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RULE NO. 424(b)(3)
REGISTRATION NO. 33-80123
PROSPECTUS SUPPLEMENT
OCEAN FINANCIAL CORP.
RETIREMENT PLAN FOR
OCEAN FEDERAL SAVINGS BANK
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the Retirement Plan for Ocean Federal Savings Bank
(the "Plan" or the "401(k) Plan") of participation interests and shares of
Ocean Financial Corp. common stock, par value $.01 per share (the "Common
Stock"), as set forth herein.
In connection with the proposed conversion of Ocean Federal Savings Bank
(the "Bank" or "Employer") from a mutual savings bank to a stock savings bank,
a holding company, Ocean Financial Corp. (the "Company"), has been formed. The
simultaneous conversion of the Bank to the stock form, the issuance of the
Bank's common stock to the Company and the offer and sale of the Company's
Common Stock to the public are herein referred to as the "Conversion." The
Board of Directors of the Bank has amended the Diversified Investment
Advisors, Inc. Plan to permit the investment of Plan assets in Common Stock of
Ocean Financial Corp. The Plan will permit Participants to direct the trustee
of the Plan to purchase Common Stock with amounts in the Plan attributable to
such Participants. This Prospectus Supplement relates to the initial election
of a Participant to direct the purchase of Common Stock in connection with the
Conversion and also to elections to purchase Common Stock after the
Conversion.
The Prospectus dated May 13, 1996 of the Company (the "Prospectus") which is
attached to this Prospectus Supplement, includes detailed information with
respect to the Conversion, the Common Stock and the financial condition,
results of operation and business of the Bank and the Company. This Prospectus
Supplement, which provides detailed information with respect to the Plan,
should be read only in conjunction with the Prospectus. Terms not otherwise
defined in this Prospectus Supplement are defined in the Plan or the
Prospectus.
A PARTICIPANT'S ELIGIBILITY TO PURCHASE COMMON STOCK IN THE CONVERSION
THROUGH THE PLAN IS SUBJECT TO THE PARTICIPANT'S GENERAL ELIGIBILITY TO
PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION AND THE MAXIMUM AND MINIMUM
PURCHASE LIMITATIONS SET FORTH IN THE PLAN OF CONVERSION. SEE "THE CONVERSION"
AND "LIMITATIONS ON COMMON STOCK PURCHASES" IN THE PROSPECTUS.
FOR A DISCUSSION OF CERTAIN SPECIAL RISKS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" IN THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION, OR ANY OTHER AGENCY,
NOR HAS SUCH COMMISSION, DEPARTMENT, CORPORATION OR ANY STATE SECURITIES
COMMISSION OR OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 13, 1996.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS
PROSPECTUS SUPPLEMENT IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, BANK OR THE PLAN. THIS PROSPECTUS
SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE BANK OR THE PLAN SINCE THE DATE HEREOF, OR THAT
THE INFORMATION HEREIN CONTAINED OR INCORPORATED BY REFERENCE IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS THAT IS ATTACHED HERETO AND
SHOULD BE RETAINED FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
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PAGE
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THE OFFERING............................................................... 4
Securities Offered....................................................... 4
Election to Purchase Common Stock in the Conversion...................... 4
Value of Participation Interests......................................... 4
Method of Directing Transfer............................................. 4
Time for Directing Transfer.............................................. 4
Irrevocability of Transfer Direction..................................... 4
Direction to Purchase Common Stock After the Conversion.................. 5
Purchase Price of Common Stock........................................... 5
Nature of a Participant's Interest in the Common Stock................... 5
Voting and Tender Rights of Common Stock................................. 5
DESCRIPTION OF THE PLAN.................................................... 6
Introduction............................................................. 6
Eligibility and Participation............................................ 6
Contributions Under the Plan............................................. 6
Limitations on Contributions............................................. 7
Investment of Contributions.............................................. 9
Benefits Under the Plan.................................................. 11
Withdrawals and Distributions From the Plan.............................. 12
Administration of the Plan............................................... 13
Reports to Plan Participants............................................. 13
Plan Administrator....................................................... 13
Amendment and Termination................................................ 14
Merger, Consolidation or Transfer........................................ 14
Federal Income Tax Consequences.......................................... 14
ERISA and Other Qualifications........................................... 16
Restrictions on Resale................................................... 16
SEC Reporting and Short-Swing Profit Liability........................... 17
LEGAL OPINIONS............................................................. 17
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INVESTMENT FORM
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan and up
to 180,000 shares, at the actual purchase price of $20.00 per share, of Common
Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Company is the issuer of the Common Stock. Only
employees of the Bank may participate in the Plan. Information with regard to
the Plan is contained in this Prospectus Supplement and information with
regard to the Conversion and the financial condition, results of operations
and business of the Bank and the Company is contained in the attached
Prospectus. The address of the executive office of the Bank is 74 Brick
Boulevard, Brick, New Jersey 08723. The Bank's telephone number is (908) 477-
5200.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Bank's Conversion, the Bank has amended the Ocean
Federal Savings Bank Profit Sharing Plan and Trust so as to permit each
Participant to direct the trustee of the Plan ("Trustee") to transfer all or
part of the funds which represent his or her beneficial interest in the assets
of the Plan to an employer stock fund ("Employer Stock Fund") and to use such
funds to purchase Common Stock issued in connection with the Conversion.
Amounts transferred will include salary deferral, Bank Matching Contributions,
(as defined in the Plan) and rollover contributions, if any. The Employer
Stock Fund will consist of investments in the Common Stock made on or after
the effective date of the Conversion. Funds not transferred to the Employer
Stock Fund will remain in the other investment funds of the Plan as directed
by the Participant. A PARTICIPANT'S ABILITY TO TRANSFER FUNDS TO THE EMPLOYER
STOCK FUND IN THE CONVERSION IS SUBJECT TO THE PARTICIPANT'S GENERAL
ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION. FOR GENERAL
INFORMATION AS TO THE ABILITY OF PARTICIPANTS TO PURCHASE SHARES IN THE
CONVERSION, SEE "THE CONVERSION--SUBSCRIPTION OFFERING AND SUBSCRIPTION
RIGHTS" IN THE ATTACHED PROSPECTUS.
VALUE OF PARTICIPATION INTERESTS
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on a
quarterly basis. This value represents the market value of past contributions
to the Plan by the Bank and by the Participants and earnings thereon, less
previous withdrawals.
METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund (the "Investment Form"). If a
Participant wishes to transfer all or part of his or her beneficial interest
in the assets of the Plan to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion, he or she should indicate that
decision in Part 2 of the Investment Form. If a Participant does not wish to
make such an election, he or she does not need to take any action.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund in order to purchase Common Stock issued in connection with the
Conversion is June 14, 1996. The Investment Form should be returned to the
Bank's Human Resources Department by 12:00 noon, Brick, New Jersey Time, on
such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such Participant's
account in the Plan to the Employer Stock Fund in order to purchase shares of
Common Stock in connection with the Conversion shall be irrevocable up to the
closing of the Conversion. Participants, however, will be able to direct the
reinvestment of their accounts ("Accounts") including their interest in the
Employer Stock Fund under the Plan as explained below.
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DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant will be able to direct that a certain
percentage of such Participant's interests in the trust assets ("Trust") be
transferred to the Employer Stock Fund and invested in Common Stock, or to the
other investment funds available under the Plan. Alternatively, a Participant
may direct that a certain percentage of such Participant's interest in the
Employer Stock Fund be transferred from the Employer Stock Fund to the other
investment funds available under the Plan. Participants will be permitted to
direct that future contributions made to the Plan by or on their behalf be
invested in Common Stock. Following the initial election, the allocation of a
Participant's interest in the Employer Stock Fund may be changed by the
Participant, with each change generally becoming effective at the close of
business on the day the change is received by the Plan Administrator. Special
restrictions apply to transfers directed by those Participants who are
executive officers, directors and principal shareholders of the Company who
are subject to the provisions of Section 16(b) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price paid for such shares of Common
Stock will be the same price as is paid by all other persons who purchase
shares of Common Stock in the Conversion.
Any shares of Common Stock purchased by the Trustee after the Conversion
will be acquired in open market transactions. The prices paid by the Trustee
for shares of Common Stock will not exceed "adequate consideration" as defined
in Section 3(18) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant has an allocable interest in the investment funds of
the Plan but not in any particular assets of the Plan. Accordingly, a specific
number of shares of Common Stock will not be directly attributable to the
account of any Participant. Net earnings, e.g., gains and losses, are
allocated to the Account of a Participant based on the particular investment
designations of the Participants. Therefore, earnings with respect to a
Participant's Account should not be affected by the investment designations
(including investments in Common Stock) of other Participants.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee generally will exercise voting and tender rights attributable to
all Common Stock held by the Trust as directed by Participants with interests
in the Employer Stock Fund. With respect to each matter as to which holders of
Common Stock have a right to vote, each Participant will be allocated a number
of voting instruction rights reflecting such Participant's proportionate
interest in the Employer Stock Fund. The percentage of shares of Common Stock
held in the Employer Stock Fund that are voted in the affirmative or negative
on each matter shall be the same percentage of the total number of voting
instruction rights that are exercised in either the affirmative or negative,
respectively. In the event of a tender offer for the Common Stock, the Plan
provides that each Participant will be allotted a number of tender instruction
rights reflecting such Participant's proportionate interest in the Employer
Stock Fund. The percentage of shares of Common Stock held in the Employer
Stock Fund that will be tendered will be the same as the percentage of the
total number of tender instruction rights that are exercised in favor of
tendering. The remaining shares of Common Stock held in the Employer Stock
Fund will not be tendered. The Plan makes provision for Participants to
exercise their voting instruction rights and tender instruction rights on a
confidential basis.
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DESCRIPTION OF THE PLAN
INTRODUCTION
Effective as of September 1, 1988, the Bank adopted the Plan. The Plan is a
cash or deferred arrangement established in accordance with the requirements
under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code").
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank
will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable Treasury
Regulations. The Plan has received from the Internal Revenue Service ("IRS") a
determination that the Plan, as amended, is qualified under Section 401(a) of
the Code and that it satisfies the requirements for a qualified cash or
deferred arrangement under Section 401(k) of the Code.
Employee Retirement Income Security Act. The Plan is an "individual account
plan" other than a "money purchase pension plan" within the meaning of ERISA.
As such, the Plan is subject to all of the provisions of Title I (Protection
of Employee Benefit Rights) and Title II (Amendments to the Internal Revenue
Code Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA which by their terms do not apply to
an individual account plan (other than a money purchase pension plan). The
Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. Neither
the funding requirements contained in Part 3 of Title I of ERISA nor the plan
termination insurance provisions contained in Title IV of ERISA will be
extended to Participants or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT
UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH THE
BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS
MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A PARTICIPANT
RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER SUCH A WITHDRAWAL
OCCURS DURING HIS EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan, which is filed as an exhibit to
the registration statement filed with the Securities and Exchange Commission
("SEC"). Copies of the Plan are available to all employees by filing a request
with the Plan Administrator. Each employee is urged to read carefully the full
text of the Plan.
ELIGIBILITY AND PARTICIPATION
Any employee of the Bank is eligible to participate and will become a
Participant in the Plan on the first day of the month immediately following
completion of six months of service with the Bank within a twelve month period
of employment and attaining age 21 years. The Plan's fiscal year is the
calendar year ("Plan Year"). Directors who are not employees of the Bank are
not eligible to participate in the Plan.
As of December 31, 1995, there were approximately 209 employees eligible to
participate in the Plan, and approximately 177 employees had elected to
contribute to the Plan.
CONTRIBUTIONS UNDER THE PLAN
Participant Contributions. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to
a salary reduction agreement by an amount not more than 15%
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and have that amount contributed to the Plan on such Participant's behalf.
Such amounts are credited to the Participant's "401(k) Account." For purposes
of the Plan, "Compensation" means a Participant's base salary, bonuses and
commissions. Due to a statutory change, effective January 1, 1994, the annual
Compensation of each Participant taken into account under the Plan shall be
limited to $150,000 (adjusted for cost of living as permitted by the Code). A
Participant may elect to modify the amount contributed to the Plan under such
Participant's salary reduction agreement, which changes generally become
effective for the next payroll period processed through the Bank's normal
procedures. Deferred contributions are generally transferred by the Bank to
the Trustee of the Plan at each payroll.
Employer Contributions. The Bank currently makes a bi-weekly contribution to
the Plan of an amount equal to 75% of each Participant's bi-weekly
contributions to his or her 401(k) Account, up to a maximum of 4.5% of each
Participant's bi-weekly compensation. Effective on or about July 1, 1996, and
contingent upon the consummation of the Conversion, the Employer Contribution
will be limited to a maximum of 50% of each Participant's contributions, up to
a maximum of 3% of such Participant's compensation. Such amounts are credited
to the Participant's Regular Account.
EFFECTIVE JULY 1, 1996, WHEN AN EMPLOYER CONTRIBUTION IS MADE, IT WILL BE
MADE IN THE FORM OF A CASH CONTRIBUTION INTO THE EMPLOYER STOCK FUND. Twenty-
five percent (measured on the first day of each plan year) of the amount
attributable to the Employer Contribution may be reallocated once per year.
Rollover Amount from Other Plans. An employee eligible to participate in the
Plan, who has satisfied the service requirements, and who, as a result of a
plan termination, termination of employment, disability, or attainment of age
59 1/2, has had distributed to such employee the entire interest in another
plan which meets the requirements of Section 401(a) of the Code (the "Other
Plan") may, in accordance with Section 402(a)(5) of the Code and procedures
approved at the discretion of the Trustee, transfer the distribution received
from the Other Plan to the Trustee. Any amounts rolled over from an Other Plan
will be contributed to the employee's "Rollover Account."
Voluntary Employee Contributions. A Participant may make voluntary
contributions each plan year in increments of 1% of salary. These voluntary
contributions will not reduce the amount of earnings on which the Participant
pays taxes since they will be made on an after-tax basis. These contributions
are eligible for matching Employer contributions subject to the limitations
set out above.
LIMITATIONS ON CONTRIBUTIONS
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's 401(k) Contribution Account during any Plan Year may not
exceed the lesser of 25% of the Participant's "Section 415 Compensation" for
the Plan Year or $30,000 (adjusted for increases in the cost of living as
permitted by the Code). A Participant's "Section 415 Compensation" is a
Participant's Compensation, excluding any amount contributed to the Plan under
a compensation reduction agreement or any employer contribution to the Plan or
to any other plan of deferred compensation or any distributions from a plan of
deferred compensation. In addition, annual additions shall be limited to the
extent necessary to prevent the limitations for the combined plans of the Bank
from being exceeded. To the extent that these limitations would be exceeded by
reason of excess annual additions to the Plan with respect to a Participant,
such excess will be disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to reduce
the Bank's contributions for such Participant in the next Limitation Year,
which is the same as the plan year, and each succeeding Limitation Year if
necessary;
(ii) If an excess amount still exists, and the Participant is not covered
by the Plan at the end of the Limitation Year, the excess amount will be
held unallocated in a suspense account which will then be
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applied to reduce future Bank contributions for all remaining Participants
in the next Limitation Year, and each succeeding Limitation Year if
necessary;
(iii) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of investment
gains and losses.
However, if the annual addition limitations are exceeded with respect to a
Participant in both the Plan and the defined benefit pension plan maintained
by the Bank, the Participant's annual benefit under the pension plan will be
reduced.
$7,000 Limitation on 401(k) Plan Contributions. The annual amount of
deferred compensation of a Participant (when aggregated with any elective
deferrals of the Participant under any other employer plan, a simplified
employee pension plan or a tax-deferred annuity) may not exceed $7,000,
adjusted for increases in the cost of living as permitted by the Code (the
limitation for 1996 is $9,500). Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross income for
federal income tax purposes in the year they are made. In addition, any such
excess deferral will again be subject to federal income tax when distributed
by the Plan to the Participant, unless the excess deferral (together with any
income allocable thereto) is distributed to the Participant not later than the
first April 15th following the close of the taxable year in which the excess
deferral is made. Any income on the excess deferral that is distributed not
later than such date shall be treated, for federal income tax purposes, as
earned and received by the Participant in the taxable year in which the excess
deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees. Sections
401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
contributed by or on behalf of all other employees eligible to participate in
the Plan. Specifically, the actual deferral percentage for a plan year (i.e.,
the average of the ratios, calculated separately for each eligible employee in
each group, by dividing the amount of Deferred Compensation credited to the
401(k) Account of such eligible employee by such eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual deferral percentage of all other
eligible employees, or (b) the lesser of (i) 200% of the actual deferral
percentage of all other eligible employees, or (ii) the actual deferral
percentage of all other eligible employees plus two percentage points. In
addition, the actual contribution percentage for a Plan Year (i.e., the
average of the ratios calculated separately for each eligible employee in each
group, by dividing the amount of employer contributions credited to the
Regular Account of such eligible employee by such eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual contribution percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual
contribution percentage of all other eligible employees, or (ii) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner
(i.e., owns directly or indirectly more than 5% of the stock of the Employer,
or stock possessing more than 5% of the total combined voting power of all
stock of the Employer), (2) received compensation from the Employer in excess
of $100,000, (3) received compensation from the Employer in excess of $66,000
and was in the group consisting of the top 20% of employees when ranked on the
basis of compensation paid during the Plan Year, or (4) was at any time an
officer of the Employer and received compensation in excess of $60,000 (a
"Highly Compensated Employee"). The dollar amounts in the foregoing sentence
are for 1995. Such amounts are adjusted annually to reflect increases in the
cost of living. If the Employer does not have at least one officer whose
annual compensation is in excess of $60,000, then the highest paid officer of
the Employer will be treated as a Highly Compensated Employee.
In order to prevent the disqualification of the Plan, any amounts
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of
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the following Plan Year. However, the Bank will be subject to a 10% excise tax
on any excess contributions unless such excess contributions, together with
any income allocable thereto, either are recharacterized or are distributed
before the close of the first 2 1/2 months following the Plan Year to which
such excess contributions relate. In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated
Employees that exceed the average contribution limitation in any Plan Year
("excess aggregate contributions") together with any income allocable thereto,
must be distributed to such Highly Compensated Employees before the close of
the following Plan Year. However, the 10% excise tax will be imposed on the
Bank with respect to any excess aggregate contributions, unless such amounts,
plus any income allocable thereto, are distributed within 2 1/2 months
following the close of the Plan Year in which they arose.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees, and (ii)
certain additional restrictions would apply with respect to the combination of
annual additions to the Plan and projected annual benefits under any defined
benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance
of the Accounts of Participants who are Key Employees exceeds 60% of the
aggregate balance of the Accounts of all Participants. "Key Employees"
generally include any employee who, at any time during the Plan Year or any of
the four preceding Plan Years, is (1) an officer of the Bank having annual
compensation in excess of $60,000 who is in an administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owning, directly or indirectly, the largest interests in the Bank
or the Company, (3) a 5% owner of the Bank or the Company, (i.e., owns
directly or indirectly more than 5% of the stock of the Bank or the Company,
or stock possessing more than 5% of the total combined voting power of all
stock of the Bank or the Company) or (4) a 1% owner of the Bank or the Company
having annual compensation in excess of $150,000.
INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held in
the Trust which is administered by the Trustee. The Trustee is appointed by
the Bank's Board of Directors. The Plan provides that a Participant may direct
the Trustee to invest all or a portion of his Accounts in various managed
investment portfolios, described below. A Participant may elect to change his
investment directions with respect to both past contributions and for more
additions to the Participant's accounts invested in these investment
alternatives. These elections generally become effective on the next business
day following the day Diversified receives the Participant's written notice of
the elections. Participants may make elections using a "Voice Response System"
by calling 1-800-755-5801. Any amounts credited to a Participant's Accounts
for which investment directions are not given will be invested by the Trustee
in the Money Market Fund.
Prior to the effective date of the Conversion, the Accounts of a Participant
held in the Trust have been invested at the direction of the Participant in
the following managed portfolios:
Money Market Fund -- This fund seeks to obtain maximum income consistent
with high liquidity and the maintenance of a quality
portfolio of short-term market instruments. This fund
is most suitable for highly risk adverse investors or
as a holding vehicle for diversification strategies.
Stable Fund -- This fund offers a declared interest rate each plan
year with an underlying floor rate. This fund is
suitable for investors who want competitive rates of
return with a guarantee of principal and interest.
Equity Income Fund -- This fund seeks long-term capital appreciation through
investment primarily in common stocks that have
relatively high current yields. This fund is most
suitable for investors who want long-term growth with
lower risk than the overall equity market.
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Growth-Income Fund -- This fund seeks long term capital appreciation as its
primary objective and income as its secondary
objective. This fund is most suitable for investors who
seek broad stock market participation.
Special Equity Fund -- This fund seeks capital appreciation through investment
in the securities of small-to-medium-sized growth-
oriented companies. This fund is suitable for investors
who desire high growth potential and are able to
tolerate significant short-term volatility.
Government Fixed This fund is designed to provide guaranteed positive
Fund -- returns in all market environments through investments
in obligations issued by the U. S. Government or its
Agencies. The fund is suitable for individuals who
desire a high level of safety and rates of return that
are more competitive than Certificates of Deposit.
Intermediate
Government Bond Fund --This fund seeks high current income through investment
in fixed income securities. This fund is suitable for
conservative investors who desire low volatility and
modest growth.
Conservative Fund -- This fund seeks consistent returns with less volatility
through investment primarily in fixed income
securities. This fund is suitable for investors who
desire a diversified portfolio with minimum risk and
returns consistent with fixed income funds.
Moderate Fund -- This fund seeks moderate returns and less volatility
through investment in a combination of stocks, bonds
and short-term instruments. This fund is suitable for
investors who desire a diversified portfolio with
moderate risk and greater potential for increased
returns.
Aggressive Fund -- This fund seeks to maximize returns while limiting
volatility through investment primarily in stocks. This
fund is suitable for investors who desire a diversified
portfolio and can withstand short-term volatility in
favor of long-term investment results.
Effective upon the Conversion, a Participant may invest all or a portion of
his Accounts in the portfolios described above and in the Employer Stock Fund,
described below:
Employer Stock Fund -- Invests in common stock of the parent holding company,
Ocean Financial Corp.
A Participant may elect in whole percentages to have both past and future
contributions and additions to the Participant's Accounts invested either in
the Employer Stock Fund or in such other managed portfolios listed above.
These elections will generally be effective the business day coinciding with
or next following the day of Diversified's receipt of such investment
directions. Any amounts credited to a Participant's Accounts for which
investment directions are not given will be invested in the Money Market Fund.
Because investment allocations only are required to be made in increments,
Participants can invest their Accounts in each of the eleven available
investment funds. Lack of diversification with respect to the investment of a
Participant's Account is not a significant risk given the eleven investment
options available to Participants and the ability of Participants to make
investment designations daily (subject to the limitations on certain
executives as described below).
The net gain (or loss) in the Accounts from investments including the
Employer Stock Fund (including interest payments, dividends, realized and
unrealized gains and losses on securities, and expenses paid from the Trust)
are determined daily during the Plan Year. For purposes of such allocations,
all assets of the Trust are valued at their fair market value.
10
<PAGE>
A. PREVIOUS FUNDS.
Prior to the Conversion, contributions under the Plan were invested in the
ten Funds listed below. The annual percentage of returns on these funds,
calculated net of any fees being charged to the portfolio for 1995 and 1994
was:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
A.Money Market Fund......................................... 5.34% 3.85%
B.Stable Fund............................................... 7.50 6.75
C.Equity Income Fund........................................ 33.79 -2.71
D.Growth Income Fund........................................ 31.53 -3.38
E.Special Equity Fund....................................... 40.35 -4.62
F.Intermediate Government Bond Fund......................... 13.35 -1.50
G.Government Fixed Fund..................................... 4.75 4.50
H.Conservative Fund......................................... 15.76 -0.79
I.Moderate Fund............................................. 18.88 -1.10
J.Aggressive Fund........................................... 23.44 -1.06
</TABLE>
B. THE EMPLOYER STOCK FUND.
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion. In connection with the
Conversion, pursuant to the attached Investment Form, Participants will be
able to change their investments. Any cash dividends paid on Common Stock held
in the Employer Stock Fund will be credited to a cash dividend subaccount for
each Participant investing in the Employer Stock Fund. The Trustee will, to
the extent practicable, use all amounts held by it in the Employer Stock Fund
(except the amounts credited to cash dividend subaccounts) to purchase shares
of Common Stock. It is expected that all purchases will be made at prevailing
market prices. Under certain circumstances, the Trustee may be required to
limit the daily volume of shares purchased. Pending investment in Common
Stock, assets held in the Employer Stock Fund will be placed in bank deposits
and other short-term investments.
When Common Stock is purchased or sold, the cost or net proceeds are charged
or credited to the Accounts of Participants affected by the purchase or sale.
Transactional fees, such as any brokerage commissions, transfer fees and other
expenses incurred in the sale and purchase of Common Stock for the Employer
Stock Fund will be allocated among a Participant's account. A Participant's
Account will be adjusted to reflect changes in the value of shares of Common
Stock resulting from stock dividends, stock splits and similar changes.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will
consist only of the market value appreciation of the Common Stock subsequent
to its purchase. Following the Conversion, the Board of the Company may
consider a policy of paying dividends on the Common Stock, however, no
decision has been made by the Board of the Company regarding the amount or
timing of dividends, if any.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market
for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL RISKS
ASSOCIATED WITH INVESTMENTS IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION
OF THESE RISK FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS.
BENEFITS UNDER THE PLAN
Vesting. A Participant has at all times a fully vested, nonforfeitable
interest in all of his Contributions to his 401(k) Account pre-tax or after-
tax and Rollover Account and the earnings thereon under the Plan. A
Participant is 100% vested in the portion of his account attributable to
matching contributions after the
11
<PAGE>
completion of six years of service under the Plan's six-year graded vesting
schedule (20% per year beginning after two years of service).
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT
UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2 UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK.
Withdrawals Prior to Termination of Employment. In certain circumstances, a
Participant may make a withdrawal from his Accounts under the Plan pursuant to
the hardship distribution rules under the Plan. These requirements insure that
Participants have a true financial need before a withdrawal may be made. A
Participant may make a withdrawal from his 401(k) Contribution Account after
the age of 59 1/2.
No more than once each calendar year, a Participant may borrow from the
vested portion of his Regular Account, 401(k) Account and/or Rollover Account
any amount between $1,000 and the lesser of (i) $50,000, reduced by the
Participant's highest outstanding loan balance from the 401(k) Plan during the
preceding 12 months or (ii) 50% of the Participant's vested account balance,
subject to certain limitations. Loans have an interest rate comparable to
current interest rates offered by major banking institutions. Repayments are
made through salary deductions. If a Participant who is not an employee takes
out a loan there may be terms offered different than those offered to
Participants who are still employed. There is a loan set-up charge of $75.
Distribution of Voluntary Contributions. A Participant may withdraw all or
part of that portion of his account attributable to Voluntary Contributions
(including earnings thereon) at any time; however, once a withdrawal has been
made, the Participant must wait six months before a second withdrawal can be
made. If a Participant elects to make a withdrawal of his or her matched
voluntary contributions, he or she may not make Voluntary Contributions for a
period of 3 months after the date of such a withdrawal.
Distribution Upon Retirement, Disability or Termination of
Employment. Payment of benefits to a Participant who retires, incurs a
disability, or otherwise terminates employment generally shall be made in a
lump sum cash payment. At the request of the Participant, the distribution may
include an in-kind distribution of Common Stock of the Company credited to the
Participant's Account. A Participant whose total vested account balance equals
or exceeds $3,500 at the time of termination, may elect, in lieu of a lump sum
payment, to be paid (i) a life annuity with payments certain to be made in
annual installments over a period of 5, 10, or 15 years, or (ii) as a lump sum
or (iii) as a contingent annuity. Benefit payments ordinarily shall be made
not later than 60 days following the end of the Plan Year in which occurs the
later of the Participant's: (i) termination of employment; (ii) attainment of
age 65; (iii) 10th anniversary of commencement of participation in the Plan;
but in no event later than the April 1 following the calendar year in which
the Participant attains age 70 1/2. However, if the vested portion of the
Participant's Account balances exceeds $3,500, no distribution shall be made
from the Plan prior to the Participant's attaining age 65 unless the
Participant consents to an earlier distribution. Special restrictions apply to
the distribution of Common Stock of the Company to those Participants who are
executive officers, directors and principal shareholders of the Company who
are subject to the provisions of Section 16(b) of the Exchange Act.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have his benefits paid to the surviving
spouse in an annuity over the life of the spouse, or if the payment of his
benefit had commenced before his death, in accordance with the distribution
method in effect at death. With respect to an unmarried Participant, and in
the case of a married Participant with spousal consent to the designation of
another beneficiary, payment of benefits to the beneficiary of a deceased
Participant shall be made in the form of a lump-sum payment in cash
12
<PAGE>
or in Common Stock, or, if the payment of his benefit had commenced before his
death, in accordance with the distribution method in effect at death.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order (as defined in the Code), benefits payable under the Plan shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution, or levy of any kind,
either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
Trustees. The Trustee with respect to the Plan is the named fiduciary of the
Plan for purposes of Section 402 of ERISA. The Trustee of the Plan is to be
Investor's Bank and Trust Co., Boston, Massachusetts.
Pursuant to the terms of the Plan, the Trustee receives and holds
contributions to the Plan in trust and has exclusive authority and discretion
to manage and control the assets of the Plan pursuant to the terms of the Plan
and to manage, invest and reinvest the Trust and income therefrom. The Trustee
has the authority to invest and reinvest the Trust and may sell or otherwise
dispose of Trust investments at any time and may hold trust funds uninvested.
The Trustee has authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustee has full power to vote any corporate securities in the Trust in
person or by proxy, provided, however, that the Plan Administrator shall
direct the Trustee as to voting and tendering of all Common Stock held in the
Employer Stock Fund.
The Trustee is entitled to reasonable compensation for its services and is
also entitled to reimbursement for expenses properly and actually incurred in
the administration of the Trust. The expenses of the Trustee and the
compensation of the persons so employed is paid out of the Trust except to the
extent such expenses and compensation are paid by the Bank.
The Trustee must render at least annual reports to the Bank and to the
Participants in such form and containing such information that the Trustee
deems necessary.
REPORTS TO PLAN PARTICIPANTS
The Administrator will furnish to each Participant a statement at least
quarterly showing (i) the balance in the Participant's Account as of the end
of that period, (ii) the amount of contributions allocated to such
Participant's Account for that period, and (iii) the adjustments to such
Participant's Account to reflect earnings or losses (if any).
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan Administrator is the Bank. A
committee of the Bank has been designated by the Board of Directors of the
Bank to act on the Bank's behalf as the Plan Administrator. The name, address
and telephone number of the current Plan Administrator is Ocean Federal
Savings Bank, 74 Brick Boulevard, Brick, New Jersey 08723. The Bank's
telephone number is (908) 477-5200. The Administrator is responsible for the
administration of the Plan, interpretation of the provisions of the Plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the Plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the Plan, and preparation and filing of all returns and reports relating to
the Plan which are required to be filed with the U.S. Department of Labor and
the IRS, and for all disclosures required to be made to Participants,
beneficiaries and others under Sections 104 and 105 of ERISA.
13
<PAGE>
AMENDMENT AND TERMINATION
The Bank may terminate the Plan at any time. If the Plan is terminated in
whole or in part, then regardless of other provisions in the Plan, each
employee who ceases to be a Participant shall have a fully vested interest in
his Account. The Bank reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust
to be used for, or diverted to, any purpose other than the exclusive benefit
of the Participants or their beneficiaries.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan may be submitted to the IRS for a determination that it is
qualified under Section 401(a) and 401(k) of the Code, and that the related
Trust is exempt from tax under Section 501(a) of the Code. A plan that is
"qualified" under these sections of the Code is afforded special tax treatment
which include the following: (1) The sponsoring employer is allowed an
immediate tax deduction for the amount contributed to the Plan each year; (2)
Participants pay no current income tax on amounts contributed by the employer
on their behalf; and (3) Earnings of the plan are tax-exempt thereby
permitting the tax-free accumulation of income and gains on investments. The
Plan will be administered to comply in operation with the requirements of the
Code as of the applicable effective date of any change in the law. The Bank
expects to timely adopt any amendments to the Plan that may be necessary to
maintain the qualified status of the Plan under the Code. Following such an
amendment, the Plan will be submitted to the IRS for a determination that the
Plan, as amended, continues to qualify under Sections 401(a) and 501(a) of the
Code and that it continues to satisfy the requirements for a qualified cash or
deferred arrangement under Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code and that the IRS issues a favorable determination as described in
the preceding paragraph, participation in the Plan under existing federal
income tax laws will have the following effects:
(a) Amounts contributed to a Participant's 401(k) Account and the
investment earnings on this Account are not includable in a Participant's
federal taxable income until such contributions or earnings are actually
distributed or withdrawn from the Plan. Special tax treatment may apply to
the taxable portion of any distribution that includes Common Stock or
qualifies as a Lump Sum Distribution (as described below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it
is made: (i) within a single taxable year of the Participant or
14
<PAGE>
beneficiary; (ii) on account of the Participant's death or separation from
service, or after the Participant attains age 59 1/2; and (iii) consists of
the balance to the credit of the Participant under the Plan and all other
profit sharing plans, if any, maintained by the Bank. The portion of any Lump
Sum Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes (the "total
taxable amount") consists of the entire amount of such Lump Sum Distribution
less the amount of after-tax contributions, if any, made by the Participant to
any other profit sharing plans maintained by the Bank which is included in
such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution (the "ordinary income portion") will be taxable generally as
ordinary income for federal income tax purposes. However, a Participant who
has completed at least five years of participation in the Plan before the
taxable year in which the distribution is made, or a beneficiary who receives
a Lump Sum Distribution on account of the Participant's death (regardless of
the period of the Participant's participation in the Plan or any other profit-
sharing plan maintained by the Employer), may elect to have the ordinary
income portion of such Lump Sum Distribution taxed according to a special
averaging rule ("five-year averaging"). The election of the special averaging
rules may apply only to one Lump Sum Distribution received by the Participant
or beneficiary, provided such amount is received on or after the Participant
turns 59 1/2 and the recipient elects to have any other Lump Sum Distribution
from a qualified plan received in the same taxable year taxed under the
special averaging rule. Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule or under the prior law ten-year averaging
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the Participant's pre-1974 participation in the
Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the
extent of the amount of net unrealized appreciation at the time of
distribution, will be considered long-term capital gain regardless of the
holding period of such Common Stock. Any gain on a subsequent sale or other
taxable disposition of the Common Stock in excess of the amount of net
unrealized appreciation at the time of distribution will be considered either
short-term capital gain or long-term capital gain depending upon the length of
the holding period of the Common Stock. The recipient of a distribution may
elect to include the amount of any net unrealized appreciation in the total
taxable amount of such distribution to the extent allowed by the regulations
to be issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an IRA without regard to whether the distribution is a
Lump Sum Distribution or a Partial Distribution. Effective January 1, 1993,
Participants have the right to elect to have the Trustee transfer all or any
portion of an "eligible rollover distribution" directly to another plan
qualified under Section 401(a) of the Code or to an IRA. If the Participant
does not elect to have an "eligible rollover distribution" transferred
directly to another qualified plan or to an IRA, the distribution will be
subject to a mandatory federal withholding tax equal to 20% of the taxable
distribution. An "eligible rollover distribution" means any amount distributed
from the Plan except: (1) a distribution that is (a) one of a series of
substantially equal periodic payments made (not less frequently than annually)
over the Participant's life or the joint life of the Participant and the
Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump
15
<PAGE>
Sum Distributions, that are not rolled over or transferred i.e., forward
averaging, capital gains tax treatment and the nonrecognition of net
unrealized appreciation, discussed earlier.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant)
on or after the death of the Participant, (ii) attributable to the
Participant's being disabled within the meaning of Section 72(m)(7) of the
Code, (iii) part of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life expectancy) of the
Participant or the joint lives (or joint life expectancies) of the Participant
and his beneficiary, (iv) made to the Participant after separation from
service on account of early retirement under the Plan after attainment of age
55, (v) made to pay medical expenses to the extent deductible for federal
income tax purposes, (vi) pursuant to a qualified domestic relations order, or
(vii) made to effect the distribution of excess contributions or excess
deferrals.
ERISA AND OTHER QUALIFICATIONS
As noted above, the Plan is subject to certain provisions of ERISA and will
be submitted to the IRS for a determination that it is qualified under Section
401(a) of the Code as most recently amended to allow for the investment in
Employer Stock.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT
INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
RESTRICTIONS ON RESALE
Any person receiving shares of Common Stock under the Plan who is an
"affiliate" of the Company as the term "affiliate" is used in Rules 144 and
405 under the Securities Act of 1933, as amended ("Securities Act") (e.g.,
directors, officers and substantial shareholders of the Company) may reoffer
or resell such shares only pursuant to a registration statement filed under
the Securities Act or, assuming the availability thereof, pursuant to Rule 144
or some other exemption of the registration requirements of the Securities
Act. Any person who may be an "affiliate" of the Company may wish to consult
with counsel before transferring any Company Stock owned by him. In addition,
Participants are advised to consult with counsel as to the applicability of
Section 16 of the Exchange Act which may restrict the sale of Common Stock
where acquired under the Plan, or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Company at the time of
resale will be free to resell any shares of Common Stock distributed to them
under the Plan, either publicly or privately, without regard to the
registration and prospectus delivery requirements of the Securities Act or
compliance with the restrictions and conditions contained in the exemptive
rules thereunder. An "affiliate" of the Company is someone who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control, with the Company. All directors, the Chief Executive
Officer, the Chief Financial Officer, Chief Lending Officer, Chief Counsel and
the Director of Operations have been designated as "affiliates" of the
Company. A person who may be deemed an "affiliate" of the Company at the time
of a proposed resale will be permitted to make public resales of the Company's
Common Stock only pursuant to a "reoffer" Prospectus or in accordance with the
restrictions and conditions contained in Rule 144 under the Securities Act or
some other exemption from registration, and will not be permitted to use this
Prospectus in connection with any such resale. In general, the amount of the
Company's Common Stock which any such affiliate may publicly resell pursuant
to Rule 144 in any three-month period may not exceed the greater of one
percent of the Company's Common Stock then
16
<PAGE>
outstanding or the average weekly trading volume reported on the Nasdaq Stock
Market during the four calendar weeks prior to the sale. Such sales may be
made only through brokers without solicitation and only at a time when the
Company is current in filing the reports required of it under the Exchange
Act.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the Exchange Act imposes reporting and liability requirements
on executive officers, directors and persons beneficially owning more than ten
percent of public companies such as the Company. Section 16(a) of the Act
requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a
Form 3 reporting initial beneficial ownership must be filed with the SEC.
Certain changes in beneficial ownership, such as purchases, sales, gifts and
participation in savings and retirement plans must be reported periodically,
either on a Form 4 within ten days after the end of the month in which a
change occurs, or annually on a Form 5 within 45 days after the close of the
Company's fiscal year. Participation in the Employer Stock Fund of the Plan by
executive officers, directors and persons beneficially owning more than ten
percent of Common Stock of the Company must be reported to the SEC annually on
a Form 5 by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the Exchange Act provides for the recovery by the Company of profits realized
by any officer, director or any person beneficially owning more than ten
percent of the Company's Common Stock ("Section 16(b) Persons") resulting from
the purchase and sale or sale and purchase of the Company's Common Stock
within any six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for Participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided
certain requirements are met. These requirements generally involve
restrictions upon the timing of elections to acquire or dispose of employer
securities for the accounts of Section 16(b) Persons.
The Plan, as amended, only permits Section 16(b) Persons to make transfers
to or from the Employer Stock Fund in accordance with the terms of the Plan,
and only during the period beginning on the third business day following the
date of release of the Company's quarterly and annual statements of earnings
and ending on the 12th business day following that date. Section 16(b) Persons
also are prohibited under the Plan from making a transfer into or out of the
Employer Stock Fund within six months of the next preceding transfer into or
out of the Employer Stock Fund.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order under the Plan, Section 16(b) Persons are required to hold shares of
Common Stock distributed from the Plan for six months following such
distribution and are prohibited from directing additional purchases of units
within the Employer Stock Fund for six months after receiving such a
distribution. Finally, the Plan provides that Section 16(b) Persons who
terminate their participation in the Plan may not rejoin the Plan for six
months following the date of their termination. These Plan restrictions
conform with the rules issued by the SEC to exempt the Plan from the profit-
recovery rules of Section 16(b) of the Exchange Act.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Muldoon, Murphy & Faucette, Washington, D.C., which firm is acting as special
counsel for the Company and the Bank in connection with the Bank's Conversion
from a mutual savings bank to a stock savings bank and the concurrent
formation of the Company.
17
<PAGE>
RETIREMENT PLAN FOR OCEAN FEDERAL SAVINGS BANK
INVESTMENT FORM
Name of Plan Participant: ________________________
Social Security Number: __________________________
1. INSTRUCTIONS. In connection with the proposed Conversion of Ocean Federal
Savings Bank from a mutual savings bank to a stock based organization
(the "Conversion"), the Ocean Federal Savings Bank Profit Sharing Plan
and Trust (the "401(k) Plan") has been adopted to permit Participants to
direct their June 14, 1996 account balances into a new fund: the Employer
Stock Fund. The percentage of a Participant's account transferred at the
direction of the Participant into the Employer Stock Fund will be used to
purchase shares of common stock of Ocean Financial Corp. (the "Common
Stock").
To direct a transfer of all or a part of the funds credited to your
accounts to the Employer Stock Fund, you must complete and file this form
with the Human Resources Department no later than June 14, 1996. A
representative for the Plan Administrator will retain a copy of this form
and return a copy to you. If you need any assistance in completing this
form, please contact Ms. Donna Lowden, Vice President and Director, Human
Resources. If you do not complete and return this form to the Human
Resources Department by June 14, 1996, the funds credited to your
accounts under the 401(k) Plan will continue to be invested in accordance
with your prior investment direction, or in accordance with the terms of
the 401(k) Plan if no investment direction had been provided.
2. TRANSFER DIRECTIONS. I hereby direct the Plan Administrator to invest the
following percentage (in multiples of not less than 1%) of my account
balance in the:
<TABLE>
<C> <S> <C>
A. Money Market Fund %
B. Stable Fund %
C. Equity Income Fund %
D. Growth Income Fund %
E. Special Equity Fund %
F. Intermediate Government Fund %
G. Government Fixed Fund %
H. Conservative Fund %
I. Moderate Fund %
J. Aggressive Fund %
K. Employer Stock Fund %
</TABLE>
NOTE: THE TOTAL PERCENTAGE STATED ABOVE MAY NOT EXCEED 100%. YOUR ABILITY TO
TRANSFER FUNDS TO THE EMPLOYER STOCK FUND IN THE CONVERSION IS SUBJECT
TO YOUR GENERAL ELIGIBILITY TO PURCHASE SHARESOF COMMON STOCK IN THE
CONVERSION AND THE MAXIMUM AND MINIMUM PURCHASE LIMITATIONS SETFORTH IN
THE PLAN OF CONVERSION. FOR GENERAL INFORMATION AS TO YOUR ELIGIBILITY
TO PURCHASE SHARES OF COMMON STOCK AND THE MINIMUM AND MAXIMUM AMOUNTS
THAT MAY BE PURCHASED INTHE CONVERSION, SEE "THE CONVERSION--
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS" AND""--LIMITATION ON
COMMON STOCK PURCHASES" IN THE PROSPECTUS.
3. ACKNOWLEDGEMENT OF PARTICIPANT. I understand that this Investment Form
shall be subject to all of the terms and conditions of the 401(k) Plan. I
acknowledge that I have received a copy of the Prospectus and the
Prospectus Supplement.
Signature of Participant: _____________ _____________________
Date
ACKNOWLEDGMENT OF RECEIPT BY ADMINISTRATOR. This Investment Form was received
by the Plan Administrator and will become effective on the date noted below.
Plan Administrator: ___________________ _____________________
Date
<PAGE>
RULE NO. 424(b)(3)
REGISTRATION NO. 33-80123
PROSPECTUS
OCEAN
FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR OCEAN FEDERAL SAVINGS BANK)
UP TO 7,293,981 SHARES OF COMMON STOCK
Ocean Financial Corp. (the "Company" or "Ocean Financial"), a Delaware
corporation, is offering up to 7,293,981 shares of its common stock, par value
$.01 per share (the "Common Stock"), in connection with the conversion of
Ocean Federal Savings Bank (the "Bank" or "Ocean Federal") from a federally
chartered mutual savings bank to a federally chartered capital stock savings
bank pursuant to the Bank's plan of conversion (the "Plan" or "Plan of
Conversion"). The simultaneous conversion of the Bank to stock form, the
issuance of the Bank's stock to the Company and the offer and sale of the
Common Stock by the Company are herein referred to as the "Conversion." In
certain circumstances, the Company may increase the amount of Common Stock
offered hereby to 8,388,078 shares. See Footnote 4 to the table below.
(continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 20.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT ACCOUNTS OR DEPOSITS AND
ARE NOT FEDERALLY INSURED OR GUARANTEED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER
FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING
COMMISSIONS
AND OTHER FEES ESTIMATED
SUBSCRIPTION PRICE(1) AND EXPENSES(2) NET PROCEEDS(3)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share....... $20.00 $.62 $19.38
- -------------------------------------------------------------------------------------
Midpoint Per Share...... $20.00 $.57 $19.43
- -------------------------------------------------------------------------------------
Maximum Per Share....... $20.00 $.54 $19.46
- -------------------------------------------------------------------------------------
Total Minimum(1)........ $107,824,060 $3,332,217 $104,491,843
- -------------------------------------------------------------------------------------
Total Midpoint(1)....... $126,851,860 $3,638,565 $123,213,295
- -------------------------------------------------------------------------------------
Total Maximum(1)........ $145,879,620 $3,944,912 $141,934,708
- -------------------------------------------------------------------------------------
Total Maximum, as ad-
justed(4).............. $167,761,560 $4,297,211 $163,464,349
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") dated April 26, 1996, which states that
the estimated aggregate pro forma market value of the Common Stock being
offered for sale ranged from $107,824,060 to $145,879,620 with a midpoint
of $126,851,860 (the "Valuation Range"). Based on the Valuation Range, the
Board of Directors of the Bank (the "Board of Directors") established the
estimated price range of $107.8 million to $145.9 million (the "Estimated
Price Range"), or between 5,391,203 and 7,293,981 shares of Common Stock
at the $20 price per share (the "Purchase Price") to be paid for each
share of Common Stock subscribed for or purchased in the Offerings (as
hereinafter defined). RP Financial's appraisal is based upon estimates and
projections that are subject to change and the valuation must neither be
construed as a recommendation as to the advisability of purchasing such
shares nor that a purchaser will thereafter be able to sell such shares at
or above the Purchase Price. See "The Conversion--Stock Pricing" and "--
Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of $1,633,000 and
marketing fees to be paid to Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill") in connection with the Subscription and Community Offerings as
hereinafter defined, which fees are estimated to be $1,699,217 and
$2,311,912 at the minimum and the maximum of the Estimated Price Range,
respectively. See "The Conversion--Marketing and Underwriting
Arrangements." Such fees may be deemed to be underwriting fees and Sandler
O'Neill may be deemed to be an underwriter. See "Pro Forma Data" for the
assumptions used to arrive at these estimates. The actual fees and
expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in each of the Offerings, as
hereinafter defined, and other factors. Includes the purchase of shares of
Common Stock by the Ocean Federal Savings Bank Employee Stock Ownership
Plan and related trust (the "ESOP") funded by a loan from the Company to
the ESOP, which will initially be deducted from the Company's
stockholders' equity. See "Use of Proceeds," "Pro Forma Data" and "The
Conversion--Stock Pricing."
(4) As adjusted to give effect to the sale of up to an additional 15% of the
shares offered at the Purchase Price, without resolicitation of
subscribers or any right of cancellation, due to regulatory
considerations, or changes in market or general financial and economic
conditions. See "Pro Forma Data" and "The Conversion--Stock Pricing." For
a discussion of the distribution and allocation of the additional shares,
if any, see "The Conversion--Subscription Offering and Subscription
Rights," "--Community Offering" and "--Limitations on Common Stock
Purchases."
---------------
Sandler O'Neill & Partners, L.P.
---------------
The date of this Prospectus is May 13, 1996.
<PAGE>
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK HAVE BEEN GRANTED,
IN ORDER OF PRIORITY, TO EACH OF THE BANK'S ELIGIBLE ACCOUNT HOLDERS, THE
ESOP, THE BANK'S SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS AND CERTAIN OTHER
MEMBERS (EACH AS DEFINED HEREIN) IN A SUBSCRIPTION OFFERING (THE "SUBSCRIPTION
OFFERING"). SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. PERSONS FOUND TO BE
TRANSFERRING SUBSCRIPTION RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF SUCH
RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF
THRIFT SUPERVISION ("OTS"). Concurrently, and subject to the prior rights of
holders of subscription rights, the Company is offering the shares of Common
Stock not subscribed for in the Subscription Offering for sale in a community
offering to certain members of the general public, with preference given to
natural persons residing in Ocean, Middlesex and Monmouth Counties, New Jersey
(the "Community Offering") (the Subscription Offering and Community Offering
are referred to collectively as the "Subscription and Community Offerings").
It is anticipated that shares not subscribed for in the Subscription and
Community Offerings will be offered to members of the general public in a
syndicated community offering (the "Syndicated Community Offering") (the
Subscription and Community Offerings and the Syndicated Community Offering are
referred to collectively as the "Offerings"). See "The Conversion--
Subscription Offering and Subscription Rights," "--Community Offering," "--
Restrictions on Transfer of Subscription Rights and Shares" and "--Limitations
on Common Stock Purchases."
Except for the ESOP, which intends to subscribe for 8% of the shares of
Common Stock issued in the Conversion, no Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member, in their capacity as
such, may subscribe in the Subscription Offering for more than $200,000 of the
aggregate value of shares of Common Stock offered; no person, together with
associates of or persons acting in concert with such person, may purchase in
the Community Offering and the Syndicated Community Offering in the aggregate
more than $200,000 of the aggregate value of shares of Common Stock offered;
and no person, together with associates of or persons acting in concert with
such person, may purchase in the Offerings more than the overall maximum
purchase limitation of 1.0% of the total number of shares of Common Stock to
be issued in the Conversion, exclusive of any shares issued pursuant to an
increase in the Estimated Price Range of up to 15%; provided, however, that
the maximum overall purchase limitation and the maximum individual amount
permitted to be purchased may be increased or decreased in the sole discretion
of the Company. See "The Conversion--Subscription Offering and Subscription
Rights," "--Community Offering" and "--Limitations on Common Stock Purchases."
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will create the Ocean Federal Foundation (the "Foundation"),
which was incorporated under Delaware law as a non-stock corporation, and will
fund the Foundation with shares of Common Stock contributed by the Company in
an amount equal to 8% of the number of shares of Common Stock issued in the
Conversion. The Foundation would be dedicated to charitable and educational
purposes within Ocean County, New Jersey and its neighboring communities. The
establishment of the Foundation is subject to the approval of the Bank's
members at the special meeting being held to consider the Plan of Conversion.
For a discussion of the Foundation and the effects on the Conversion,
including if members do not approve the establishment of the Foundation, see
"Risk Factors--Establishment of the Charitable Foundation," "Pro Forma Data,"
and "The Conversion--Establishment of Charitable Foundation."
The Bank has engaged Sandler O'Neill to consult with and advise the Company
and the Bank in the Offerings and Sandler O'Neill has agreed to use its best
efforts to assist the Company with the solicitation of subscriptions and
purchase orders for shares of Common Stock in the Offerings. Sandler O'Neill
is not obligated to take or purchase any shares of Common Stock in the
Offerings. The Bank and the Company will pay a fee to Sandler O'Neill which
will be based on the aggregate Purchase Price of the Common Stock sold in the
Offerings. The Company and the Bank have agreed to indemnify Sandler O'Neill
against certain liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act"). See "The Conversion--Marketing and
Underwriting Arrangements."
THE SUBSCRIPTION AND COMMUNITY OFFERINGS WILL TERMINATE AT 5:00 P.M.,
EASTERN TIME, ON JUNE 20, 1996 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE
BANK AND THE COMPANY, WITH APPROVAL OF THE OTS, IF NECESSARY. Subscriptions
paid by cash, check, bank draft or money order will be placed in a segregated
account at the Bank and will earn interest at the Bank's passbook rate of
interest from the date of receipt until completion or termination of the
Conversion. Payments authorized by withdrawal from deposit accounts at the
Bank will continue to earn interest at the contractual rate until the
Conversion is completed or terminated; these funds will be otherwise
unavailable to the depositor until such time. Orders submitted are irrevocable
until the completion of the Conversion; provided that, if the Conversion is
not completed within 45 days after the close of the Subscription and Community
Offerings, unless such period has been extended with the consent of the OTS,
if necessary, all subscribers will have their funds returned promptly with
interest, and all withdrawal authorizations will be cancelled. Such extensions
may not go beyond June 25, 1998. For a discussion of the Offerings, and the
rights of subscribers in the event of an extension of the offering period,
see, "The Conversion--Subscription Offering and Subscription Rights," "--
Community Offering" and "--Procedure for Purchasing Shares in Subscription and
Community Offerings."
The Company has received conditional approval from the National Association
of Securities Dealers, Inc. ("NASD") to have its Common Stock trade on the
Nasdaq National Market under the symbol "OCFC" upon completion of the
Conversion. Prior to this Offering there has not been a public market for the
Common Stock, and there can be no assurance that an active and liquid trading
market for the Common Stock will develop or that the Common Stock will trade
at or above the Purchase Price. The absence or discontinuance of a market may
have an adverse impact on both the price and liquidity of the Common Stock.
See "Risk Factors--Absence of Market for Common Stock" and "Market for the
Common Stock."
2
<PAGE>
OCEAN FEDERAL SAVINGS BANK OFFICE LOCATIONS
* ADMINISTRATIVE OFFICE 4 POINT PLEASANT BORO
Pavilion Office Center 2400 Bridge Avenue
74 Brick Boulevard
Brick, New Jersey 5 WHITING
Whiting Shopping Center
1 BRICK
321 Chambers Bridge Road 6 BERKELEY
Holiday City Plaza
2 BRICK
70 Brick Boulevard 7 BERKELEY
Holiday Plaza III
3 POINT PLEASANT BEACH
701 Arnold Avenue 8 CONCORDIA
Concordia Mall, Monroe Township
[CHART APPEARS HERE]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT ACCOUNTS OR DEPOSITS AND ARE
NOT FEDERALLY INSURED OR GUARANTEED.
3
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed information
and Consolidated Financial Statements of the Bank and Notes thereto appearing
elsewhere in this Prospectus.
OCEAN FINANCIAL CORP.
Ocean Financial Corp. is a Delaware corporation recently organized by the
Bank for the purpose of acquiring all of the capital stock of the Bank to be
issued in the Conversion. Immediately following the Conversion, the only
significant assets of the Company will be the capital stock of the Bank, the
Company's loan to the Bank's ESOP, and the net proceeds of the Offerings
retained by the Company. The Company will purchase all of the capital stock of
the Bank to be issued upon the Conversion in exchange for 50% of the net
proceeds with the remaining net proceeds to be retained by the Company. Funds
retained by the Company will be used for general business activities, including
a loan by the Company directly to the ESOP to enable the ESOP to purchase 8% of
the Common Stock issued in the Conversion. On an interim basis, the net
proceeds are expected to be invested in federal funds, short-term, investment
grade marketable securities and mortgage-backed securities. See "Use of
Proceeds." The business of the Company will initially consist of the business
of the Bank. See "Business of the Bank" and "Regulation--Holding Company
Regulation."
The Company's executive offices are located at the administrative office of
the Bank at 74 Brick Boulevard, Brick, New Jersey 08723. The Company's
telephone number is (908) 477-5200.
