchase shares of
Common Stock in the Offering. In addition, the provisions of the ERISA and
Internal Revenue Service regulations require that officers, directors and 10%
stockholders who use self-directed IRA funds to purchase shares of Common Stock
in the Offering make such purchases for the exclusive benefit of the IRAs.
If the ESOP subscribes for shares during the Subscription Offering,
such plan will not be required to pay for the shares subscribed for at the time
it subscribes, but rather, may pay for such shares of Common Stock subscribed
for the Purchase Price upon consummation of the Conversion, provided that there
is in force from the time of its subscription until such time, a loan commitment
to lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
For information regarding the submission of orders in connection with
the Public Offering and Direct Community Offering, see "- Public Offering and
Direct Community Offering."
All refunds and any interest due will be paid after completion of the
Conversion. Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Association, or to such other address as may be specified in
properly completed order forms, as soon as practicable following consummation of
the sale of all shares of Common Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order forms will only be distributed with a prospectus. The Association will
accept for processing only orders submitted on original order forms with the
form of certification. Photocopies or facsimile copies of order forms or
certifications will not be accepted. Payment by cash, check, money order, bank
draft or debit authorization to an existing account at the Association must
accompany the order form. No wire transfers will be accepted.
121
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (September 30,
1996), Supplemental Eligibility Record Date (___________, 1998) and/or the
Voting Record Date (_______ __, 1997) must list all accounts on the stock order
form giving all names on each account and the account number
as of the applicable record date.
In addition to the foregoing, if shares are offered through Selected
Dealers, a purchaser may pay for his shares with funds held by or deposited with
a Selected Dealer. If an order form is executed and forwarded to the Selected
Dealer or if the Selected Dealer is authorized to execute the order form on
behalf of a purchaser, the Selected Dealer is required to forward the order form
and funds to the Association for deposit in a segregated account on or before
noon of the business day following receipt of the order form or execution of the
order form by the Selected Dealer. Alternatively, Selected Dealers may solicit
indications of interest from their customers who indicated an interest and seek
their confirmation as to their intent to purchase. Those indicating an intent to
purchase shall forward executed order forms and certifications to their Selected
Dealer or authorize the Selected Dealer to execute such forms. The Selected
Dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Association for deposit in a segregated
account. If such alternative procedure is employed, purchasers' funds are not
required to be in their accounts with Selected Dealers until the debit date.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the Eligible
Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, Other Members and employees, officers and directors, 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
executed only by the person to whom they are granted and only for his account.
Each person exercising such subscription rights will be required to certify that
he is purchasing shares solely for his own account and that he has no agreement
or understanding regarding the sale or transfer of such shares. The OTS
regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase such subscription rights or
shares of Common Stock prior to the completion of the Conversion.
The Association and the Holding Company may pursue any and all legal
and equitable remedies in the event they become aware of the transfer of
subscription rights and will not honor orders known by them to involve the
transfer of such rights.
Except as to directors and executive officers of the Association and
the Holding Company, the shares of Common Stock sold in the Conversion will be
freely transferable. Shares purchased by directors, executive officers or their
associates in the Conversion shall be subject to the restrictions that said
shares shall not be sold during the period of one year following the date of
122
purchase, except in the event of the death of the stockholder. Accordingly,
stock certificates issued by the Holding Company to directors, executive
officers and their associates shall bear a legend giving appropriate notice of
such restriction and, in addition, the Association and the Holding Company will
give appropriate instructions to the transfer agent for the Common Stock with
respect to the applicable restriction upon transfer of any restricted shares.
Any shares issued at a later date as a stock dividend, stock split or otherwise,
to holders of restricted stock, shall be subject to the same restrictions that
may apply to such restricted stock. Holding Company stock (like the stock of
most companies) is subject to the requirements of the Securities Act.
Accordingly, Holding Company stock may be offered and sold only in compliance
with registration requirements or pursuant to an applicable exemption from
registration.
Holding Company stock received in the Conversion by persons who are not
"affiliates" of the Holding Company may be resold without registration. Shares
received by affiliates of the Holding Company (primarily the directors, officers
and principal stockholders of the Holding Company) will be subject to the resale
restrictions of Rule 144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain
information concerning the Holding Company, and that sales thereunder be made in
routine brokerage transactions or through a market maker. If the conditions of
Rule 144 are satisfied, each affiliate (or group of persons acting in concert
with one or more affiliates) is entitled to sell in the public market, without
registration, in any three-month period, a number of shares which does not
exceed the greater of (i) 1% of the number of outstanding shares of Holding
Company stock, or (ii) if the stock is admitted to trading on a national
securities exchange or reported through the automated quotation system of a
registered securities bank, the average weekly reported volume of trading during
the four weeks preceding the sale.
Participation by the Board and Executive Officers
The directors and executive officers of Gloversville Federal have
indicated their intention to purchase in the Conversion an aggregate of $385,500
of Common Stock, equal to .90%, .77%, .67% or .58% of the number of shares to be
issued in the Offering, at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively. The following table sets
forth information regarding Subscription Rights to Common Stock intended to be
exercised by each of the directors of the Association, including members of
their immediate family and their IRAs, and by all directors and executive
officers as a group. The following table assumes that 5.0 million shares, the
midpoint of the Estimated Valuation Range, of Common Stock are issued at the
Purchase Price of $10.00 per share and that sufficient shares will be available
to satisfy the subscriptions indicated. The table does not include shares to be
purchased through the ESOP (8.0% of shares issued in the Conversion) or awarded
under the proposed RRP (an amount of shares which may be acquired after
stockholder ratification of such plan equal to 4.0% of the shares sold in the
Conversion) or proposed Stock Option Plan (an amount of shares which may be
issued after stockholder ratification of such plan equal to 10.0% of the shares
sold in the Conversion).
123
Number
Aggregate of Shares Percent of
Purchase at $10.00 Shares at
Name Title Price per Share(1) Midpoint
---- ----- ----- ------------ --------
Priscilla J. Bell Director $10,000 1,000 .02%
Timothy E. Delaney Director 100,000 10,000 .20
Lewis E. Kolar Director, President and Chief
Executive Officer 75,000 7,500 .15
Donald I. Lee Director and Secretary 50,000 5,000 .10
Richard D. Ruby Chairman of the Board 100,000 10,000 .20
Robert J. Sofarelli Director 20,000 2,000 .04
All other executive officers
as a group 30,500 3,050 .07
All directors and executive
officers as a group (8 persons) 385,500 38,550 .77
- ----------
(1) Does not include subscriptions by the ESOP, or options which are intended
to be granted under the proposed Stock Option Plan or restricted stock
awards which are intended to be granted under the proposed RRP, subject to
stockholder ratification of such plans.
Risk of Delayed Offering
The completion of the sale of all unsubscribed shares in the Offering
will be dependent, in part, upon the Association's operating results and market
conditions at the time of the Offering. Under the Plan of Conversion, all shares
offered in the Conversion must be sold within a period ending 24 months from the
date of the Special Meeting. While the Association and the Holding Company
anticipate completing the sale of shares offered in the Conversion within this
period, if the Board of Directors of the Association and the Holding Company are
of the opinion that economic conditions generally or the market for publicly
traded thrift institution stocks make undesirable a sale of the Common Stock,
then the Offering may be delayed until such conditions improve.
A material delay in the completion of the sale of all unsubscribed
shares in the Public Offering or otherwise may result in a significant increase
in the costs of completing the Conversion. Significant changes in the
Association's operations and financial condition, the aggregate market value of
the shares to be issued in the Conversion and general market conditions may
occur during such material delay. In the event the Conversion is not consummated
within 24 months after the date of the Special Meeting of Members, the
Association would charge accrued Conversion costs to then current period
operations.
Approval, Interpretation, Amendment and Termination
All interpretations of the Plan of Conversion, as well as the
completeness and validity of order forms and stock order and account withdrawal
authorizations, will be made by the Association and the Holding Company and will
be final, subject to the authority of the OTS and the requirements of applicable
law. The Plan of Conversion provides that, if deemed necessary or desirable by
the
124
Boards of Directors of the Association and the Holding Company, the Plan of
Conversion may be substantively amended by the Boards of Directors of the
Association and the Holding Company, as a result of comments from regulatory
authorities or otherwise, at any time with the concurrence of the OTS and the
SEC. In the event the Plan of Conversion is substantially amended, other than a
change in the maximum purchase limits set forth herein, the Holding Company
intends to notify subscribers of the change and to refund subscription funds
with interest unless subscribers affirmatively elect to increase, decrease or
maintain their subscriptions. The Plan of Conversion will terminate if the sale
of all shares is not completed within 24 months after the date of the Special
Meeting of Members. The Plan of Conversion may be terminated by the Boards of
Directors of the Holding Company and the Association with the concurrence of the
OTS, at any time. A specific resolution approved by a two-thirds vote of the
Boards of Directors of the Holding Company and the Association would be required
to terminate the Plan of Conversion prior to the end of such 24-month period.
Restrictions on Repurchase of Stock
For a period of three years following Conversion, the Holding Company
may not repurchase any shares of its capital stock, except in the case of an
offer to repurchase on a pro rata basis made to all holders of capital stock of
the Holding Company. Any such offer shall be subject to the prior approval of
the OTS. Furthermore, the Holding Company may not repurchase any of its stock
(i) if the result thereof would be to reduce the regulatory capital of the
Association below the amount required for the liquidation account to be
established pursuant to OTS regulations and (ii) except in compliance with the
requirements of the OTS' capital distribution rule.
The above limitations are subject to the OTS conversion rules which
generally provide that the Holding Company may repurchase its capital stock
provided (i) no repurchases occur within one year following the Conversion
(subject to certain exceptions), (ii) repurchases during the second and third
year after conversion are part of an open market stock repurchase program that
does not allow for a repurchase of more than 5% of the Holding Company's
outstanding capital stock during a 12- month period, (iii) the repurchases do
not cause the Association to become undercapitalized, and (iv) the Holding
Company provides notice to the OTS at lease 10 days prior to the commencement of
a repurchase program and the OTS does not object to such regulations. In
addition, the above limitations do not preclude repurchases of capital stock by
the Holding Company in the event applicable federal regulatory limitations are
subsequently liberalized.
Income Tax Consequences
Consummation of the Conversion is expressly conditioned upon prior
receipt by the Association of either a ruling from the IRS or an opinion of
Silver, Freedman & Taff, L.L.P. with respect to federal taxation, and an opinion
of KPMG Peat Marwick LLP with respect to New York taxation, to the effect that
consummation of the Conversion will not be taxable to the converted Association
or the Holding Company. The full text of the Silver, Freedman & Taff, L.L.P.
opinion, the RP Financial Letter (hereinafter defined) and the KPMG Peat Marwick
LLP opinion, which opinions are summarized herein, were filed with the SEC as
exhibits to the Holding Company's Registration Statement on Form SB-2. See
"Additional Information."
