PROSPECTUS
BAYONNE
(LOGO) BANCSHARES,
INC.
(PROPOSED HOLDING COMPANY FOR FIRST SAVINGS BANK OF NEW JERSEY, SLA)
7,820,000 SHARES OF COMMON STOCK
Bayonne Bancshares, Inc. (the "Company" or "Bayonne Bancshares"), a
Delaware corporation, is offering up to 7,820,000 shares of its common stock,
par value $.01 per share (the "Common Stock"), in connection with the
reorganization of First Savings Bank of New Jersey, SLA ("First Savings" or the
"Bank") and Bayonne Bankshares, M.H.C., the mutual holding company of the Bank
(the "Mutual Holding Company" or "MHC") into the stock holding company structure
pursuant to the Mutual Holding Company's Plan of Conversion and Agreement and
Plan of Reorganization (the "Plan" or "Plan of Conversion"). In certain
circumstances, the Company may increase the amount of Common Stock offered
hereby to 8,993,000 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 17.
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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.
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THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY, NOR
ARE THEY INSURED OR GUARANTEED BY THE BANK OR THE COMPANY.
<TABLE>
<CAPTION>
================================================================================================
| | Estimated |
| | Underwriting |
| | Commissions |
| Subscription | and Other Fees | Estimated Net
| Price (1) | and Expenses (2) | Proceeds (3)
- ----------------------------------------|----------------|--------------------|-----------------
<S> <C> <C> <C>
Minimum Per Share ................... | $10.00 | $0.48 | $9.52
- ----------------------------------------|----------------|--------------------|-----------------
Midpoint Per Share .................. | $10.00 | $0.44 | $9.56
- ----------------------------------------|----------------|--------------------|-----------------
Maximum Per Share ................... | $10.00 | $0.40 | $9.60
- ----------------------------------------|----------------|--------------------|-----------------
Total Minimum (1) ................... | $31,300,000 | $1,511,000 | $29,789,000
- ----------------------------------------|----------------|--------------------|-----------------
Total Midpoint (1) .................. | $36,820,000 | $1,612,000 | $35,208,000
- ----------------------------------------|----------------|--------------------|-----------------
Total Maximum (1) ................... | $42,340,000 | $1,714,000 | $40,626,000
- ----------------------------------------|----------------|--------------------|-----------------
Total Maximum, as adjusted (4) ...... | $48,700,000 | $1,831,000 | $46,869,000
================================================================================================
</TABLE>
(1) Based upon the minimum, midpoint and maximum of the Valuation Price Range
(as defined herein), which was determined in accordance with an independent
appraisal prepared by FinPro, Inc. ("FinPro") dated May 19, 1997. Does not
include shares of Common Stock issued to Public Stockholders in the
Exchange (as both are hereinafter defined). See "The Conversion and
Reorganization--Stock Pricing and Exchange Ratio" and "--Number of Shares
to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion and Reorganization, including estimated fixed expenses of
$945,000 and marketing fees to be paid to Sandler O'Neill & Partners, L.P.
("Sandler O'Neill") estimated to be $566,000 and $769,000 at the minimum
and the maximum of the Estimated Price Range (as defined herein),
respectively. See "The Conversion and Reorganization--Marketing and
Underwriting Arrangements." 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 and other factors.
Includes the purchase of shares of Common Stock by the First Savings Bank
of New Jersey, SLA Employee Stock Ownership Plan and related trust (the
"ESOP") which will be funded by a loan to the ESOP from the Company or a
third party and which will be deducted from the Company's stockholders'
equity. See "Use of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the $10 per share price (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 and Reorganization--Stock Pricing and Exchange Ratio." For a
discussion of the distribution and allocation of the additional shares, if
any, see "The Conversion and Reorganization--Subscription Offering and
Subscription Rights," "--Community Offering" and "--Limitations on
Conversion Stock Purchases."
----------
SANDLER O'NEILL & PARTNERS, L.P.
THE DATE OF THIS PROSPECTUS IS JULY 2, 1997.
<PAGE>
Pursuant to the Plan adopted by the Bank and the Mutual Holding Company,
the Bank will become a subsidiary of the Company upon consummation of the
transactions described herein (collectively, with the Offerings, the "Conversion
and Reorganization"). As a result of the Conversion and Reorganization, each
share of common stock, par value $.10 per share, of the Bank ("Bank Common
Stock") held by the Mutual Holding Company, which currently holds 1,659,485
shares, or approximately 54.1% of the outstanding Bank Common Stock, will be
cancelled and each share of Bank Common Stock held by the Bank's public
stockholders (the "Public Bank Shares"), which amounted to 1,406,004 shares, or
approximately 45.9% of the outstanding Bank Common Stock at March 31, 1997
(excluding shares underlying options pursuant to the Bayonne Bankshares, M.H.C.
and First Savings Bank of New Jersey, SLA 1995 Stock Option Plan (the "1995
Stock Option Plan"), will be converted into shares of the Company's Common Stock
("Exchange Shares") pursuant to a ratio (the "Exchange Ratio") that will result
in the holders of such shares (the "Public Stockholders") owning in the
aggregate approximately the same percentage of the Company as they owned of the
Bank, before giving effect to (a) the payment of cash in lieu of fractional
Exchange Shares, or (b) any shares of Common Stock purchased by such
stockholders in the Offerings described herein or purchased by the Bank's ESOP
thereafter (the "Exchange").
IN ADDITION TO THE EXCHANGE, NONTRANSFERABLE SUBSCRIPTION RIGHTS TO
SUBSCRIBE FOR UP TO 4,234,000 SHARES (WHICH MAY BE INCREASED TO 4,870,000 SHARES
UNDER CERTAIN CIRCUMSTANCES DESCRIBED BELOW) OF COMMON STOCK (THE "CONVERSION
STOCK") HAVE BEEN GRANTED, IN ORDER OF PRIORITY, TO EACH OF THE BANK'S ELIGIBLE
ACCOUNT HOLDERS, TO THE ESOP, TO EACH OF THE BANK'S SUPPLEMENTAL ELIGIBLE
ACCOUNT HOLDERS, AND TO CERTAIN OTHER MEMBERS (EACH AS DEFINED HEREIN) IN A
SUBSCRIPTION OFFERING (THE "SUBSCRIPTION OFFERING"). SUBSCRIPTION RIGHTS ARE
NONTRANSFERABLE. 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 Conversion Stock not subscribed for in the Subscription
Offering for sale in a community offering to certain members of the general
public, with a first preference given to holders of the Public Bank Shares and a
second preference to natural persons residing in the City of Bayonne in the
State of New Jersey (the "Community Offering") (the Subscription Offering and
Community Offering are referred to collectively as the "Subscription and
Community Offerings"). 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").
Except for the ESOP, no Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member may, in their respective capacities as such,
purchase in the Subscription Offering more than $200,000 of Conversion Stock
offered for sale in the Conversion and Reorganization; no person, together with
associates of and persons acting in concert with such person, may purchase in
the Community Offering and the Syndicated Community Offering more than $200,000
of Conversion Stock offered for sale in the Conversion and Reorganization; and
no person, together with associates of and persons acting in concert with such
person, may purchase in the aggregate more than the number of shares of
Conversion Stock that when combined with Exchange Shares received by such person
would exceed the overall maximum purchase limitation of 3% of the total number
of shares of Conversion Stock offered for sale in the Conversion and
Reorganization; provided, however, that such purchase limitations and the amount
that may be subscribed for may be increased or decreased in the sole discretion
of the Company, the Mutual Holding Company and the Bank (the "Primary Parties")
without further approval of the Mutual Holding Company's members or the Public
Stockholders. See "The Conversion and Reorganization--Subscription Offering and
Subscription Rights," "--Community Offering" and "--Limitations on Conversion
Stock Purchases." The minimum purchase is 25 shares.
THE SUBSCRIPTION AND COMMUNITY OFFERINGS WILL TERMINATE AT 12:00 NOON,
EASTERN TIME, ON AUGUST 11, 1997 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY THE
PRIMARY PARTIES, WITH APPROVAL OF THE OTS, IF NECESSARY. Orders submitted are
irrevocable until the completion of the Conversion and Reorganization; provided
that, if the Conversion and Reorganization 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 August 14,
1999. See "The Conversion and Reorganization--Subscription Offering and
Subscription Rights" and "--Procedure for Purchasing Shares in Subscription and
Community Offerings."
The Company has received conditional approval to have its Common Stock
traded on the Nasdaq National Market under the symbol "FSNJ" upon completion of
the Conversion and Reorganization. The Bank's Common Stock currently trades on
the Nasdaq National Market under the symbol "FSNJ." See "Market for the Common
Stock."
2
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[MAP GOES HERE]
3
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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.
BAYONNE BANCSHARES, INC.
Bayonne Bancshares, Inc. is a Delaware corporation recently organized by
the Bank for the purpose of holding all of the capital stock of the Bank and
facilitating the Conversion and Reorganization. Immediately following the
Conversion and Reorganization, the only significant assets of the Company will
be the capital stock of the Bank, a loan to the ESOP and the net proceeds of the
Offerings retained by the Company. The Company will transfer to the Bank 50% of
the net proceeds from the Offerings with the remaining net proceeds to be
retained by the Company. Funds retained by the Company will be used for general
business activities, including the loan to the ESOP to enable the ESOP to
purchase up to 8% of the aggregate of the Conversion Stock issued. On an interim
basis, the net proceeds are expected to be deposited by the Company into a
deposit account at the Bank. 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 568 Broadway, Bayonne, New Jersey 07002. The Company's telephone
number is (201) 437-1000.
FIRST SAVINGS BANK OF NEW JERSEY, SLA
First Savings is a New Jersey chartered stock savings association that
conducts its operations from its main office and three branch offices located in
Bayonne, New Jersey. The Bank was originally chartered in 1889, and has been a
member of the Federal Home Loan Bank ("FHLB") System since 1945. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") under
the Savings Association Insurance Fund ("SAIF"). As a SAIF-insured,
state-chartered savings association, the Bank is also regulated by the New
Jersey Department of Banking and Insurance ("Department") and the OTS. At March
31, 1997, the Bank had total assets of $577.0 million, total deposits of $444.1
million, and stockholders' equity of $48.1 million. On January 6, 1995, the
Bank, in the mutual form of organization, reorganized from a New
Jersey-chartered savings association into Bayonne Bankshares, M.H.C., a federal
mutual holding company, and concurrently formed the Bank, which succeeded to the
name and operations of the Bank's mutual savings association predecessor. In
connection with the organization of the Mutual Holding Company in 1995 (the
"1995 MHC Reorganization"), First Savings transferred substantially all of its
assets and liabilities to the Bank in exchange for 1,659,485 shares of Bank
Common Stock and converted its charter to that of a federal mutual holding
company known as Bayonne Bankshares, M.H.C. As part of the 1995 MHC
Reorganization, the Bank also sold an additional 1,402,836 shares of Bank Common
Stock to certain members of the general public. As of March 31, 1997, there were
3,065,489 shares of Bank Common Stock issued and outstanding, of which 1,406,004
shares, or 45.9%, consisted of Public Bank Shares.
The Bank is a community oriented savings institution that is primarily
engaged in the business of attracting deposits from the general public in the
Bank's market area, and investing such deposits in one- to four-family
residential real estate mortgage loans, mortgage-backed securities and U.S.
Government and agency obligations. In more recent periods, the Bank's investment
in mortgage-backed securities has exceeded its investment in mortgage loans due
to a reduced demand for such loans. At March 31, 1997, mortgage-backed
securities totalled $223.0 million, or 38.6% of the Bank's total assets, while
one- to four-family residential mortgage loans totalled $197.8 million, or 34.3%
of the Bank's total assets, and U.S. Government and agency obligations totalled
$76.5 million, or 13.3% of total assets. To a lesser extent, the Bank also
invests in multifamily and commercial real estate loans, home equity loans, and
passbook and other consumer loans. The Bank's principal sources of funds have
been deposits, principal and interest payments on loans and mortgage-backed
securities, funds from sales of investments and borrowings and reverse
repurchase agreements. Principal sources of income have been interest received
from loans, mortgage-backed securities and other investments. The Bank's
principal expenses have been interest paid on deposits and borrowings,
compensation and employee benefits, and SAIF deposit insurance premiums.
The Bank significantly increased its portfolio of mortgage-backed
securities in the year ended March 31, 1996 in response to its declining loan
demand. Mortgage-backed securities increased 320% between March 31, 1995 and
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4
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March 31, 1996, from $53.1 million to $220.7 million, as a result of the Bank's
purchase of $174.8 million of mortgage-backed securities in fiscal 1996. The
Bank funded a large portion of these purchases with an $80 million repurchase
agreement and a $70 million FHLB advance. Also during fiscal 1996, the Bank sold
$25.0 million of FHLB structured dual index notes, which were paying below
market interest rates. The sale resulted in a pre-tax loss of $2.5 million, or
$1.6 million after taxes, but enabled the Bank to reinvest the proceeds in
higher interest-earning assets.
During the year ended March 31, 1997, the Bank experienced compression of
its interest rate spread, which was reduced to 1.99% for fiscal 1997, from 2.16%
for the fiscal year ended March 31, 1996. This compression was due to both the
rising interest rate environment and the Bank's interest rate risk position as a
result of its significant investment in fixed-rate assets. The Bank began
repositioning its investment portfolio during fiscal 1997 to place greater
emphasis on improving its yield on investments, while maintaining its interest
rate risk position. During the 1997 fiscal year, the Bank sold intermediate- and
short-term mutual funds totalling $71.5 million and U.S. Treasury securities
totalling $25.0 million, which were earning below market interest rates, at a
pre-tax loss of $2.8 million. The Bank used the proceeds from these sales to
purchase $60.5 million of higher yielding mortgage-backed securities and to
repay $50.0 million of FHLB advances.
The Bank does not anticipate any further significant sales of investment
securities since much of the remaining U.S. Treasury and agency securities with
unrealized losses are due to mature by 1999. Another $51.0 million of U.S.
Treasury and agency securities available for sale are due to mature by October
31, 1998, thereby affording the Bank the opportunity to reinvest those
additional funds or further reduce borrowings. Although the Bank has incurred
significant losses in recent periods on the sale of securities, such sales are
consistent with the Bank's overall objective of reducing its interest rate risk
exposure and improving earnings and stockholders' equity over the long term.
Although still sensitive to interest rate changes, the Bank has improved its
interest rate risk position as a result of its efforts to reposition the
investment portfolio. As of March 31, 1997, the Bank's interest rate spread had
increased to 2.43% from 1.89% at March 31, 1996. See "Risk Factors--Sensitivity
to Increases in Interest Rates" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Highlights of the Bank's operations include the following:
o Capital Strength. At March 31, 1997, the Bank had stockholders' equity
of $48.1 million, or 8.33% of total assets, and exceeded all of its
regulatory capital requirements. The Bank's tangible capital, core
capital and risk-based capital ratios were 8.99%, 8.99% and 25.31%,
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 $67.5
million, or 11.31% of assets, and the Company would have had pro forma
stockholders' equity of $83.6 million, or 13.7% of assets as of March
31, 1997. See "Regulatory Capital Compliance."
o Results of Operations. The Bank's net income has been adversely
affected in recent years due to a number of factors. Net income (loss)
for the years ended March 31, 1997 and 1996, the ten months ended
March 31, 1995, and the years ended May 31, 1994 and 1993 was $(3.2
million), $615,000, $2.2 million, $4.0 million and $6.6 million,
respectively. One reason for the decline in net income has been the
compression of the Bank's interest rate spread and net interest
margin, as discussed below. Another cause has been the losses incurred
on the sales of investment securities. Finally, the Bank's results of
operations for the most recent fiscal year were adversely affected by
the one-time $2.9 million special assessment to recapitalize the SAIF
("SAIF Special Assessment") and by a $1.8 million provision in
employee benefit expense to provide for one-time, lump-sum retirement
benefit payments for two executive officers. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Management of the Bank."
The Bank does not anticipate further significant sales of securities
at a loss. Furthermore, the SAIF Special Assessment and the lump sum
retirement plan payments are non-recurring items. Operating expenses
may increase in future periods, however, due to the implementation of
additional stock benefit plans in connection with the Conversion and
Reorganization and the possible expansion of the Bank's branch
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5
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network. See "Risk Factors--Effects of Repositioning Investment
Portfolio," "--Sensitivity to Increases in Interest Rates" and
"--Recent Decline in Operating Results."
o Interest Rate Risk Position. The Bank's profitability is largely
dependent upon its net interest income, which is greatly affected by
market interest rates. Since 1995, the Bank's average cost of
interest-bearing liabilities has risen 76 basis points, while the
average yield on interest-earning assets has decreased by 17 basis
points. This repricing has caused a compression in the Bank's average
interest rate spread, which was reduced to 1.99% for the year ended
March 31, 1997, from 2.92% for the ten months ended March 31, 1995,
and in its net interest margin, which was reduced to 2.28% for the
year ended March 31, 1997, from 3.12% for the ten months ended March
31, 1995. The Bank's interest rate spread had increased to 2.43%,
however, as of March 31, 1997, due primarily to the Bank's
repositioning of its investment portfolio throughout fiscal 1997.
Despite the Bank's improvement, its interest rate spread would
probably still decline in a rising interest rate environment as the
Bank's liabilities will reprice more quickly than its interest-earning
assets. See "Risk Factors--Sensitivity to Increases in Interest Rates"
and "--Effects of Repositioning Investment Portfolio."
o 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 the City of Bayonne and Hudson
County. At March 31, 1997, one- to four-family residential mortgage
loans comprised 82.2% of the Bank's total loans receivable. An
additional 11.5% of the Bank's total loans receivable was comprised of
home equity loans and lines of credit secured by one- to four-family
residential properties within the Bank's market area. The Bank's total
loan portfolio has declined in the 1990s from a year-end high of
$286.5 million at May 31, 1990, representing 53.8% of total assets, to
a year-end low of $193.9 million at May 31, 1994, representing 35.4%
of total assets. At March 31, 1997, total loans receivable had
increased to $240.6 million, equalling 41.7% of total assets.