OCEAN FEDERAL SAVINGS BANK
Ocean Federal Savings Bank was originally founded as a state-chartered
building and loan association in 1902. In 1945, the Bank converted to a federal
savings and loan association, and in 1989, the Bank adopted its current federal
savings bank charter. The Bank conducts business from its administrative office
located in Brick, New Jersey and its eight branch offices, seven of which are
located throughout Ocean County, and one of which is located in Middlesex
County, New Jersey. The Bank's deposit gathering base is concentrated in the
communities surrounding its offices, which includes Ocean County and parts of
Monmouth and Middlesex Counties. The Bank considers these communities to
comprise its primary market area, although its lending area extends throughout
the State of New Jersey. See "Business of the Bank--Market Area and
Competition." At December 31, 1995, the Bank had total assets of $1.0 billion,
total deposits of $926.6 million and retained earnings of $92.4 million. The
Bank's deposits are insured up to the maximum allowable amount by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC").
The Bank is the only remaining community-based financial institution
headquartered in Ocean County. Its business consists of accepting deposits from
customers and investing those funds primarily in mortgage loans secured by
single-family, owner-occupied residences within its market area. To a
significantly lesser extent, the Bank invests in commercial real estate, multi-
family, land, construction and consumer loans. At December 31, 1995, the Bank's
total loan portfolio amounted to $625.0 million, or 60.3% of total assets,
including $1.9 million of loans held for sale. Of that amount, one- to four-
family loans totalled $575.0 million, or 92.0% of total loans; commercial real
estate, multi-family and land loans totalled $14.9 million, or 2.4%;
construction loans totalled $8.2 million, or 1.3%; and consumer loans,
consisting almost entirely of home equity loans and lines of credit secured by
single-family residences, totalled $26.9 million, or 4.3%. Of the total loan
portfolio, $405.5 million, or 64.9%, had adjustable rates of interest; and
$219.5 million, or 35.1%, had fixed rates of interest.
In addition to its lending activities, the Bank also invests in mortgage-
backed securities, primarily those guaranteed by governmental agencies such as
the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National
Mortgage Association ("FNMA") and the Government National Mortgage Association
("GNMA"). At December 31, 1995, mortgage-backed securities totalled $265.1
million, or 25.6% of total
4
<PAGE>
assets, all of which were classified as available for sale. For a discussion of
the Bank's reclassification of its securities portfolio, see "Business of the
Bank--Investment Activities." The Bank also invests in investment securities,
primarily consisting of U.S. Government and agency obligations. Investment
securities totalled $114.9 million, or 11.1% of assets as of December 31, 1995,
all of which were classified as available for sale. At December 31, 1995, the
Bank's deposits totalled $926.6 million, or 98.1% of total liabilities. The
average balance of core deposits, which consist of savings, money market, NOW
and non-interest bearing accounts, was $320.2 million, or 35.8% of average
deposits as of December 31, 1995. The average balance of certificates of
deposit for the same period was $574.8 million, or 64.2% of average deposits.
The Bank also uses an overnight line of credit from the Federal Home Loan Bank
of New York ("FHLB-NY") as a source of funds. At December 31, 1995, amounts
borrowed against the overnight line of credit totalled $10.4 million, or 1.1%
of total liabilities. See "Ocean Federal Savings Bank" and "Business of the
Bank."
The Bank has historically operated as a consumer-oriented federal savings
bank, with a focus on offering traditional savings deposit and loan products to
its local community. In recent years, the Bank's strategy has been to maintain
profitability while managing its mutual capital position and limiting its
credit and interest rate risk exposure. To accomplish these objectives, the
Bank has sought to: (1) control credit risk by emphasizing the origination of
single-family, owner-occupied residential mortgage loans and consumer loans,
consisting primarily of home equity loans and lines of credit; (2) offer
superior service and competitive rates to increase the core deposit base
consistent with its capital management goals; (3) invest funds in excess of
loan demand in mortgage-backed and investment securities; (4) reduce exposure
to interest rate risk by originating for the portfolio first mortgage loans
having terms to maturity of not more than 15 years and adjustable-rate mortgage
("ARM") loans, selling fixed-rate 30-year mortgage loans, and investing in
shorter term or adjustable-rate mortgage-backed securities; and (5) control
operating expenses.
In recent years, most locally headquartered competitors in the Bank's market
area have been acquired by larger, regional financial institutions, resulting
in a reduced presence of local, community-based banks. Although such
acquisitions have generated increased competition from these larger, regional
institutions, the Bank believes that the absence of its former principal
competitors, the community-based institutions, has created significant
opportunities for Ocean Federal as the only remaining institution headquartered
in Ocean County. As a result, management plans to modify the Bank's operating
strategy to satisfy its perceived need within the market area for additional
customer products and services. By seeking to broaden the range of its products
and services offered, the Bank believes it will offset declining margins in the
market for one-to four-family mortgage loans which it has experienced in recent
years. Specifically, the Bank intends to: (1) maintain its traditional
community thrift orientation as a provider of residential mortgage products;
(2) diversify the products and services offered to possibly include, among
other things, trust services, nondeposit products, secured and unsecured
commercial lending and commercial deposit accounts in order to increase its
customer base within its existing market area; and (3) increase the Bank's
market share within its primary market area through the establishment and/or
acquisition of additional branch offices, or the acquisition of other remaining
financial institutions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Management Strategy."
Financial and operating characteristics of the Bank include the following:
Capital Strength. At December 31, 1995, the Bank had $90.3 million of
regulatory tangible capital, or 8.7% of total assets, and exceeded all of its
regulatory capital requirements. The Bank's tangible capital, core capital and
risk-based capital ratios were 8.7%, 8.7% and 21.3%, respectively, at that
date. Assuming the Company retains 50% of the net Conversion proceeds at the
maximum of the Estimated Price Range and utilizes the remaining net proceeds to
purchase the Bank's capital stock, the Bank would have had pro forma tangible
capital of $143.7 million, or 13.21% of assets, as of December 31, 1995. See
"Regulatory Capital Compliance."
Profitability. The Bank has been profitable in each of the past five years,
with net income of $7.9 million in 1995, $9.7 million in 1994, $10.1 million in
1993, $10.0 million in 1992 and $5.6 million in 1991. The Bank's
5
<PAGE>
return on average assets for these periods ranged from a high of 1.19% for
1992, to a low of 0.75% for 1991. Return on average retained earnings for the
same periods ranged from a high of 17.14% for 1992, to a low of 9.44% for 1995.
The Bank's net interest margin (net interest income as a percentage of average
interest-earning assets) ranged from a high of 3.48% for 1992, to a low of
3.07% for 1991. During 1995, the Bank experienced compression in its average
interest rate spread, which was reduced to 2.79%, from 3.07% for the year ended
December 31, 1994, and in its net interest margin, which was reduced to 3.13%
from 3.34% for the year ended December 31, 1994. The Bank's profitability, like
that of most financial institutions, is dependent to a large extent upon its
net interest income. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets and liabilities in response to such
movements. See "Risk Factors--Potential Impact of Changes in Interest Rates,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management of Interest Rate Risk," and "Selected Consolidated
Financial and Other Data of the Bank."
Traditional Community Lending Activities. The Bank's primary lending emphasis
has been, and will continue to be, the origination of single-family, owner-
occupied residential mortgage loans, secured primarily by properties located
within its market area. At December 31, 1995, the Bank's residential mortgage
loan portfolio comprised 92.0% of its total loan portfolio. An additional 4.3%
of the Bank's loan portfolio was comprised of consumer loans, which almost
entirely consisted of home equity loans and lines of credit secured by one- to
four-family residential properties within the Bank's market area. Of the Bank's
$26.9 million in consumer loans, $25.2 million consisted of home equity loans
and lines of credit at December 31, 1995. At that date, adjustable-rate loans
accounted for 64.9% of the Bank's total loan portfolio, while fixed-rate loans
accounted for the remaining 35.1%. Although the Bank intends to maintain its
primary emphasis on traditional residential mortgage lending, the Bank also
plans to diversify the products and services offered in the future in an effort
to satisfy a perceived need within its market area for additional customer
products and services. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Management Strategy."
Asset Quality. The Bank has significantly reduced the level of its non-
performing loans and non-performing assets in recent periods. The Bank's ratio
of non-performing loans to total loans at December 31, 1995 was 1.40%, the
lowest such ratio has been in the past five years, reduced from a high of 4.09%
in 1991. The Bank's non-performing assets at December 31, 1995 totalled $10.0
million, representing .97% of total assets. At December 31, 1995, the Bank's
allowance for loan losses totalled $6.0 million, which equalled 0.97% of the
Bank's total loan portfolio, 69.2% of total non-performing loans and 59.8% of
total non-performing assets. See "Business of the Bank--Lending Activities."
Operating Expenses. The Bank has sought to manage and monitor overhead costs
in all areas, through controlled growth in personnel and an efficient product
delivery system. For the years ended December 31, 1995, 1994, 1993, 1992 and
1991, the Bank's ratio of operating expenses to average assets was 1.82%,
1.79%, 1.81%, 1.93% and 1.81%, respectively. The Bank's efficiency ratio
(operating expense divided by net interest income plus other income) over the
same periods ranged from a high of 57.05% for 1995, to a low of 49.46% for
1993. Management expects that the Bank's operating expenses will increase in
future periods primarily as a result of operating as a public company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Operating Results for the Years Ended December 31,
1995 and December 31, 1994."
OCEAN FEDERAL FOUNDATION
In furtherance of the Bank's long-standing commitment to its local community,
the Bank's Plan of Conversion, as amended, provides for the establishment of a
charitable foundation in connection with the Conversion. The Plan provides that
the Bank and the Company will create the Ocean Federal Foundation (the
"Foundation"), which recently was incorporated under Delaware law as a non-
stock corporation, and will fund
6
<PAGE>
the Foundation with shares of common stock contributed by the Company, as
further described below. The Company and the Bank believe that the funding of
the Foundation with Common Stock of the Company is a means of establishing a
common bond between the Bank and its community and thereby enables the Bank's
community to share in the growth and success of the Company over the long term.
By further enhancing the Bank's visibility and reputation in its local
community, the Bank believes that the Foundation will enhance the long-term
value of the Bank's community banking franchise.
The Foundation will be dedicated to charitable purposes within Ocean County,
New Jersey and its neighboring communities, including, but not limited to,
providing grants or donations for housing assistance, scholarships, local
education, not-for-profit medical facilities, assistance to community groups,
and other similar types of organizations or projects. The Foundation will be a
private foundation under the Internal Revenue Code of 1986, as amended, (the
"Code") versus a public charity. A private foundation typically receives its
support from one person or one corporation whereas a public charity receives
its support from the public. As required under the Code, in order to maintain
its exempt status as a private foundation, the certificate of incorporation of
the Foundation provides that the earnings of the Foundation shall not result in
any private benefit for its members, directors or officers. While this
provision would not prohibit the payment of reasonable compensation for
services rendered, the Foundation does not presently intend to pay any
compensation to its directors and officers. Pursuant to the Foundation's
bylaws, the Foundation's board of directors will be comprised of 13 members, at
least 10 of whom must be civic and community leaders of the Bank's local
community who are unaffiliated with either the Bank or the Company, or their
directors, officers and employees ("Disinterested Directors"). The remaining
three members of the board will be comprised of the directors of the Company or
the Bank. See "The Conversion--Establishment of Charitable Foundation--
Structure of the Foundation." The Foundation's place of business will be
located at the Bank's administrative office and initially, the Foundation will
have no employees but will utilize members of the Bank's staff to provide
administrative support services to the Foundation which are ministerial in
nature. The board of directors of the Foundation will appoint such officers as
may be necessary to manage the operations of the Foundation. It is anticipated
that initially such officers would be selected from the board of directors of
the Foundation.
The authority for the affairs of the Foundation will be vested in the board
of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors will
adopt such a policy upon establishment of the Foundation. The directors will
also be responsible for directing the assets of the Foundation. Pursuant to the
Foundation's bylaws, only a special committee of the board of directors,
comprised solely of Disinterested Directors, will be permitted to direct the
timing of any sales of Common Stock held by the Foundation. Further, pursuant
to the terms of the contribution as mandated by the OTS, the Company and the
Foundation will take the necessary steps to provide in the Foundation's
corporate governance documents that all shares of Common Stock held by the
Foundation must be voted in the same ratio as all other shares of the Company's
Common Stock on all proposals considered by stockholders of the Company;
provided, however, that the OTS will waive this voting restriction under
certain circumstances if compliance with the voting restriction would: (i)
cause a violation of the laws of the State of Delaware and the OTS determines
that federal law would not preempt the application of the laws of the State of
Delaware to the Foundation; (ii) cause the Foundation to lose its tax-exempt
status or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting
restriction, the Company's or the Foundation's legal counsel must render an
opinion satisfactory to OTS that compliance with the voting restriction would
have the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS will grant a waiver of the voting restriction upon
submission of such opinion(s) by the Company or the Foundation. In the event
that the OTS waived the voting restriction, the directors would direct the
voting of the Common Stock held by the Foundation. However, there will be no
agreements or understandings with directors of the Foundation regarding
7
<PAGE>
the exercise of control, directly or indirectly, over the management or
policies of the Company or the Bank, including agreements related to voting,
acquisition or disposition of the Company's Common Stock. As a result, the
Company and the Bank will be unable to exercise control over the actions and
decisions of the Foundation's board of directors. As directors of a nonprofit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established.
The Company proposes to establish the Foundation by contributing to the
Foundation immediately following the Conversion a number of shares of
authorized but unissued Common Stock equal to 8.0% of the Common Stock issued
in the Offerings, or 431,297, 507,407 and 583,519 shares at the minimum,
midpoint and maximum, respectively, of the Estimated Price Range. Such
contribution, once made, will not be recoverable by the Company or the Bank.
The Foundation would receive working capital from any dividends that may be
paid on the Company's Common Stock in the future, and subject to applicable
federal and state laws, loans collateralized by the Common Stock or from the
proceeds of the sale of any of the Common Stock in the open market from time to
time as may be permitted to provide the Foundation with additional liquidity.
As a private foundation under Section 501(c)(3) of the Code, the Foundation
will be required to distribute annually in grants or donations, a minimum of 5%
of the average fair market value of its net investment assets. One of the
conditions imposed on the gift of Common Stock by the Company is that the
amount of Common Stock that may be sold by the Foundation in any one year shall
not exceed 5% of the average market value of the assets held by the Foundation,
except where the board of directors of the Foundation, by two-thirds vote,
determines that the failure to sell an amount of Common Stock greater than such
amount would result in a long-term reduction of the value of the Foundation's
assets, and as such, would jeopardize the Foundation's capacity to carry out
its charitable and educational purposes. While there may be greater risk
associated with a one-stock portfolio in comparison to a diversified portfolio,
the Company believes any such risk is mitigated by the ability of the
Foundation's directors to sell more than 5% of its stock in such circumstances.
Assuming the sale of shares at the maximum of the Estimated Price Range, the
Company will have 7,877,500 shares issued and outstanding, of which the
Foundation will own 583,519 shares or 7.4%. DUE TO THE ADDITIONAL ISSUANCE OF
SHARES OF COMMON STOCK TO THE FOUNDATION, PERSONS PURCHASING SHARES IN THE
CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING INTERESTS IN THE COMPANY
DILUTED BY 7.4%, AS COMPARED TO COMPLETING THE CONVERSION WITHOUT THE
ESTABLISHMENT OF THE FOUNDATION. SEE "PRO FORMA DATA." IN ADDITION, THE TRADING
PRICE OF THE COMMON STOCK COULD BE ADVERSELY AFFECTED IN THE EVENT THE MARKET
REFLECTS LESS OF A SPECULATIVE TAKEOVER PREMIUM AS A RESULT OF THE FOUNDATION
HOLDING 7.4% OF THE COMPANY'S COMMON STOCK.
The Foundation will submit a request to the Internal Revenue Service ("IRS")
to be recognized as a tax-exempt organization. The application for tax-exempt
status will be submitted to the IRS after approval of the Foundation by the
Bank's members at the special meeting being held to consider the Conversion. As
long as the Foundation files its application for tax-exempt status within 15
months from the date of its organization, and provided the IRS approves the
application, the effective date of the Foundation's status as a Section
501(c)(3) organization will be the date of its organization. Although there can
be no assurances that such recognition will be received, the Company and the
Bank have been advised by their independent accountants that an organization
created for the above purposes would qualify as a Section 501(c)(3) exempt
organization, and would be classified as a private foundation. The Company's
independent accountants, however, have not rendered any advice on the condition
to the gift which requires that all shares held by the Foundation must be voted
in the same ratio as all other outstanding shares of Common Stock of the
Company on all proposals considered by stockholders. In the event that the
Company or the Foundation receives an opinion of their tax counsel satisfactory
to OTS that compliance with the voting restriction would cause the Foundation
to lose its tax-exempt status, otherwise have a material and adverse tax
consequence on the Foundation or subject the Foundation to an excise tax under
Section 4941 of the Code, the OTS will waive such condition upon submission of
such opinion by the Company or the Foundation. In the event the IRS denied
exempt status to the Foundation, the Company's contribution to
8
<PAGE>
the Foundation would be expensed without tax benefit, resulting in a reduction
in earnings in the year in which the IRS makes such determination. In addition,
in cases of willful, flagrant or repeated acts or failures to act which results
in violations of the IRS rules governing private foundations, a private
foundation's status as a private foundation may be involuntarily terminated by
the IRS. In such event, the managers of a private foundation could be liable
for excise taxes based on such violations and the private foundation could be
liable for a termination tax under the Code. The Foundation's certificate of
incorporation provides that it shall have perpetual existence. In the event,
however, the Foundation were subsequently dissolved as a result of a loss of
its exempt status, the Foundation would be required under the Code and its
certificate of incorporation to distribute any assets remaining in the
Foundation at that time for one or more exempt purposes within the meaning of
Section 501(c)(3) of the Code, or to distribute such assets to the federal
government, or to a state or local government, for a public purpose.
The Company and the Bank have also been advised by their independent
accountants that a contribution of Common Stock to the Foundation by the
Company would be tax deductible, subject to a limitation based on 10% of the
Company's annual taxable income. The Company, however, would be able to carry
forward any unused portion of the deduction for five years following the year
in which the contribution is made. Neither the Company nor the Bank expect to
make any further contributions to the Foundation within the first five years
following the initial contribution. After that time, the Company and the Bank
may consider future contributions to the Foundation. Any such decisions would
be based on an assessment of, among other factors, the financial condition of
the Company and the Bank at that time, the interests of shareholders and
depositors of the Company and the Bank, and the financial condition and
operations of the Foundation.
If the Foundation is established, the Company will recognize an expense in
the full amount of the contribution, offset in part by the corresponding tax
deduction, during the quarter in which the contribution is made, which is
expected to be the second quarter of 1996. Such expense would reduce earnings
and have a material impact on the Company's earnings for the year. Assuming a
contribution of $11.7 million in Common Stock, based on the maximum of the
Estimated Price Range, the Company estimates a net tax effected expense of $8.0
million. If the Foundation had been established at December 31, 1995, the Bank
would have incurred a net loss of $53,000, rather than experiencing earnings of
$7.9 million for the year ended December 31, 1995. Management cannot predict
earnings for 1996, but expects that the establishment and funding of the
Foundation will have an adverse impact on the Company's earnings for the year.
In addition to the contribution to the Foundation, the Bank expects in the
future to continue making ordinary charitable contributions within its
community. Such additional contributions are expected to range from $32,000 to
$40,000 per year. For further discussion of the Foundation and its impact on
purchasers in the Conversion, see "Risk Factors--Establishment of the
Charitable Foundation," "Pro Forma Data," "Comparison of Valuation and Pro
Forma Information with No Foundation," and "The Conversion--Establishment of
the Charitable Foundation."
Establishment of the Foundation is subject to the following conditions
imposed by the OTS: (i) the Foundation will be subject to examination by the
OTS, at the Foundation's own expense; (ii) the Foundation must comply with
supervisory directives imposed by the OTS; (iii) the Foundation will provide
annual reports to the OTS describing grants made and grant recipients; (iv) the
Foundation will operate in accordance with written policies adopted by the
board of directors, including a conflict of interest policy; (v) unless
required by another condition imposed by the OTS, the Foundation will not
engage in self-dealing and will comply with all laws necessary to maintain its
tax-exempt status; (vi) directors, officers, employees and/or affiliates of the
Company and the Bank together must comprise less than 25% of the Foundation's
board of directors; and (vii) any shares of Common Stock held by the Foundation
must be voted in the same ratio as all other outstanding shares of Common Stock
on all proposals considered by stockholders of the Company; provided, however,
that the OTS will waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (a) cause a violation of the laws
of the State of Delaware and the OTS determines that federal law would not
preempt
9
<PAGE>
the application of the laws of the State of Delaware to the Foundation; (b)
cause the Foundation to lose its tax-exempt status or otherwise have a material
and adverse tax consequence on the Foundation; or (c) cause the Foundation to
be subject to an excise tax under Section 4941 of the Code. In order for the
OTS to waive such voting restriction, the Company's or the Foundation's legal
counsel must render an opinion satisfactory to OTS that compliance with the
voting restriction would have the effect described in clauses (a), (b) or (c)
above. Under those circumstances, the OTS has advised that it will grant a
waiver of the voting restriction upon submission of such opinion(s) by the
Company or the Foundation. There can be no assurances that either a legal or
tax opinion addressing these issues will be rendered, or if rendered, that the
OTS will grant an unconditional waiver of the voting restriction. In no event
will the voting restriction survive the sale of the shares of the Common Stock
held by the Foundation. In addition, establishment of the Foundation is also
subject to the approval of a majority of the total outstanding votes of the
Bank's members eligible to be cast at the special meeting being held to
consider the Conversion. The establishment of the Foundation will be considered
as a separate matter from approval of the Plan of Conversion. If the Bank's
members approve the Plan of Conversion, but not the establishment of the
Foundation, the Bank intends to complete the Conversion without the charitable
foundation. Failure to approve the Foundation may materially increase the pro
forma market value of the Common Stock being offered since the Valuation Range,
as set forth herein, takes into account the dilutive impact of the issuance of
shares to the Foundation. In such an event, the Bank may establish a new
Estimated Price Range and commence a resolicitation of subscribers. In the
event of a resolicitation, unless an affirmative response is received within a
specified period of time, all funds will be promptly returned to investors, as
described elsewhere herein. See "The Conversion--Stock Pricing."
THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
On August 17, 1995, the Board of Directors of the Bank adopted the Plan of
Conversion, which was subsequently amended on November 22, 1995, March 20, 1996
and May 7, 1996. Pursuant to the Plan, the Bank is converting from a federally
chartered mutual savings bank to a federally chartered capital stock savings
bank, the Common Stock of the Company will be offered and sold hereby and all
of the outstanding capital stock of the Bank will be acquired by the Company in
exchange for 50% of the net proceeds of the Offerings. The Conversion and the
Offerings are subject to OTS approval, which was received on May 14, 1996, and
approval of the Bank's members at a special meeting to be held on June 25, 1996
(the "Special Meeting"). See "The Conversion--General." For a discussion of the
reasons why the Bank is converting to stock form, see "The Conversion--Purposes
of Conversion."
Common Stock offered in the Subscription Offering will be offered in the
following order of priority: (1) depositors whose accounts with the Bank
totalled $50 or more on July 31, 1994 ("Eligible Account Holders"); (2) the
ESOP; (3) depositors whose accounts with the Bank totalled $50 or more on March
31, 1996 ("Supplemental Eligible Account Holders"); and (4) other members of
the Bank, consisting of depositors of the Bank as of April 30, 1996, the voting
record date ("Voting Record Date") for the Special Meeting, and borrowers with
loans outstanding as of April 12, 1989 which continue to be outstanding as of
the Voting Record Date, other than those members who otherwise qualify as
Eligible Account Holders and Supplemental Eligible Account Holders ("Other
Members"). Subject to the prior rights of holders of subscription rights,
Common Stock not subscribed for in the Subscription Offering is being
concurrently offered in the Community Offering to certain members of the
general public, with preference given to natural persons residing in Ocean,
Middlesex and Monmouth Counties, the counties served by the Bank. It is
anticipated that any shares not subscribed for in the Subscription and
Community Offerings will be offered to members of the general public in a
Syndicated Community Offering. The Company and the Bank reserve the right, in
their absolute discretion, to reject or accept, in whole or in part, any orders
in the Community Offering and the Syndicated Community Offering, either at the
time of receipt of an order or as soon as practicable following the Expiration
Date. If an order is rejected, the funds submitted with such order will be
returned promptly. Subscription rights will expire if not exercised by 5:00
p.m., Eastern Time, on June 20, 1996. See "The Conversion--Subscription
Offering and Subscription Rights" and "--Community Offering."
10
<PAGE>
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
Order forms will only be distributed with this Prospectus. The Bank is not
obligated to accept for processing orders not submitted on original order
forms. Order forms unaccompanied by an executed certification form will not be
accepted. Payment by check, money order, bank draft, cash or debit
authorization to an existing account at the Bank must accompany the order and
certification forms. No wire transfers will be accepted. The Bank is prohibited
from lending funds to any person or entity for the purpose of purchasing shares
of Common Stock in the Conversion. See "The Conversion--Procedure for
Purchasing Shares in Subscription and Community Offerings."
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 (July 31,
1994) or Supplemental Eligibility Record Date (March 31, 1996) and depositors
and borrowers as of the Voting Record Date (April 30, 1996) must list all
deposit and/or loan accounts on the stock order form, giving all names on each
account and the account numbers. Borrowers of the Bank with loans outstanding
on April 12, 1989 which continue to be outstanding on the Voting Record Date
should check the appropriate box on the stock order form in order to identify
themselves as Other Members. Failure to list all account numbers may result in
the inability of the Company or the Bank to fill all or part of a subscription
order. In addition, registration of shares in a name or title different from
the names or titles listed on the account may adversely affect such
subscriber's purchase priority. See "The Conversion--Procedure for Purchasing
Shares in Subscription and Community Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
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. Each person exercising
subscription rights will be required to certify that a purchase of Common Stock
is solely for the purchaser's own account and that there is no agreement or
understanding regarding the sale or transfer of such shares. The Company and
the Bank will pursue any and all legal and equitable remedies in the event they
become aware of the transfer of subscription rights and will not honor orders
known by them to involve the transfer of such rights. See "The Conversion--
Restrictions on Transfer of Subscription Rights and Shares."
Following the Conversion there generally will be no restrictions on the
transfer or sale of shares by purchasers other than affiliates of the Company
and the Bank. See "Regulation--Federal Securities Laws" and "The Conversion--
Certain Restrictions on Purchase or Transfer of Shares After Conversion."
PURCHASE LIMITATIONS
The minimum purchase in the Subscription and Community Offerings is 25
shares. The ESOP intends to subscribe for 8% of the shares of Common Stock
issued in the Conversion pursuant to the subscription rights granted under the
Plan. No Eligible Account Holder, Supplemental Eligible Account Holder or Other
Member, in their capacity as such, may subscribe in the Subscription Offering
for more than $200,000 of the aggregate value of the shares of Common Stock
offered; no person, together with associates of or persons acting in concert
with such person, may purchase in the Community Offering and the Syndicated
Community Offering in the aggregate more than $200,000 of the aggregate value
of the shares of Common Stock offered; and no person, together with associates
of or persons acting in concert with such person, may purchase in the Offerings
more than the overall maximum purchase limitation of 1.0% of the total number
of shares of Common Stock to be issued in the Conversion, exclusive of any
shares issued pursuant to an increase in the Estimated Price Range of up to
15%. In the event of an increase in the Estimated Price Range, the additional
shares will be distributed and allocated to fill unfilled orders in the
Subscription and Community Offerings, with priority given to the ESOP, without
any resolicitation of subscribers, as described in "The Conversion--
Subscription Offering and Subscription Rights," "--Community Offering" and "--
Limitations on Common Stock Purchases." For
11
<PAGE>
further discussion of the purchase limitations and the right of the Company and
the Bank to increase such limitations, see "The Conversion--Limitations on
Common Stock Purchases."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Federal regulations require that the aggregate purchase price of the Common
Stock to be issued in the Conversion be consistent with an independent
appraisal of the estimated pro forma market value of the Common Stock giving
effect to the Conversion. RP Financial, an independent appraiser, has advised
the Bank that in its opinion, dated April 26, 1996, the estimated aggregate pro
forma market value of the Common Stock being offered for sale ranged from
$107.8 million to $145.9 million, with a midpoint of $126.9 million. THE
APPRAISAL OF THE COMMON STOCK IS NOT INTENDED AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH STOCK NOR
CAN ANY ASSURANCE BE GIVEN THAT PURCHASERS OF THE COMMON STOCK IN THE
CONVERSION WILL BE ABLE TO SELL SUCH SHARES AFTER THE COMPLETION OF THE
CONVERSION AT OR ABOVE THE PURCHASE PRICE.
Based upon the above Valuation Range, the Board of Directors of the Bank has
established the Estimated Price Range of $107.8 million to $145.9 million,
assuming the issuance of 5,391,203 shares to 7,293,981 shares of Common Stock
at the Purchase Price of $20 per share. All shares of Common Stock issued in
the Conversion will be sold at the Purchase Price of $20 per share, as
determined by the Bank and approved by the Company. The actual number of shares
to be issued in the Conversion will be determined by the Company and the Bank
based upon the final updated estimate of the aggregate pro forma market value
of the Common Stock, giving effect to the Conversion, at the completion of the
Offerings. The maximum of the Estimated Price Range may be increased by up to
15% and the number of shares of Common Stock to be issued in the Conversion may
be increased to 8,388,078 shares due to regulatory considerations, or changes
in market or general financial and economic conditions. No resolicitation of
subscribers will be made and subscribers will not be permitted to modify or
cancel their subscriptions unless the gross proceeds from the sale of the
Common Stock are less than the minimum or more than 15% above the maximum of
the current Estimated Price Range. See "Risk Factors--Possible Increase in
Estimated Price Range and Number of Shares Issued," "Pro Forma Data," and "The
Conversion--Stock Pricing" and "--Number of Shares to be Issued."
The number of shares to be outstanding following the Conversion may be
increased to fund the Foundation. If the Foundation is approved by the Bank's
members, the Company will issue an additional 583,519 shares of its Common
Stock from authorized but unissued shares immediately following completion of
the Conversion, assuming the sale of Common Stock at the maximum of the
Estimated Price Range in the Offerings. In that event, the Company will have a
total of 7,877,500 shares of Common Stock outstanding. Of that amount, the
Foundation will own 7.4%. Funding the Foundation with authorized but unissued
shares will have the effect of diluting the ownership and voting interests of
persons purchasing shares in the Conversion by 7.4% since a greater number of
shares will be outstanding upon completion of the Conversion. See "Pro Forma
Data."
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock are estimated to be between
$104.5 million and $141.9 million (or $163.5 million if the Estimated Price
Range is increased by 15%) depending on the number of shares sold and the
expenses of the Conversion. See "Pro Forma Data." The Company will purchase all
of the outstanding capital stock of the Bank to be issued upon Conversion in
exchange for 50% of the net proceeds with the remaining net proceeds to be
retained by the Company. Net proceeds to be retained by the Company after the
purchase of the capital stock of the Bank are estimated to be between $52.2
million and $71.0 million (or $81.7 million if the Estimated Price Range is
increased by 15%). The Company will not be permitted to utilize any of the net
proceeds until the close of the Offerings.
Funds retained by the Company will be used for general business activities,
including a loan by the Company directly to the ESOP and, subject to applicable
limitations, the possible payment of dividends and repurchases of Common Stock.
The Board of Directors intends to consider a policy of paying cash dividends on
12
<PAGE>
the Common Stock in the future. However, no decision has been made as to the
amount or timing of such dividends, if any. See "Dividend Policy." Assuming the
acquisition by the ESOP of 8% of the shares to be issued in the Conversion, the
amount of the loan to the ESOP is estimated to be between $8.6 million and
$11.7 million (or $13.4 million if the Estimated Price Range is increased by
15%) to be repaid over a 12-year period at the prime rate of interest as of the
date the loan is made. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan and Trust."
Funds received by the Bank from the Company's purchase of its capital stock
may be used to repay any of the Bank's outstanding FHLB borrowings, to renovate
newly acquired office space which is to become the Bank's new administrative
office, or for other general business purposes. See "Business of the Bank." For
a discussion of the Bank's strategy to prefund anticipated Conversion proceeds
with FHLB borrowings, see "Summary of Recent Developments--Management's
Discussion and Analysis of Recent Developments--Comparison of Financial
Condition at March 31, 1996 and December 31, 1995." The renovation of the
Bank's new administrative office, which is scheduled to be completed in early
1997, is estimated to cost approximately $6.5 million. In December 1995, the
Bank entered into a $5.8 million construction commitment for the planned
renovation. See "Business of the Bank--Properties." The Company and the Bank
may also use such funds to expand operations through the establishment or
acquisition of branch offices and the acquisition of financial institutions.
Neither the Bank nor the Company has any pending agreements or understandings
regarding acquisitions of any specific financial institutions or branch
offices, although the Bank has received approval to open three new branch
offices, and is negotiating to establish a fourth new branch. In addition to
the costs associated with opening the new administrative office described
above, management estimates the aggregate cost of opening the additional newly
approved branches to be approximately $923,000. See "Business of the Bank--
Properties." Based on the amount of the estimated net proceeds of the
Offerings, it is anticipated that the Company will experience lower rates of
return on equity in future periods as compared to historical returns. No
assurances can be given that the Company will be able to realize a rate of
return on the investment of the net proceeds comparable to the Bank's
historical rates of return. See "Use of Proceeds."
DIVIDENDS
The Board of Directors of the Company intends to consider a policy of paying
cash dividends on the Common Stock in the future; however, it has no present
plans with respect to the payment of dividends. Declarations of dividends by
the Board of Directors will depend upon a number of factors, including the
amount of the net proceeds retained by the Company in the Conversion,
investment opportunities available to the Company or the Bank, capital
requirements, regulatory limitations, the Company's and the Bank's financial
condition and results of operations, tax considerations and general economic
conditions. No assurances can be given that any dividends will be paid or, if
commenced, will continue to be paid. See "Dividend Policy."
RISK FACTORS
See "Risk Factors--Recapitalization of SAIF and Its Impact on SAIF Premiums;"
"--Financial Institution Regulation and Possible Legislation;" "--Potential
Impact of Changes in Interest Rates;" "--Competition;" "--Establishment of the
Charitable Foundation;" "--Benefits to Management and Directors;" "--Possible
Dilutive Effect of Stock Programs and Stock Options;" "--Certain Anti-Takeover
Provisions;" "--Absence of Market for Common Stock;" "--Possible Increase in
Estimated Price Range and Number of Shares Issued;" and "--Possible Adverse
Income Tax Consequences of the Distribution of Subscription Rights," for a
discussion of certain factors that should be considered by prospective
investors.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Bank and Notes thereto presented
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1995 1994 1993 1992 1991
---------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION
DATA:
Total assets................... $1,036,445 $971,651 $937,214 $886,494 $785,249
Investment securities held to
maturity...................... -- 127,451 126,999 122,625 66,114
Investment securities available
for sale...................... 114,881 -- -- -- --
FHLB-NY stock.................. 7,723 7,323 6,680 5,835 5,209
Mortgage-backed securities held
to maturity................... -- 224,569 241,188 205,958 191,066
Mortgage-backed securities
available for sale............ 265,113 -- -- -- --
Loans receivable, net.......... 612,696 592,315 539,885 514,187 495,774
Mortgage loans held for sale... 1,894 -- 963 545 1,428
Deposits....................... 926,558 867,420 858,461 819,300 726,977
Retained earnings,
substantially restricted...... 92,351 82,334 72,605 62,469 52,494
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income........................ $70,210 $63,683 $64,853 $67,281 $67,822
Interest expense....................... 40,004 32,373 33,975 38,897 45,249
------- ------- ------- ------- -------
Net interest income.................. 30,206 31,310 30,878 28,384 22,573
Provision for loan losses.............. 950 1,129 1,300 1,220 1,847
------- ------- ------- ------- -------
Net interest income after provision
for loan losses..................... 29,256 30,181 29,578 27,164 20,726
Other income........................... 1,356 2,057 2,740 1,869 1,769
Operating expenses..................... 18,006 17,104 16,626 16,156 13,579
------- ------- ------- ------- -------
Income before provision for income
taxes and cumulative effect of change
in accounting......................... 12,606 15,134 15,692 12,877 8,916
Provision for income taxes............. 4,659 5,405 5,556 4,567 3,327
------- ------- ------- ------- -------
Income before cumulative effect of
change in accounting.................. 7,947 9,729 10,136 8,310 5,589
Cumulative effect of change in
accounting for income taxes........... -- -- -- 1,665 --
------- ------- ------- ------- -------
Net income............................. $ 7,947 $ 9,729 $10,136 $ 9,975 $ 5,589
======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND
OTHER DATA(1):
PERFORMANCE RATIOS:
Return on average assets........ 0.80% 1.02% 1.10% 1.19% 0.75%
Return on average retained
earnings....................... 9.44 12.54 14.85 17.14 11.25
Average retained earnings to
average assets................. 8.51 8.11 7.41 6.96 6.62
Retained earnings to total
assets at end of year.......... 8.91 8.47 7.75 7.05 6.69
Average interest rate
spread(2)...................... 2.79 3.07 3.20 3.22 2.70
Net interest margin(3).......... 3.13 3.34 3.44 3.48 3.07
Average interest-earning assets
to average interest-bearing
liabilities.................... 107.98 107.71 106.42 105.56 106.02
Operating expenses to average
assets......................... 1.82 1.79 1.81 1.93 1.81
Operating Efficiency Ratio(4)... 57.05 51.26 49.46 53.40 55.78
REGULATORY CAPITAL RATIOS(5):
Tangible capital................ 8.72 8.43 7.73 7.05 6.67
Core capital.................... 8.72 8.43 7.73 7.05 6.67
Risk-based capital.............. 21.34 20.34 18.59 16.57 14.53
ASSET QUALITY RATIOS:
Non-performing loans as a
percent of total loans
receivable(6)(7)............... 1.40 1.83 1.92 2.79 4.09
Non-performing assets as a
percent of total assets(7)..... 0.97 1.29 1.45 2.08 2.84
Allowance for loan losses as a
percent of total loans
receivable(6).................. 0.97 0.94 1.01 1.10 1.13
Allowance for loan losses as a
percent of total
non-performing loans(7)........ 69.21 51.27 52.45 39.55 27.61
NUMBER OF FULL-SERVICE CUSTOMER
FACILITIES....................... 8 8 8 8 8
</TABLE>
- --------
(1) With the exception of end of year ratios, all ratios are based on average
monthly balances during the indicated years.
(2) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(3) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) Operating efficiency ratio represents the ratio of operating expenses to
the aggregate of other income and net interest income.
(5) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Federal Savings Institution
Regulation--Capital Requirements." See "Regulatory Capital Compliance" for
the Bank's pro forma capital levels as a result of the Offerings.
(6) Total loans receivable includes loans receivable and loans held for sale,
less undisbursed loan funds, deferred loan fees and unamortized
discounts/premiums.
(7) Non-performing assets consist of non-performing loans and real estate
acquired through foreclosure ("REO"). Non-performing loans consist of all
loans 90 days or more past due and other loans in the process of
foreclosure. It is the Bank's policy to cease accruing interest on all such
loans. See "Business of the Bank--Lending Activities--Non-Accrual Loans and
REO."
15
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
The following table set forth certain consolidated financial and other data
of the Bank at and for the periods indicated. Consolidated financial and
operating data and financial ratios and other data at and for the year ended
December 31, 1995 have been derived from and should be read in conjunction with
the Consolidated Financial Statements of the Bank and Notes thereto presented
elsewhere in this Prospectus. Consolidated financial and operating data and
financial ratios and other data at and for the three months ended March 31,
1996 and 1995, were derived from unaudited financial statements. The results of
operations and ratios and other data presented for the three months ended March
31, 1996 are not necessarily indicative of the results of operations for the
year ended December 31, 1996.
<TABLE>
<CAPTION>
AT AT
MARCH 31, 1996 (1) DECEMBER 31, 1995
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets............................. $1,130,204 $1,036,445
Investment securities available for
sale.................................... 128,956 114,881
FHLB-NY stock............................ 8,457 7,723
Mortgage-backed securities available for
sale.................................... 342,872 265,113
Loans receivable, net.................... 615,790 612,696
Mortgage loans held for sale............. 5,352 1,894
Deposits................................. 931,273 926,558
Federal Home Loan Bank borrowings........ 98,800 10,400
Retained earnings, substantially re-
stricted................................ 92,091 92,351
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1996(1) 1995(1)
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income........................................... $ 18,988 $ 16,838
Interest expense.......................................... 11,208 9,117
---------- ----------
Net interest income..................................... 7,780 7,721
Provision for loan losses................................. 125 237
---------- ----------
Net interest income after provision for loan losses..... 7,655 7,484
Other income.............................................. 696 481
Operating expenses........................................ 4,460 4,238
---------- ----------
Income before provision for income taxes.................. 3,891 3,727
Provision for income taxes................................ 1,480 1,406
---------- ----------
Net income................................................ $ 2,411 $ 2,321
========== ==========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
1996(1) 1995(1)
------- -------
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(2):
PERFORMANCE RATIOS:
Return on average assets..................................... 0.89% 0.96%
Return on average retained earnings.......................... 10.65 11.44
Average retained earnings to average assets.................. 8.33 8.36
Retained earnings to total assets at end of period........... 8.15 8.66
Average interest rate spread(3).............................. 2.57 2.86
Net interest margin(4)....................................... 2.97 3.24
Average interest-earning assets to average interest-bearing
liabilities................................................. 107.45 108.03
Operating expenses to average assets......................... 1.64 1.75
Operating efficiency ratio(5)................................ 52.62 51.67
REGULATORY CAPITAL RATIOS(6):
Tangible capital............................................. 8.17 8.81
Core capital................................................. 8.17 8.81
Risk-based capital........................................... 20.74 20.67
ASSET QUALITY RATIOS:
Non-performing loans as a percent of total loans receiv-
able(7)(8).................................................. 1.65 1.60
Non-performing assets as a percent of total assets(8)........ 1.01 1.20
Allowance for loan losses as a percent of total loans receiv-
able(7)..................................................... 0.97 0.93
Allowance for loan losses as a percent of non-performing
loans(8).................................................... 58.86 58.11
NUMBER OF FULL-SERVICE CUSTOMER FACILITIES..................... 8 8
</TABLE>
- --------
(1) In the opinion of management, financial information at and for the three
months ended March 31, 1996 and 1995 reflects all adjustments (consisting
only of normal recurring adjustments) which are necessary to present fairly
the results for such interim periods.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(3) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(5) Operating efficiency ratio represents the ratio of operating expenses to
the aggregate of other income and net interest income.
(6) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Federal Savings Institution
Regulation--Capital Requirements." See "Regulatory Capital Compliance" for
the Bank's pro forma capital levels as a result of the Offerings.
(7) Total loans receivable includes loans receivable held for investment and
loans held for sale, less undisbursed loan funds, deferred loan fees and
unamortized discounts/premiums.
(8) Non-performing assets consist of non-performing loans and REO. Non-
performing loans consist of all loans 90 days or more past due and other
loans in the process of foreclosure. It is the Bank's policy to cease
accruing interest on all such loans. See "Business of the Bank--Lending
Activities--Non-Accrual Loans and REO."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1996 AND DECEMBER 31, 1995
Total assets at March 31, 1996, were $1.1 billion, an increase of $93.8
million, or 9.0%, compared to $1.04 billion at December 31, 1995. The growth
was primarily due to a strategy employed by the Bank to prefund anticipated
Conversion proceeds, through the layered purchase of investment and mortgage-
backed securities funded by short-term Federal Home Loan Bank borrowings, which
are expected to be repaid upon Conversion. As a result of this strategy,
investment securities available-for-sale increased by $14.1 million to a
balance of $129.0 million at March 31, 1996, compared to a balance of $114.9
million at December 31, 1995 and mortgage-backed securities available-for-sale
increased by $77.8 million to $342.9 million at March 31, 1996, from $265.1
million at December 31, 1995. The $91.9 million aggregate increase in
investment and mortgage-backed securities available for sale was funded by an
increase in Federal Home Loan Bank borrowings of $88.4 million. These
borrowings increased to $98.8 million at March 31, 1996, compared to a balance
of $10.4 million at December 31, 1995. Cash and due from banks was $301,000 at
March 31, 1996, a decrease of $7.7 million from $8.0 million at December 31,
1995. The decrease in cash and due from banks was a result of the timing of
operating and investing cash flows. Mortgage loans held for sale increased by
$3.5 million or 182.6%, to $5.4 million at March 31, 1996, from $1.9 million at
December 31, 1995. The relatively low interest rate environment at the start of
the first quarter of 1996 increased mortgage loan refinance activity, primarily
in the 30-year fixed-rate mortgage product, which the Bank sells. Total
deposits at March 31, 1996 were $931.3 million, an increase of $4.7 million,
compared to $926.6 million at December 31, 1995. Retained earnings at March 31,
1996 were $92.1 million, a decrease of $300,000, compared to $92.4 million at
December 31, 1995, as net income of $2.4 million for the three months ended
March 31, 1996, was more than offset by a reduction in the net unrealized gain
on securities available-for-sale, net of tax, of $2.7 million.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
MARCH 31, 1995
General
Net income increased $90,000, or 3.9%, to $2.4 million for the three months
ended March 31, 1996, from $2.3 million for the three months ended March 31,
1995. The increase was due to an increase in net interest and other income,
combined with a reduction in the provision for loan losses, partly offset by
increases in operating expenses and provision for income taxes.
Interest Income
Interest income for the three months ended March 31, 1996 was $19.0 million,
compared to $16.8 million for the three months ended March 31, 1995, an
increase of $2.1 million, or 12.8%. The increase in interest income was the
result of a significant increase in the average size of the mortgage-backed
securities available-for-sale portfolio due to the 1996 purchases relating to
the prefunding of Conversion proceeds strategy discussed above. Additionally,
the average balance of loans receivable and investment securities available-
for-sale also increased during the first quarter of 1996 as compared to the
first quarter of 1995.
Interest Expense
Interest expense for the three months ended March 31, 1996, was $11.2
million, compared to $9.1 million for the three months ended March 31, 1995, an
increase of $2.1 million, or 22.9%. The increase in interest expense was the
result of an increase in both the average balance of deposits and Federal Home
Loan Bank borrowings and an increase in the average cost of deposits. The
increase in the average cost of deposits was partly due to a shift in the
composition of deposit accounts from lower yielding core accounts into higher
yielding certificates of deposit.
18
<PAGE>
Provision for Loan Losses
During the three months ended March 31, 1996, the Bank's provision for loan
losses was $125,000 compared to $237,000 for the three months ended March 31,
1995, a decrease of $112,000, which was based on management's assessment of the
loan portfolio.
Other Income
Other income increased to $696,000 for the three months ended March 31, 1996,
from $481,000 for the three months ended March 31, 1995. The increase was
primarily due to an increase in the net gain of $174,000 on the sale of loans
held for sale due to a higher volume of loan sales and due to the adoption,
effective January 1, 1996, of Statement of Financial Accounting Standards No.
122 "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement
No. 65," which allowed the Bank to record, as a separate asset, rights to
service mortgage loans for others.
Operating Expenses
Operating expenses increased to $4.5 million for the three months ended March
31, 1996, from $4.2 million for the three months ended March 31, 1995. The
increase was attributable to higher compensation and employee benefits due to
annual salary increases, increased FDIC insurance premiums resulting from
increased deposit levels; and higher data processing charges.
Provision for Income Taxes
Income tax expense was $1.5 million for the three months ended March 31,
1996, compared to $1.4 million for the three months ended March 31, 1995. The
increase in the provision for income taxes was the result of the increase in
earnings before income taxes.
19
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors in deciding whether to purchase
the Common Stock offered hereby.
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the Bank Insurance Fund ("BIF"), the deposit insurance fund that covers most
commercial bank deposits, are statutorily required to be recapitalized to a
1.25% of insured reserve deposits ratio. A portion of the insurance assessment
paid by SAIF members is required by statute to be used to make payments on
bonds issued by the Financing Corporation ("FICO") which were issued in the
late 1980's to recapitalize the predecessor to the SAIF.
The FDIC recently adopted a new assessment rate schedule of 0 to 27 basis
points for BIF members. Under the new schedule, approximately 92% of BIF
members would be required to pay only $2,000 per year, the legal minimum, in
insurance premiums. With respect to SAIF member institutions, the FDIC adopted
a final rule retaining the existing assessment rate schedule applicable to
SAIF member institutions of 23 to 31 basis points. Consequently, there is a
significant differential in the insurance premiums paid by BIF and SAIF
members. As long as the premium differential continues, it may have adverse
consequences for SAIF members, including reduced earnings and an impaired
ability to raise funds in the capital markets. In addition, SAIF members, such
as the Bank, could be placed at a substantial competitive disadvantage to BIF
members with respect to pricing of loans and deposits and the ability to
achieve lower operating costs.
Several legislative bills have been introduced in Congress to mitigate the
effect of the BIF/SAIF premium disparity. These bills would, among other
things, impose a one-time special assessment on SAIF-member institutions,
including the Bank, calculated on the basis of an institution's deposit
insurance assessment base as of March 31, 1995, to recapitalize the SAIF fund;
would spread the FICO payments across all BIF and SAIF members; and would
require a merger of the BIF and SAIF by January 1, 1998 provided that
subsequent legislation is adopted to eliminate the federal thrift charter. It
is presently estimated that the amount of the one-time fee would range from 75
to 80 basis points on the amount of deposits held by SAIF-member institutions.
The payment of the one-time fee would have the effect of immediately reducing
the capital of SAIF-member institutions by the amount of the fee, net of any
tax effect; however, it would not affect the Bank's compliance with its
regulatory capital requirements. See "Regulatory Capital Compliance" and
"Regulation--Insurance of Deposit Accounts." Management cannot predict whether
legislation imposing such a fee will be enacted, or, if enacted, the amount of
any one-time fee, or whether ongoing SAIF premiums will be reduced to a level
equal to that of BIF premiums.
The Bank's assessment rate for 1995 was 23 basis points, and the premium
paid for 1995 totalled $2.2 million. A significant increase in SAIF insurance
premiums or a significant one-time fee to recapitalize the SAIF would likely
have an adverse effect on the operating expenses and results of operations of
the Bank. Based on the Bank's deposit insurance assessment base as of March
31, 1995, a 75 to 80 basis point fee to recapitalize the SAIF would result in
a $4.2 million to $4.5 million charge to operations on an after-tax basis. If
the Bank had been required to pay a special assessment of 80 basis points on
March 31, 1995, the Bank would have reported net income of $3.4 million for
the year ended December 31, 1995, rather than $7.9 million.
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision, as a federal
savings bank. In addition, the Company, as a savings association holding
company, is subject to extensive regulation and supervision. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
OTS, the FDIC or the Congress, could have a material impact on the Company,
the Bank, its operations or the Bank's Conversion. See "Regulation."
20
<PAGE>
Congress currently has under consideration various proposals to eliminate
the federal thrift charter and abolish the OTS. Several of the bills presently
pending in Congress would require that all federal savings associations
convert to national banks or state banks by no later than January 1, 1998 and
would treat all state savings associations as state banks as of that date. All
savings and loan holding companies would become bank holding companies under
the pending legislative proposals and would be subject to the activities
restrictions applicable to bank holding companies. The legislative proposals
would grandfather any lawful activity in which a savings association was
lawfully engaged as of September 13, 1995 for up to five years following the
effective date of its conversion to a bank charter and would grandfather
existing thrift intrastate and interstate branches which were operated as
branches on September 13, 1995. The legislative proposals would also abolish
the OTS and transfer its functions to the Office of the Comptroller of the
Currency with respect to the regulation of federal savings associations, and
to the Board of Governors of the Federal Reserve Board with respect to the
regulation of savings and loan holding companies. All state savings
associations would be regulated as state banks by the FDIC. Certain provisions
of other pending legislation would eliminate the bad debt reserve deduction
for financial institutions and, would require savings associations to
recapture any bad debt reserves taken after 1987. See "Federal and State
Taxation--Federal Taxation--Bad Debt Reserve." The outcome of any pending
legislation and the effect of such legislation on the bad debt reserve
deduction of thrift institutions such as the Bank is uncertain. Therefore, the
Bank is unable to determine the extent to which such legislation, if enacted,
would affect its business or require the recapture of the bad debt reserve. If
legislation is enacted eliminating the bad debt reserve deduction for thrifts
and requiring thrifts to recapture the bad debt reserve for reserves taken
after 1987, federal income taxes of $600,000 could be imposed on the Bank.
This cash payment would have no effect on the Bank's operating results for the
year(s) of payment since the Bank has already established a deferred tax
liability in its financial statements.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits and borrowings.
Accordingly, the Bank's results of operations and financial condition are
largely dependent on movements in market interest rates and its ability to
manage its assets and liabilities in response to such movements.
The Bank's recent results of operations have been adversely affected by the
increase in interest rates experienced during 1995. In particular, during
1995, the Bank experienced compression in its average interest rate spread,
which was reduced to 2.79%, from 3.07% for the year ended December 31, 1994,
and in its net interest margin, which was reduced to 3.13%, from 3.34% for the
year ended December 31, 1994. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Of the Bank's $625.0 million
total loan portfolio as of December 31, 1995, $219.5 million or 35.1% had
fixed rates, and $405.5 million or 64.9% had adjustable interest rates, of
which $221.2 million reprice within one year.
One method of analyzing an institution's exposure to interest rate risk is
by measuring the change in the institution's Net Portfolio Value ("NPV") under
various interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities and off-balance sheet contracts. A NPV Ratio,
in any interest rate scenario, is defined as the NPV in that scenario divided
by the market value of assets in the same scenario. The sensitivity measure is
the decline in the NPV Ratio, in basis points, caused by a 2% increase or
decrease in rates, whichever produces a larger decline. The higher an
institution's sensitivity measure is, the greater its exposure to interest
rate risk is considered to be. As of December 31, 1995, the Bank's sensitivity
measure, as measured by the OTS, indicated that a 2% increase in interest
rates would cause a 164 basis point decline in the Bank's NPV Ratio. This NPV
Ratio sensitivity measure is below the thresholds at which the Bank could be
required to hold additional risk-based capital under OTS regulations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management of Interest Rate Risk--Net Portfolio Value."
21
<PAGE>
Another indicator of interest rate risk exposure is GAP analysis, which
compares asset and liability balances that reprice in given time periods. At
December 31, 1995, the Bank's total interest-earning assets maturing or
repricing within one year exceeded its total interest-bearing liabilities
maturing or repricing in the same time period by $11.8 million, representing a
cumulative one-year interest sensitivity gap as a percentage of total assets
of 1.14%. Although the Bank had a positive one year sensitivity gap a
significant portion of its interest-earning assets consist of ARMs, which will
be repricing within 12 months. The limits on annual adjustments on certain of
the Bank's one- to four-family ARM loans, together with the overall caps on
interest rate increases on such loans, may cause the Bank's yield on interest-
earning assets to adjust more slowly than the cost of interest-bearing
liabilities. Accordingly, a rapidly rising interest rate environment generally
may adversely affect the Bank's net interest income. Increases in interest
rates also could adversely affect the type (fixed-rate or adjustable-rate) and
amount of loans originated by the Bank and the average life of loans and
securities which could adversely impact the yields earned on the Bank's loan
and securities portfolios as well as the amount of secondary market activity
in which the Bank engages. Additionally, the Bank originates for sale one- to
four-family fixed-rate loans with terms in excess of 15 years and utilizes
forward sale commitment contracts as a method of hedging such loan sales. The
Bank covers most loans originated for sale with forward commitment contracts
depending on management's estimation of the amount of such loans that are
expected to close and its estimation of future market interest rates. See
"Business of the Bank--Lending Activities--Origination, Sale, Servicing and
Purchase of Loans." With respect to loans originated for sale that are not
covered by forward commitment contracts, if market interest rates rise from
the time of the loan commitment to the actual time of sale of such loans, the
market value of such loans will be adversely affected, thereby exposing the
Bank to potential losses with respect to such loans. With respect to loans
originated for sale that are covered by forward commitments, if borrowers
determine not to close such loans, the Bank may be required to fund each
forward commitment contract with loans purchased at a premium or take other
measures which may result in losses related to such activity.