125
An opinion which is summarized below has been received from Silver,
Freedman & Taff, L.L.P. with respect to the proposed Conversion of the
Association to the stock form. The Silver, Freedman Taff, L.L.P. opinion states
that (i) the Conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, and no gain or
loss will be recognized to the Association in either its mutual form or its
stock form by reason of the proposed Conversion, (ii) no gain or loss will be
recognized to the Association in its stock form upon the receipt of money and
other property, if any, from the Holding Company for the stock of the
Association; and no gain or loss will be recognized to the Holding Company upon
the receipt of money for Common Stock of the Holding Company; (iii) the assets
of the Association in either its mutual or its stock form will have the same
basis before and after the Conversion; (iv) the holding period of the assets of
the Association in its stock form will include the period during which the
assets were held by the Association in its mutual form prior to Conversion; (v)
gain, if any, will be realized by the depositors of the Association upon the
constructive issuance to them of withdrawable deposit accounts of the
Association in its stock form, nontransferable subscription rights to purchase
Holding Company Common Stock and/or interests in the Liquidation Account (any
such gain will be recognized by such depositors, but only in an amount not in
excess of the fair market value of the subscription rights and Liquidation
Account interests received); (vi) the basis of the account holder's savings
accounts in the Association after the Conversion will be the same as the basis
of his or her savings accounts in the Association prior to the Conversion; (vii)
the basis of each account holder's interest in the Liquidation Account is
assumed to be zero; (viii) based on the RP Financial Letter, as hereinafter
defined, the basis of the subscription rights will be zero; (ix) the basis of
the Holding Company Common Stock to its stockholders will be the purchase price
thereof; (x) a stockholder's holding period for Holding Company Common Stock
acquired through the exercise of subscription rights shall begin on the date on
which the subscription rights are exercised and the holding period for the
Conversion Stock purchased in the Offering will commence on the date following
the date on which such stock is purchased; (xi) the Association in its stock
form will succeed to and take into account the earnings and profits or deficit
in earnings and profits, of the Association, in its mutual form, as of the date
of Conversion; (xii) the Association, immediately after Conversion, will succeed
to and take into account the bad debt reserve accounts of the Association, in
mutual form, and the bad debt reserves will have the same character in the hands
of the Association after Conversion as if no Conversion had occurred; and (xiii)
the creation of the Liquidation Account will have no effect on the Association's
taxable income, deductions or addition to reserve for bad debts either in its
mutual or stock form.
The opinion from Silver, Freedman & Taff, L.L.P. is based, among other
things, on certain assumptions, including the assumptions that the exercise
price of the Subscription Rights to purchase Holding Company Common Stock will
be approximately equal to the fair market value of that stock at the time of the
completion of the proposed Conversion. With respect to the Subscription Rights,
the Association will receive a letter from RP Financial (the "RP Financial
Letter") which, based on certain assumptions, will conclude that the
Subscription Rights to be received by Eligible Account Holders, Supplemental
Eligible Account Holders and other eligible subscribers do not have any economic
value at the time of distribution or at the time the Subscription Rights are
exercised, whether or not a Public Offering takes place.
The Association has also received an opinion of Silver, Freedman &
Taff, L.L.P. to the effect that, based in part on the RP Financial Letter: (i)
no taxable income will be realized by depositors
126
as a result of the exercise of non-transferable Subscription Rights to purchase
shares of Holding Company Common Stock at fair market value; (ii) no taxable
income will be recognized by borrowers, directors, officers and employees of the
Association on the receipt or exercise of Subscription Rights to purchase shares
of Holding Company Common Stock at fair market value; and (iii) no taxable
income will be realized by the Association or Holding Company on the issuance of
Subscription Rights to eligible subscribers to purchase shares of Holding
Company Common Stock at fair market value.
Notwithstanding the RP Financial Letter, if the Subscription Rights are
subsequently found to have a fair market value and are deemed a distribution of
property, it is Silver, Freedman & Taff, L.L.P.'s opinion that gain or income
will be recognized by various recipients of the Subscription Rights (in certain
cases, whether or not the rights are exercised) and the Association and/or the
Holding Company may be taxable on the distribution of the Subscription Rights.
With respect to New York taxation, the Association has received an
opinion from KPMG Peat Marwick LLP to the effect that the New York tax
consequences to the Association, in its mutual or stock form, the Holding
Company, eligible account holders, parties receiving Subscription Rights,
parties purchasing conversion stock, and other parties participating in the
Conversion will be the same as the federal income tax consequences described
above.
Unlike a private letter ruling, the opinions of Silver, Freedman &
Taff, L.L.P. and KPMG Peat Marwick LLP, as well as the RP Financial Letter, have
no binding effect or official status, and no assurance can be given that the
conclusions reached in any of those opinions would be sustained by a court if
contested by the IRS or the Delaware or New York tax authorities.
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Boards of Directors of the Association and the Holding
Company are not aware of any effort that might be made to obtain control of the
Holding Company after Conversion, the Board of Directors, as discussed below,
believe that it is appropriate to include certain provisions as part of the
Holding Company's certificate of incorporation to protect the interests of the
Holding Company and its stockholders from takeovers which the Board of Directors
of the Holding Company might conclude are not in the best interests of the
Association, the Holding Company or the Holding Company's stockholders.
The following discussion is a general summary of material provisions of
the Holding Company's certificate of incorporation and bylaws and certain other
regulatory provisions which may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in the Holding Company's certificate of
incorporation and bylaws and the Association's proposed stock charter and
bylaws, reference should be made in each case to the document in question, each
of which is part of the Association's Conversion Application filed with the OTS
and the Holding Company's Registration Statement filed with the SEC. See
"Additional Information."
127
Provisions of the Holding Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors of the Holding Company will be divided into three classes,
with directors in each class elected for three-year staggered terms except for
the initial directors. Thus, assuming a Board of six directors, it would take
two annual elections to replace a majority of the Holding Company's Board. The
Holding Company's certificate of incorporation also provides that the size of
the Board of Directors may be increased or decreased only by a majority vote of
the whole Board or by a vote of 80% of the shares eligible to be voted at a duly
constituted meeting of stockholders called for such purpose. The bylaws also pro
vide that any vacancy occurring in the Board of Directors, including a vacancy
created by an increase in the number of directors, shall be filled for the
remainder of the unexpired term by a majority vote of the directors then in
office. Finally, the bylaws impose certain notice and information requirements
in connection with the nomination by stockholders of candidates for election to
the Board of Directors or the proposal by stockholders of business to be acted
upon at an annual meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The certificate of
incorporation of the Holding Company provides that a special meeting of
stockholders may be called only pursuant to a resolution of the Board of
Directors and for only such business as directed by the Board. Stockholders are
not authorized to call a special meeting.
Absence of Cumulative Voting. The Holding Company's certificate of
incorporation does not provide for cumulative voting rights in the election of
directors.
Authorization of Preferred Stock. The certificate of incorporation of
the Holding Company authorizes 100,000 shares of serial preferred stock, $.01
par value. The Holding 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, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Holding 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 and does not intend to issue any preferred stock except on
terms which the Board deems to be in the best interests of the Holding Company
and its stockholders.
Limitation on Voting Rights. The certificate of incorporation of the
Holding Company provides that in no event shall any record owner of any
outstanding Common Stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the
128
then outstanding shares of Common Stock (the "Limit"), be entitled or permitted
to any vote in respect of the shares held in excess of the Limit. This
limitation would not inhibit any person from soliciting (or voting) proxies from
other beneficial owners for more than 10% of the Common Stock or from voting
such proxies. Beneficial ownership is to be determined pursuant to Rule 13d-3 of
the General Rules and Regulations of the Exchange Act, and in any event includes
shares beneficially owned by any affiliate of such person, shares which such
person or his affiliates (as defined in the certificate of incorporation) have
the right to acquire upon the exercise of conversion rights or options and
shares as to which such person and his affiliates have or share investment or
voting power but shall not include shares beneficially owned by directors,
officers and employees of the Association or the Holding Company. This provision
will be enforced by the Board of Directors to limit the voting rights of persons
beneficially owning more than 10% of the stock and thus could be utilized in a
proxy contest or other solicitation to defeat a proposal that is desired by a
majority of the stockholders.
Procedures for Certain Business Combinations. The Holding Company's
certificate of incorporation requires that certain business combinations
(including transactions initiated by management) between the Holding Company (or
any majority-owned subsidiary thereof) and a 10% or more stockholder either (i)
be approved by at least 80% of the total number of outstanding voting shares,
voting as a single class, of the Holding Company, (ii) be approved by two-thirds
of the continuing Board of Directors (i.e., persons serving prior to the 10%
stockholder becoming such) or (iii) involve consideration per share generally
equal to that paid by such 10% stockholder when it acquired its block of stock.
It should be noted that, since the Board and executive officers (8
persons) intend to purchase approximately $385,500 of the shares offered in the
Conversion and may control the voting of additional shares through the ESOP and
proposed RRP and Stock Option Plan, the Board and management may be able to
block the approval of combinations requiring an 80% vote even where a majority
of the stockholders vote to approve such combinations.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's certificate of incorporation must be approved by the Holding
Company's Board of Directors and also by a majority of the outstanding shares of
the Holding Company's voting stock, provided, however, that approval by at least
80% of the outstanding voting stock is generally required for certain provisions
(i.e., provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; offers to
acquire and acquisitions of control; director liability; certain business
combinations; power of indemnification; and amendments to provisions relating to
the foregoing in the certificate of incorporation).
The bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of the
Association believes that the provisions described above are prudent and will
reduce the Holding Company's vulnerability to takeover
129
attempts and certain other transactions which have not been negotiated with and
approved by its Board of Directors. These provisions will also assist the
Association in the orderly deployment of the conversion proceeds into productive
assets during the initial period after the Conversion. The Board of Directors
believes these provisions are in the best interest of the Association and of the
Holding Company and its stockholders. In the judgment of the Board of Directors,
the Holding Company's Board will be in the best position to determine the true
value of the Holding Company and to negotiate more effectively for what may be
in the best interests of its stockholders. Ac cordingly, the Board of Directors
believes that it is in the best interests of the Holding Company and its
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of the Holding Company and that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is also
the view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at prices reflective of the
true value of the Holding Company and which is in the best interests of all
stockholders.
Attempts to take over financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners becomes less
than the 300 required for Exchange Act registration.