Although the Bank intends to maintain its primary emphasis on
traditional residential mortgage lending, the Bank is considering
expanding its lending program in the future to include commercial
business and real estate loans in an effort to satisfy a perceived
need within its market area and increase its loan portfolio. In
addition, the Bank also intends to expand its market area to include
the surrounding communities in order to address the declining loan
demand within the Bayonne market area. See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations--Business Strategy."
o Asset Quality. The Bank has reduced the level of its non-performing
loans and non-performing assets in recent periods. The Bank's ratio of
loans 90 days or more past due to net loans at March 31, 1997 was
2.38%, which was reduced from a year-end high in the last five years
of 3.64% at May 31, 1994. The Bank's loans 90 days or more past due
and other non-performing assets at March 31, 1997 represented 1.04% of
total assets, which was reduced from 1.55% at May 31, 1993. At March
31, 1997, the Bank's allowance for loan losses totalled $3.2 million,
which equalled 1.34% of the Bank's net loan portfolio and 52.9% of
loans 90 days past due and other non-performing assets. See "Business
of the Bank--Lending Activities."
o Operating Expenses. The Bank has sought to manage overhead costs in
all areas by controlling growth in personnel and managing other
operating expenses. At March 31, 1997, the Bank operated four offices
and had $577.0 million in assets with a total of 83 full-time
employees and 54 part-time employees, resulting in an average of $5.2
million in assets per full-time equivalent employee. For the years
ended March 31, 1997 and 1996, the ten months ended March 31, 1995,
and the years ended May 31, 1994 and 1993, the Bank's ratio of
operating expenses to average assets was 2.35% (1.87% excluding the
SAIF Special Assessment), 1.91%, 1.76%, 1.68% and 1.63%, respectively.
o Retail Deposit Base. The Bank has had a relatively strong retail
deposit base drawn from its offices located in Bayonne, New Jersey.
The Bank holds approximately 40% of all deposits held by branches of
commercial banks, credit unions, and savings associations located in
Bayonne, and approximately 6% of such deposits in Hudson County. At
March 31, 1997, 43.4% of the Bank's deposit base of $444.1 million
consisted of core deposits, which included passbook accounts,
negotiable order of withdrawal ("NOW") accounts, money market deposit
accounts, noninterest demand accounts, and club accounts. Core
deposits are considered to be a more stable and lower cost source of
funds than certificates of deposit or outside
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borrowings. The Bank's total deposits, however, have decreased 7.8%
since May 31, 1993, from $481.7 million to $444.1 million at March 31,
1997. This decline is reflective of both the declining Bayonne
population, as well as a shift of funds generally from thrift
institutions to mutual funds and other types of financial investments
as interest rates have decreased over recent years. The Bank also
expects to experience a run-off of deposits when approximately $45
million of ten-year certificates of deposit yielding 10% mature by
April 1998.
The Bank will continue to emphasize retail deposits by providing
quality customer service, offering competitive rates on deposit
accounts, and providing depositors with a full range of accounts. The
Bank also intends to expand commercial deposit accounts in an effort
to increase its deposit base. In addition, the Bank is considering
opening additional branch offices in its surrounding communities to
increase its deposit base. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Business Strategy."
o Change in Management. Patrick F.X. Nilan, the President, Chief
Executive Officer and Chairman of the Board, retired from active
service as President and Chief Executive Officer as of June 30, 1997,
having completed 43 years of service with the Bank. Mr. Nilan will
remain as Chairman of the Board of Directors of both the Company and
the Bank. He is succeeded by his son, Michael Nilan, who was formerly
a Vice President and Chief Operating Officer of the Bank. Michael
Nilan has been employed by the Bank since 1986. In addition, Eugene V.
Malinowski, Vice President and Chief Financial Officer of the Company
and the Bank, joined the Bank in November 1996. The future success of
the Bank and the Company depends to a significant degree on the skills
and competence of these two officers. For further information
regarding Patrick F.X. Nilan's retirement and the experience of
Michael Nilan and Eugene V. Malinowski, see "Management of the Bank."
THE CONVERSION AND REORGANIZATION
On December 19, 1996, the Boards of Directors of the Bank and the Mutual
Holding Company adopted the Plan, and subsequent thereto amended the Plan.
Subsequent to its incorporation under Delaware law in February, 1997, the
Company became a first-tier wholly owned subsidiary of the Bank. Pursuant to the
Plan (i) the Mutual Holding Company will convert to an interim federal stock
savings institution and simultaneously merge with and into the Bank, pursuant to
which the Mutual Holding Company will cease to exist and the 1,659,485 shares,
or 54.1% of the outstanding Bank Common Stock held by the Mutual Holding Company
will be cancelled, and (ii) an interim savings association, First Interim
Savings Bank of New Jersey ("First Interim") to be formed as a wholly owned
subsidiary of the Company solely for purposes of the Reorganization will then
merge with and into the Bank, with the Bank as the surviving entity. As a result
of the merger of First Interim with and into the Bank, the Bank will become a
wholly owned subsidiary of the Company and the outstanding Public Bank Shares,
which amounted to 1,406,004 shares, or 45.9% of the outstanding Bank Common
Stock at March 31, 1997, will be converted into the Exchange Shares pursuant to
the Exchange Ratio. This will result in the holders of such shares owning in the
aggregate approximately the same percentage of the Common Stock to be
outstanding upon completion of the Conversion and Reorganization (i.e., the
Conversion Stock) as the percentage of Bank Common Stock owned by them in the
aggregate immediately prior to consummation of the Conversion and
Reorganization, before giving effect to (a) the payment of cash in lieu of
issuing fractional Exchange Shares, or (b) any shares of Conversion Stock
purchased by the Bank's Stockholders or purchased by the ESOP in the Offerings
or thereafter.
In addition to shares of Common Stock to be issued pursuant to the
Exchange, pursuant to the Plan, the Company is offering shares of Conversion
Stock in the Offerings as part of the Conversion and Reorganization. See
"-- The Offerings" below and "The Conversion and Reorganization."
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization is conditioned upon the approval of the Plan by the OTS, which
was received on July 2, 1997, as well as (1) the approval of the holders of at
least a majority of the total number of votes eligible to be cast by the members
of the Mutual Holding Company ("Members") as of the close of business on June
30, 1997 (the "Voting Record Date") at a special meeting of Members called for
the purpose of submitting the Plan for approval (the "Members' Meeting"), and
(2) the approval of the holders of at least two-thirds of the shares of the
outstanding Bank Common Stock held by the Stockholders, as
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of the Voting Record Date at a special meeting of Stockholders called for the
purpose of considering the Plan (the "Stockholders' Meeting"). In addition, in
accordance with current OTS policy, the Plan must be approved by a majority of
the votes cast in person or by proxy by the holders of the Public Bank Shares at
the Stockholders' Meeting. The Mutual Holding Company intends to vote its shares
of Bank Common Stock, which amount to 54.1% of the outstanding shares, in favor
of the Plan at the Stockholders' Meeting.
Under New Jersey law, Public Stockholders of the Bank will not have
dissenters' rights or appraisal rights in connection with the Conversion and the
Reorganization. See "The Conversion and Reorganization--Effects of the
Conversion and Reorganization--Effect on Public Bank Shares."
PURPOSES OF THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Bank and the Mutual Holding Company believe
that the Conversion and Reorganization is in the best interests of their
respective stockholders and members. A principal purpose of the Conversion and
Reorganization is to structure the Mutual Holding Company and the Bank in a form
used by most other holding companies of savings institutions and commercial
banks and most other business entities. The Conversion and Reorganization will
also support future expansion of operations of the Bank, as well as possible
diversification into other banking-related businesses. Although there are no
current arrangements, understandings or agreements regarding such opportunities,
the Company will be in a position after the Conversion and Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any additional opportunities for such expansion that may arise.
In addition, the Mutual Holding Company and the Bank considered various
regulatory uncertainties associated with the mutual holding company structure,
including the ability to waive dividends from the Bank in the future, the tax
limitation on the Bank to repurchase its Common Stock as well as the general
uncertainty regarding a possible elimination of the thrift charter. See "Risk
Factors--Financial Institution Regulation and Possible Legislation," "Use of
Proceeds" and "Dividend Policy." The Offerings will also result in more shares
of stock outstanding, which should result in a more active and liquid market for
the Common Stock than currently exists for the Bank Common Stock, although there
can be no assurances that this will be the case. See "Market for the Common
Stock."
In light of the foregoing, the Boards of Directors of the Bank and the
Mutual Holding Company believe that the Conversion and Reorganization is in the
best interests of such companies and their respective Stockholders and Members.
See "The Conversion and Reorganization."
EFFECTS OF THE REORGANIZATION ON PUBLIC STOCKHOLDERS
The following are effects of the Reorganization on Public Stockholders,
assuming that at the minimum, midpoint, maximum and 15% above the maximum
Estimated Price Range, as defined herein, one Public Bank Share will be
exchanged for 1.885, 2.218, 2.550 and 2.933 shares of Company Common Stock. See
"Pro Forma Data."
Effect of the Exchange on Stockholders' Equity Per Share. The Conversion
and Reorganization will significantly increase the stockholders' equity of the
Public Stockholders. At March 31, 1997, stockholders' equity per share was
$15.68 for each share of the Bank Common Stock outstanding, including shares
held by the Mutual Holding Company. Based on the pro forma information set forth
in "Pro Forma Data" assuming the sale of 3,682,000 shares of Conversion Stock at
the midpoint of the Estimated Price Range at March 31, 1997, the pro forma
stockholders' equity per share of Common Stock was $11.63, and the pro forma
stockholders' equity for the aggregate number of Exchange Shares to be received
for each Public Bank Share was $25.80. This represents a pro forma increase of
64.5% from stockholders' equity at March 31, 1997. The pro forma stockholders'
equity for the aggregate number of Exchange Shares to be received for each
Public Bank Share was $24.24, $27.36 and $29.12 at the minimum, maximum and
adjusted maximum of the Estimated Price Range.
Effect of the Exchange on Earnings Per Share. The Conversion and
Reorganization will also affect Public Stockholders' pro forma earnings per
share. For the year ended March 31, 1997, the Bank reported a loss of $(1.07)
for each share of the Bank Common Stock outstanding, including shares held by
the Mutual Holding Company. Excluding the non-recurring expenses of the SAIF
Special Assessment, the loss on the sale of securities, and the lump sum
employee benefit provision aggregating $5.6 million on an after-tax basis,
earnings per share would have been
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
$0.84. Based on the pro forma information set forth in "Pro Forma Data,"
assuming the sale of 3,682,000 shares of Common Stock at the midpoint of the
Estimated Price Range, the pro forma earnings per share of Common Stock was
$0.51 for such period, as adjusted for the above referenced nonrecurring
expenses and losses, and the pro forma earnings for the aggregate number of
Exchange Shares to be received for each Public Bank Share was $1.13, as adjusted
for nonrecurring expenses and losses. On a pro forma basis, this represents a
34.5% increase from historical earnings per share at March 31, 1997, as
adjusted. For the year ended March 31, 1997, the pro forma earnings per share
for the aggregate number of Exchange Shares to be received for each Public Bank
Share was $1.09, $1.17 and $1.26 at the minimum, maximum and adjusted maximum of
the Estimated Price Range.
Effect of the Exchange on Dividends Per Share. The Bank paid cash dividends
totalling $0.50 per share to Public Stockholders for the year ended March 31,
1997. The Company expects to pay an annual dividend of $0.265, $0.225, $0.196
and $0.170 per share on the Common Stock at the minimum, midpoint, maximum and
adjusted maximum of the Estimated Price Range or an aggregate annual dividend of
approximately $0.50 on the total Exchange Shares received by Public Stockholders
for each Public Bank Share. However, no assurance can be given as to the amount
of any dividend or that a dividend will be paid, or if paid, that it will not be
reduced or eliminated in future periods. See "Dividend Policy."
Effect of the Exchange on the Market Value. The aggregate number of
Exchange Shares to be received for each Public Bank Share will have a calculated
value of $18.85, $22.18, $25.50 and $29.33 at the minimum, midpoint, maximum and
adjusted maximum of the Estimated Price Range based on the $10.00 Purchase Price
of Conversion Stock. The last sale price of Public Bank Shares was $27.00 per
share on June 30, 1997. THE VALUE OF THE EXCHANGE SHARES TO BE RECEIVED FOR EACH
PUBLIC BANK SHARE MAY BE LESS THAN THE MARKET PRICE OF THE PUBLIC BANK SHARES AT
THE TIME OF THE EXCHANGE, BASED ON THE FINAL EXCHANGE RATIO AND THE MARKET PRICE
AT THE TIME OF THE EXCHANGE. SEE "SUMMARY--STOCK PRICING AND NUMBER OF SHARES TO
BE ISSUED IN THE CONVERSION AND REORGANIZATION."
THE OFFERINGS
Pursuant to the Plan and in connection with the Conversion and
Reorganization, the Company is offering up to 4,234,000 shares of Conversion
Stock in the Offerings. Conversion Stock will be offered in the Subscription and
Community Offerings and, to the extent shares are available, in the Syndicated
Community Offering. Conversion Stock offered in the Subscription Offering will
be offered in the following order of priority: (1) holders of savings accounts
in the Bank, as defined in the Plan, totalling $50 or more on December 31, 1994
("Eligible Account Holders"); (2) the ESOP; (3) holders of savings accounts in
the Bank totalling $50 or more on June 30, 1997 ("Supplemental Eligible Account
Holders"); and (4) other members of the MHC, consisting of depositors of the
Bank as of June 30, 1997, the Voting Record Date for the special meeting of
members to vote on the Conversion and Reorganization, and borrowers with loans
outstanding as of January 6, 1995, which continue to be outstanding as of the
Voting Record Date, other than those members who otherwise qualify as Eligible
Account Holders or Supplemental Eligible Account Holders ("Other Members").
Subject to the prior rights of holders of subscription rights, Conversion Stock
not subscribed for in the Subscription Offering is being concurrently offered in
the Community Offering to certain members of the general public, with a first
preference given to the Public Stockholders and a second preference given to
natural persons residing in the City of Bayonne in the State of New Jersey. The
Primary Parties reserve the absolute right to reject or accept any orders in the
Community Offering, in whole or in part, either at the time of receipt of an
order or as soon as practicable following the Expiration Date.
All shares of Conversion 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 Conversion Stock. The Primary
Parties reserve the absolute right to reject orders, in whole or part, in their
sole discretion, in the Syndicated Community Offering.
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), no Prospectus will be
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9
<PAGE>
- --------------------------------------------------------------------------------
mailed any later than five days prior to the Expiration Date or hand delivered
any later than two days prior to such date. Stock order forms will only be
distributed with a Prospectus. The Bank is not obligated to accept for
processing orders not submitted on original stock order forms. Stock order forms
unaccompanied by an executed certification form will not be accepted. Payment in
full by check, money order, bank draft, cash or debit authorization to an
existing account at the Bank must accompany the stock 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 Conversion
Stock in the Conversion and Reorganization. See "The Conversion and
Reorganization--Procedure for Purchasing Shares in Subscription and Community
Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion and Reorganization, 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. Following the
Conversion and Reorganization, 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 and
Reorganization--Certain Restrictions on Purchase or Transfer of Shares After
Conversion and Reorganization."
PURCHASE LIMITATIONS
The minimum purchase in the Subscription and Community Offerings is 25
shares. With the exception of the ESOP, 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 Conversion
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 Conversion
Stock offered; and no person, together with associates of or persons acting in
concert with such person, may purchase in the Offerings the number of shares of
Conversion Stock that, when combined with any Exchange Shares received by such
person, equals in the aggregate no more than the overall maximum purchase
limitation of 3% of the total number of shares of Conversion Stock offered in
the Conversion and Reorganization, exclusive of any shares issued pursuant to an
increase in the Estimated Price Range of up to 15%. See "Risk Factors--Effect of
Purchase Limitations on Ability of Public Stockholders to Purchase Conversion
Shares." At any time during the Conversion and Reorganization and without
further approval by the Mutual Holding Company's members, the Primary Parties
may in their sole discretion decrease the maximum purchase limitation to 1% of
the number of shares of Conversion Stock to be issued in the Subscription and
Community Offerings, when aggregated with any Exchange Shares, and/or may
decrease the amount that may be subscribed for in the Subscription and Community
Offerings. Additionally, at any time during the Conversion and Reorganization
and without further approval by the Mutual Holding Company's members or the
Bank's Public Stockholders, the Primary Parties may in their sole discretion
increase the overall maximum purchase limitation and/or increase the amount that
may be subscribed for in the Subscription and Community Offerings, up to 5% of
the Conversion Stock to be offered in the Conversion and Reorganization. Prior
to consummation of the Conversion and Reorganization, if the overall maximum
purchase limitation is increased, subscribers for the maximum amount will be,
and certain other large subscribers in the sole discretion of the Primary
Parties may be, given the opportunity to increase their subscriptions up to the
then applicable limit. In any event, any Exchange Shares received by an
individual will be aggregated with shares subscribed for by such person for
purposes of applying the maximum purchase limitation. 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 and Reorganization--Subscription
Offering and Subscription Rights," "--Community Offering" and "--Limitations on
Conversion Stock Purchases." BECAUSE THE OVERALL MAXIMUM PURCHASE LIMITATION
CONTAINED IN THE PLAN OF CONVERSION INCLUDES EXCHANGE SHARES TO BE ISSUED TO
PUBLIC STOCKHOLDERS FOR THEIR PUBLIC BANK SHARES, CERTAIN HOLDERS OF PUBLIC BANK
SHARES MAY BE LIMITED IN THEIR ABILITY TO PURCHASE CONVERSION STOCK IN THE
OFFERINGS. See "Risk Factors--Effect of Purchase Limitations on Ability of
Public Stockholders to Purchase Conversion Shares."