Increases in interest rates would result in interest rates on the Bank's
adjustable-rate loans increasing, thereby resulting in increased loan payment
amounts by the borrowers which, in turn, may result in higher delinquencies on
such loans. Increases in the level of interest rates also may adversely affect
the value of the Bank's mortgage-backed securities and other interest-earning
assets, which could adversely affect the Bank's results of operations. Of the
Bank's $265.1 million in mortgage-backed securities, $175.4 million, or 66.9%
were adjustable rate. Of this amount, $170.3 million of such securities will
reprice within one year. Of the Bank's $114.9 million in investment
securities, $10.8 million had contractual maturities of one year or less, and
$84.6 million had contractual maturities of between one and five years at
December 31, 1995. Unrealized gains on mortgage-backed securities and
investment securities available for sale totalled $2.9 million and $376,000,
respectively, at December 31, 1995. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Management of Interest Rate
Risk," "Business of the Bank--Lending Activities--One- to Four-Family Mortgage
Lending" and "--Investment Activities."
COMPETITION
The Bank faces significant competition both in making loans and in
attracting deposits. The State of New Jersey has a high density of financial
institutions, many of which have a state-wide or regional presence, and, in
some cases, a national presence, all of which are competitors of the Bank to
varying degrees. The Bank's competition for loans comes principally from
commercial banks, savings banks, savings and loan associations, credit unions,
mortgage banking companies and insurance companies. Its most direct
competition for deposits has historically come from commercial banks, savings
banks, savings and loan associations and credit unions, many of which are
significantly larger than the Bank and, therefore, have greater financial and
marketing resources than those of the Bank. The Bank faces additional
competition for deposits from short-term money market funds, other corporate
and government securities funds and from other financial institutions such as
brokerage firms and insurance companies. See "Business of the Bank--Market
Area and Competition."
22
<PAGE>
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will establish the Foundation, which has been incorporated
under Delaware law as a non-stock corporation, and will fund the Foundation
with shares of Common Stock contributed by the Company. Establishment of the
Foundation is subject to the approval of the Bank's members at the special
meeting being held to consider the Conversion. If approved by members, the
establishment of the Foundation will be dilutive to the interests of
stockholders and will have an adverse impact on the operating results of the
Company in 1996, possibly resulting in an operating loss in 1996, the year in
which the Foundation was established.
Dilution of Stockholders' Interests. The Company proposes to establish the
Foundation with Company Common Stock in an amount equal to 8.0% of the Common
Stock to be issued in the Conversion. At the minimum, midpoint and maximum of
the Estimated Price Range, the contribution to the Foundation would equal
431,297, 507,407 and 583,519 shares, with a value of $8.6 million, $10.1
million and $11.7 million, respectively, based on the Purchase Price of $20
per share. Upon completion of the Conversion and establishment of the
Foundation, the Company will have 7,877,500 shares issued and outstanding at
the maximum of the Estimated Price Range, of which the Foundation will own
583,519 shares, or 7.4%. AS A RESULT, PERSONS PURCHASING SHARES IN THE
CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING INTERESTS IN THE COMPANY
DILUTED BY 7.4%, AS COMPARED TO COMPLETING THE CONVERSION WITHOUT THE
FOUNDATION. SEE "PRO FORMA DATA." IN ADDITION, THE TRADING PRICE OF THE COMMON
STOCK COULD BE ADVERSELY AFFECTED IN THE EVENT THE MARKET REFLECTS LESS OF A
SPECULATIVE TAKEOVER PREMIUM AS A RESULT OF THE FOUNDATION HOLDING 7.4% OF THE
COMPANY'S OUTSTANDING COMMON STOCK.
Impact on Earnings. Assuming receipt of approval of the Bank's members,
establishment of the Foundation will have an adverse impact on the Company's
and the Bank's earnings in the year in which the contribution is made. The
Company will recognize an expense in the amount of the contribution to the
Foundation in the quarter in which it occurs, which is expected to be the
second quarter of 1996. The amount of the contribution will range from $8.6
million to $11.7 million, depending on the amount of Common Stock sold in the
Conversion. The contribution expense will be partially offset by the tax
deductibility of the expense. The Company and the Bank have been advised by
their independent accountants that the contribution to the Foundation will be
tax deductible, subject to a limitation based on 10% of the Company's annual
taxable income. Assuming a contribution of $11.7 million in Common Stock,
based on the maximum of the Estimated Price Range, the Company estimates a net
tax effected expense of $8.0 million. If the Foundation had been established
at December 31, 1995, the Bank would have incurred a net loss of $53,000,
rather than experiencing earnings of $7.9 million for the year ended December
31, 1995. Management cannot predict earnings for 1996, but expects that the
establishment and funding of the Foundation will have an adverse impact on the
Company's earnings for the year. In addition to the contribution to the
Foundation, the Bank expects in the future to continue making ordinary
charitable contributions within its community. Such additional contributions
are expected to range from $32,000 to $40,000 per year.
Tax Considerations. The Company and the Bank have been advised by their
independent accountants that an organization created for the above purposes
would qualify as a Section 501(c)(3) exempt organization under the Code, and
would be classified as a private foundation. In this regard, the Foundation
will submit a request to the IRS to be recognized as an exempt organization.
The Company and the Bank have received an opinion of their independent
accountants that the Foundation would qualify as a Section 501(c)(3) exempt
organization under the Code, except that such opinion does not consider the
impact of the condition on the gift which requires the shares held by the
Foundation to be voted in the same ratio as all other shares of Common Stock
of the Company. In the event that the Company or the Foundation receives an
opinion of their tax counsel satisfactory to the OTS that compliance with the
voting restriction would cause the Foundation to lose its tax exempt status,
otherwise have a material and adverse tax consequence on the Foundation or
subject the Foundation to an excise tax under Section 4941 of the Code, the
OTS will waive such condition upon submission of such opinion by the Company
or the Foundation. The independent accountants' opinion further provides that
there is substantial
23
<PAGE>
authority for the position that the Company's contribution of its own stock to
the Foundation would not constitute an act of self-dealing, and that the
Company would be entitled to a deduction in the amount of the fair market
value of the stock at the time of the contribution, subject to a limitation
based on 10% of the Company's annual taxable income. The Company, however,
would be able to carry forward any unused portion of the deduction for five
years following the contribution. Thus, while the Company will only receive a
charitable contribution deduction of approximately $1.6 million in 1996, the
Company is permitted under the Code to carry the excess contribution over a
five-year period assuming that the Company realizes sufficient earnings over
that period to take the deduction. Assuming the sale of Common Stock at the
midpoint of the Estimated Price Range, the Company estimates that
substantially all of the deduction should be deductible over the six-year
period. Although the Company and the Bank have received an opinion of their
independent accountants that the Company will be entitled to the deduction for
the charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that
the deduction will be permitted. In such event, the Company's contribution to
the Foundation would be fully expensed, resulting in a further reduction in
earnings in the year in which the IRS makes such a determination.
Comparison of Valuation and Other Factors Assuming the Foundation is Not
Established as Part of the Conversion. The establishment of the Foundation was
taken into account by RP Financial in determining the estimated pro forma
market value of the Company. The aggregate price of the shares of Common Stock
being offered in the Subscription and Community Offerings is based upon the
independent appraisal conducted by RP Financial of the estimated pro forma
market value of the Company. The pro forma aggregate price of the shares being
offered in the Conversion is currently estimated to be between $107.8 million
and $145.9 million, with a midpoint of $126.9 million. Based on the appraisal,
the pro forma market capitalization of the Bank at the midpoint, including
shares contributed to the Foundation, is $137.0 million. The pro forma price
to book ratio and the pro forma price to earnings ratio are 67.14% and 12.19x,
respectively, at the midpoint of the Estimated Price Range. In the event that
the Conversion did not include the Foundation, RP Financial has estimated that
the estimated pro forma market capitalization of the Bank would be
approximately $145.0 million at the midpoint based on a pro forma price to
book ratio and the pro forma price to earnings ratio that are approximately
the same as the independent appraisal at 67.11% and 12.27%, respectively. If
the Foundation was not part of the Conversion, the pro forma market value of
the shares being offered is estimated to be between $123.2 million and $166.7
million. See "Comparison of Valuation and Pro Forma Information with No
Foundation." This estimate by RP Financial was prepared at the request of the
OTS and is solely for purposes of providing depositors with sufficient
information with which to make an informed decision on the Foundation. There
is no assurance that if the Foundation is not approved the appraisal prepared
at that time would conclude that the pro forma market value of the Company
would be the same as the amount estimated herein. Any appraisal prepared at
that time would be based on the facts and circumstances existing at that time,
including, among other things, market conditions and economic conditions.
The Bank believes that the establishment of the Foundation is in the best
interests of the Bank, its depositors and other members, its prospective
stockholders and its community. The Foundation is integrally tied to the
Bank's business of operating a community banking institution and the Bank
believes that the Foundation will have a positive impact on the Bank's long-
term franchise value. The amount of Common Stock being offered in the
Conversion at the midpoint of the Estimated Price Range is approximately $18.1
million less than the estimated amount of Common Stock that would be offered
in the Conversion without the Foundation based on the estimate provided by RP
Financial. As such, certain depositors and other members of the Bank who
subscribe to purchase Common Stock in the Subscription Offering may receive
less shares depending on the appraisal valuation at that time, the number of
shares sold based on that appraisal, the size of a depositor's or other
member's stock order and the amount of his or her qualifying deposits in the
Bank. The decrease in the amount of Common Stock being offered as a result of
the establishment of the Foundation will not have a significant effect on the
Company or the Bank's capital position. The Bank's regulatory capital is
significantly in excess of its regulatory capital requirements and will
further exceed such requirements following the Conversion. The Bank's
tangible, leverage and risk-based capital ratios at December 31, 1995 were
8.7%, 8.7% and 21.34%, respectively. Assuming the sale of shares at the
midpoint of the Estimated Price Range, the Bank's pro forma tangible, leverage
and risk-based capital ratios at December 31, 1995 would be 12.6%, 12.6%
24
<PAGE>
and 30.3%, respectively. On a consolidated basis, the Company's pro forma
stockholders' equity would be $204.0 million or approximately 17.8% of pro
forma consolidated assets, assuming the sale of shares at the midpoint of the
Estimated Price Range. Pro forma stockholders' equity per share and pro forma
net earnings per share would be $29.79 and $1.64, respectively. If the
Foundation was not being established in the Conversion, based on the RP
Financial estimate, the Company's pro forma stockholders' equity would be
approximately $216.0 million or approximately 18.6% of pro forma consolidated
assets at the midpoint of the estimate and pro forma stockholders' equity per
share and pro forma net earnings per share would be virtually the same with
the Foundation as without the establishment of the Foundation. See "Comparison
of Valuation and Pro Forma Information with No Foundation."
Potential Anti-Takeover Effect. If approved by the Bank's members, upon
completion of the Conversion, the Foundation will own 7.4% of the total shares
of the Company's Common Stock outstanding. Such shares will be owned solely by
the Foundation; however, pursuant to the terms of the contribution as mandated
by the OTS, the shares of Common Stock held by the Foundation must be voted in
the same ratio as all other shares of the Company's Common Stock on all
proposals considered by the stockholders of the Company. The Company and the
Foundation will take the necessary steps to provide this voting restriction in
the Foundation's corporate governance documents. As such, the Company does not
believe the Foundation will have an anti-takeover effect on the Company.
However, in the event that the OTS waived the voting restriction as provided
in the order requiring such restriction, the Foundation's board of directors
would exercise sole voting power over such shares and would no longer be
subject to the restriction. See "The Conversion--Establishment of the
Foundation--Regulatory Conditions Imposed on the Foundation." Although only
three of the Foundation's thirteen directors will be directors of the Company,
management of the Company and the Bank may benefit to the extent that a
majority of the board of directors of the Foundation determines to vote the
shares of Common Stock held by the Foundation in favor of proposals supported
by the Company and the Bank. Furthermore, when the Foundation's shares are
combined with shares purchased directly by officers and directors of the
Company, shares held by proposed stock benefit plans, if approved by
stockholders, and shares held in the Bank's ESOP, the aggregate of such shares
could exceed 20% of the Company's outstanding Common Stock, which could enable
management to defeat stockholder proposals requiring 80% approval assuming the
Foundation voted in favor of management's position. Consequently, this
potential voting control might preclude takeover attempts that certain
stockholders deem to be in their best interest, and might tend to perpetuate
management. Since the ESOP shares are allocated to all eligible employees of
the Bank, and any unallocated shares will be voted by an independent trustee,
and because any stock benefit plans must first be approved by stockholders no
sooner than six months following completion of the Conversion, and awards
under such proposed plans may be granted to employees other than executive
officers and directors, management of the Company does not expect to have
voting control of all shares covered by the ESOP and other stock benefit
plans. See, "--Certain Anti-Takeover Provisions--Voting Control of Officers
and Directors."
Management of the Company has sought to mitigate the potential anti-takeover
effect of the Foundation through the structure of the Foundation and certain
of the policies and procedures under which the Foundation must operate.
Although three directors of the Company and/or the Bank will serve on the
Foundation's board, the Foundation's bylaws mandate that at all times, at
least ten members of the board must be Disinterested Directors. Therefore,
Disinterested Directors will comprise more than 75% of the Foundation's board.
Furthermore, there will be no agreements or understandings, written or tacit,
with respect to the exercise of either direct or indirect control over the
management or policies of the Company, including agreements related to voting,
acquisition or disposition of the Company's Common Stock. Finally, as the
Foundation sells its shares of Common Stock over time, its ownership interest
and voting power in the Company is expected to decrease.
Possible Litigation. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has never been done in
connection with a mutual to stock conversion. As such, the Foundation and the
OTS approval of the Conversion may be subject to potential challenges by
depositors or other members of the Bank, stockholders or other third parties
notwithstanding that the Boards of Directors of the Company and the Bank have
carefully considered the various factors involved in the establishment of the
Foundation in
25
<PAGE>
reaching its determination to establish the Foundation as part of the
Conversion. See "The Conversion--Establishment of the Charitable Foundation--
Purpose of the Foundation." In conjunction with its approval of the
Conversion, the Bank determined to submit the Foundation for a vote of members
so that members have a right to vote on whether the Foundation should be
established as part of the Conversion. If certain depositors, other members,
stockholders or other third parties were to file a petition for review of the
OTS approval of the Conversion or institute an action seeking to require the
Bank to eliminate establishment of the Foundation in connection with the
Conversion, no assurances can be made that the resolution of such action would
not result in a delay in the consummation of the Conversion or that any
objecting persons would not be ultimately successful in obtaining a
modification or termination of the OTS approval, elimination of the Foundation
or other equitable relief or monetary damages against the Company or the Bank.
Additionally, if the Company and the Bank are forced to eliminate the
Foundation, the Company may be required to resolicit subscribers in the
Offerings.
Approval of Members. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting being held to consider the
Conversion. The Foundation will be considered as a separate matter from
approval of the Plan of Conversion. If the Bank's members approve the Plan of
Conversion, but not the establishment of the Foundation, the Bank intends to
complete the Conversion without the establishment of the Foundation. Failure
to approve the Foundation may materially increase the pro forma market value
of the Common Stock being offered for sale in the Offerings since the
Valuation Range, as set forth herein, takes into account the dilutive impact
of the issuance of shares to the Foundation. If the pro forma market value of
the Company without the Foundation is either greater than $167.8 million or
less than $107.8 million, the Bank will establish a new Estimated Price Range
and commence a resolicitation of subscribers (i.e., subscribers will be
permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscriptions funds will be promptly refunded
with interest at the Bank's passbook rate of interest, or be permitted to
increase, decrease, or cancel their subscriptions). Any change in the
Estimated Price Range must be approved by the OTS. See "The Conversion--Stock
Pricing." A resolicitation, if any, following the conclusion of the
Subscription and Community Offerings would not exceed 45 days unless further
extended by the OTS for periods of up to 90 days not to extend beyond June 25,
1998.
BENEFITS TO MANAGEMENT AND DIRECTORS
Stock Programs. The Company intends to seek stockholder approval of certain
performance based stock programs (the "Stock Programs") it intends to adopt
for the benefit of non-employee directors, officers and employees of the
Company and the Bank at a meeting of stockholders following the Conversion,
which under current OTS regulations may be held no earlier than six months
after completion of the Conversion. Assuming the receipt of stockholder
approval, the Company expects to acquire Common Stock on behalf of the Stock
Programs in an amount equal to 4% of the Common Stock issued in the
Conversion, or 215,648 shares and 291,759 shares at the minimum and maximum of
the Estimated Price Range, respectively. These shares will be acquired either
through open market purchases, if permissible, or from authorized but unissued
Common Stock. See "--Possible Dilutive Effect of Stock Programs and Stock
Options." Although no specific award determinations have been made, the
Company anticipates that, if stockholder approval is obtained, it will provide
awards to its directors and employees to the extent permitted by applicable
regulations. Current OTS regulations provide that no individual officer or
employee may receive more than 25% of the shares of any plan (72,940 shares at
the maximum of the Estimated Price Range); and non-employee directors may not
receive more than 5% individually (14,588 shares at the maximum of the
Estimated Price Range), or 30% in the aggregate (87,528 shares at the maximum
of the Estimated Price Range), of the shares awarded under any plan. The
maximum value of shares eligible to be granted under OTS regulations, assuming
the sale of Common Stock at the maximum of the Estimated Price Range, the
receipt of stockholder approval of the Stock Programs and based upon the
initial Purchase Price of $20 per share, would be $1.5 million for an
individual officer or employee; $291,760 for an individual director; and $1.8
million for all non-employee directors in the aggregate. These shares will be
awarded at no cost to the recipients. Under the terms of the Stock Programs,
an independent trustee will vote unallocated shares in the same proportion as
it receives instructions from recipients with respect to allocated shares
which have not been earned and distributed. The trustee will not vote
allocated shares which
26
<PAGE>
have not been distributed if it does not receive instructions from the
recipient. See "Management--Benefits--Stock Programs."
Stock Option Plans. The Company also intends to seek stockholder approval of
an Incentive Stock Option Plan for Officers and a Stock Option Plan for
Outside Directors (the "Stock Option Plans") at a meeting of stockholders
following the Conversion, which under current OTS regulations may be held no
earlier than six months after completion of the Conversion. Although no
specific determinations have been made, assuming the receipt of stockholder
approval, the Company expects that officers and directors will be granted
options to purchase an amount of authorized but unissued Common Stock or
treasury stock, if any, equal to 10% of the Common Stock issued in the
Conversion, or 539,120 shares and 729,398 shares at the minimum and maximum of
the Estimated Price Range. Current OTS regulations provide that no individual
may receive more than 25% of the options of any plan and non-employee
directors may not receive more than 5% individually, or 30% in the aggregate,
of the options awarded under any plan. At the maximum of the Estimated Price
Range, assuming receipt of stockholder approval of the Option Plans, an
individual officer or employee could receive options for up to 182,350 shares;
an individual non-employee director could receive options for up to 36,470
shares, and all non-employee directors in the aggregate could receive options
for up to 218,819 shares. Under the Stock Option Plans, the exercise price
will be equal to the fair market value of the underlying Common Stock on the
date of grant. Such options will permit such officers and directors to benefit
from any increase in the market value of the shares in excess of the exercise
price at the time of exercise. Officers and directors receiving such options
will not be required to pay for the shares until the date of exercise. See
"Management of the Bank--Benefits--Stock Option Plans." The stock-based
benefits provided under the Stock Programs and the Stock Option Plans,
discussed above, may be provided under separate Stock Program plans and Stock
Option Plans for officers, employees and non-employee directors or such
benefits may be provided for under a single master stock-based benefit plan
adopted by the Company which would incorporate the benefits and features in
the separate plans (the "Master Stock-Based Benefit Plan"). See "Business of
the Bank--Management of the Bank--Benefits--Stock Programs" and "--Stock
Option Plans."
Employee Stock Ownership Plan. In connection with the Conversion, certain
officers and employees of the Bank and the Company will obtain the benefit of
stock ownership through the establishment of the ESOP, which is a tax-
qualified plan for the benefit of all eligible employees, including executive
officers, of the Bank. The ESOP intends to purchase in the Subscription
Offering up to 8% of the Common Stock issued in the Conversion, or 431,296
shares and 583,519 shares at the minimum and maximum of the Estimated Price
Range. The ESOP will be funded over time by the Bank, and the Bank will
allocate shares of common stock to employees of the Bank who are Participants
in the ESOP at no cost to the ESOP beneficiaries. See "Management of the
Bank--Benefits--Employee Stock Ownership Plan and Trust."
Change In Control Provisions. It is anticipated that employment or severance
agreements with certain officers and employees may be entered into subsequent
to the Conversion, which would provide for benefits and cash payments in the
event of a change in control of the Company or the Bank. Such provisions may
have the effect of increasing the cost of acquiring the Company, thereby
discouraging future attempts to take over the Company or the Bank. Based on
current salaries, cash payments that would be paid in the event of a change in
control pursuant to the terms of the employment agreements, change in control
agreements and a proposed employee severance compensation plan would be
approximately $5.0 million. The actual amount to be paid in the event of a
change in control of the Bank or the Company, however, cannot be determined at
this time because the actual amount is based on the average salary of the
employee and other factors existing at the time of the change in control. See
"Restrictions on Acquisition of the Company and the Bank--Restrictions in the
Company's Certificate of Incorporation and Bylaws," "Management of the Bank--
Employment Agreements," "--Change in Control Agreements," "--Employee
Severance Compensation Plan," "--Benefits--Stock Option Plans" and "--
Benefits--Stock Programs."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAMS AND STOCK OPTIONS
Following the Conversion, the Stock Programs, if approved by the
stockholders of the Company, will acquire an amount of shares equal to 4% of
the shares of Common Stock issued in the Conversion, either through
27
<PAGE>
open market purchases or the issuance of authorized but unissued shares of
Common Stock from the Company. If the Stock Programs are funded by the
issuance of authorized but unissued shares, the voting interests of existing
stockholders (including the Foundation) will be diluted by approximately 3.6%.
Also following the Conversion, directors, officers and employees will be
granted options, if the Stock Option Plans are approved by the stockholders of
the Company. Although no specific determinations have been made, the Company
expects that executive officers and directors will be granted options to
purchase authorized but unissued shares in an amount equal to 10% of the
Common Stock issued in the Conversion. Under certain circumstances, such
options may be exercised and sold on the same day, thereby eliminating any
risk to officers and directors in exercising options in the event that the
market price exceeds the exercise price. If all of the options were to be
granted and exercised and all of the Stock Programs are funded with authorized
but unissued Common Stock, the voting interests of existing stockholders would
be diluted by approximately 11.5%. See "Pro Forma Data."
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions in the Company's and the Bank's Governing Instruments. Certain
provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Stock Charter
and Bylaws, as well as certain federal regulations, assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess
of 10% of the outstanding shares, and certain uniform price provisions for
certain business combinations. The Bank's Stock Charter also prohibits, for
five years, the acquisition or offer to acquire, directly or indirectly, the
beneficial ownership of more than 10% of the Bank's equity securities. Any
person violating this restriction may not vote the Bank's securities in excess
of 10%. These provisions in the Bank's and the Company's governing instruments
may discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors,
and thus, generally may serve to perpetuate current management. For a more
detailed discussion of these provisions, see "Restrictions on Acquisition of
the Company and the Bank."
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating
any offer of another "Person" (as defined therein) to (i) make a tender or
exchange offer for any equity security of the Company, (ii) merge or
consolidate the Company with another corporation or entity or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Company, the Bank and the
stockholders of the Company, give due consideration to all relevant factors,
including, without limitation, the social and economic effects of acceptance
of such offer on the Company's customers and the Bank's present and future
account holders, borrowers and employees; on the communities in which the
Company and the Bank operate or are located; on the ability of the Company to
fulfill its corporate objectives as a savings bank holding company; and on the
ability of the Bank to fulfill the objectives of a federally chartered stock
savings bank under applicable statutes and regulations. Notwithstanding these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may waive such anti-takeover provisions in order to accept an offer
determined to be in the best interests of the Company, the Bank and
stockholders.
Voting Control of Officers and Directors. Directors and executive officers
of the Bank and the Company expect to purchase approximately 1.8% or 1.3% of
the shares of Common Stock to be issued in the Conversion, based upon the
minimum and the maximum of the Estimated Price Range, respectively.
Accordingly, assuming the receipt of stockholder approval for the Stock
Programs and the Stock Option Plans, and assuming the maximum allocation and
full vesting of the ESOP, Stock Programs and Stock Option Plans, directors,
executive officers and employees would have effective control over 20.2% or
19.8%, at the minimum and maximum of the Estimated Price Range, on a fully
diluted basis, respectively, of the Common Stock issued and outstanding.
Management's potential voting control could, together with additional
stockholder support, defeat stockholder proposals requiring 80% approval of
stockholders. As a result, this potential voting control may preclude
28
<PAGE>
takeover attempts that certain stockholders deem to be in their best interest
and may tend to perpetuate existing management. See "Management of the Bank--
Subscriptions by Executive Officers and Directors," and "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock. The Company has
received conditional approval from the NASD to have its Common Stock quoted on
the Nasdaq National Market under the symbol "OCFC" upon completion of the
Conversion. There can be no assurance, however, that an active and liquid
trading market for the Common Stock will develop, or, once developed, will
continue, nor can there be any assurance that purchasers of the Common Stock
will be able to sell their shares at or above the Purchase Price. The absence
or discontinuance of a market for the Common Stock may have an adverse impact
on both the price and liquidity of the Common Stock. See "Market for the
Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE 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 Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription and Community Offerings. In the event that the Estimated Price
Range is so increased, it is expected that the Company will issue up to
8,388,078 shares of Common Stock at the Purchase Price for an aggregate price
of up to $167,761,560. An increase in the number of shares issued will
decrease a subscriber's pro forma net earnings per share and stockholders'
equity per share and will increase the Company's pro forma consolidated
stockholders' equity and net earnings. Such an increase will also increase the
Purchase Price as a percentage of pro forma stockholders' equity per share and
net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received a letter from RP Financial which states that, pursuant
to RP Financial's valuation, that subscription rights granted to Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members have
no value. However, such valuation is not binding on the IRS. If the
subscription rights granted to Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are deemed to have an ascertainable value,
receipt of such rights could result in taxable gain to those Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members who receive
and/or exercise the subscription rights in an amount equal to such value.
Additionally, the Bank could recognize a gain for tax purposes on such
distribution. Whether subscription rights are considered to have ascertainable
value is an inherently factual determination. See "The Conversion--Effects of
Conversion" and "--Tax Aspects."
OCEAN FINANCIAL CORP.
The Company was recently organized at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock to
be issued by the Bank. The Company has applied to the OTS to become a savings
and loan holding company, and, as such, will be subject to regulation by the
OTS. See "The Conversion--General." After completion of the Conversion, the
Company will conduct business initially as a unitary savings and loan holding
company. See "Regulation--Holding Company Regulation." Upon consummation of
the Conversion, the Company's assets will consist of all of the outstanding
shares of the Bank's capital stock issued to the Company in the Conversion and
that portion of the net proceeds of the Offerings retained by the Company. The
Company intends to use part of the net proceeds it retains to make a loan
directly to the ESOP to enable the ESOP to purchase 8% of the Common Stock in
the Conversion. See "Use of Proceeds." The Company will have no significant
liabilities. The management of the Company is set forth under "Management of
the Company." Initially, the Company will neither own nor lease any property,
but will instead use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to
29
<PAGE>
employ any persons other than officers, but will utilize the support staff of
the Bank from time to time. Additional employees will be hired as appropriate
to the extent the Company expands its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so,
its business activities through existing or newly-formed subsidiaries, or
through acquisitions of other financial institutions and financial services
related companies. Although there are no current arrangements, understandings
or agreements, written or oral, regarding any such opportunities or
transactions, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Company are anticipated to be funded by the net
proceeds retained by the Company and earnings thereon or, alternatively,
through dividends from the Bank.
OCEAN FEDERAL SAVINGS BANK
Ocean Federal was originally founded as a state-chartered building and loan
association in 1902, and converted to a federal savings and loan association
in 1945. The Bank became a federally chartered mutual savings bank in 1989.
The Bank's primary market area includes Ocean County and portions of Monmouth
and Middlesex Counties in New Jersey. The Bank conducts its business from its
administrative office located in Brick, and eight branch offices, seven of
which are located in Ocean County, and one of which is located in Middlesex
County.
The Bank is the only remaining community-based financial institution
headquartered in Ocean County. Its business has been, and continues to be,
attracting deposits from the general public in its primary market area and
investing such deposits and other funds, generated from operations and
borrowings, primarily in mortgage loans secured by single-family, owner-
occupied residences. At December 31, 1995, the Bank had invested $575.0
million, or 92.0%, of its total loan portfolio, in one- to four-family
mortgage loans. To a significantly lesser extent, the Bank invests in
commercial real estate, multi-family, land, construction, and consumer loans.
The Bank also invests in mortgage-backed securities, securities issued by the
U.S. Government and agencies thereof, and other investments permitted by
applicable laws and regulations. In addition, the Bank services loans for
others. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business of the Bank."
The Bank is subject to extensive regulation, supervision and examination by
the OTS, its primary regulator, and the FDIC, which insures its deposits. As
of December 31, 1995, the Bank exceeded all regulatory capital requirements
with tangible, core and risk-based capital of $90.3 million, $90.3 million and
$95.7 million, respectively. Additionally, the Bank's regulatory capital was
in excess of the amount necessary for the Bank to be deemed "well-capitalized"
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). See "Regulatory Capital Compliance" and "Regulation." The Bank is
a member of the FHLB-NY, which is one of the twelve regional banks which
comprise the FHLB system.
The Bank's administrative office is located at 74 Brick Boulevard, Brick,
New Jersey 08723. The Bank's telephone number is (908) 477-5200.
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<PAGE>
REGULATORY CAPITAL COMPLIANCE
At December 31, 1995, the Bank exceeded all regulatory capital requirements.
See "Regulation--Federal Savings Institution Regulation--Capital
Requirements." Set forth below is a summary of the Bank's compliance with
regulatory capital standards as of December 31, 1995, on a historical and pro
forma basis assuming that the indicated number of shares were sold as of such
date and receipt by the Bank of 50% of the net proceeds. For purposes of the
table below, the amount expected to be borrowed by the ESOP and the cost of
the shares expected to be acquired by the Stock Programs are deducted from pro
forma regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1995 BASED UPON SALE AT $20 PER SHARE
---------------------------------------------------------------------------
8,388,078 SHARES
5,391,203 SHARES 6,342,593 SHARES 7,293,981 SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED OF ESTIMATED
DECEMBER 31, 1995 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
----------------- ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............ $92,351 8.91% $131,658 12.26% $138,736 12.83% $145,814 13.40% $153,953 14.04%
======= ===== ======== ===== ======== ===== ======== ===== ======== =====
Tangible Capital:
Capital Level......... $90,281 8.72% $129,588 12.06% $136,666 12.64% $143,744 13.21% $151,883 13.85%
Requirement........... 15,523 1.50 16,113 1.50 16,219 1.50 16,325 1.50 16,447 1.50
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess................ $74,758 7.22% $113,475 10.56% $120,447 11.14% $127,419 11.71% $135,436 12.35%
======= ===== ======== ===== ======== ===== ======== ===== ======== =====
Core Capital:
Capital Level......... $90,281 8.72% $129,588 12.06% $136,666 12.64% $143,744 13.21% $151,883 13.85%
Requirement(3)........ 31,047 3.00 32,226 3.00 32,438 3.00 32,650 3.00 32,894 3.00
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess................ $59,234 5.72% $ 97,362 9.06% $104,228 9.64% $111,094 10.21% $118,989 10.85%
======= ===== ======== ===== ======== ===== ======== ===== ======== =====
Risk-Based Capital:
Capital Level(4)...... $95,684 21.34% $134,991 29.00% $142,069 30.32% $149,147 31.62% $157,286 33.10%
Requirement........... 35,877 8.00 37,240 8.00 37,485 8.00 37,730 8.00 38,013 8.00
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess................ $59,807 13.34% $ 97,751 21.00% $104,584 22.32% $111,417 23.62% $119,273 25.10%
======= ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- ----
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of total tangible
assets. Core capital levels are shown as a percentage of total adjusted
assets. Risk-based capital levels are shown as a percentage of total risk-
weighted assets.
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements
which would require a core capital ratio of 3% of total adjusted assets
for thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements."
(4) Assumes net proceeds are invested in assets that carry a risk-weighting
equivalent to the average risk-weight of the Bank's assets at December 31,
1995. Risk-based capital at December 31, 1995 includes supplementary
capital of $5,403,000, which represents general valuation allowances. GAAP
capital at December 31, 1995, includes $2,070,000, which represents the
net unrealized gains on securities available for sale, net of tax. This
amount is excluded from regulatory capital.
31
<PAGE>
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
the net proceeds from the sale of the Common Stock will be between $104.5
million and $141.9 million (or $163.5 million if the Estimated Price Range is
increased by 15%). See "Pro Forma Data" and "The Conversion--Stock Pricing" as
to the assumptions used to arrive at such amounts. The Company will be unable
to utilize any of the net proceeds of the Offerings until the consummation of
the Conversion.
The Company will purchase all of the outstanding capital stock of the Bank
to be issued upon Conversion in exchange for 50% of the net proceeds of the
Offerings. Such proceeds will be added to the Bank's general funds, and may be
used for the repayment of any outstanding FHLB borrowings, the renovation of a
newly-acquired office which is to become the Bank's new administrative office,
or other general corporate purposes, including investment in one- to four-
family residential mortgage loans and other loans, investment in federal
funds, short-term, investment grade marketable securities and mortgage-backed
securities and to fund the Stock Programs. See Note 12 to the Consolidated
Financial Statements for a description of the Bank's FHLB borrowings at
December 31, 1995, and see "Summary of Recent Developments--Management's
Discussion and Analysis of Recent Developments--Comparison of Financial
Condition at March 31, 1996 and December 31, 1995" for a discussion of the
Bank's strategy to prefund anticipated Conversion proceeds with FHLB
borrowings. The renovation of the new administrative office is expected to be
completed in early 1997, and is expected to cost approximately $6.5 million.
In December 1995, the Bank entered into a $5.8 million construction commitment
for the planned renovation. The Bank may also use such funds for further
expansion of its facilities, and to expand operations through the acquisition
of other financial institutions, or the establishment or acquisition of branch
offices or other financial services companies. Apart from the amounts which
may be used to repay FHLB borrowings, to renovate the new office space and the
two new branch offices discussed below, the Bank has not yet determined the
approximate amount of net proceeds to be used for each of the purposes
mentioned above. Based on the amount of the estimated net proceeds of the
Offerings, it is anticipated that the Company will experience lower rates of
return on equity in future periods as compared to historical returns. No
assurances can be given that the Company will be able to realize a rate of
return on the investment of the net proceeds comparable to the Bank's
historical rates of return.
The net proceeds retained by the Company will initially be invested
primarily in federal funds, short-term, investment grade marketable securities
and mortgage-backed securities or may be used to provide additional financing
for the Bank's operations. The Company intends to use a portion of the net
proceeds to make a loan directly to the ESOP to enable the ESOP to purchase 8%
of the Common Stock issued in the Conversion. Based upon the issuance of
5,391,203 shares or 7,293,981 shares at the minimum and maximum of the
Estimated Price Range, the amount of the loan to the ESOP would be $8.6
million or $11.7 million, respectively (or $13.4 million if the Estimated
Price Range is increased by 15%) to be repaid over a 12-year period at an
interest rate of 8.25%. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan and Trust."
The net proceeds retained by the Company may also be used to support the
future expansion of operations through the establishment of branch offices,
branch acquisitions and the acquisition of savings associations and commercial
banks or diversification into other banking related businesses. The Company
has no current arrangements, understandings or agreements regarding
acquisitions of any specific financial institutions or branch offices,
although the Bank has received approval to open three new branch offices, and
is presently negotiating a lease for a fourth new branch. In addition to the
costs associated with opening the new administrative office described above,
management estimates the cost of opening the two newly approved branches to be
approximately $923,000. See "Business of the Bank--Properties." The Company,
upon the Conversion, will be a unitary savings and loan holding company, which
under existing laws would generally not be restricted as to the types of
business activities in which it may engage, provided that the Bank continues
to be a qualified thrift lender ("QTL"). See "Regulation--Holding Company
Regulation" for a description of certain regulations currently applicable to
the Company, and "Risk Factors--Financial Institution Regulation and Possible
Legislation," for a discussion of possible restrictions which may be imposed
upon unitary savings and loan holding companies in the future.
32
<PAGE>
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless approved by the OTS, the Company, pursuant
to OTS regulations, will be prohibited from repurchasing any shares of the
Common Stock for three years except (i) for an offer to all stockholders on a
pro rata basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion the Company may repurchase its Common
Stock so long as (i) the repurchases within the following two years are part
of an open-market program not involving greater than 5% of its outstanding
capital stock during a twelve-month period; (ii) the repurchases do not cause
the Bank to become "undercapitalized" within the meaning of the OTS prompt
corrective action regulation; and (iii) the Company provides to the Regional
Director of the OTS no later than 10 days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
See "Regulation--Prompt Corrective Regulatory Action." In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion provided there are valid and compelling business reasons
for such repurchases and the OTS does not object to such repurchases.
Based upon facts and circumstances following Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
not be limited to: (i) market and economic factors such as the price at which
the stock is trading in the market, the volume of trading, the attractiveness
of other investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase the book value and/or
earnings per share of the remaining outstanding shares, and the opportunity to
improve the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the
Company and its shareholders. In the event the Company determines to
repurchase stock, such repurchases may be made at market prices which may be
in excess of the Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that
such capital will be adequate, taking into account, among other things, the
level of non-performing and other risk assets, the Company's and the Bank's
current and projected results of operations and asset/liability structure, the
economic environment and tax and other considerations. See "The Conversion--
Certain Restrictions on Purchase or Transfer of Shares after Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Board of Directors intends to consider a policy
of paying cash dividends on the Common Stock in the future; however, it has no
present plans with respect to the payment of dividends. Declarations of
dividends by the Board of Directors, if any, will depend upon a number of
factors, including the amount of net proceeds retained by the Company in the
Conversion, investment opportunities available to the Company or the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. No assurances can be given, however, that any dividends
will be paid or, if commenced, will continue to be paid.
The Bank will not be permitted to pay dividends on its capital stock if its
stockholders' equity would be reduced below the amount required for the
liquidation account. See "The Conversion--Liquidation Rights." For information
concerning federal regulations which apply to the Bank in determining the
amount of proceeds which may be retained by the Company and regarding a
savings institution's ability to make capital distributions including payment
of dividends to its holding company, see "Federal and State Taxation--Federal
Taxation--Distributions" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
33
<PAGE>
Unlike the Bank, the Company is not subject to OTS regulatory restrictions
on the payment of dividends to its stockholders, although the source of such
dividends will be dependent on the net proceeds retained by the Company and
earnings thereon and may be dependent, in part, upon dividends from the Bank.
The Company is subject, however, to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of the net assets
of the Company (the amount by which total assets exceed total liabilities)
over its statutory capital, or if there is no such excess, to its net profits
for the current and/or immediately preceding fiscal year.
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock, and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval from the NASD to have its Common Stock
quoted on the Nasdaq National Market under the symbol "OCFC" upon completion
of the Conversion. One of the requirements for quotation of the Common Stock
on the Nasdaq National Market is that there be at least two market makers for
the Common Stock. The Company will seek to encourage and assist at least two
market makers to make a market in its Common Stock. Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to
various securities laws and other regulatory requirements. Sandler O'Neill has
advised the Company that it intends to make a market in the Common Stock
following the completion of the Conversion, but it is under no obligation to
do so. As of the date hereof, no other broker-dealers have agreed to act as
market makers. While the Company has attempted to obtain commitments from
broker-dealers to act as market makers, and anticipates that prior to the
completion of the Conversion it will be able to obtain the commitment from at
least one other broker-dealer to act as market maker for the Common Stock,
there can be no assurance there will be two or more market makers for the
Common Stock. Additionally, the development of a liquid public market depends
on the existence of willing buyers and sellers, the presence of which is not
within the control of the Company, the Bank or any market maker. The number of
active buyers and sellers of the Common Stock at any particular time may be
limited. Under such circumstances, investors in the Common Stock could have
difficulty disposing of their shares on short notice and should not view the
Common Stock as a short-term investment. There can be no assurance that an
active and liquid trading market for the Common Stock will develop or that, if
developed, it will continue, nor is there any assurance that persons
purchasing shares will be able to sell them at or above the Purchase Price or
that quotations will be available on the Nasdaq National Market as
contemplated.
34
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at December 31, 1995, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion, based upon the sale of the number of shares indicated in the table
and the other assumptions set forth under "Pro Forma Data." The table does not
reflect the possible use of net conversion proceeds for the repayment of any
FHLB borrowings.
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $20 PER SHARE
------------------------------------------------------
8,388,078
5,391,203 6,342,593 7,293,981 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
BANK ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
---------- ------------ ------------ ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2)............. $926,558 $926,558 $926,558 $926,558 $926,558
FHLB borrowings......... 10,400 10,400 10,400 10,400 10,400
-------- -------- -------- -------- --------
Total deposit accounts
and borrowed funds..... $936,958 $936,958 $936,958 $936,958 $936,958
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $.01
par value, 5,000,000
shares authorized;
none to be issued.... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, 55,000,000
shares authorized;
shares to be issued
as reflected(3)...... -- 58 69 79 91
Additional paid-in
capital(4)........... -- 104,434 123,144 141,856 163,374
Retained earnings(5).. 92,351 92,351 92,351 92,351 92,351
Less:
Common Stock acquired
by the ESOP(6)....... -- (8,626) (10,148) (11,670) (13,421)
Common Stock acquired
by the Stock
Programs(7).......... -- (4,313) (5,074) (5,835) (6,710)
Plus:
After-tax effect of
contribution to
Foundation(8).......... -- 3,192 3,700 3,700 3,700
-------- -------- -------- -------- --------
Total stockholders'
equity................. $ 92,351 $187,096 $204,042 $220,481 $239,385
======== ======== ======== ======== ========
</TABLE>
- -------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of the stated number of shares in the Offerings and
the issuance of 431,297, 507,407, 583,519 and 671,047 shares of Common
Stock to the Foundation, at the minimum, midpoint, maximum, and maximum,
as adjusted, respectively, of the Estimated Price Range.
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Company's proposed Stock Option Plans intended to be
adopted by the Company and presented for approval of stockholders at a
meeting of stockholders following the Conversion. If approved by the
stockholders of the Company, an amount equal to 10% of the shares of
Common Stock issued in the Conversion will be reserved for issuance upon
the exercise of options to be granted under the Stock Option Plans. See
"Risk Factors--Possible Dilutive Effect of Stock Programs and Stock
Options," Footnote 4 to the table under "Pro Forma Data" and "Management
of the Bank--Benefits--Stock Option Plans."
(5) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "The Conversion--Liquidation Rights" and "Regulation--
Federal Savings Institution Regulation--Limitations on Capital
Distributions."
(6) Assumes that 8% of the shares offered for sale in the Conversion will be
purchased by the ESOP and that the funds used to acquire such shares will
be borrowed from the Company. The Common Stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "Management of the
Bank--Benefits--Employee Stock Ownership Plan and Trust" and Footnote 1 to
the tables under "Pro Forma Data."
(7) Assumes that an amount equal to 4% of the shares of Common Stock issued in
the Conversion is purchased by the Stock Programs subsequent to the
Conversion through open market purchases. The Common Stock purchased by
the Stock Programs is reflected as a reduction of stockholders' equity.
Implementation of the Stock Programs is subject to the approval of the
Company's stockholders at a meeting following the Conversion. See "Risk
Factors--Possible Dilutive Effect of Stock Programs and Stock Options,"
Footnote 3 to the table under "Pro Forma Data" and "Management of the
Bank--Benefits--Stock Programs."
(8) Since the contribution to the Foundation will be made with Company Common
Stock, there is no cash outlay affecting stockholders' equity. The tax
benefit derived from the contribution, however, will increase
stockholders' equity. The amount of the deduction is limited to 10% of the
Company's annual taxable income, subject to the ability of the Company to
carry forward any unused portion of the deduction for five years following
the year in which the contribution is made.
35
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $104.5 million and $141.9 million (or $163.5
million in the event the Estimated Price Range is increased by 15.0%) based
upon the following assumptions: (i) all of the shares of Common Stock will be
sold in the Subscription and Community Offerings; (ii) directors, officers and
employees of the Bank and members of their immediate families will purchase an
aggregate of 105,000 shares of Common Stock; (iii) Sandler O'Neill will
receive a fee equal to 1.75% of the aggregate Purchase Price of the shares
sold in the Subscription and Community Offerings, excluding shares purchased
by directors, officers, employees, and members of their immediate families and
any employee plans, for which there is no fee; and (iv) Conversion expenses,
excluding the marketing fees paid to Sandler O'Neill, will be approximately
$1,633,000. Actual Conversion expenses may vary from those estimated.
Pro forma consolidated net earnings of the Company for the year ended
December 31, 1995, have been calculated as if the Common Stock had been sold
at the beginning of the period and the net proceeds had been invested at
5.86%, the arithmetic average of the weighted average yield earned by the Bank
on its interest-earning assets and the weighted average rate paid on its
deposits during such period (as required by OTS regulations). The table below
does not reflect the effect of withdrawals from deposit accounts for the
purchase of Common Stock or the effect of any possible use of the net
Conversion proceeds, except as set forth in Footnote 1 to the table below. The
pro forma after-tax yields for the Company and the Bank are assumed to be
3.69% for the year ended December 31, 1995, based on an effective tax rate of
37.0% for the period. Historical and pro forma net earnings per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock issued, as adjusted to give effect
to the purchase of shares by the ESOP. Historical and pro forma stockholders'
equity per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of Common Stock issued. No
effect has been given in the pro forma stockholders' equity calculations for
the assumed earnings on the net proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with GAAP. The pro forma stockholders' equity
is not intended to represent the fair market value of the Common Stock and may
be greater than amounts that would be available for distribution to
stockholders in the event of liquidation.
The following table summarizes historical data of the Bank and pro forma
data of the Company at or for the year ended December 31, 1995, based on the
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the Common Stock following the Conversion.
The table below gives effect to the Stock Programs, which are expected to be
adopted by the Company following the Conversion and presented to stockholders
for approval at a meeting of stockholders. See Footnote 3 to the table and
"Management of the Bank--Benefits--Stock Programs." No effect has been given
in the table to the possible issuance of additional shares reserved for future
issuance pursuant to the Stock Option Plans to be adopted by the Board of
Directors of the Company and presented to stockholders for approval at a
meeting of stockholders, nor does book value give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders or the bad debt reserve in
liquidation. See Footnote 4 to the table below, "The Conversion--Liquidation
Rights" and "Management of the Bank--Benefits--Stock Option Plans." THE
FOLLOWING TABLE ASSUMES THAT THE FOUNDATION IS APPROVED AS PART OF THE
CONVERSION AND THEREFORE GIVES EFFECT TO THE ISSUANCE OF AUTHORIZED BUT
UNISSUED SHARES OF THE COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY
WITH THE COMPLETION OF THE CONVERSION. THE VALUATION RANGE, AS SET FORTH
HEREIN AND IN THE TABLE BELOW, TAKES INTO ACCOUNT THE DILUTIVE IMPACT OF THE
ISSUANCE OF SHARES TO THE FOUNDATION.
36
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
5,391,203 6,342,593 7,293,981 8,388,078
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $20.00 AT $20.00 AT $20.00 AT $20.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(7)
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds......... $107,824 $126,852 $145,880 $167,762
Plus: Shares issued to
Foundation (equal
to 8% of stock
issued in
Conversion)....... 8,626 10,148 11,670 13,421
-------- -------- -------- --------
Pro Forma Market
Capitalization........ $116,450 $137,000 $157,550 $181,183
======== ======== ======== ========
Gross proceeds......... $107,824 $126,852 $145,880 $167,762
Less: Offering expenses
and commissions.. (3,332) (3,639) (3,945) (4,297)
-------- -------- -------- --------
Estimated net
proceeds.............. 104,492 123,213 141,935 163,465
Less: Common Stock
purchased by ESOP.. (8,626) (10,148) (11,670) (13,421)
Common Stock
purchased by Stock
Programs......... (4,313) (5,074) (5,835) (6,710)
-------- -------- -------- --------
Estimated net
proceeds, as
adjusted............ $ 91,553 $107,991 $124,430 $143,334
======== ======== ======== ========
Consolidated net
earnings(1):
Historical........... $ 7,947 $ 7,947 $ 7,947 $ 7,947
Pro forma earnings on
net proceeds, as
adjusted(2)......... 3,106 3,713 4,320 5,018
Less: Pro forma ESOP
adjustment(3).. (453) (533) (613) (705)
Pro forma Stock
Programs
adjustment(4).. (543) (639) (735) (846)
-------- -------- -------- --------
Pro forma net
earnings.......... $ 10,057 $ 10,488 $ 10,919 $ 11,414
======== ======== ======== ========
Per share net
earnings(1):
Historical........... $ 1.46 $ 1.25 $ 1.08 $ 0.94
Pro forma earnings on
net proceeds, as
adjusted(2)......... 0.57 0.57 0.59 0.59
Less: Pro forma ESOP
adjustment(3).. (0.08) (0.08) (0.08) (0.08)
Pro forma Stock
Programs
adjustment(4).. (0.10) (0.10) (0.10) (0.10)
-------- -------- -------- --------
Pro forma net
earnings per
share............. $ 1.85 $ 1.64 $ 1.49 $ 1.35
======== ======== ======== ========
Stockholders' equity:
Historical........... $ 92,351 $ 92,351 $ 92,351 $ 92,351
Estimated net
proceeds............ 104,492 123,213 141,935 163,465
Plus: After tax
effect of
contribution to
Foundation..... 3,192 3,700 3,700 3,700
Less: Common Stock
acquired by
ESOP(3)........ (8,626) (10,148) (11,670) (13,421)
Common Stock
acquired by Stock
Programs(2).... (4,313) (5,074) (5,835) (6,710)
-------- -------- -------- --------
Pro forma
stockholders'
equity(4)(5)(6)... $187,096 $204,042 $220,481 $239,385
======== ======== ======== ========
Stockholders' equity
per share:
Historical........... $ 15.86 $ 13.48 $ 11.72 $ 10.19
Estimated net
proceeds............ 17.95 17.99 18.02 18.04
Plus: After tax
effect of
contribution to
Foundation..... 0.55 0.54 0.47 0.41
Less: Common Stock
acquired by
ESOP(3)........ (1.48) (1.48) (1.48) (1.48)
Common Stock
acquired by Stock
Programs(3)...... (0.74) (0.74) (0.74) (0.74)
-------- -------- -------- --------
Pro forma
stockholders'
equity per
share(4)(5)(6).... $ 32.14 $ 29.79 $ 27.99 $ 26.42
======== ======== ======== ========
Offering price as a
percentage of pro
forma stockholders'
equity per share...... 62.23% 67.14% 71.45% 75.70%
Offering price to pro
forma net earnings per
share................. 10.81x 12.19x 13.42x 14.81x
</TABLE>
(Footnotes on next page)
37
<PAGE>
(1) Does not give effect to the non-recurring expense that will be recognized
in 1996 if the establishment of the Foundation is approved. In that event,
the Company will recognize an after-tax expense for the amount of the
contribution to the Foundation which is expected to be $5.4 million, $6.4
million, $8.0 million, and $9.7 million at the minimum, midpoint, maximum,
and maximum as adjusted, of the Estimated Price Range, respectively.
(2) For purposes of this calculation, net proceeds have been reduced by $7.4
million, which amount is expected to be used for office renovations in
1996, and by the amount of the Company's contribution of common stock to
the Foundation, both of which are considered non interest-earning assets.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the Company. The amount borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon 12 equal annual installments of principal, with an assumed annual
interest rate of 8.25%. The pro forma net earnings assumes: (i) that the
Bank's contribution to the ESOP is equivalent to the debt service
requirement for the year ended December 31, 1995, and was made at the end
of the period; (ii) that 35,941, 42,284, 48,627 and 55,921 shares at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, were committed to be released during the year ended December
31, 1995, at an average fair value of $20 per share in accordance with
Statement of Position ("SOP") 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the
net earnings per share calculations. See "Management of the Bank--
Benefits--Employee Stock Ownership Plan and Trust."
(4) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. If the Stock Programs are approved by stockholders, the
Stock Programs intend to acquire an amount of Common Stock equal to 4% of
the shares of Common Stock issued in the Conversion, or 215,648, 253,704,
291,759 and 335,523 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or
from authorized but unissued shares of Common Stock or treasury stock of
the Company, if any. Funds used by the Stock Programs to purchase the
shares will be contributed to the Stock Programs by the Bank. In
calculating the pro forma effect of the Stock Programs, it is assumed that
the required stockholder approval has been received, that the shares were
acquired by the Stock Programs at the beginning of the period presented in
open market purchases at the Purchase Price and that 20% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of the Company's Common Stock to the Stock
Programs instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 3.6% and pro forma net
earnings per share would be $1.81, $1.61, $1.46 and $1.33 at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively,
and pro forma stockholders' equity per share would be $31.70, $29.44,
$27.70 and $26.20 at the minimum, midpoint, maximum and 15% above the
maximum of the range, respectively. There can be no assurance that
stockholder approval of the Stock Programs will be obtained, or that the
actual purchase price of the shares will be equal to the Purchase Price.
See "Management of the Bank--Benefits--Stock Programs."