Despite the belief of the Association and the Holding Company as to the
benefits to stock holders of these provisions of the Holding Company's
certificate of incorporation and bylaws, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provi sions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board will enforce the voting limitation provisions of the charter in proxy
solicitations and accordingly could utilize these provisions to defeat proposals
that are favored by a majority of the stockholders. The Boards of Directors of
the Association and the Holding Company, however, have concluded that the
potential benefits outweigh the possible disadvantages.
130
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted to a Delaware corporation. The Holding Company and the Association
do not presently intend to propose the adoption of further restrictions on the
acquisition of the Holding Company's equity securities.
Other Restrictions on Acquisitions of Stock
Delaware Anti-Takeover Statute. The Delaware General Corporation Law
(the "DGCL") provides that buyers who acquire more than 15% of the outstanding
stock of a Delaware corporation, such as the Holding Company, are prohibited
from completing a hostile takeover of such corporation for three years. However,
the takeover can be completed if (i) the buyer, while acquiring the 15%
interest, acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting stock
listed on a national exchange or listed for quotation with a registered national
securities association. Gloversville Federal may exempt itself from the
requirements of the statute by adopting an amendment to its Certificate of
Incorporation or Bylaws electing not to be governed by this provision. At the
present time, the Board of Directors does not intend to propose any such
amendment.
Federal Regulation. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, this regulation prohibits any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire (if
the offer is opposed by the savings association) more than 10% of the stock of
any converted savings institution if such person is, or after consummation of
such acquisition would be, the beneficial owner of more than 10% of such stock.
In the event that any person, directly or indirectly, violates this regulation,
the securities beneficially owned by such person in excess of 10% may not be
counted as shares entitled to vote and may not be voted by any person or counted
as voting shares in connection with any matter submitted to a vote of
stockholders. Like the charter provisions outlined above, these federal
regulations can make a change in control more difficult, even if desired by the
holders of the majority of the shares of the stock. The Board of Directors
reserves the right to ask the OTS or other federal regulators to enforce these
restrictions against persons seeking to obtain control of the Holding Company,
whether in a proxy solicitation or otherwise. The policy of the Board is that
these legal restrictions must be observed in every case, including instances in
which an acquisition of control of the Holding Company is favored by a majority
of the stockholders.
131
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Under federal law (as well as the regulations referred to
below) the term "savings association" includes state and federally chartered
SAIF-insured institutions and federally chartered savings banks whose accounts
are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of a
savings association's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of any class of a savings association's voting stock, if the
acquiror also is subject to any one of eight "control factors," constitutes a
rebuttable determination of control under the OTS regulations. Such control
factors include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The OTS regulations provide that persons or companies
which acquire beneficial ownership exceeding 10% or more of any class of a
savings association's stock must file with the OTS a certification that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
Holding Company Capital Stock
The 1,300,000 shares of capital stock authorized by the Holding Company
certificate of incorporation are divided into two classes, consisting of
1,200,000 shares of Common Stock (par value $.01 per share) and 100,000 shares
of serial preferred stock (par value $.01 per share). The Holding Company
currently expects to issue between 425,000 and 575,000 shares (subject to
increase to 661,250) of Common Stock in the Conversion and no shares of serial
preferred stock. The aggregate par value of the issued shares will constitute
the capital account of the Holding Company on a consolidated basis. Upon payment
of the Purchase Price, all shares issued in the Conversion will be duly
authorized, fully paid and nonassessable. The balance of the purchase price of
Common Stock, less expenses of Conversion, will be reflected as paid-in capital
on a consolidated basis. See "Capitalization."
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 Holding
132
Company will represent non-withdrawable capital, will not be of an insurable
type and will not be insured by the FDIC.
Under Delaware law, the holders of the Common Stock will possess
exclusive voting power in the Holding Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
subject to the limitation discussed under "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions - Provisions of the Holding Company's
Certificate of Incorporation and Bylaws - Limitation on Voting Rights." If the
Holding Company issues preferred stock subsequent to the Conversion, holders of
the preferred stock may also possess voting powers.
Liquidation or Dissolution. In the event of any liquidation,
dissolution or winding up of the Association, the Holding Company, as the sole
holder of the Association's capital stock would be entitled to receive, after
payment or provision for payment of all debts and liabilities of the Association
(including all deposit accounts and accrued interest thereon) and after
distribution of the balance in the special liquidation account to Eligible and
Supplemental Account Holders, all assets of the Association available for
distribution. In the event of liquidation, dissolution or winding up of the
Holding Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of the Holding Company available for distribution. See "The
Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of
the Association." If preferred stock is issued subsequent to the Conversion, the
holders thereof may have a priority over the holders of Common Stock in the
event of liquidation or dissolution.
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 will not be subject to call for redemption, and, upon receipt by the
Holding Company of the full purchase price therefor, each share of the Common
Stock will be fully paid and nonassessable.
Preferred Stock. After Conversion, the Board of Directors of the
Holding 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 above, the Holding 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 a stock based employee 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
herein or as otherwise
133
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 of Directors of the Holding 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.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's certificate of incorporation and bylaws
which may affect the ability of the Holding Company's stockholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
Dividends. The Holding Company's Board of Directors may consider a
policy of paying cash dividends on the Common Stock in the future. No decision
has been made, however, as to the amount or timing of such dividends, if any.
The declaration and payment of dividends are subject to, among other things, the
Holding Company's then current and projected consolidated operating results,
financial condition, regulatory restrictions, future growth plans and other
factors the Board deems relevant. Therefore, no assurance can be given that any
dividends will be declared.
The ability of the Holding Company to pay cash dividends to its
stockholders will be dependent, in part, upon the ability of the Association to
pay dividends to the Holding Company. OTS regulations do not permit the
Association to declare or pay a cash dividend on its stock or repurchase shares
of its stock if the effect thereof would be to cause its regulatory capital to
be reduced below the amount required for the liquidation account or to meet
applicable regulatory capital requirements. See "Regulation - Limitations on
Dividends and Other Capital Distributions" for information regarding OTS
regulations governing the Association's ability to pay dividends to the Holding
Company.
Delaware law generally limits dividends of the Holding Company to an
amount equal to the excess of its net assets over its paid-in capital or, if
there is no such excess, to its net earnings for the current and immediately
preceding fiscal year. In addition, as the Holding Company does not anticipate,
for the immediate future, engaging in activities other than (i) investing in
cash, short-term securities and investment and mortgage-backed securities
similar to those invested in by the Association and (ii) holding the stock of
Gloversville Federal, the Holding Company's ability to pay dividends will be
limited, in part, by the Association's ability to pay dividends, as set forth
above.
Earnings appropriated to the Association's "Excess" bad debt reserves
and deducted for federal income tax purposes cannot be used by the Association
to pay cash dividends to the Holding Company without adverse tax consequences.
See "Regulation - Federal and State Taxation."
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for Gloversville Federal by
the firm of Silver, Freedman & Taff, L.L.P. (a limited liability partnership
including professional corporations), 7th Floor, East Tower, 1100 New York
Avenue, NW, Washington, DC 20005. Silver, Freedman & Taff, L.L.P. has
134
consented to the references herein to its opinions. The New York income tax
consequences of the Conversion will be passed upon by KPMG Peat Marwick LLP.
KPMG Peat Marwick LLP has consented to references herein to its opinion. Capital
Resources has been represented in the Conversion by Serchuk & Zelermyer, LLP, 81
Main Street, White Plains, New York.
EXPERTS
The financial statements of Gloversville Federal as of September 30,
1997 and 1996 and for each of the years in the three year period ended September
30, 1997 appearing in this Prospectus have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, as set forth in their report
thereon appearing elsewhere herein, and is included in reliance upon such
report, given upon the authority of such firm as experts in accounting and
auditing.
RP Financial has consented to the inclusion herein of the summary of
its letter to the Association setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Association as converted and
to the reference to its opinion that subscription rights received by Eligible
Account Holders, Supplemental Eligible Account Holders and other eligible
subscribers do not have any economic value.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement
under the Securities Act with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all the information set forth in the Registration Statement. However,
the prospectus does contain a description of the material provisions of the
documents contained therein. Such information can be examined without charge at
the public reference facilities of the SEC located at 450 Fifth Street, NW,
Washington, DC 20549, and copies of such material can be obtained from the SEC
at prescribed rates. In addition, the SEC maintains a Web site. The address of
the SEC's Web site is "http://www.sec.gov." The statements contained herein as
to the contents of any contract or other document filed as an exhibit to the
Registration Statement are, of necessity, brief descriptions thereof which
describe only the material provisions of such documents; each such statement is
qualified by reference to such contract or document.
The Association has filed an Application for Conversion with the OTS
with respect to the Conversion. Pursuant to the rules and regulations of the
OTS, this Prospectus omits certain information contained in that Application.
The Application may be examined at the principal offices of the OTS, 1700 G
Street, NW, Washington, DC 20552 and at the Chicago District Office of the OTS,
Suite 1300, 200 West Madison Street, Chicago, Illinois 60606, without charge.
In connection with the Conversion, the Holding Company will register
the Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, the Holding Company and the holders of its Common Stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the
135
Exchange Act. Under the Plan, the Holding Company has undertaken that it will
not terminate such registration for a period of at least three years following
the Conversion.
A copy of the Certificate of Incorporation and Bylaws of the Holding
Company are available without charge from the Association.
136
GLOVERSVILLE FEDERAL SAVINGS
AND LOAN ASSOCIATION
Financial Statements
As of September 30, 1997 and 1996 and
for the years in the three-year period
ended September 30, 1997
(With Independent Auditors' Report Thereon)
[LETTERHEAD FOR KPMG PEAT MARWICK LLP]
Independent Auditors' Report
The Board of Directors
Gloversville Federal Savings and
Loan Association
Gloversville, New York
We have audited the accompanying statements of financial condition of
Gloversville Federal Savings and Loan Association (the Association) as of
September 30, 1997 and 1996, and the related statements of operations, changes
in equity and cash flows for each of the years in the three year period ended
September 30, 1997. These financial statements are the responsibility of the
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 Gloversville Federal Savings
and Loan Association as of September 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three year period
ended September 30, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
December 12, 1997
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Financial Condition
September 30,
------------------------------
Assets 1997 1996
---- ----
Cash and due from banks ...................... $ 1,922,386 1,098,081
Interest bearing time deposits ............... -- 100,000
------------ ------------
Total cash and cash equivalents .......... 1,922,386 1,198,081
Securities available for sale ................ 7,017,111 7,438,982
Net loans receivable ......................... 49,526,290 49,636,131
Accrued interest receivable .................. 332,122 329,991
Other real estate owned ...................... 312,892 69,548
Premises and equipment, net .................. 1,538,364 1,793,739
Prepaid expenses and other assets ............ 372,642 539,608
------------ ------------
Total assets ............................. $ 61,021,807 61,006,080
============ ============
Liabilities and Equity
Liabilities:
Deposits:
Demand and N.O.W. accounts ............... 5,147,684 5,174,015
Savings and money market accounts ........ 22,954,408 23,531,620
Time deposit accounts .................... 28,014,594 27,010,165
------------ ------------
Total deposits ........................... 56,116,686 55,715,800
Accrued expenses and other liabilities ...... 325,152 1,200,324
Borrowings .................................. 1,300,000 300,000
------------ ------------
Total liabilities ........................ 57,741,838 57,216,124
------------ ------------
Commitments and contingent liabilities
(note 10)
Equity:
Retained earnings .......................... 3,301,370 3,884,148
Net unrealized loss on securities
available for sale, net of taxes .......... (21,401) (94,192)
------------ ------------
Total equity ............................. 3,279,969 3,789,956
------------ ------------
Total liabilities and equity ............. $ 61,021,807 61,006,080
============ ============
See accompanying notes to financial statements.