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10
<PAGE>
- --------------------------------------------------------------------------------
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
IN THE CONVERSION AND REORGANIZATION
Federal regulations require that the aggregate purchase price of the
Conversion Stock to be offered in the Conversion and Reorganization be
consistent with an independent appraisal of the estimated pro forma market value
of the Bank and the Mutual Holding Company. FinPro, an independent appraiser,
has advised the Primary Parties that in its opinion, dated May 19, 1997, the
estimated aggregate pro forma market value of the Bank and the Mutual Holding
Company was $68.0 million (the "Appraisal") and the aggregate estimated pro
forma value of the Common Stock ranged from $31.3 million to $42.3 million with
a midpoint of $36.8 million (the "Valuation Price Range"). Because the holders
of the Public Bank Shares will continue to hold approximately the same aggregate
percentage ownership interest in the Company as they held in the Bank (before
giving effect to any shares of Conversion Stock purchased by the Bank's
stockholders in the Offerings or the ESOP thereafter or the payment of cash in
lieu of issuing fractional Exchange Shares), the Appraisal was multiplied by the
Mutual Holding Company's percentage interest in the Bank which corresponds with
the amount of Conversion Stock to be sold in the Offerings (i.e., 54.1%), to
determine the midpoint of the Valuation Price Range, which was $36.8 million. In
accordance with OTS regulations, the minimum and maximum of the offering range
were set at 15% below and above the midpoint, respectively, resulting in an
offering range of $31.3 million to $42.3 million (the "Estimated Price Range").
The full text of the appraisal report of FinPro describes the procedures
followed, the assumptions made, limitations on the review undertaken and matters
considered, which included the trading market for the Bank Common Stock (see
"Market for the Common Stock") but was not solely dependent thereon. (Based on
the $17.385 closing price of the Bank Common Stock on December 26, 1996, the day
preceding the Bank's announcement of the Conversion and the Reorganization and
the $27.00 closing price on June 30, 1997, the estimated market value of all
outstanding shares of Bank Common Stock (including shares held by the Mutual
Holding Company) was $53.2 million and $82.8 million, respectively.) For further
information, see "The Conversion and Reorganization--Stock Pricing and Exchange
Ratio." 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 AND REORGANIZATION WILL BE ABLE TO SELL SUCH SHARES AFTER THE
COMPLETION OF THE CONVERSION AND REORGANIZATION AT OR ABOVE THE PURCHASE PRICE.
All shares of Conversion Stock issued in the Conversion and Reorganization
will be sold at the Purchase Price of $10.00 per share, as determined by the
Primary Parties. The actual number of shares to be issued in the Offerings will
be determined by the Primary Parties based upon the final updated estimate of
the aggregate pro forma market value of the Conversion Stock, giving effect to
the Conversion and Reorganization, 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 Conversion Stock to be issued in the Conversion and
Reorganization may be increased to 4,870,000 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 Conversion Stock are less than the minimum or more
than 15% above the maximum of the current Estimated Price Range. Any increase or
decrease in the number of shares of Conversion Stock will result in a
corresponding change in the number of Exchange Shares, so that upon consummation
of the Conversion and Reorganization, the Conversion Stock and the Exchange
Shares will represent approximately 54.1% and 45.9%, respectively, of the
Company's total outstanding shares. Furthermore, Exchange Shares may represent
less than 45.9% of the Company's total outstanding shares if there are
insufficient shares for the ESOP to purchase 8.0% of the Conversion Stock and,
consequently, the Company has to issue authorized but unissued shares to the
ESOP in order to satisfy its order to purchase such amount of Conversion Stock
in the Offerings. See "Risk Factors--Possible Increase in Estimated Price Range
and Number of Shares Issued," "Pro Forma Data," and "The Conversion and
Reorganization--Stock Pricing and Exchange Ratio" and "--Number of Shares to be
Issued."
Based on the 1,406,004 Public Bank Shares outstanding at March 31, 1997,
and assuming a minimum of 3,130,000 and a maximum of 4,234,000 shares of
Conversion Stock are issued in the Offerings, the Exchange Ratio is expected to
range from approximately 1.885 Exchange Shares to 2.550 Exchange Shares for each
Public Bank Share outstanding immediately prior to the consummation of the
Conversion and Reorganization. The Exchange Ratio will be affected if any stock
options to purchase shares of Bank Common Stock are exercised after March 31,
1997 and prior to consummation of the Conversion and Reorganization. If any of
such stock options are outstanding immediately prior to consummation of the
Conversion and Reorganization, they will be converted into options to
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11
<PAGE>
- --------------------------------------------------------------------------------
purchase shares of Common Stock, with the number of shares subject to the option
and the exercise price per share to be adjusted based upon the Exchange Ratio so
that the aggregate exercise price remains unchanged, and with the duration of
the option remaining unchanged. At March 31, 1997, there were outstanding
options to purchase 109,548 shares of Bank Common Stock, which have an exercise
price of $13.00 per share. The Bank has no plans to grant additional stock
options prior to the consummation of the Conversion and Reorganization.
The following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Price Range: (i) the total number of
shares of Conversion Stock and Exchange Shares to be issued in the Conversion
and Reorganization, (ii) the percentage of the total Common Stock represented by
the Conversion Stock and the Exchange Shares, and (iii) the Exchange Ratio. The
table does not give effect to cash paid in lieu of issuing fractional Exchange
Shares.
<TABLE>
<CAPTION>
CONVERSION STOCK EXCHANGE SHARES TOTAL SHARES
TO BE OFFERED(1) TO BE ISSUED(1) OF COMMON
--------------------- --------------------- STOCK TO BE EXCHANGE
AMOUNT PERCENT AMOUNT PERCENT OUTSTANDING(1) RATIO(1)
--------- ------- --------- ------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Minimum .................... 3,130,000 54.1% 2,650,000 45.9% 5,780,000 1.885
Midpoint ................... 3,682,000 54.1 3,118,000 45.9 6,800,000 2.218
Maximum .................... 4,234,000 54.1 3,586,000 45.9 7,820,000 2.550
15% above maximum .......... 4,870,000 54.1 4,123,000 45.9 8,993,000 2.933
</TABLE>
- ----------
(1) Assumes that outstanding options to purchase 109,548 shares of Bank Common
Stock at March 31, 1997 are not exercised prior to consummation of the
Conversion and Reorganization.
The final Exchange Ratio will be determined based upon the number of shares
issued in the Offerings in order to maintain the Public Stockholders'
approximately 45.9% ownership interest in the Bank. The final Exchange Ratio
will not be based upon the market value of the Public Bank Shares. At the
minimum, midpoint and maximum of the Estimated Price Range, one Public Bank
Share will be exchanged for 1.885, 2.218 and 2.550 shares of Common Stock,
respectively (which have a calculated equivalent value of $18.85, $22.18 and
$25.50 based on the $10.00 Purchase Price of a share of Common Stock in the
Offerings and the aforementioned Exchange Ratios). THE VALUE OF THE EXCHANGE
SHARES TO BE RECEIVED FOR EACH PUBLIC BANK SHARE MAY BE LESS THAN THE MARKET
PRICE OF THE PUBLIC BANK SHARES AT THE TIME OF THE EXCHANGE, BASED ON THE FINAL
EXCHANGE RATIO AND THE MARKET PRICE AT THE TIME OF THE EXCHANGE. Further there
can be no assurance as to the actual market value of a share of Common Stock
after the Conversion and Reorganization or that such shares could be sold at or
above the $10.00 Purchase Price. Public Stockholders will be paid cash in lieu
of issuing fractional Exchange Shares.
USE OF PROCEEDS
Net proceeds from the sale of the Conversion Stock are estimated to be
between $29.8 million and $40.6 million (or $46.9 million if the Estimated Price
Range is increased by 15%) depending on the number of shares sold and the
expenses of the Conversion and Reorganization. See "Pro Forma Data." The Company
plans to contribute to the Bank 50% of the net proceeds from the Offerings, with
the remaining net proceeds to be retained by the Company. Net proceeds to be
retained by the Company after the contribution to the Bank are estimated to be
between $14.9 million and $20.3 million (or $23.4 million if the Estimated Price
Range is increased by 15%). The Company will be unable 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 the extension of credit to the ESOP to purchase Conversion Stock in
the Offerings (to the extent such loan is not funded by a third party), and,
subject to applicable limitations, the possible payment of dividends and
repurchases of Common Stock. Assuming the acquisition by the ESOP of 8% of the
aggregate of the number of shares of Conversion Stock to be issued in the
Conversion and Reorganization, the amount of the loan to the ESOP is estimated
to be between $2.5 million and $3.4 million (or $3.9 million if the Estimated
Price Range is increased by 15%) to be repaid over a 15 year period at the
prevailing prime rate, which is currently 8.50%. See "Management of the
Bank--Benefit Plans--Employee Stock Ownership Plan and Trust." Funds received by
the Bank from the Company's purchase of its capital stock will be used for other
general business purposes. The Company and the Bank may also use such funds to
expand operations
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12
<PAGE>
through the acquisition or establishment of branch offices and the acquisition
of smaller financial institutions or assets of other financial institutions.
Neither the Bank nor the Company has any pending agreements or understandings
regarding acquisitions of any specific financial institutions, branch offices or
assets of other financial institutions. See "Use of Proceeds" and "Business of
the Bank." To the extent that the stock-based benefit programs which the Company
or Bank intend to adopt subsequent to the Conversion and Reorganization are not
funded with authorized but unissued common stock of the Company, the Company or
Bank may use net proceeds from the Conversion and Reorganization to fund the
purchase of stock to be awarded under such stock benefit programs. See
"Management of the Bank--New Benefits Resulting from the Conversion and
Reorganization--Stock Options Plans" and "--Stock Programs."
DIVIDENDS
Since the reorganization of the Bank and the formation of the MHC on
January 6, 1995, the Bank has paid, in the aggregate, annual cash dividends on
the Bank Common Stock of $.50 (50 cents) per share, which amounts to a quarterly
dividend of $.125 per share. The Bank intends to continue to pay regular
quarterly dividends through either the date of consummation of the Conversion
and Reorganization (on a pro rata basis) or the end of the fiscal quarter during
which the consummation of the Conversion and Reorganization occurs.
Commencing with the first full quarter following consummation of the
Conversion and Reorganization, the Board of Directors of the Company intends to
declare cash dividends on the Common Stock at an initial quarterly rate equal to
the amount of the existing quarterly dividend on the Bank Common Stock divided
by the Exchange Ratio. Based upon the Estimated Price Range, the Exchange Ratio
is expected to be 1.885, 2.218, 2.550 and 2.933 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, respectively.
Based upon the Exchange Ratio and the sale of Conversion Stock at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range, the
Company expects to pay an initial quarterly dividend of $.066, $.056, $.049 and
$.043 per share, respectively, following consummation of the Conversion and
Reorganization. Declarations of dividends by the Company's Board of Directors
will depend upon a number of factors, including the amount of the net proceeds
from the Offerings retained by the Company, 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. Consequently, there can be no
assurance that dividends will in fact be paid on the Common Stock or that, if
paid, such dividends will not be reduced or eliminated in future periods. See
"Dividend Policy" and "Market for the Common Stock."
BENEFITS OF THE CONVERSION AND REORGANIZATION TO MANAGEMENT
Among the benefits to the Company and the Bank anticipated from the
Conversion and Reorganization is the ability to attract and retain personnel
through the prudent use of stock options and other stock related benefit
programs. Subsequent to the Conversion and Reorganization, the Company intends
to adopt Stock Programs (as defined herein) and Stock Option Plans (as defined
herein) for the benefit of directors, officers and employees. If such benefit
plans are adopted within one year after the Conversion and Reorganization, under
current OTS regulations such plans will be subject to stockholders' approval at
a meeting of stockholders which may not be held earlier than six months after
the Conversion and Reorganization. The Company intends to adopt the Stock
Programs which would provide for the granting of Common Stock to officers,
directors and employees of the Bank and Company in an amount equal to 4% of the
Conversion Stock sold in the Conversion. The Stock Option Plans that the Company
intends to adopt would provide the Company with the ability to grant options to
officers, directors and employees of the Bank and Company to purchase Common
Stock equal to 10% of the number of shares of Conversion Stock sold in the
Conversion and Reorganization. For a further description of the Stock Programs
and Stock Option Plans, see "Risk Factors--Stock- Based Benefits to Management
and Directors, Employment Contracts and Change in Control Payments," "Management
of the Bank--Benefit Plans," "Beneficial Ownership of Capital
Stock--Subscriptions by Executive Officers and Directors," "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.
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13
<PAGE>
<TABLE>
<CAPTION>
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SELECTED FINANCIAL AND OTHER DATA
Set forth below are selected financial and other data of the Bank. This information is derived in part from
and should be read in conjunction with the Consolidated Financial Statements of the Bank and the Notes thereto
presented elsewhere in this Prospectus.
AT MARCH 31,(1) AT MAY 31,
------------------------------------- ----------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
SELECTED CONSOLIDATED FINANCIAL (In thousands)
CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Total assets .......................... $577,004 $651,945 $512,126 $547,550 $572,509
Cash and cash equivalents ............. 15,472 11,791 6,111 47,839 45,247
Loans receivable, net:
Real estate ......................... 207,262 198,658 197,240 172,552 206,573
Consumer ............................ 28,362 25,370 21,314 16,428 16,160
-------- -------- -------- -------- --------
Total loans receivable, net(2) .... 235,624 224,028 218,554 188,980 222,733
U.S. Government and agency
obligations, net of valuation
allowance(3) ........................ 76,489 101,729 148,062 146,806 64,006
Mortgage securities, net(4) ........... 222,980 289,848 117,205 141,271 223,401
Deposits .............................. 444,139 445,424 444,380 471,681 481,704
Borrowed funds ........................ 75,598 151,334 15,032 -- 50,000
Stockholders' equity .................. 48,079 49,519 46,625 34,066 38,642
(continued on next page)
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</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
YEARS TEN MONTHS YEARS
ENDED MARCH 31, ENDED ENDED MARCH 31,
-------------------- MARCH 31, --------------------
1997 1996 1995(1) 1994 1993
------- ------- ------- ------- -------
SELECTED CONSOLIDATED OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total interest and dividend income ................ $41,126 $37,309 $28,431 $35,616 $37,417
Total interest expense ............................ 27,469 23,842 15,831 20,795 22,933
------- ------- ------- ------- -------
Net interest income ............................. 13,657 13,467 12,600 14,821 14,484
Provisions for loan losses ........................ 320 450 350 500 871
------- ------- ------- ------- -------
Net interest income after provision
for loan losses ............................... 13,337 13,017 12,250 14,321 13,613
------- ------- ------- ------- -------
Other income (loss):
Loan fees and service charges ................... 294 307 285 428 384
Gain (loss) on sale of securities
available for sale, net ....................... (2,878)(2) (2,217)(5) (547) 262 2,938
Gain (loss) on sale of real estate
acquired in settlement of loans ............... (92) (7) -- 62 2,144
Gain (loss) from real estate operations, net .... (26) (25) (62) 172 (184)
Other ........................................... 906 729 452 856 338
------- ------- ------- ------- -------
Total other income (loss) ..................... (1,796) (1,213) 128 1,780 5,620
------- ------- ------- ------- -------
Operating expenses:
Compensation and employee benefits .............. 7,184 5,821 4,674 4,735 4,110
Occupancy ....................................... 773 802 630 648 646
Equipment ....................................... 1,135 1,092 858 972 931
Advertising and promotion ....................... 69 176 123 91 96
SAIF assessment(6) .............................. 2,895 -- -- -- --
Federal insurance premiums ...................... 974 1,163 990 1,210 1,093
Other ........................................... 1,572 1,761 1,676 1,860 1,917
------- ------- ------- ------- -------
Total operating expenses ...................... 14,602 10,815 8,951 9,516 8,793
------- ------- ------- ------- -------
(Loss)/Income before income tax expense and
cumulative effect of accounting changes ......... (3,061) 989 3,427 6,585 10,440
Income tax expense (benefit) ...................... 154 374 1,236 2,247 3,885
------- ------- ------- ------- -------
(Loss)/Income before cumulative effect of
accounting changes .............................. (3,215) 615 2,191 4,338 6,585
Cumulative effect of accounting changes:
Income taxes .................................... -- -- -- 400 --
Postretirement benefits ......................... -- -- -- (1,216)
Investments ..................................... -- -- -- 471 --
------- ------- ------- ------- -------
Net (loss)/income ............................. $(3,215) $ 615 $ 2,191 $ 3,993 $ 6,585
======= ====== ======= ======= =======
Earnings (loss) per share ......................... $ (1.07) $ 0.21 N/A(7) N/A(7) N/A(7)
======= ======
(continued on next page)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
YEARS TEN MONTHS YEARS
ENDED MARCH 31, ENDED ENDED MAY 31,
------------------ MARCH 31, ------------------
1997 1996 1995(1) 1994 1993
------ ------ ------ ------ ------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
<S> <C> <C> <C> <C> <C>
Equity to assets at period end ........................ 8.33% 7.60% 9.10% 6.22% 6.75%
Interest rate spread (difference between
average yield on interest-earning assets and
average cost of interest-bearing liabilities) ....... 1.99 2.16 2.92 2.52 2.56
Net interest margin (net interest income as a
percentage of average interest-earning
assets) ............................................. 2.28 2.48 3.12 2.71 2.76
Return on average assets (net income divided
by average total assets) ............................ (0.52) 0.11 0.52 0.71 1.22
Return on average equity (net income divided
by average equity) .................................. (6.56) 1.20 7.06 10.22 18.95
Dividend payout ratio(8) .............................. N/A(7) 238.00 N/A(7) N/A(7) N/A(7)
Stockholders' equity to average assets ratio
(average stockholders' equity divided by
average total assets) ............................... 7.90 9.08 7.30 6.92 6.43
Total other income to average assets .................. (0.29) (.21) 0.03 0.31 1.04
Total operating expenses to average assets(9) ......... 1.87 1.91 1.76 1.68 1.63
ASSET QUALITY RATIOS:
Loans 90 days or more past due to net loans ........... 2.38 2.66 2.56 3.63 3.55
Loans 90 days past due and other
nonperforming assets to total assets ................ 1.04 .92 1.14 1.53 1.55
Allowance for loan losses to loans 90 days past
due and other nonperforming assets .................. 52.87 49.73 46.02 34.74 29.31
Allowance for loan losses as a percent of net
loans receivable at end of period ................... 1.34 1.33 1.22 1.54 1.17
Net interest income to total operating
expenses(9) ......................................... 1.18x 1.25x 1.41x 1.56x 1.65x
Net interest income after provision for loan
losses to total operating expenses(9) ................ 1.15x 1.20x 1.37x 1.51x 1.55x
Average interest-earning assets to
average interest-bearing liabilities ................ 1.06x 1.07x 1.05x 1.05x 1.05x
REGULATORY CAPITAL RATIOS:
Tangible capital(10) .................................. 8.99% 8.48% 10.83% 6.22% 6.75%
Core capital(10) ...................................... 8.99 8.48 10.83 6.22 6.75
Risk-based capital(10) ................................ 25.31 26.10 32.21 20.61 21.27
NUMBER OF FULL-SERVICE OFFICES .......................... 4 4 4 4 4
- --------------
<FN>
(1) At the time of the Bank's 1995 MHC Reorganization, the Bank changed its fiscal year end from May 31
to March 31.