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plans for approval at a meeting of stockholders. If the Stock
Option Plans are approved by stockholders, an amount equal to 10% of the
Common Stock issued in the Conversion, or 539,120, 634,259, 729,398 and
838,808 shares at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Price Range, respectively, will be reserved for future
issuance upon the exercise of options to be granted under the Stock Option
Plans. The issuance of Common Stock pursuant to the exercise of options
under the Stock Option Plans will result in the dilution of existing
stockholders' interests. Assuming stockholder approval of the Stock Option
Plans and all options were exercised at the end of the period at an
exercise price of $20 per share, the pro forma net earnings per share
would be $1.75, $1.56, $1.42 and $1.30, respectively, and the pro forma
stockholders' equity per share would be $31.11, $28.96, $27.31 and $25.88,
respectively. See "Management of the Bank--Benefits--Stock Option Plans."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
38
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not established as part of the
Conversion, RP Financial has estimated that the pro forma market
capitalization of the Bank would be approximately $145.0 million, at the
midpoint, which is approximately $8.0 million greater than the pro forma
market capitalization of the Bank if the Foundation is approved by the members
of the Bank and would result in approximately an $18.1 million increase in the
amount of Common Stock offered for sale in the Conversion. The pro forma price
to book ratio and pro forma price to earnings ratio would be approximately the
same under both the current appraisal and the estimate of the value of the
Company without the Foundation. Further, assuming the midpoint of the
Estimated Price Range, pro forma stockholders' equity per share and pro forma
earnings per share would be approximately the same with the Foundation as
without the Foundation. In this regard, pro forma stockholders' equity and pro
forma net income per share would be $29.80 and $1.63, respectively, at the
midpoint of the estimate, assuming no Foundation, and $29.79 and 1.64,
respectively, with the Foundation. The pro forma price to book ratio and the
pro forma price to earnings ratio are 67.11% and 12.27x, respectively, at the
midpoint of the estimate, assuming no Foundation and 67.14% and 12.19x,
respectively, with the Foundation. This estimate by RP Financial was prepared
at the request of the OTS and is solely for purposes of providing members with
sufficient information with which to make an informed decision on the
Foundation. There is no assurance that in the event the Foundation is not
approved at the Special Meeting of members that the appraisal prepared at that
time would conclude that the pro forma market value of the Company would be
the same as that estimated herein. Any appraisal prepared at that time would
be based on the facts and circumstances existing at that time, including,
among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum,
as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at December 31, 1995.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
---------------------- ---------------------- ---------------------- ----------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering
amount.................. $ 107,824 $ 123,250 $ 126,852 $ 145,000 $ 145,880 $ 166,750 $ 167,762 $ 191,763
Pro forma market
capitalization.......... 116,450 123,250 137,000 145,000 157,550 166,750 181,183 191,763
Total assets............ 1,131,190 1,141,325 1,148,136 1,160,115 1,164,575 1,178,905 1,183,479 1,200,513
Total liabilities....... 944,094 944,094 944,094 944,094 944,094 944,094 944,094 944,094
Pro forma stockholders'
equity.................. 187,096 197,231 204,042 216,021 220,481 234,811 239,385 256,419
Pro forma consolidated
net earnings............ 10,057 10,447 10,488 10,946 10,919 11,446 11,414 12,021
Pro forma stockholders'
equity per share........ 32.14 32.01 29.79 29.80 27.99 28.16 26.42 26.74
Pro forma consolidated
net earnings per share.. 1.85 1.83 1.64 1.63 1.49 1.48 1.35 1.35
Pro forma pricing
ratios:
Offering price as a
percentage of pro
forma stockholders'
equity per share...... 62.23% 62.48% 67.14% 67.11% 71.45% 71.02% 75.70% 74.79%
Offering price to pro
forma net earnings per
share................. 10.81x 10.93x 12.19x 12.27x 13.42x 13.51x 14.81x 14.81x
Offering price to
assets................ 10.29% 10.80% 11.93% 12.50% 13.53% 14.14% 15.31% 15.97%
Pro forma financial
ratios:
Return on assets...... 0.89 0.92 0.91 0.94 0.94 0.97 0.96 1.00
Return on
stockholders' equity.. 5.38 5.30 5.14 5.07 4.95 4.87 4.77 4.69
Stockholders' equity
to assets............. 16.54 17.28 17.77 18.62 18.93 19.92 20.23 21.36
</TABLE>
39
<PAGE>
OCEAN FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank for each of the
years ended December 31, 1995, 1994 and 1993 have been derived from the
Consolidated Financial Statements, which Financial Statements have been audited
by KPMG Peat Marwick, LLP, independent certified public accountants, whose
report thereon appears elsewhere herein. The report of KPMG Peat Marwick LLP
refers to a change in the method of accounting for investments in 1994. These
statements should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Loans............................................... $48,323 $42,706 $42,413
Mortgage-backed securities.......................... 13,799 13,440 14,198
Investment securities and other..................... 8,088 7,537 8,242
------- ------- -------
Total interest income............................... 70,210 63,683 64,853
------- ------- -------
Interest expense:
Deposits (note 9)................................... 39,826 32,130 33,948
Federal Home Loan Bank borrowings................... 178 243 27
------- ------- -------
Total interest expense............................ 40,004 32,373 33,975
------- ------- -------
Net interest income............................... 30,206 31,310 30,878
Provision for loan losses (note 5).................... 950 1,129 1,300
------- ------- -------
Net interest income after provision for loan loss-
es................................................. 29,256 30,181 29,578
------- ------- -------
Other income:
Fees and service charges (note 5)................... 1,603 1,685 1,776
Net (loss) gain on sales of loans and securities
available for sale (note 3)........................ (340) 182 670
Net (loss) gain from real estate owned.............. (41) 8 228
Other............................................... 134 182 66
------- ------- -------
Total other income................................ 1,356 2,057 2,740
------- ------- -------
Operating expenses:
Compensation and employee benefits (note 11)........ 8,707 8,324 7,688
Occupancy (note 12)................................. 1,721 1,652 1,565
Equipment........................................... 879 958 967
Advertising......................................... 836 716 545
Federal insurance................................... 2,199 2,167 2,020
Data processing..................................... 737 715 764
General and administrative.......................... 2,927 2,572 3,077
------- ------- -------
Total operating expenses.......................... 18,006 17,104 16,626
------- ------- -------
Income before provision for income taxes.......... 12,606 15,134 15,692
Provision for income taxes (note 10).................. 4,659 5,405 5,556
------- ------- -------
Net income............................................ $ 7,947 $ 9,729 $10,136
======= ======= =======
</TABLE>
See accompanying Notes to consolidated financial statements.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly has no results of
operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
the Bank's interest-earning assets, such as loans and investments, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. The Bank also generates non-interest income such as income from
secondary marketing activities, loan servicing and other fees. The Bank's
operating expenses primarily consist of compensation and employee benefits,
general and administrative expenses, federal deposit insurance premiums,
occupancy and equipment expenses, advertising expenses and other operating
expenses. The Bank's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory agencies. The
Bank exceeded all of its regulatory capital requirements at December 31, 1995.
See "Regulatory Capital Compliance" for a discussion of the historical and pro
forma capital of the Bank and capital requirements. See also "Regulation--
Federal Savings Institution Regulation--Capital Requirements."
MANAGEMENT STRATEGY
The Bank has historically operated as a consumer-oriented federal savings
bank, with a focus on offering traditional savings deposit and loan products
to its local community. In recent years, the Bank's strategy has been to
maintain profitability while managing its mutual capital position and limiting
its credit and interest rate risk exposure. To accomplish these objectives,
the Bank has sought to: (1) control credit risk by emphasizing the origination
of single-family, owner-occupied residential mortgage loans and consumer
loans, consisting primarily of home equity loans and lines of credit; (2)
offer superior service and competitive rates to increase the core deposit base
consistent with its capital management goals; (3) invest funds in excess of
loan demand in mortgage-backed and investment securities; (4) reduce exposure
to interest rate risk by originating for the portfolio first mortgage loans
having terms to maturity of not more than 15 years and adjustable-rate
mortgage ("ARM") loans, selling fixed-rate 30-year mortgage loans, and
investing in shorter term or adjustable-rate mortgage-backed securities; and
(5) control operating expenses.
In recent years, most locally headquartered competitors in the Bank's market
area have been acquired by larger, regional financial institutions, resulting
in a reduced presence of local, community-based banks. Although such
acquisitions have generated increased competition from these larger, regional
institutions, the Bank believes that the absence of its former principal
competitors, the community-based institutions, has created significant
opportunities for Ocean Federal as the only remaining financial institution
headquartered in Ocean County. As a result, management plans to modify its
operating strategy to satisfy its perceived need within the market area for
additional customer products and services. By seeking to broaden the range of
its products and services offered, the Bank believes it will offset declining
margins in the market for one-to four-family mortgage loans which it has
experienced in recent years. Specifically, the Bank intends to: (1) maintain
its traditional community thrift orientation as a provider of residential
mortgage products; (2) diversify the products and services offered to possibly
include, among other things, trust services, nondeposit products, secured and
unsecured commercial lending and commercial deposit accounts in order to
increase its customer base within its existing market area; and (3) increase
the Bank's market share within its primary market area through the
establishment and/or acquisition of additional branch offices, or the
acquisition of other remaining financial institutions.
Management believes that the diversification of the Bank's loan products may
expose the Bank to a higher degree of credit risk than is involved in the
Bank's one- to four-family residential mortgage lending activity. As a
consequence of management's lending strategy, the Bank may, in future periods,
depending upon the current conditions, increase the level of its provision for
loan losses as well as its provision for losses on real estate owned over that
experienced in the Bank's most recent fiscal year.
41
<PAGE>
Maintaining Community Orientation. Management is seeking to maintain the
value of the Bank's existing franchise in its primary market area, which is
based in large part upon its long-standing reputation for a high level of
customer service in the delivery of traditional thrift products and services
and active community involvement. The Bank is the only remaining financial
institution headquartered in Ocean County. See "Business of the Bank--Market
Area and Competition." It intends to maintain its community orientation by
continuing to emphasize traditional deposit and loan products, primarily
single-family residential mortgages. Many of the Bank's directors and senior
officers belong to service or philanthropic organizations in the communities
served by the Bank which management believes contributes to the Bank's
community presence. The Bank also intends to enhance its community involvement
through the establishment of the Foundation. See "The Conversion--
Establishment of a Charitable Foundation," and "Management of the Bank--
Biographical Information."
Diversifying Products and Services Offered. The Bank intends to take
advantage of a perceived opportunity created by the reduced presence of
community-based financial institutions in its primary market area to expand
its services and products to customers and increase its market share. While
maintaining its emphasis on originating one- to four-family residential
mortgage loans, the Bank is seeking to broaden the range of products and
services it offers and may in the future offer products and services such as
trust services, nondeposit products, secured and unsecured commercial loans
and commercial deposit accounts. To facilitate this diversification, the Bank
may hire additional personnel experienced with such product lines. The Bank
also intends to consider the issuance of a proprietary credit card and other
consumer loan products. In this manner, the Bank is aiming to increase its
presence within its existing market area. See "Business of the Bank."
Increasing Market Share. Management is also seeking to increase the Bank's
market share in its primary market area through expanding the Bank's branch
network as well as through expanding the product and customer base. The Bank
has received approval to relocate its administrative offices to Toms River,
New Jersey, and to open three additional branch offices. In addition, the Bank
is currently negotiating a lease for a fourth new branch site in Toms River,
and will seek approval for that site if a lease can be successfully
negotiated. Each of these new branches would represent an expansion of the
Bank's existing market share. The Company and the Bank may use a portion of
the net Conversion proceeds to open additional branch offices or acquire other
financial institutions. However, neither the Company nor the Bank have any
additional pending agreements or understandings regarding acquisitions of any
specific financial institutions or branch offices. See "Use of Proceeds."
MANAGEMENT OF INTEREST RATE RISK
The principal objectives of the Bank's interest rate risk management
function are to evaluate the interest rate risk included in certain balance
sheet accounts; determine the level of risk appropriate given the Bank's
business focus, operating environment, capital and liquidity requirements and
performance objectives; and manage the risk consistent with Board approved
guidelines. Through such management, the Bank seeks to reduce the
vulnerability of its operations to changes in interest rates. The Bank
monitors its interest rate risk as such risk relates to its operating
strategies. The Bank's Board of Directors has established an Asset/Liability
Committee ("ALCO Committee") consisting of members of the Bank's management,
responsible for reviewing the Bank's asset/liability policies and interest
rate risk position. The ALCO Committee meets monthly and reports trends and
the Bank's interest rate risk position to the Board of Directors on a
quarterly basis. The extent of the movement of interest rates, higher or
lower, is an uncertainty that could have a negative impact on the earnings of
the Bank. See "Risk Factors--Potential Impact of Changes in Interest Rates."
In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (i) emphasizing the origination for portfolio of fixed-
rate mortgage loans having terms to maturity of not more than fifteen years,
adjustable-rate loans, and consumer loans consisting primarily of home equity
loans and lines of credit; (ii) selling substantially all 30-year fixed-rate
mortgage loans originated to the secondary market; (iii) holding primarily
short-term and/or adjustable-rate mortgage-backed and investment securities;
and (iv) attempting to reduce the overall interest rate sensitivity of
liabilities by emphasizing core and longer-term deposits.
42
<PAGE>
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
during a period of rising interest rates, an institution with a negative gap
position generally would not be in as favorable a position, compared to an
institution with a positive gap, to invest in higher yielding assets. This may
result in the yield on the institution's assets increasing at a slower rate
than the increase in its cost of interest-bearing liabilities. Conversely,
during a period of falling interest rates, an institution with a negative gap
might experience a repricing of it assets at a slower rate than its interest-
bearing liabilities which, consequently, may result in its net interest income
growing at a faster rate than an institution with a positive gap position.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1995, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amount
of assets and liabilities shown which reprice or mature during a particular
period were determined in accordance with the earlier of term to repricing or
the contractual maturity of the asset or liability. It is intended to provide
an approximation of the projected repricing of assets and liabilities at
December 31, 1995, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a three month period and
subsequent selected time intervals. The loan amounts in the table reflect
principal balances expected to be redeployed and/or repriced as a result of
contractual amortization and anticipated prepayments of adjustable-rate loans
and fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans. For loans on residential properties, adjustable-rate
loans and fixed-rate loans are projected to prepay at rates between 9.0% and
28.4% annually. Mortgage-backed securities are projected to prepay at rates
between 13.0% and 25.0% annually. Passbook accounts and negotiable order of
withdrawal ("NOW") accounts are assumed to decay at 9.53%, 8.62%, 14.85%,
36.92%, 16.58%, 11.68% and 1.82% and money market savings accounts are assumed
to decay at 15.90%, 13.38%, 20.71%, 37.50%, 9.38%, 3.03% and .10% for the
periods of three months or less, three to six months, six to 12 months, one to
three years, three to five years, five to ten years and more than ten years,
respectively. Prepayment rates can have a significant impact on the Bank's
estimated gap. There can be no assurance that projected prepayment rates for
loans and mortgage-backed securities will be achieved or that projected decay
rates will be realized. See "Business of the Bank--Lending Activities," "--
Investment Activities" and "--Sources of Funds."
43
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
-----------------------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN MORE THAN
3 MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 3 YEARS TO 5 YEARS TO MORE THAN
OR LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS TOTAL
-------- ----------- ----------- --------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS(1):
Interest-earning
deposits and short-term
investments............ $ 6,408 $ -- $ -- $ -- $ -- $ -- $ -- $ 6,408
Investment securities.. 10,000 100 708 20,410 64,528 19,000 135 114,881
Loans receivable(2).... 104,052 76,925 128,467 150,729 85,696 64,566 14,534 624,969
Mortgage-backed
securities............. 60,565 31,713 111,721 41,659 18,601 854 -- 265,113
FHLB stock............. 7,723 -- -- -- -- -- -- 7,723
-------- --------- -------- -------- -------- ------- ------- ----------
Total interest-earning
assets................ 188,748 108,738 240,896 212,798 168,825 84,420 14,669 1,019,094
-------- --------- -------- -------- -------- ------- ------- ----------
INTEREST-BEARING
LIABILITIES:
Money market deposit
accounts............... 11,224 9,440 14,613 26,459 6,615 2,136 69 70,556
Passbook accounts...... 16,747 15,151 26,109 64,903 29,135 20,528 3,204 175,777
NOW accounts........... 6,727 6,038 10,405 25,866 11,611 8,181 1,277 70,105
Certificate accounts... 108,131 132,912 158,680 137,363 39,314 28,815 -- 605,215
FHLB borrowings........ 10,400 -- -- -- -- -- -- 10,400
-------- --------- -------- -------- -------- ------- ------- ----------
Total interest-bearing
liabilities........... 153,229 163,541 209,807 254,591 86,675 59,660 4,550 932,053
-------- --------- -------- -------- -------- ------- ------- ----------
Interest sensitivity
gap(3)................. $ 35,519 $ (54,803) $ 31,089 $(41,793) $ 82,150 $24,760 $10,119 $ 87,041
======== ========= ======== ======== ======== ======= ======= ==========
Cumulative interest
sensitivity gap........ $ 35,519 $ (19,284) $ 11,805 $(29,988) $ 52,162 $76,922 $87,041
======== ========= ======== ======== ======== ======= =======
Cumulative interest
sensitivity gap as a
percent of total
assets................. 3.43% (1.86%) 1.14% (2.89%) 5.03% 7.42% 8.40%
Cumulative interest-
earning assets as a
percent of cumulative
interest-bearing
liabilities............ 123.18% 93.91% 102.24% 96.16% 106.01% 108.29% 109.34%
</TABLE>
- ----
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) For purposes of the gap analysis, loans receivable includes non-performing
loans gross of the allowance for loan losses, undisbursed loan funds,
unamortized discounts and deferred loan fees.
(3) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
44
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates both on a short-
term basis and over the life of the asset. Further, in the event of a change
in interest rates, prepayment and decay rates would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their adjustable-rate loans may be
impaired in the event of an interest rate increase.
Net Portfolio Value. Another method of analyzing an institution's exposure
to interest rate risk is by measuring the change in the institution's net
portfolio value ("NPV") under various interest rate scenarios. NPV is the
difference between the net present value of assets, liabilities and off-
balance sheet contracts. The NPV ratio, in any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in
the same scenario. The Sensitivity Measure is the decline in the NPV ratio, in
basis points, caused by a 2% increase or decrease in rates, whichever produces
a larger decline. The higher an institution's Sensitivity Measure is, the
greater its exposure to interest rate risk is considered to be. The Bank's
interest rate sensitivity is monitored by management through the use of
interest rate risk ("IRR") reports which are generated by an external
servicer. The Bank measures its IRR by modeling the change in NPV over a range
of interest rate scenarios. The OTS also produces a similar analysis using its
own model, based upon data submitted on the Bank's quarterly Thrift Financial
Reports, the results of which may vary from the results provided by the Bank's
external servicer. See "Regulation--Federal Savings Institution Regulation."
The following table sets forth the Bank's NPV as of December 31, 1995, as
calculated by the OTS.
<TABLE>
<CAPTION>
NPV AS %
OF PORTFOLIO
NET PORTFOLIO VALUE VALUE OF ASSETS
------------------------------------- -----------------------
CHANGE IN
INTEREST RATES IN
BASIS POINTS NPV %
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE (1)
- ----------------- -------- -------- -------- ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $ 67,219 $(53,427) (44.3)% 6.72% (40.3)%
300 84,669 (35,977) (29.8) 8.28 (26.4)
200 100,078 (20,568) (17.0) 9.61 (14.6)
100 112,378 (8,268) (6.9) 10.61 (5.7)
Static 120,646 -- -- 11.25 --
(100) 126,911 6,265 5.2 11.70 4.0
(200) 130,560 9,914 8.2 11.92 6.0
(300) 135,422 14,776 12.2 12.23 8.7
(400) 143,204 22,558 18.7 12.75 13.3
</TABLE>
- --------
(1) Based on the portfolio value of the Bank's assets assuming no change in
interest rates.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule which requires an institution whose sensitivity measure exceeds
2% to deduct an interest rate risk component in calculating its total capital
for purposes of the risk-based capital requirement. As of December 31, 1995,
the last date this information was available, the Bank's NPV, as measured by
the OTS, was $120.6 million, or 11.25% of the market value of assets.
Following a 200 basis point increase in interest rates, the Bank's "post-
shock" NPV was $100.1 million, or 9.61% of the market value of assets. The
change in the NPV ratio or the Bank's Sensitivity Measure was negative 1.64%.
Under OTS capital requirements, which have not yet been fully implemented, the
decline in the NPV ratio at December 31, 1995 would reflect a below normal
interest rate risk because it is less than 2%. If such OTS requirement had
been implemented, the Bank's Sensitivity Measure would not have resulted in an
increase in the Bank's risk-based capital requirement because its sensitivity
measure is below the threshold at which the Bank could be required to hold
additional risk-based capital. See "Regulation--Federal Savings Institution
Regulation."
45
<PAGE>
As is the case with the gap table, certain shortcomings are inherent in the
methodology used in the NPV IRR measurements. Modelling changes in NPV
requires the making of certain assumptions which may tend to oversimplify the
manner in which actual yields and costs respond to changes in market interest
rates. First, the models assume that the composition of the Bank's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured. Second, the models assume that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets
and liabilities. Third, the model does not take into account the Bank's
business or strategic plans. Accordingly, although the NPV measurements do
provide an indication of the Bank's IRR exposure at a particular point in
time, such measurements are not intended to provide a precise forecast of the
effect of changes in market interest rates on the Bank's net interest income
and can be expected to differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
46
<PAGE>
Average Balance Sheet. The following table sets forth certain information
relating to the Bank at December 31, 1995 and for each of the years ended
December 31, 1995, 1994 and 1993. The yields and costs are derived by dividing
income or expense by the average balance of assets or liabilities,
respectively, for the periods shown except where noted otherwise. Average
balances are derived from average month-end balances. Management does not
believe that the use of average monthly balances instead of average daily
balances has caused any material differences in the information presented. The
yields and costs include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995 1995 1994 1993
------------------ -------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ------ -------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Interest-earning
deposits and short-
term investments... $ 6,408 4.25% $ 5,245 $ 331 6.31% $ 1,322 $ 56 4.24% $ 5,162 $ 149 2.89%
Investment
securities(1)...... 114,881 6.34 126,792 7,166 5.65 127,762 6,933 5.43 131,786 7,511 5.70
Loans receivable,
net (2)............ 614,590 7.82 612,431 48,323 7.89 559,862 42,706 7.63 524,172 42,413 8.09
Mortgage-backed
securities(3)...... 265,113 6.81 214,348 13,799 6.44 241,944 13,440 5.56 229,676 14,198 6.18
FHLB stock......... 7,723 6.90 7,679 591 7.70 7,216 548 7.59 6,580 582 8.84
---------- -------- ------- -------- ------- -------- -------
Total interest-
earning assets... 1,008,715 7.16 966,495 70,210 7.26 938,106 63,683 6.79 897,376 64,853 7.23
---- ------- ---- ------- ---- ------- ----
Non-interest-earning
assets.............. 27,730 22,212 18,282 22,965
---------- -------- -------- --------
Total assets...... $1,036,445 $988,707 $956,388 $920,341
========== ======== ======== ========
LIABILITIES AND
EQUITY:
Interest-bearing
liabilities:
Money market
deposit accounts... $ 70,556 2.93% $ 68,987 $ 2,083 3.02% $ 78,288 $ 1,899 2.43% $ 82,620 $ 2,228 2.70%
Savings accounts... 175,777 2.53 178,973 4,537 2.54 206,131 5,246 2.54 187,743 5,178 2.76
NOW accounts....... 70,105 2.14 69,330 1,483 2.14 69,934 1,440 2.06 59,672 1,347 2.26
Time deposits...... 605,215 5.70 574,844 31,723 5.52 511,634 23,545 4.60 512,323 25,195 4.92
---------- -------- ------- -------- ------- -------- -------
Total............. 921,653 4.61 892,134 39,826 4.46 865,987 32,130 3.71 842,358 33,948 4.03
FHLB borrowings.... 10,400 5.94 2,933 178 6.07 5,006 243 4.85 893 27 3.02
---------- -------- ------- -------- ------- -------- -------
Total interest-
bearing
liabilities...... 932,053 4.62 895,067 40,004 4.47 870,993 32,373 3.72 843,251 33,975 4.03
---------- ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Non-interest-bearing
liabilities......... 12,041 9,457 7,805 8,852
---------- -------- -------- --------
Total liabilities. 944,094 904,524 878,798 852,103
Retained Earnings... 92,351 84,183 77,590 68,238
---------- -------- -------- --------
Total liabilities
and equity....... $1,036,445 $988,707 $956,388 $920,341
========== ======== ======== ========
Net interest
income.............. $30,206 $31,310 $30,878
======= ======= =======
Net interest rate
spread(4)........... 2.54% 2.79% 3.07% 3.20%
==== ==== ==== ====
Net interest
margin(5)........... 2.89% 3.13% 3.34% 3.44%
==== ==== ==== ====
Ratio of interest-
earning assets to
interest-bearing
liabilities......... 108.23% 107.98% 107.71% 106.42%
========== ======== ======== ========
</TABLE>
- ----
(1) Includes investment securities available for sale.
(2) Amount is net of deferred loan fees, undisbursed loan funds, discounts and
premiums and estimated loan loss allowances and includes loans held for
sale and non-performing loans.
(3) Includes mortgage-backed securities available for sale.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
47
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated proportionately to the changes due to volume and the
changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1993
------------------------------- ------------------------------
INCREASE
INCREASE (DECREASE) (DECREASE)
DUE TO DUE TO
-------------------- -------------------
VOLUME RATE NET VOLUME RATE NET
-------------------- --------- ------------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning
deposits and short-
term investments..... $ 236 $ 39 $ 275 $ (143) $ 50 $ (93)
Investment
securities........... (52) 285 233 (227) (351) (578)
Loans receivable...... 4,121 1,496 5,617 2,788 (2,495) 293
Mortgage-backed
securities........... (1,633) 1,992 359 726 (1,484) (758)
FHLB stock............ 35 8 43 53 (87) (34)
--------- --------- --------- -------- --------- ---------
Total interest-
earning assets..... 2,707 3,820 6,527 3,197 (4,367) (1,170)
--------- --------- --------- -------- --------- ---------
INTEREST-BEARING
LIABILITIES:
Money market deposit
accounts............. (243) 427 184 (113) (216) (329)
Savings accounts...... (709) -- (709) 493 (425) 68
NOW accounts.......... (13) 56 43 219 (126) 93
Time deposits......... 3,123 5,055 8,178 (33) (1,617) (1,650)
Total............... 2,158 5,538 7,696 566 (2,384) (1,818)
FHLB borrowings....... (116) 51 (65) 191 25 216
--------- --------- --------- -------- --------- ---------
Total interest-
bearing
liabilities........ 2,042 5,589 7,631 757 (2,359) (1,602)
--------- --------- --------- -------- --------- ---------
Net change in net
interest income........ $ 665 $ (1,769) $ (1,104) $ 2,440 $ (2,008) $ 432
========= ========= ========= ======== ========= =========
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND DECEMBER 31, 1994
Total assets as December 31, 1995, were $1.04 billion, an increase of $64.8
million, or 6.7%, compared to $971.7 million at December 31, 1994. This growth
was primarily due to an increase in one- to four-family residential mortgage
loans, which caused loans receivable, net, to increase by $20.4 million to a
balance of $612.7 million at December 31, 1995, compared to a balance of
$592.3 million at December 31, 1994. On November 15, 1995, the Financial
Accounting Standards Board ("FASB") issued its Special Report for SFAS No.
115, "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities," which provided institutions a
limited opportunity to reassess the appropriateness of the classification of
all securities held at that time and account for any resulting
reclassification at fair value. As a result of that Special Report, in
December 1995, the Bank reclassified all investment and mortgage-backed
securities from held-to-maturity to available-for-sale. Subsequent to this
reclassification, but prior to year-end, the Bank sold $63.7 million in low-
yielding U.S. agency obligations, incurring a loss of $587,000. The sale
proceeds were reinvested in callable U.S. government agency securities and
either 1-year adjustable-rate or 5- to 10-year fixed-rate mortgage-backed
securities. Under the provisions of FASB Statement No. 115, securities
categorized as available-for-sale are reported at fair value, with unrealized
gains or losses reported as a separate component of equity. At December 31,
1995, the fair value of the Bank's investment and mortgage-backed securities
available-for-sale exceeded the related amortized cost by $3.2 million. The
net result of the security portfolio restructuring was to decrease total
investment securities by $12.6 million, or 9.9%, to a balance of
48
<PAGE>
$114.9 million at December 31, 1995, compared to a balance of $127.5 million
at December 31, 1994 and increase total mortgage-backed securities by $40.5
million to $265.1 million at December 31, 1995, from $224.6 million at
December 31, 1994. Cash and due from banks was $8.0 million at December 31,
1995, an increase of $7.8 million from $239,000 at December 31, 1994. The
increase in cash and due from banks was a result of the timing of operating
and investing cash flows. Premises and equipment increased by $3.3 million, or
76.5%, to $7.6 million at December 31, 1995, from $4.3 million at December 31,
1994, as a result of the purchase in July 1995 of land and a building, which
upon renovation, will be the site of both a new branch office and the Bank's
new administrative facility. The renovation is due to be completed in early
1997. Total deposits at December 31, 1995, were $926.6 million, an increase of
$59.1 million, or 6.8%, compared to $867.4 million at December 31, 1994. The
increase was primarily due to an increase of $71.9 million, or 13.5%, in time
deposits to $605.2 million at December 31, 1995, from $533.3 million at
December 31, 1994, which reflected a shift in the composition of the Bank's
interest-bearing liabilities from core savings accounts into higher-yielding
certificates of deposit. Retained earnings at December 31, 1995, were $92.4
million, compared to $82.3 million at December 31, 1994 as a result of net
income of $7.9 million for the year ended December 31, 1995 combined with the
recognition as a component of retained earnings of $2.1 million of unrealized
gain (net of tax) on securities available-for-sale.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
GENERAL
Net income decreased $1.8 million, or 18.3%, to $7.9 million for the year
ended December 31, 1995, from $9.7 million for the year ended December 31,
1994. The decrease was due primarily to a decline in net interest income,
which is the principal source of income for the Bank and represents the
difference between total interest and fees earned on loans, mortgage-backed
securities and other investments and total interest paid on deposits and
borrowings. The decline in net interest income resulted from a decrease in the
interest rate spread to 2.79% for the year ended December 31, 1995, from 3.07%
for the year ended December 31, 1994. The shift in the composition of the
Bank's interest-bearing liabilities from core savings accounts to higher
yielding certificates of deposit was the primary reason for this decline.
Additionally, the Bank recognized a loss of $587,000 in 1995 on the sale of
investment securities available for sale. Profitability further declined as a
result of a decrease in other income (net of the $587,000 loss on the sale of
investment securities) and increased operating expenses, partly offset by
decreases in the provision for loan losses and the provision for income taxes.
INTEREST INCOME
Interest income for the year ended December 31, 1995 was $70.2 million,
compared to $63.7 million for the year ended December 31, 1994, an increase of
$6.5 million, or 10.2%. Increased interest income on loans accounted for
substantially all of this increase. The increase in interest income on loans
was a result of growth in the average balance of loans outstanding combined
with an increase in the average yield. The average balance of loans receivable
increased $52.6 million, while the yield on such loans increased by 26 basis
points to 7.89% for 1995, from 7.63% for 1994. The growth in loans was
attributable to an increase in the origination of ARM loans in the first half
of 1995, which the Bank maintains in portfolio. The volume of originations of
ARM loans declined in the second half of 1995 as market interest rates
declined and the demand for fixed-rate financing increased. As a result, the
Bank experienced a slight decline in loans receivable during the second half
of 1995. The increase in average yield for 1995 over 1994 was a result of the
generally higher interest rate environment, causing ARM loans to reprice
upward.
Interest income on mortgage-backed securities increased $359,000 for 1995,
compared to 1994. The average balance of mortgage-backed securities declined
by $27.6 million for 1995, compared to 1994, as a result of principal
repayments and limited purchase activity due to an increased demand for loans.
The yield on this portfolio, however, increased 88 basis points due to the
repricing of adjustable-rate securities. Interest income on investment
securities increased $233,000 for 1995, compared to 1994, primarily due to an
increase in the average yield of 22 basis points.
49
<PAGE>
INTEREST EXPENSE
Interest expense for the year ended December 31, 1995 was $40.0 million,
compared to $32.4 million for the year ended December 31, 1994, an increase of
$7.6 million, or 23.6%. The increase in interest expense was the result of a
$26.1 million increase in the average balance of interest-bearing deposits and
an increase in the average cost of deposits to 4.46% for 1995, from 3.71% for
1994. The increase in average cost was primarily due to a shift in the
composition of deposit accounts from lower yielding core accounts into higher
yielding certificates of deposit. Average balances on money market deposit and
savings accounts decreased by $9.3 million and $27.2 million, respectively,
for 1995, compared to 1994, while the average balance of time deposits
increased by $63.2 million from 1994 to 1995.
PROVISION FOR LOAN LOSSES
During the year ended December 31, 1995, the Bank's provision for loan
losses was $950,000 compared to $1.1 million for the year ended December 31,
1994, a decrease of $179,000. The decrease was partly due to the decline in
nonperforming loans, which decreased by $2.2 million to $8.7 million at
December 31, 1995, from $10.9 million at December 31, 1994. Management of the
Bank is responsible for the determination of the level of the allowance for
loan losses. The allowance for loan losses is maintained at a level sufficient
to provide for estimated losses based on evaluating known and inherent risks
in the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, actual loan loss experience,
current and anticipated economic conditions, detailed analysis of individual
loans for which full collectibility may not be assured, and determination of
the existence and realizable value of the collateral and guarantees securing
the loan. Additions to this allowance are charged to earnings. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to provide additions to the allowance based upon judgments
different from management. Although management uses the best information
available, future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions beyond the Bank's
control. See "Business of the Bank--Lending Activities--Nonperforming Assets
and Delinquencies" and "--Lending Activities--Allowance for Loan Losses."
OTHER INCOME
Other income decreased to $1.4 million for the year ended December 31, 1995,
from $2.1 million for the year ended December 31, 1994. The decrease was
primarily due to the recognition of a $587,000 loss in 1995 on the sale of
investment securities available for sale. Additionally, fees and service
charges, which consist of deposit product fees, loan servicing fees and other
loan fees, declined by $82,000 in 1995 as compared to 1994. The decrease in
this category can be attributed to a $112,000 decrease in mortgage loan
servicing income.
OPERATING EXPENSES
Operating expenses increased to $18.0 million for the year ended December
31, 1995, from $17.1 million for the year ended December 31, 1994.
Compensation and employee benefits increased $383,000, or 4.6%, primarily due
to annual salary increases. Advertising expense increased by $120,000 to
$836,000 for 1995, from $716,000 for 1994, as a result of increased
advertising to maintain loan volume and market presence. General and
administrative expenses increased $355,000, or 13.8%, to $2.9 million for
1995, compared to 1994. The Bank expects that salary and benefits expense may
increase after the Conversion, primarily as a result of the adoption of
various employee benefit plans and compensation adjustments contemplated in
connection with the Conversion. In this regard, the proposed ESOP, which
intends to purchase 8% of the Common Stock sold in the Offering, and the Stock
Programs which, if implemented, would purchase an amount of Common Stock equal
to 4% of the Common Stock sold in the Offering, may result in increased salary
and benefits expense as interest on and amortization of the ESOP loan and
amortization of the Stock Program awards will be reflected as compensation
expense. See "Management of the Bank--Benefits--Employee Stock Ownership Plan
and Trust." In addition, the Bank expects operating expenses to increase in
future periods as a result of its current renovation
50
<PAGE>
of a new administrative office and the opening of at least three new branch
offices in 1996 and early 1997. See "Use of Proceeds" and "Business of the
Bank--Properties."
PROVISION FOR INCOME TAXES
Income tax expense was $4.7 million for the year ended December 31, 1995,
compared to $5.4 million for the year ended December 31, 1994. The decrease in
the provision for income taxes was primarily the result of the decrease in
earnings before income taxes. The effective tax rate for 1995 was 37.0%, an
increase of 1.3% over the 35.7% effective tax rate for 1994. The increase in
the effective tax rate for 1995 can be attributed to the non-deductibility of
certain expenses incurred by the Bank.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1994 AND DECEMBER 31, 1993
Total assets at December 31, 1994, were $971.7 million, an increase of $34.4
million or 3.7%, compared to $937.2 million at December 31, 1993. This growth
was primarily due to an increase in one- to four-family residential mortgage
loans, which caused loans receivable, net, to increase by $52.4 million to a
balance of $592.3 million at December 31, 1994, compared to a balance of
$539.9 million at December 31, 1993. This increase was partially offset by a
decrease in mortgage-backed securities of $16.6 million, to $224.6 million at
December 31, 1994, from $241.2 million at December 31, 1993. Total liabilities
at December 31, 1994 were $889.3 million, an increase of $24.7 million, or
2.9%, compared to $864.6 million at December 31, 1993. The increase was
primarily attributable to an increase in certificate of deposit accounts to
$25.9 million to $533.3 million at December 31, 1994, from $507.4 million at
December 31, 1993. Retained earnings at December 31, 1994, were $82.3 million,
an increase of $9.7 million from December 31, 1993. The increase is
attributable to net income for the period.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND
DECEMBER 31, 1993
GENERAL
Net income decreased $407,000, or 4.0%, to $9.7 million for the year ended
December 31, 1994, from $10.1 million for the year ended December 31, 1993.
The decrease was primarily due to a decline in total other income, which was
primarily attributable to reduced gains of $708,000 on the sale of mortgage
loans and on the sale of real estate owned properties in 1994 compared to
1993. An increase in total operating expenses in 1994 of $478,000 also
contributed to the decline, which was partly offset by an increase in net
interest income and decreases in the provisions for loan losses and income
taxes.
INTEREST INCOME
Interest income for the year ended December 31, 1994 was $63.7 million,
compared to $64.9 million for the year ended December 31, 1993, a decrease of
$1.2 million, or 1.8%. The decrease in interest income was the result of a
decline in the average yield on interest-earning assets of 44 basis points, to
6.79% in 1994, from 7.23% in 1993, partly offset by growth in average
interest-earning asset balances. Most of the increase in the average balance
of interest-earning assets was attributable to an increase in the balance of
loans receivable. The average balance of loans receivable increased by $35.7
million for 1994 over 1993. The average yield on loans receivable decreased 46
basis points, to 7.63% in 1994, from 8.09% in 1993. The decrease was due to
the high levels of prepayments on higher rate mortgage loans during late 1993
and the effects of lower interest rates on new loan originations.
The average balance of mortgage-backed securities increased by $12.3 million
for 1994, compared to 1993; however, average yields on mortgage-backed
securities declined 62 basis points to 5.56% in 1994 from 6.18% in 1993. The
decline in average yield was largely due to the purchase of adjustable-rate
securities at discounted first year yields, which adjust to market rates in
succeeding years. Also, high coupon securities were prepaid as a result of the
low interest rate environment.
51
<PAGE>
INTEREST EXPENSE
Interest expense for the year ended December 31, 1994 was $32.4 million,
compared to $34.0 million for the year ended December 31, 1993, a decrease of
$1.6 million, or 4.7%. The decrease is primarily due to the decrease in the
average cost of deposits to 3.71% for 1994, from 4.03% for 1993, partly offset
by a $23.6 million increase in the average balance of deposits outstanding.
Part of the decrease in average cost can be attributed to a shift in the
composition of deposits from certificate accounts to core accounts, which
represented 40.9% of average deposit balances in 1994, compared to 39.2% in
1993. The decline in the average cost of deposits further reflected generally
lower rates paid for new deposits and the maturities of higher, fixed-rate
term certificates of deposits issued in prior years. Interest on Federal Home
Loan Bank borrowings increased to $243,000 for the year ended December 31,
1994, from $27,000 for the year ended December 31, 1993, an increase of
$216,000, which reflected increases in both the average balance outstanding
and the average cost incurred.
PROVISION FOR LOAN LOSSES
During the year ended December 31, 1994, the Bank's provision for loan
losses was $1.1 million, compared to $1.3 million for the year ended December
31, 1993, a decrease of $171,000. The reduction in the provision was based on
improved charge-off experience, as well as management's review and evaluation
of the loan portfolio, an asset classification review, the stabilization of
real estate values in New Jersey and the continued improvement in the economy.
OTHER INCOME
Other income decreased to $2.1 million for the year ended December 31, 1994,
from $2.7 million for the year ended December 31, 1993. The decrease was
primarily due to a $488,000 reduction in secondary market income due to a
decrease in loan sales. As a result of the generally high level of refinance
activity in 1993, sales of 30-year fixed-rate loans decreased to $16.8 million
in 1994, a decline of $24.3 million, from $41.1 million in 1993. Additionally,
the net gain from real estate owned decreased to $8,000 for the year ended
December 31, 1994, from $228,000 for the year ended December 31, 1993, as
actual sales of real estate owned declined to $4.6 million in 1994 from $6.36
million in 1993.
OPERATING EXPENSES
Operating expenses increased $478,000, or 2.9%, to $17.1 million for the
year ended December 31, 1994, from $16.6 million for the year ended December
31, 1993. The increase in compensation and employee benefits expenses of
$636,000, or 8.3%, partially reflected the decline in mortgage lending
originations as a smaller proportion of these expenses were offset through the
recognition of fee income. Advertising expense increased $171,000 to $716,000
for the year ended December 31, 1994, from $545,000 for the year ended
December 31, 1993. The increase was primarily the result of a greater focus on
deposit generation in addition to mortgage volume. The decline in general and
administrative expense to $3.3 million for the year ended December 31, 1994
from $3.8 million for the year ended December 31, 1993 was primarily related
to the decline in mortgage loan production, as loan related expenses,
including appraisal fees and credit reports, declined by $483,000 in 1994,
compared to 1993.
PROVISION FOR INCOME TAXES
The provision for income taxes totalled $5.4 million for the year ended
December 31, 1994 compared to $5.6 million for the year ended December 31,
1993, a decrease of $151,000. The decrease is primarily due to lower income
before taxes as the effective tax rate remained relatively unchanged at 35.7%
in 1994, compared to 35.4% in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, FHLB borrowings and, to a lesser extent, investment
maturities and proceeds from the sale of loans. While scheduled
52
<PAGE>
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates,
economic conditions, and competition. The Bank's most liquid assets are cash
and short-term investments. The levels of these assets are dependent on the
Bank's operating, financing, lending and investing activities during any given
period. At December 31, 1995, cash and investment securities maturing within
one year totalled $18.8 million. See "Use of Proceeds." The Bank has other
sources of liquidity if a need for additional funds arises, including an
overnight line of credit and advances from the FHLB. At December 31, 1995, the
Bank had $10.4 million in overnight borrowings outstanding from the FHLB,
representing a decrease from $16.3 million at December 31, 1994. The Bank
utilizes the overnight line from time to time to fund short-term liquidity
needs.
The Bank has continued to maintain the required minimum levels of liquid
assets as defined by OTS regulations. This requirement, which may be varied at
the direction of the OTS depending upon economic conditions and deposit flows,
is based upon a percentage of deposits and short-term borrowings. The Bank's
liquidity ratio at December 31, 1995, was 17.2%, compared to its required
liquidity ratio of 5.0%. The Bank's liquidity ratio has historically exceeded
regulatory requirements. See the Consolidated Statements of Cash Flows in the
Consolidated Financial Statements contained elsewhere herein.
At December 31, 1995, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $90.3 million, or 8.7% of total adjusted
assets, which is above the required level of $15.5 million or 1.5%; core
capital of $90.3 million, or 8.7% of total adjusted assets, which is above the
required level of $31.0 million or 3.0%, and risk-based capital of $95.7
million, or 21.3% of risk-weighted assets, which is above the required level
of $35.9 million or 8.0%. See "Regulatory Capital Compliance."
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. As a result,
interest rates have a greater impact on the Bank's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and
services.
IMPACT OF NEW ACCOUNTING STANDARDS
In November 1993, the American Institute of Certified Public Accountants
issued SOP 93-6, "Employers' Accounting for Employee Stock Ownership Plans"
which is effective for fiscal years beginning after December 15, 1993. SOP 93-
6 will apply to the Bank upon completion of the Conversion and establishment
of the ESOP. SOP 93-6 will, among other things, change the measurement of
compensation expense recorded by employers for leveraged ESOPs, from the cost
of ESOP shares to the fair value of ESOP shares. Under SOP 93-6, the Company
will recognize compensation expense equal to the fair value of the ESOP shares
during the periods in which they become committed to be released. To the
extent that the fair value of the Bank's ESOP shares differs from the cost of
such shares, this differential will be charged or credited to equity.
Employers with internally leveraged ESOPs, such as the Company, will not
report the loan receivable from the ESOP as an asset and will not report the
ESOP debt from the employer as a liability. For information on the pro forma
effects of the ESOP on the Bank's results of operations and stockholders
equity, see "Pro Forma Data." See "Management of the Bank--Benefits--Employee
Stock Ownership Plan and Trust."
In May 1993, FASB issued Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). SFAS 115 generally requires that debt and equity securities that have
readily determinable fair values be carried at fair value unless they are
classified as held to maturity. Securities can be classified as held to
maturity and carried at amortized cost only if the reporting entity
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<PAGE>
has a positive intent and ability to hold those securities to maturity. If not
classified as held to maturity, such securities must be classified as trading
securities or securities available for sale. Unrealized holding gains or
losses for securities available for sale are to be excluded from earnings and
reported as a net amount as a separate component of stockholders' equity.
Unrealized holding gains and losses for trading securities are to be included
in earnings. The statement's effective date was for fiscal years beginning
after December 15, 1993. SFAS 115 was adopted on January 1, 1994 by the Bank.
On November 28, 1994, the OTS changed its policy relating to the treatment
of unrealized gains and losses on securities available for sale in accordance
with SFAS 115. Under the new policy, unrealized gains and losses are excluded
for purposes of calculating regulatory capital. This change in OTS policy did
not have a material impact on the Bank's level of regulatory capital.
On November 15, 1995, the FASB issued its Special Report for SFAS No. 115,
"A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." The Special Report provides that,
concurrent with the initial adoption of the implementation guidance but no
later than December 31, 1995, an enterprise may reassess the appropriateness
of the classification of all securities held at that time and account for any
resulting reclassification at fair value. Reclassification from the held to
maturity category that results from this one-time reassessment (which must be
made on a single date) will not call into question the intent of an enterprise
to hold debt securities to maturity in the future. In accordance with such
Special Report, in December, 1995, the Bank reclassified all of its investment
and mortgage-backed securities included in its held to maturity portfolio,
totalling $382.7 million, to its available for sale portfolio. Prior to year-
end, the Bank subsequently sold $63.7 million in low-yielding U.S. agency
obligations, recognizing a loss of $587,000. At December 31, 1995, the fair
value of the Bank's investment and mortgage-backed securities available for
sale exceeded the related amortized cost by $3.2 million.
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of." SFASNo. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. However,SFAS No. 121 does not apply to financial
instruments, core deposit intangibles, mortgage and other servicing rights or
deferred tax assets. SFAS No. 121 is effective for fiscal years beginning
after December 15, 1995. Management believes that the adoption of this
Statement will not have a material impact on the earnings or the financial
statements of the Bank.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65," which requires that
a mortgage banking enterprise record as a separate asset, rights to service
mortgage loans for others, however those servicing rights are acquired. In
circumstances where mortgage loans are originated, separate asset rights to
service mortgage loans are only recorded when the enterprise intends to sell
or securitize such loans and retain servicing. SFAS No. 122 will be applied
prospectively beginning January 1, 1996. Adoption of this new statement is not
expected to have a material impact on the Bank's financial position or results
of operations.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123").
This statement establishes financial accounting standards for stock-based
employee compensation plans. SFAS 123 permits the Bank to choose either a new
fair value based method or the current APB Opinion 25 intrinsic value based
method of accounting for its stock-based compensation arrangements. SFAS 123
requires pro forma disclosures of net earnings and earnings per share computed
as if the fair value based method had been applied in financial statements of
companies that continue to follow current practice in accounting for such
arrangements under APB Opinion 25. SFAS 123 applies to all stock-based
employee compensation plans in which an employer grants shares of its stock or
other equity instruments to employees except for employee stock ownership
plans. SFAS 123 also applies to plans in which the employer incurs liabilities
to employees in amounts based on the price of the employer's stock, (e.g.
stock option plans, stock purchase plans, restricted stock plans, and stock
appreciation rights). The statement also
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<PAGE>
specifies the accounting for transactions in which a company issues stock
options or other equity instruments for services provided by nonemployees or
to acquire goods or services from outside suppliers or vendors. The
recognition provisions of SFAS 123 for companies choosing to adopt the new
fair value based method of accounting for stock-based compensation
arrangements may be adopted immediately and will apply to all transactions
entered into in fiscal years that begin after December 15, 1995. The
disclosure provisions of SFAS 123 are effective for fiscal years beginning
after December 15, 1995, however disclosure of the pro forma net earnings and
earnings per share, as if the fair value method of accounting for stock-based
compensation had been elected, is required for all awards granted in fiscal
years beginning after December 31, 1994. Any effect that this statement will
have on the Bank will be applicable upon the consummation of the Conversion.
In December 1994, the American Institute of Certified Public Accountants
issued SOP 94-6, "Disclosure of Certain Significant Risks and Uncertainties."
SOP 94-6 supplements disclosure requirements for risks and uncertainties
existing as of the date of the financial statements in the following areas:
(a) nature of operations, (b) use of estimates in the preparation of financial
statements, (c) certain significant estimates and (d) current vulnerability
due to certain concentrations. SOP 94-6 is effective for financial statements
issued for fiscal years ending after December 15, 1995, and for financial
statements for interim periods in fiscal years subsequent to the year for
which this SOP is to be first applied. The Bank implemented the disclosure
requirements of SOP 94-6 in the financial statements as of and for the year
ended December 31, 1995.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business has been and continues to be attracting retail
deposits from the general public in the communities surrounding its branch
offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in single-family, owner-occupied
residential mortgage loans within its market area. To a significantly lesser
extent, the Bank invests in commercial real estate, multi-family, construction
and consumer loans. The Bank also invests in mortgage-backed securities,
securities issued by the U.S. Government and agencies thereof, and other
investments permitted by applicable law and regulations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management Strategy." The Bank sells substantially all newly originated 30-
year, fixed-rate mortgage loans to the secondary market. Loan sales come from
loans held in the Bank's portfolio designated as being held for sale or
originated during the period and being so designated. The Bank retains all of
the servicing rights of loans sold. The Bank's revenues are derived
principally from interest on its mortgage loans, and to a lesser extent,
interest on its investment and mortgage-backed securities and income from loan
servicing. The Bank's primary sources of funds are deposits, principal and
interest payments on loans, advances from the FHLB and to a lesser extent,
investment maturities and proceeds from the sale of loans.
MARKET AREA AND COMPETITION
The Bank has been, and intends to continue to be, a community-oriented
financial institution, offering a wide variety of financial services to meet
the needs of the communities it serves. The Bank conducts its business through
an administrative office located in Brick, New Jersey, and eight branch
offices, seven of which are located in Ocean County and one of which is
located in Middlesex County, New Jersey. The Bank's deposit gathering base is
concentrated in the communities surrounding its offices. While its lending
area extends throughout New Jersey, most of the Bank's mortgage loans are
secured by properties located in Ocean County and Southern Monmouth County.
The Bank is the only remaining community-based financial institution
headquartered in Ocean County, New Jersey, which is located along the central
New Jersey shore. Ocean County is among the fastest growing population areas
in New Jersey and has a significant number of retired residents who have
traditionally provided the Bank with a stable source of deposit funds. The
economy in the Bank's primary market area is based upon a mixture of service
and retail trade. Other employment is provided by a variety of wholesale
trade, manufacturing,
55
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federal, state and local government, hospitals and utilities. The area is also
home to commuters working in New Jersey suburban areas around New York and
Philadelphia.
In the late 1980's and early 1990's, due in part to the effects of a
prolonged decline in the national and regional economy, layoffs in the
financial services industry and corporate relocations, New Jersey experienced
reduced levels of employment. These events, in conjunction with a surplus of
available commercial and residential properties, resulted in an overall
decline during this period in the underlying values of properties located in
New Jersey. However, New Jersey's real estate market has stabilized in recent
periods. Whether such stabilization will continue is dependent, in large part,
upon the general economic health of the United States and New Jersey, and
other factors beyond the Bank's control and, therefore, cannot be estimated.
The Bank faces significant competition both in making loans and in
attracting deposits. The State of New Jersey has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Bank, all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, credit unions, mortgage banking companies and insurance
companies. Its most direct competition for deposits has historically come from
commercial banks, savings banks, savings and loan associations and credit
unions. The Bank faces additional competition for deposits from short-term
money market funds, other corporate and government securities funds and from
other financial service institutions such as brokerage firms and insurance
companies.
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one- to four-family residences.
At December 31, 1995, the Bank had total loans outstanding of $625.0 million,
of which $575.0 million, or 92.0% of total loans, were one- to four-family,
residential mortgage loans. The remainder of the portfolio consisted of $26.9
million of consumer loans, primarily home equity loans and lines of credit,
equalling 4.3% of total loans; $14.9 million of commercial real estate, multi-
family and land loans, or 2.4% of total loans; and $8.2 million of real estate
construction loans, or 1.3% of total loans. The Bank had $1.9 million in loans
held for sale at December 31, 1995. At that same date, 64.9% of the Bank's
total loans had adjustable interest rates.
The types of loans that the Bank may originate are subject to federal and
state law and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies
of the federal government, including the Federal Reserve Board, and
legislative tax policies.
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<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-
family............ $575,010 92.01% $552,401 91.63% $505,984 91.66% $477,753 90.75% $456,827 89.92%
Commercial real
estate, multi-
family and land... 14,939 2.39 13,885 2.30 11,472 2.08 8,235 1.56 9,283 1.83
Construction...... 8,153 1.30 10,474 1.74 8,123 1.47 12,484 2.37 11,897 2.34
Consumer (1)........ 26,867 4.30 26,100 4.33 26,427 4.79 28,003 5.32 30,019 5.91
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans..... 624,969 100.00% 602,860 100.00% 552,006 100.00% 526,475 100.00% 508,026 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan
funds............. 2,687 2,661 2,341 2,233 1,417
Unamortized
discounts, net.... 12 13 27 36 38
Deferred loan
fees.............. 1,679 2,263 3,286 3,737 3,687
Allowance for loan
losses............ 6,001 5,608 5,504 5,737 5,682
-------- -------- -------- -------- --------
Total loans,
net............. 614,590 592,315 540,848 514,732 497,202
Less:
Mortgage loans
held for sale..... 1,894 -- 963 545 1,428
-------- -------- -------- -------- --------
Loans
receivable,
net............. $612,696 $592,315 $539,885 $514,187 $495,774
======== ======== ======== ======== ========
Total loans:
Adjustable rate... $405,485 64.88% $386,424 64.10% $332,487 60.23% $311,898 59.24% $332,381 65.43%
Fixed rate........ 219,484 35.12 216,436 35.90 219,519 39.77 214,577 40.76 175,645 34.57
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans..... $624,969 100.00% $602,860 100.00% $552,006 100.00% $526,475 100.00% $508,026 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
- ----------
(1) Consists primarily of home equity loans and lines of credit, and to a
lesser extent, loans on savings accounts, automobile and student loans.
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<PAGE>
Loan Maturity. The following table shows the contractual maturity of the
Bank's total loans at December 31, 1995. There were $1.9 million in loans held
for sale at December 31, 1995. The table does not include principal
repayments. Principal repayments, including prepayments, on total loans was
$89.6 million, $90.9 million and $127.5 million for the years ended December
31, 1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
------------------------------------------------------
COMMERCIAL
ONE- TO REAL ESTATE, TOTAL
FOUR- MULTI-FAMILY LOANS
FAMILY AND LAND CONSTRUCTION CONSUMER RECEIVABLE
-------- ------------ ------------ -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts due:
One year or less...... $ 20,464 $ -- $8,153 $ 2,637 $ 31,254
-------- ------- ------ ------- --------
After one year:
More than one year
to three years..... 45,461 2,083 -- 3,703 51,247
More than three
years to five
years.............. 50,433 1,831 -- 3,415 55,679
More than five years
to 10 years........ 124,641 2,497 -- 11,574 138,712
More than 10 years
to 20 years........ 187,204 5,751 -- 5,537 198,492
More than 20 years.. 146,807 2,777 -- 1 149,585
-------- ------- ------ ------- --------
Total due after De-
cember 31, 1996.... 554,546 14,939 -- 24,230 593,715
-------- ------- ------ ------- --------
Total amount due.... $575,010 $14,939 $8,153 $26,867 624,969
======== ======= ====== =======
Less:
Undisbursed loan
funds.......... 2,687
Unamortized dis-
counts, net.... 12
Deferred loan
fees........... 1,679
Allowance for
loan losses.... 6,001
--------
Total loans, net.... 614,590
Less: Mortgage loans
held for sale........ 1,894
--------
Loans receivable,
net.................. $612,696
========
</TABLE>
The following table sets forth at December 31, 1995, the dollar amount of
total loans receivable contractually due after December 31, 1996, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1996
----------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family......................... $204,812 $349,734 $554,546
Commercial real estate, multi-family and
land....................................... 3,178 11,761 14,939
Construction................................ -- -- --
Consumer...................................... 3,348 20,882 24,230
-------- -------- --------
Total loans receivable.................... $211,338 $382,377 $593,715
======== ======== ========
</TABLE>
Origination, Sale, Servicing and Purchase of Loans. The Bank's mortgage
lending activities are conducted primarily by commissioned loan
representatives in the exclusive employment of the Bank and through the Bank's
branch offices. The Bank originates both adjustable-rate and fixed-rate
mortgage loans. The Bank's ability to originate loans is dependent upon the
relative customer demand for fixed-rate or adjustable-rate mortgage loans,
which is affected by the current and expected future level of interest rates.
It is the general policy of the Bank to sell substantially all of the 30-year,
fixed-rate mortgage loans that it originates and retain for portfolio ARM
loans and shorter term fixed-rate loans with maturities of 15 years or less.