2
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Operations
For the Years Ended
September 30,
---------------------------------------
1997 1996 1995
---- ---- ----
Interest and dividend income:
Interest and fees on loans ............. $ 4,409,006 4,131,580 3,928,591
Securities available for sale .......... 458,932 466,898 398,455
Securities held to maturity ............ -- -- 302,124
Interest bearing deposits .............. 36,714 134,345 186,839
----------- ----------- -----------
Total interest and dividend income .... 4,904,652 4,732,823 4,816,009
----------- ----------- -----------
Interest expense:
N.O.W. accounts ........................ 64,841 69,251 84,852
Savings and money market accounts ...... 837,803 679,589 645,219
Time deposit accounts .................. 1,522,058 1,667,030 1,796,706
Borrowings ............................. 21,777 178 --
----------- ----------- -----------
Total interest expense ................ 2,446,479 2,416,048 2,526,777
----------- ----------- -----------
Net interest income ................... 2,458,173 2,316,775 2,289,232
Provision for loan losses ............... 792,266 714,276 128,876
----------- ----------- -----------
Net interest income after provision
for loan losses ...................... 1,665,907 1,602,499 2,160,356
----------- ----------- -----------
Other income:
Fees and service charges ............... 140,309 118,499 96,130
Net (loss) gain on sale or writedown
of premises and equipment ............. -- (15,322) 86,379
Net gain on sale of securities available
for sale .............................. -- -- 204,285
Other .................................. 14,810 6,091 4,957
----------- ----------- -----------
Total other income ..................... 155,119 109,268 391,751
----------- ----------- -----------
Other expenses:
Compensation and employee benefits ..... 892,434 826,360 868,163
Occupancy expenses ..................... 224,598 212,054 156,802
Federal deposit insurance premiums ..... 56,665 130,387 143,696
Special one-time FDIC assessment ....... -- 414,835 --
Advertising expenses ................... 110,796 140,291 92,152
Directors' fees and expenses ........... 102,912 76,298 41,861
Equipment and data processing expenses . 319,110 310,218 282,206
Other real estate expenses ............. 73,030 27,039 126,719
Other operating expenses ............... 539,251 832,815 486,759
----------- ----------- -----------
Total other expenses .................. 2,318,796 2,970,297 2,198,358
----------- ----------- -----------
(Loss) income before income tax
(benefit) expense ...................... (497,770) (1,258,530) 353,749
Income tax expense (benefit) ............ 85,008 (222,324) 102,443
----------- ----------- -----------
Net (loss) income ..................... $ (582,778) (1,036,206) 251,306
=========== =========== ===========
See accompanying notes to financial statements.
3
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Changes in Equity
For the Years Ended September 30, 1997, 1996, and 1995
Net unrealized
gain(loss) on
securities
Retained available Total
earnings for sale equity
-------- -------- ------
Balance at October 1, 1994 ........ $ 4,669,048 35,609 4,704,657
Net income for 1995 ............... 251,306 -- 251,306
Change in valuation allowance
for securities available for
sale, net of income taxes ........ -- (101,943) (101,943)
----------- ----------- -----------
Balance at September 30, 1995 ..... 4,920,354 (66,334) 4,854,020
Net loss for 1996 ................. (1,036,206) -- (1,036,206)
Change in valuation allowance
for securities available for
sale, net of income taxes ........ -- (27,858) (27,858)
----------- ----------- -----------
Balance at September 30, 1996 ..... 3,884,148 (94,192) 3,789,956
Net loss for 1997 ................. (582,778) -- (582,778)
Change in valuation allowance
for securities available for
sale, net of income taxes ........ -- 72,791 72,791
----------- ----------- -----------
Balance at September 30, 1997 ..... $ 3,301,370 (21,401) 3,279,969
=========== =========== ===========
See accompanying notes to financial statements.
4
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Cash Flows
For the Years Ended
September 30,
--------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net (loss) income ....................... $ (582,778) (1,036,206) 251,306
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation expense ................... 291,086 227,646 179,412
Provision for loan losses .............. 792,266 714,276 128,876
Deferred tax expense (benefit) ......... 125,000 (55,651) 85,676
Writedown of other real estate owned ... 33,032 24,300 88,100
Net gain on sale of other real estate
owned ................................. (38,881) (76,847) (18,093)
Net loss (gain) on sale or writedown
of premises and equipment ............. -- 15,322 (86,379)
Net gain on sale of securities
available for sale .................... -- -- (204,285)
(Increase) decrease in accrued interest
receivable ............................ (2,131) 49,528 10,984
(Increase) decrease in prepaid expenses
and other assets ...................... (12,947) (4,536) (362,379)
(Decrease) increase in accrued expenses
and other liabilities ................. (875,172) 846,553 163,908
----------- ----------- -----------
Total adjustments .................... 312,253 1,740,591 (14,180)
Net cash (used in) provided by
operating activities ............... (270,525) 704,385 237,126
----------- ----------- -----------
Cash flows from investing activities:
Purchase of securities available for sale -- (4,601,592) (10,490,471)
Proceeds from sale of securities
available for sale .................... -- -- 13,636,976
Proceeds from principal repayment of
securities available for sale ......... 549,575 430,569 56,339
Proceeds from maturity and redemption
of securities available for sale ...... -- 3,700,000 1,500,000
Purchase of securities held to maturity . -- -- (500,000)
Proceeds from maturity and redemption
of securities held to maturity ........ -- 2,500,000 1,590,000
Net increase in loans receivable ........ (1,193,317) (2,409,148) (2,903,669)
Proceeds from sale of other real estate
owned ................................. 273,397 462,684 262,348
Capital expenditures .................... (35,711) (920,326) (287,053)
Net proceeds from sale of premises and
equipment ............................. -- -- 407,552
----------- ----------- -----------
Net cash (used in) provided by
investing activities ................ (406,056) (837,813) 3,272,022
----------- ----------- -----------
Cash flows financing activities:
Net increase (decrease) in deposits ..... 400,886 (2,149,816) (6,837,041)
Net increase in borrowings .............. 1,000,000 300,000 --
----------- ----------- -----------
Net cash provided by (used in)
financing activities ................ 1,400,886 (1,849,816) (6,837,041)
Net increase (decrease) in cash and
cash equivalents ...................... 724,305 (1,983,244) (3,327,893)
Cash and cash equivalents at
beginning of year ..................... 1,198,081 3,181,325 6,509,218
----------- ----------- -----------
Cash and cash equivalents at end
of year ............................... $ 1,922,386 1,198,081 3,181,325
=========== =========== ===========
(Continued)
5
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Cash Flows, Continued
For the Years Ended
September 30,
-------------------------------------
1997 1996 1995
---- ---- ----
Additional disclosures relative
to cash flows:
Interest paid .......................... $ 2,446,479 2,416,048 2,526,955
=========== ========== ==========
(Refunds Received) Taxes paid .......... $ (165,891) (83,587) 330,699
=========== ========== ==========
Supplemental schedule of non-cash
investing and financing activities:
Transfers from loans to other real
estate owned ......................... $ 510,892 297,909 180,577
=========== ========== ==========
Securities held to maturity transferred
to securities available for sale under
the provisions of the FASBis Special
Report ............................... $ -- 2,000,000 --
=========== ========== ==========
Change in net unrealized loss on
securities available for sale,
net of $54,913, ($21,015) and
($76,904) tax effect at
September 30, 1997, 1996 and
1995, respectively ................... $ 72,791 (27,858) (101,943)
=========== ========== ==========
See accompanying notes to financial statements.
6
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements
September 30, 1997 and 1996
(1) Significant Accounting Policies
The accounting and reporting policies of Gloversville Federal Savings and
Loan Association (the Association) conform, in all material respects, to
generally accepted accounting principles and to general practice within the
thrift industry. The following is a description of the more significant of
those policies which the Association follows in preparing and presenting
its financial statements.
(a) Basis of Presentation
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.
A substantial portion of the Association's loans are secured by real
estate in the Upstate New York area, primarily in Fulton, Montgomery
and Saratoga counties. In addition, the other real estate owned is
located in the same market area. Accordingly, the ultimate
collectibility of a substantial portion of the Association's loan
portfolio and the recovery of the carrying amount of other real estate
owned are susceptible to changes in market conditions in these areas.
The determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures in
satisfaction of loans are based on material estimates that are
susceptible to change based on such factors as economic conditions in
the market area serviced by the Association, financial conditions of
individual borrowers, and changes in underlying collateral values. In
connection with the determination of the allowance for loan losses and
the valuation of other real estate owned, management obtains
independent appraisals for significant properties.
Management believes that the allowance for loan losses and the
valuation of other real estate owned are adequate. While management
uses available information to recognize losses on loans and other real
estate owned, future additions to valuation allowances may be
necessary based on changes in economic conditions, particularly in the
Association's market area. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review
the Association's allowance for loan losses and other real estate
owned. 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 which may not be
currently available to management.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, the Association considers all
cash and due from bank balances and interest bearing time deposits
with maturities of less than three months to be cash and cash
equivalents.
7
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(1), Continued
(c) Securities
The Association accounts for securities in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity
Securities". SFAS No. 115 requires classification of securities into
three categories: trading, available for sale, or held to maturity.
The Association classifies its debt securities, including mortgage
backed securities, as either available for sale or held to maturity,
as the Association does not hold any securities for trading purposes.
Held to maturity securities are those debt securities for which the
Association has the positive intent and the ability to hold until
maturity. All other securities are classified as available for sale.
As of September 30, 1997 and 1996 all securities were classified as
available for sale.
Available for sale securities are recorded at fair value. Held to
maturity securities are recorded at amortized cost, adjusted for the
amortization of premiums and accretion of discounts. Unrealized
holding gains and losses, net of the related tax effect, on available
for sale securities are excluded from earnings and are reported as a
separate component of equity until realized. Federal Home Loan Bank of
New York stock, a non-marketable equity security, is included in
securities available for sale at cost since there is no readily
available fair value. This investment is required for membership.