(2) Excludes loans to joint ventures of the Bank's subsidiaries. See "Business of the Bank--Subsidiary Activities."
(3) At March 31, 1997, 1996 and 1995, and May 31, 1994, $67.6 million, $92.9 million, $64.3 million and $64.1
million of such securities, respectively, net of valuation allowance, were classified as available for sale,
and $8.9 million, $8.9 million, $83.7 million and $82.7 million, respectively, of such securities were
classified as held to maturity. At May 31, 1993, all such securities were classified as held to maturity.
(4) Includes mortgage-backed securities and mutual funds that invest primarily in mortgage-backed securities, net
of valuation allowance. At March 31, 1997, 1996 and 1995, and May 31, 1994 and 1993, all such securities were
available for sale.
(5) The loss on securities available for sale resulted from the sale of investment securities as part of the Bank's
restructuring of its investment portfolio. See "Risk Factors--Effects of Repositioning Investment Portfolio"
and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(6) Reflects the SAIF Special Assessment of $2.9 million as of September 30, 1996.
(7) Not applicable.
(8) Aggregate dividends per share divided by net income per share.
(9) Total oerating expenses do not include income tax expense, the provision for loan losses or the SAIF Special
Assessment.
(10) Excludes unrealized losses on available for sale securities. If such unrealized losses were included at
March 31, 1997, then both tangible and core capital would have been 8.31%, and risk-based capital would
have been 23.31%.
</FN>
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
RECENT DEVELOPMENTS
In June 1997, the Bank's bid to lend $6.0 million under a sale/leaseback
financing arrangement was accepted by the City of Bayonne's Board of Education.
The purpose of the arrangement is to finance the construction of additions to
schools within the Bayonne school district under the New Jersey Early Childhood
Education Program. To finance these additions, the Board of Education has agreed
to enter into a ground lease with the Bank whereby the Board of Education will
lease the property upon which the additions will be built. The Bank will then
advance $6.0 million to the Board of Education under a financing agreement to
finance the construction of the additions; and the Bank will also enter into a
lease purchase agreement pursuant to which the Board of Education will lease the
additions from the Bank for a period of 58 months, with an option to purchase
the additions at any time during that 58 months. It is expected that either all
or a portion of the loan proceeds will be deposited with the Bank. The Board of
Education may prepay the loan at any time without penalty.
The loan is subject to, and conditioned upon, the ground lease, financing
and lease/purchase agreements meeting the Bank's underwriting standards and the
execution by both parties of loan and deposit agreements. The loan payments will
be made from the Capital Reserve of the Early Childhood Program, a New Jersey
government sponsored program operated by the Department of Education, a portion
of which reserve has been allocated to the Bayonne Board of Education under the
Program. The Early Childhood Program has received appropriations from the State
of New Jersey for the two years ending June 30, 1999. Subsequent appropriations
will be required from the budget of the State of New Jersey. Should subsequent
appropriations not be made and in the event that the Board of Education is
unable to obtain funds from other sources to repay the loan, the Bank may seek
to satisfy any outstanding indebtedness through foreclosure of the real estate
collateralizing the loan.
If made, this loan will be the Bank's largest loan to one borrower. At
March 31, 1997, the Bank's largest loan to one borrower was $1.5 million. The
Bank's loan-to-one-borrower limit was $7.5 million at June 1, 1997.
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.
EFFECTS OF REPOSITIONING INVESTMENT PORTFOLIO
During fiscal 1997, the Bank experienced further compression of its
interest rate spread, which was reduced to 1.99% for the year ended March 31,
1997 from 2.16% for the year ended March 31, 1996 and from 2.92% for the ten
months ended March 31, 1995. This compression was due to both the rising
interest rate environment and the Bank's interest rate risk position as a result
of its significant investment in fixed-rate assets. The Bank began repositioning
its investment portfolio during fiscal 1997 to place greater emphasis on
improving its yield on investments, while maintaining its interest rate risk
position. During the 1997 fiscal year, the Bank sold intermediate- and
short-term mutual funds totalling $71.5 million and U.S. Treasury securities
totalling $25.0 million, which were earning below market interest rates, at a
pre-tax loss of $2.8 million. The Bank used the proceeds from these sales to
purchase $60.5 million of higher-yielding mortgage-backed securities and to
repay $50.0 million of FHLB advances that were outstanding as of March 31, 1996.
These sales followed a sale in December 1995 of $25.0 million of FHLB structured
dual index notes, which were paying below market interest rates. The fiscal 1996
sale resulted in a pre-tax loss of $2.5 million, or $1.6 million after taxes,
but enabled the Bank to reinvest the proceeds in higher yielding assets.
While the Bank's interest rate spread has improved as a result of its
efforts to reposition its investment portfolio, it is still sensitive to
interest rate changes. As of March 31, 1997, the Bank's interest rate spread had
increased to 2.43% from 1.89% at March 31, 1996. However, the Bank's securities
available for sale portfolio totalled $290.6 million at March 31, 1997,
comprising 50.4% of total assets at that date. Because securities available for
sale are carried at market value, with unrealized gains and losses, net of
income tax benefit, recorded as a separate component of stockholders' equity,
the Bank's stockholders' equity is still subject to volatility during periods of
changing interest rates as a consequence of the fluctuations in the market value
of securities. Further, the Bank still maintains a substantial portfolio of
fixed-rate mortgage-backed securities and mortgage loans, which contributes to
the Bank's exposure to fluctuations in interest rates. See "--Sensitivity to
Increases in Interest Rates."
17
<PAGE>
The Bank does not anticipate any further significant sales of investment
securities, since much of the remaining securities with unrealized losses are
due to mature by 1999. In addition, $51.0 million of U.S. Treasury and agency
securities available for sale are due to mature by October 31, 1998, thereby
affording the Bank the opportunity to reinvest those additional funds or further
reduce borrowings. At March 31, 1997, the Bank had $6.8 million in net
unrealized losses in its securities available for sale portfolio. There can be
no assurances as to the actual gain or loss, if any, that will be incurred on
these securities. Although the Bank has incurred significant losses in recent
periods on the sale of securities, such sales are consistent with the Bank's
overall objective of reducing its interest rate risk exposure and improving
earnings and stockholders' equity over the long term.
SENSITIVITY TO INCREASES 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. 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. An
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 March 31, 1997, the Bank's sensitivity
measure indicated that a 2% instantaneous increase in interest rates would cause
a 315 basis point decline in the Bank's NPV ratio. This NPV ratio sensitivity
measure would exceed the threshold at which the Bank would be required to hold
additional risk-based capital under rules the OTS has adopted but not
implemented. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Management of Interest Rate Risk--Net Portfolio
Value" and "Regulation--Federal Regulation of Savings Institutions--Capital
Requirements."
The Bank's recent results of operations were adversely affected by the
increase in interest rates experienced during 1995 and 1996, and by the increase
in the Bank's short-term borrowings and fixed-rate mortgage loans and
mortgage-backed securities. In particular, the Bank's liabilities have repriced
from an average cost of 4.00% for the year ended May 31, 1994 to 4.87% for the
year ended March 31, 1997. Conversely, the average yield earned on
interest-earning assets has only increased 34 basis points over the same time
period, from 6.52% for the year ended May 31, 1994, to 6.86% for the year ended
March 31, 1997. This upward repricing of liabilities, without a corresponding
upward repricing of assets, has resulted in the compression in the Bank's
average interest rate spread, which was reduced to 1.99% for the year ended
March 31, 1997, from 2.52% for the year ended May 31, 1994, and in its net
interest margin, which was reduced to 2.28% from 2.71% for the same periods. The
Bank's interest rate spread increased, however, to 2.43% at March 31, 1997 from
1.89% at March 31, 1996 as a result of the Bank's repositioning of its
investment portfolio. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Management of Interest Rate Risk."
Despite the Bank's recent improvement in its interest rate spread, net
interest income would probably still be adversely affected in a rising interest
rate environment, as liabilities would continue to reprice to higher market
rates more quickly than assets. This effect would be compounded because the
prepayment speeds of the Bank's long-term fixed-rate assets would decrease in a
rising interest rate environment. At March 31, 1997, $116.1 million, or 51.0% of
the Bank's $227.4 million of mortgage-backed securities had fixed-rates of
interest. In addition, $156.7 million, or 79.2%, of the Bank's one- to
four-family mortgage loans had fixed-rates of interest. To reduce the Bank's
exposure to interest rate risk in a changing interest rate environment, the Bank
has more recently sought to invest in mortgage securities that have adjustable
rates and/or relatively short expected terms, and to offer fixed-rate one- to
four-family mortgage loans with terms of 15 years or less and adjustable-rate
one- to four-family mortgage loans. See "Business of the Bank--Lending
Activities" and "--Investment Activities."
INCREASED RISKS ASSOCIATED WITH FIXED-RATE ASSETS
The Bank's profitability may be affected by its substantial investment in
fixed-rate assets. At March 31, 1997, the Bank held in portfolio $156.7 million
in fixed-rate one- to four-family mortgage loans, which comprised 79.2% of the
Bank's total one- to four-family mortgage loans and 27.2% of total assets.
Although the Bank's loans are
18
<PAGE>
underwritten according to standards that qualify such loans for resale, the Bank
has not sold any mortgage loans since 1989. When added to the Bank's $116.1
million in fixed-rate mortgage-backed securities, at least 47.3% of the Bank's
assets have fixed rates of interest, which could have an adverse impact on
operations in a rising interest rate environment. See "--Sensitivity to
Increases in Interest Rates." In addition, increases in interest rates can also
affect the amount of loans originated by the Bank and, thus, the amount of loan
and commitment fees generated by the Bank. Increases in interest rates also tend
to slow prepayments on fixed-rate loans, thereby limiting the amount of funds
available to the Bank to invest in higher interest-earning assets. The Bank has
sought to reduce its interest rate risk exposure of holding a substantial amount
of fixed-rate assets by purchasing adjustable-rate mortgage-backed securities
and selling fixed-rate mortgage-backed securities. In addition, the Bank offers
fixed-rate loans with terms of 15 years or less, as well as adjustable-rate
mortgages. During the year ended March 31, 1997, the Bank originated $28.6
million of one- to four-family mortgage loans. Of those loans, $9.4 million, or
32.9%, were fixed-rate loans with terms of 15 years or less, and $12.8 million,
or 44.8% were adjustable-rate loans. The Bank's ability to originate
shorter-term and adjustable-rate loans in the future, however, will depend upon
market interest rates and consumer demand for such loans. Therefore, there can
be no assurances that the Bank will be able to substantially increase its
shorter-term and adjustable-rate loan portfolios. See "Business of the
Bank--Lending Activities."
RECENT DECLINE IN OPERATING RESULTS
Over the past two fiscal years, the Bank has experienced a decline in its
operating results and earnings performance ratios. For the years ended March 31,
1997 and 1996, and the ten months ended March 31, 1995, the Bank's net
income/(loss) totalled ($3.2 million), $615,000 and $2.2 million, respectively,
resulting in a return on average assets of (0.52%), 0.11% and 0.52%,
respectively, and a return on average equity of (6.56%), 1.2% and 7.06%,
respectively. The decline in net income has primarily been attributable to the
losses incurred on the sale of investment securities in fiscal 1996 and 1997.
Losses on the sale of securities for the years ended March 31, 1997 and 1996,
and the ten months ended March 31, 1995 totalled $2.9 million, $2.2 million and
$547,000, respectively. The Bank does not anticipate any additional significant
losses on the sale of securities. See "--Sensitivity to Increases in Interest
Rates."
Other operating expenses have also increased in recent years, due in part
to certain non-recurring items. Operating results for the year ended March 31,
1997 were adversely impacted by the one-time SAIF Special Assessment of $2.9
million to recapitalize the SAIF. In addition, between May 31, 1993 and March
31, 1997, compensation and employee benefits expense increased 74.8%, to $7.2
million for the year ended March 31, 1997, from $4.1 million for the year ended
May 31, 1993. For the year ended March 31, 1997, compensation and employee
benefits expense comprised 61.6% of total operating expenses (excluding the
impact of the SAIF Special Assessment of $2.9 million during the year). A
significant portion of this increase in expense resulted from the implementation
of employee stock benefit plans in connection with the Bank's 1995 MHC
Reorganization. The Bank also provided an additional $1.8 million in employee
benefit expense during fiscal 1997 to provide for one-time, lump sum retirement
benefit payments for two executive officers, thereby eliminating future
obligations under the Bank's supplemental executive retirement agreements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Financial Condition at March 31, 1997 and March 31,
1996." The Bank expects that compensation expense will increase in future
periods due to the implementation of additional stock benefit plans in
connection with the Conversion and Reorganization. See "Management of the
Bank--New Benefits Resulting from the Conversion and Reorganization."
Although recent results have been significantly affected by sales of
investment securities, the benefits of such sales have not yet been fully
realized. At March 31, 1997, however, the Bank's interest rate spread had
increased to 2.43%, from 1.89% at March 31, 1996, beginning to reflect the
results of the Bank's repositioning. Despite this improvement, there can be no
assurances as to the earnings performance of the Bank in the near future. The
Bank's significant fixed-rate investment securities and loan portfolios expose
it to interest rate risk in a rising interest rate environment. Furthermore, the
increase in stockholders' equity resulting from the Conversion and
Reorganization may have a negative impact on the return on stockholders' equity
until such time as the Bank can effectively deploy all of the proceeds of the
Offerings. Finally, any expansion by the Bank through its branch franchise and
the developments of new loan and deposit products will increase operating
expenses. Such increases cannot be estimated at this time.
19
<PAGE>
WEAKNESSES IN LOCAL ECONOMY
In the late 1980s and early 1990s, 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 values of properties located in New Jersey. However, New
Jersey's real estate market has stabilized in recent periods. Nevertheless,
despite the modest economic improvement, certain demographics of the Bank's
primary market area have continued to adversely affect its ability to generate
loans. The Bank's area primarily consists of mature, fully developed
communities. The population of Bayonne is declining and new housing starts in
the Bank's primary market area are lower than those in the state of New Jersey
generally. These factors, along with the highly competitive market in which the
Bank operates, has contributed to a decline in originations of new mortgage
loans in recent periods. For the years ended March 31, 1997 and 1996, and the
ten months ended March 31, 1995, the Bank originated $28.6 million, $18.2
million and $42.8 million of one- to four-family residential loans,
respectively. Repayments were $32.9 million, $26.3 million and $27.9 million,
respectively, for the same periods. The Bank's total loan portfolio has also
declined in the 1990s, from a year-end high of $286.5 million at May 31, 1990,
representing 53.8% of total assets, to a year-end low of $193.9 million at May
31, 1994, representing 35.4% of total assets. At March 31, 1997, total loans
receivable had increased to $240.6 million, equalling 41.7% of total assets.
In addition, the Bank's total deposits have decreased 7.8% since May 31,
1993, from $481.7 million to $444.1 million at March 31, 1997. This decline is
reflective of both the declining Bayonne population, as well as a shift of funds
generally from thrift institutions to credit markets and mutual funds. The Bank
also expects to experience a run-off of deposits when approximately $45 million
of ten-year certificates of deposit yielding 10% mature byApril 1998.
Diminished mortgage lending and deposit opportunities in the Bank's primary
market area may exist for the foreseeable future, preventing the Bank from
achieving significant growth within its primary market area. In an effort to
address diminished mortgage loan demand and a reduced deposit base, the Bank is
seeking to expand its market area and the loan and deposit products it offers.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Business Strategy," "Business of the Bank--Lending Activities" and
"--Sources of Funds."