The Bank also may sell the ARM loans that it originates. The Bank retains all
servicing of the loans sold. See "--Loan Servicing." The Bank recognizes, at
the time of sale, the gain or loss on the sale of the loans based on the
difference between the net cash proceeds
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<PAGE>
received and the carrying value of the loans sold. At December 31, 1995 there
were $1.9 million in loans categorized as held for sale. In the past, the Bank
has also originated loans through commitments negotiated with correspondent
mortgage origination firms.
The following tables set forth the Bank's loan originations, purchases,
sales, principal repayments and loan activity for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR DECEMBER 31,
--------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total loans:
Beginning balance.................................... $602,860 $552,006 $526,475
-------- -------- --------
Loans originated:
One- to four-family.............................. 112,283 139,106 181,081
Commercial real estate, multi-family and land.... 4,058 2,558 1,936
Construction..................................... 6,010 11,647 7,409
Consumer......................................... 11,007 7,714 7,991
-------- -------- --------
Total loans originated......................... 133,358 161,025 198,417
-------- -------- --------
Total.......................................... 736,218 713,031 724,892
Less:
Principal repayments............................... 89,596 90,870 127,514
Sales of loans..................................... 18,861 16,578 40,400
Transfer to REO.................................... 2,792 2,723 4,972
-------- -------- --------
Total loans.......................................... $624,969 $602,860 $552,006
======== ======== ========
</TABLE>
One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate and
adjustable-rate mortgage loans secured by one- to four-family residences with
maturities up to 30 years. Substantially all of such loans are secured by
property located in the Bank's primary market area. Loan originations are
generally obtained from the Bank's existing or past customers, members of the
local communities and commissioned loan representatives and their contacts
with the local real estate industry. In the past, the Bank has also originated
loans through commitments negotiated with correspondent mortgage origination
firms.
At December 31, 1995, the Bank's total loans outstanding were $625.0
million, of which $575.0 million, or 92.0%, were one- to four-family
residential mortgage loans, primarily single-family and owner-occupied. To a
lesser extent, the Bank also makes mortgage loans secured by seasonal second
homes. The average size of the Bank's one- to four-family mortgage loan was
approximately $76,000 at December 31, 1995. The Bank currently offers a number
of ARM loan programs with interest rates which adjust every one-, three-, or
five-years. The Bank's ARM loans generally provide for periodic (not less than
2%) and overall (not more than 6%) caps on the increase or decrease in the
interest rate at any adjustment date and over the life of the loan. The
interest rate on these loans is indexed to the applicable one-, three-, or
five year U.S. Treasury constant maturity yield, with a repricing margin which
ranges generally from 2.75% to 3.25% above the index. The Bank also offers
three-, five- and seven-year ARM loans which operate as fixed-rate loans for
three, five or seven years and then convert to one-year ARM loans for the
remainder of the term. The ARM loans are then indexed to a margin of generally
2.75% to 3.25% above the one-year U.S. Treasury constant maturity yield.
Generally, ARM loans pose credit risks different than risks inherent in
fixed-rate loans, primarily because as interest rates rise, the payments of
the borrower rise, thereby increasing the potential for delinquency and
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. In order to minimize risks,
borrowers of one-year ARM loans with a loan-to-value ratio of 75% or less are
qualified at the fully-indexed rate (the applicable U.S. Treasury index plus
the margin, rounded to the nearest one-eighth of one percent), and borrowers
of one-year ARM loans with a loan-to-value ratio over 75% are qualified at the
higher of the fully indexed rate or the initial rate plus the 2% annual
interest rate cap. The Bank does not originate ARM loans which provide for
negative amortization.
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<PAGE>
The Bank's fixed-rate mortgage loans currently are made for terms from 10 to
30 years. At December 31, 1995, the Bank had commitments for the origination
of fixed-rate mortgage loans totalling $10.8 million. The normal terms for
such commitments provide for a maximum of 90 days rate lock upon receipt of a
1.0% fee charged on the mortgage amount. The Bank sells substantially all of
the 30-year, fixed-rate residential mortgage loans that it originates and
retains the servicing on all loans sold. The Bank retains for its portfolio
shorter term, fixed-rate loans with maturities of 15 years or less, and
certain longer term fixed-rate loans, generally consisting of loans to
facilitate the sale of REO, loans to officers, directors or employees of the
Bank and "jumbo", non-conforming loans as determined by applicable FNMA and
FHLMC guidelines.
The Bank's policy is to originate one- to four-family residential mortgage
loans in amounts up to 80% of the lower of the appraised value or the selling
price of the property securing the loan and up to 95% of the appraised value
or selling price if private mortgage insurance is obtained. Mortgage loans
originated by the Bank include due-on-sale clauses which provide the Bank with
the contractual right to deem the loan immediately due and payable in the
event the borrower transfers ownership of the property without the Bank's
consent. Due-on-sale clauses are an important means of adjusting the rates on
the Bank's fixed-rate mortgage loan portfolio and the Bank has generally
exercised its rights under these clauses.
Commercial Real Estate, Multi-Family and Land Lending. The Bank originates
commercial real estate loans that are secured by properties generally used for
business purposes such as small office buildings or retail facilities located
in the Bank's primary market area. The Bank's underwriting procedures provide
that commercial real estate loans may be made in amounts up to 75% of the
appraised value of the property to a maximum of generally $4 million. The Bank
currently originates commercial real estate loans with terms of up to twenty
five years with fixed or adjustable rates which are indexed to a margin above
the one-, three-, or five-year U.S. Treasury constant maturity yield. In
reaching its decision on whether to make a commercial real estate loan, the
Bank considers the net operating income of the property and the borrower's
expertise, credit history and profitability. The Bank has generally required
that the properties securing commercial real estate loans have debt service
coverage ratios of at least 120%. Properties securing a loan are appraised by
an independent appraiser and title insurance is required on all loans. The
Bank typically requires the personal guarantee of the principal borrowers for
all commercial real estate loans. The Bank's commercial real estate loan
portfolio at December 31, 1995 was $10.0 million, or 1.6% of total loans. The
largest commercial real estate loan in the Bank's portfolio at December 31,
1995 was a 10.4% participation in a performing loan for which the Bank had an
outstanding carrying balance of $1.6 million, which was secured by a 200,000
square foot office building located in Fairfield, New Jersey.
The Bank originates multi-family mortgage loans generally secured by
buildings with five or more housing units located in the Bank's primary market
area. As a result of market conditions in its primary market area, the Bank
currently originates multi-family loans on a limited and highly selective
basis. In reaching its decision on whether to make a multi-family loan, the
Bank considers the qualifications of the borrower as well as the underlying
property. Some of the factors to be considered are: the net operating income
of the mortgaged premises before debt service and depreciation; the debt
service ratio; and the ratio of loan amount to appraised value. Pursuant to
the Bank's current underwriting policies, a multi-family adjustable-rate
mortgage loan may only be made in an amount up to 75% of the appraised value
of the underlying property to a maximum amount of generally $4 million. In
addition, the Bank generally requires a debt service ratio of 120%. Properties
securing a loan are appraised by an independent appraiser and title insurance
is required on all loans. The Bank's multi-family loan portfolio at December
31, 1995, totalled $4.5 million. The Bank's largest multi-family loan at
December 31, 1995, had an outstanding balance of $2.3 million and was secured
by a 125-unit affordable-housing apartment complex located in Toms River, New
Jersey. To a significantly lesser extent, the Bank also originates land loans.
Such loans totalled $421,000 at December 31, 1995.
Loans secured by commercial real estate and multi-family residential
properties are generally larger and involve a greater degree of risk than one-
to four-family residential mortgage loans. Because payments on loans secured
by multi-family properties are often dependent on successful operation or
management of the properties,
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<PAGE>
repayment of such loans may be subject to a greater extent to adverse
conditions in the real estate market or the economy. The Bank seeks to
minimize these risks through its underwriting policies, which require such
loans to be qualified at origination on the basis of the property's income and
debt coverage ratio.
Construction Lending. At December 31, 1995, construction loans totalled $8.2
million, or 1.3%, of the Bank's total loans outstanding. The Bank originates
single-family construction loans primarily on a construction/permanent basis
with such loans converting to an amortizing loan following the completion of
the construction phase. Most of the Bank's construction loans are made to
individuals building their primary residence, while, to a lesser extent, loans
are made to developers known to the Bank in order to build single-family
houses under contract for sale, which loans become due and payable over terms
not exceeding 18 months. The current policy of the Bank is to charge interest
rates on its construction loans which float at margins which are generally
2.0% above the prime rate (as published in the Wall Street Journal). The
Bank's construction loans improve the interest rate sensitivity of its earning
assets. At December 31, 1995, the Bank had 47 construction loans, with the
largest loan balance being approximately $895,000. Although current in
payments, this loan was classified as substandard by the Bank due to the
borrower's postponement of construction on the property. At December 31, 1995,
all of the Bank's construction lending portfolio consisted of loans secured by
property located in the State of New Jersey, for the purpose of constructing
one- to four-family homes. The Bank may originate construction loans to
individuals and contractors on approved building lots in amounts up to 75% of
the appraised value of the land. The terms to maturity of the Bank's
construction/permanent loans are similar to the Bank's other one- to four-
family mortgage products. The Bank requires an appraisal of the property,
credit reports, and financial statements on all principals and guarantors,
among other items, for all construction loans.
Construction lending, by its nature, entails additional risks compared to
one- to four-family mortgage lending, attributable primarily to the fact that
funds are advanced upon the security of the project under construction prior
to its completion. As a result, construction lending often involves the
disbursement of substantial funds with repayment dependent on the success of
the ultimate project and the ability of the borrower or guarantor to repay the
loan. Because of these factors, the analysis of prospective construction loan
projects requires an expertise that is different in significant respects from
that which is required for residential mortgage lending. The Bank has
attempted to address these risks through its underwriting procedures. With the
exception of the one loan noted above, which was current at December 31, 1995
but classified internally as substandard, none of the Bank's other
construction loans were classified.
Consumer Loans. The Bank also offers consumer loans. At December 31, 1995,
the Bank's consumer loans totalled $26.9 million, or 4.3% of the Bank's total
loan portfolio. Of that amount, home equity loans comprised $13.2 million, or
49.0%; home equity lines of credit comprised $12.0 million, or 44.8%; loans on
savings accounts totalled $1.2 million, or 4.3%; and automobile and student
loans totalled $521,000, or 1.9%.
The Bank originates home equity loans secured by one- to four-family
residences. These loans are originated as either adjustable-rate or fixed-rate
loans with terms ranging from 10 to 20 years. Home equity loans are typically
made on owner-occupied, one- to four-family residences and generally to the
Bank's first mortgage customers. These loans are subject to a 75% loan-to-
value limitation, including any other outstanding mortgages or liens.
The Bank also offers a variable rate home equity line of credit which
extends a credit line based on the applicant's income and equity in the home.
Generally, the credit line, when combined with the balance of the first
mortgage lien, may not exceed 75% of the appraised value of the property at
the time of the loan commitment. Home equity lines of credit are secured by a
mortgage on the underlying real estate. The Bank presently charges no
origination fees for these loans, but may in the future charge origination
fees for its home equity lines of credit. A borrower is required to make
monthly payments of principal and interest, at a minimum of $50, based upon a
10 or 15 year amortization period. Generally, the adjustable rate of interest
charged is the prime rate of interest (as published in the Wall Street
Journal) plus up to 1.75%. The loans have an 18% lifetime cap on interest rate
adjustments. The Bank's home equity lines of credit outstanding at December
31, 1995 totalled $12.0 million.
61
<PAGE>
Commercial Lending. As part of its overall strategy, the Bank plans to
diversify its loan portfolio to include commercial lending in its primary
market area. The Bank is presently considering offering such loan products as
secured and unsecured commercial business loans, including possibly credit
lines to support fluctuations in accounts receivable and inventory,
conventional term loans (including both owner-occupied and investment real
estate loans), working capital loans, business acquisition loans and small
business loans. In making commercial loans, the Bank will consider primarily
the value of the collateral if the loan is secured, the financial history and
resources of the borrower, the borrower's ability to repay the loan out of net
operating income, and the Bank's lending history with the borrower. Unsecured
commercial business lending is generally considered to involve a higher degree
of risk than secured commercial and real estate lending. Risk of loss on an
unsecured commercial business loan is dependent largely on the borrower's
ability to remain financially able to repay the loan out of ongoing
operations. If the Bank's estimate of the borrower's financial ability is
inaccurate, the Bank may be confronted with a loss of principal on the loan.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Management Strategy."
Loan Approval Procedures and Authority. The Board of Directors establishes
the loan approval policies of the Bank. The Board of Directors has authorized
the approval of loans secured by real estate up to $400,000 by various
employees of the Bank, on a scale which requires approval by personnel with
progressively higher levels of responsibility as the loan amount increases. A
minimum of two employees' signatures are required to approve loans over
$100,000. Loans in amounts over $400,000 require approval by the Loan
Committee of the Board of Directors. The Bank's policy is to refrain from
making loans to a single borrower that in the aggregate exceed $3.0 million.
Pursuant to OTS regulations, loans to one borrower generally cannot exceed 15%
of the Bank's core capital, which at December 31, 1995 amounted to $13.5
million.
Loan Servicing. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, making inspections as
required of mortgaged premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults,
making certain insurance and tax payments on behalf of the borrowers and
generally administering the loans. The Bank also services mortgage loans for
others. All of the loans currently being serviced for others are loans which
have been sold by the Bank. At December 31, 1995, the Bank was servicing
$143.1 million of loans for others. For the years ended December 31, 1995 and
1994 and 1993, loan servicing fees totalled $522,000, $633,000 and $621,000,
respectively.
Delinquencies and Classified Assets. The Board of Directors performs a
monthly review of all delinquent loans which includes loans sixty days or more
past due, all loans thirty days or more past due that were originated within
the past year, and all mortgage loans referred to foreclosure within the
previous month. In addition, management prepares a quarterly list of all
classified loans and a narrative report of classified major loans (i.e., any
mortgage or construction loan secured by other than a one- to four-family
residence.) The procedures taken by the Bank with respect to delinquencies
vary depending on the nature of the loan and period of delinquency. When a
borrower fails to make a required payment on a loan, the Bank takes a number
of steps to have the borrower cure the delinquency and restore the loan to
current status. The Bank generally sends the borrower a written notice of non-
payment after the loan is first past due. In the event payment is not then
received, additional letters and phone calls generally are made. If the loan
is still not brought current and it becomes necessary for the Bank to take
legal action, which typically occurs after a loan is delinquent at least 30
days or more, the Bank will commence foreclosure proceedings against any real
property that secures the loan. If a foreclosure action is instituted and the
loan is not brought current, paid in full, or an acceptable workout
accommodation is not agreed upon before the foreclosure sale, the real
property securing the loan generally is sold at foreclosure.
The Bank's Internal Asset Classification Committee, which is chaired by an
officer who reports directly to the Audit Committee of the Board of Directors,
reviews and classifies the Bank's assets quarterly and reports the results of
its review to the Board of Directors. The Bank classifies assets in accordance
with certain regulatory guidelines established by the OTS which are applicable
to all savings associations. See "Regulation--Federal Savings Institution
Regulation--Classified Assets" for a discussion of those classifications. At
December 31,
62
<PAGE>
1995, the Bank had $11.5 million of assets, including all REO, classified as
Substandard, $13,000 of assets classified as Doubtful and no assets classified
as Loss. Loans and other assets may also be placed on a watch list as "Special
Mention" assets. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention." Special Mention assets totalled $4.1 million at December 31, 1995,
and consisted primarily of loans secured by single-family, owner-occupied
residences. These loans are classified as Special Mention due to past
delinquencies or other identifiable weaknesses. At December 31, 1995, the
largest loan classified as Special Mention had a loan balance of $247,000 and
the largest loan classified as Substandard had a balance of $895,000.
The following table sets forth delinquencies in the Bank's loan portfolio as
of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... 27 $1,634 80 $7,675 19 $1,503 92 $ 9,396
Commercial real estate,
multi-family and land.. -- -- 1 154 -- -- 1 96
Construction............ -- -- -- -- -- -- 2 265
Consumer loans.......... 6 111 9 209 -- -- 10 293
--- ------ --- ------ --- ------ --- -------
Total................... 33 $1,745 90 $8,038 19 $1,503 105 $10,050
=== ====== === ====== === ====== === =======
Delinquent loans to
total loans............ .28% 1.29% .25% 1.67%
====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993
-------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------ ------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family..................... 23 $1,950 96 $ 9,382
Commercial real estate, multi-family and
land................................... -- -- 2 315
Construction............................ -- -- 1 250
Consumer loans.......................... 1 7 7 224
--- ------ --- -------
Total................................... 24 $1,957 106 $10,171
=== ====== === =======
Delinquent loans to total loans......... .35% 1.84%
====== =======
</TABLE>
63
<PAGE>
Non-Accrual Loans and REO
The following table sets forth information regarding non-accrual loans and
REO. The Bank had no troubled-debt restructured loans within the meaning of
SFAS 15, and 26 REO properties at December 31, 1995. It is the policy of the
Bank to cease accruing interest on loans 90 days or more past due or in the
process of foreclosure. For the years ended December 31, 1995, 1994, 1993,
1992 and 1991, respectively, the amount of interest income that would have
been recognized on nonaccrual loans if such loans had continued to perform in
accordance with their contractual terms was $428,000, $607,000, $642,000,
$1,479,000 and $1,450,000, none of which was recognized.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Real estate:
One- to four-family.......... $ 8,296 $10,280 $ 9,705 $13,694 $14,678
Commercial real estate,
multi-family and land....... 154 96 315 145 2,330
Construction................. -- 265 250 337 2,241
Consumer....................... 221 298 224 330 1,333
------- ------- ------- ------- -------
Total........................ 8,671 10,939 10,494 14,506 20,582
REO, net(1)...................... 1,367 1,580 3,056 3,927 1,727
------- ------- ------- ------- -------
Total non-performing assets.. $10,038 $12,519 $13,550 $18,433 $22,309
======= ======= ======= ======= =======
Allowance for loan losses as a
percent of total loans
receivable(2)................... .97% .94% 1.01% 1.10% 1.13%
Allowance for loan losses as a
percent of total non-performing
loans(3)........................ 69.21% 51.27% 52.45% 39.55% 27.61%
Non-performing loans as a percent
of total loans
receivable(2)(3)................ 1.40% 1.83% 1.92% 2.79% 4.09%
Non-performing assets as a
percent of total assets(3)...... .97% 1.29% 1.45% 2.08% 2.84%
</TABLE>
- --------
(1) REO balances are shown net of related loss allowances.
(2) Total loans include loans receivable and mortgage loans held for sale,
less undisbursed loan funds, deferred loan fees and unamortized premiums
and discounts.
(3) Non-performing assets consist of non-performing loans and REO. Non-
performing loans consist of all loans 90 days or more past due and other
loans in the process of foreclosure.
64
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance
for loan losses is maintained at an amount management considers sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio based upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, actual loan loss experience,
current and anticipated economic conditions, detailed analysis of individual
loans for which full collectibility may not be assured, and the determination
of the existence and realizable value of the collateral and guarantees
securing the loan. Additions to the allowance are charged to earnings. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for loan
losses based upon judgments different from those of management. As of December
31, 1995 and 1994, the Bank's allowance for loan losses was .97% and .94%,
respectively, of total loans. The Bank had non-accrual loans of $8.7 million
and $10.9 million at December 31, 1995 and 1994, respectively. The Bank will
continue to monitor and modify its allowances for loan losses as conditions
dictate.
The following table sets forth activity in the Bank's allowance for
estimated loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period......... $ 5,608 $ 5,504 $ 5,737 $ 5,682 $ 3,904
Provision for loan losses.............. 950 1,129 1,300 1,220 1,847
Charge-offs:
Real Estate:
One- to four-family................ 510 907 1,080 1,007 98
Commercial real estate, multi-fam-
ily and land...................... 28 141 334 106 --
Construction....................... -- -- 11 32 --
Consumer............................. 30 5 122 25 --
------- ------- ------- ------- -------
Total............................ 568 1,053 1,547 1,170 98
Recoveries............................. 11 28 14 5 29
------- ------- ------- ------- -------
Balance at end of period............... $ 6,001 $ 5,608 $ 5,504 $ 5,737 $ 5,682
======= ======= ======= ======= =======
</TABLE>
65
<PAGE>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance and the percent of loans to total loans in each of
the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------
1995 1994 1993
---------------------------- ---------------------------- ----------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- ---------- ------ ---------- ---------- ------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family.......... $2,790 46.49% 92.01% $2,809 50.09% 91.63% $2,941 53.43% 91.66%
Commercial real
estate, multi-
family and
land............ 556 9.27 2.39 483 8.61 2.30 506 9.19 2.08
Construction.... 41 .68 1.30 79 1.41 1.74 49 .89 1.47
Consumer........ 273 4.55 4.30 268 4.78 4.33 275 5.00 4.79
Unallocated..... 2,341 39.01 -- 1,969 35.11 -- 1,733 31.49 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total........... $6,001 100.00% 100.00% $5,608 100.00% 100.00% $5,504 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
At December 31,
--------------------------------------------------------
1992 1991
---------------------------- ---------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- ---------- ------ ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-
family.......... $3,354 58.46% 90.75% $2,734 48.12% 89.92%
Commercial real
estate, multi-
family and
land............ 1,261 21.98 1.56 1,888 33.23 1.83
Construction.... 47 .82 2.37 82 1.44 2.34
Consumer........ 346 6.03 5.32 545 9.59 5.91
Unallocated..... 729 12.71 -- 433 7.62 --
------ ------ ------ ------ ------ ------
Total........... $5,737 100.00% 100.00% $5,682 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
66
<PAGE>
INVESTMENT ACTIVITIES
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, certificates of deposit of insured
banks and savings institutions, 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. Additionally, the Bank must maintain
minimum levels of investments that qualify as liquid assets under OTS
regulations. See "Regulation--Federal Savings Institution Regulation--
Liquidity." Historically, the Bank has maintained liquid assets above the
minimum OTS requirements and at a level considered to be adequate to meet its
normal daily activities.
The investment policy of the Bank as established by the Board of Directors
attempts to provide and maintain liquidity, generate a favorable return on
investments without incurring undue interest rate and credit risk, and
complement the Bank's lending activities. Specifically, the Bank's policies
generally limit investments to government and federal agency-backed securities
and other non-government guaranteed securities, including corporate debt
obligations, that are investment grade. The Bank's policies provide that all
investment purchases must be approved by two officers (either the Senior Vice
President/Treasurer, Executive Vice President/Chief Financial Officer or the
President and Chief Executive Officer) and be ratified by the Board of
Directors. In December 1995, the Bank reassessed its investment portfolio and
reclassified all of its investment and mortgage-backed securities, totalling
in the aggregate $382.7 million, from held-to-maturity to available for sale.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Impact of New Accounting Standards."
Mortgage-backed Securities. Mortgage-backed securities represent a
participation interest in a pool of single-family or multi-family mortgages,
the principal and interest payments on which, in general, are passed from the
mortgage originators, through intermediaries that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such intermediaries may be private issuers, or agencies including FHLMC,
FNMA and GNMA that guarantee the payment of principal and interest to
investors. Mortgage-backed securities typically are issued with stated
principal amounts, and the securities are backed by pools of mortgages that
have loans with interest rates that are within a range and have varying
maturities. The underlying pool of mortgages can be composed of either fixed-
or ARM loans.
The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors repay or prepay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the security, thereby affecting
its yield to maturity and the related market value of the mortgage-backed
security. The prepayments of the underlying mortgages depend on many factors,
including the type of mortgages, the coupon rates, the age of mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages, general levels of market interest rates, and general economic
conditions. GNMA mortgage-backed securities that are backed by assumable
Federal Housing Authority ("FHA") or the Department of Veterans Affairs ("VA")
loans generally have a longer life than conventional non-assumable loans
underlying FHLMC and FNMA mortgage-backed securities. During periods of
falling mortgage interest rates, prepayments generally increase, as opposed to
periods of increasing interest rates when prepayments generally decrease. If
the interest rate of underlying mortgages significantly exceeds the prevailing
market interest rates offered for mortgage loans, refinancing generally
increases and accelerates the prepayment of the underlying mortgages.
Prepayment experience is more difficult to estimate for adjustable-rate
mortgage-backed securities.
The Bank has significant investments in mortgage-backed securities and has
utilized such investments to complement its mortgage lending activities. At
December 31, 1995, mortgage-backed securities totalled $265.1 million, or
25.6% of total assets, all of which were classified as available for sale. The
Bank invests in a large variety of mortgage-backed securities, including ARM,
balloon and fixed-rate mortgage-backed securities, the majority of which are
directly insured or guaranteed by FHLMC, GNMA and FNMA. At such date, the
mortgage-backed securities portfolio had a weighted average interest rate of
6.81%.
67
<PAGE>
The Bank generally purchases short-term, straight sequential or planned
amortization class collateralized mortgage obligations ("CMOs"). CMOs are
securities created by segregating or portioning cash flows from mortgage pass-
through securities or from pools of mortgage loans. CMOs provide a broad range
of mortgage investment vehicles by tailoring cash flows from mortgages to meet
the varied risk and return preferences of investors. These securities enable
the issuer to "carve up" the cash flows from the underlying securities and
thereby create multiple classes of securities with different maturity and risk
characteristics. The Bank invests in U.S. Government and agency-backed CMOs
and, to a lesser extent, privately issued CMOs, all of which have agency-
backed collateral and are currently rated "AAA". Prior to purchasing mortgage-
backed securities, each security is tested for Federal Financial Institutions
Examination Council ("FFIEC") qualification. At December 31, 1995, the Bank's
investment in CMOs had an amortized cost of $9.6 million, and a carrying value
and estimated market value of $9.8 million.
The following table sets forth the composition of the Bank's mortgage-backed
securities portfolio in dollar amounts and in percentages of the respective
portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securi-
ties:
FHLMC.................. $223,884 84.45% $183,424 81.68% $182,216 75.55%
FNMA................... 27,624 10.42 21,602 9.62 25,237 10.46
GNMA................... 3,763 1.42 4,586 2.04 5,830 2.42
CMOs................... 9,842 3.71 14,957 6.66 27,905 11.57
-------- ------ -------- ------ -------- ------
Total mortgage-backed
securities.......... $265,113 100.00% $224,569 100.00% $241,188 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth the Bank's mortgage-backed securities
activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.......................... $ 224,569 $ 241,188 $ 205,958
Mortgage-backed securities purchased..... 88,490 50,042 116,992
Less: Principal repayments............... (50,193) (65,978) (81,601)
(Amortization of premium)/accretion of
discount................................ (612) (683) (161)
Unrealized gain on mortgage-backed
securities available for sale........... 2,859 -- --
---------- ---------- ----------
Ending balance............................. $ 265,113 $ 224,569 $ 241,188
========== ========== ==========
</TABLE>
The following table sets forth certain information regarding the amortized
cost and market value of the Bank's mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securi-
ties:
FHLMC................. $221,822 $223,884 $183,424 $178,542 $182,216 $186,084
FNMA.................. 27,307 27,624 21,602 21,445 25,237 26,106
GNMA.................. 3,561 3,763 4,586 4,588 5,830 6,126
CMOs.................. 9,564 9,842 14,957 14,999 27,905 28,810
-------- -------- -------- -------- -------- --------
Total mortgage-
backed securities.. $262,254 $265,113 $224,569 $219,574 $241,188 $247,126
======== ======== ======== ======== ======== ========
</TABLE>
68
<PAGE>
Investment Securities. Investment securities identified as held to maturity
are carried at cost, adjusted for amortization of premium and accretion of
discount, which are recognized as adjustments to interest income. Management
determines the appropriate classification of securities at the time of
purchase. If management has the intent and the Bank has the ability at the
time of purchase to hold securities until maturity, they are classified as
held to maturity. Debt securities to be held for indefinite periods of time
and not intended to be held to maturity are classified as available for sale.
Securities available for sale include securities that management intends to
use as part of its asset/liability management strategy. Such securities are
carried at fair value and unrealized gains and losses, net of related tax
effect, are excluded from earnings, but are included in retained earnings. At
December 31, 1995, the Bank had investment securities with an amortized cost
of $114.5 million, and a market value of $114.9 million, all of which were
classified as available for sale.
The following table sets forth certain information regarding the amortized
cost and market values of the Bank's investment securities at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government and
agency obligations... $112,956 $113,302 $122,278 $114,986 $112,270 $113,292
State and municipal
obligations.......... 1,549 1,579 2,173 2,158 3,733 3,738
Corporate obliga-
tions................ -- -- 3,000 3,000 10,996 11,102
-------- -------- -------- -------- -------- --------
Total investment se-
curities........... $114,505 $114,881 $127,451 $120,144 $126,999 $128,132
======== ======== ======== ======== ======== ========
</TABLE>
69
<PAGE>
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of the Bank's investment
and mortgage-backed securities as of December 31, 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
-------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE MORE THAN TEN
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS YEARS TOTAL
------------------ ------------------ ------------------ ------------------ ---------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST VALUE YIELD
--------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
securities:
U.S. Government
and agency
obligations...... $10,000 5.12% $83,956 6.25% $19,000 7.10% $ -- -- % $112,956 $113,302 6.29%
State and
municipal
obligations (1).. 808 9.79 606 9.15 -- -- 135 8.71 1,549 1,579 9.44
------- ------- ------- -------- -------- --------
Total investment
securities........ $10,808 5.47 $84,562 6.27 $19,000 7.10 $ 135 8.71 $114,505 $114,881 6.34
======= ======= ======= ======== ======== ========
Mortgage-backed
securities:
FHLMC............ $ 3,547 8.29 $50,492 6.12 $ 3,387 9.58 $164,396 6.72 $221,822 $223,884 6.65
FNMA............. -- -- 3,626 8.83 12,464 6.42 11,217 7.51 27,307 27,624 7.19
GNMA............. -- -- 172 8.03 2,386 8.91 1,003 11.46 3,561 3,763 9.58
CMOs............. -- -- 3,308 8.05 6,211 8.25 45 6.82 9,564 9,842 8.17
------- ------- ------- -------- -------- --------
Total mortgage-
backed
securities...... $ 3,547 8.29 $57,598 8.41 $24,448 7.57 $176,661 6.80 $262,254 $265,113 6.81
======= ======= ======= ======== ======== ========
</TABLE>
- ----
(1) Tax equivalent yield.
70
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, investment maturities, cash flows generated from operations and FHLB
borrowings are the primary sources of the Bank's funds for use in lending,
investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of savings accounts, NOW
accounts, money market accounts and time deposits. For the year ended December
31, 1995, time deposits constituted 64.2% of total average deposits. The flow
of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. The
Bank's deposits are obtained predominantly from the areas in which its branch
offices are located. The Bank relies primarily on customer service and long-
standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits. Time deposits in excess of $100,000 are not actively solicited by
the Bank, nor does the Bank use brokers to obtain deposits. See Note 9 of the
Notes to the Consolidated Financial Statements for a discussion of the types
of deposit accounts offered by the Bank.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals).................. $ 23,097 $ (20,261) $ 8,627
Interest credited on deposit accounts....... 36,041 29,220 30,534
---------- ----------- ----------
Total increase in deposit accounts.......... $ 59,138 $ 8,959 $ 39,161
========== =========== ==========
</TABLE>
At December 31, 1995, the Bank had $41.2 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less.... $ 7,532 6.03%
Over three through six
months................. 8,207 6.20
Over six through 12
months................. 6,801 6.03
Over 12 months.......... 18,696 6.43
------------
Total................... $ 41,236 6.25
============
</TABLE>
71
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts for the periods indicated and the weighted average yield on each
category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1995 1994 1993
-------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS YIELD BALANCE DEPOSITS YIELD BALANCE DEPOSITS YIELD
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market deposit ac-
counts.................. $ 68,987 7.71% 2.93% $ 78,288 9.02% 2.57% $ 82,620 9.78% 2.52%
Savings accounts........ 178,973 20.00 2.53 206,131 23.76 2.54 187,743 22.23 2.53
NOW accounts............ 69,330 7.74 2.14 69,934 8.06 2.14 59,672 7.07 2.14
Non-interest-bearing ac-
counts.................. 2,902 .32 -- 1,694 .20 -- 2,017 .24 --
-------- ------ -------- ------ -------- ------
Total................. 320,192 35.77 2.49 356,047 41.04 2.45 332,052 39.32 2.44
-------- ------ -------- ------ -------- ------
Time deposits:
Six months or less.... 78,455 8.77 4.84 112,661 12.98 3.65 126,662 15.00 3.00
Over Six through 12
months................ 131,795 14.73 5.44 102,006 11.76 4.38 98,859 11.71 3.34
Over 12 through 24
months................ 123,825 13.83 5.59 70,582 8.13 4.54 59,686 7.07 4.22
Over 24 months........ 127,205 14.21 6.19 118,601 13.67 6.01 118,027 13.98 6.43
IRA/Qualified Plans... 113,564 12.69 6.39 107,784 12.42 5.97 109,089 12.92 6.42
-------- ------ -------- ------ -------- ------
Total time deposits.. 574,844 64.23 5.70 511,634 58.96 4.95 512,323 60.68 4.66
-------- ------ -------- ------ -------- ------
Total average depos-
its................. $895,036 100.00% 4.59 $867,681 100.00% 3.99 $844,375 100.00% 3.76
======== ====== ======== ====== ======== ======
</TABLE>
72
<PAGE>
The following table presents, by various rate categories, the amount of time
deposits outstanding at the dates indicated and the periods to maturity of the
certificate accounts outstanding at December 31, 1995.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1995 AT DECEMBER 31,
---------------------------------------------------------------- --------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO OVER
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS FIVE YEARS 1995 1994 1993
--------- --------- ----------- ---------- ---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%.............. $ 6,398 $ -- $ -- $ -- $ -- $ -- $ 6,398 $167,458 $272,592
4.01 to 5.00%........... 133,673 13,213 4,285 2,932 -- -- 154,103 152,576 53,918
5.01 to 6.00%........... 173,891 44,686 23,390 6,765 6,018 2,971 257,721 105,567 64,937
6.01 to 7.00%........... 62,072 23,691 12,183 16,959 6,661 8,178 129,744 51,716 44,015
7.01 to 8.00%........... 6,016 3,972 4,836 13 83 17,566 32,486 24,437 32,605
8.01 to 9.00%........... 4,522 7,029 -- -- -- -- 11,551 18,911 22,010
Over 9.01%.............. 13,155 57 -- -- -- -- 13,212 12,602 17,316
-------- ------- ------- ------- ------- ------- -------- -------- --------
Total................. $399,727 $92,648 $44,694 $26,669 $12,762 $28,715 $605,215 $533,267 $507,393
======== ======= ======= ======= ======= ======= ======== ======== ========
</TABLE>
73
<PAGE>
BORROWINGS
From time to time the Bank has obtained advances from the FHLB as an
alternative to retail deposit funds and may do so in the future as part of its
operating strategy. FHLB advances may also be used to acquire certain other
assets as may be deemed appropriate for investment purposes. These advances
are collateralized primarily by certain of the Bank's mortgage loans and
mortgage-backed securities and secondarily by the Bank's investment in capital
stock of the FHLB. See "Regulation--Federal Home Loan Bank System." The Bank
has an available overnight line of credit with the FHLB-NY for $50.0 million
which expires November 25, 1996. When utilized, the line bears a floating
interest rate of .125% over the current federal funds rate and is secured by
the Bank's mortgage loans, mortgage-backed securities and U.S. Government
securities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the OTS and the FHLB. At December 31, 1995, the Bank had
borrowed $10.4 million against the FHLB line of credit, and had no other
borrowings.
SUBSIDIARY ACTIVITIES
The Bank owns one subsidiary which is inactive.
PROPERTIES
The Bank currently conducts its business through its administrative office
located in Brick, and eight other full service offices located in Ocean and
Middlesex Counties. In addition to its current offices, the Bank has received
the approval of the OTS to establish three new branch offices, and is
presently negotiating to establish a fourth new branch. Management estimates
the aggregate cost of opening the newly approved branches to be approximately
$923,000. The Bank has also recently acquired property in Toms River, New
Jersey, which, upon completion of scheduled renovations, is intended to become
the new administrative office. The Bank's current administrative office is
being temporarily leased until the new office becomes available. The
renovations are scheduled to be completed in early 1997, and are estimated to
cost $6.5 million. In December 1995, the Bank entered into a $5.8 million
construction commitment for the planned renovations. The Company believes that
the Bank's current and proposed facilities, when combined with the planned
additions, will be adequate to meet the present and immediately foreseeable
needs of the Bank and the Company.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1995
- -------- ------ -------- ---------- -----------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE OFFICE:
74 Brick Boulevard Leased 1990 3/31/1997 $ --
Brick, New Jersey 08723
975 Hooper Avenue(1) Owned 1995 -- 3,304
Toms River, New Jersey
08753
BRANCH OFFICES:
Brick Office(2) Owned 1960 -- 1,396
321 Chambers Bridge Road
Brick, New Jersey 08723
Point Pleasant Beach:
701 Arnold Avenue Owned 1937 -- 83
Point Pleasant, New
Jersey 08742
Point Pleasant Boro:
2400 Bridge Avenue Owned 1971 -- 703
Point Pleasant, New
Jersey 08742
</TABLE>
(Footnotes on next page)
74
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1995
- -------- ------ -------- ---------- -----------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Whiting:
Whiting Shopping Center Leased 1983 10/31/2007 73
PO Box 20
Whiting, New Jersey 08759
Concordia:
1 Concordia Shopping Mall Leased 1985 07/31/2000 --
Box 3
Cranbury, New Jersey
08512
Berkeley:
Holiday City Plaza Leased 1984 08/31/2004 221
730 Jamaica Boulevard
Toms River, New Jersey
08757
Pavilion:
70 Brick Boulevard Leased 1989 09/30/2018 400
Brick, New Jersey 08723
Holiday City South:
Holiday Plaza III Leased 1991 05/11/2001 75
604 Mule Road
Toms River, New Jersey
08787
</TABLE>
- --------
(1) The Bank intends to relocate its administrative office from its present
location to this site in 1996. Renovations to this new location are
estimated to cost $6.5 million.
(2) This property is adjoined by another lot owned by the Bank, where the
Bank's former loan center was located. The loan center is currently not in
use. The net book value of this property includes the adjacent lot and
building's value of $472,000 at December 31, 1995.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such other
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition or results of operations.
PERSONNEL
As of December 31, 1995, the Bank had 209 full-time employees and 19 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employees to be good.
See "Management of the Bank--Benefits" for a description of certain
compensation and benefit programs offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a calendar
year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description
75
<PAGE>
of the tax rules applicable to the Bank or the Company. The Bank has not been
audited by the IRS in over 10 years.
Bad Debt Reserve. Savings institutions such as the Bank which meet certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") are permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, be deducted in arriving at their taxable income. The
Bank's deduction with respect to "qualifying loans," which are generally loans
secured by certain interests in real property, may be computed using an amount
based on the Bank's actual loss experience, or a percentage equal to 8% of the
Bank's taxable income, computed with certain modifications and reduced by the
amount of any permitted addition to the non-qualifying reserve. Use of the
percentage of taxable income method of calculating the Bank's deductible
addition to its bad debt reserve has the effect of reducing the marginal rate
of federal tax on the Bank's income to 32.2%, exclusive of any minimum or
environmental tax, compared to the generally applicable maximum corporate
federal income tax rate of 35%. The Bank's deduction with respect to non-
qualifying loans must be computed under the experience method which allows a
deduction based on the Bank's actual loss experience over a period of several
years. Each year the Bank selects the most favorable way to calculate the
deduction attributable to an addition to the tax bad debt reserve.
The Bank presently satisfies the qualifying thrift definitional tests. If
the Bank failed to satisfy such tests in any taxable year, it would be unable
to make additions to its bad debt reserve. Instead, the Bank would be required
to deduct bad debts as they occur and would additionally be required to
recapture its bad debt reserve deductions ratably over a multi-year period.
Among other things, the qualifying thrift definitional tests require the Bank
to hold at least 60% of its assets as "qualifying assets." Qualifying assets
generally include cash, obligations of the United States or any agency or
instrumentality thereof, certain obligations of a state or political
subdivision thereof, loans secured by interests in improved residential real
property or by savings accounts, student loans and property used by the Bank
in the conduct of its banking business. The Bank's ratio of qualifying assets
to total assets exceeded 60% through December 31, 1995. Although there can be
no assurance that the Bank will satisfy the 60% test in the future, management
believes that this level of qualifying assets can be maintained by the Bank.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on
qualifying real property loans at the close of the taxable year to six percent
of the balance of the qualifying real property loans outstanding at the end of
the taxable year. At December 31, 1994, the Bank's total reserve for bad debts
on qualifying real property loans was approximately $12.5 million, less than
six percent of its qualifying real property loans outstanding. Also, if the
qualifying thrift uses the percentage of taxable income method, then the
qualifying thrift's aggregate addition to its reserve for losses on qualifying
real property loans cannot, when added to the addition to the reserve for
losses on non-qualifying loans, exceed the amount by which: (i) 12 percent of
the amount that the total deposits or withdrawable accounts of depositors of
the qualifying thrift at the close of the taxable year exceeds (ii) the sum of
the qualifying thrift's surplus, undivided profits and reserves at the
beginning of such year. As of December 31, 1995, this overall limitation would
not have restricted the Bank's deduction for additions to its bad debt
reserve. For a discussion of the possible impact of proposed legislation on
the Bank's bad debt reserve, see "Risk Factors--Financial Institution
Regulation and Possible Legislation."
Legislation is pending before Congress that would generally repeal,
effective for taxable years beginning after 1995, the above-described bad debt
deduction rules available to thrift institutions such as the Bank, but would
generally retain the experience method for thrift institutions having assets
with average adjusted bases of $500 million or less. The proposed tax
legislation would not require the recapture of bad debt reserve deductions
taken prior to 1988, but would require the recapture of at least some of the
bad debt reserve deductions taken by an affected thrift institution after
1987. The balance of pre-1988 bad debt reserves would continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders. Bad debt reserve
deductions required to be recaptured would generally be taken into account
76
<PAGE>
ratably over the six-taxable year period beginning with the first taxable year
beginning after December 31, 1995. However, if an institution maintains its
residential loans at a level equal to the average level of such loans for a
period preceding 1995, the institution would be permitted to defer recapture
of its reserves until 1998. The Bank is not able to predict whether, or in
what form, the proposed tax legislation will be enacted or the effect that
such enactment would have on the Bank's federal income tax liability. In
addition, there may be an impact on state income tax liability as a result of
the enactment of the proposed legislation. If the Bank is required to convert
from a federal savings bank to a commercial bank charter, this would change
the way the Bank is subject to tax in New Jersey. Currently, the Bank is
subject to a 3% tax rate under the Savings Institution Tax. As a commercial
bank, the Bank would be subject to tax at a 9% tax rate under the Corporation
Business Tax. See "Risk Factors--Financial Institution Regulation and Possible
Legislation."
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for
such losses exceeds the amount that would have been allowed under the
experience method, or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will
be included in the Bank's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. Thus, any dividends to the Company that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income
tax purposes would create a tax liability for the Bank. The amount of
additional taxable income created from an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if, after the Conversion, the Bank makes a
"non-dividend distribution," then approximately one and one-half times the
amount so used would be includable in gross income for federal income tax
purposes, assuming a 35% corporate income tax rate (exclusive of state and
local taxes). See "Regulation" and "Dividend Policy" for limits on the payment
of dividends of the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. Only 90% of
AMTI can be offset by net operating loss carryovers of which the Bank
currently has none. AMTI is increased by an amount equal to 75% of the amount
by which the Bank's adjusted current earnings exceeds its AMTI (determined
without regard to this preference and prior to reduction for net operating
losses). In addition, for taxable years beginning after December 31, 1986 and
before January 1, 1996, an environmental tax of .12% of the excess of AMTI
(with certain modifications) over $2.0 million is imposed on corporations,
including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid.
The Bank does not expect to be subject to the AMT, but may be subject to the
environmental tax liability.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend then 80% of any dividends
received may be deducted.
STATE AND LOCAL TAXATION
New Jersey Taxation. The Bank files New Jersey income tax returns. For New
Jersey income tax purposes, savings institutions are presently taxed at a rate
equal to 3% of taxable income. For this purpose, "taxable
77
<PAGE>
income" generally means federal taxable income, subject to certain adjustments
(including addition of interest income on State and municipal obligations).
The Company will be required to file a New Jersey income tax return because
it will be doing business in New Jersey. For New Jersey tax purposes, regular
corporations are presently taxed at a rate equal to 9% of taxable income. For
this purpose, "taxable income" generally means Federal taxable income, subject
to certain adjustments (including addition of interest income on state and
municipal obligations). However, if the Company meets certain requirements, it
may be eligible to elect to be taxed as a New Jersey Investment Company at a
tax rate presently equal to 2.25% (25% of 9%) of taxable income.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System and its deposit accounts are insured up to
applicable limits by the SAIF managed by the FDIC. The Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to test
the Bank's compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which
an institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. Assuming that
the holding company form of organization is utilized, the Company, as a
savings and loan holding company, will also be required to file certain
reports with, and otherwise comply with the rules and regulations of the OTS
and of the Securities and Exchange Commission (the "SEC") under the federal
securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a
material impact on the Company, the Bank, its operations or the Bank's
Conversion. Congress currently has under consideration various proposals to
consolidate the regulatory functions of the four federal banking agencies: the
OTS, the FDIC, the Office of the Comptroller of the Currency and the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). The outcome
of efforts to effect regulatory consolidation is uncertain. Therefore, the
Bank is unable to determine the extent to which legislation, if enacted, would
affect its business. See "Risk Factors--Financial Institution Regulation and
Possible Legislation."
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Bank.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and
78
<PAGE>
the regulations issued by the agencies to implement these statutes. These laws
and regulations delineate the nature and extent of the activities in which
federal associations may engage. In particular, many types of lending
authority for federal associations, e.g., commercial, non-residential real
property loans, consumer loans, are limited to a specified percentage of the
institutions's capital or assets.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus (as of December 31,
1995 this amount was $13.5 million), plus an additional 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain financial instruments and bullion. At
December 31, 1995, the Bank's self-imposed limit on loans to one borrower was
$3.0 million, which was subsequently raised to $4.0 million. At December 31,
1995, the Bank's largest aggregate amount of loans to one borrower consisted
of $2.3 million and the second largest borrower had an aggregate balance of
$1.8 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of
its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments,
including certain mortgage-backed and related securities) in at least 9 months
out of each 12 month period. A savings association that fails the QTL test
must either convert to a bank charter or operate under certain restrictions.
As of December 31, 1995, the Bank maintained 117.0% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level. An
institution that exceeds all fully phased-in regulatory capital requirements
before and after a proposed capital distribution ("Tier 1 Bank") and has not
been advised by the OTS that it is in need of more than normal supervision,
could, after prior notice to, but without the approval of the OTS, make
capital distributions during a calendar year equal to the greater of: (i) 100%
of its net earnings to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar
year; or (ii) 75% of its net earnings for the previous four quarters. Any
additional capital distributions would require prior OTS approval. In the
event the Bank's capital fell below its capital requirements or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the
OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that
such distribution would constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 5%) of its net withdrawable deposit accounts
plus short-term borrowings. OTS regulations also require each savings
institution to maintain an average daily balance of short-term liquid assets
at a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Bank's liquidity ratio at December 31, 1995 was 17.2%, which exceeded the then
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements.
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported
in the Bank's latest quarterly Thrift Financial Report. The assessments paid
by the Bank for the years ended December 31, 1995 and 1994, totalled $200,000
and $196,000, respectively.
79
<PAGE>
Branching. OTS regulations permit federally chartered savings banks to
branch nationwide under certain conditions. Generally, federal savings banks
may establish interstate networks and geographically diversify their loan
portfolios and lines of business. The OTS authority preempts any state law
purporting to regulate branching by federal savings banks.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and
23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate
amount of covered transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally requires that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. Notwithstanding Sections 23A and
23B, savings institutions are prohibited from lending to any affiliate that is
engaged in activities that are not permissible for bank holding companies
under Section 4(c) of the Bank Holding Company Act ("BHC Act"). Further, no
savings institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the FRA, and Regulation O thereunder.
Among other things, these regulations require that such loans to be made on
terms and conditions substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. Regulation
O also places individual and aggregate limits on the amount of loans the Bank
may make to such persons based, in part, on the Bank's capital position, and
requires certain board approval procedures be followed. The OTS regulations,
with certain minor variances, apply Regulation O to savings institutions.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate
in wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive
or cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies recently adopted a final regulation and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation,
fees and benefits. The agencies also adopted a proposed rule which proposes
asset quality and earnings standards which, if adopted in final, would be
added to the Guidelines. If the appropriate federal banking agency determines
that an institution fails to meet any standard prescribed by the Guidelines,
the agency may require the institution to submit to the agency an
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acceptable plan to achieve compliance with the standard, as required by the
FDI Act. The final regulation establishes deadlines for the submission and
review of such safety and soundness compliance plans.
Classification of Assets. Federal regulations and the Bank's Classification
of Assets Policy require that the Bank utilize an internal asset
classification system as a means of reporting problem and potential problem
assets. The Bank has incorporated the OTS internal asset classifications as a
part of its credit monitoring system. The Bank currently classifies problem
and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An
asset is considered "Substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "Doubtful" have
all of the weaknesses inherent in those classified "Substandard" with the
added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions,
and values, "highly questionable and improbable." Assets classified as "Loss"
are those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted. Assets which do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances, which is a regulatory term, represent loss
allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies one or more assets, or portions thereof, as "Loss," it
is required either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge off such amount.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS
which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
recently adopted an interagency policy statement on the allowance for loan and
lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth
in the policy statement. As a result of the declines in local and regional
real estate market values and the significant losses experienced by many
financial institutions, there has been a greater level of scrutiny by
regulatory authorities of the loan portfolios of financial institutions
undertaken as part of the examination of institutions by the OTS and the FDIC.
While the Bank believes that it has established an adequate allowance for loan
losses, there can be no assurance that regulators, in reviewing the Bank's
loan portfolio, will not request the Bank to materially increase at that time
its allowance for loan losses, thereby negatively affecting the Bank's
financial condition and earnings at that time. Although management believes
that adequate specific and general loan loss allowances have been established,
actual losses are dependent upon future events and, as such, further additions
to the level of specific and general loan loss allowances may become
necessary.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital
standard, a 3% leverage (core capital) ratio and an 8% risk based capital
standard. Core capital is defined as common stockholder's equity (including
retained earnings), certain non-cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain purchased mortgage servicing
rights ("PMSRs") and credit card relationships. The OTS regulations also
require that, in meeting the leverage ratio, tangible and risk-based capital
standards institutions generally must deduct investments in and loans to
subsidiaries engaged in activities
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not permissible for a national bank. In addition, the OTS prompt corrective
action regulation provides that a savings institution that has a leverage
capital ratio of less than 4% (3% for institutions receiving the highest CAMEL
examination rating) will be deemed to be "undercapitalized" and may be subject
to certain restrictions. See "--Prompt Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, including certain off-balance
sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by
the OTS capital regulation based on the risks OTS believes are inherent in the
type of asset. The components of core capital are equivalent to those
discussed earlier under the 3% leverage standard. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and, within specified limits, the allowance
for loan and lease losses. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-
weighting for certain mortgage derivative securities. Under the rule, savings
banks with "above normal" interest rate risk exposure would be subject to a
deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings bank's interest rate risk is measured by the
decline in the net portfolio value of its assets (i.e., the difference between
incoming and outgoing discounted cash flows from assets, liabilities and off-
balance sheet contracts) that would result from a hypothetical 200-basis point
increase or decrease in market interest rates divided by the estimated
economic value of the bank's assets, as calculated in accordance with
guidelines set forth by the OTS. A savings bank whose measured interest rate
risk exposure exceeds 2% must deduct an interest rate component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the bank's assets. That dollar amount is deducted from an
bank's total capital in calculating compliance with its risk-based capital
requirement. Under the rule, there is a two quarter lag between the reporting
date of an institution's financial data and the effective date for the new
capital requirement based on that data. A savings bank with assets of less
than $300 million and risk-based capital ratios in excess of 12% is not
subject to the interest rate risk component, unless the OTS determines
otherwise. The rule also provides that the Director of the OTS may waive or
defer an bank's interest rate risk component on a case-by-case basis. The OTS
has recently postponed the date that the component will first be deducted from
an institution's total capital until an appeals process is developed for the
measurement of an institution's interest rate risk. If the Bank had been
subject to an interest rate risk capital component as of December 31, 1995,
there would have been no material effect on the Bank's risk-weighted capital.
At December 31, 1995, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. See "Regulatory Capital Compliance" for a
table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Bank's historical amounts
and percentages at December 31, 1995, and pro forma amounts and percentages
based upon the issuance of the shares within the Estimated Price Range and
assuming that a portion of the net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically
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undercapitalized. The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date an institution receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory
actions may become immediately applicable to the institution depending upon
its category, including, but not limited to, increased monitoring by
regulators, restrictions on growth, and capital distributions and limitations
on expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds. An institution's assessment
rate depends on the capital category and supervisory category to which it is
assigned. Assessment rates currently range from 23 basis points to 31 basis
points. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank. The Bank's
assessment rate for 1995 was .23% of deposits. See "Risk Factors--
Recapitalization of SAIF and Its Impact on SAIF Premiums."
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. The management of the Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB stock at December 31, 1995,
of $7.7 million. FHLB advances must be secured by specified types of
collateral and all long-term advances may only be obtained for the purpose of
providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. For the years ended December 31, 1995, 1994 and
1993, dividends from the FHLB to the Bank amounted to $591,000, $548,000 and
$582,000, respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Bank's net interest income would likely also be
reduced. Further, there can be no assurance that the impact of recent
legislation on the FHLBs will not also cause a decrease in the value of the
FHLB stock held by the Bank.
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FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $52.0 million or
less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $52.0 million, the reserve
requirement is $1.6 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $52.0 million. The first $4.3 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. The Bank is in compliance with the
foregoing requirements. Because required reserves must be maintained in the
form of either vault cash, a non-interest-bearing account at a Federal Reserve
Bank or a pass-through account as defined by the Federal Reserve Board, the
effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
HOLDING COMPANY REGULATION
The Company, if utilized, will be a non-diversified unitary savings and loan
holding company within the meaning of the HOLA. As such, the Company will be
required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict
or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. The Bank must notify the OTS 30 days before
declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities
in which it may engage, provided that the Bank continues to be a QTL. See "--
Federal Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the BHC Act, subject to the prior approval of the
OTS, and to other activities authorized by OTS regulation. Recently proposed
legislation would restrict the activities of unitary savings and loan holding
companies to those permissible for multiple savings and loan holding
companies. See "Risk Factors--Financial Institution Regulation and Possible
Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings, institution or holding company
thereof, without prior written approval of the OTS; and from acquiring or
retaining, with certain exceptions. more than 5% of a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the
insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition
of a savings institution
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in another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant
to the Conversion. Upon completion of the Conversion, the Company's Common
Stock will be registered with the SEC under the Exchange Act. The Company will
then be subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of the Company or (ii) the average weekly volume
of trading in such shares during the preceding four calendar weeks. Provision
may be made in the future by the Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain
circumstances.
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MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each of
which comprises approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Messrs. Garbarino, Curtin and Schlosser, has a term of office
expiring at the first annual meeting of stockholders, a second class,
consisting of Messrs. Feltz, Hyde and Knemoller, has a term of office expiring
at the second annual meeting of stockholders, and a third class, consisting of
Messrs. Barrett, McLaughlin and Snyder, has a term of office expiring at the
third annual meeting of stockholders. Their names and biographical information
are set forth under "Management of the Bank--Directors."
The following individuals are executive officers of the Company and hold the
offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH COMPANY
---- ------------------------------------------------------------
<S> <C>
John R. Garbarino Chairman of the Board, President and Chief Executive Officer
Michael J. Fitzpatrick Executive Vice President and Chief Financial Officer
John K. Kelly Senior Vice President and Corporate Secretary
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
Information concerning the principal occupations, employment and compensation
of the directors and officers of the Company during the past five years is set
forth under "Management of the Bank--Biographical Information."