A decline in the fair value of any available for sale or held to
maturity security below cost that is deemed other than temporary is
charged to earnings, resulting in the establishment of a new cost
basis for the security.
Interest income includes interest earned on the securities and the
amortization of premiums and accretion of discounts. Amortization and
accretion is recorded using a method that approximates the level-yield
method. Realized gains or losses on securities sold are recognized on
the trade date using the specific identification method.
(d) Reclassification of Investment Securities
In November 1995, the staff of the Financial Accounting Standards
Board released a Special Report, iA Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities.i The Special Report contained a unique provision that
allowed entities to, as of one date between November 15, 1995 and
December 31, 1995, reassess the appropriateness of the classifications
of all securities held at that time. In conjunction with the
provisions of the Special Report, dated December 31, 1995, the
Association transferred securities with an amortized cost of
$2,000,000 and an estimated fair value of $1,985,000 from securities
held to maturity to securities available for sale.
8
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(1), Continued
(e) Loans Receivable
Loans are carried at the principal amount outstanding less net
deferred loan fees and the allowance for loan losses. Loan fees
received and certain direct loan origination costs are deferred, and
the net fee or cost is amortized into income so as to provide for a
level-yield of interest on the underlying loans. Amortization of
related net deferred fees is suspended when a loan is placed on
nonaccrual status.
Interest on loans is recognized on an accrual basis. Loans are
generally placed on nonaccrual status when principal or interest
becomes 90 days or more past due or sooner if management believes it
is prudent to do so. Unpaid interest previously recognized is reversed
when a loan is placed on nonaccrual status. Loans generally remain on
nonaccrual status until past due principal and interest payments are
brought current through cash collections or when, in the opinion of
management, the loans are estimated to be fully collectible as to
principal and interest.
An allowance for loan losses is established through a provision
charged to operations. Losses on loans are charged to the allowance
for loan losses when all or a portion of a loan is deemed to be
uncollectible. Recoveries of loans previously charged off are credited
to the allowance when realized. Management's periodic evaluation of
the adequacy of the allowance for loan losses considers known and
inherent risks in the portfolio, adverse situations which may affect
the borrowers' ability to repay, estimated value of underlying
collateral, results of reviews performed on specific problem loans,
and current and prospective economic conditions in the Association's
lending area.
Impaired loans are identified and measured in accordance with SFAS No.
114, iAccounting by Creditors for Impairment of a Loani, and SFAS No.
118, iAccounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures.i These Statements prescribe recognition
criteria for loan impairment, and measurement methods for impaired
loans and loans whose terms are modified in troubled-debt
restructurings subsequent to the adoption of these Statements. The
adoption of these Statements on October 1, 1995 did not have a
material effect on the Associationis financial statements.
(f) Other Real Estate Owned
Other real estate owned is recorded at the lower of cost (defined as
fair value at initial foreclosure) or fair value of the asset
acquired, less estimated costs to dispose of the property. Costs of
developing and improving such properties are capitalized, where
appropriate. Subsequent declines in the value of other real estate
owned and expenses relating to holding such real estate are charged to
operations as incurred. Other real estate owned consists primarily of
residential properties
(g) Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the related assets.
9
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(1), Continued
(h) Income Taxes
The Association accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes". Under the asset and liability
method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets are
recognized subject to management's judgment that those assets will
more likely than not be realized. A valuation allowance is recognized
if, based on an analysis of available evidence, management believes
that all or a portion of deferred tax assets will not be realized.
Adjustments to increase or decrease the valuation allowance are
charged or credited, respectively, to income tax expense. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(i) Financial Instruments
In the normal course of business, the Association is a party to
certain financial instruments with off-balance-sheet risk, such as
commitments to extend credit, unused lines of credit, and standby
letters of credit. The Association's policy is to record such
instruments when funded.
(j) Transfers of Financial Assets and Extinguishment of Liabilities
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which 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. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. Certain aspects of SFAS
No. 125 were amended by SFAS No. 127 "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." The adoption of SFAS
No. 125, as amended, did not have a material impact on the
Association's financial statements.
(k) Reclassification
Amounts in the prior periods' financial statements are reclassified
whenever necessary to conform with the current periodis presentation.
10
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(1), Continued
(l) Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. "SFAS No. 130",
"Reporting Comprehensive Income". SFAS No. 130 states that
comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct entries
to equity, such as the mark to market adjustment on securities
available for sale, foreign currency items and minimum pension
liability adjustments. This statement is effective for fiscal years
beginning after December 15, 1997. Management does not believe that
the impact of adopting this Statement will be material to the
Association's financial statements.
(2) Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and estimated fair
values of securities available for sale at September 30, 1997 and 1996 are
summarized as follows:
September 30, 1997
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Debt securities:
U.S. Government agency obligations ....... $2,998,160 1,867 (6,020) 2,994,007
Mortgage backed securities ............... 3,595,397 14,059 (47,452) 3,562,004
---------- ---------- ---------- ----------
Total debt securities ............. 6,593,557 15,926 (53,472) 6,556,011
Non-marketable equity securities:
Stock in FHLB ............................ 461,100 -- -- 461,100
---------- ---------- ---------- ----------
Total securities available for sale $7,054,657 15,926 (53,472) 7,017,111
========== ========== ========== ==========
September 30, 1996
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Debt securities:
U.S. Government agency obligations ....... $2,998,160 -- (64,726) 2,933,434
Mortgage backed securities ............... 4,144,972 -- (100,524) 4,044,448
---------- ---------- ---------- ----------
Total debt securities ............. 7,143,132 -- (165,250) 6,977,882
Non-marketable equity securities:
Stock in FHLB ............................ 461,100 -- -- 461,100
---------- ---------- --------- ----------
Total securities available for sale $7,604,232 -- (165,250) 7,438,982
========== ========== ========= ==========
At September 30, 1997 and 1996, mortgage backed securities consisted of
Federal Home Loan Mortgage Corporation (FHLMC) and Federal National
Mortgage Association (FNMA) securities.
11
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(2), Continued
The following sets forth information with regard to remaining contractual
maturities of debt securities available for sale as of September 30, 1997
(mortgage backed securities are included based on the final contractual
maturity date):
Estimated
Amortized Fair
Cost Value
---- -----
Within one year .......................... $ 693,867 671,834
From one to five years ................... 2,997,587 2,971,146
From five to ten years ................... -- --
After ten years .......................... 2,902,103 2,913,031
---------- ----------
$6,593,557 6,556,011
========== ==========
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
There were no security sales for the years ended September 30, 1997 and
1996. Proceeds from the sale of securities available for sale for the year
ended September 30, 1995 totaled $13,720,234. Gross gains and losses
realized on the sale of securities available for sale for the year ended
September 30, 1995 were $410,762 and $206,477, respectively.
(3) Net Loans Receivable
Net loans receivable at September 30, 1997 and 1996 are summarized as
follows:
1997 1996
---- ----
Loans secured by real estate:
Residential one-to-four family .............. $ 36,890,541 40,262,375
Multi-family and commercial ................. 7,949,702 4,635,401
Residential one-to-four family construction . 539,284 937,994
------------ ------------
Total loans secured by real estate ...... 45,379,527 45,835,770
------------ ------------
Other loans:
Commercial business ......................... 1,421,581 1,229,279
Home equity ................................. 3,379,775 2,868,795
Other consumer .............................. 1,111,559 1,154,440
------------ ------------
Total other loans ....................... 5,912,915 5,252,514
------------ ------------
Gross loans receivable .................. 51,292,442 51,088,284
Less:
Net deferred loan fees ...................... (153,171) (201,543)
Allowance for loan losses ................... (1,612,981) (1,250,610)
------------ ------------
Net loans receivable .................... $ 49,526,290 49,636,131
============ ============
12
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(3), Continued
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30, 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Balance at beginning of year ......... $ 1,250,610 779,417 856,480
Charge-offs .......................... (466,182) (254,364) (209,660)
Recoveries ........................... 36,287 11,281 3,721
Provision charged to operations ...... 792,266 714,276 128,876
----------- ----------- -----------
Balance at end of year ............... $ 1,612,981 1,250,610 779,417
=========== =========== ===========
Non-performing loans consist of loans on nonaccrual status at September 30,
1997 and 1996 amounting to $3,792,873 and $2,212,425, respectively. There
were no loans past due as to principal or interest greater than 90 days and
still accruing interest or accruing loans in a trouble debt restructuring
as of September 30, 1997 or 1996. Included in nonaccrual loans at September
30, 1997 are approximately $1.6 million of loans restructured in trouble
debt restructurings. At September 30, 1996, a number of substandard
classified residential loans were past due as to property taxes on property
collateralizing the loans. The total amount of the related past due taxes
on these substandard loans was approximately $318,000 at September 30,
1996.
During 1997, certain loans with past due property taxes were either
rewritten to provide the borrowers with amounts necessary to pay past due
property taxes or the loans were restructured in trouble debt restructuring
(but generally at market rates) to provide the borrowers with amounts
necessary to pay past due property taxes. Loans rewritten or restructured
due to past due property taxes at September 30, 1997 totaled $1.1 million
and $1.6 million, respectively.
Interest income which would have been recorded under the original terms of
nonaccrual loans for the years ended September 30, 1997, 1996 and 1995 was
approximately $343,000, $230,000 and $241,000, respectively. Interest
income recognized on nonaccrual loans for the years ended September 30,
1997, 1996 and 1995 was approximately, $304,000, $84,000 and $54,000. There
are no commitments to extend further credit on nonaccrual loans.
Under SFAS No. 114, a loan (generally commercial-type loans) is considered
impaired when it is probable that the borrower will be unable to repay the
loan according to the original contractual terms of the loan agreement or
when a loan (of any loan type) is restructured in a trouble debt
restructuring. The allowance for loan losses related to impaired loans is
based on discounted cash flows using the loanis initial effective interest
rate or the fair value of the collateral for loans where repayment of the
loan is expected to be provided solely by the underlying collateral
(collateral dependent loans).
As of September 30, 1997, there were no commercial-type loans on nonaccrual
status or classified as impaired. At September 30, 1997, there were
approximately $1.6 million in consumer loan related troubled debt
restructurings which are considered to be impaired. Approximately $334,700
of the allowance for loan losses has been allocated to these impaired loans
at September 30, 1997. As of September 30, 1997, there were no impaired
loans which did not have an allowance for loan losses determined in
accordance with SFAS No. 114. The average recorded investment in impaired
loans during the year ended September 30, 1997 was approximately $799,000.