COMPETITION
The Bank is headquartered in the City of Bayonne, which is located in
Hudson County in northeastern New Jersey. The Bank currently conducts its
business from its main office and three branch offices, all of which are located
in Bayonne. The Bank faces significant competition both in making loans and in
attracting deposits. While its lending area extends throughout New Jersey, most
of the Bank's mortgage loans are secured by properties located in Hudson County,
with a predominance of such properties located in the City of Bayonne. 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. Such competition may limit the
growth and profitability of the Bank in the future. See "Business of the
Bank--Market Area and Competition."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a savings
institution. In addition, the Company, as a savings and loan holding company,
will be subject to extensive regulation and supervision. Such regulations, which
affect the Bank on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations is also subject to change by
the authorities who examine the Bank and interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the Department, the OTS, the FDIC or the Congress, could
have a material impact on the Company, the Bank, its operations or the
Conversion and Reorganization. See "Regulation."
20
<PAGE>
Recently enacted legislation provides that the Bank Insurance Fund ("BIF")
and the SAIF will merge on January 1, 1999 if there are no more savings
associations as of that date. Several bills have been introduced in the current
Congress that would eliminate the federal thrift charter and the OTS. The bills
would require that all federal savings associations convert to national banks or
state depository institutions by no later than January 1, 1998 in one bill and
June 30, 1998 in the other, and would treat all state savings associations, such
as the Bank, as state banks for purposes of federal banking laws. Subject to a
narrow grandfathering provision, all savings and loan holding companies would
become subject to the same regulation and activities restrictions as bank
holding companies under the pending legislative proposals. Under one proposal, a
state-chartered savings association's activities would be limited to those
engaged in prior to the date of enactment of final legislation. Such proposals
would not affect existing branching rights of state-chartered savings
associations. The legislative proposals would also abolish the OTS and transfer
its functions to the federal bank regulators with respect to the institutions
and to the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") with respect to the regulation of holding companies. The Bank is
unable to predict whether the legislation will be enacted or, given such
uncertainty, determine the extent to which the legislation, if enacted, would
affect its business. The Bank is also unable to predict whether the SAIF and BIF
will eventually be merged.
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS, EMPLOYMENT CONTRACTS AND
CHANGE IN CONTROL PAYMENTS
Stock Programs. The Company intends to seek stockholder approval of certain
stock programs (the "Stock Programs") which 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 and Reorganization, which
under current OTS regulations may be held no earlier than six months after
completion of the Conversion and Reorganization. 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 Conversion Stock sold in the
Conversion and Reorganization or 125,200 shares and 169,360 shares at the
minimum and maximum of the Estimated Price Range, respectively. These shares
will be acquired either through open market purchases or from authorized but
unissued Common Stock. Based on a market value of $10.00 per share and the
minimum and maximum of the Estimated Price Range, the aggregate market value of
Common Stock intended to be distributed under the Stock Programs would be $1.3
million to $1.7 million. See "--Possible Dilutive Effect of Stock Programs and
Stock Options." Although no specific award determinations have been made, the
Company anticipates that it will provide awards to its directors and employees
to the extent permitted by applicable regulations. Current OTS regulations
provide that no individual may receive more than 25% of the shares of any plan
and non-employee directors may not receive more than 5% individually, or 30% in
the aggregate, of the shares awarded under any plan. These shares will be
awarded at no cost to the recipients. See "Management of the Bank--New Benefits
Resulting from the Conversion and Reorganization--Stock Programs."
Stock Option Plans. The Company also intends to seek stockholder approval
of a benefit plan or plans which would provide options to purchase Common Stock
to officers, employees and non-employee directors (the "Stock Option Plans") at
a meeting of stockholders following the Conversion and Reorganization, which
under current OTS regulations may be held no earlier than six months after
completion of the Conversion and Reorganization. Although no specific
determinations have been made, assuming the receipt of stockholder approval, the
Company expects that executive 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 Conversion Stock issued in the Conversion and
Reorganization or 313,000 shares and 423,400 shares at the minimum and maximum
of the Estimated Price Range. 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--New Benefits Resulting from the Conversion and
Reorganization--Stock Option Plans."
The foregoing plans are in addition to the 1995 Stock Option Plan and the
Bayonne Bankshares, M.H.C. and First Savings Bank of New Jersey, SLA 1995
Recognition and Retention Plan (the "1995 Recognition Plan") which were adopted
by the Bank in connection with the 1995 MHC Reorganization and subsequently
approved by the Public Stockholders. These plans will continue in existence
after the Conversion and Reorganization as plans of the
21
<PAGE>
Company. See "Management of the Bank--Benefit Plans" and "The Conversion and
Reorganization--Effect on Existing Compensation Plans."
Employee Stock Ownership Plan. In addition, the Bank's existing ESOP, which
was adopted in connection with the 1995 MHC Reorganization and which has
previously purchased 108,641 Public Bank Shares, intends to purchase 8.0% of the
Conversion Stock to be issued in the Offerings (338,720 shares or $3.4 million
of Conversion Stock at the maximum of the Valuation Price Range) with a loan
funded by the Company, if such loan is not made by a third party. See "Use of
Proceeds" and "Management of the Bank--Benefit Plans--Employee Stock Ownership
Plan and Trust."
Employment Contracts, Change In Control Provisions and Employee Severance
Compensation. The Bank and the Company intend to enter into employment or
severance agreements with certain executive officers of the Company and the
Bank, which agreements provide for severance payments if their respective
employment is terminated in connection with a change in control of the Bank or
the Company. In addition, the Bank intends to adopt a severance plan for
employees that would provide for severance payments for employees that are
terminated in connection with a 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," and "--Employee Severance
Compensation Plan."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAMS AND STOCK OPTIONS
Following the Conversion and Reorganization, the Stock Programs, if
approved by the stockholders of the Company, will acquire an amount of shares
equal to 4% of the shares of Conversion Stock issued in the Conversion and
Reorganization, either through 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 then-existing shareholders will be diluted by 3.9%. Also
following the Conversion and Reorganization, 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 Conversion Stock issued in the Conversion and Reorganization. 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 exercised using authorized but unissued Common Stock and the Stock
Programs were funded with authorized but unissued shares, the voting interests
of existing stockholders would be diluted by 12.3%.
The Bank also has adopted and maintains the 1995 Stock Option Plan, which
reserves for issuance 135,802 shares of Bank Common Stock. As of March 31, 1997,
3,168 shares had been issued as a result of the exercise of options granted
under such option plan. Upon consummation of the Conversion and Reorganization,
these plans will become plans of the Company and Common Stock will be issued in
lieu of Bank Common Stock pursuant to the terms of such plans, as adjusted to
reflect the exchange of options in connection with the Conversion and
Reorganization. See "Management of the Bank--Benefit Plans."
EFFECT OF PURCHASE LIMITATIONS ON ABILITY OF PUBLIC STOCKHOLDERS
TO PURCHASE CONVERSION SHARES
The OTS has required that the overall maximum purchase limitation contained
in the Plan of Conversion include Exchange Shares to be issued to Public
Stockholders for their Public Bank Shares. As a result, certain holders of
Public Bank Shares may be limited in their ability to purchase Conversion Stock
in the Offerings. For example, a Public Stockholder who receives Exchange Shares
in an amount equal to or exceeding 3% of the Conversion Stock offered will not
be able to purchase shares of Conversion Stock in the Offerings. Similarly, a
Public Stockholder who qualifies as an Eligible Account Holder and receives
110,460 Exchange Shares, assuming the midpoint of the Estimated Price Range,
will not be able to participate as a first priority purchaser in the
Subscription Offering. See "The Conversion and Reorganization--Limitations on
Conversion Stock Purchases."
CERTAIN ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
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
22
<PAGE>
Certificate of Incorporation 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, super majority
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 Certificate of
Incorporation 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."
Voting Control of Officers and Directors. Directors and executive officers
of the Bank and the Company expect to hold approximately 6.0% or 7.7% of the
shares of Common Stock to be outstanding upon completion of the Conversion and
Reorganization, based upon the maximum and the minimum of the Estimated Price
Range, respectively, exclusive of shares that may be attributable to directors
and officers through the existing and future Stock Programs, the Stock Options
Plans and the ESOP. 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 takeover attempts that certain stockholders deem to be in their best
interest and may tend to perpetuate existing management. See "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND
NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion and Reorganization 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
4,870,000 shares of Conversion Stock at the Purchase Price for an aggregate
purchase price of up to $48,700,000. 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 an opinion of FinPro that subscription rights granted
to Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members have no value. However, this opinion is not binding on the Internal
Revenue Service (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 and Reorganization--Effects of the Conversion and Reorganization" and
"--Tax Aspects."
BAYONNE BANCSHARES, INC.
The Company was organized in February 1997 at the direction of the Boards
of Directors of the Mutual Holding Company and the Bank for the purpose of
holding all of the capital stock of the Bank. The Company received approval of
the OTS to become a savings and loan holding company, and, as such, will be
subject to regulation by the OTS. See "The Conversion and Reorganization--
General." After completion of the Conversion and Reorganization, the Company
will conduct business initially as a unitary savings and loan holding company.
See "Regulation--Holding Company Regulation." Upon consummation of the
Conversion and Reorganization, 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 Reorganization 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 loan funds to the ESOP to enable the ESOP to purchase 8%
of the aggregate
23
<PAGE>
of the Conversion Stock issued, and to initially deposit the remaining proceeds
with the Bank. See "Use of Proceeds." The Company and Bank may, however,
alternatively choose to fund the ESOP through a loan to the ESOP trust by a
third party financial institution.
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 employ any persons other than the officers
set forth under "Management of the Company," 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. The initial
business activities of the Company will consist of investment in the Bank. The
Company may in the future expand its business activities or services which it
provides through existing or newly-formed subsidiaries or through acquisitions
of other financial services providers. 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.
BAYONNE BANKSHARES, M.H.C.
The Mutual Holding Company is a federally-chartered mutual holding company
which was chartered on January 6, 1995 in connection with the MHC
Reorganization. The Mutual Holding Company's primary asset is 1,659,485 shares
of Bank Common Stock, which represent approximately 54.1% of the shares of Bank
Common Stock outstanding as of the date of this Prospectus. The Mutual Holding
Company's only other asset consists of a deposit account in the amount of
$200,000 as of March 31, 1997 (which will become an asset of the Bank upon
consummation of the Conversion and Reorganization). As part of the Conversion
and Reorganization, the Mutual Holding Company will convert from mutual form to
a federal interim stock savings institution and simultaneously merge with and
into the Bank, with the Bank being the surviving entity.
FIRST SAVINGS BANK OF NEW JERSEY, SLA
First Savings is a New Jersey chartered stock savings association that
conducts its operations from its main office and three branch offices located in
Bayonne, New Jersey. The Bank was originally chartered in 1889 and has been a
member of the FHLB System since 1945. The Bank's deposits are insured by the
FDIC under the SAIF. As a SAIF-insured, state-chartered savings association, the
Bank is also regulated by the Department and the OTS. At March 31, 1997, the
Bank had total assets of $577.0 million, total deposits of $444.1 million, and
stockholders' equity of $48.1 million. On January 6, 1995, the Bank, in the
mutual form, reorganized from a New Jersey-chartered mutual savings association
into Bayonne Bankshares, M.H.C., a federal mutual holding company, and
concurrently formed the Bank, which succeeded to the name and operations of the
Bank's mutual savings and loan association predecessor. In connection with the
1995 MHC Reorganization, First Savings transferred substantially all of its
assets and liabilities to the Bank in exchange for 1,659,485 shares of Bank
Common Stock and also sold an additional 1,358,015 shares of Bank Common Stock
to certain members of the general public. As of March 31, 1997, there were
3,065,489 shares of Bank Common Stock issued and outstanding, of which 1,406,004
shares consisted of Public Bank Shares.
The Bank is a community oriented savings institution that is primarily
engaged in the business of attracting deposits from the general public in the
Bank's market area, and investing such deposits in one- to four-family
residential real estate mortgage loans, mortgage-backed securities and U.S.
Government and agency obligations. At March 31, 1997, one- to four-family
residential mortgage loans totalled $197.8 million, comprising 34.3% of the
Bank's total assets, while mortgage-backed securities totalled $223.0 million,
or 38.6% of total assets, and U.S. Government and agency obligations totalled
$76.5 million, or 13.3% of total assets. To a lesser extent, the Bank also
invests in multifamily and commercial real estate loans, home equity loans, and
passbook and other consumer loans. The Bank's principal sources of funds have
been deposits, principal and interest payments on loans and mortgage-backed
securities, funds from sales of investments and borrowings and reverse
repurchase agreements. Principal sources of income have been interest received
from loans, mortgage-backed securities and other investments. The Bank's
principal expense has been interest paid on deposits, borrowings compensation
and employee benefits, and SAIF deposit insurance premiums.
The Bank's executive offices are located at 568 Broadway, Bayonne, New
Jersey, and its telephone number at that location is (201) 437-1000.
24
<PAGE>
<TABLE>
<CAPTION>
REGULATORY CAPITAL COMPLIANCE
At March 31, 1997, the Bank exceeded all regulatory capital requirements. See "Regulation--Federal Regulation of Savings
Institutions--Capital Requirements." Set forth below is a summary of the Bank's compliance with regulatory capital standards as of
March 31, 1997, on a historical and pro forma basis assuming that the indicated number of shares were sold as of such date, the
issuance of Exchange Shares 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.
<CAPTION>
FIRST SAVINGS BANK OF NEW JERSEY, SLA
PRO FORMA AT MARCH 31, 1997 BASED UPON SALE AT $10.00 PER SHARE
--------------------------------------------------------------------------------------------------------
4,870,000 SHARES
3,130,000 SHARES 3,682,000 SHARES 4,234,000 SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED OF ESTIMATED
MARCH 31, 1997 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(3) ........ $52,415 9.02% $63,549 10.73% $65,600 11.03% $67,647 11.34% $70,006 11.69%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible Capital:
Capital Level ......... $52,260 8.99% $63,394 10.70% $65,445 11.01% $67,492 11.31% $69,851 11.66%
Requirement ........... 8,720 1.50 8,887 1.50 8,918 1.50 8,949 1.50 8,984 1.50
------- ---- ------- ----- ------- ----- ------- ----- ------- -----
Excess ................ $43,540 7.49% $54,507 9.20% $56,527 9.51% $58,543 9.81% $60,867 10.16%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core Capital:
Capital Level ......... $52,260 8.99% $63,394 10.70% $65,445 11.01% $67,492 11.31% $69,851 11.66%
Requirement(4) ........ 17,440 3.00 17,774 3.00 17,836 3.00 17,897 3.00 17,968 3.00
------- ---- ------- ----- ------- ----- ------- ----- ------- -----
Excess ................ $34,820 5.99% $45,620 7.70% $47,609 8.01% $49,595 8.31% $51,883 8.66%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-Based Capital(5):
Capital Level(5) ...... $54,975 25.31% $66,179 29.70% $68,243 30,49% $70,303 31.27% $72,676 32.15%
Requirement ........... 17,379 8.00 17,824 8.00 17,906 8.00 17,988 8.00 18,083 8.00
------- ---- ------- ----- ------- ----- ------- ----- ------- -----
Excess ................ $37,596 17.31% $48,355 21.70% $50,337 22.49% $52,314 23.27% $54,593 24.15%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- ----------------
<FN>
(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 adjusted assets. Core capital levels are shown as a percentage of
total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(3) Excludes the $4.3 million unrealized loss on securities available for sale, net of taxes.
(4) The current OTS core capital requirement for savings associations is 3% of total adjusted assets. The OTS has proposed core
capital requirements which would require a core capital ratio of 3% of total adjusted assets for thrifts that receive the
highest supervisory rating for safety and soundness and a 4% to 5% core capital ratio requirement for all other thrifts. See
"Regulation--Federal Regulation of Savings Institutions--Capital Requirements."
(5) Assumes net proceeds are invested in assets that carry a 50% risk-weighting.
</FN>
</TABLE>
25
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Conversion Stock
cannot be determined until the Conversion and Reorganization is completed, it is
presently anticipated that the net proceeds from the sale of the Conversion
Stock will be between $29.8 million and $40.6 million (or $46.9 million if the
Estimated Price Range is increased by 15%). See "Pro Forma Data" and "The
Conversion and Reorganization--Stock Pricing and Exchange Ratio" 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 and Reorganization.
The Company will contribute to the Bank 50% of the net proceeds of the
Offerings. Such portion of net proceeds will be added to the Bank's general
funds which the Bank currently intends to utilize for 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. The Bank may also use such funds to expand operations through the
establishment or acquisition of branch offices, and the acquisition of other
financial institutions or other financial services companies, including those
located within the Bank's market area. To the extent the Stock Programs are not
funded with authorized but unissued common stock of the Company, the Company or
Bank may use net proceeds from the Conversion and Reorganization to fund the
purchase of stock to be awarded under such Stock Programs. See "Risk
Factors--Stock-Based Benefits to Management and Directors, Employment Contracts
and Change in Control Payments" and "Management of the Bank--New Benefits
Resulting from the Conversion and Reorganization--Stock Options Plans" and
"--Stock Programs."
The Company intends to use a portion of the net proceeds to assume the
existing loan to the ESOP and to loan additional funds to the ESOP to enable the
ESOP to purchase 8% of the Conversion Stock issued in the Conversion and
Reorganization. The Company and Bank may alternatively choose to fund the ESOP's
stock purchases through a loan by a third party financial institution. Based
upon the issuance of 3,130,000 shares or 4,234,000 shares at the minimum and
maximum of the Estimated Price Range, the amount of the loan to the ESOP would
be $2.5 million or $3.4 million, respectively (or $3.9 million if the Estimated
Price Range is increased by 15%) to be repaid over a 15 year period at the prime
rate of interest, which currently is 8.50%. See "Management of the Bank--Benefit
Plans--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 branch acquisitions, the establishment of
branch offices and the acquisition of smaller savings associations and
commercial banks or their assets, including those located within the Bank's
market area, or diversification into other banking related businesses. The
Company has no current arrangements, understandings or agreements regarding any
such transactions. Upon completion of the Conversion and Reorganization, the
Company 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 "Risk Factors--Financial Institution Regulation and Possible
Legislation," for a discussion of certain proposed changes to the activities
restrictions applicable to the Company and "Regulation--Holding Company
Regulation" for a description of certain regulations currently applicable to the
Company.