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE DIRECTOR TERM
NAME AGE(1) BANK(2) SINCE EXPIRES
- ---- ------ ------------------------- -------- -------
<S> <C> <C> <C> <C>
John R. Garbarino....... 46 Chairman of the Board, President and Chief 1984 1998
Executive Officer
Michael E. Barrett...... 56 Director and Executive Vice President, 1989 1997
Director of Loan Division
Thomas F. Curtin........ 64 Director 1991 1998
Carl Feltz, Jr.......... 57 Director 1990 1999
Roy M. Hyde............. 87 Director 1964 1999
Robert E. Knemoller..... 66 Director 1982 1999
Donald E. McLaughlin.... 48 Director 1985 1997
Frederick E. Schlosser.. 73 Director 1968 1998
James T. Snyder......... 61 Director 1991 1997
</TABLE>
- --------
(1) As of December 31, 1995.
(2) All directors are also directors of Ocean Financial Corp.
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH THE BANK
- ---- ------ ------------------------------
<S> <C> <C>
Michael J. Fitzpatrick.. 40 Executive Vice President and Chief Financial Officer
John K. Kelly........... 46 Senior Vice President and General Counsel
Robert J. Kroner........ 46 Senior Vice President and Director of Operations
</TABLE>
- --------
(1) As of December 31, 1995.
Each of the executive officers of the Bank will retain his office in the
converted Bank until the annual meeting of the Board of Directors of the Bank,
held immediately after the first annual meeting of stockholders subsequent to
Conversion, and until their successors are elected and qualified or until they
are removed or replaced. Officers are re-elected by the Board of Directors
annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
John R. Garbarino has served in various capacities for the Bank since 1971,
and has been a member of the Bank's senior management since 1979. He served as
Executive Vice President of the Bank from 1983 to 1985, at which time he was
elected President and Chief Executive Officer. He has been a member of the
Bank's Board of Directors since 1984, and was appointed Chairman of the Board
in 1989. Mr. Garbarino is also active in a number of industry related
organizations, including his past service as Chairman of the Board of
Governors of the New Jersey Savings League and current service on the Board of
Directors of America's Community Bankers. In 1995, Mr. Garbarino was elected
to the Board of Directors of the Federal Home Loan Bank of New York. He also
serves on the Boards of numerous local civic and charitable organizations.
Michael E. Barrett has served as an Executive Vice President and Director of
the Bank's Loan Division since 1987. He was elected to the Board of Directors
in 1989. Prior to 1987, he served as Executive Vice President in charge of
lending and operations for another savings institution for 12 years. In total,
Mr. Barrett has worked in the financial services industry for over 26 years.
Thomas F. Curtin is a partner with The Foristall Company, Inc., an investor
relations firm specializing in financial communications. He has been a member
of the Board of Directors since 1991.
Carl Feltz, Jr. is a registered architect and has been a principal in the
firm of Feltz Associates, Architects since its establishment in 1977. Mr.
Feltz has been a member of the Board of Directors since 1990.
Roy M. Hyde is a retired custom home builder. He serves on the boards of
numerous local building and planning organizations. He has served on the
Bank's Board of Directors since 1964.
Robert E. Knemoller is retired from the Bank, having served in numerous
capacities for over 30 years. He was President of the Bank from 1983 until
1985. He has been a member of the Board since 1982.
Donald E. McLaughlin is a certified public accountant and President of
Donald E. McLaughlin, CPA P.C. He has worked as an accountant since 1970. Mr.
McLaughlin has been a member of Board since 1985.
Frederick E. Schlosser is a former management consultant for a chain of
department stores, and is now retired. Mr. Schlosser has served on the Board
of Directors since 1968.
James T. Snyder is retired. He was formerly a 50% owner of Wallach's, Inc.,
a New Jersey retail company. Mr. Snyder has served on the Board of Directors
since 1991.
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Michael J. Fitzpatrick has served as Executive Vice President and Chief
Financial Officer of the Bank since 1992, and in that capacity, is responsible
for all financial activities of the Bank. Prior to 1992, Mr. Fitzpatrick, a
certified public accountant, was employed by KPMG Peat Marwick, LLP for 11
years, completing his tenure as a senior audit manager.
John K. Kelly, admitted to the practice of law in New Jersey and
Connecticut, has been Senior Vice President and General Counsel of the Bank
since 1988. In this position, Mr. Kelly oversees all legal, insurance and risk
assessment functions of the Bank. He has also served as the Bank's Compliance
Officer since 1989. Prior to joining the Bank, Mr. Kelly was associated with a
private law firm and was also a Deputy Attorney General of the New Jersey
Department of Law and Public Safety.
Robert J. Kroner has been with the Bank since 1983, and currently serves as
a Senior Vice President and Director of Operations. In that capacity, Mr.
Kroner is responsible for the operations of the Bank, including branch
operations, facilities management, information services and checking services.
He has worked in the financial services industry since 1972.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY
The Board of Directors meets on a monthly basis and may have additional
special meetings upon the request of the Chairman of the Board. During the
year ended December 31, 1995, the Board of Directors met 13 times. No director
attended fewer than 90% of the total number of Board meetings held during this
period.
The Board of Directors of the Bank has established the following committees:
The Audit Committee consists of Messrs. McLaughlin, Knemoller and Schlosser.
The Bank's Internal Auditor and Loan Review Officer report to this committee.
The purpose of this committee is to review audit and loan review reports and
management actions regarding the implementation of audit findings. The
committee also maintains a liaison with the outside auditors and reviews the
adequacy of internal controls. The committee generally meets on a quarterly
basis, and met five times in 1995.
The Loan Committee consists of Messrs. Barrett, Garbarino and three
directors on a rotating basis. The purpose of this committee is to review and
ratify all loans approved by management, and to approve large loan requests.
The committee meets on at least a monthly basis, and more often if necessary.
This committee met 13 times in 1995.
The Human Resources/Compensation Committee consists of Messrs. Knemoller,
Schlosser and Curtin. The purpose of this committee is to review and approve
compensation and benefits to be paid to employees of the Bank and management's
compliance with approved guidelines. This committee meets periodically, as
needed, and met five times in 1995.
The Budget and Planning Committee consists of Messrs. Hyde, Feltz and
Snyder. The Committee is responsible for the formulation, review and approval
of the annual and long-term business plans and budgets of the Bank, and for
making recommendations to the Board on goals and strategies to develop the
Bank's business. This Committee meets as necessary, and met three times in
1995.
Additionally, the Bank has a number of other management committees,
including the ALCO and Asset Classification Committees, consisting of members
of senior management.
The Board of Directors of the Company has established the following
committees: the Audit Committee, Nominating Committee, Pricing Committee and
the Compensation Committee.
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DIRECTORS' COMPENSATION
FEE ARRANGEMENTS. Currently, all outside directors of the Bank and Company
receive an annual retainer of $15,000 for service on the Bank's Board and
$5,000 for service on the Company's Board. All fees are paid to directors
quarterly. Outside directors of the Bank also receive a fee of $900 for each
regular board meeting attended, and $300 for each committee meeting attended.
Committee chairmen receive $500 per committee meeting attended. The Bank's
directors are also provided with medical and dental insurance.
DEFERRED COMPENSATION PLAN FOR DIRECTORS. The Bank maintains a deferred
compensation plan for the benefit of directors. The plan is a non-qualified
arrangement which offers participating directors the opportunity to defer
compensation through a reduction in fees in lieu of a promise of future
benefits. Such benefits are payable commencing at an age mutually agreed upon
by the Bank and the participating director (the "Benefit Age"). The benefits
equal the account balance of the director annuitized over a period of time
mutually agreed upon by the Bank and the director and then reannuitized at the
beginning of each calendar year thereafter. Lump sum payouts are also
available upon eligibility for distribution of benefits or in the event of the
death of the director. The account balance equals deferrals and interest.
Currently the plan credits interest on deferrals at a rate equal to the sum of
(i) the "Stable Fund" investment option in the Bank's qualified 401(k) plan
and (ii) 200 basis points. The plan offers a death benefit which may be funded
through the proceeds of Corporate Owned Life Insurance ("COLI") which is equal
to the estimated benefit which would have been payable if the director had
participated in the plan for the entire period up to the Benefit Age. Early
distribution of benefits may occur under certain circumstances which include,
change in control, financial hardship, termination for cause or disability.
EXECUTIVE COMPENSATION
CASH COMPENSATION. The following table sets forth the cash compensation paid
by the Bank for services rendered in all capacities during the year ended
December 31, 1995, to the Chief Executive Officer and four other executive
officers who received compensation in excess of $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
----------------------------- --------------------- --------
SECURITIES
OTHER RESTRICTED UNDERLYING (I)
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
POSITIONS YEAR ($) ($)(2) ($)(3) ($)(4) (#)(5) ($)(6) ($)(7)
------------------ ---- -------- ------- ------------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John R. Garbarino....... 1995 $225,600 $63,099 $-- $-- $-- $158,600 $11,625
President and Chief
Executive Officer
Michael E. Barrett...... 1995 138,200 24,108 -- -- -- 74,996 10,819
Executive Vice
President
Michael J. Fitzpatrick.. 1995 118,200 30,534 -- -- -- 63,200 6,750
Executive Vice
President and Chief
Financial Officer
John K. Kelly........... 1995 105,700 22,042 -- -- -- 45,948 5,812
Senior Vice President
and General Counsel
Robert J. Kroner........ 1995 102,300 24,531 -- -- -- 46,120 5,755
Senior Vice President
</TABLE>
- --------
(1) Under Annual Compensation, the column titled "Salary" includes amounts
deferred by the named executive officer pursuant to the Bank's 401(k) Plan
and Deferred Compensation Plan as hereinafter defined.
(Footnotes continued on next page)
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(2) Consists of bonuses paid pursuant to the Bank's Performance Achievement
Awards Program, which awards bonuses based on the attainment of certain
predetermined annual performance goals.
(3) For 1995, there were no (a) perquisites over the lesser of $50,000 or 10%
of the individual's total salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments
of earnings with respect to long-term incentive plans prior to settlement
or maturation; (d) tax payment reimbursements; or (e) preferential
discounts on stock. For 1995, the Bank had no restricted stock or stock
related plans in existence.
(4) Does not include awards pursuant to the Stock Programs, which may be
granted in conjunction with a meeting of stockholders of the Company,
subject to OTS and stockholder approval, as such awards were not earned,
vested or granted in fiscal 1995. For a discussion of the terms of the
Stock Programs, see "--Benefits--Stock Programs." For 1995, the Bank had
no restricted stock plans in existence.
(5) Does not include options which may be granted under the Stock Option Plans
in conjunction with a meeting of stockholders of the Company, subject to
OTS and stockholder approval, as such options were not earned or granted
in 1995. For a discussion of the terms of the Stock Option plans, see "--
Benefits--Stock Option Plans."
(6) Represents the payout for the first three-year performance period and for
the first year of the second performance period under the Bank's Long-Term
Award Program. This Program was terminated as of December 31, 1995. See
"--Long-Term Incentive Plan."
(7) Includes $6,750, $6,750, $6,750, $5,812 and $5,755 contributed by the Bank
to the accounts of Messrs. Garbarino, Barrett, Fitzpatrick, Kelly and
Kroner, respectively, under the Bank's 401(k) Plan.
LONG-TERM INCENTIVE PLAN. In 1992, the Bank implemented the Ocean Federal
Savings Bank Long-Term Award Program, which awarded compensation to
participants based upon the financial performance of the Bank measured over
three-year periods. The first three-year performance period under the Program
concluded as of December 31, 1995. The payouts for that performance period are
reflected in the Summary Compensation table above. In connection with the
Bank's Conversion, and the proposed implementation of certain stock-based
benefit plans at least six months following Conversion, pending stockholder
approval, the Long-Term Award Program was terminated by the Bank as of
December 31, 1995. A second performance period had begun under the Program as
of January 1, 1995. Payouts for the partial one-year period ended December 31,
1995 have been funded and distributed, and are also reflected in the Summary
Compensation Table above.
EMPLOYMENT AGREEMENTS
It is anticipated that subsequent to the Conversion, the Bank and the
Company intend to enter into employment agreements with Messrs. Garbarino and
Fitzpatrick (individually, the "Executive"). These agreements are subject to
the review and approval of the Company and the Bank and the review of the OTS
and may be amended as a result of such review. Review of the compensation
arrangements by the OTS does not indicate, and should not be construed to
indicate, that the OTS has passed upon the merits thereof. The employment
agreements are intended to ensure that the Bank and the Company will be able
to maintain a stable and competent management base after the Conversion. The
continued success of the Bank and the Company depends to a significant degree
on the skills and competence of Messrs. Garbarino and Fitzpatrick.
The proposed employment agreements are expected to provide for a three-year
term for both Executives. It is expected that the Bank's employment agreements
would provide that, commencing on the first anniversary date and continuing
each anniversary date thereafter, the Board of Directors of the Bank would
review the agreements and the Executive's performance for purposes of
determining whether to extend the agreements with the Bank for an additional
year such that the remaining terms would be the amount of the original terms.
It is expected that the agreements with the Company would automatically extend
daily, such that the remaining terms would be the amount of the original term
unless written notice of non-renewal is given by the Board of Directors of the
Company after conducting a performance evaluation of the executive. In
addition to the base salary, the proposed agreements would provide for, among
other things, participation in stock benefit plans and other fringe benefits
applicable to executive personnel. The agreements would provide for
termination by the Bank or the Company for cause, as would be defined in the
agreements, at any time. In the event the Bank or the Company would choose to
terminate the Executive's employment for reasons other than for cause, or in
the event of the Executive's resignation from the Bank and the Company upon:
(i) failure to re-elect the Executive to his current offices; (ii) a material
change in the Executive's functions, duties or responsibilities; (iii) a
relocation of the Executive's principal place of employment by more than 25
miles; (iv) liquidation or dissolution of the Bank or the Company; or (v) a
breach of the agreement by the Bank or the Company, the Executive or, in the
event of death, his beneficiary, would be entitled to receive the remaining
base salary payments due to the Executive and
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the contributions that would have been made on the Executive's behalf to any
employee benefit plans of the Bank or the Company during the remaining term of
the agreement. The Bank and the Company would also continue and pay for the
Executive's life, health and disability coverage for the remaining term of the
agreement.
Under the proposed agreements, if voluntary or involuntary termination
follows a "change in control" of the Bank or the Company, as defined in the
proposed employment agreements, it is expected that the Executive or, in the
event of death, his beneficiary, would be entitled to a payment equal to the
greater of: (1) the payments due for the remaining term of the agreement; or
(2) a severance payment equal to three times the average of the five preceding
taxable years' compensation. It is also expected that the Bank and the Company
would also continue the Executive's life, health, and disability coverage for
36 months. Notwithstanding that both agreements would provide for a severance
payment in the event of a change in control, the Executive would only be
entitled to receive a severance payment under one agreement.
Payments to the Executive under the Bank's proposed agreements are expected
to be guaranteed by the Company in the event that payments or benefits are not
paid by the Bank. Payment under the Company's agreements would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the
agreements would be paid by the Bank or Company, respectively, if the
Executive is successful on the merits pursuant to a legal judgment,
arbitration or settlement. It is also expected that the employment agreements
would provide that the Bank and Company would indemnify the Executive to the
fullest extent allowable under federal and Delaware law, respectively. In the
event of a change in control of the Bank or Company, the total amount of
payments that would be due under the agreements, based solely on cash
compensation paid to Messrs. Garbarino and Fitzpatrick over the past three
fiscal years and excluding any benefits under any employee benefit plan which
may be payable, would be approximately $1.4 million.
CHANGE IN CONTROL AGREEMENTS
It is anticipated that subsequent to the Conversion, the Company and the
Bank will enter into two-year Change in Control Agreements ("CIC Agreement")
with Messrs. Barrett, Kelly and Kroner. The proposed CIC Agreement is expected
to provide that commencing on the first anniversary date and continuing on
each anniversary thereafter, the Bank's CIC Agreements may be renewed by the
Board of Directors for an additional year while the term of the Company's CIC
Agreements shall be extended on a daily basis unless written notice of non-
renewal is given by the Board of Directors of the Company. It is also expected
that the CIC Agreements with the Company will provide that in the event
voluntary or involuntary termination follows a change in control of the Bank
or the Company, the officer would be entitled to receive a severance payment
equal to two times the officer's average annual compensation for the five
years preceding termination. It is also expected that the Bank's CIC Agreement
would have a similar change in control provision; however, the officer would
only be entitled to receive a severance payment under one agreement. The
Company and the Bank would also continue, and pay for, the officer's life,
health and disability coverage for 36 months following termination. Payments
to the officer under the Bank's CIC Agreements would be guaranteed by the
Company in the event that payments or benefits are not paid by the Bank. In
the event of a change in control of the Bank or Company, the total payments
that would be due under the CIC Agreements, based solely on the cash
compensation paid to the three officers covered by the CIC Agreements over the
past two fiscal years and excluding any benefits under any employee benefit
plan which may be payable, would be approximately $1.0 million.
EMPLOYEE SEVERANCE COMPENSATION PLAN
It is anticipated that the Bank's Board of Directors will, subsequent to the
Conversion, establish the Ocean Federal Savings Bank Employee Severance
Compensation Plan ("Severance Plan") which would provide eligible employees
with severance pay benefits in the event of a change in control of the Bank or
the Company following Conversion. Management personnel with employment or CIC
agreements would not be eligible to participate in the Severance Plan.
Generally, all employees would be eligible to participate in the Severance
Plan. It is expected that the Severance Plan would vest in each participant a
contractual right to the benefits such
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participant is entitled to thereunder. It is expected that under the Severance
Plan, in the event of a change in control of the Bank or the Company, eligible
employees who are terminated from or terminate their employment within one
year of the change in control (for reasons specified under the Severance
Plan), would be entitled to receive a severance payment. The participant would
be entitled to a cash severance payment equal to one-twelfth of annual
compensation for each year of service up to a maximum of 100% of annual
compensation. Those holding title of Vice President or above would receive a
benefit of one year's salary regardless of service. Such payments may tend to
discourage takeover attempts by increasing costs to be incurred by the Bank in
the event of a takeover. In the event the provisions of the Severance Plan
were triggered, the total amount of payments that would be due thereunder,
based solely upon current salary levels at December 31, 1995, would be
approximately $2.6 million.
INSURANCE PLANS
All full-time employees, after three months of employment with the Bank are
covered as a group for comprehensive hospitalization, including major medical,
long-term disability, accidental death and dismemberment insurance. In
addition, the Bank maintains a health care and dependent care reimbursement
account plan for employees on a pre-tax basis, for the payment of medical and
dependent care expenses, as well as the payment of certain insurance premiums.
BENEFITS
RETIREMENT PLAN. The Bank maintains a defined benefit plan (the "Retirement
Plan") for salaried employees who have attained the age of 21 and have
completed one year of service. Benefits vest after a participant is credited
with five years of service. The Retirement Plan is designed to comply with the
requirements under Section 401(a) of the Code.
The Retirement Plan provides for a monthly benefit to the employee upon
retirement at the age of 65, or if later, the fifth anniversary of the
employee's initial participation in the Retirement Plan ("Normal Retirement
Age"). The Retirement Plan also provides for a monthly benefit upon the
Participant's death, disability and early retirement. Early retirement is
conditioned upon the attainment of the age of 55, and the completion by the
Participant of 10 years of service. Benefits under the Plan are determined
taking into account the participant's final average earnings and years of
credited service under the Retirement Plan Benefits are not calculated to
include social security benefits. About the time of the Conversion, the Board
intends to freeze or reduce the future accrual of benefits under the
Retirement Plan in connection with the adoption or amendment of other
qualified employee benefit plans.
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The following table sets forth the estimated annual benefits payable upon
retirement at age 65 for the year ended December 31, 1995, expressed in the
form of a 10 year certain and continuous benefit, for the final average salary
and benefit service classifications specified.
<TABLE>
<CAPTION>
OCEAN FEDERAL SAVINGS BANK EMPLOYEE PENSION PLAN
----------------------------------------------------------------
YEARS OF SERVICE
FINAL AVERAGE ----------------
COMPENSATION 15 20 25 30 35
- ------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 7,500 $ 10,000 $ 12,500 $ 15,000 $ 17,500
100,000 15,000 20,000 25,000 30,000 35,000
150,000 22,500 30,000 37,500 45,000 52,500
200,000 22,500 30,000 37,500 45,000 52,500
250,000 22,500 30,000 37,500 45,000 52,500
300,000 22,500 30,000 37,500 45,000 52,500
350,000 22,500 30,000 37,500 45,000 52,500
</TABLE>
Compensation under the Retirement Income Plan includes all regular pay,
overtime and regular bonuses as set forth under "--Cash Compensation." The
benefit amounts listed above were computed on a 10 year certain and continuous
benefit basis, which is the normal form under the plan. Participants of the
plan, however, have the option of electing benefits to be paid on a single
life annuity basis.
The approximate years of service, as of December 31, 1995, for the named
executive officers are as follows:
<TABLE>
<CAPTION>
NAME SERVICE
---- -------
<S> <C>
John R. Garbarino............................................... 24
Michael E. Barrett.............................................. 8
Michael J. Fitzpatrick.......................................... 3
John K. Kelly................................................... 8
Robert J. Kroner................................................ 12
</TABLE>
EMPLOYEES' PROFIT SHARING PLAN. The Bank maintains the Retirement Plan for
Ocean Federal Savings Bank (the "401(k) Plan"), designed to be qualified under
Section 401(k) of the Code. The 401(k) Plan covers all full-time employees of
the Bank. An employee is eligible to participate in the 401(k) Plan following
the attainment of age 21 and the completion of six months of service (1,000
hours within a twelve-month period) with the Bank. Under the 401(k) Plan,
subject to the limitations imposed under Section 401(k) and Section 415 of the
Code, a participant may elect to defer not more than 15% of his compensation
by directing the Bank to contribute such amount to the 401(k) Plan on such
employee's behalf. The Bank currently makes matching contributions applicable
to its 401(k) Plan equal to 75% of the first 6% of the participant's monthly
contribution. The Board reviews the match periodically. About the time of the
Conversion, the Board intends to reduce the employer contribution in
connection with the adoption of the ESOP. When an employer contribution is
made, it will be made in the form of a cash contribution into the employer
stock fund. Twenty-five percent (measured on the first day of each plan year)
of the amount attributable to the employer contribution may be reallocated
once per year. "Compensation" for purposes of the 401(k) Plan is defined as a
participant's compensation from the Bank on which federal withholding would be
required, including contributions to the 401(k) Plan by the employee, and
contributions made by the Bank to any other pension, insurance, welfare or any
other employee benefit plan. Under the 401(k) Plan, a separate account is
established for each participant. Participants are always 100% vested in their
contributions and in the earnings thereon. Participants in the 401(k) Plan
become vested at the rate of 20% per year commencing with the second year of
service, in employer contributions and earnings thereon. Participants will
become 100% vested in the employer contributions and earnings thereon in the
event of death, disability or attainment of age 65 while employed by the Bank.
The 401(k) Plan provides for in-service hardship distributions of elective
deferrals. Distributions from the 401(k) Plan are made upon termination of
service in a lump sum or in annual installments over a period of years at the
election of the Participant with the right to take a lump sum payment at any
time during such period.
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The 401(k) Plan has been amended to increase the number of investment
options provided to participants, by including an Employer Stock Fund. The
401(k) Plan, as amended, permits participants to direct that all or a portion
of their account be invested in such fund. Each participant who directs the
trustee to invest all or part of his account in the Employer Stock Fund will
have assets in his account applied to the purchase of shares of the Common
Stock. A participant in the 401(k) Plan who elects to purchase Common Stock in
the Conversion through the 401(k) Plan will receive the same subscription
priority, and be subject to the same individual purchase limitations, for such
a purchase as if such participant had elected to purchase Common Stock in the
Conversion using funds not in the 401(k) Plan. See "The Conversion--
Limitations on Common Stock Purchases." As of December 31, 1995, the 401(k)
Plan had approximately $3.6 million in assets.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank has implemented a non-
qualified Supplemental Executive Retirement Plan ("SERP") to provide a select
group of management and highly compensated employees with additional
retirement benefits. The benefits provided under the SERP will make up the
difference between an amount up to 70% of final base compensation and the
benefits provided from Bank funding of the Bank's tax qualified retirement
plan and 401(k) Plan. In addition, the SERP will provide a benefit equal to
the benefit lost from the ESOP due to the application of limitations imposed
by the Code on compensation and maximum benefits under the ESOP.
The Bank intends to establish an irrevocable trust in connection with the
SERP. This trust would be funded with contributions from the Bank for the
purpose of providing the benefits promised under the terms of the SERP. The
assets of the trust will be beneficially owned by the SERP participants, who
will recognize income as contributions are made to the trust. Earnings on the
trust's assets are taxable to the participants. The trustee of the trust may
invest the trust's assets in the Company's stock and may purchase life
insurance on the life of the participants with assets of the trust.
DEFERRED COMPENSATION PLAN FOR OFFICERS. This plan is a non-qualified
arrangement which offers participating officers the opportunity to defer
compensation through a reduction in salary in lieu of a promise of future
benefits. Such benefits are payable commencing at an age mutually agreed upon
by the Bank and the participating officer (the "Benefit Age"). The benefits
equal the account balance of the officer annuitized over a period of time
mutually agreed to by the Bank and the officer and then reannuitized at the
beginning of each calendar year thereafter. Lump sum payouts are also
available upon eligibility for distribution of benefits or in the event of the
death of the officer. The account balance equals deferrals and interest.
Currently the plan credits interest on deferrals at a rate equal to the sum of
(i) the "Stable Fund" investment option in the Bank's qualified 401(k) plan
and (ii) 200 basis points. The plan offers a death benefit which may be funded
through the proceeds of COLI which is equal to the estimated benefit which
would have been payable if the officer had participated in the plan for the
entire period up to the Benefit Age. Early distribution of benefits may occur
under certain circumstances which include change in control, financial
hardship. termination for cause or disability.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank has established for
eligible employees an ESOP and related trust to become effective upon
Conversion. Full-time employees employed with the Bank as of January 1, 1996
and full-time employees of the Company or the Bank employed after such date,
who have been credited with at least 1,000 hours during a twelve month period
and who have attained the age of twenty-one will become participants. The ESOP
intends to purchase 8% of the Common Stock issued in the Conversion. As part
of the Conversion and in order to fund the ESOP's purchase of the Common Stock
to be issued in the Conversion, the ESOP intends to borrow funds from the
Company equal to 100% of the aggregate purchase price of the Common Stock. In
either case, the loan will be repaid principally from the Company's or the
Bank's contributions to the ESOP over a period of 12 years, provided that such
term may be accelerated or extended and the collateral for the loan will be
the Common Stock purchased by the ESOP. Subject to receipt of any necessary
regulatory approvals or opinions, the Bank may make contributions to the ESOP
for repayment of the loan since the participants are all employees of the Bank
or to reimburse the Company for contributions made by it. Contributions to the
ESOP will be discretionary; however, the Company or the Bank intend to make
annual contributions to the ESOP in an aggregate amount at least equal to the
principal and interest requirement on the debt. The interest rate for the loan
is the prime rate of interest, currently 8.25%. There can be no assurance that
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the OTS will permit the Company to make the loan to the ESOP, or guarantee and
provide additional collateral in the event the ESOP loan is obtained from a
third party.
Shares purchased by the ESOP will initially be pledged as collateral for the
loan, and will be held in a suspense account until released for allocation
among participants as the loan is repaid. The pledged shares will be released
annually from the suspense account in an amount proportional to the repayment
of the ESOP loan for each plan year. The released shares will be allocated
among the accounts of participants on the basis of the participant's
compensation for the year of allocation. Participants generally become 100%
vested in their ESOP account after five years of credited service or if their
service is terminated due to death, early retirement, permanent disability or
a change in control. Employees will be credited for years of service to the
Bank prior to the adoption of the ESOP for participation and vesting purposes.
Prior to the completion of five years of credited service, a participant who
terminates employment for reasons other than death, retirement, disability, or
change in control of the Bank or Company will not receive any benefit.
Forfeitures will be reallocated among remaining participating employees, in
the same proportion as contributions. Benefits may be payable upon death,
retirement, early retirement, disability or separation from service. The
contributions to the ESOP are not fixed, so benefits payable under the ESOP
cannot be estimated.
In connection with the establishment of the ESOP, the Human
Resources/Compensation Committee of the Board of Directors was appointed to
administer the ESOP (the "Committee"). An unrelated corporate trustee for the
ESOP will be appointed prior to the Conversion and continuing thereafter. The
Committee may instruct the trustee regarding investment of funds contributed
to the ESOP. The ESOP trustee, subject to its fiduciary duty, must vote all
allocated shares held in the ESOP in accordance with the instructions of the
participating employees. Under the ESOP, unallocated shares will be voted in a
manner calculated to most accurately reflect the instructions it has received
from participants regarding the allocated stock as long as such vote is in
accordance with the provisions of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA").
STOCK OPTION PLANS. Following the Conversion, the Board of Directors of the
Company intends to adopt stock-based benefit plans which would provide for the
granting of stock options to eligible officers, employees and directors of the
Company and the Bank. Stock options are intended to be granted under either a
separate stock option plan for officers and employees (the "Incentive Option
Plan") and a separate option plan for outside directors (the "Directors'
Option Plan") (collectively, the "Option Plans") or under a single Master
Stock-Based Benefit Plan which would incorporate the benefits and features of
the Incentive Option Plan, Directors Option Plan and potentially, the Stock
Programs described below. At a meeting of stockholders of the Company
following the Conversion, which under applicable OTS regulations, may be held
no earlier than six months after the completion of the Conversion, the Board
of Directors intends to present the Option Plans or the Master Stock-Based
Benefit Plan to stockholders for approval and has reserved an amount equal to
10.0% of the shares of Common Stock issued in the Conversion or 729,398 shares
(based upon the issuance of 7,293,981 shares), for issuance under the Option
Plans or the Master Stock-Based Benefit Plan. OTS regulations provide that no
individual officer or employee of the Bank may receive more than 25% of the
options granted under the Option Plans or Master Stock-Based Benefit Plan and
non-employee directors may not receive more than 5% individually, or 30% in
the aggregate of the options granted under the Option Plans.
The stock option benefits provided under the Incentive Option Plan or Master
Stock-Based Benefit Plan will be designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a
propriety interest in the Company as an incentive to contribute to the success
of the Company and reward key employees for outstanding performance. All
employees of the Company and its subsidiaries will be eligible to participate
in such plans. The Incentive Option Plan or Master Stock-Based Benefit Plan
will provide for the grant of: (i) options to purchase the Company's Common
Stock intended to qualify as incentive stock options under Section 422 of the
Code ("Incentive Stock Options"); (ii) options that do not so qualify ("Non-
Statutory Stock Options"); and (iii) Limited Rights (discussed below) which
will be exercisable only upon a change in control of the Bank or the Company.
Unless sooner terminated, the Incentive Option Plan or Master Stock-Based
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Benefit Plan will be in effect for a period of ten years from the earlier of
adoption by the Board of Directors or approval by the Company's Stockholders.
Subject to stockholder approval, the Company intends to grant options with
Limited Rights under the Incentive Option Plan or Master Stock-Based Benefit
Plan at an exercise price equal to the fair market value of the underlying
Common Stock on the date of grant. Upon exercise of "Limited Rights" in the
event of a change in control, the employee will be entitled to receive a lump
sum cash payment equal to the difference between the exercise price of the
related option and the fair market value of the shares of common stock subject
to the option on the date of exercise of the right in lieu of purchasing the
stock underlying the option. In addition, the Company intends to provide a
Dividend Equalization Benefit ("DEB") which will provide option holders a
payment equal to the product of (i) the number of shares upon which options
are held, and (ii) the per share amounts of any extraordinary dividends
declared by the Board of Directors. It is anticipated that all options granted
to officers and employees contemporaneously with stockholder approval of such
plans will be intended to be Incentive Stock Options to the extent permitted
under Section 422 of the Code.
Under the Incentive Option Plan, or Master Stock-Based Benefit Plan, it is
expected that the Compensation Committee will determine which officers and
employees will be granted options and Limited Rights, whether such options
will be incentive or non-statutory stock options, the number of shares subject
to each option, the exercise price of each non-statutory stock option, whether
such options may be exercised by delivering other shares of Common Stock and
when such options become exercisable. It is expected that the per share
exercise price of an incentive stock option will be required to be at least
equal to the fair market value of a share of Common Stock on the date the
option is granted.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, an employee will not be deemed to have received
taxable income upon grant or exercise of any Incentive Stock Option, provided
that such shares received through the exercise of such option are not disposed
of by the employee for at least one year after the date the stock is received
in connection with the option exercise and two years after the date of grant
of the option. No compensation deduction would be able to be taken by the
Company as a result of the grant or exercise of Incentive Stock Options,
provided such shares are not disposed of before the expiration of the period
described above (a "disqualifying disposition"). In the case of a Non-
Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an employee will be deemed to receive ordinary income
upon exercise of the stock option in an amount equal to the amount by which
the exercise price is exceeded by the fair market value of the Common Stock
purchased by exercising the option on the date of exercise. The amount of any
ordinary income deemed to be received by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an
Incentive Stock Option would be a deductible expense for tax purposes for the
Company. In the case of Limited Rights, upon exercise or upon the payment of a
DEB, the option holder would have to include the amount paid to him or her
upon exercise in his gross income for federal income tax purposes in the year
in which the payment is made and the Company would be entitled to a deduction
for federal income tax purposes of the amount paid.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, stock options would become vested and exercisable
in the manner specified by the Company, subject to applicable OTS regulations,
which require that options begin vesting no earlier than one year from the
date of shareholder approval of the Incentive Option Plan or Master Stock-
Based Benefit Plan and thereafter vest at a rate of no more than 20% per year.
Options granted in connection with the Incentive Option Plan or Master Stock-
Based Benefit Plan could be exercisable for three months following the date on
which the employee ceases to perform services for the Bank or the Company,
except that in the event of death or disability, options accelerate and become
fully vested and may be exercisable for up to one year thereafter or such
longer period as determined by the Company. However, any Incentive Stock
Options exercised more than three months following the date the employee
ceases to perform services as an employee shall be treated as a Non-Statutory
Stock Option as described above. In the event of retirement, any unvested
stock options shall be terminated and remain unearned unless the optionee
continues to perform services on behalf of the Bank, the Company or an
affiliate, in which case unvested options would continue to vest in accordance
with their original vesting schedule. If the Incentive Option Plan or Master
Stock-Based Benefit Plan is adopted in the form described above, in the event
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of death, disability or normal retirement, the Company, if requested by the
optionee, could elect, in exchange for vested options, to pay the optionee, or
beneficiary in the event of death, the amount by which the fair market value
of the Common Stock exceeds the exercise price of the options on the date of
the employee's termination of employment.
Under the Directors' Option Plan or Master Stock-Based Benefit Plan
contemplated, the exercise price per share of each option granted could be
equal to the fair market value of the shares of Common Stock on the date the
option is granted. All Options granted to outside directors under the
Directors' Option Plan would be Non-Statutory Stock Options and, pursuant to
applicable OTS regulations, would vest and become exercisable commencing one
year after the date of shareholder approval of the Directors Option Plan at
the rate of 20% per year, and would expire upon the earlier of ten years
following the date of grant or one year following the date the optionee ceases
to be a director or consulting director. In the event of the death or
disability of a participant, all previously granted options would immediately
vest and become fully exercisable.
Applicable OTS regulations currently do not permit accelerated vesting in
the event of a change in control of stock options granted under a plan adopted
within one year after conversion. If permitted by OTS regulations in effect at
the time a change in control occurs, the Incentive Option Plan and the
Directors Option Plan or Master Stock-Based Benefit Plan described above would
provide for accelerated vesting of previously granted options in the event of
a change in control of the Company or the Bank. A change in control would be
defined in the contemplated Incentive Option Plan, Master Stock-Based Benefit
Plan or the Directors' Option Plan generally to occur when a person or group
of persons acting in concert acquires beneficial ownership of 20% or more of
any class of equity security of the Company or the Bank or in the event of a
tender or exchange offer, merger or other form of business combination, sale
of all or substantially all of the assets of the Company or the Bank or
contested election of directors which results in the replacement of a majority
of the Board of Directors by persons not nominated by the directors in office
prior to the contested election.
STOCK PROGRAMS. Following the Conversion, the Company or the Bank intends to
establish performance based Stock Programs as a method of providing officers,
employees and non-employee directors of the Bank and Company with a
proprietary interest in the Company in a manner designed to encourage such
persons to remain with the Bank or the Company. The benefits intended to be
granted under the Stock Programs may be provided for under either a separate
plan for officers and employees and a separate plan for outside directors or
under the Master Stock-Based Benefit Plan which would incorporate the benefits
and features of such separate Stock Program plans or could additionally
include (but not duplicate) the types of benefits described above in the
section captioned "Stock Option Plans." The Company intends to present the
Stock Programs or Master Stock-Based Benefit Plan for stockholder approval at
a meeting of stockholders, which pursuant to applicable OTS regulations, may
be held no earlier than six months after the completion of the Conversion. The
Company's acquisition of Common Stock for the Stock Programs in an amount
equal to 4% of the shares issued in the Conversion is subject to the approval
of the Regional Director of the OTS.
Subject to stockholder approval, the Bank or the Company expects to
contribute funds to the Stock Programs or Master Stock-Based Benefit Plan to
enable such plans to acquire, in the aggregate, an amount equal to 4% of the
shares of Common Stock issued in the Conversion, or 291,759 shares (based upon
the issuance of 7,293,981 shares). These shares would be acquired through open
market purchases, if permitted, or from authorized but unissued shares.
Although no specific award determinations have been made, the Company
anticipates that, if stockholder approval is obtained, it would provide awards
to its directors and employees to the extent permitted by applicable
regulations. OTS regulations provide that no individual employee may receive
more than 25% of the shares of any plan and non-employee directors may not
receive more than 5% of any plan individually or 30% in the aggregate for all
directors.
The Human Resources/Compensation Committee of the Bank's Board of Directors
would administer the Stock Programs or Master Stock-Based Benefit Plan
described above. The Stock Programs or Master Stock-Based Benefit Plan are
expected to be self-administered for grants or allocations made to non-
employee directors,
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which would not be performance-based. Under the Stock Programs or Master
Stock-Based Benefit Plan, awards would be granted in the form of shares of
Common Stock held by such plans. Awards will be non-transferable and non-
assignable. The Board intends to appoint an independent fiduciary to serve as
trustee of the trust to be established pursuant to the Stock Programs or
Master Stock-Based Benefit Plan. Allocations and grants to officers and
employees under the Stock Programs or Master Stock-Based Benefit Plan may be
made in the form of base grants and allocations based on performance goals
established by the Human Resources/Compensation Committee. In establishing
such goals, the Committee may utilize the annual financial results of the
Company and the Bank, actual performance of the Company and the Bank as
compared to targeted goals such as the ratio of the Company and the Bank's net
worth to total assets, the Company's and the Bank's return on average assets,
or such other performance standard as determined by the Committee with the
approval of the Board of Directors. Performance allocations would be granted
upon the achievement of performance goals and base grants and performance
allocations would vest in annual installments established by the Committee.
Pursuant to applicable OTS regulations, base grants and allocations will
commence vesting one year after the date of shareholder approval of the plan
and thereafter at the rate of 20% per year.
In the event of death, grants would be 100% vested. In the event of
disability, grants would be 100% vested upon termination of employment of an
officer or employee, or upon termination of service as a director. In the
event of retirement, the participant continues to perform services on behalf
of the Bank, the Company or an affiliate or, in the case of a retiring
director, as a consulting director, unvested grants would continue to vest in
accordance with their original vesting schedule until the recipient ceases to
perform such services at which time any unvested grants would lapse.
Applicable OTS regulations currently do not permit accelerated vesting in
the event of a change in control of shares granted under the Stock Programs or
Master Stock-Based Benefit Plan described above. If permitted by OTS
regulations at the time a change in control occurs, the Stock Programs or
Master Stock-Based Benefit Plan would provide for accelerated vesting in the
event of a change in control of shares granted under the Stock Programs or
Master Stock-Based Benefit Plan. A change in control is expected to be defined
in the Stock Programs or Master Stock-Based Benefit Plan generally to occur
when a person or group of persons acting in concert acquires beneficial
ownership of 20% or more of a class of equity securities of the Company or the
Bank or in the event of a tender or exchange offer, merger or other form of
business combination, sale of all or substantially all of the assets of the
Company or the Bank or contested election of directors which results in the
replacement of a majority of the Board of Directors by persons not nominated
by the directors in office prior to the contested election.
When shares become vested in accordance with the Stock Programs or Master
Stock-Based Benefit Plan described above, the Participants would recognize
income equal to the fair market value of the Common Stock at that time. The
amount of income recognized by the participants would be a deductible expense
for tax purposes for the Bank and the Company. When shares become vested and
are actually distributed in accordance with the Stock Programs or Master
Stock-Based Benefit Plan, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of grants
could direct the voting of the shares awarded to them. Shares not subject to
grants and shares allocated subject to the achievement of performance and high
performance goals will be voted by the trustee of the Stock Programs or Master
Stock-Based Benefit Plan in proportion to the directions provided with respect
to shares subject to grants. Vested shares are distributed to recipients as
soon as practicable following the day on which they are vested.
In the event that additional authorized but unissued shares are acquired by
the Stock Programs or Master Stock-Based Benefit Plan after the Conversion,
the interests of existing shareholders would be diluted. See "Pro Forma Data."
PROFIT SHARING BONUS PLAN. The Bank has maintained a practice of paying a
bonus at the annual direction of the Board of Directors to non-management
employees. The bonus is calculated as a percentage of salary with the
percentage being determined by job classification. It is the policy of the
Board not to approve a bonus for a
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year when after-tax profits are less than $1.0 million. Total non-management
employee bonuses have varied between 2.7% and 3.6% of after-tax profits over
the last three fiscal years.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans
made to a director or executive officer in excess of the greater of $25,000 or
5% of the Bank's capital and surplus (up to a maximum of $500,000) must be
approved in advance by a majority of the disinterested members of the Board of
Directors.
The Bank currently makes loans to executive officers and directors on the
same terms and conditions offered to the general public. The Bank's policy
provides that all loans made by the Bank to its executive officers and
directors be made in the ordinary course of business, on substantially the
same terms, including collateral, as those prevailing at the time for
comparable transactions with other persons and may not involve more than the
normal risk of collectibility or present other unfavorable features. The Bank
offers to its other employees loans which are made on substantially the same
terms and conditions offered to the general public with the exception of
providing a 100 basis point discount on the interest rate. At December 31,
1995, all loans to executive officers were made by the Bank in the ordinary
course of business, with no favorable terms, and such loans did not involve
more than the normal risk of collectibility or present unfavorable terms.
The Company intends that all transactions in the future between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no
less favorable to the Company than could have been obtained by it in arm's-
length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any
interest in the transaction.
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SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming shares
of Common Stock are issued at the minimum and maximum of the Estimated Price
Range and that sufficient shares will be available to satisfy their
subscriptions. The table also sets forth the total expected beneficial
ownership of Common Stock as to all directors and executive officers as a
group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED OF THE ESTIMATED
PRICE RANGE(1) PRICE RANGE(1)
---------------------- ----------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF SHARES OFFERED
- ---- ---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
John R. Garbarino....... $ 325,000 16,250 0.30% 16,250 0.22%
Michael E. Barrett...... 160,000 8,000 0.15 8,000 0.11
Thomas F. Curtin........ 225,000 11,250 0.21 11,250 0.15
Carl Feltz, Jr.......... 50,000 2,500 0.05 2,500 0.03
Roy M. Hyde............. 150,000 7,500 0.14 7,500 0.10
Robert E. Knemoller..... 100,000 5,000 0.09 5,000 0.07
Donald E. McLaughlin.... 25,000 1,250 0.02 1,250 0.02
Frederick E. Schlosser.. 175,000 8,750 0.16 8,750 0.12
James T. Snyder......... 200,000 10,000 0.19 10,000 0.14
Michael J. Fitzpatrick.. 200,000 10,000 0.19 10,000 0.14
John K. Kelly........... 240,000 12,000 0.22 12,000 0.16
Robert J. Kroner........ 100,000 5,000 0.09 5,000 0.07
---------- ------ ---- ------ ----
All directors and
executive officers as a
group (12 persons)..... $1,950,000 97,500 1.81% 97,500 1.33%
========== ====== ==== ====== ====
</TABLE>
- --------
(1) Includes proposed subscriptions, if any, by associates. Also includes
funds from the Bank's 401(k) Plan which may be used to purchase shares of
Common Stock under such plan's new employer stock fund investment option.
See "--Benefits--Employees' Profit Sharing Plan." Does not include
subscription order by the ESOP. The intended purchase by the ESOP is
expected to be 8% of the shares issued in the Conversion. See "--
Directors' Compensation" and "--Executive Compensation."
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN OF
CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON
THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS
APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY SUCH AGENCY. THE OTS HAS NEITHER APPROVED NOR DISAPPROVED THE
ESTABLISHMENT OF THE OCEAN FEDERAL FOUNDATION.
GENERAL
On August 17, 1995, the Bank's Board of Directors unanimously adopted,
subject to approval by the OTS, the Plan, pursuant to which the Bank will be
converted from a federally chartered mutual savings bank to a federally
chartered capital stock savings bank. The Plan was subsequently amended on
November 22, 1995, March 20, 1996 and May 7, 1996, to provide for, among other
things, the establishment and funding of a charitable foundation in connection
with the Conversion. It is currently intended that all of the outstanding
capital stock of the Bank will be held by the Company, which is incorporated
under Delaware law. The Plan was approved by the OTS, subject to, among other
things, approval of the Plan by the Bank's members at the Special Meeting. The
establishment of the Foundation is also subject to approval by the Bank's
members. The Special Meeting has been called for this purpose to be held on
June 25, 1996.
The Company has received the approval of the OTS to become a savings bank
holding company and to acquire all of the Common Stock of the Bank to be
issued in the Conversion. The Company plans to retain 50% of the net proceeds
from the sale of the Common Stock and to use the remaining 50% of the net
proceeds to purchase all of the then to be issued and outstanding capital
stock of the Bank. The Conversion will be effected only upon completion of the
sale of all of the shares of Common Stock of the Company or the Bank, if the
Company's form of organization is not utilized, to be issued pursuant to the
Plan.
The Plan provides that the Board of Directors of the Bank may, at any time
prior to the issuance of the Common Stock and for any reason, decide not to
use a holding company form. Such reasons may include possible delays resulting
from overlapping regulatory processing or policies which could adversely
affect the Bank's or the Company's ability to consummate the Conversion and
transact its business as contemplated herein and in accordance with the Bank's
operating policies. In the event such a decision is made, the Bank will
withdraw the Company's registration statement from the SEC and take steps
necessary to complete the Conversion without the Company, including filing any
necessary documents with the OTS. In such event, and provided there is no
regulatory action, directive or other consideration upon which basis the Bank
determines not to complete the Conversion, if permitted by the OTS, the Bank
will issue and sell the common stock of the Bank and subscribers will be
notified of the elimination of a holding company and resolicited (i.e., be
permitted to affirm their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their funds will be promptly refunded with interest
at the Bank's passbook rate of interest or be permitted to modify or rescind
their subscriptions), and notified of the time period within which the
subscriber must affirmatively notify the Bank of his intention to affirm,
modify or rescind his subscription. In the event that a holding company form
of organization is not used, all other pertinent terms of the Plan as
described below will apply to the conversion of the Bank from the mutual to
stock form of organization and the sale of the Bank's common stock.
The Plan provides generally that: (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank; (ii) the Company will offer
shares of Common Stock for sale in the Subscription Offering to the Bank's
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders, and
Other Members; and (iii) the Company will offer shares for sale in the
Community Offering to certain members of the general public, with preference
given to natural persons residing in Ocean, Middlesex and Monmouth Counties,
New Jersey, subject to the prior rights of holders of subscription rights. It
is anticipated that all shares not subscribed for in the Subscription and
Community Offerings will be offered for sale by the Company to the general
public in a
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Syndicated Community Offering. The Bank has the right to accept or reject, in
whole or in part, any orders to purchase shares of the Common Stock received
in the Community Offering or in the Syndicated Community Offering. See "--
Community Offering" and "--Syndicated Community Offering."
The aggregate price of the shares of Common Stock to be offered for sale in
the Conversion within the Estimated Price Range, currently estimated to be
between $107.8 million and $145.9 million, will be determined based upon an
independent appraisal, prepared by RP Financial, of the estimated pro forma
market value of the Common Stock of the Company. All shares of Common Stock to
be issued and sold in the Conversion will be sold at the same price. The
independent appraisal will be affirmed or, if necessary, updated at the
completion of the Subscription and Community Offerings, if all shares are
subscribed for, or at the completion of the Syndicated Community Offering. The
appraisal has been performed by RP Financial, a consulting firm experienced in
the valuation and appraisal of savings institutions. See "--Stock Pricing" for
additional information as to the determination of the estimated pro forma
market value of the Common Stock.
The following is a brief summary of pertinent aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at each branch of the
Bank and at the Northeast Region and Washington, D.C. offices of the OTS. The
Plan is also filed as an Exhibit to the Registration Statement of which this
Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
ESTABLISHMENT OF CHARITABLE FOUNDATION
General. In furtherance of the Bank's long-standing commitment to its local
community, the Bank's Plan of Conversion provides for the establishment of a
charitable foundation in connection with the Bank's Conversion. The Plan
provides that the Bank and the Company will establish the Foundation, which
was recently incorporated under Delaware law as a non-stock corporation, and
will fund the Foundation with Common Stock of the Company, as further
described below. The Company and the Bank believe that the funding of the
Foundation with Common Stock of the Company is a means of establishing a
common bond between the Bank and its community and thereby enables the Bank's
community to share in the growth and success of the Company over the long
term. By further enhancing the Bank's visibility and reputation in its local
community, the Bank believes that the Foundation will enhance the long-term
value of the Bank's community banking franchise.
The Foundation will be dedicated to charitable purposes within Ocean County,
New Jersey and its neighboring communities, including, but not limited to,
providing grants or donations for housing assistance, scholarships, local
education, not-for-profit medical facilities, assistance to community groups,
and other similar types of organizations or projects. Establishment of the
Foundation is subject to the approval of a majority of the total outstanding
votes of the Bank's members eligible to be cast at the special meeting being
held to consider the Conversion. The Foundation will be considered as a
separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the Foundation, the Bank intends to
complete the Conversion without the establishment of the Foundation. Failure
to approve the establishment of the Foundation may materially affect the pro
forma market value of the Common Stock. In such an event, the Bank may
establish a new Estimated Price Range and commence a resolicitation of
subscribers. In the event of a resolicitation, unless an affirmative response
is received within a specified period of time, all funds will be promptly
returned to investors, as described elsewhere herein. See "--Stock Pricing,"
and "Pro Forma Data--Comparison of Valuation and Pro Forma Information with no
Foundation."
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes within Ocean County and its neighboring
communities. The Bank has long emphasized community lending and community
development activities and has received an outstanding Community Reinvestment
Act ("CRA") rating in its last two CRA examinations. The Foundation is being
formed to complement the Bank's existing community activities, not as a
replacement for such activities. Indeed, the Bank intends to continue to
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emphasize community lending and community development activities following the
Conversion. However, such activities are not the Bank's sole corporate
purpose. The Foundation, conversely, will be completely dedicated to community
activities and the promotion of charitable causes, and may be able to support
such activities in ways that are not presently available to the Bank. Since
the Bank has an outstanding record of serving its community under the CRA and
already engages in community development activities, the Bank believes that
the Foundation will enable the Company and the Bank to assist their local
community in areas beyond community development and lending. In this regard,
the Board of Directors believes the establishment of a charitable foundation
is consistent with the Bank's commitment to community service. The Board also
believes that the funding of the Foundation with Common Stock of the Company
is a means of enabling the Bank's community to share in the growth and success
of the Company long after completion of the Conversion. The Foundation
accomplishes that goal by providing for continued ties between the Foundation
and Bank, thereby forming a partnership with the Bank's community. The
establishment of the Foundation would also enable the Company and the Bank to
develop a unified charitable donation strategy and would centralize the
responsibility for administration and allocation of corporate charitable
funds. The Bank, however, does not expect the contribution to the Foundation
to take the place of the Bank's traditional community lending and charitable
activities. The Bank expects in future periods to continue making its ordinary
charitable contributions within its communities. Such ordinary contributions
typically range between $32,000 and $40,000 per year.
Structure of the Foundation. The Foundation has been incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's bylaws,
the Foundation's board of directors will be comprised of 13 members, at least
10 of whom must be civic and community leaders in the Bank's local community,
who are unaffiliated with either the Bank or the Company, or their officers,
directors and employees ("Disinterested Directors"). The remaining three
members of the board of directors will be comprised of directors of the
Company or the Bank. A Nominating Committee of the Board, which is to be
comprised of a minimum of any three members of the board, will nominate
individuals eligible for election to the board of directors. The members of
the Foundation, who are comprised of its board members, will elect the
directors at the annual meeting of the Foundation from those nominated by the
Nominating Committee. Directors will be divided into three classes with each
class appointed for three-year terms. While the Disinterested Directors have
not been selected as of this time, all directors will be appointed prior to
the contribution to the Foundation of the Common Stock of the Company pursuant
to the qualifications required by the Foundation's bylaws. Only persons
serving as directors qualify as members of the Foundation, with voting
authority. The certificate of incorporation of the Foundation provides that
the corporation is organized exclusively for charitable and educational
purposes as set forth in Section 501(c)(3) of the Code. The Foundation's
certificate of incorporation further provides that no part of the net earnings
of the Foundation will inure to the benefit of, or be distributable to its
directors, officers or members.
The members of the Foundation will be the board of directors, at least 10 of
whom must be Disinterested Directors. The authority for the affairs of the
Foundation will be vested in the board of directors of the Foundation. The
directors of the Foundation will be responsible for establishing the policies
of the Foundation with respect to grants or donations by the Foundation,
consistent with the stated purposes for which the Foundation was established.
Although no formal policy governing Foundation grants exists at this time, the
Foundation's board of directors will adopt such a policy upon establishment of
the Foundation. The directors will also be responsible for directing the
assets of the Foundation. Pursuant to the Foundation's bylaws, only a special
committee of the board of directors, comprised solely of Disinterested
Directors, will be permitted to direct the timing of any sales of Common Stock
held by the Foundation. Further, pursuant to the terms of the contribution as
mandated by the OTS, the Company and the Foundation will take the necessary
steps to provide in the Foundation's corporate governance documents that all
shares of Common Stock held by the Foundation must be voted in the same ratio
as all other shares of the Company's Common Stock on all proposals considered
by stockholders of the Company; provided, however, that the OTS will waive
this voting restriction under certain circumstances if compliance with the
voting restriction would: (i) cause a violation of the laws of the State of
Delaware and the OTS determines that federal law would not preempt the
application of the laws of the State of Delaware to the Foundation; (ii) cause
the Foundation to lose its tax-exempt status or otherwise have a material
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and adverse tax consequence on the Foundation; or (iii) cause the Foundation
to be subject to an excise tax under Section 4941 of the Code. In order for
the OTS to waive such voting restriction, the Company's or the Foundation's
legal counsel must render an opinion satisfactory to OTS that compliance with
the voting restriction would have the effect described in clauses (i), (ii) or
(iii) above. Under those circumstances, the OTS will grant a waiver of the
voting restriction upon submission of such opinion(s) by the Company or the
Foundation. In the event that the OTS waived the voting restriction, the
directors would direct the voting of the Common Stock held by the Foundation.
However, there will be no agreements or understandings with directors of the
Foundation regarding the exercise of control, directly or indirectly, over the
management or policies of the Company or the Bank, including agreements
related to voting, acquisition or disposition of the Company's stock. As a
result, the Company and the Bank cannot exercise control over the actions and
decisions of the Foundation's board of directors. As directors of a nonprofit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established. The Foundation's place of
business will be located at the Bank's administrative offices and initially
the Foundation is expected to have no employees but will utilize the members
of the Bank's staff to provide administrative support services which are
ministerial in nature. The board of directors of the Foundation will appoint
such officers as may be necessary to manage the operations of the Foundation.