For the year ended September 30, 1997, the Association has recognized
interest income of approximately $153,000 on impaired loans. There were no
impaired loans at September 30, 1996.
13
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(3), Continued
The Association's lending activities are conducted principally in Fulton
and Saratoga Counties of New York State. The Association grants single
family and multi-family residential loans, commercial real estate,
commercial business loans, and a variety of consumer loans. In addition,
the Association grants loans for the construction of residential homes,
multi-family properties, and for commercial development. Most loans granted
by the Association are secured by related real estate. The ability and
willingness of borrowers to honor their repayment commitments generally
depends on the level of overall economic activity within the borrowers'
geographic areas and real estate values.
Certain directors and executive officers of the Association have had loan
transactions with the Association in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as
comparable loans made to others. Total loans to directors and executive
officers amounted to approximately $381,000 and $406,000 at September 30,
1997 and 1996, respectively. During the year ended September 30, 1997, new
loans of approximately $9,000 were made to directors or executive officers,
and repayments totaled approximately $34,000.
(4) Accrued Interest Receivable
A summary of accrued interest receivable at September 30, 1997 and 1996 is
as follows:
1997 1996
---- ----
Loans .......................................... $271,986 272,944
Securities available for sale .................. 60,136 57,047
-------- --------
Total ........................................ $332,122 329,991
======== ========
(5) Premises and Equipment
Premises and equipment at September 30, 1997 and 1996 are summarized by
major classifications as follows: 1997 1996
1997 1996
---- ----
Land ....................................... $ 140,215 140,215
Buildings .................................. 1,278,156 1,276,656
Furniture and fixtures ..................... 1,124,289 1,098,750
----------- -----------
Total .................................. 2,542,660 2,515,621
Less accumulated depreciation .............. (1,004,296) (721,882)
----------- -----------
Premises and equipment, net ............ $ 1,538,364 1,793,739
=========== ===========
Amounts charged to non-interest expense for depreciation of premises and
equipment amounted to $291,086, $227,646 and $179,412 in 1997, 1996 and
1995, respectively.
14
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(6) Deposits
Deposit account balances at September 30, 1997 and 1996 are summarized as
follows:
1997 1996
---- ----
Demand accounts (non-interest bearing) ......... $ 1,021,123 835,929
----------- -----------
N.O.W. accounts (1.75%) ........................ 4,126,561 4,338,086
----------- -----------
Passbook and statement savings
accounts (up to 4.00%) ....................... 12,004,406 13,139,454
Money market accounts (up to 4.88%) ............ 10,950,002 10,392,166
----------- -----------
22,954,408 23,531,620
----------- -----------
Time deposit accounts:
Under - 4.00% ......................... 2,624 10
4.00 - 4.99% ......................... 3,993,984 11,356,698
5.00 - 5.99% ......................... 21,942,237 11,101,230
6.00 - 6.99% ......................... 2,045,965 4,524,833
7.00 and over ........................ 29,784 27,394
----------- -----------
28,014,594 27,010,165
----------- -----------
$56,116,686 55,715,800
=========== ===========
At September 30, 1997 and 1996, the aggregate amount of time deposit
accounts with a balance equal to or in excess of $100,000 was $2,492,469
and $2,239,057, respectively. At September 30, 1997 and 1996, the aggregate
amount of escrow deposits was not significant, and are included in savings
and money market accounts.
Contractual maturities of time deposit accounts at September 30, 1997 are
as follows:
Years ending September 30,
1998 $23,295,264
1999 3,260,840
2000 1,030,752
Thereafter 427,738
-----------
$28,014,594
===========
Certain executive officers and directors of the Association, as well as
certain affiliates of these officers and directors, were customers of and
had deposit balances with the Association in the ordinary course of
business. The aggregate of such deposits was approximately $681,000 as of
September 30, 1997.
(7) Borrowings
The Association had approximately $9.2 million of available lines of credit
with the FHLB as of September 30, 1997 and 1996. Substantially all of the
assets of the Association have been pledged as collateral related to this
line of credit.
15
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(7), Continued
Information concerning FHLB borrowings in 1997 and 1996 follows:
1997 1996
---- ----
Amount outstanding at September 30 ................. $ -- 300,000
Maximum amount outstanding at any month end ........ 850,000 300,000
Average amount outstanding ......................... 272,726 6,027
Weighted average interest rate:
For the year .................................. 5.56% 5.56%
As of year end ................................ -- 5.88%
Information concerning securities sold under agreements to repurchase in
1997 and 1996 follows:
1997 1996
---- ----
Amount outstanding at September 30, ................ $1,300,000 --
Maximum outstanding at any month end ............... 1,300,000 --
Average amount outstanding ......................... 118,274 --
Weighted average interest rate:
For the year .................................. 5.78% --
As of year end ................................ 5.80% --
Securities underlying the repurchase agreements remain under the control of
the Association. Repurchase agreements are typically entered into for one
to three day periods.
(8) Income Taxes
The components of the income tax expense (benefit) for the years ended
September 30, 1997, 1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
Current tax (benefit) expense:
Federal .......................... $ (40,248) (166,929) 16,511
State ............................ 256 256 256
Deferred tax (benefit) expense ........ 125,000 (55,651) 85,676
--------- --------- ---------
$ 85,008 (222,324) 102,443
========= ========= =========
The actual tax expense (benefit) for the years ended September 30, 1997,
1996 and 1995 differs from expected tax expense (benefit), computed by
applying the Federal corporate tax rate of 34% to income (loss) before
taxes as follows:
1997 1996 1995
---- ---- ----
Expected tax expense (benefit) ....... $(169,242) (427,900) 120,275
Change in valuation allowance
for deferred tax asset .............. 273,510 248,426 --
New York State tax ................... (22,107) (45,443) 256
Other items .......................... 2,847 2,593 (18,088)
--------- --------- ---------
$ 85,008 (222,324) 102,443
========= ========= =========
16
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(8), Continued
The tax effects of temporary differences that give rise to the
Association's deferred tax assets and liabilities at September 30, 1997 and
1996 are presented below:
1997 1996
---- ----
Deferred tax assets:
Differences in reporting the provision
for loan losses and the tax bad debt
deduction ................................... $ 628,792 461,788
Deferred net loan origination fees ............ 61,268 80,617
Differences in reporting accrued expenses ..... 73,393 81,200
Other ......................................... 14,010 2,120
--------- ---------
Total gross deferred tax assets ........... 777,463 625,725
Valuation allowance ....................... (625,052) (351,542)
--------- ---------
Deferred tax assets, net of valuation
allowance ............................... 152,411 274,183
--------- ---------
Deferred tax liabilities:
Depreciation .................................. (9,540) (4,902)
Net effect of other real estate
owned transactions .......................... (22,871) (24,281)
--------- ---------
Total gross deferred tax liabilities ...... (32,411) (29,183)
--------- ---------
Net deferred tax asset at
end of year ............................. 120,000 245,000
Net deferred tax asset at
beginning of year ....................... 245,000 189,349
--------- ---------
Deferred tax expense (benefit)
for the year ............................ $ 125,000 (55,651)
========= =========
In addition to the deferred tax assets described above, the Association had
a deferred tax asset of $16,145 and $71,058 at September 30, 1997 and 1996,
respectively, related to the net unrealized loss on securities available
for sale.
In assessing whether deferred tax assets will more likely than not be
realized, management considers the historical level of taxable income, the
time period over which the temporary differences are expected to reverse,
as well as estimates of future taxable income. As a result of the
Association experiencing a second year of significant losses before taxes,
continued economic weakness in the Association's market area, including
declining real estate values collateralizing much of the Association's loan
portfolio, reduced expectations of earnings in the future, as well as a
reduction in the amount of historical taxes available for carryback in
1997, the Association increased the deferred tax valuation allowance in
1997 by $273,510 to $625,052. As of September 30, 1997, the net deferred
tax asset is considered to be more likely then not realizable based upon
the historical level of taxable income available for carryback, amounting
to approximately $50 thousand, the reversal of temporary taxable items and
reliance on future taxable income amounting to approximately $175 thousand.
As a result of the 1996 loss before taxes of approximately $1.3 million,
and the significant reduction in the amount of historical taxes available
for carryback, the Association increased the valuation allowance in 1996 by
$248,426 to $351,542. As of September 30, 1996, the net deferred tax asset
is considered to be more likely than not realizable based upon the amount
of historical taxable income available for carryback, amounting to
approximately $90 thousand, the reversal of temporary taxable items and
reliance on future taxable income, amounting to approximately $380
thousand.
17
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(8), Continued
As a thrift institution, the Association is subject to special provisions
in the Federal and New York State tax laws regarding its allowable tax bad
debt deductions and related tax bad debt reserves. These deductions
historically have been determined using methods based on loss experience or
a percentage of taxable income. Tax bad debt reserves are maintained equal
to the excess of allowable deductions over actual bad debt losses and other
reserve reductions. These reserves consist of a defined base-year amount,
plus additional amounts ("excess reserves") accumulated after the base
year. SFAS No. 109 requires recognition of deferred tax liabilities with
respect to such excess reserves, as well as any portion of the base-year
amount which is expected to become taxable (or "recaptured") in the
foreseeable future.
Certain amendments to the Federal and New York State tax laws regarding bad
debt deductions were enacted in July and August 1996. The Federal
amendments include elimination of the percentage of taxable income method
for tax years beginning after December 31, 1995, and imposition of a
requirement to recapture into taxable income (over a period of
approximately six years) the bad debt reserves in excess of the base-year
amounts. The Association previously established, and will continue to
maintain, a deferred tax liability with respect to such excess Federal
reserves. The New York State amendments redesignate the Association's state
bad debt reserves at December 31, 1995 as the base-year amount and also
provide for future additions to the base-year reserve using the percentage
of taxable income method.
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the Federal and state base-year reserves since
the Association does not expect that these reserves will become taxable in
the foreseeable future. At September 30, 1997, the Federal base year
reserve was approximately $1.3 million and the state base-year reserve was
not significant. Under New York State tax law, as amended, events that
would result in taxation of the state reserves include the failure of the
Association to maintain a specified qualifying assets ratio or meet other
thrift definition tests for tax purposes. The unrecognized tax liability at
September 30, 1997 with respect to the Federal base-year reserve was
approximately $440 thousand.
(9) Employee Benefits
Effective January 1, 1995, the Association established a defined
contribution plan (ithe Plani) that is intended to qualify under section
401(k) of the Internal Revenue Code. The Plan covers all employees with at
least six months of service. The Associationis contributions to the Plan
are discretionary and determined annually by the Board of Directors.
Employee contributions are voluntary. Employees vest immediately in their
own contributions, and vest in the Associationis contributions based on
years of service. For the years ended September 30, 1997, 1996 and 1995,
the Associationis contributions to the Plan were approximately $57,219,
$45,070 and $38,023, respectively.