Upon completion of the Conversion and Reorganization, 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 and
Reorganization, 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 ten 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."
Based upon facts and circumstances following the Conversion and
Reorganization and subject to applicable regulatory requirements, the Board of
Directors may determine to repurchase stock in the future. Such facts and
26
<PAGE>
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 and Reorganization. To the extent that the
Company repurchases stock at market prices in excess of the per share book
value, such repurchases may have a dilutive effect upon the interests of
existing stockholders.
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
nonperforming and other risk assets, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment, tax and other considerations. See "The Conversion and
Reorganization--Certain Restrictions on Purchase or Transfer of Shares After
Conversion and Reorganization."
DIVIDEND POLICY
Since the reorganization of the Bank and the formation of the MHC on
January 6, 1995, the Bank has paid, in the aggregate, annual cash dividends on
the Bank Common Stock of $.50 (50 cents) per share, which amounts to a quarterly
dividend of $.125 per share. The Bank intends to continue to pay regular
quarterly dividends through either the date of consummation of the Conversion
and Reorganization (on a pro rata basis) or the end of the fiscal quarter during
which the consummation of the Conversion and Reorganization occurs.
Commencing with the first full quarter following consummation of the
Conversion and Reorganization, the Board of Directors of the Company intends to
declare cash dividends on the Common Stock at an initial quarterly rate equal to
the amount of the existing quarterly dividend on the Bank Common Stock divided
by the Exchange Ratio. Based upon the Estimated Price Range, the Exchange Ratio
is expected to be 1.885, 2.218, 2.550 and 2.933 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, respectively.
Based upon the Exchange Ratio and the sale of Conversion Stock at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range, the
Company expects to pay an initial quarterly dividend of $.066, $.056, $.049 and
$.043 per share, respectively, following consummation of the Conversion and
Reorganization. Declarations of dividends by the Company's Board of Directors
will depend upon a number of factors, including the amount of the net proceeds
from the Offerings retained by the Company, 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. Consequently, there can be no
assurance that dividends will in fact be paid on the Common Stock or that, if
paid, such dividends will not be reduced or eliminated in future periods. See
"Market for the Common Stock."
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion and
Reorganization--Liquidation Rights." For information concerning federal and
state law and 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 Regulation of Savings
Institutions--Limitation on Capital Distributions."
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 (generally defined as the aggregate par value of the
outstanding shares of the Company's capital stock having a par value plus the
amount of the consideration paid for shares of the Company's capital stock
without par value) or, if there is no such excess, to its net profits for the
current and/or immediately preceding fiscal year.
27
<PAGE>
Additionally, in connection with the Conversion and Reorganization, the
Company and Bank have committed to the OTS that during the one-year period
following the consummation of the Conversion and Reorganization, the Company
will not take any action to declare an extraordinary dividend to stockholders
which would be treated by recipient stockholders as a tax-free return of capital
for federal income tax purposes without prior approval of the OTS.
MARKET FOR THE COMMON STOCK
Although the Bank Common Stock is traded on the Nasdaq National Market,
there is no established market for the Common Stock of the Company at this time.
The Company has received conditional approval to have its Common Stock quoted on
the Nasdaq National Market under the symbol "FSNJ." 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.
Although under no obligation to do so, Sandler O'Neill has informed the Company
that it intends, upon the completion of the Conversion and Reorganization, to
make a market in the Common Stock by maintaining bid and ask quotations and
trading in the Common Stock so long as the volume of trading activity and
certain other market making considerations justify it doing 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 and
Reorganization, it will be able to obtain a 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. Accordingly, 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. The absence of an active and
liquid trading market for the Common Stock could affect the price and liquidity
of the Common Stock. At March 31, 1997, there were 3,065,489 shares of Bank
Common Stock outstanding, including 1,406,004 Public Bank Shares, which were
held of record by 1,371 shareholders. Since January 6, 1995, the Bank Common
Stock has traded on the Nasdaq National Market under the symbol "FSNJ." Upon
consummation of the Conversion and Reorganization, outstanding shares of Bank
Common Stock will no longer be traded and will be exchanged for shares of
Company Common Stock pursuant to the Exchange Ratio.
The following table sets forth the high and low trading prices of the
Bank's Common Stock subsequent to the completion of the 1995 MHC Reorganization,
together with the cash dividends declared during the periods indicated.
FISCAL YEAR ENDING CASH DIVIDENDS
MARCH 31, 1995 HIGH LOW DECLARED(1)
- ------------------- ------ ------ --------------
Fourth Quarter ..................... $11.38 $10.00(2) $.125
Fiscal Year Ending
March 31, 1996
- -------------------
First Quarter ...................... $13.75 $11.00 $.125
Second Quarter ..................... 16.75 13.00 .125
Third Quarter ...................... 19.50 16.75 .125
Fourth Quarter ..................... 17.00 14.25 .125
FISCAL YEAR ENDING
MARCH 31, 1997
- -------------------
First Quarter ...................... $15.25 $13.75 $.125
Second Quarter ..................... 16.00 14.00 .125
Third Quarter ...................... 23.00 15.25 .125
Fourth Quarter ..................... 24.50 21.00 .125
FISCAL YEAR ENDING
MARCH 31, 1998
- -------------------
First Quarter ...................... $27.00 $23.25 $.125
- ----------
(1) The Mutual Holding Company has waived receipt of all dividends declared by
the Bank. The aggregate amount of all dividends waived by the Mutual
Holding Company as of March 31, 1997 was $1.9 million.
(2) Represents the initial offering price in the Bank's 1995 MHC
Reorganization.
28
<PAGE>
<TABLE>
<CAPTION>
CAPITALIZATION
The following table presents the unaudited historical consolidated capitalization of the Bank at March 31, 1997, and the
pro forma consolidated capitalization of the Company after giving effect to the Conversion and Reorganization, based upon the
sale of the number of shares indicated in the table and the other assumptions set forth under "Pro Forma Data."
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
------------------------------------------------------------------
4,870,000
3,130,000 3,682,000 4,234,000 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM OF
OF OF OF ESTIMATED
BANK ESTIMATED ESTIMATED ESTIMATED PRICE
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE)(1)
---------- ------------ ------------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposit accounts(2) ..................................... $444,139 $444,139 $444,139 $444,139 $444,139
Borrowed funds .......................................... 75,000 75,000 75,000 75,000 75,000
Debt in connection with acquisition
of shares of Common Stock by ESOP(3) .................. 598 598 598 598 598
-------- -------- -------- -------- --------
Total deposit accounts and borrowed funds ............... $519,737 $519,737 $519,737 $519,737 $519,737
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000
shares authorized; none to be issued .................. $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 22,000,000 shares
authorized; shares to be issued as reflected(4) ....... 307 58 68 78 90
Additional paid-in capital(5)(6) ........................ 12,426 42,464 47,873 53,281 59,512
Retained earnings(6) .................................... 36,322 36,522 36,522 36,522 36,522
Less:
Unearned Common Stock acquired by the
1995 ESOP(3) ........................................ (598) (598) (598) (598) (598)
Unearned Common Stock held by the 1995
Recognition and Retention Plan ...................... (378) (378) (378) (378) (378)
Common Stock to be acquired by the ESOP(7) ............ -- (2,504) (2,946) (3,387) (3,896)
Common Stock to be acquired by the Stock
Programs(8) ......................................... -- (1,252) (1,473) (1,694) (1,948)
-------- -------- -------- -------- --------
Total stockholders' equity .............................. $ 48,079 $ 74,312 $ 79,068 $ 83,824 $ 89,304
======== ======== ======== ======== ========
- ----------------
<FN>
(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 and Reorganization.
Such withdrawals would reduce pro forma deposits by the amount of such withdrawals.
(3) Assumes that the existing loan to the ESOP remains outstanding.
(4) Assumes (i) that the 1,406,004 Public Bank Shares outstanding at March 31, 1997 are converted into 2,650,318, 3,118,517,
3,585,310 and 4,123,810 Exchange Shares at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price
Range, respectively, and (ii) that no fractional shares of Exchange Shares will be issued by the Company. No effect has
been given to the issuance of additional shares of Common Stock pursuant to existing and proposed stock option plans. See
"Pro Forma Data," "Management of the Bank--Benefit Plans." Reflects par value of $.10 per share for the Bank's common
stock, and par value of $.01 per share for the Company's Common Stock.
(5) No effect has been given to the issuance of additional shares of Common Stock pursuant to the Company's Stock Option Plans
intended to be adopted by the Company and presented for approval of stockholders at a meeting of stockholders following the
Conversion and Reorganization. If approved by the stockholders of the Company, an amount equal to 10% of the shares of
Conversion Stock issued in the Conversion and Reorganization 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 3 to the table under "Pro Forma Data" and "Management of the Bank--New Benefits Resulting from the Conversion and
Reorganization--Stock Option Plans."
(6) The pro forma retained earnings include $200,000 of assets from the Mutual Holding Company. The pro forma additional
paid-in capital and retained earnings reflect a restriction of the original retained earnings of the Bank prior to the MHC
Reorganization. The retained earnings of the Bank will be substantially restricted after the Conversion and Reorganization
by virtue of the liquidation account to be established in connection with the Conversion and Reorganization. See "The
Conversion and Reorganization--Liquidation Rights" and "Regulation--Federal Regulation of Savings Institutions--Limitations
on Capital Distributions."
(7) Assumes that 8% of the aggregate of the Conversion Stock issued in the Conversion and Reorganization 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--Benefit Plans--Employee Stock
Ownership Plan and Trust."
(8) Assumes that, subsequent to the Conversion and Reorganization, an amount equal to 4% of the shares of Conversion Stock
issued in the Conversion and Reorganization is purchased by the Stock Programs 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 and Reorganization.
See "Risk Factors--Possible Dilutive Effect of Stock Programs and Stock Options," Footnote 2 to the table under "Pro Forma
Data" and "Management of the Bank--New Benefits Resulting from the Conversion and Reorganization--Stock Programs."
</FN>
</TABLE>
29
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion and Reorganization is completed. However, net
proceeds are currently estimated to be between $29.8 million and $40.6 million
(or $46.9 million in the event the Estimated Price Range is increased by 15%)
based upon the following assumptions: (i) 100% of the shares of Conversion Stock
will be sold in the Subscription Offering to Eligible Account Holders; (ii)
directors, officers and employees of the Bank and members of their immediate
families (collectively, "Insiders") will purchase an aggregate of $1.1 million
of Common Stock; (iii) Sandler O'Neill will receive a fee equal to 2.0% of the
aggregate Purchase Price of shares sold in the Subscription Offering and in the
Community Offering, excluding shares purchased by directors, officers, employees
and any immediate family member thereof and the ESOP for which Sandler O'Neill
will not receive a fee; and (iv) Conversion and Reorganization expenses,
excluding the marketing fees paid to Sandler O'Neill, will be approximately
$945,000. Actual expenses may vary from those estimated.
Pro forma consolidated net income/(loss) of the Company for the year ended
March 31, 1997, has been calculated as if the Conversion Stock had been sold
(and the Exchange Shares issued) at the beginning of the respective periods and
the net proceeds had been invested at 6.02%, the one-year Treasury note rate at
March 31, 1997. The Treasury yield was used on the reinvestment of proceeds
because it more appropriately reflects a market rate of return than the
arithmetic average of the average yield of the Bank's interest-earning assets
and cost of deposits, which was 5.94% at March 31, 1997. The table below does
not reflect the effect of withdrawals from deposit accounts for the purchase of
Conversion Stock or the effect of any possible use of the net proceeds. The pro
forma after-tax yield for the Company and the Bank is assumed to be 3.79% for
the year ended March 31, 1997 based on an effective tax rate of 37.0%.
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.
Pro forma consolidated net income of the Company for the year ending March
31, 1997 includes the SAIF Special Assessment, a non-recurring loss on the sale
of securities from the available for sale portfolio and a one-time employee
benefit provision. A net income adjustment of $5.6 million for these events
would result in net earnings of $3.1 million, $3.3 million, $3.4 million and
$3.6 million; net earnings per share of $0.58, $0.51, $0.46 and $0.43; and an
offering price to pro forma net earnings of 17.24x, 19.61x, 21.74x and 23.26x at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively.
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. 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 March 31, 1997 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 and
Reorganization. The tables below give effect to the Stock Programs, which are
expected to be adopted by the Company following the Conversion and
Reorganization and presented to stockholders for approval at a meeting of
stockholders. See Footnote 2 to the table and "Management of the Bank--New
Benefits Resulting from the Conversion and Reorganization--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, in the event of
liquidation of the Bank, to the tax effect of the bad debt reserve and other
factors. See Footnote 3 to the table below, "The Conversion and
Reorganization--Liquidation Rights" and "Management of the Bank--New Benefits
Resulting from the Conversion and Reorganization--Stock Option Plans."
30
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31, 1997
----------------------------------------------------------------
3,130,000 3,682,000 4,234,000 4,870,000
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00 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)(5)
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds .................................................. $31,300 $36,820 $42,340 $48,700
Less: Offering expenses and commissions ......................... (1,511) (1,612) (1,714) (1,831)
------- ------- ------- -------
Estimated net proceeds .......................................... 29,780 35,208 40,626 46,869
Less: Common Stock purchased by ESOP ............................ (2,504) (2,946) (3,387) (3,896)
Common Stock purchased by Stock Programs .................. (1,252) (1,473) (1,694) (1,948)
------- ------- ------- -------
Estimated net proceeds, as adjusted ............................ $26,033 $30,789 $35,545 $41,025
======= ======= ======= =======
Consolidated net earnings:
Historical ..................................................... $(3,215) $(3,215) $(3,215) $(3,215)
Pro forma earnings on net proceeds, as adjusted ................ 987 1,167 1,347 1,555
Less: Pro forma ESOP adjustment(1) ............................. (105) (124) (142) (164)
Pro forma Stock Programs adjustment(2) ................... (158) (186) (213) (245)
------- ------- ------- -------
Pro forma net earnings ........................................ $(2,491) $(2,358) $(2,233) $(2,069)
======= ======= ======= =======
Per share net earnings (loss):
Historical ..................................................... $ (0.60) $ (0.51) $ (0.44) $ (0.38)
Pro forma earnings (loss) on net proceeds, as adjusted ......... 0.18 0.18 0.18 0.19
Less: Pro forma ESOP adjustment(1) ............................. (0.02) (0.02) (0.02) (0.02)
Pro forma Stock Programs adjustment(2) ................... (0.03) (0.03) (0.03) (0.03)
------- ------- ------- -------
Pro forma net earnings (loss) per share ....................... $ (0.47) $ (0.38) $ (0.31) $ (0.24)
======= ======= ======= =======
Stockholders' equity:
Historical ..................................................... $48,079 $48,079 $48,079 $48,079
Estimated net proceeds ......................................... 29,789 35,208 40,626 46,869
Plus: Assets consolidated from MHC ............................. 200 200 200 200
Less: Common Stock acquired by ESOP(1) ......................... (2,504) (2,946) (3,387) (3,896)
Common Stock acquired by Stock Programs(2) ............... (1,252) (1,473) (1,694) (1,948)
------- ------- ------- -------
Pro forma stockholders' equity(2)(3)(4) ....................... $74,312 $79,068 $83,824 $89,304
======= ======= ======= =======
Stockholders' equity per share:
Historical ..................................................... $ 8.32 $ 7.07 $ 6.15 $ 5.35
Estimated net proceeds ......................................... 5.15 5.18 5.20 5.21
Plus: Assets consolidated from MHC ............................. 0.03 0.03 0.03 0.02
Less: Common Stock acquired by ESOP(1) ......................... (0.43) (0.43) (0.43) (0.43)
Common Stock acquired by Stock Programs(2) ............... (0.22) (0.22) (0.22) (0.22)
------- ------- ------- -------
Pro forma stockholders' equity per
share(2)(3)(4) ............................................... $ 12.86 $ 11.63 $ 10.73 $ 9.93
======= ======= ======= =======
Offering price as a percentage of pro forma
stockholders' equity per share ................................. 77.82% 85.98% 93.20% 100.70%
Offering price to pro forma net earnings (loss)
per share ...................................................... N/M N/M N/M N/M
(footnotes continued on next page)
</TABLE>
31
<PAGE>
- ----------
(1) It is assumed that 8% of the shares of Conversion Stock issued in the
Conversion and Reorganization 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 to be 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 15 equal annual installments of
principal, with an assumed interest rate at 8.50%. 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 March 31,
1997, and was made at the end of the period; (ii) that 16,693, 19,637,
22,581 and 25,973 shares at the minimum, midpoint, maximum and 15% above
the maximum of the range, respectively, were committed to be released
during the year ended March 31, 1997, at an average fair value of $10.00
per share in accordance with the American Institute of Certified Public
Accountants ("AICPA") 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--Benefit Plans--Employee Stock Ownership Plan and Trust."
(2) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and Reorganization 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 Conversion Stock issued in the
Conversion and Reorganization, or 125,200, 147,280, 169,360 and 194,800
shares of Conversion 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 3.9% and pro forma net earnings per share would be $(0.44),
$(0.36), $(0.29) and $(0.24) at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, and pro forma stockholders'
equity per share would be $12.36, $11.18, $10.31 and $9.55 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--New Benefits
Resulting from the Conversion and Reorganization--Stock Programs."