It is anticipated that initially such officers will be selected from the board
of directors of the Foundation.
The Company proposes to capitalize the Foundation with Company Common Stock
in an amount equal to 8.0% of the total amount of Common Stock to be issued in
the Conversion. At the minimum, midpoint and maximum of the Estimated Price
Range, the contribution to the Foundation would equal 431,297, 507,407, and
583,519 shares, which would have a market value of $8.6 million, $10.1 million
and $11.7 million, respectively, assuming the Purchase Price of $20 per share.
Such contribution, once made, will not be recoverable by the Company or the
Bank. The Company and the Bank determined to fund the Foundation with Common
Stock rather than cash because they desired to form a bond with their
community in a manner that would allow the community to share in the potential
growth and success of the Company and the Bank over the long term. The funding
of the Foundation with stock also provides the Foundation with a potentially
larger endowment than if the Company contributed cash to the Foundation since,
as a shareholder, the Foundation will share in the potential growth and
success of the Company. As such, the contribution of stock to the Foundation
has the potential to provide a self-sustaining funding mechanism which reduces
the amount of cash that the Company, if it were not making the stock
contribution, would have to contribute to the Foundation in future years in
order to maintain a level amount of charitable grants and donations.
The Foundation would receive working capital from any dividends that may be
paid on the Company's Common Stock in the future, and subject to applicable
federal and state laws, loans collateralized by the Common Stock or from the
proceeds of the sale of any of the Common Stock in the open market from time
to time as may be permitted to provide the Foundation with additional
liquidity. As a private foundation under Section 501(c)(3) of the Code, the
Foundation will be required to distribute annually in grants or donations, a
minimum of 5% of the average fair market value of its net investment assets.
One of the conditions imposed on the gift of Common Stock by the Company is
that the amount of Common Stock that may be sold by the Foundation in any one
year shall not exceed 5% of the average market value of the assets held by the
Foundation, except where the board of directors of the Foundation, by two-
thirds vote, determines that the failure to sell an amount of Common Stock
greater than such amount would result in a long-term reduction of the value of
the Foundation's assets and as such would jeopardize the Foundation's capacity
to carry out its charitable and educational purposes. While there may be
greater risk associated with a one-stock portfolio in comparison to a
diversified portfolio, the Company believes any such risk is mitigated by the
ability of the Foundation's directors to sell more than 5% of its stock in
such circumstances. Upon completion of the Conversion and the contribution of
shares to the Foundation immediately following the Conversion, the Company
would have 5,822,500, 6,850,000 and 7,877,500 shares issued and outstanding at
the minimum, midpoint and maximum of the Estimated Price Range. Because the
Company will have an increased number of shares outstanding, the voting and
ownership interests of shareholders in the Company's common stock would be
diluted by 7.4%, as compared to
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their interests in the Company if the Foundation was not established. For
additional discussion of the dilutive effect, see "Pro Forma Data."
Tax Considerations. The Company and the Bank have been advised by their
independent accountants that an organization created for the above purposes
would qualify as a 501(c)(3) exempt organization under the Code, and would
likely be classified as a private foundation rather than a public charity. A
private foundation typically receives its support from one person or one
corporation whereas a public charity receives its support from the public. The
Foundation will submit a request to the IRS to be recognized as an exempt
organization after approval of the Foundation by the Bank's members at the
Special Meeting being held to consider the Conversion. As long as the
Foundation files its application for tax-exempt status within 15 months from
the date of its organization, and provided the IRS approves the application,
the effective date of the Foundation's status as a Section 501(c)(3)
organization will be the date of its organization. The Company's independent
accountants, however, have not rendered any advice on the condition to the
gift which requires that all shares held by the Foundation must be voted in
the same ratio as all other outstanding shares of Common Stock of the Company
on all proposals considered by stockholders of the Company. In the event that
the Company or the Foundation receives an opinion of their tax counsel
satisfactory to OTS that compliance with the voting restriction would cause
the Foundation to lose its tax-exempt status, otherwise have a material and
adverse tax consequence on the Foundation or subject the Foundation to an
excise tax under Section 4941 of the Code, or subject the Foundation to an
excise tax under Section 4941 of the Code, the OTS will waive such condition
upon submission of such opinion by the Company or the Foundation. See "--
Regulatory Conditions Imposed on the Foundation."
A legal opinion of the OTS which addresses the establishment of charitable
foundations by savings associations opines that as a general rule funds
contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code, and if an association's contributions
exceed the deductible limit, such action must be justified by the board of
directors. In addition, under Delaware law, the Company is authorized by
statute to make charitable contributions and case law has recognized the
benefits of such contributions to a Delaware corporation. In this regard,
Delaware case law provides that a charitable gift must merely be within
reasonable limits as to amount and purpose to be valid. Under the Code, the
Company may deduct up to 10% of its taxable income in any one year and any
contributions made by the Company in excess of the deductible amount will be
deductible over each of the five succeeding taxable years. The Company and the
Bank believe that the Conversion presents a unique opportunity to establish
and fund a charitable foundation given the substantial amount of additional
capital being raised in the Conversion. In making such a determination, the
Company and the Bank considered the dilutive impact of the Foundation on the
amount of Common Stock available to be offered for sale in the Conversion. See
"Comparison of Valuation and Pro Forma Information with No Foundation." Based
on such consideration, the Company and Bank believe that the contribution to
the Foundation in excess of the 10% annual limitation is justified given the
Bank's capital position and its earnings, the substantial additional capital
being raised in the Conversion and the potential benefits of the Foundation to
the Bank's community. In this regard, assuming the sale of the Common Stock at
the midpoint of the Estimated Price Range, the Company would have pro forma
consolidated capital of $204.0 million or 17.8% of consolidated assets and the
Bank's pro forma tangible, core and risk-based capital ratios would be 12.64%,
12.64% and 30.32%, respectively. See "Regulatory Capital Compliance,"
"Capitalization," and "Comparison of Valuation and Pro Forma Information with
No Foundation." Thus, the amount of the contribution will not adversely impact
the financial condition of the Company and the Bank and the Company and the
Bank therefore believe that the amount of the charitable contribution is
reasonable given the Company and the Bank's pro forma capital positions. As
such, the Company and the Bank believe that the contribution does not raise
safety and soundness concerns.
The Company and the Bank have received an opinion of their independent
accountants that the Company's contribution of its own stock to the Foundation
would not constitute an act of self-dealing, and that the Company would be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution, subject to a limitation based on 10% of the
Company's annual taxable income. The Company, however, would be able to carry
forward any unused portion of the deduction for five years following the year
in which the
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contribution is made. Thus, while the Company will only receive a charitable
contribution deduction of approximately $1.6 million in 1996, the Company is
permitted under the Code to carryover the excess contribution over a five-year
period. Assuming the close of the Offerings at the midpoint of the Estimated
Price Range, the Company estimates that substantially all of the deduction
should be deductible over the six-year period. Neither the Company nor the
Bank expect to make any further contributions to the Foundation within the
first five years following the initial contribution. After that time, the
Company and the Bank may consider future contributions to the Foundation. Any
such decisions would be based on an assessment of, among other factors, the
financial condition of the Company and the Bank at that time, the interests of
shareholders and depositors of the Company and the Bank, and the financial
condition and operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent accountants that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that
the deduction will be permitted. In such event, the Company's contribution to
the Foundation would be expensed without tax benefit, resulting in a reduction
in earnings in the year in which the IRS makes such a determination. See "Risk
Factors--Establishment of the Charitable Foundation." In cases of willful,
flagrant or repeated acts or failures to act which result in violations of the
IRS rules governing private foundations, a private foundation's status as a
private foundation may be involuntarily terminated by the IRS. In such event,
the managers of a private foundation could be liable for excise taxes based on
such violations and the private foundation could be liable for a termination
tax under the Code. The Foundation's certificate of incorporation provides
that it shall have a perpetual existence. In the event, however, the
Foundation were subsequently dissolved as a result of a loss of its tax exempt
status, the Foundation would be required under the Code and its certificate of
incorporation to distribute any assets remaining in the Foundation at that
time for one or more exempt purposes within the meaning of Section 501(c)(3)
of the Code, or to distribute such assets to the federal government, or to a
state or local government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of Common
Stock or other assets are exempt from federal and state corporate taxation.
However, investment income, such as interest, dividends and capital gains,
will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a
private foundation must include, among other things, an itemized list of all
grants made or approved, showing the amount of each grant, the recipient, any
relationship between a grant recipient and the Foundation's managers and a
concise statement of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed
by the OTS; (iii) the Foundation will provide annual reports to the OTS
describing grants made and grant recipients; (iv) the Foundation will operate
in accordance with written policies adopted by the board of directors,
including a conflict of interest policy; (v) unless required by another
condition imposed by the OTS, the Foundation will not engage in self-dealing
and will comply with all laws necessary to maintain its tax-exempt status;
(vi) officers, directors, employees and/or affiliates of the Company and the
Bank together must comprise less than 25% of the Foundation's board of
directors; and (vii) any shares of Common Stock held by the Foundation must be
voted in the same ratio as all other outstanding shares of Common Stock on all
proposals considered by stockholders of the Company; provided, however, that
the OTS will waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (a) cause a violation the laws
of the State of Delaware and the OTS determines that federal law would not
preempt the application of the laws of the State of Delaware to the
Foundation; (b) cause the Foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the Foundation; or
(c) cause the Foundation to be subject to an excise tax under Section 4941 of
the Code. In order for the OTS to waive such voting restriction, the Company's
or the Foundation's legal counsel
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must render an opinion satisfactory to OTS that compliance with the voting
restriction would have the effect described in clauses (a), (b) or (c) above.
Under those circumstances, the OTS will grant a waiver of the voting
restriction upon submission of such opinion(s) by the Company or the
Foundation. There can be no assurances that either a legal or tax opinion
addressing these issues will be rendered, or if rendered, that the OTS will
grant an unconditional waiver of the voting restriction. In no event will the
voting restriction survive the sale of shares of the Common Stock held by the
Foundation. In addition, establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the special meeting being held to consider the
Conversion. The Foundation will be considered as a separate matter from
approval of the Plan of Conversion. If the Bank's members approve the Plan of
Conversion, but not the Foundation, the Bank intends to complete the
Conversion without the establishment of the Foundation. Failure to approve the
Foundation may materially increase the pro forma market value of the Common
Stock being offered for sale in the Offering since the Valuation Range, as set
forth herein, takes into account the dilutive impact of the issuance of shares
to the Foundation. If the pro forma market value of the Company without the
Foundation is either greater than $167.8 million or less than $107.8 million,
the Bank will establish a new Estimated Price Range and commence a
resolicitation of subscribers (i.e., subscribers will be permitted to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to decrease, increase or cancel
their subscriptions). Any change in the Estimated Price Range must be approved
by the OTS. See "The Conversion--Stock Pricing." A resolicitation, if any,
following the conclusion of the Subscription and Community Offerings would not
exceed 45 days unless further extended by the OTS for periods of up to 90 days
not to extend beyond June 25, 1998.
PURPOSES OF CONVERSION
The Bank, as a federally chartered mutual savings bank, does not have
shareholders and has no authority to issue capital stock. By converting to the
capital stock form of organization, the Bank will be structured in the form
used by commercial banks, other business entities and a growing number of
savings institutions. The Conversion will enhance the Bank's ability to
maintain its traditional thrift orientation as a provider of residential
mortgage products, access capital markets, expand its current operations by
diversifying the products and services it offers, and acquire and/or establish
other financial institutions or branch offices. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Management
Strategy" and "Business of the Bank--Market Area and Competition."
As discussed above, the net Conversion proceeds will also permit the Bank to
increase its presence in the communities it serves through the establishment
or acquisition of branch offices or the acquisition of smaller financial
institutions, although the Bank has no current understandings or agreements
for the acquisition of any specific financial institutions or the acquisition
of any branch offices. For a discussion of the Bank's plans to establish new
branch offices, see "Business of the Bank--Properties."
The holding company form of organization will provide additional flexibility
to diversify the Bank's business activities through existing or newly formed
subsidiaries, or through acquisitions of or mergers with both mutual and stock
institutions, as well as other companies. Although there are no current
arrangements, understandings or agreements regarding any such opportunities,
the Company will be in a position after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of any
such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. The Bank had equity in accordance with GAAP of $92.4 million, or
8.9% of assets at December 31, 1995. Assuming that $145.9 million (based on
the maximum of the estimated pro forma market value of the Common Stock which
has been estimated by RP Financial to be from a minimum of $107.8 million to a
maximum of $145.9 million) of gross proceeds are realized from the sale of
Common Stock (see "Pro Forma Data" for the basis of this assumption) and
assuming that 50% of the net proceeds are used by the Company to purchase the
capital stock of the Bank, the Bank's ratio of GAAP capital to adjusted
assets, on a pro forma basis, will increase to 13.4% after the Conversion. The
investment of the net proceeds from the sale of the Common Stock will provide
the Bank with
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additional income to further increase its capital position. The additional
capital may also assist the Bank in offering new programs and expanded
services to its customers.
After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and regulatory approval of an offering,
to raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present
time, the Company has no plans with respect to additional offerings of
securities, other than the issuance of additional shares upon exercise of
stock options or the possible issuance of authorized but unissued shares to
the Stock Programs. Following the Conversion, the Company will also be able to
use stock-related incentive programs to attract and retain executive and other
personnel for itself and its subsidiaries. See "Management of the Bank--
Executive Compensation."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings institution has both a deposit
account in the institution and a pro rata ownership interest in the net worth
of the institution based upon the balance in his account, which interest may
only be realized in the event of a liquidation of the institution or in the
event the institution declares a capital distribution to depositors, subject
to applicable regulations of the OTS. However, this ownership interest is tied
to the depositor's account and has no tangible market value separate from such
deposit account. Any depositor who opens a deposit account obtains a pro rata
ownership interest in the net worth of the institution without any additional
payment beyond the amount of the deposit. A depositor who reduces or closes
his account receives a portion or all of the balance in the account but
nothing for his ownership interest in the net worth of the institution, which
is lost to the extent that the balance in the account is reduced.
Consequently, depositors of mutual savings institutions normally have no way
to realize the value of their ownership interest, which has realizable value
only in the unlikely event that the mutual savings bank is liquidated or in
the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. In the event of a liquidation of
the mutual savings bank, the depositors of record at that time, as owners,
would share pro rata in any residual surplus and reserves after other claims,
including claims of depositors to the amounts of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent non-
withdrawable capital stock is created to represent the ownership of the
institution's net worth. The Common Stock is separate and apart from deposit
accounts and cannot be and is not insured or guaranteed by the FDIC or any
other governmental agency. Certificates are issued to evidence ownership of
the capital stock. The stock certificates are transferable, and therefore the
stock may be sold or traded if a purchaser is available with no effect on any
account the seller may hold in the institution.
Continuity. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the OTS
and the FDIC. After the Conversion, the Bank will continue to provide services
for depositors and borrowers under current policies by its present management
and staff.
The Directors serving the Bank at the time of Conversion will serve as
Directors of the Bank after the Conversion. The Directors of the Company will
consist of individuals currently serving on the Board of Directors of the
Bank. All officers of the Bank at the time of Conversion will retain their
positions after Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion (i.e., up to
$100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.
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Effect on Voting Rights of Members. At present, all depositors and certain
borrowers of the Bank are members of, and have voting rights in, the Bank as
to all matters requiring membership action. Upon Conversion, depositors and
borrowers will cease to be members and will no longer be entitled to vote at
meetings of the Bank. Upon Conversion, all voting rights in the Bank will be
vested in the Company as the sole stockholder of the Bank. Exclusive voting
rights with respect to the Company will be vested in the holders of Common
Stock. Depositors of and borrowers from the Bank will not have voting rights
after the Conversion except to the extent that they become stockholders of the
Company through the purchase of Common Stock.
Tax Effects. The Bank has received an opinion of counsel with regard to
federal and New Jersey state income taxation which indicates that the adoption
and implementation of the Plan of Conversion set forth herein will not be
taxable for federal or New Jersey tax purposes to the Bank, its Eligible
Account Holders, Supplemental Eligible Account Holders or the Company, except
as discussed below. See "--Tax Aspects."
Effect on Liquidation Rights. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were any
assets remaining, depositors would be entitled to such remaining assets, pro
rata, based upon the deposit balances in their deposit accounts immediately
prior to liquidation. In the unlikely event that the Bank were to liquidate
after Conversion, all claims of creditors (including those of depositors, to
the extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see "--
Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common Stock
must be based on the appraised pro forma market value of the Common Stock, as
determined on the basis of an independent valuation. The Bank and the Company
have retained RP Financial to make such valuation. For its services in making
such appraisal, RP Financial will receive a fee of $40,000, plus reasonable
expenses. The Bank and the Company have agreed to indemnify RP Financial and
its employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where RP Financial's liability results from its
negligence or its acting in bad faith.
An appraisal has been made by RP Financial in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
RP Financial also considered the following factors, among others: the present
and projected operating results and financial condition of the Company and the
Bank and the economic and demographic conditions in the Bank's existing
marketing area; certain historical, financial and other information relating
to the Bank; a comparative evaluation of the operating and financial
statistics of the Bank with those of other similarly situated publicly-traded
savings banks and savings institutions located in the Bank's primary market
area and the State of New Jersey; the aggregate size of the offering of the
Common Stock; the impact of Conversion on the Bank's net worth and earnings
potential; the proposed dividend policy of the Company and the Bank; the
trading market for securities of comparable institutions and general
conditions in the market for such securities; and the establishment of the
Foundation with Common Stock contributed by the Company.
On the basis of the foregoing, RP Financial has advised the Company and the
Bank that, in its opinion, dated April 26, 1996, the estimated pro forma
market value of the Common Stock being offered for sale in the Offerings
ranged from a minimum of $107.8 million to a maximum of $145.9 million with a
midpoint of $126.9 million. Based upon the Valuation Range and the Purchase
Price of $20 per share for the Common Stock established by the Board of
Directors, the Board of Directors has established the Estimated Price Range of
$107.8 million to $145.9 million, with a midpoint of $126.9 million, and the
Company expects to issue between 5,391,203 and 7,293,981 shares of Common
Stock. The Board of Directors of the Company and the Bank have
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reviewed the appraisal of RP Financial and in determining the reasonableness
and adequacy of such appraisal consistent with OTS regulations and policies,
have reviewed the methodology and reasonableness of the assumptions utilized
by RP Financial in the preparation of such appraisal.
SUCH VALUATION, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES.
RP FINANCIAL DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID RP FINANCIAL
VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE VALUATION
CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH
VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE
CAN BE GIVEN THAT PERSONS PURCHASING SUCH SHARES IN THE CONVERSION WILL
THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE PURCHASE
PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE
THEREOF. SEE "RISK FACTORS--ABSENCE OF MARKET FOR COMMON STOCK."
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the number
of shares of Common Stock to be issued in the Conversion may be increased to
8,388,078 shares due to regulatory considerations, or changes in market
conditions or general financial and economic conditions, without the
resolicitation of subscribers. See "--Limitations on Common Stock Purchases"
as to the method of distribution and allocation of additional shares that may
be issued in the event of an increase in the Estimated Price Range to fill
unfilled orders in the Subscription and Community Offerings.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, RP Financial confirms to the Bank, the Company and the OTS that,
to the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, including those which would be
involved in a change in the maximum subscription price, would cause RP
Financial to conclude that the value of the Common Stock at the price so
determined is incompatible with its estimate of the pro forma market value of
the Common Stock at the conclusion of the Subscription and Community
Offerings.
If, based on RP Financial's estimate, the pro forma market value of the
Common Stock as of such date is not more than 15% above the maximum and not
less than the minimum of the Estimated Price Range then, (1) with the approval
of the OTS, the number of shares of Common Stock to be issued in the
Conversion may be increased or decreased, pro rata to the increase or decrease
in value, without resolicitation of subscriptions, to no more than 8,388,078
shares or no less than 5,391,203 shares; and (2) all shares purchased in the
Subscription and Community Offerings will be purchased for the Purchase Price
of $20 per share. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect regulatory considerations, or changes in market conditions or general
financial and economic conditions, persons who subscribed for the maximum
number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See "--Limitations on Common Stock
Purchases."
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the
OTS, may terminate the Plan and return all funds promptly with interest at the
Bank's passbook rate of interest on payments made by check, bank draft or
money order, extend or hold a new Subscription and Community Offering,
establish a new Estimated Price Range, commence a resolicitation of
subscribers or take such other actions as permitted by the OTS in order to
complete the Conversion. In the event that a resolicitation is commenced,
unless an affirmative response is received within a reasonable period of time,
all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the
OTS for periods of up to 90 days not to extend beyond June 25, 1998.
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If all shares of Common Stock are not sold through the Subscription and
Community Offerings, and in the event that the Board of Directors determines
to offer additional shares, then the Bank and the Company may offer the
remaining shares in a Syndicated Community Offering which would occur as soon
as practicable following the close of the Subscription and Community Offerings
but may commence during the Subscription and Community Offering subject to
prior rights of subscribers. All shares of Common Stock will be sold at the
same price per share in the Syndicated Community Offering as in the
Subscription and Community Offerings. See "--Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, RP Financial confirms to the Bank, the Company and the OTS that,
to the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
RP Financial to conclude that the aggregate value of the Common Stock at the
Purchase Price is incompatible with its estimate of the pro forma market value
of the Common Stock of the Company at the time of the Syndicated Community
Offering. Any change which would result in an aggregate purchase price which
is below or more than 15% above the Estimated Price Range would be subject to
OTS approval. If such confirmation is not received, the Bank may extend the
Conversion, extend, reopen or commence new Subscription and Community
Offerings or Syndicated Community Offering, establish a new Estimated Price
Range and commence a resolicitation of all subscribers with the approval of
the OTS or take such other actions as permitted by the OTS in order to
complete the Conversion, or terminate the Plan and cancel the Subscription and
Community Offerings and/or the Syndicated Community Offering. In the event
market or financial conditions change so as to cause the aggregate purchase
price of the shares to be below the minimum of the Estimated Price Range or
more than 15% above the maximum of such range, and the Company and the Bank
determine to continue the Conversion, subscribers will be resolicited (i.e.,
be permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at the Bank's passbook rate of interest, or be permitted to
decrease or cancel their subscriptions). Any change in the Estimated Price
Range must be approved by the OTS. A resolicitation, if any, following the
conclusion of the Subscription and Community Offerings would not exceed 45
days, or if following the Syndicated Community Offering, 90 days, unless
further extended by the OTS for periods up to 90 days not to extend beyond
June 25, 1998. If such resolicitation is not effected, the Bank will return
all funds promptly with interest at the Bank's passbook rate of interest on
payments made by check, bank draft or money order.
Copies of the appraisal report of RP Financial, including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of the Bank and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and Community Offerings, the total number of shares to be
issued in the Conversion may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number
of shares times the price per share is not below the minimum or more than 15%
above the maximum of the Estimated Price Range, and the total number of shares
to be issued in the Conversion is not less than 5,391,203 or greater than
7,293,981 (or 8,388,078 if the Estimated Price Range is increased by 15%).
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of such range, if the
Plan is not terminated by the Company and the Bank after consultation with the
OTS, purchasers will be resolicited (i.e., permitted to continue their orders,
in which case they will need to affirmatively reconfirm their subscriptions
prior to the expiration of the resolicitation offering or their subscription
funds will be promptly refunded, or be permitted to modify or rescind their
subscriptions). Any change in the Estimated Price Range must be approved by
the OTS. If the number of shares issued in the Conversion is increased due to
an increase of up to 15% in the Estimated Price Range to reflect changes in
market or financial condition, persons who
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subscribed for the maximum number of shares will not be given the opportunity
to subscribe for an adjusted maximum number of shares, except for the ESOP
which will be able to subscribe for such adjusted amount. See "--Limitations
on Common Stock Purchases."
The number of shares to be issued and outstanding following the Conversion
may be increased by a number of shares equal to 8% of the Common Stock issued
in the Conversion to fund the Foundation. Assuming the sale of shares in the
Offerings at the maximum of the Estimated Price Range, the Company will issue
583,519 shares of its Common Stock from authorized but unissued shares to the
Foundation immediately following the completion of the Conversion. In that
event, the Company will have total shares of Common Stock outstanding of
7,877,500 shares. Of that amount, the Foundation will own 7.4%. Funding the
Foundation with authorized but unissued shares will have the effect of
diluting the ownership and voting interests of persons purchasing shares in
the Conversion by 7.4% since a greater number of shares will be outstanding
upon completion of the Conversion than would be if the Foundation were not
established. See "Pro Forma Data."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders
of qualifying deposit accounts with a balance of $50 or more as of July 31,
1994 ("Eligible Account Holders"); (2) the ESOP; (3) holders of qualifying
deposit accounts with a balance of $50 or more as of March 31, 1996
("Supplemental Eligible Account Holders"); and (4) members of the Bank,
consisting of depositors of the Bank as of April 30, 1996, the Voting Record
Date, and borrowers with loans outstanding as of April 12, 1989 which continue
to be outstanding as of the Voting Record Date other than Eligible Account
Holders and Supplemental Eligible Account Holders ("Other Members"). All
subscriptions received will be subject to the availability of Common Stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion and as described below under "--
Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, non-transferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $200,000 of the Common Stock offered; one-tenth of one percent
(.10%) of the total offering of shares of Common Stock; or fifteen 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 Eligible Account Holder's qualifying deposit
and the denominator is the total amount of qualifying deposits of all Eligible
Account Holders, in each case on the Eligibility Record Date, subject to the
overall purchase limitation and exclusive of an increase in the shares issued
pursuant to an increase in the Estimated Price Range of up to 15%. See "--
Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Common Stock in excess of the total number of such
shares eligible for subscription, the shares of Common Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Common
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account
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Holder. Any shares remaining after that allocation will be allocated among the
subscribing Eligible Account Holders whose subscriptions remain unsatisfied in
the proportion that the amount of the qualifying deposit of each Eligible
Account Holder whose subscription remains unsatisfied bears to the total
amount of the qualifying deposits of all Eligible Account Holders whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied, exclusive
of any increase in the shares issued pursuant to an increase in the Estimated
Price Range of up to 15%.
To ensure proper allocation of stock, each Eligible Account Holder must list
on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of the Bank or
their associates will be subordinated to the subscription rights of other
Eligible Account Holders to the extent attributable to increased deposits in
the year preceding July 31, 1994.
Priority 2: Employee Stock Ownership Plan. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by
Eligible Account Holders, the ESOP will receive, without payment therefor,
second priority, non-transferable subscription rights to purchase, in the
aggregate, up to 10% of Common Stock issued in the Conversion, including any
increase in the number of shares of Common Stock to be issued in the
Conversion after the date hereof as a result of an increase of up to 15% in
the maximum of the Estimated Price Range. The ESOP intends to purchase 8% of
the shares to be issued in the Conversion, or 431,296 shares and 583,519
shares, based on the issuance of 5,391,203 shares and 7,293,981 shares,
respectively. Subscriptions by the ESOP will not be aggregated with shares of
Common Stock purchased directly by or which are otherwise attributable to any
other participants in the Subscription and Community Offerings, including
subscriptions of any of the Bank's directors, officers, employees or
associates thereof. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan and Trust."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third
priority, non-transferable subscription rights to subscribe for in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $200,000 of the Common Stock
offered; one-tenth of one percent (.10%) of the total offering of shares of
Common Stock; or fifteen 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
Supplemental Eligible Account Holder's qualifying deposit and the denominator
is the total amount of qualifying deposits of all Supplemental Eligible
Account Holders, in each case on the Supplemental Eligibility Record Date,
subject to the overall purchase limitation and exclusive of an increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to
15%. See "--Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of such shares eligible for subscription, the shares of Common
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his
or her total allocation of Common Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account
Holder. Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the qualifying deposit of
each Supplemental Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the qualifying deposits of all
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied.
If the amount so allocated exceeds the amount subscribed for by any one or
more Supplemental Eligible Account Holders, the excess shall be reallocated
(one or more times as necessary) among those Supplemental Eligible Account
Holders whose subscriptions are still not fully satisfied, exclusive of any
increase in the shares issued pursuant to an increase in the Estimated Price
Range of up to 15%.
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To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has
an ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
Priority 4: Other Members. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority non-transferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the amount permitted to be purchased in the Community Offering,
currently $200,000 of the Common Stock offered; one-tenth of one percent
(.10%) of the total offering of shares of Common Stock; subject to the overall
purchase limitation and exclusive of an increase in shares issued pursuant to
an increase in the Estimated Price Range of up to 15%.
In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock
subscribed for by the Eligible Account Holders, the ESOP and the Supplemental
Eligible Account Holders is in excess of the total number of shares of
Conversion Stock being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation of Conversion Stock equal to
the lesser of 100 shares or the number of shares subscribed for by the Other
Member. Any shares remaining after that allocation will be allocated among the
subscribing Other Members whose subscriptions remain unsatisfied pro rata in
the same proportion that the number of votes of a subscribing Other Member on
the Voting Record Date bears to the total votes on the Voting Record Date of
all subscribing Other Members whose subscriptions remain unsatisfied. If the
amount so allocated exceeds the amount subscribed for by any one or more
remaining Other Members, the excess shall be reallocated (one or more times as
necessary) among those remaining Other Members whose subscriptions are still
not fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Other Member must list on his
subscription order form all accounts in which he has an ownership interest.
Failure to list an account could result in less shares being allocated than if
all accounts had been disclosed. The subscription rights received by Eligible
Account Holders and Supplemental Eligible Account Holders will be applied in
partial satisfaction to the subscription rights to be received as an Other
Member.
Expiration Date for the Subscription Offering. The Subscription Offering will
expire on June 20, 1996. Subscription rights which have not been exercised
prior to the Expiration Date will become void. The Bank will not execute
orders until all shares of Common Stock have been subscribed for or otherwise
sold. If all shares have not been subscribed for or sold within 45 days after
the Subscription Expiration Date, unless such period is extended with the
consent of the OTS, all funds delivered to the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be cancelled. If an extension
beyond the 45 day period following the Subscription Expiration Date is
granted, the Bank will notify subscribers of the extension of time and of any
rights of subscribers to modify or rescind their subscriptions. Such
extensions may not go beyond June 25, 1998.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of the Eligible Account Holders, the ESOP, the
Supplemental Eligible Account Holders and Other Members, the Bank has
determined to offer shares pursuant to the Plan to certain members of the
general public. Any excess of shares available will be available for purchase
by the general public, with preference given to natural persons (such natural
persons referred to as "Preferred Subscribers") residing in Ocean, Middlesex
and Monmouth Counties, the counties served by the Bank, subject to the right
of the Company to accept or reject any such orders, in
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whole or in part, in their sole discretion. Such persons, together with
associates of and persons acting in concert with such persons, may purchase up
to the number of the shares offered in the Subscription and Community
Offerings that could be purchased for $200,000 at the Purchase Price, subject
to the maximum purchase limitation and exclusive of shares issued pursuant to
an increase in the Estimated Price Range by up to 15%. See "--Limitations on
Common Stock Purchases." This amount may be increased to up to a maximum of 5%
or decreased to less than the number of shares that could be purchased for
$200,000 at the Purchase Price at the sole discretion of the Company and the
Bank. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN ITS
SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART
EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING
THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers after completion of the
Subscription and Community Offerings, such stock will be allocated first to
each Preferred Subscriber whose order is accepted by the Bank, in an amount
equal to the lesser of 100 shares or the number of shares subscribed for by
each such Preferred Subscriber, if possible. Thereafter, unallocated shares
will be allocated among the Preferred Subscribers whose orders remain
unsatisfied on a 100 shares per order basis until all such orders have been
filled or the remaining shares have been allocated. If there are any shares
remaining, shares will be allocated to other persons of the general public who
purchase in the Community Offering applying the same allocation described
above for Preferred Subscribers.
PERSONS IN NON-QUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled
to subscribe for stock pursuant to the Plan reside. However, the Bank and the
Company are not required to offer stock in the Subscription Offering to any
person who resides in a foreign country or resides in a state of the United
States with respect to which (i) a small number of persons otherwise eligible
to subscribe for shares of Common Stock reside in such state; or (ii) the
Company or the Bank determines that compliance with the securities laws of
such state would be impracticable for reasons of cost or otherwise, including
but not limited to a request that the Company and the Bank or their officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of such state, or a request to register or otherwise
qualify the subscription rights or Common Stock for sale or submit any filing
with respect thereto in such state. Where the number of persons eligible to
subscribe for shares in one state is small, the Bank and the Company will base
their decision as to whether or not to offer the Common Stock in such state on
a number of factors, including the size of accounts held by account holders in
the state, the cost of registering or qualifying the shares or the need to
register the Company, its officers, directors or employees as brokers, dealers
or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a consultant and
financial advisor in connection with the offering of the Common Stock and
Sandler O'Neill has agreed to use its best efforts to solicit subscriptions
and purchase orders for shares of Common Stock in the Offerings. Based upon
negotiations between the Bank and the Company concerning fee structure,
Sandler O'Neill will receive a fee equal to 1.75% of the aggregate Purchase
Price of Common Stock sold in the Subscription and Community Offerings. No
fees will be paid to Sandler O'Neill on subscriptions by any director, officer
or employee of the Bank or the Company or members of their immediate families
or the employee plans. In the event that a selected dealers agreement is
entered into in connection with a Syndicated Community Offering, the Bank will
pay a fee to such selected dealer, any sponsoring dealers fees, and a
management fee to Sandler O'Neill of 1.5% for shares sold by an NASD member
firm pursuant to a selected dealers agreement; provided, however, that any
fees payable to Sandler O'Neill for Common Stock sold by them pursuant to such
a selected dealers agreement shall not exceed 1.75% of the Purchase Price and
that the aggregate fees payable to Sandler O'Neill and selected dealers shall
not exceed 7.0% of the Purchase Price. Fees paid to Sandler O'Neill and to any
other broker-dealer may be deemed
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to be underwriting fees and Sandler O'Neill and such broker-dealers may be
deemed to be underwriters. Sandler O'Neill will also be reimbursed for its
reasonable out-of-pocket expenses, including legal fees, in an amount not to
exceed $100,000. Notwithstanding the foregoing, in the event the Offerings are
not consummated or Sandler O'Neill ceases, under certain circumstances after
the subscription solicitation activities are commenced, to provide assistance
to the Company, Sandler O'Neill will be entitled to a fee for its management
advisory services in an amount to be agreed upon by the Bank and Sandler
O'Neill, and based upon the amount of services performed by Sandler O'Neill
and will also be reimbursed for its reasonable out-of-pocket expenses as
described above. The Company and the Bank have agreed to indemnify Sandler
O'Neill for reasonable costs and expenses in connection with certain claims or
liabilities, including certain liabilities under the Securities Act. Sandler
O'Neill has received advances towards its fees totalling $50,000. Total
marketing fees to Sandler O'Neill are expected to be approximately $1,699,217
and $2,311,912 at the minimum and the maximum of the Estimated Price Range,
respectively. See "Pro Forma Data" for the assumptions used to arrive at these
estimates.
Sandler O'Neill will also perform conversion and records management services
for the Bank in the Conversion and will receive a fee for this service of
$40,000, plus reimbursement of reasonable out-of-pocket expenses to be billed
to the Bank.
Directors and executive officers of the Company and Bank may participate in
the solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offering
in ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers
to purchase Common Stock or provide advice regarding the purchase of Common
Stock. The 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 Company or the Bank 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.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours before
the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act, no
prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order and certification forms will only be
distributed with a prospectus.
To purchase shares in the Subscription and Community Offerings, an executed
stock order form and certification form with the required payment for each
share subscribed for, or with appropriate authorization for withdrawal from
the Bank's deposit account (which may be given by completing the appropriate
blanks in the stock order form), must be received by the Bank at any of its
offices by 5:00 p.m., Eastern Time, on the Expiration Date, unless the
Community Offering is extended. Stock 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. In
addition, the Bank is not obligated to accept orders submitted on photocopied
or facsimilied stock order forms and will not accept stock order forms
unaccompanied by an executed certification form. Notwithstanding the
foregoing, the Company shall have the right, in its sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of Common
Stock for which they subscribe in the Community Offering at any time prior to
48 hours before the completion of the Conversion. The Company and the Bank
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 stock order form may not be modified, amended or rescinded without
the consent of the Bank unless the Conversion has not been completed within 45
days after the end of the Subscription and Community Offerings, unless such
period has been extended.
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Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Bank; (ii) by check, bank draft or money order; or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. No wire transfers will be accepted. Interest will be paid on payments
made by cash, check, bank draft or money order at the Bank's passbook rate of
interest from the date payment is received until the completion or termination
of the Conversion. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date
of the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. 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 certificate will be cancelled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
the passbook rate.
The ESOP and the employee plans 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 at the Purchase Price upon consummation of the
Conversion.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use the
assets of such IRAs to purchase shares of Common Stock in the Subscription and
Community Offerings, provided that such IRAs are not maintained at the Bank.
Persons with IRAs maintained at the Bank must have their accounts transferred
to an unaffiliated institution or broker to purchase shares of Common Stock in
the Subscription and Community Offerings. In addition, the provisions of ERISA
and IRS regulations require that officers and directors who use self-directed
IRA funds to purchase shares of Common Stock in the Subscription and Community
Offerings, make such purchases for the exclusive benefit of the IRAs.
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
Bank, or to such other address as may be specified in properly completed stock
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.
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, the ESOP, the Supplemental Eligible Account Holders and Other Members
of the Bank, from transferring or entering into any agreement or understanding
to transfer the legal or beneficial ownership of the subscription rights
issued under the Plan or the shares of Common Stock to be issued upon their
exercise. Such rights may be exercised only by the person to whom they are
granted and only for his 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 regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
purchase such subscription rights or shares of Common Stock prior to the
completion of the Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) 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.
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SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. THE COMPANY
AND THE BANK RESERVE THE RIGHT TO REJECT ORDERS IN WHOLE OR PART IN THEIR SOLE
DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Sandler O'Neill nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering, however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in
the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community Offering
will be determined as described above under "--Stock Pricing." Subject to
overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than the total number of shares offered in the
Conversion that could be purchased for $200,000 at the Purchase Price,
exclusive of an increase in shares issued pursuant to an increase in the
Estimated Price Range of up to 15%; provided, however, that shares of Common
Stock purchased in the Community Offering by any persons, together with
associates of or persons acting in concert with such persons, will be
aggregated with purchases in the Syndicated Community Offering and be subject
to an overall maximum purchase limitation of 1.0% of the shares offered,
exclusive of an increase in shares issued pursuant to an increase in the
Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, 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 Bank 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 to place orders for
shares. Such selected dealers shall subsequently contact their customers who
indicated an interest and seek their confirmation as to their intent to
purchase. Those indicating an intent to purchase shall execute order forms and
forward them 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
Bank for deposit in a segregated account. Although purchasers' funds are not
required to be in their accounts with selected dealers until the debit date in
the event that such alternative procedure is employed once a confirmation of
an intent to purchase has been received by the selected dealer, the purchaser
has no right to rescind his order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company
with the approval of the OTS. Such extensions may not be beyond June 25, 1998.
See "--Stock Pricing" above for a discussion of rights of subscribers, if any,
in the event an extension is granted.
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LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently the number of shares of the
Common Stock offered that could be purchased for $200,000 at the Purchase
Price; one-tenth of one percent (.10%) of the total offering of shares of
Common Stock; or fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock
to be issued by a fraction of which the numerator is the amount of the
qualifying deposit of the Eligible Account Holder and the denominator is
the total amount of qualifying deposits of all Eligible Account Holders in
each case on the Eligibility Record Date subject to the overall maximum
limitation in (8) below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of the
shares of Common Stock issued in the Conversion, including shares issued in
the event of an increase in the Estimated Price Range of 15%, and intends
to purchase 8% of the shares of Common Stock issued in the Conversion;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently the number
of shares of the Common Stock offered that could be purchased for $200,000
at the Purchase Price; one-tenth of one percent (.10%) of the total
offering of shares of Common Stock; or fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is
the amount of the qualifying deposit of the Supplemental Eligible Account
Holder and the denominator is the total amount of qualifying deposits of
all Supplemental Eligible Account Holders in such case on the Supplemental
Eligibility Record Date subject to the overall limitation in (8) below and
exclusive of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently the number of shares of the Common Stock
offered that could be purchased for $200,000 at the Purchase Price, or one-
tenth of one percent (.10%) of the total offering of shares of Common
Stock, subject to the overall limitation in (8) below and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of and groups of persons acting in concert with
such persons, may purchase in the Community Offering up to the number of
shares of the Common Stock offered in the Conversion that could be
purchased for $200,000 at the Purchase Price, subject to the overall
limitation in (8) below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with associates of and persons acting in concert with
such persons, may purchase in the Syndicated Offering up to the number of
the shares of Common Stock offered in the Conversion that could be
purchased for $200,000 at the Purchase Price, subject to the overall
limitation in (8) below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%
and, provided further that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of and persons
acting in concert with such persons, will be aggregated with purchases in
the Syndicated Community Offering in applying the $200,000 purchase
limitation.
(8) Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may purchase stock in the Community Offering and Syndicated
Community Offering subject to the purchase
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limitations described in (6) and (7) above, provided that, except for the
ESOP, the maximum number of shares of Common Stock subscribed for or
purchased in all categories of the Conversion by any person, together with
associates of and groups of persons acting in concert with such persons,
shall not exceed 1.0% of the shares of Common Stock offered in the
Conversion, exclusive of an increase in the total number of shares issued
due to an increase in the Estimated Price Range of up to 15%; and
(9) No more than 25% of the total number of shares offered for sale in
the Conversion may be purchased by directors and officers of the Bank and
their associates in the aggregate, excluding purchases by the ESOP.
The Plan of Conversion provides that the maximum individual amount permitted
to be subscribed for in the Community Offering is the greater of .10% of the
Common Stock offered or $200,000. Under the Valuation Range, as set forth
herein, the greater of .10% or $200,000 is $200,000 at all points of the
Valuation Range. Subject to any required regulatory approval and the
requirements of applicable laws and regulations, but without further approval
of the members of the Bank, both the individual amount permitted to be
subscribed for and the overall maximum purchase limitation may be increased to
up to a maximum of 5% at the sole discretion of the Company and the Bank. If
such amount is increased, subscribers for the maximum amount will be, and
certain other large subscribers in the sole discretion of the Bank may be,
given the opportunity to increase their subscriptions up to the then
applicable limit. In addition, the Boards of Directors of the Company and the
Bank may, in their sole discretion, increase the overall maximum purchase
limitation referred to above up to 9.99%, provided that orders for shares
exceeding 5% of the shares being offered in the Subscription and Community
Offerings shall not exceed, in the aggregate, 10% of the shares being offered
in the Subscription and Community Offerings. Requests to purchase additional
shares of Common Stock under this provision will be determined by the Boards
of Directors and, if approved, allocated on a pro rata basis giving priority
in accordance with the priority rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than
1.0%, but the individual amount permitted to be subscribed for may be reduced
by the Bank to less than $200,000, subject to paragraphs (2), (4) and (5)
above without the further approval of members or resolicitation of
subscribers. An individual Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member may not purchase individually in the
Subscription Offering the overall maximum purchase limit of 1.0% of the shares
offered, but may make such purchase, together with associates of and persons
acting in concert with such person, by also purchasing in other available
categories of the Conversion, subject to availability of shares and the
maximum overall purchase limit for purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the Adjusted Maximum number of shares; (ii) in the event
that there is an oversubscription by Eligible Account Holders, to fill
unsatisfied subscriptions of Eligible Account Holders exclusive of the
Adjusted Maximum; (iii) in the event that there is an oversubscription by
Supplemental Eligible Account Holders, to fill unsatisfied subscriptions of
Supplemental Eligible Account Holders, exclusive of the Adjusted Maximum; (iv)
in the event that there is an oversubscription by Other Members, to fill
unsatisfied subscriptions of Other Members exclusive of the Adjusted Maximum;
and (v) to fill unsatisfied subscriptions in the Community Offering to the
extent possible exclusive of the Adjusted Maximum with preference to Preferred
Subscribers.
The term "associate" of a person is defined to mean: (i) any corporation
(other than the Bank or a majority-owned subsidiary of the Bank) of which such
person is an officer, partner or 10% stockholder; (ii) any trust or other
estate in which such person has a substantial beneficial interest or serves as
a trustee or in a similar fiduciary capacity; provided, however, such term
shall not include any employee stock benefit plan of the Bank in which such
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity; and (iii) any relative or spouse of such person,
or any relative of such spouse, who either has the same home as
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such person or who is a director or officer of the Bank. Directors are not
treated as associates of each other solely because of their Board membership.
For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion,
see "Management of the Bank-- Subscriptions by Executive Officers and
Directors," "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would receive his pro rata share of any assets of
the Bank remaining after payment of claims of all creditors (including the
claims of all depositors to the withdrawal value of their accounts). Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his deposit account was to the total value of all
deposit accounts in the Bank at the time of liquidation. After the Conversion,
each depositor, in the event of a complete liquidation, would have a claim as
a creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank
above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal
to the surplus and reserves of the Bank as of the date of its latest balance
sheet contained in the final Prospectus used in connection with the
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would be entitled, on a complete liquidation of the Bank after the Conversion,
to an interest in the liquidation account prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, including regular accounts, transaction
accounts such as NOW accounts, money market deposit accounts, and certificates
of deposit, with a balance of $50 or more held in the Bank on July 31, 1994
and March 31, 1996, respectively ("Qualifying Deposit"). Each Eligible Account
Holder and Supplemental Eligible Account Holder will have a pro rata interest
in the total liquidation account for each of his Deposit Accounts based on the
proportion that the balance of each such Deposit Account on the Eligibility
Record Date or Supplemental Eligibility Record Date, respectively, bore to the
total amount of all Deposit Accounts of all Eligible Account Holders and
Supplemental Eligible Account Holders in the Bank. For deposit accounts in
existence at both dates separate subaccounts shall be determined on the basis
of the Qualifying Deposits in such deposit accounts on such record date.
If, however, on any annual closing date of the Bank, subsequent to the
Eligibility Record Date or Supplement Eligibility Record Date, the amount of
the Qualifying Deposit is less than the amount in such Qualifying Deposit as
of the Eligibility Record Date or the Supplemental Eligibility Record Date,
respectively, or less than the amount of the Qualifying Deposit as of the
previous annual closing date, then the interest in the liquidation account
relating to such Qualifying Deposit would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if
such Qualifying Deposit account is closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related Qualifying Deposit. Any assets remaining after the above
liquidation rights of Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to the Company as the sole
stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel
with respect to federal income taxation and New Jersey income and franchise
taxation, to the effect that the Conversion, including establishment of the
Foundation, will not be a taxable transaction to the Company, the Bank,
Eligible Account Holders, or Supplemental Eligible Account
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Holders except as noted below. The federal and New Jersey income and franchise
tax consequences will remain unchanged in the event that a holding company
form of organization is not utilized.
No private ruling will be received from the IRS with respect to the proposed
Conversion. Instead, the Bank has received an opinion of its counsel, Muldoon,
Murphy & Faucette, to the effect that for federal income tax purposes, among
other matters: (i) the Bank's change in form from mutual to stock ownership
will constitute a reorganization under section 368(a)(1)(F) of the Code and
neither the Bank nor the Company will recognize any gain or loss as a result
of the Conversion; (ii) no gain or loss will be recognized to the Bank or the
Company upon the purchase of the Bank's capital stock by the Company or to the
Company upon the purchase of its Common Stock in the Conversion; (iii) no gain
or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of Deposit Accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' deposit accounts in the Bank immediately after the Conversion will
be the same as the basis of their deposit accounts immediately prior to the
Conversion; (v) the tax basis of each Eligible Account Holder's and
Supplemental Eligible Account Holder's interest in the liquidation account
will be zero; (vi) no gain or loss will be recognized by Eligible Account
Holders or Supplemental Eligible Account Holders upon the distribution to them
of non-transferable subscription rights to purchase shares of the Common
Stock, provided that the amount to be paid for the Common Stock is equal to
the fair market value of such stock; and (vii) the tax basis to the
stockholders of the Common Stock of the Company purchased in the Conversion
will be the amount paid therefore and the holding period for the shares of
Common Stock purchased by such persons will begin on the date on which their
subscription rights are exercised. Muldoon, Murphy & Faucette has also opined
that the Conversion will not be a taxable transaction to the Company, the
Bank, Eligible Account Holders or Supplemental Eligible Account Holders for
New Jersey income and/or franchise tax purposes. Certain portions of both the
federal and the state tax opinions are based upon the assumption that the
subscription rights issued in connection with the Conversion will have no
value.
Unlike private rulings, an opinion of counsel is not binding on the IRS and
the IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
RP Financial has issued a letter stating that, pursuant to its valuation, RP
Financial is of the belief that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without
cost, are non-transferable and of short duration, and afford the recipients
the right only to purchase the Common Stock at a price equal to its estimated
fair market value, which will be the same price as the Purchase Price for the
unsubscribed shares of Common Stock. Such valuation is not binding with the
IRS. If the subscription rights granted to Eligible Account Holders or
Supplemental Eligible Account Holders are deemed to have an ascertainable
value, receipt of such rights could result in taxable gain to those Eligible
Account Holders or Supplemental Eligible Account Holders who receive and/or
exercise the subscription rights in an amount equal to such value and the Bank
could recognize gain on such distribution. Eligible Account Holders and
Supplemental Eligible Account Holders are encouraged to consult with their own
tax advisor as to the tax consequences in the event that such subscription
rights are deemed to have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the Bank
will be final. The Plan provides that the Bank's Board of Directors shall have
the discretion to interpret and apply the provisions of the Plan to particular
circumstances and that such interpretation or application shall be final. This
includes any and all interpretations, applications and determinations made by
the Board of Directors on the basis of such information and assistance as was
then reasonably available for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-
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thirds vote of the Bank's Board of Directors. After submission of the proxy
materials to the members, the Plan may be amended by a two-thirds vote of the
Board of Directors at any time prior to the Special Meeting with the
concurrence of the OTS. The Plan may be amended at any time after the approval
of members with the approval of the OTS and no further approval of the members
will be necessary unless otherwise required by the OTS. By adoption of the
Plan, the Bank's members will be deemed to have authorized amendment of the
Plan under the circumstances described above.
The establishment of the Foundation will be considered as a separate matter
from approval of the Plan of Conversion. If the Bank's members approve the
Plan of Conversion, but not the creation of the Foundation, the Bank intends
to complete the Conversion without the Foundation. Failure to approve the
establishment of the Foundation may materially increase the pro forma market
value of the Common Stock since the Valuation Range, as set forth herein,
takes into account the dilutive impact of the issuance of shares to the
Foundation. In such an event, the Bank may establish a new Estimated Price
Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a specified
period of time, all funds will be promptly returned to investors, as described
elsewhere herein. See "--Stock Pricing."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
director or an executive officer of the Bank will be subject to a restriction
that the shares not be sold for a period of one year following the Conversion,
except in the event of the death of such director or executive officer. Each
certificate for restricted shares will bear a legend giving notice of this
restriction on transfer, and instructions will be issued to the effect that
any transfer within such time period of any certificate or record ownership of
such shares other than as provided above is a violation of the restriction.
Any shares of Common Stock issued at a later date as a stock dividend, stock
split, or otherwise, with respect to such restricted stock will be subject to
the same restrictions. The directors and executive officers of the Bank will
also be subject to the insider trading rules promulgated pursuant to the
Exchange Act and any other applicable requirements of the federal securities
laws.
Purchases of outstanding shares of Common Stock of the Company by directors,
executive officers (or any person who was an executive officer or director of
the Bank after adoption of the Plan of Conversion) and their associates during
the three-year period following Conversion may be made only through a broker
or dealer registered with the SEC, except with the prior written approval of
the OTS. This restriction does not apply, however, to negotiated transactions
involving more than 1% of the Company's outstanding Common Stock or to the
purchase of stock pursuant to the Incentive Stock Option Plan and the Stock
Option Plan for Outside Directors to be established after the Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations, will
be prohibited from repurchasing any shares of the Common Stock for three years
except (i) for an offer to all stockholders on a pro rata basis; or (ii) for
the repurchase of qualifying shares of a director. Notwithstanding the
foregoing and except as provided below, beginning one year following
completion of the Conversion the Company may repurchase its Common Stock so
long as (i) the repurchases within the following two years are part of an
open-market program not involving greater than 5% of its outstanding capital
stock during a twelve-month period; (ii) the repurchases do not cause the
Company to become undercapitalized; and (iii) the Company provides to the
Regional Director of the OTS no later than 10 days prior to the commencement
of a repurchase program written notice containing a full description of the
program to be undertaken and such program is not disapproved by the Regional
Director. In addition, under current OTS policies, repurchases may be allowed
in the first year following Conversion and in amounts greater than 5% in the
second and third years following Conversion provided there are valid and
compelling business reasons for such repurchases and the OTS does not object
to such repurchases.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, a
new Federal Stock Charter and Bylaws to be adopted by members of the Bank. The
Plan also provides for the concurrent formation of a holding company, which
form of organization may or may not be utilized at the option of the Board of
Directors of the Bank. See "The Conversion--General." In the event that the
holding company form of organization is utilized, as described below, certain
provisions in the Company's Certificate of Incorporation and Bylaws and in its
management remuneration entered into in connection with the Conversion,
together with provisions of Delaware corporate law, may have anti-takeover
effects. In the event that the holding company form of organization is not
utilized, the Bank's Stock Charter and Bylaws and management remuneration
entered into in connection with the Conversion may have anti-takeover effects
as described below. In addition, regulatory restrictions may make it difficult
for persons or companies to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and
certain other statutory and regulatory provisions relating to stock ownership
and transfers, the Board of Directors and business combinations, which might
be deemed to have a potential "anti-takeover" effect. These provisions may
have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors but which individual Company stockholders
may deem to be in their best interests or in which shareholders 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 an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of the Company more difficult.
The following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the Company
provides that in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations promulgated
pursuant to the Exchange Act, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates 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 the ESOP or directors,
officers and employees of the Bank or Company or shares that are subject to a
revocable proxy and that are not otherwise beneficially owned, or deemed by
the Company to be beneficially owned, by such person and his affiliates. The
Certificate of Incorporation of the Company further provides that this
provision limiting voting rights may only be amended upon the vote of 80% of
the outstanding shares of voting stock (after giving effect to the limitation
on voting rights).
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected
each year. The Company's Certificate of Incorporation and Bylaws provide that
the size of the Board shall be determined by a
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majority of the directors. The Certificate of Incorporation and the Bylaws
provide that any vacancy occurring in the Board, including a vacancy created
by an increase in the number of directors or resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the directors then in office. The classified Board is
intended to provide for continuity of the Board of Directors and to make it
more difficult and time consuming for a stockholder group to fully use its
voting power to gain control of the Board of Directors without the consent of
the incumbent Board of Directors of the Company. The Certificate of
Incorporation of the Company provides that a director may be removed from the
Board of Directors prior to the expiration of his term only for cause, upon
the vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority of
the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 55 million (55,000,000) shares of Common Stock and five million (5,000,000)
shares of Preferred Stock. The shares of Common Stock and Preferred Stock were
authorized in an amount greater than that to be issued in the Conversion to
provide the Company's Board of Directors with as much flexibility as possible
to effect, among other transactions, financings, acquisitions, stock
dividends, stock splits and employee stock options. However, these additional
authorized shares may also be used by the Board of Directors consistent with
its fiduciary duty to deter future attempts to gain control of the Company.