Effective December 31, 1994, the Association terminated its defined benefit
pension plan. As of that date all participants in the plan were immediately
vested. Subsequent to termination date, no additional benefit obligations
accrued to the plan participants. In order to settle the benefit
obligations to plan participants, assets were liquidated and distributed.
The plan's termination resulted in a settlement loss of approximately
$64,000 which is included in compensation and employee benefits in the year
ended September 30, 1995.
18
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(10) Commitments and Contingent Liabilities
(a) Legal Proceedings
The Association is, from time to time, be a defendant in legal
proceedings relating to the conduct of its business. In the best
judgment of management, the financial position of the Association will
not be affected materially by the outcome of any pending legal
proceedings.
(b) Off-Balance Sheet Financing and Concentrations of Credit
The Association is a party to certain financial instruments with
off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
the Association's commitments to extend credit and commercial lines of
credit. Financial instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized on the statements of
financial condition. The contract amounts of these instruments reflect
the extent of involvement the Association has in particular classes of
financial instruments.
The Association's exposure to credit loss in the event of
nonperformance by the other party to the commitments to extend credit
is represented by the contractual notional amount of those
instruments. The Association uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Commitments to extend credit may be written on a fixed rate basis
exposing the Association to interest rate risk given the possibility
that market rates may change between commitment and actual extension
of credit.
Unless otherwise noted, the Association does not require collateral or
other security to support off-balance-sheet financial instruments with
credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being fully drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Association evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral, if
any, required by the Association upon the extension of credit is based
on management's credit evaluation of the customer. Mortgage
commitments are secured by a first lien on real estate. Collateral on
extensions of credit for commercial loans varies but may include
property, plant and equipment, and income producing commercial
property.
19
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(10), Continued
Contract amounts of financial instruments that represent the future
extension of credit as of September 30, 1997 and 1996 at fixed and
variable interest rates are as follows:
1997
----
Fixed Variable Total
----- -------- -----
Financial instruments whose contract
amounts represent credit risk:
Residential (one-to-four-family) ....... $ 387,400 -- 387,400
Multi-family and commercial ............ -- 1,008,939 1,008,939
Construction ........................... 306,260 3,006 309,266
Commercial business .................... -- 375,604 375,604
Home equity ............................ -- 942,202 942,202
Other consumer ......................... 114,527 -- 114,527
---------- ---------- ----------
$ 808,187 2,329,751 3,137,938
========== ========== ==========
1996
----
Fixed Variable Total
----- -------- -----
Financial instruments whose contract
amounts represent credit risk:
Residential (one-to-four-family) ....... $ 194,928 43,000 237,928
Multi-family and commercial ............ -- 1,561,000 1,561,000
Construction ........................... 98,800 -- 98,800
Commercial business .................... -- 122,000 122,000
Home equity ............................ -- 1,591,000 1,591,000
Other consumer ......................... 131,500 -- 131,500
---------- ---------- ----------
$ 425,228 3,317,000 3,742,228
========== ========== ==========
The range of interest on fixed rate commitments was 7.625% to 10.250%
at September 30, 1997 and 7.90% to 9.25% at September 30, 1996. The
range of interest on adjustable rate commitments was 7.00% to 11.00%
at September 30, 1997 and 7.00% to 10.25% at September 30, 1996,
respectively.
At September 30, 1997, the Bank was required to maintain a $500,000
compensating balance with a correspondent bank. There were no
compensating balance requirements at September 30, 1996.
(c) Interest Rate Risk
The principal assets of the Association are long-term, fixed rate
first mortgage loans which have been primarily funded by deposits.
Accordingly, increases in interest rates paid on deposit accounts will
have an adverse effect on the Association's overall interest margins.
In response to this situation, the Association has begun programs
offering one year adjustable rate mortgages, three to five year
adjustable rate multi-family and commercial loans, commercial business
loans, home equity loans, and variable rate line of credit accounts to
loan customers in order to more closely match the pricing of earning
assets with their sources of funds on a prospective basis.
20
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(11) Savings Association Insurance Fund - Special Assessment
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
Act) was enacted into law. The Act included, among other things,
provisions to recapitalize the Savings Association Insurance Fund
(SAIF) through a special assessment, as well as provisions calling for
a future merger of the SAIF with the Bank Insurance Fund.
As a result of the Act, SAIF members were required to pay a special
assessment to recapitalize the SAIF based on insured deposits held on
March 31, 1995. The amount of the special SAIF assessment as
determined by the FDIC was 65.7 basis points. Based upon the
Associationis insured deposits on March 31, 1995, the special
assessment amounted to $414,835.
(12) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires that the Association disclose estimated fair values for
certain financial instruments. SFAS No. 107 defines fair value of
financial instruments 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.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Association's
entire holdings 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 judgments regarding
future expected net cash flows, 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 judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the deferred tax asset and bank premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates of fair
value under SFAS No. 107.
In addition there are intangible assets that SFAS No. 107 does not
recognize, such as the value of "core deposits," the Association's
branch network and other items generally referred to as "goodwill."
Securities Available for Sale
-----------------------------
Securities available for sale are financial instruments which are
usually traded in broad markets. Fair values are based upon bid
quotations received from either quotation services or securities
dealers. The estimated fair value of stock in the Federal Home Loan
Bank of New York is assumed to be its cost given the lack of a public
market available for this investment.
21
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(12), Continued
Loans
-----
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as single
family loans, consumer loans and commercial loans. Each loan category
is further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories.
The fair value of performing loans, is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the
contractual term of the loans to maturity taking into consideration
certain prepayment assumptions.
Fair value for significant non-performing loans may be based on recent
external appraisals or discounting of cash flows. Estimated cash flows
are discounted using a rate commensurate with the risk associated with
the estimated cash flows. Assumptions regarding credit risk, cash
flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
Deposit Liabilities
-------------------
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as non-interest bearing demand deposit, savings
accounts, NOW accounts, and money market accounts, must be stated at
the amount payable on demand as of September 30, 1997 and 1996. The
fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
Other Items
-----------
The following items are considered to have a fair value equal to
carrying value due to the nature of the financial instrument and the
period within which it will be settled: cash and cash equivalents,
accrued interest receivable, accrued interest payable, and borrowings.
22
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(12), Continued
Table of Financial Instruments
------------------------------
The carrying values and estimated fair values of financial instruments
as of September 30, 1997 and 1996 are as follows:
September 30, 1997 September 30, 1996
------------------------ -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and cash equivalents ... $ 1,922,386 1,922,386 1,198,081 1,198,081
Securities available for sale 7,017,111 7,017,111 7,438,982 7,438,982
Net Loans ................... 49,526,290 49,959,626 49,636,131 50,137,989
Accrued interest receivable . 332,122 332,122 329,991 329,991
Financial liabilities:
Deposits:
Demand, savings,
money market, and
NOW accounts ........... 28,102,092 28,102,092 28,705,635 28,705,635
Time deposits ........... 28,014,594 28,014,594 27,010,165 27,010,165
Borrowings .................. 1,300,000 1,300,000 300,000 300,000
Commitments to Extend Credit
----------------------------
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present credit
worthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates. Fees, such as these are not a
major part of the Association's business and in the Association's
business territory are not a "normal business practice." Therefore,
based upon the above facts the Association believes that book value
equals fair value and the amounts are not significant.
23
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(13) Regulatory Capital Requirements
OTS capital regulations require savings institutions to maintain
minimum levels of regulatory capital. Under the regulations in effect
at September 30, 1997 and 1996, the Association was required to
maintain a minimum ratio of tangible capital to tangible assets of
1.5%; a minimum leverage ratio of core (Tier I) capital to total
adjusted tangible assets of 3.0%; and a minimum ratio of total capital
(core capital and supplementary capital) to risk weighted assets of
8.0%, of which 4.0% must be core (Tier I) capital.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized
institution. Such actions could have a direct material effect on an
institution's financial statements. The regulations establish a
framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, under
capitalized, significantly under capitalized, and critically under
capitalized. Generally an institution is considered well capitalized
if it has a core (Tier I) capital ratio of at least 5.0% (based on
average total assets); a core (Tier I) risk based capital ratio of at
least 6.0%; and a total risk based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific
quantitative measures of assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative
judgments by the OTS about capital components, risk weightings and
other factors.
Management believes that, as of September 30, 1997 and 1996, the
Association meets all capital adequacy requirements to which it is
subject. Further, the most recent OTS notification categorized the
Association as a well-capitalized institution under the prompt
corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the
Association's capital classification.
The following is a summary of the Association's actual capital amounts
and ratios as of September 30, 1997 and 1996 compared to the OTS
minimum capital adequacy requirements and the OTS requirements for
classification as a well-capitalized institution.
September 30, 1997
-------------------------------------------------------------------
Minimum
Capital For Classification
Actual Adequacy as Well Capitalized
------ -------- -------------------
Amount Ratio Ratio Ratio
------ ----- ----- -----
Tangible capital ........................ $3,301,370 5.41% 1.50%
Core (Tier I) capital ................... 3,301,370 5.41% 3.00% 5.00%
Core (Tier I) risk-based capital ........ 3,301,370 8.48% 6.00%
Total risk-based capital ................ 3,787,762 10.01% 8.00% 10.00%
24
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(13), Continued
September 30, 1996
-------------------------------------------------------------------
Minimum
Capital For Classification
Actual Adequacy as Well Capitalized
------ -------- -------------------
Amount Ratio Ratio Ratio
------ ----- ----- -----
Tangible capital ........................ $3,827,023 6.26% 1.50%
Core (Tier I) capital ................... 3,827,023 6.26% 3.00% 5.00%
Core (Tier I) risk-based capital ........ 3,827,023 10.26% 6.00%
Total risk-based capital ................ 4,293,161 11.73% 8.00% 10.00%
The OTS may reduce an institution's regulatory capital for interest
rate risk exposure (as determined by the OTS) if the institution's
risk-based capital ratio is less than 12% and the OTS notifies the
institution of such reduction. The Association has not been notified
by the OTS of any reduction to its regulatory capital for interest
rate risk exposure.
(14) Adoption of Plan of Conversion
On November 19, 1997, the Board of Directors of the Association,
subject to regulatory approval and approval by the members of the
Association, unanimously adopted a Plan of Conversion to convert from
a federally chartered mutual savings bank to a federally chartered
stock savings bank with the concurrent formation of a holding company.
The transaction is expected to be accomplished through amendment of
the Association's federal charter and the sale of the holding
company's common stock in an amount equal to the pro forma market
value of the Association after giving effect to the conversion. A
subscription offering of the sale of the Association's common stock
will be offered initially to the Association's depositors, then to
other members and directors, officers and employees of the
Association. Any shares of the Association's common stock not sold in
the subscription offering will be offered for sale to the general
public in the Association's market area.