(3) 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 and Reorganization. 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 Conversion Stock issued in the Conversion and Reorganization or
313,000, 368,200, 423,400 and 487,000 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 $10.00 per
share, the pro forma net earnings per share would be $(0.38), $(0.30),
$(0.24) and $(0.19) respectively, and the pro forma stockholders' equity
per share would be $11.69, 10.57, $9.75 and $9.03, respectively. See
"Management of the Bank--New Benefits Resulting from the Conversion and
Reorganization--Stock Option Plans."
(4) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion and Reorganization. See "Dividend Policy,"
"The Conversion and Reorganization--Liquidation Rights" and
"Regulation--Federal Regulation of Savings Institutions--Limitation on
Capital Distributions."
(5) 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.
32
<PAGE>
<TABLE>
FIRST SAVINGS BANK OF NEW JERSEY, SLA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations of the Bank and subsidiaries for the years ended
March 31, 1997 and 1996, and the ten months ended March 31, 1995 have been audited by KPMG Peat Marwick LLP
("Peat Marwick"), independent certified public accountants, whose report thereon is included elsewhere in this
Prospectus. These Consolidated Statements of Operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Prospectus.
<CAPTION>
YEARS ENDED TEN MONTHS
MARCH 31, ENDED
--------------------- MARCH 31,
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans ............................................................ $19,944 $19,196 $14,935
Securities available for sale .................................... 19,147 14,032 8,998
Securities held to maturity ...................................... 1,240 3,827 4,133
Deposits with financial institutions ............................. 795 254 365
------- ------- -------
Total interest and dividend income ............................. 41,126 37,309 28,431
------- ------- -------
INTEREST EXPENSE:
Interest on deposits (note 9) .................................... 20,814 20,760 15,628
Interest on borrowings ........................................... 6,655 3,082 203
------- ------- -------
Total interest expense ......................................... 27,469 23,842 15,831
------- ------- -------
Net interest income ............................................ 13,657 13,467 12,600
Provision for loan losses (note 6) ............................... 320 450 350
------- ------- -------
Net interest income after provision for loan losses ............ 13,337 13,017 12,250
------- ------- -------
NON-INTEREST INCOME (LOSS):
Loan fees and service charges .................................... 294 307 285
Loss on sale of securities available for sale, net (note 4) ...... (2,878) (2,217) (547)
Loss on sales of real estate acquired in settlement of loans ..... (92) (7) --
Loss from real estate operations, net ............................ (26) (25) (62)
Other ............................................................ 906 729 452
------- ------- -------
Total non-interest income (loss) ............................... (1,796) (1,213) 128
------- ------- -------
OPERATING EXPENSES:
Compensation and employee benefits (notes 12 and 13) ............. 7,184 5,821 4,674
Occupancy ........................................................ 773 802 630
Equipment ........................................................ 1,135 1,092 858
Advertising and promotion ........................................ 69 176 123
Federal insurance premiums ....................................... 974 1,163 990
SAIF assessment (note 17) ........................................ 2,895 -- --
Other ............................................................ 1,572 1,761 1,676
------- ------- -------
Total operating expenses ....................................... 14,602 10,815 8,951
------- ------- -------
Income (loss) before income tax expense .......................... (3,061) 989 3,427
Income tax expense (note 11) ..................................... 154 374 1,236
------- ------- -------
Net loss/income .................................................. $(3,215) $ 615 $ 2,191
======= ====== =======
Earnings (loss) per share ........................................ $ (1.07) $ 0.21 $ --
======= ====== =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The earnings of the Bank depend primarily on its level of net interest and
dividend income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of mortgage and consumer loans,
mortgage-backed securities, and U.S. Government and agency obligations, and the
interest paid on interest-bearing liabilities, which consist of savings deposits
and borrowings from the FHLB. Net interest income is a function of the Bank's
interest rate spread, which is the difference between the average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets as compared to interest-bearing liabilities. The Bank's earnings are also
affected by its level of noninterest income, including primarily loan fees and
service charges, gains (losses) on sales of securities available for sale, sales
of real estate acquired in settlement of loans, income from real estate
operations and by its level of noninterest expense, including primarily
compensation and employee benefits, occupancy, equipment, SAIF deposit premiums,
and other operating expenses. Earnings of the Bank are also affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities, which events are beyond the control of the Bank.
Following the Bank's initial public offering in January 1995, the Board of
Directors determined to change the Bank's fiscal year from May 31 to March 31
commencing with the ten month transition period ended March 31, 1995. Therefore,
for comparative purposes, the information presented for the period ended March
31, 1995, is based upon a ten-month period unless otherwise noted.
BUSINESS STRATEGY
The Bank's business strategy has been to operate as a well-capitalized and
independent community-oriented savings institution dedicated to providing
quality customer service. Generally, the Bank has sought to implement this
strategy by maintaining a substantial part of its assets in loans secured by
one- to four-family residential real estate located in the Bank's market area,
home equity loans, mortgage-backed securities, and U.S. Government and agency
obligations. Specifically, the Bank's business strategy has incorporated the
following elements: (1) operating as a community-oriented financial institution,
maintaining a strong core customer base by providing quality service and
offering customers the access to senior management and services that a
community-based institution can offer; (2) emphasizing investment in residential
mortgage loans, mortgage-backed securities and other securities issued or
guaranteed by the U.S. Government or agencies thereof; (3) maintaining capital
in excess of regulatory requirements and growing only to the extent that
adequate capital levels can be maintained; and (4) striving to increase its
retail deposit base.
While management intends to continue emphasizing these objectives, it also
plans to modify the existing operating strategy in order to achieve greater
growth and profitability. Specifically, the Bank intends to: (i) diversify the
products and services offered to customers to possibly include commercial loans
and commercial deposit accounts, among other products; and (ii) expand the
Bank's market area through its branch network and through its lending and
investment services. By seeking to broaden the range of its products and
services offered, the Bank believes it will offset the declining margins in the
market for one- to four-family loans and the reduced deposit base and loan
demand that it has experienced in recent years.
Management believes that the diversification of the Bank's loan products
may expose it 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
conditions at that time, increase the level of its provision for loan losses as
well as its provision for losses on real estate owned ("REO") over the
provisions taken in the Bank's recent fiscal years.
Highlights of the Bank's business strategy are as follows:
Community-Oriented Institution. The Bank is the largest savings
institution headquartered in Bayonne. The Bank is committed to meeting the
financial needs of the community in which it operates. Management
34
<PAGE>
believes that the Bank is large enough to provide a full range of personal
and business financial services, and yet is small enough to be able to
provide such services in a personalized and efficient manner. Management
believes that the Bank can be more effective in servicing its customers
than many of its nonlocal competitors because of the Bank's ability to
quickly and effectively provide senior management responses to customer
needs and inquiries. The Bank intends to maintain its community orientation
by continuing to emphasize traditional deposit and loan products, primarily
single-family residential mortgages.
Emphasis on Residential Mortgage Lending. Since inception, the Bank
has been a portfolio lender, and has not sold loans in the secondary market
in the 1990s. The Bank has emphasized and will continue to emphasize the
origination of mortgage loans secured by one- to four-family residential
properties located in Bayonne and the rest of Hudson County. Such mortgage
loans generally have less credit risk than loans collateralized by
multifamily or commercial real estate. At March 31, 1997, one- to
four-family residential mortgage loans totalled $197.8 million, or 82.2%,
of the Bank's loan portfolio. Generally, the yield on mortgage loans
originated by the Bank is greater than that of mortgage securities
purchased by the Bank. In the future, the Bank is considering expanding its
lending program to include commercial loans in an effort to satisfy a
perceived need within its market area and increase its loan portfolio. To
accomplish this, the Bank may hire additional personnel experienced in
commercial lending and may focus marketing efforts on smaller businesses
operating in the Bank's market areas.
Liquid Investments. Where available funds exceed mortgage loan demand,
the Bank maintains a substantial portfolio of liquid investments with low
credit risk. At March 31, 1997, $306.2 million, or 53.1%, of the Bank's
total assets consisted of securities issued or guaranteed by the U.S.
Government or an agency or sponsored-corporation of the U.S. Government or
mortgage securities collateralized by such U.S. Government-related
instruments.
Retail Deposit Base. The Bank has had a relatively strong retail
deposit base drawn from its offices located in Bayonne, New Jersey. The
Bank holds approximately 40% of all deposits held by branches of commercial
banks, credit unions, and savings associations located in Bayonne, and
approximately 6% of such deposits in Hudson County. At March 31, 1997,
43.4% of the Bank's deposit base of $444.1 million consisted of core
deposits, which included passbook accounts, NOW accounts, money market
deposit accounts, noninterest demand accounts, and club accounts. Core
deposits are considered to be a more stable and lower cost source of funds
than certificates of deposit or outside borrowings. The Bank has
experienced a 7.8% decrease in deposits over the last five years due to a
declining population in Bayonne and a shift of funds into mutual funds and
other markets as a result of relatively lower interest rates. The Bank will
continue to emphasize retail deposits by providing quality customer
service, offering competitive rates on deposit accounts, and providing
depositors with a full range of accounts. The Bank also plans to introduce
commercial deposit accounts, including business checking, in an effort to
increase its customer base.
Expanding Market Area. Management is also seeking to expand the Bank's
market area. Presently, a significant portion of the Bank's lending and
deposit activities are concentrated within the City of Bayonne. While
management will continue to emphasize the delivery of products and services
to Bayonne residents, it will seek to broaden its lending area into
surrounding communities. The Bank may hire additional loan personnel to
increase its lending activities outside of Bayonne. In addition, the Bank
intends to explore expanding its branch network into surrounding
communities within the next few years in an effort to increase its retail
deposit base and to facilitate increased lending. The Bank does not intend
to expand its market outside the State of New Jersey.
MANAGEMENT OF INTEREST RATE RISK
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
35
<PAGE>
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.
The Bank's deposit accounts typically react more quickly to changes in
market interest rates than interest-earning assets such as mortgage loans,
because of the relatively shorter maturities of deposits. When interest rates
are rising, interest expense will increase more rapidly than interest income if
a higher volume of interest-bearing liabilities than interest-earning assets
reprice to higher interest rates. In a falling interest rate environment,
interest income will increase more rapidly than interest expense if a higher
volume of interest-bearing liabilities than interest-earning assets reprice to
lower interest rates.
Management seeks to manage the Bank's interest rate risk exposure by
monitoring the levels of interest rate sensitive assets and liabilities, and has
sought to improve its interest rate spread. To reduce the potential volatility
of the Bank's earnings in a changing interest rate environment, the Bank has
invested in mortgage securities that have adjustable rates and/or relatively
short expected terms. At March 31, 1997, $73.9 million, or 23.2%, of the Bank's
$318.0 million of investments consisted of mortgage securities with adjustable
interest rates. The Bank has also sought to reduce the term of its
interest-earning assets by offering fixed-rate one- to four-family mortgage
loans with terms of 15 years or less. Such loans constituted $9.4 million, or
32.8%, of the Bank's total originations of one- to four-family mortgage loans
during the year ended March 31, 1997. The Bank also originates adjustable-rate
one- to four-family mortgage loans. Of the Bank's one- to four-family mortgage
loans originated during the year ended March 31, 1997, $12.8 million, or 44.9%,
had adjustable rates of interest. The Bank also maintains relatively high levels
of liquidity, which assets may be reinvested more quickly in response to changes
in market interest rates. In addition, the Bank manages its interest-bearing
liabilities by offering competitive interest rates on deposit accounts and
pricing certificates of deposit to provide customers with incentives to choose
certificates of deposit with longer terms. In the current interest rate
environment, however, longer-term certificates of deposit tend to be less
attractive to depositors.
In a rising interest rate environment the Bank's net interest income would
be adversely affected as liabilities would reprice to higher market rates more
quickly than assets. This effect would be compounded because the prepayment
speeds of the Bank's long-term fixed-rate assets would decrease in a rising
interest rate environment. Although the Bank could reduce its exposure to
interest rate risk by investing a larger portion of its assets in short-term
securities and adjustable-rate mortgage securities and by pursuing other
strategies such as hedging and interest rate swap programs, management believes
that the benefits of such a strategy would be outweighed by the cost of such
programs, as well as by the loss of earnings from concentrating on short-term
and adjustable-rate investments, which typically offer lower yields.
The Bank has an Asset-Liability Management Committee which meets and
reports monthly to the Board of Directors. The primary responsibility of the
Asset-Liability Committee is to determine and monitor the level of interest rate
risk that the Bank determines to be acceptable, and establish strategies and
procedures to keep that risk within its specified limits. To that end, the
Committee reviews and approves pricing and fee structures for all asset and
liability products, and analyzes cash flow projections to calculate their
collective impact on growth, capital, net interest income and market value of
portfolio equity. The Committee regularly reviews the results of operations and
makes recommendations to the Board of Directors, based on such analyses, to
enhance both the Bank's interest rate risk position as well as its
profitability.
Net Portfolio Value. In 1993, the OTS adopted a rule which would
incorporate an interest rate risk ("IRR") component into its risk-based capital
rules. The IRR component is a dollar amount that would be deducted from
regulatory capital for the purpose of calculating an institution's risk-based
capital requirement. IRR is measured in terms of the sensitivity of the
institution's NPV to changes in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts. An institution's IRR would be measured as the
change to its NPV as a result of a hypothetical 200 basis point instantaneous
change in market interest rates. Under the adopted OTS rule, a resultant change
in NPV of more than 2% of the estimated market value of an institution's assets
would require the institution to deduct from its capital 50% of that excess
change. In March 1995, the OTS announced that application of the revised rule
was being suspended until further notice.
36
<PAGE>
The following table presents the Bank's NPV as of March 31, 1997, as
calculated by the OTS, based on information provided to the OTS by the Bank.
NPV AS % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ---------------------------------- -----------------------
IN BASIS POINTS % NPV BASIS POINT
(RATE SHOCK) AMOUNT $ CHANGE CHANGE RATIO CHANGE
- --------------- ------- -------- ------ ------- ------------
(DOLLARS IN THOUSANDS)
400 $17,567 $(40,678) (69.8)% 3.28% (663)bp
300 27,615 (30,630) (52.6) 5.04 (488)
200 37,964 (20,281) (34.8) 6.77 (315)
100 48,541 (9,704) (16.7) 8.45 (147)
Static 58,245 -- -- 9.92 --
(100) 65,255 7,010 12.0 10.92 101
(200) 69,434 11,189 19.2 11.48 156
(300) 74,740 16,495 28.3 12.18 227
(400) 80,530 22,285 38.3 12.94 302
Based upon the above calculations, the Bank believes that it would have
been in compliance with the risk-based capital requirements of the regulations,
as of March 31, 1997, if such regulation had been effective as of such date.
Based upon such calculations, a 200 basis point increase in interest rates would
result in a 34.8% reduction in the value of the Bank's discounted cash flows,
and the Bank would have been required to deduct $20.3 million from total capital
for purposes of calculating the Bank's risk-based capital. As of March 31, 1997,
without taking into effect the IRR component, the Bank had $55.0 million of
risk-based capital, which exceeded the OTS minimum requirements by $37.6
million.
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 on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them.
37
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances.
YEARS ENDED MARCH 31,
-------------------------------------------------------------------
AT MARCH 31, 1997 1997 1996
-------------------- ------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE
ANNUALIZED ANNUALIZED ANNUALIZED
ACTUAL YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
------- ---------- ------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1) .................. $207,262 8.36% $205,744 $17,482 8.50% $197,206 $17,203 8.72%
Consumer and other loans ........... 28,362 8.57 29,227 2,462 8.42 23,614 1,993 8.44
Mortgage-backed securities
available for sale ................ 222,979 6.64 213,222 12,422 5.83 104,186 5,674 5.45
Mutual funds available
for sale .......................... -- -- 36,557 2,350 6.43 67,775 4,351 6.42
Other investments available
for sale(2) ....................... 67,635 5.34 83,311 4,375 5.25 75,180 4,007 5.33
Investment securities and
overnight deposits with
financial institutions(3) ......... 27,381 7.77 31,199 2,035 6.52 75,889 4,082 5.38
-------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets .......................... 553,618 7.28 599,260 41,126 6.86 543,850 37,310 6.86
Noninterest-earning assets .......... 23,386 20,846 21,031
-------- -------- --------
Total assets ..................... $577,004 $620,106 $564,881
======== ======== ========
Interest-bearing liabilities:
Deposits(4) ........................ $444,139 4.69 $443,726 20,814 4.69 $446,300 20,761 4.65
Advances from FHLB and
other borrowings .................. 75,598 5.77 120,557 6,655 5.52 61,410 3,082 5.02
-------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities ..................... 519,737 4.85 564,283 27,469 4.87 507,710 23,843 4.70
Noninterest-bearing
liabilities ........................ 9,188 6,838 5,861
-------- -------- --------
Total liabilities ................ 528,925 571,121 513,571
Stockholders' equity ................ 48,079 48,985 51,310
-------- -------- --------
Total liabilities and
stockholders' equity ............ $577,004 $620,106 $564,881
======== ======== ========
Net interest income ................. $13,657 $13,467
Net interest rate spread(5) ......... 2.43% 1.99% 2.16%
==== ==== ====
Net interest margin(6) .............. N/A 2.28% 2.48%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities ........................ 1.07x 1.06x 1.07x
==== ==== ====
<CAPTION>
TEN MONTHS ENDED MARCH 31, 1995
--------------------------------
AVERAGE
ANNUALIZED
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1) .................. $181,717 $13,498 8.91%
Consumer and other loans ........... 20,370 1,437 8.47
Mortgage-backed securities
available for sale ................ 52,997 2,427 5.50
Mutual funds available
for sale .......................... 71,694 3,625 6.07
Other investments available
for sale(2) ....................... 63,129 2,946 5.60
Investment securities and
overnight deposits with
financial institutions(3) ......... 95,269 4,498 5.67
-------- ------- ----
Total interest-earning
assets .......................... 485,176 28,431 7.03
Noninterest-earning assets .......... 24,507
--------
Total assets ..................... $509,683
========
Interest-bearing liabilities:
Deposits(4) ........................ $456,899 15,628 4.10
Advances from FHLB and
other borrowings .................. 5,170 202 4.69
-------- ------- ----
Total interest-bearing
liabilities ..................... 462,069 15,830 4.11
Noninterest-bearing
liabilities ........................ 10,389
--------
Total liabilities ................ 472,458
Stockholders' equity ................ 37,225
--------
Total liabilities and
stockholders' equity ............ $509,683
========
Net interest income ................. $12,601
=======
Net interest rate spread(5) ......... 2.92%
====
Net interest margin(6) .............. 3.12%
====
Ratio of average interest-earning
assets to average interest-bearing
liabilities ........................ 1.05x
====
</TABLE>
- ---------------
(1) Includes one- to four-family residential real estate loans and commercial
real estate loans.