The Board of Directors also has sole authority to determine the terms of any
one or more series of Preferred Stock, including voting rights, conversion
rates, and liquidation preferences. As a result of the ability to fix voting
rights for a series of Preferred Stock, the Board has the power, to the extent
consistent with its fiduciary duty, to issue a series of Preferred Stock to
persons friendly to management in order to attempt to block a post-tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. The Company's Board of
Directors currently has no plans for the issuance of additional shares, other
than the issuance of additional shares pursuant to the terms of the Stock
Programs and upon exercise of stock options to be issued pursuant to the terms
of the Incentive Stock Option Plan and the Stock Option Plan for Outside
Directors, all of which are to be established and presented to stockholders at
the first annual meeting after the Conversion.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock to
approve certain "Business Combinations," as defined therein, and related
transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the Company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
shareholders is required in connection with any transaction involving an
Interested Stockholder (as defined below) except (i) in cases where the
proposed transaction has been approved in advance by a majority of those
members of the Company's Board of Directors who are unaffiliated with the
Interested Stockholder and were directors prior to the time when the
Interested Stockholder became an Interested Stockholder or (ii) if the
proposed transaction meets certain conditions set forth therein which are
designed to afford the shareholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The
term "Interested Stockholder" is defined to include any individual,
corporation, partnership or other entity (other than the Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of the
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Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, transfer, or other disposition to or with any Interested Stockholder
or Affiliate of 25% or more of the assets of the Company or combined assets of
the Company and its subsidiary; (iii) the issuance or transfer to any
Interested Stockholder or its Affiliate by the Company (or any subsidiary) of
any securities of the Company in exchange for any assets, cash or securities
the value of which equals or exceeds 25% of the fair market value of the
Common Stock of the Company; (iv) the adoption of any plan for the liquidation
or dissolution of the Company proposed by or on behalf of any Interested
Stockholder or Affiliate thereof; and (v) any reclassification of securities,
recapitalization, merger or consolidation of the Company which has the effect
of increasing the proportionate share of Common Stock or any class of equity
or convertible securities of the Company owned directly or indirectly by an
Interested Stockholder or Affiliate thereof. The directors and executive
officers of the Bank are purchasing in the aggregate approximately 1.3% of the
shares of the Common Stock at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock sold in the
Conversion. Additionally, if at a meeting of stockholders following the
Conversion stockholder approval of the proposed Stock Programs and Stock
Options Plans is received, the Company expects to acquire 4% of the Common
Stock issued in the Conversion on behalf of the Stock Programs and expects to
issue an amount equal to 10% of the Common Stock issued in the Conversion
under the Stock Option Plans to directors and executive officers. As a result,
assuming the Stock Programs and Stock Option Plans are approved by
stockholders, directors, executive officers and employees have the potential
to control the voting of approximately 19.8% of the Company's Common Stock on
a fully diluted basis at the maximum of the Estimated Price Range, which may
enable them to prevent the approval of the transactions requiring the approval
of at least 80% of the Company's outstanding shares of voting stock described
hereinabove.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating
any offer of another "Person" (as defined therein) to (i) make a tender or
exchange offer for any equity security of the Company; (ii) merge or
consolidate the Company with another corporation or entity; or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Company, the Bank and the
stockholders of the Company, give due consideration to all relevant factors,
including, without limitation, the social and economic effects of acceptance
of such offer on the Company's customers and the Bank's present and future
account holders, borrowers and employees; on the communities in which the
Company and the Bank operate or are located; and on the ability of the Company
to fulfill its corporate objectives as a savings and loan holding company and
on the ability of the Bank to fulfill the objectives of a federally chartered
stock savings bank under applicable statutes and regulations. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision
limiting voting rights, the provisions relating to approval of certain
business combinations, calling special meetings, the number and classification
of directors, director and officer indemnification by the Company and
amendment of the Company's Bylaws and Certificate of Incorporation. The
Company's Bylaws may be amended by its Board of Directors, or by a vote of 80%
of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to
126
<PAGE>
give at least 90 days advance notice to the Secretary of the Company. The
notice provision requires a stockholder who desires to raise new business to
provide certain information to the Company concerning the nature of the new
business, the stockholder and the stockholder's interest in the business
matter. Similarly, a stockholder wishing to nominate any person for election
as a director must provide the Company with certain information concerning the
nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have
not been negotiated with and approved by members of its Board of Directors.
The provisions of the employment agreements with officers, and the Stock
Programs, the Incentive Stock Option Plan and the Stock Option Plan for
Outside Directors to be established may also discourage takeover attempts by
increasing the costs to be incurred by the Bank and the Company in the event
of a takeover. See "Management of the Bank--Employment Agreements" and "--
Benefits--Stock Option Plans."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of
Directors' view that these provisions should not discourage persons from
proposing a merger or other transaction at a price that reflects the true
value of the Company and that otherwise is in the best interest of all
stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The
takeover statute, which is codified in Section 203 of the Delaware General
Corporate Law ("Section 203"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquiror to engage in certain
transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-
year period following the date such "Person" became an Interested Stockholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person
became an Interested Stockholder, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the Interested Stockholder; and (iv) certain
business combinations that are proposed after the corporation had received
other acquisition proposals and which are approved or not opposed by a
majority of certain continuing members of the Board of Directors. A
corporation 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 Section 203. At the present time, the Board of Directors does not
intend to propose any such amendment.
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<PAGE>
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after the Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions
permitted by federal regulations to protect the interests of the converted
Bank and its stockholders from any hostile takeover. Such provisions may,
indirectly, inhibit a change in control of the Company, as the Bank's sole
stockholder. See "Risk Factors--Certain Anti-Takeover Provisions."
The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of
the issued and outstanding shares of any class of equity securities of the
Bank by any person (i.e., any individual, corporation, group acting in
concert, trust, partnership, joint stock company or similar organization),
either directly or through an affiliate thereof, will be prohibited for a
period of five years following the date of completion of the Conversion. Any
stock in excess of 10% acquired in violation of the Federal Stock Charter
provision will not be counted as outstanding for voting purposes. This
limitation shall not apply to any transaction in which the Bank forms a
holding company without a change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter or appraisal rights. In the event that holders of revocable proxies
for more than 10% of the shares of the Common Stock of the Company seek, among
other things, to elect one-third or more of the Company's Board of Directors,
to cause the Company's stockholders to approve the acquisition or corporate
reorganization of the Company or to exert a continuing influence on a material
aspect of the business operations of the Company, which actions could
indirectly result in a change in control of the Bank, the Board of Directors
of the Bank will be able to assert this provision of the Bank's Federal Stock
Charter against such holders. Although the Board of Directors of the Bank is
not currently able to determine when and if it would assert this provision of
the Bank's Federal Stock Charter, the Board of Directors, in exercising its
fiduciary duty, may assert this provision if it were deemed to be in the best
interests of the Bank, the Company and its stockholders. It is unclear,
however, whether this provision, if asserted, would be successful against such
persons in a proxy contest which could result in a change in control of the
Bank indirectly through a change in control of the Company. Finally, for five
years, stockholders will not be permitted to call a special meeting of
stockholders relating to a change of control of the Bank or a charter
amendment or to cumulate their votes in the election of directors.
Furthermore, the staggered terms of the Board of Directors could have an anti-
takeover effect by making it more difficult for a majority of shares to force
an immediate change in the Board of Directors since only one-third of the
Board is elected each year. The purpose of these provisions is to assure
stability and continuity of management of the Bank in the years immediately
following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time for the issuance or use of the shares of undesignated preferred
stock proposed to be authorized, the Board of Directors believes that the
availability of such shares will provide the Bank with increased flexibility
in structuring possible future financings and acquisitions and in meeting
other corporate needs which may arise. In the event of a proposed merger,
tender offer or other attempt to gain control of the Bank of which management
does not approve, it might be possible for the Board of Directors to authorize
the issuance of one or more series of preferred stock with rights and
preferences which could impede the completion of such a transaction. An effect
of the possible issuance of such preferred stock, therefore, may be to deter a
future takeover attempt. The Board of Directors does not intend to issue any
preferred stock except on terms which the Board deems to be in the best
interest of the Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of
an offer or intent to make an offer, to purchase such subscription rights or
Common Stock.
128
<PAGE>
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or
the Company; or (iii) offers which are not opposed by the Board of Directors
of the Bank and which receive the prior approval of the OTS. Such prohibition
is also applicable to the acquisition of the stock of the Company. Such
acquisition may be disapproved by the OTS if it is found, among other things,
that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the conversion; (d) would be
likely to result in injury to the savings institution; (e) would not be
consistent with economical home financing; (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the
savings institution's conversion proceeds. In the event that any person,
directly or indirectly, violates this regulation, the securities beneficially
owned by such person in excess of 10% shall not be counted as shares entitled
to vote and shall not be voted by any person or counted as voting shares in
connection with any matters submitted to a vote of stockholders. The
definition of beneficial ownership for this regulation extends to persons
holding revocable or irrevocable proxies for the Company's stock under
circumstances that give rise to a conclusive or rebuttable determination of
control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity security of
the Company generally would be subject to approval by the OTS under the Change
in Bank Control Act. The OTS requires all persons seeking control of a savings
institution, and, therefore, indirectly its holding company, to obtain
regulatory approval prior to offering to obtain control. Federal law generally
provides that no "person," acting directly or indirectly or through or in
concert with one or more other persons, may acquire directly or indirectly
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among
other things, that (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interests of
its depositors; or (iii) the competency, experience or integrity of the
acquiring person or the proposed management personnel indicates that it would
not be in the interest of the depositors or the public to permit the
acquisition of control by such person. Such change in control restrictions on
the acquisition of holding company stock are not limited to three years after
conversion but will apply for as long as the regulations are in effect.
Persons holding revocable or irrevocable proxies may be deemed to be
beneficial owners of such securities under OTS regulations and therefore
prohibited from voting all or the portion of such proxies in excess of the 10%
aggregate beneficial ownership limit. Such regulatory restrictions may prevent
or inhibit proxy contests for control of the Company or the Bank which have
not received prior regulatory approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 55 million shares of Common Stock having
a par value of $.01 per share and five million shares of preferred stock
having a par value of $.01 per share (the "Preferred Stock"). The Company
currently expects to issue 7,293,981 shares of Common Stock (or 8,388,078 in
the event of an increase of 15% in the Estimated Price Range) and no shares of
Preferred Stock in the Conversion. Each share of the Company's Common Stock
will have the same relative rights as, and will be identical in all respects
with, each other share of Common Stock. Upon payment of the Purchase Price for
the Common Stock, in accordance with the Plan, all such stock will be duly
authorized, fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
129
<PAGE>
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are
imposed by law and applicable regulation. See "Dividend Policy" and
"Regulation." The holders of Common Stock of the Company will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the
Company issues Preferred Stock, the holders thereof may have a priority over
the holders of the Common Stock with respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to
be presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Bank," each holder of Common Stock will be entitled to one vote per share and
will not have any right to cumulate votes in the election of directors. If the
Company issues Preferred Stock, holders of the Preferred Stock may also
possess voting rights. Certain matters require an 80% shareholder vote. See
"Restrictions on Acquisition of the Company and the Bank."
As a federal mutual savings bank, corporate powers and control of the Bank
are vested in its Board of Directors, who elect the officers of the Bank and
who fill any vacancies on the Board of Directors as it exists upon Conversion.
Subsequent to Conversion, voting rights will be vested exclusively in the
owners of the shares of capital stock of the Bank, which will be the Company,
and voted at the direction of the Company's Board of Directors. Consequently,
the holders of the Common Stock will not have direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion--Liquidation Rights"), all assets of the Bank available
for distribution. In the event of liquidation, dissolution or winding up of
the Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all
of the assets of the Company available for distribution. If Preferred Stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock
with voting, dividend, liquidation and conversion rights which could dilute
the voting strength of the holders of the Common Stock and may assist
management in impeding an unfriendly takeover or attempted change in control.
130
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the Conversion,
authorizes the issuance of capital stock consisting of 55 million shares of
common stock, par value $1.00 per share, and five million shares of preferred
stock, par value $1.00 per share, which preferred stock may be issued in
series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common
Stock of the Bank will have the same relative rights as, and will be identical
in all respects with, each other share of common stock. After the Conversion,
the Board of Directors will be authorized to approve the issuance of Common
Stock up to the amount authorized by the Federal Stock Charter without the
approval of the Bank's stockholders. Assuming that the holding company form of
organization is utilized, all of the issued and outstanding common stock of
the Bank will be held by the Company as the Bank's sole stockholder. THE
CAPITAL STOCK OF THE BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE
AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation--Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held,
subject to the right of shareholders to cumulate their votes for the election
of directors. During the five-year period after the effective date of the
Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank--Anti-Takeover Effects of the
Company's Certificate of Incorporation and Bylaws and Management Remuneration
Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit
accounts and accrued interest thereon), and distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Bank available for distribution in
cash or in kind. If preferred stock is issued subsequent to the Conversion,
the holders thereof may also have priority over the holders of common stock in
the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank will
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price therefor, the common
stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
EXPERTS
The consolidated financial statements of Ocean Federal Savings Bank and its
subsidiary as of December 31, 1995 and 1994 and for each of the years in the
three year period ended December 31, 1995, have been included
131
<PAGE>
in this Prospectus in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. Such report
refers to a change in the method of accounting for investments in 1994.
RP Financial, LC. has consented to the publication herein of the summary of
its report to the Bank and Company setting forth its opinion as to the
estimated pro forma market value of the Common Stock upon Conversion and its
valuation with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal and New Jersey income tax
consequences of the Conversion will be passed upon for the Bank and the
Company by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to
the Bank and the Company. The federal income tax consequences of the Ocean
Federal Foundation will be passed upon for the Bank and the Company by KPMG
Peat Marwick LLP, independent certified public accountants. Muldoon, Murphy &
Faucette will rely as to certain matters of Delaware law on the opinion of
Morris, Nichols, Arsht & Tunnell. Certain legal matters will be passed upon
for Sandler O'Neill by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information,
including the Conversion Valuation Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of such material can be obtained from the SEC at prescribed
rates. The statements contained in this Prospectus as to the contents of any
contract or other document filed as an exhibit to the registration statement
are, of necessity, brief descriptions thereof and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
The Bank has filed an application for conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 10 Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the
Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion. In the event that the Bank amends the Plan to eliminate the
concurrent formation of the Company as part of the Conversion, the Bank will
register its stock with the OTS under Section 12(g) of the Exchange Act and,
upon such registration, the Bank and the holders of its stock will become
subject to the same obligations and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the Company and
the Federal Stock Charter and Bylaws of the Bank are available without charge
from the Bank.
132
<PAGE>
OCEAN FEDERAL SAVINGS BANK
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-1
Financial Statements:
Consolidated Statements of Financial Condition As of December 31, 1995
and 1994............................................................... F-2
Consolidated Statements of Income For the years ended December 31, 1995,
1994 and 1993.......................................................... 40
Consolidated Statements of Retained Earnings For the years ended
December 31, 1995, 1994 and 1993....................................... F-3
Consolidated Statements of Cash Flows For the years ended December 31,
1995, 1994 and 1993.................................................... F-4
Notes to Consolidated Financial Statements................................ F-6
</TABLE>
All schedules are omitted as the required information is not applicable or
the information is presented in the consolidated financial statements or notes
thereto.
The financial statements of Ocean Financial Corp. have been omitted because
Ocean Financial Corp. has not yet issued any stock, has no assets and no
liabilities, and has not conducted any business other than of an
organizational nature.
133
<PAGE>
[KPMG PEAT MARWICK LLP LOGO]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ocean Federal Savings Bank:
We have audited the consolidated financial statements of Ocean Federal
Savings Bank and subsidiary as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ocean
Federal Savings Bank and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Bank
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," as of January 1, 1994.
KPMG PEAT MARWICK LLP
February 12, 1996
F-1
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
ASSETS
Cash and due from banks.................................... $ 8,022 $ 239
Investment securities held to maturity, at amortized cost
(estimated market value of $120,144) (notes 3 and 12)..... -- 127,451
Investment securities available for sale (notes 3 and 12).. 114,881 --
Federal Home Loan Bank of New York stock, at cost.......... 7,723 7,323
Mortgage-backed securities held to maturity (estimated
market value of $219,574) (notes 4 and 12)................ -- 224,569
Mortgage-backed securities available for sale (notes 4 and
12)....................................................... 265,113 --
Loans receivable, net (notes 5 and 12)..................... 612,696 592,315
Mortgage loans held for sale............................... 1,894 --
Interest and dividends receivable (note 6)................. 7,480 7,229
Real estate owned, net (note 8)............................ 1,367 1,580
Premises and equipment, net (note 7)....................... 7,641 4,330
Excess servicing asset (note 5)............................ 1,222 819
Other assets (note 10)..................................... 8,406 5,796
---------- --------
Total assets........................................... $1,036,445 $971,651
========== ========
LIABILITIES AND RETAINED EARNINGS
Deposits (note 9).......................................... $ 926,558 $867,420
Federal Home Loan Bank borrowings (note 12)................ 10,400 16,300
Advances by borrowers for taxes and insurance.............. 3,321 3,153
Other liabilities (notes 10 and 11)........................ 3,815 2,444
---------- --------
Total liabilities...................................... 944,094 889,317
---------- --------
Retained earnings:
Substantially restricted (notes 2 and 10)................ 90,281 82,334
Net unrealized gain on securities available for sale, net
of tax.................................................. 2,070 --
---------- --------
Total retained earnings................................ 92,351 82,334
---------- --------
Commitments and contingencies (note 12)
Total liabilities and retained earnings................ $1,036,445 $971,651
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1992............................................. $62,469
Net income for the year ended December 31, 1993........................ 10,136
-------
Balance at December 31, 1993............................................. $72,605
Net income for the year ended December 31, 1994........................ 9,729
-------
Balance at December 31, 1994............................................. $82,334
Net income for the year ended December 31, 1995........................ 7,947
Net unrealized gain on securities available for sale, net of tax....... 2,070
-------
Balance at December 31, 1995............................................. $92,351
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 7,947 $ 9,729 $ 10,136
-------- -------- --------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization of premises and
equipment..................................... 810 966 944
Amortization of excess servicing asset......... 106 141 463
Net premium amortization in excess of discount
accretion on mortgage-backed and investment
securities.................................... 585 644 179
Net accretion of deferred fees and discounts in
excess of premium on loans.................... (535) (917) (1,401)
Provision for loan losses...................... 950 1,129 1,300
Provision for deferred taxes................... 385 883 177
Net gain on sales of real estate owned......... (256) (417) (611)
Proceeds from sales of real estate owned....... 3,261 4,571 6,297
Net loss (gain) on sales of loans and
securities available for sale................. 340 (182) (670)
(Increase) decrease in interest and dividends
receivable.................................... (251) (839) 3
(Increase) decrease in other assets............ (4,160) (2,799) 1
Increase (decrease) in other liabilities....... 1,371 (1,231) 972
-------- -------- --------
Total adjustments............................ 2,606 1,949 7,654
-------- -------- --------
Net cash provided by operating activities.... 10,553 11,678 17,790
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable............... (23,588) (55,320) (30,412)
Proceeds from sales of investment securities
available for sale............................ 63,713 -- --
Proceeds from sales of mortgage loans held for
sale.......................................... 19,108 16,760 41,070
Purchase of investment securities available for
sale.......................................... (29,976) -- --
Purchase of mortgage-backed securities
available for sale............................ (34,575) -- --
Purchases of investments held to maturity...... (54,975) (31,973) (78,181)
Purchases of mortgage-backed securities held to
maturity...................................... (53,915) (50,042) (116,992)
Mortgage loans originated for sale............. (21,264) (15,946) (41,173)
Principal payments on mortgage-backed
securities held to maturity................... 50,193 65,978 81,601
Proceeds from maturities of investments held to
maturity...................................... 33,624 31,573 73,826
Purchases of Federal Home Loan Bank of New York
stock......................................... (400) (643) (845)
Purchases of premises and equipment............ (4,121) (885) (655)
-------- -------- --------
Net cash used in investing activities........ (56,176) (40,498) (71,761)
-------- -------- --------
</TABLE>
F-4
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits............................ $ 59,138 $ 8,959 $ 39,161
(Decrease) increase in Federal Home Loan Bank
borrowings..................................... (5,900) 16,300 --
Increase in advances by borrowers for taxes and
insurance...................................... 168 680 450
-------- ------- --------
Net cash provided by financing activities..... 53,406 25,939 39,611
-------- ------- --------
Net increase (decrease) in cash and due from
banks........................................ 7,783 (2,881) (14,360)
Cash and due from banks at beginning of year...... 239 3,120 17,480
-------- ------- --------
Cash and due from banks at end of year............ $ 8,022 $ 239 $ 3,120
======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................ $ 39,849 $32,362 $ 33,998
Income taxes.................................... 3,873 5,036 5,876
NONCASH INVESTING ACTIVITIES:
Transfer of loans receivable to real estate
owned.......................................... 2,792 2,678 4,972
Transfer of investment and mortgage-backed
securities from held-to- maturity to available-
for-sale....................................... 382,713 -- --
Mortgage loans securitized into mortgage-backed
securities..................................... 17,180 14,771 25,273
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Ocean Federal
Savings Bank (the Bank) and its wholly-owned subsidiary, Dome Financial
Services, Inc. (inactive). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Business
The Bank provides a range of banking services to customers through its
branches in New Jersey, primarily in Ocean, Middlesex and Monmouth counties.
The Bank is subject to competition from other financial institutions; it is
also subject to the regulations of certain regulatory agencies and undergoes
periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the consolidated statement of financial condition and revenues and expenses
for the period then ended. Actual results could differ significantly from
those estimates and assumptions.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or
in settlement of loans. In connection with the determination of the allowances
for loan losses and Real Estate Owned (REO), management obtains independent
appraisals for significant properties.
Cash Equivalents
Cash equivalents consist of interest-bearing deposits in other financial
institutions and loans of Federal funds. For purposes of the consolidated
statements of cash flows, the Bank considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Investment and Mortgage-Backed Securities
On January 1, 1994, the Bank adopted Statement of Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities" (FAS
115). Investment and mortgage-backed securities identified as held to maturity
are carried at cost, adjusted for amortization of premium and accretion of
discount, which are recognized as adjustments to interest income. Management
determines the appropriate classification of securities at the time of
purchase. If management has the intent and the Bank has the ability at the
time of purchase to hold securities until maturity, they are classified as
held to maturity.
Debt securities to be held for indefinite periods of time and not intended
to be held to maturity are classified as available for sale. Securities
available for sale include securities that management intends to use as part
of its asset/liability management strategy. Such securities are carried at
fair value and unrealized gains and losses, net of related tax effect, are
excluded from earnings, but are included in retained earnings. Gains or losses
on the sale of such securities are recognized in the current period in which
such transactions are consummated and are included in other income.
F-6
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As permitted by the Financial Accounting Standards Board's, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities," the Bank reassessed the classification of its held to
maturity portfolios. As a result of such reassessment, the Bank transferred,
on December 20, 1995, securities with a book value of $382,713,000 and a fair
value of $385,361,000, from held to maturity to available for sale. In
connection with such transfer, an unrealized gain, net of deferred income
taxes, of $1,695,000 was recognized and classified as a separate component of
retained earnings.
Loans Receivable
Loans receivable, other than loans held for sale, are stated at unpaid
principal balance less unearned discounts, unamortized premiums, net deferred
loan origination and commitment fees, and the allowance for loan losses.
Discounts and premiums are recognized in income using the level-yield method
over the estimated lives of the loans.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net fee or cost is recognized in interest income
using the level-yield method over the contractual life of the specifically
identified loans, adjusted for actual prepayments.
Loans in which interest is more than 90 days past due and other loans in the
process of foreclosure are placed on nonaccrual status. Interest income
previously accrued on these loans, but not yet received, is reversed in the
current period. Any interest subsequently collected is credited to income in
the period of recovery.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS No. 114) and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures" (SFAS No. 118) were adopted prospectively by the Bank on January
1, 1995. These statements address the accounting for impaired loans and
specify how allowances for loan losses related to these impaired loans should
be determined. The adoption of the statements did not effect operating
results, the level of the overall allowance or the comparability of credit
related data. Income recognition and charge-off policies were not changed as a
result of SFAS No. 114 and SFAS No. 118.
The Bank has defined the population of impaired loans to be all non-accrual
commercial real estate, multi-family and land loans. Impaired loans are
individually assessed to determine that the loan's carrying value is not in
excess of the fair value of the collateral or the present value of the loan's
expected future cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage loans and
installment loans, are specifically excluded from the impaired loan portfolio.
At December 31, 1995 the total impaired loan portfolio was $154,000 for which
general and specific allocations to the allowance for loan losses of $31,000
were identified.
Mortgage Loans Held for Sale
The Bank may periodically sell all or part of its 30-year fixed rate,
conforming loan originations while retaining all other types of loan
originations for its loan portfolio. Mortgage loans intended for sale are
carried at the lower of unpaid principal balance, net, or market value on an
aggregate basis.
Allowance for Loan Losses
The allowance for loan losses is based on management's evaluation of the
adequacy of the allowance based on the Bank's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
current economic
F-7
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
conditions. Additions to the allowance arise from charges to operations
through the provision for loan losses or from the recovery of amounts
previously charged off. The allowance is reduced by loan charge-offs. Loans
are charged-off when management believes there has been permanent impairment
of their carrying values.
Sale of Loans with Servicing Retained
The Bank sells loans on a non-recourse basis at a net yield to investors
while retaining the servicing rights. A gain or loss is recorded for the
difference between the cost basis of the loan and the sales price. An
additional "excess servicing" gain or loss is recorded for the present value
of the income stream retained by the Bank after subtracting a normal servicing
fee.
The excess servicing gain or loss is recognized in current income and as an
excess servicing asset. The excess servicing asset is amortized ratably, as a
charge to fees and service charges, over the estimated lives of the related
loans, with adjustments for unanticipated prepayments. The excess servicing
asset does not exceed the present value of the future net excess servicing fee
income.
When loans are converted into mortgage-backed securities, the Bank does not
record an excess servicing gain or loss until the securities are sold.
Real Estate Owned
Real estate owned is carried at fair value, less estimated costs to sell.
When a property is acquired, the excess of the loan balance over fair value is
charged to the allowance for loan losses. A reserve for real estate owned has
been established to provide for subsequent write downs that may be required.
Real estate owned is carried net of the related reserve. Operating results
from real estate owned, including rental income, operating expenses, and gains
and losses realized from the sales of real estate owned are recorded as
incurred.
Premises and Equipment
Land is carried at cost and premises and equipment, including leasehold
improvements, are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-
line method over the estimated useful lives of the assets or leases. Repair
and maintenance items are expensed and improvements are capitalized. Gains and
losses on dispositions are reflected in current operations.
Income Taxes
The Bank utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Pension Plan
Pension plan costs based on actuarial computation of current and future
benefits for employees are charged to expense and funded based on the maximum
amount that can be deducted for Federal income tax purposes.
F-8
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Contributions
Contributions made shall be recognized as expenses in the period made and as
decreases of assets or increases of liabilities depending on the form of the
benefits given. Contributions made shall be measured at the fair values of the
asset given or, if made in the form of a settlement or cancellation of a
donee's liabilities, at the fair value of the liabilities canceled.
(2) REGULATORY MATTERS
On August 9, 1989, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA) was signed into law. FIRREA imposes more
stringent capital requirements upon the Bank. In addition, FIRREA includes
provisions for changes in the Federal regulatory structure, including a new
deposit insurance system, increased deposit insurance premiums and restricted
investment activities with respect to non-investment grade corporate debt and
certain other investments. FIRREA also increases the required ratio of
housing-related assets in order to qualify as a savings association.
The legislation requires the Bank to have a minimum regulatory tangible
capital ratio equal to 1.5% of adjusted total assets, a minimum 3% leverage
(core) capital ratio and an 8.0% risk-based capital ratio. The Bank is in
compliance with the current minimum capital requirements of FIRREA at December
31, 1995.
The OTS has adopted a rule which will require that an amount be added to an
institution's risk-based capital requirement equal to 50% of the decline in
net portfolio value (NPV) that exceeds 2% of the institution's assets
expressed in terms of economic value under a hypothetical 200 basis point
shift in interest rates. NPV represents the net discounted cash flows stemming
from an institution's assets, liabilities and off balance sheet items. The OTS
has postponed the effective date of the interest rate risk capital component
pending the development of an appeals process for the measurement of an
institution's interest rate risk. If the Bank had been subject to an interest
rate risk capital component as of December 31, 1995, there would have been no
material effect on the Bank's risk-weighted capital.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was
signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19, 1992.
In addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for
certain kinds of deposits, increased supervision by the Federal regulatory
agencies, increased reporting requirements for insured institutions and new
regulations concerning internal controls, accounting and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with the Office
of Thrift Supervision (OTS), prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed
on the institution either by the OTS or by the FDIC, including requirements to
raise additional capital, sell assets, or sell the entire institution. Once an
institution becomes "critically undercapitalized" it is generally placed in
receivership or conservatorship within 90 days.
To be considered "well capitalized," an institution must generally have a
leverage ratio of at least 5%, a Tier 1 risked-based capital ratio of at least
6%, and a total risk-based capital ratio of at least 10%. At December 31,
1995, the Bank was considered well-capitalized.
F-9
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
December 31, 1995 and December 31, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Investment Securities Available For
Sale:
United States Government and agency
obligations....................... $112,956 $386 $ (40) $113,302
State and municipal obligations.... 1,549 30 -- 1,579
-------- ---- ------- --------
$114,505 $416 $ (40) $114,881
======== ==== ======= ========
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Investment Securities Held to Maturi-
ty:
United States Government and agency
obligations....................... $122,278 $ 33 $(7,325) $114,986
State and municipal obligations.... 2,173 1 (16) 2,158
Corporate obligations.............. 3,000 -- -- 3,000
-------- ---- ------- --------
$127,451 $ 34 $(7,341) $120,144
======== ==== ======= ========
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1995 by contractual maturity, are shown below (in thousands).
Actual maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Investment Securities Available For Sale:
Due in one year or less................................... $ 10,808 $ 10,816
Due after one year through five years..................... 84,562 84,720
Due after five years through ten years.................... 19,000 19,209
Due after 10 years........................................ 135 136
-------- --------
$114,505 $114,881
======== ========
</TABLE>
Gross losses on the sale of investment securities available for sale of
$587,000 were realized in 1995. There were no sales of investment securities
for the years ended December 31, 1994 and 1993.
F-10
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of mortgage-backed securities
at December 31, 1995 and December 31, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities Available
For Sale:
FHLMC............................. $221,822 $2,340 $ (278) $223,884
FNMA.............................. 27,307 317 -- 27,624
GNMA.............................. 3,561 202 -- 3,763
Collaterized mortgage
obligations...................... 9,564 278 -- 9,842
-------- ------ ------- --------
$262,254 $3,137 $ (278) $265,113
======== ====== ======= ========
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities Held to
Maturity:
FHLMC............................. $183,424 $ 334 $(5,216) $178,542
FNMA.............................. 21,602 137 (294) 21,445
GNMA.............................. 4,586 28 (26) 4,588
Collaterized mortgage
obligations...................... 14,957 75 (33) 14,999
-------- ------ ------- --------
$224,569 $ 574 $(5,569) $219,574
======== ====== ======= ========
</TABLE>
Collateralized mortgage obligations issued by FHLMC, FNMA and private
interests amounted to $7,377,000, $850,000 and $1,337,000, respectively at
December 31, 1995 and $11,946,000, $850,000 and $2,161,000, respectively at
December 31, 1994.
The contractual maturities of mortgage-backed securities generally exceed 20
years; however, the effective lives are expected to be shorter due to
anticipated prepayments.
F-11
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LOANS RECEIVABLE, NET
A summary of loans receivable at December 31, 1995 and 1994 follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
Real estate mortgage:
One to four-family..................................... $572,632 $552,168
Commercial real estate, multi-family and land.......... 14,939 13,885
FHA insured & VA guaranteed............................ 484 233
-------- --------
588,055 566,286
Real estate construction................................. 8,153 10,474
Consumer................................................. 26,867 26,100
-------- --------
Total loans.......................................... 623,075 602,860
-------- --------
Loans in process......................................... (2,687) (2,661)
Deferred fees............................................ (1,679) (2,263)
Unearned discount........................................ (12) (13)
Allowance for loan losses................................ (6,001) (5,608)
-------- --------
(10,379) (10,545)
-------- --------
$612,696 $592,315
======== ========
</TABLE>
Management believes that the allowances for losses on loans and real estate
owned (REO) are adequate. While management uses available information to
recognize losses on loans and REO, future additions to the allowances may be
necessary based on changes in economic conditions in the Bank's market area.
In addition, various regulatory agencies, as an integral part of their routine
examination process, periodically review the Bank's allowances for losses on
loans and REO. Such agencies may require the Bank to recognize additions to
the allowances based on their judgments about information available to them at
the time of their examination. (See also note 8)
At December 31, 1995, 1994 and 1993, loans in the amount of $8,671,000,
$10,939,000 and $10,494,000, respectively, were three or more months
delinquent or in the process of foreclosure and the Bank was not recognizing
interest income. If these loans had continued to realize interest in
accordance with their contractual terms, approximately $428,000, $607,000 and
$642,000 of additional interest income would have been recognized for the
years ended December 31, 1995, 1994 and 1993, respectively. The Bank was not
committed to lend additional funds on any nonaccrual loans at December 31,
1995.
An analysis of the allowance for loan losses for the years ended December
31, 1995, 1994 and 1993 is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year.................... $ 5,608 $ 5,504 $ 5,737
Provision charged to operations................. 950 1,129 1,300
Charge-offs..................................... (568) (1,053) (1,547)
Recoveries...................................... 11 28 14
------- -------- --------
Balance at end of year.......................... $ 6,001 $ 5,608 $ 5,504
======= ======== ========
</TABLE>
F-12
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995, 1994 and 1993, the Bank serviced loans for others in
the amount of $143,115,000, $133,652,000 and $138,084,000, respectively.
An analysis of the excess servicing asset for the years ended December 31,
1995, 1994 and 1993 is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year................. $ 819 $ 642 $ 786
Additions.................................... 509 318 319
Amortization................................. (106) (141) (463)
-------- ------- -------
Balance at end of year....................... $ 1,222 $ 819 $ 642
======== ======= =======
</TABLE>
The Financial Accounting Standards Board has issued Statements No. 114 and
118. The new statements, which are effective for financial statements issued
for fiscal years beginning after December 15, 1994, require impaired loans be
measured at the present value of expected future cash flows by discounting
those cash flows generally at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. The new statements also
require troubled debt restructurings involving a modification of terms be
remeasured on a discounted basis. The Bank adopted these statements on January
1, 1995. The adoption of these statements did not have a material impact on
results of operations or financial position or upon the comparability of
credit related data.
(6) INTEREST AND DIVIDENDS RECEIVABLE
A summary of interest and dividends receivable at December 31, 1995 and 1994
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Loans..................................................... $3,554 $3,083
Investment securities..................................... 1,527 2,293
Mortgage-backed securities................................ 2,399 1,853
------ ------
$7,480 $7,229
====== ======
</TABLE>
(7) PREMISES AND EQUIPMENT, NET
Premises and equipment at December 31, 1995 and 1994 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -------
<S> <C> <C>
Land................................................... $ 2,971 $ 781
Buildings and improvements............................. 4,107 4,021
Leasehold improvements................................. 1,097 794
Furniture and equipment................................ 3,666 3,396
Automobiles............................................ 88 88
Construction in progress............................... 1,452 185
------- -------
Total................................................ 13,381 9,265
Accumulated depreciation and amortization.............. (5,740) (4,935)
------- -------
$ 7,641 $ 4,330
======= =======
</TABLE>
F-13
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995, the Bank was committed to expend $5,355,000 towards
the renovation of a new branch and administrative center.
(8) REAL ESTATE OWNED, NET
An analysis of the allowance for losses on real estate owned for the years
ended December 31, 1995, 1994 and 1993 is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Balance at beginning of year................. $ 476 $ 506 $ 614
Losses charged off........................... (65) (30) (108)
------- ------- --------
Balance at end of year....................... $ 411 $ 476 $ 506
======= ======= ========
</TABLE>
(9) DEPOSITS
Deposits, including accrued interest payable of $93,000 and $115,000 at
December 31, 1995 and 1994, respectively, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1995 1994
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT COST AMOUNT COST
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NOW accounts............................. $ 75,010 2.00% $ 71,413 2.09%
Money Market deposit accounts............ 70,556 2.93% 71,971 2.57%
Savings accounts......................... 175,777 2.53% 190,769 2.54%
Time deposits............................ 605,215 5.70% 533,267 4.95%
-------- ---- -------- ----
$926,558 4.59% $867,420 3.99%
======== ==== ======== ====
</TABLE>
Included in time deposits at December 31, 1995 and 1994, respectively, is
$41,236,000 and $32,847,000 of deposits of $100,000 and over. The deposits of
the Bank are insured up to $100,000 by the Savings Association Insurance Fund,
which is administered by the FDIC and is backed by the full faith and credit
of the U.S. Government.
Time deposits at December 31, 1995 mature as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
1996........................................................ $399,727
1997........................................................ 92,648
1998........................................................ 44,694
1999........................................................ 26,669
2000........................................................ 12,762
Thereafter.................................................. 28,715
--------
$605,215
========
</TABLE>
F-14
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest expense on deposits for the years ended December 31, 1995, 1994 and
1993 was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
NOW accounts...................................... $ 1,483 $ 1,440 $ 1,347
Money Market deposit accounts..................... 2,083 1,899 2,228
Savings accounts.................................. 4,537 5,246 5,178
Time deposits..................................... 31,723 23,545 25,195
------- ------- -------
$39,826 $32,130 $33,948
======= ======= =======
</TABLE>
(10) INCOME TAXES
The Bank is generally allowed a special bad debt deduction in determining
income for Federal income tax purposes. The deduction is based on either
specified experience formulas or a percentage of taxable income before such
deduction (presently 8%). For the years ended December 31, 1995, 1994 and
1993, the Bank used the percentage of taxable income method.
Retained earnings at December 31, 1995 includes approximately $10,750,000 of
income that has not been subject to tax because of deductions for bad debts
allowed for income tax purposes. Deferred income taxes have not been provided
on such bad debt deductions since the Bank does not intend to use the
accumulated bad debt deductions for purposes other than to absorb loan losses.
If this portion of retained earnings is used for any purposes other than to
absorb bad debt losses, taxes would be imposed on such amounts. If triggered,
the tax liability related to the appropriated earnings would have been
$3,870,000 at December 31, 1995.
Recent proposed tax legislation would repeal the reserve method of
accounting for bad debts by thrift institutions. Under the legislation, the
Bank would be required to recapture its post-1987 additions to its tax bad
debt reserve. The Bank has accrued for this liability in the consolidated
financial statements.
The provision for income taxes for the years ended December 31, 1995, 1994
and 1993 consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 3,936 $ 4,148 $ 4,928
State............................................ 338 374 451
------- ------- -------
Total Current.................................. 4,274 4,522 5,379
------- ------- -------
Deferred:
Federal.......................................... 353 811 166
State............................................ 32 72 11
------- ------- -------
Total Deferred................................. 385 883 177
------- ------- -------
$ 4,659 $ 5,405 $ 5,556
======= ======= =======
</TABLE>
F-15
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation between the provision for income taxes and the expected
amount computed by multiplying income before provision for income taxes times
the applicable statutory Federal income tax rate for the years ended December
31, 1995, 1994 and 1993 is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Income before provision for income taxes........... $12,606 $15,134 $15,692
Applicable statutory Federal income tax rate....... 34.1% 34.2% 34.3%
Computed "expected" Federal income tax expense..... 4,299 5,176 5,382
Increase (decrease) in Federal income tax expense
resulting from:
State income taxes net of Federal benefit........ 253 318 304
Other items, net................................. 107 (89) (130)
------- ------- -------
$ 4,659 $ 5,405 $ 5,556
======= ======= =======
Effective tax rate................................. 37.0% 35.7% 35.4%
======= ======= =======
</TABLE>
Included in other assets at December 31, 1995 and 1994 is a net deferred tax
asset of $870,000 and $2,420,000, respectively. In addition, included in other
liabilities at December 31, 1995 and 1994 is a current tax payable
(refundable) of $236,000 and ($177,000).
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1994 are presented below (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -------
<S> <C> <C>
Allowance for loan and real estate owned losses per books... $ 2,314 $ 2,198
Reserve for uncollected interest............................ 217 235
Deferred loan and commitment fees........................... 132 527
Deferred compensation....................................... 68 21
Accrued pension expense..................................... 154 185
Premises and equipment, differences in depreciation......... 199 133
Other reserves.............................................. 175 138
------- -------
Total deferred tax assets................................. 3,259 3,437
------- -------
Allowance for loan and real estate owned losses for tax
purposes................................................... (831) (617)
Unrealized gain on securities available-for-sale............ (1,165) --
Excess servicing on sale of mortgage loans.................. (11) (14)
Prepaid FDIC insurance premium.............................. (373) (358)
Investments, discount accretion............................. (9) (28)
------- -------
Total deferred tax liabilities............................ (2,389) (1,017)
------- -------
Net deferred tax assets................................... $ 870 $ 2,420
======= =======
</TABLE>
The Bank has determined that it is not required to establish a valuation
reserve for the deferred tax asset account since it is "more likely than not"
that the deferred tax asset will be realized through future reversals of
existing taxable temporary differences, future taxable income and tax planning
strategies. The conclusion that it is "more likely than not" that the deferred
tax asset will be realized is based on the history of earnings and the
prospects for continued growth. Management will continue to review the tax
criteria related to the recognition of deferred tax assets.
F-16
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) PENSION PLAN
The Bank has a qualified noncontributory defined benefit pension plan (the
Plan) covering all eligible employees. Retirement benefits are based upon a
formula utilizing years of service and average monthly compensation.
It is the Bank's practice to fund the Plan for the maximum amount that can
be deducted for Federal income tax purposes subject to the minimum funding
requirements of ERISA.
The following table sets forth the Plan's latest available funded status and
amounts recognized at December 31, 1995 and 1994 in the Bank's consolidated
statements of financial condition (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Actuarial present value of benefit obligations--accumulated
benefit obligation:
Vested..................................................... $(1,009) $ (784)
Non-vested................................................. (97) (86)
======= ======
Projected benefit obligation for service rendered to date.... (1,911) (1,602)
Plan assets at fair value, primarily a group annuity
contract.................................................... 1,636 1,387
------- ------
Plan assets less than projected benefit obligation........... (275) (215)
Unrecognized net loss........................................ 233 111
Unrecognized net transition asset............................ (352) (372)
------- ------
Accrued pension cost (included in other liabilities)......... $ (394) $ (476)
======= ======
</TABLE>
The components of net pension expense for the years ended December 31, 1995,
1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Service cost--benefits earned during the year.............. $ 209 $200 $180
Interest cost on projected benefit obligation.............. 137 108 97
Actual return on plan assets............................... (79) (83) (74)
Net amortization and deferral.............................. (40) (26) (19)
----- ---- ----
Net pension expense...................................... $ 227 $199 $184
===== ==== ====
Assumptions used to develop the net periodic pension cost
are:
Discount rate............................................ 8.00% 8.00% 8.00%
Expected long-term rate of return on assets.............. 6.75 6.75 6.75
Rate of increase in compensation level................... 5.00 5.00 5.00
===== ==== ====
</TABLE>
The Bank also maintains an incentive savings plan for eligible employees. A
member may make contributions to the plan of 1% to 15% of his or her
compensation. For the first 6% of the member's contribution, the Bank will
contribute 75% of that amount to the member's account. The Bank's
contributions under this plan were $242,000, $241,000 and $224,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
(12) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
The Bank, in the normal course of business, is party to financial
instruments and commitments which involve, to varying degrees, elements of
risk in excess of the amounts recognized in the consolidated financial
F-17
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
statements. These financial instruments and commitments include unused
consumer lines of credit and commitments to extend credit.
At December 31, 1995, the following commitments and contingent liabilities
existed which are not reflected in the accompanying consolidated financial
statements (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Unused consumer and construction loan lines of credit
(primarily floating-rate)................................... $ 16,826
Other commitments to extend credit:
Fixed Rate................................................. 10,790
Adjustable Rate............................................ 8,975
Floating Rate.............................................. 60
========
</TABLE>
The Bank's fixed-rate loan commitments expire within 90 days of issuance and
carried interest rates ranging from 6.625% to 7.875% at December 31, 1995.
The Bank's maximum exposure to credit losses in the event of nonperformance
by the other party to these financial instruments and commitments is
represented by the contractual amounts. The Bank uses the same credit policies
in granting commitments and conditional obligations as it does for financial
instruments recorded in the consolidated statements of financial condition.
These commitments and obligations do not necessarily represent future cash
flow requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's assessment of risk. The unused consumer and construction
loan lines of credit are collateralized by mortgages on real estate.
The Bank has an available overnight line of credit with the Federal Home
Loan Bank of New York for $50,000,000 which expires November 25, 1996. When
utilized, the line bears a floating interest rate of 1/8% over the current
Federal funds rate and is secured by the Bank's mortgage loans, mortgage-
backed securities and U.S. Government agency obligations.
At December 31, 1995, the Bank is obligated under noncancellable operating
leases for premises and equipment. Rental expense under these leases
aggregated approximately $791,000, $701,000 and $725,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
The projected minimum rental commitments as of December 31, 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
1996........................................................ $ 760
1997........................................................ 325
1998........................................................ 268
1999........................................................ 265
2000........................................................ 134
Thereafter.................................................. 923
------
$2,675
======
</TABLE>
F-18
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank grants one to four-family first mortgage real estate loans and
multifamily first mortgage real estate loans to borrowers primarily located in
Ocean, Middlesex and Monmouth Counties, New Jersey. Its borrowers' abilities
to repay their obligations are dependent upon various factors including the
borrowers' income and net worth, cash flows generated by the underlying
collateral, value of the underlying collateral and priority of the Bank's lien
on the property. Such factors are dependent upon various economic conditions
and individual circumstances beyond the Bank's control; the Bank is,
therefore, subject to risk of loss.
The Bank believes its lending policies and procedures adequately minimize
the potential exposure to such risks and that adequate provisions for loan
losses are provided for all known and inherent risks. Collateral and/or
guarantees are required for all loans.
Contingencies
The Bank is a defendant in certain claims and legal actions arising in the
ordinary course of business. Management and its legal counsel are of the
opinion that the ultimate disposition of these matters will not have a
material adverse effect on the Bank's consolidated financial condition,
results of operations or liquidity.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (Statement 107), requires that the Bank
disclose estimated fair values for its financial instruments. Fair value
estimates, methods and assumptions are set forth below for the Bank's
financial instruments.
Cash and Due from Banks
For cash and due from banks, the carrying amount approximates fair value.
Investments and Mortgage-Backed Securities
The fair value of investment and mortgage-backed securities is estimated
based on bid quotations received from securities dealers, if available. If a
quoted market price was not available, fair value was estimated using quoted
market prices of similar instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
Federal Home Loan Bank of New York Stock
The fair value for Federal Home Loan Bank of New York Stock is its carrying
value since this is the amount for which it could be redeemed. There is no
active market for this stock and the Bank is required to maintain a minimum
balance based upon the unpaid principal of home mortgage loans.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential mortgage,
construction, land and consumer. Each loan category is further segmented into
fixed and adjustable rate interest terms and by performing and nonperforming
categories.
Fair value of performing loans was estimated using the quoted market prices
for securities backed by similar loans, adjusted for differences in loan
characteristics, if applicable.
Fair value for significant nonperforming loans is based on recent external
appraisals of collateral securing such loans, adjusted for the timing of
anticipated cash flows.
F-19
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deposit Liabilities
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings, and NOW and money market accounts, is equal
to the amount payable on demand. The fair value of certificates of deposit 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.
Federal Home Loan Bank Advances
For Federal Home Loan Bank advances, the carrying amount approximates fair
value.
Commitments to Extend Credit, and to Purchase or Sell Securities
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 creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The estimated fair values of the Bank's financial instruments as of December
31, 1995 and 1994 are presented in the following tables (in thousands). Since
the fair value of off-balance sheet commitments approximate book value, these
disclosures are not included.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
BOOK FAIR
VALUE VALUE
-------- --------
<S> <C> <C>
Financial Assets:
Cash and due from banks................................. $ 8,022 $ 8,022
Investment Securities Available For Sale................ 114,881 114,881
Mortgage-Backed Securities Available For Sale........... 265,113 265,113
Federal Home Loan Bank of New York Stock................ 7,723 7,723
Loans receivable and Mortgage Loans Held for Sale....... 614,590 632,606
Financial Liabilities:
Deposits................................................ 926,558 932,606
Federal Home Loan Bank Borrowings....................... 10,400 10,400
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------
BOOK FAIR
VALUE VALUE
-------- --------
<S> <C> <C>
Financial Assets:
Cash and due from banks................................. $ 239 $ 239
Investment Securities Held to Maturity.................. 127,451 120,144
Mortgage-Backed Securities Held to Maturity............. 224,569 219,574
Federal Home Loan Bank of New York Stock................ 7,323 7,323
Loans receivable and Mortgage Loans Held for Sale....... 592,315 578,677
Financial Liabilities:
Deposits................................................ 867,420 864,851
Federal Home Loan Bank Borrowings....................... 16,300 16,300
======== ========
</TABLE>
F-20
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Limitations
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 Bank's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant 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 mortgage banking
operation, deferred tax assets, and 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.
(14) CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On August 17, 1995, the Board of Directors of the Bank adopted a Plan of
Conversion (Plan), as amended, to convert from a federally chartered mutual
savings and loan association to a federally chartered capital stock
association. The Plan, which is subject to approval by the OTS, includes
formation of a holding company and the filing of a registration statement with
the Securities and Exchange Commission. The conversion requires the approval
of the Bank's voting members and involves the sale of the holding company's
common stock. A subscription offering of the shares of the holding company's
common stock will be offered in order of the following priorities to: eligible
account holders; employee benefit plans of the Bank; supplemental eligible
account holders and other members. Any remaining shares not subscribed for by
the foregoing will be offered to the public in a direct community offering.
Pursuant to the Plan, the holding company intends to establish a Charitable
Foundation in connection with the conversion. The Plan provides that the Bank
and the holding company will create the Foundation and donate an amount of the
holding company's common stock equal to 8.0% of the common stock to be issued
in the conversion. The Foundation will be dedicated to charitable purposes
within Ocean County, New Jersey and its neighboring communities and to
complement the Bank's existing community activities.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
holding company would be tax deductible, subject to a limitation based on 10%
of the holding company's annual taxable income. The holding company, however,
would be able to carry forward any unused portion of the deduction for five
years following the contribution. Upon funding the Foundation, the holding
company will recognize an expense in the full amount of the contribution,
offset in part by the corresponding tax deduction, during the quarter in which
the contribution is made.
The Bank may provide support services to the Foundation including, but not
limited to, employee time, office space, and accounting support. The Bank
expects to provide these services without compensation, however, expenses
incurred on behalf of the Foundation are not expected to be significant to the
operations of the Bank.
F-21
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The establishment and funding of a charitable foundation as part of a
conversion is innovative and has never been done in connection with a mutual
to stock conversion. As such, the Foundation may be subject to potential
challenges by depositors of the Bank, notwithstanding that the Board of
Directors of the Company and the Bank have carefully considered the various
factors involved in the establishment of the Foundation in reaching its
determination to establish the Foundation as part of the Conversion.
At the time of the conversion, the Bank will establish a liquidation account
in an amount equal to its equity as reflected in the latest statement of
financial condition used in the final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their accounts
at the Bank after the conversion. The liquidation account will be reduced
annually to the extent that eligible account holders and supplemental eligible
account holders have reduced their qualifying deposits as of each anniversary
date. Subsequent increases will not restore an eligible account holder's or
supplemental eligible account holder's interest in the liquidation account. In
the event of a complete liquidation of the Bank, each eligible account holder
and supplemental eligible account holder 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.
Subsequent to the conversion, the Bank may not declare or pay cash dividends
on or repurchase any of its shares of common stock if the effect thereof would
cause equity to be reduced below applicable regulatory capital maintenance
requirements or if such declaration and payment would otherwise violate
regulatory requirements.
Conversion costs will be deferred and reduce the proceeds from the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged as an expense.
(15) INSURANCE OF DEPOSIT ACCOUNTS
The FDIC charges an annual assessment for the insurance of deposits based on
the risk a particular institution poses to its deposit insurance fund. The
final risk-related system took affect on January 1, 1994, in accordance with
the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
This risk classification is based on an institution's capital group and
supervisory subgroup assignment.
Currently, the Association pays an insurance premium to the FDIC equal to
.23% of its total deposits. In August 1995, the FDIC announced that it will
lower the insurance premium for members of the Bank Insurance Fund (BIF)
primarily commercial Banks, to a range of between 0.04% and 0.31% of deposits,
with the result that most commercial banks will pay the lowest rate of 0.04%.
This revised premium schedule became effective in the third quarter of 1995.
This reduction in insurance premiums for BIF members places Savings
Association Insurance Fund (SAIF) members, primarily savings associations,
such as the Bank, at a material competitive disadvantage to BIF members and,
for the reasons set forth below, could have a material adverse effect on the
Bank's consolidated financial condition and results of operations in future
periods.
A disparity in insurance premiums between those required for the Bank and
BIF members, could allow BIF members to attract and retain deposits at a lower
effective cost than that possible for the Bank and put competitive pressures
on the Bank to raise its interest rates paid on deposits, thus increasing its
cost of funds and possibly reducing net interest income. The resultant
competitive disadvantage could result in the Bank losing deposits to BIF
members who have a lower cost of funds and are, therefore, able to pay higher
rates of interest on deposits. Although the Bank has other sources of funds,
these other sources may have higher costs than those of deposits.
F-22
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Several alternatives to mitigate the effect of the BIF/SAIF insurance
premium disparity have recently been proposed by the U.S. Congress, Federal
regulators, industry lobbyists and the Administration. One plan that has
gained support of several sponsors would require all SAIF member institutions,
including the Bank, to pay a one-time assessment of up to 75 to 80 basis
points on the amount of deposits held by the member institution to
recapitalize the SAIF. If this proposal is enacted by Congress, the effect
would be to immediately reduce the capital of the SAIF-member institutions by
the amount of the fee, and such amount would be immediately charged to
earnings. If a requirement was implemented as of March 31, 1995 (the date
currently contained in the proposed legislation for the Bank to pay a one-time
assessment of 80 basis points of insured deposits), the amount of such
assessment would be approximately $7,011,000 before tax benefit. Management of
the Bank is unable to predict whether this proposal or any similar proposal
will be enacted or whether ongoing SAIF premiums will be reduced to a level
equal to that of BIF premiums.
F-23
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY OCEAN FINANCIAL CORP., THE BANK OR SANDLER O'NEILL &
PARTNERS, L.P. 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 OCEAN FINANCIAL CORP. OR THE
BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR
SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 4
Selected Consolidated Financial and
Other Data of the Bank.................................................. 14
Summary of Recent Developments........................................... 16
Risk Factors............................................................. 20
Ocean Financial Corp..................................................... 29
Ocean Federal Savings Bank............................................... 30
Regulatory Capital Compliance............................................ 31
Use of Proceeds.......................................................... 32
Dividend Policy.......................................................... 33
Market for the Common Stock.............................................. 34
Capitalization........................................................... 35
Pro Forma Data........................................................... 36
Consolidated Statements of Operations.................................... 40
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 41
Business of the Bank..................................................... 55
Federal and State Taxation............................................... 75
Regulation............................................................... 78
Management of the Company................................................ 86
Management of the Bank................................................... 86
The Conversion........................................................... 101
Restrictions on Acquisition of the Company
and the Bank............................................................ 124
Description of Capital Stock of the Company.............................. 129
Description of Capital Stock of the Bank................................. 131
Transfer Agent and Registrar............................................. 131
Experts.................................................................. 131
Legal and Tax Opinions................................................... 132
Additional Information................................................... 132
Index to Financial Statements............................................ 133
</TABLE>
----------------
UNTIL JUNE 14, 1996 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UP TO 7,293,981 SHARES
OCEAN
FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR
OCEAN FEDERAL SAVINGS BANK)
COMMON STOCK
--------------------
PROSPECTUS
--------------------
MAY 13, 1996
Sandler O'Neill & Partners, L.P.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