At the time of the conversion, the Association will establish a
liquidation account in an amount equal to its total net worth as of
the date of the latest balance sheet appearing in the final
prospectus. The liquidation account will be maintained for the benefit
of eligible depositors who continue to maintain their accounts at the
Association after the conversion. The liquidation account will be
reduced annually to the extent that eligible depositors have reduced
their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible depositor will be
entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for
accounts then held. The Association may not pay dividends that would
reduce stockholders' equity below the required liquidation account
balance.
25
GLOVERSVILLE FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(14), Continued
Under Office of Thrift Supervision (OTS) regulations, limitations have
been imposed on all "capital distributions" by savings institutions,
including cash dividends. The regulation establishes a three-tiered
system of restrictions, with the greatest flexibility afforded to
thrifts which are both well-capitalized and given favorable
qualitative examination ratings by the OTS. For example, a thrift
which is given one of the two highest examination ratings and has
"capital" (as defined) equal to its fully phased-in regulatory capital
requirements could, after prior notice but without the prior approval
of the OTS, make capital distributions in any year that would reduce
by one-half the amount of its capital which exceeds its fully
phased-in capital requirement, as adjusted to reflect net income to
date during the year. Other thrifts would be subject to more stringent
procedural and substantive requirements, the most restrictive being
prior OTS approval of any capital distribution.
Conversion costs will be deferred and deducted from the proceeds of
the shares sold in the conversion. If the conversion is not completed,
all costs will be charged to expense. No conversion costs were
incurred as of September 30, 1997.
26
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by the Holding
Company or the Association. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Holding Company or the Association since
any of the dates as of which information is furnished herein or since the date
hereof.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................
Selected Financial Information............................
Recent Financial Data.....................................
Risk Factors..............................................
Adirondack Financial Services Bancorp, Inc................
Gloversville Federal......................................
Use of Proceeds...........................................
Dividends.................................................
Market for Common Stock...................................
Pro Forma Data............................................
Pro Forma Regulatory Capital Analysis.....................
Capitalization............................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................
Business .................................................
Regulation................................................
Management ...............................................
The Conversion............................................
Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions..........................
Description of Capital Stock..............................
Legal and Tax Matters.....................................
Experts...................................................
Additional Information....................................
Index to Financial Statements.............................
Until the later of ________, 1998 or 25 days after commencement of the
offering of Common Stock, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
5,750,000
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
(Proposed Holding Company for Gloversville Federal Savings and Loan Association)
COMMON STOCK
----------
PROSPECTUS
----------
CAPITAL RESOURCES, INC.
_____________, 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
- ---------------------------------------------------
Article Eleventh of the Holding Company's Certificate of Incorporation
provides for indemnification of directors and officers of the Holding Company
against any and all liabilities, judgments, fines and reasonable settlements,
costs, expenses and attorneys' fees incurred in any actual, threatened or
potential proceeding, except to the extent that such indemnification is limited
by Delaware law and such law cannot be varied by contract or bylaw. Article
Eleventh also provides for the authority to purchase insurance with respect
thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation's Board of Directors to grant indemnity under certain
circumstances to directors and officers, when made, or threatened to be made,
parties to certain proceedings by reason of such status with the corporation,
against judgments, fines, settlements and expenses, including attorneys' fees.
In addition, under certain circumstances such persons may be indemnified against
expenses actually and reasonably incurred in defense of a proceeding by or on
behalf of the corporation. Similarly, the corporation, under certain
circumstances, is authorized to indemnify directors and officers of other
corporations or enterprises who are serving as such at the request of the
corporation, when such persons are made, or threatened to be made, parties to
certain proceedings by reason of such status, against judgments, fines,
settlements and expenses, including attorneys' fees; and under certain
circumstances, such persons may be indemnified against expenses actually and
reasonably incurred in connection with the defense or settlement of a proceeding
by or in the right of such other corporation or enterprise. Indemnification is
permitted where such person (i) was acting in good faith; (ii) was acting in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation or other corporation or enterprise, as appropriate; (iii) with
respect to a criminal proceeding, has no reasonable cause to believe his conduct
was unlawful; and (iv) was not adjudged to be liable to the corporation or other
corporation or enterprise (unless the court where the proceeding was brought
determines that such person is fairly and reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may be
made (i) by the Board of Directors of the Holding Company by a majority vote of
a quorum consisting of directors not at the time parties to such proceeding; or
(ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
II-1
Item 25. Other Expenses of Issuance and Distribution
- -----------------------------------------------------
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance of the shares.
SEC registration fee.................................................. $ 1,951
NASD fee.............................................................. 1,100
OTS filing fees....................................................... 8,400
Counsel fees and expenses............................................. 75,000
Accounting fees and expenses.......................................... 165,000
Appraisal and business plan fees and expenses......................... 16,000
Conversion agent fees and expenses.................................... 12,000
Marketing agent's expenses............................................ 15,000
Marketing agent's fee................................................. 90,000
Marketing agent's counsel fees and expenses........................... 20,000
Printing, postage and mailing......................................... 60,000
Blue sky fees and expenses............................................ 14,000
Other expenses........................................................ 30,000
--------
TOTAL............................................................ $508,451
========
- ---------
(1) Based on maximum of Estimated Valuation Range and assumptions set forth
under "Pro Forma Data" in the Prospectus.
Item 26. Recent Sales of Unregistered Securities
- -------------------------------------------------
The Registrant is newly incorporated, solely for the purpose of acting as
the holding company of First Security Federal Savings Bank pursuant to the Plan
of Conversion (filed as Exhibit 2 herein), and no sales of its securities have
occurred to date, other than the sale of one share of the Registrant's stock to
its incorporator for the purpose of qualifying the Registrant to do business in
Illinois.
II-2
Item 27. Exhibits and Financial Statement Schedules
- ----------------------------------------------------
(a) Exhibits:
1.1 Letter Agreement regarding marketing and consulting services with
Capital Resources, Inc.*
1.2 Form of Agency Agreement*
2 Plan of Conversion
3.1 Certificate of Incorporation of the Holding Company
3.2 Bylaws of the Holding Company
3.3 Charter of First Security Federal Savings Bank in stock form
3.4 Bylaws of First Security Federal Savings Bank in stock form
4 Form of Stock Certificate of the Holding Company
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality of
stock
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal
income tax consequences of the Conversion
8.2 Opinion of KPMG Peat Marwick LLP with respect to New York income tax
consequences of the Conversion*
8.3 RP Financial, LC. Letter with respect to estimated pro forma market
value and Subscription Rights
10.1 Form of Proposed Stock Option and Incentive Plan
10.2 Form of Proposed Recognition and Retention Plan
10.3 Form of Change-In-Control Severance Agreement with Lewis E. Kolar
10.4 Form of Change-In-Control Severance Agreement with Menzo D. Case
10.5 Employee Stock Ownership Plan*
21 Subsidiaries
23.1 Consent of Silver, Freedman & Taff, L.L.P.
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of RP Financial, LC.
24 Power of Attorney (set forth on signature page)
99.1 Appraisal*
99.2 Proxy Statement and form of proxy to be furnished to Gloversville
Federal Savings and Loan Association account holders
99.3 Stock Order Form and Order Form Instructions*
99.4 Question and Answer Brochure*
99.5 Advertising, Training and Community Informational Meeting Materials*
- ---------
* To be filed by amendment.
II-3
Item 28. Undertakings
- ----------------------
The undersigned Registrant hereby undertakes:
(i) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant
II-4
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
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 of filing on form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Gloversville, State of New York on January 2, 1998.
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
By: /s/ Lewis E. Kolar
--------------------------------------
Lewis E. Kolar, President,
Chief Executive Officer and Director
(Duly Authorized Representative)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lewis E. Kolar, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all said attorney-in-fact and agent or his substitutes
or substitute may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Lewis E. Kolar /s/ Priscilla J. Bell
- -------------------------------------- --------------------------------------
Lewis E. Kolar Priscilla J. Bell
President, Chief Executive Officer and Director
Director
(Principal Executive Officer)
Date: January 2, 1998 Date: January 2, 1998
-------------------------------- --------------------------------
/s/ Timothy E. Delaney /s/ Richard D. Ruby
- -------------------------------------- --------------------------------------
Timothy E. Delaney Richard D. Ruby
Director Chairman of the Board
Date: January 2, 1998 Date: January 2, 1998
-------------------------------- --------------------------------
II-6
/s/ Donald I. Lee /s/ Robert J. Sofarelli
- -------------------------------------- --------------------------------------
Donald I. Lee Robert J. Sofarelli
Recording Secretary and Director Director
Date: January 2, 1998 Date: January 2, 1998
-------------------------------- --------------------------------
/s/Menzo D. Case
- --------------------------------------
Menzo D. Case
Executive Vice-President, Chief Operating
Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Date: January 2, 1998
--------------------------------
II-7
As filed with the Securities and Exchange Commission on January 2, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
EXHIBITS TO THE
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
-------------
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
52 North Main Street
Gloversville, New York 12078-3084
================================================================================
Exhibits:
- ---------
1.1 Letter Agreement regarding marketing and consulting services with
Capital Resources, Inc.*
1.2 Form of Agency Agreement*
2 Plan of Conversion
3.1 Certificate of Incorporation of the Holding Company
3.2 Bylaws of the Holding Company
3.3 Charter of First Security Federal Savings Bank in stock form
3.4 Bylaws of First Security Federal Savings Bank in stock form
4 Form of Stock Certificate of the Holding Company
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality of
stock
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal
income tax consequences of the Conversion
8.2 Opinion of KPMG Peat Marwick LLP with respect to New York income tax
consequences of the Conversion*
8.3 RP Financial, LC. Letter with respect to estimated pro forma market
value and Subscription Rights
10.1 Form of Proposed Stock Option and Incentive Plan
10.2 Form of Proposed Recognition and Retention Plan
10.3 Form of Change-In-Control Severance Agreement with Lewis E. Kolar
10.4 Form of Change-In-Control Severance Agreement with Menzo D. Case
10.5 Employee Stock Ownership Plan*
21 Subsidiaries
23.1 Consent of Silver, Freedman & Taff, L.L.P.
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of RP Financial, LC.
24 Power of Attorney (set forth on signature page)
99.1 Appraisal*
99.2 Proxy Statement and form of proxy to be furnished to Gloversville
Federal Savings and Loan Association account holders
99.3 Stock Order Form and Order Form Instructions*
99.4 Question and Answer Brochure*
99.5 Advertising, Training and Community Informational Meeting Materials*
- ---------
* To be filed by amendment.