(2) Includes U.S. Government and agency obligations.
(3) Includes primarily short-term mutual funds, interest-earning deposits in
other institutions, FHLB stock, and municipal and other agency obligations.
(4) At March 31, 1997, 1996 and 1995, included noninterest-bearing demand
accounts of $11.3 million, $8.3 million and $5.2 million, respectively.
(5) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
38
<PAGE>
RATE VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing the volume or amount of these assets and liabilities. The following
table represents 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 (change 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. 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. Changes for the ten months ended March
31, 1995 have been calculated based on annualized interest income and expenses.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
VS. YEAR ENDED VS. TEN MONTHS
MARCH 31, 1996 ENDED MARCH 31, 1995
---------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
--------------------- ---------------------
VOLUME RATE NET VOLUME RATE NET
-------- ------ ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans ............................ $ 725 $(446) $ 279 $ 1,356 $ (351) $ 1,005
Consumer and other loans .................. 474 (5) 469 275 (6) 269
Mortgage-backed securities
available for sale ....................... 6,326 422 6,748 2,789 (27) 2,762
Mutual funds available for sale ........... (2,008) 7 (2,001) (245) 246 1
Other investments available for sale ...... 429 (61) 368 649 (177) 472
Investment securities and overnight
deposits with financial institutions
and other ................................ (2,778) 731 (2,047) (1,050) (266) (1,316)
------- ----- ------- ------- ------- -------
Total .................................. 3,168 648 3,816 3,774 (581) 3,193
------- ----- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits .................................. (122) 175 53 (446) 2,453 2,007
Advances from FHLB
and other borrowings ..................... 3,238 335 3,573 2,823 17 2,840
------- ----- ------- ------- ------- -------
Total .................................. 3,116 510 3,626 2,377 2,470 4,847
------- ----- ------- ------- ------- -------
Net change in net interest income .......... $ 52 $ 138 $ 190 $ 1,397 $(3,051) $(1,654)
======= ===== ======= ======= ======= =======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND MARCH 31, 1996
Stockholders' equity decreased by $1.4 million to $48.1 million at March
31, 1997, compared to $49.5 million at March 31, 1996. The decrease in
stockholders' equity was primarily attributable to the loss from operations of
$3.2 million, caused by the $2.9 million one-time SAIF Special Assessment ($1.9
million after tax), the $1.8 million employee benefit provision ($1.1 million
after tax) and the $2.9 million loss on the sale of securities available for
sale. Net unrealized holding losses on securities available for sale decreased
by $2.0 million to $4.3 million at March 31, 1997. This decrease was due to the
realization of $2.9 million of securities losses which was partially offset by
the increase in net unrealized holding losses on the remaining portfolio
resulting from unfavorable market interest rates. At March 31, 1997, the Bank's
tangible, core and risk based capital ratios (excluding the allowance for
marketable debt and equity securities) were 8.99%, 8.99% and 25.31%,
respectively.
Total assets decreased by $74.9 million, or 11.5%, to $577.0 million at
March 31, 1997, from $651.9 million at March 31, 1996. Securities available for
sale at market value decreased by $92.1 million, or 24.1%, to $290.6 million at
March 31, 1997, compared to $382.7 million at March 31, 1996. This decrease was
primarily attributable to the sale of intermediate and adjustable rate mutual
funds totalling $71.5 million and U.S. Treasury securities totalling $25.0
million. Because of the Bank's substantial portfolio of securities available for
sale, stockholders' equity could experience substantial volatility during
periods of changing market interest rates. Loans receivable, net, increased by
$11.6 million, or 5.2%, to $235.6 million at March 31, 1997, compared to
39
<PAGE>
$224.0 million at March 31, 1996, primarily due to the Bank's active marketing
of adjustable-rate mortgages and equity line of credit products.
Total deposits decreased slightly by $1.3 million, or 0.3%, to $444.1
million at March 31, 1997 from $445.4 million at March 31, 1996, due primarily
to attrition caused by depositors seeking higher yields on certificates of
deposit. Total borrowings decreased by $75.7 million, or 50.0%, to $75.6 million
at March 31, 1997. The reduction in borrowings resulted from a portion of the
proceeds from the sale of available for sale securities being used to repay FHLB
reverse repurchase agreements totalling $60.0 million and advances outstanding
totalling $15.0 million.
COMPARISON OF OPERATING RESULTS OF THE YEARS ENDED MARCH 31, 1997 AND MARCH 31,
1996
General. The Bank experienced a loss from operations of $3.2 million for
the year ended March 31, 1997, compared to net income of $615,000 for the year
ended March 31, 1996. The loss in fiscal 1997 was primarily attributable to
three items. First, on September 30, 1996, the Bank paid a one-time special
assessment of $2.9 million ($1.9 million after tax) to recapitalize the SAIF.
Second, as part of the Bank's repositioning of its investment portfolio, it sold
mutual funds totalling $71.5 million and U.S. Treasury securities totalling
$25.0 million at a loss of $2.9 million during the year ended March 31, 1997.
The Bank does not anticipate any further significant sales of investment
securities. See "Risk Factors--Effects of Repositioning Investment Portfolio."
Third, the Bank provided an additional $1.8 million ($1.1 million after tax) in
employee benefit expense during the quarter ended March 31, 1997 to provide for
one-time retirement benefit payments for two executive officers under the Bank's
supplemental executive retirement agreements. Patrick F.X. Nilan, the President
and Chief Executive Officer of the Bank and the MHC, retired effective June 30,
1997. Mr. Patrick F.X. Nilan, who has served in various capacities with the Bank
since 1954, will remain as a Director and Chairman of the Board of the Bank and
will serve as a Director and Chairman of the Board of Bayonne Bancshares, Inc.
Mr. Patrick F.X. Nilan has been succeeded by his son, Michael Nilan, who
previously served as Vice President and Chief Operating Officer of the Bank.
Michael Nilan is also the President and Chief Executive Officer of Bayonne
Bancshares, Inc.
The Bank has maintained a Supplemental Executive Retirement Income-Deferred
Compensation Agreement ("SERP") on behalf of Mr. Patrick F.X. Nilan and certain
other executive officers to provide the executives, upon their retirement, with
benefits to which they would have been entitled under the First Savings Bank of
New Jersey Pension Plan ("Pension Plan") upon retirement, but for limitations
imposed on the Pension Plan by the Internal Revenue Code of 1986, as amended
(the "Code"). Pursuant to the terms of the SERP, benefits are payable upon
retirement either in equal monthly installments for life, with a minimum of 120
payments, or in a lump sum payment at the Bank's discretion. See "Management of
the Bank--Benefit Plans." Upon evaluation of the ongoing liability to fund the
SERP, the Bank determined to pay both Mr. Patrick F.X. Nilan and another
executive officer who retired in August 1996 their benefits due under the SERP
in a lump sum payment. The lump sum payments represent the present value of the
executives' accrued annual benefits under the SERP based on a current actuarial
valuation. The Bank has determined that paying Mr. Patrick F.X. Nilan and the
other retired executive in a lump sum will benefit the Bank over time by saving
the annual accruals that would otherwise be required to fund the SERP
agreements. For additional expenses to be incurred upon Mr. Patrick F.X. Nilan's
retirement on June 30, 1997, see "Management of the Bank--Director Compensation"
and "--Executive Compensation."
Interest and Dividend Income. Total interest and dividend income increased
by approximately $3.8 million, or 10.2%, to $41.1 million for the year ended
March 31, 1997, from $37.3 million for the year ended March 31, 1996. The
increase was primarily due to the increase in average balances of interest
earning assets to $599.3 million, compared to $543.9 million for the year ended
March 31, 1996. The average balance of loans increased $14.2 million, or 6.4%,
to $235.0 million for the year ended March 31, 1997, from $220.8 million for the
year ended March 31, 1996. That increase was partially offset by a decrease in
the average yield on mortgage loans of 22 basis points over the same periods, to
8.50% for fiscal 1997. The average balance of mortgage-backed securities
increased by $109.0 million to $213.2 million for the year ended March 31, 1997,
and the yield on mortgage-backed securities increased 38 basis points to 5.83%
for the year ended March 31, 1997, compared to 5.45% for the comparable period
in 1996.
Interest Expense. Interest expense increased by $3.7 million, to $27.5
million, for the year ended March 31, 1997, compared to $23.8 million for the
year ended March 31, 1996. The increase was related to interest expense on
borrowings which totalled $6.7 million for the year ended March 31, 1997,
compared to $3.1 million for the prior fiscal year. The increased interest
expense on borrowings reflects the increase on average borrowings for the year
ended March 31, 1997 to $120.6 million, compared to $61.4 million for the prior
fiscal year and the full year impact of
40
<PAGE>
the Bank's borrowings from the FHLB to fund a substantial amount of the $147.0
million of mortgage-backed securities purchased in December 1995.
Net Interest Income. Net interest income increased by $190,000, or 1.4%, to
$13.7 million for the year ended March 31, 1997, compared to $13.5 million for
the comparable period in 1996. The increase was primarily due to additional
income earned on a $55.4 million increase in average interest-earning assets,
which was partially offset by the 17 basis point increase in average cost of
interest-bearing liabilities to 4.87% from 4.70%, and the additional interest
expense on the $59.1 million in FHLB borrowings for the year ended March 31,
1997 compared to 1996.
Provision for Loan Losses. The Bank maintains an allowance for loan losses
based on management's periodic evaluation of known and inherent risks in the
loan portfolio, the Bank's past loan loss experience, adverse situations that
may affect the borrower's ability to repay loans, estimated value of the
underlying loan collateral, and current and expected economic conditions. The
Bank periodically reviews the loan portfolio and maintains the allowance for
loan losses at a balance considered adequate to provide for losses in the loan
portfolio. See "Business of the Bank--Lending Activities--Allowance for Loan
Losses."
For the year ended March 31, 1997, the Bank provided $320,000 for loan
losses compared to $450,000 for the prior fiscal year. The Bank periodically
reviews the loan portfolio and maintains the allowance for loan losses at a
level that is adequate to provide for loan losses and other known impairments in
the loan portfolio although there can be no assurance that such loan losses will
not exceed estimated amounts. Of the total provision, $200,000 was made in March
1997 as 12 mortgage loans to one borrower with outstanding balances of $1.4
million were placed on non-accrual status. This provision was considered prudent
based on discussions with the borrower and the inability to formulate a plan for
timely repayment of principal and interest. See Notes 1 and 6 of Notes to the
Consolidated Financial Statements for additional information on the allowance
for loan losses.
Non-Interest Income/(Loss). Non-interest income activities resulted in a
loss of $1.8 million for the year ended March 31, 1997, compared to a loss of
$1.2 million for the year ended March 31, 1996, representing a change of
$583,000 or 48.1%. Loss on the sale of securities available for sale increased
by $661,000, to $2.9 million for the year ended March 31, 1997, compared to $2.2
million for the year ended March 31, 1996, primarily due to the loss of $2.8
million on the sale of intermediate- and adjustable-rate mutual funds in fiscal
1997.
Operating Expenses. Total operating expenses increased by $3.8 million, or
35.0%, to $14.6 million for the year ended March 31, 1997, compared with $10.8
million for the year ended March 31, 1996. Compensation and employee benefits
expense increased by $1.4 million primarily due to the provision of $1.8 million
for the one-time payments to be made to two executive officers under the Bank's
terminated supplemental executive retirement agreements. Other operating
expenses increased by approximately $2.7 million as a result of the one-time
SAIF Special Assessment. Offsetting these increases were decreases in employee
salaries and related employee benefits of $388,000 and advertising expenses of
$107,000.
Income Taxes. Income tax expense was $154,000 for the year ending March 31,
1997, compared to $374,000 for the year ended March 31, 1996. The provision for
income taxes for fiscal 1997 resulted from the loss on the sale of mutual funds
not being available as a current deduction in computing income tax expense.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED MARCH 31, 1996 AND THE TEN
MONTHS ENDED MARCH 31, 1995
In February 1995, the Bank changed its fiscal year end to March 31 from
May 31. As a result of the change, certain of the results of operations herein
compare a ten month transition period ended March 31, 1995, with the 12 month
fiscal year ended March 31, 1996. The Bank had net income of $615,000 for the
year ended March 31, 1996. Net income totalled $2.2 million for the ten months
ended March 31, 1995.
Interest and Dividend Income. Total interest and dividend income increased
by $8.9 million, or 31.2%, to $37.3 million for the year ended March 31, 1996,
from $28.4 million for the ten months ended March 31, 1995. The increase was
primarily attributable to the comparison of a 12 month fiscal year ended March
31, 1996 to the ten month transitional period ended March 31, 1995, and a $58.7
million, or 12.1%, increase in the average balance of interest-earning assets
to $543.9 million for the year ended March 31, 1996, from $485.2 million for
the ten months ended March 31, 1995, partially offset by a decrease in the
average yield on the Bank's average interest-earning assets to 6.86%, from
7.03%. The decrease in average yield was due to generally lower market rates of
interest during the period.
41
<PAGE>
Interest income on loans increased by $4.3 million, or 28.9%, to $19.2
million for the year ended March 31, 1996, from $14.9 million for the ten months
ended March 31, 1995. Interest income on mortgage loans increased by $3.7
million, or 27.4%, to $17.2 million for the year ended March 31, 1996, from
$13.5 million for the ten months ended March 31, 1995. The increase in interest
income on mortgage loans was primarily because of the effect of a 12 month to
ten month period comparison, and a $15.5 million, or 8.5%, increase in the
average balance of mortgage loans to $197.2 million for the year ended March 31,
1996, from $181.7 million for the ten months ended March 31, 1995, partially
offset by a decrease in the average yield on mortgage loans to 8.72% from 8.91%.
The increase in average mortgage loans resulted from the Bank utilizing local
mortgage brokers to facilitate an increase in origination activity which more
than offset normal amortization and pay-off activity. Interest income on
consumer loans increased to $2.0 million, from $1.4 million as a result of the
effect of the longer fiscal year, and a $3.2 million increase in average
consumer loans, partially offset by a decrease in the average yield to 8.44%,
from 8.47%.
Interest and dividend income on securities available for sale increased by
$5.0 million, or 55.6%, to $14.0 million for the year ended March 31, 1996, from
$9.0 million for the ten months ended March 31, 1995. The increase was
principally attributable to the longer fiscal year and a substantial increase in
the average balance of securities available for sale, partially offset by a
decrease in the average yield on securities available for sale. Interest income
on mortgage-backed securities increased to $5.7 million from $2.4 million. This
increase resulted from the effect of the longer fiscal year and a $51.2 million
increase in average mortgage-backed securities to $104.2 million for the year
ended March 31, 1996, from $53.0 million for the ten months ended March 31,
1995, partially offset by a decrease in the average yield to 5.45%, from 5.50%.
The increase in the average balance of mortgage-backed securities resulted from
several purchases during the 12 months ended March 31, 1996 in order to increase
assets as part of the restructuring of the Bank's investment portfolio. Dividend
income on mutual funds available for sale increased by $726,000 to $4.4 million,
from $3.6 million. This increase resulted from the effect of the longer fiscal
year and an increase in the average yield to 6.42% from 6.07%, partially offset
by a decrease in the average balance to $67.8 million for the year ended March
31, 1996, from $71.7 million for the ten months ended March 31, 1995. Interest
income on other investments available for sale increased by $1.1 million, or
37.9%, to $4.0 million, from $2.9 million as a result of the longer fiscal year
and an increase in the average balance to $75.2 million, from $63.1 million,
partially offset by a decrease in the average yield of other investments
available for sale to 5.33% from 5.60%. Interest income on investment securities
and overnight deposits decreased by $416,000, or 9.2%, to $4.1 million, from
$4.5 million, as a result of a $19.4 million decrease in the average balance to
$75.9 million, from $95.3 million, along with a decrease in the average yield to
5.38%, from 5.67%, partially offset by the longer fiscal year.
Interest Expense. Total interest expense increased by $8.0 million, to
$23.8 million for the 12 months ended March 31, 1996, from $15.8 million for the
ten months ended March 31, 1995. This increase was primarily attributable to the
longer fiscal year in the prior period, a $45.6 million, or 9.9%, increase in
the average balance of interest-bearing liabilities to $507.7 million for the 12
months ended March 31, 1996, from $462.1 million for the ten months ended March
31, 1995, and an increase in the average yield on the cost of interest-bearing
liabilities to 4.70%, from 4.11%. The increase in average interest-bearing
liabilities resulted primarily from a $56.2 million increase in average FHLB
advances and other borrowings to $61.4 million, from $5.2 million, which was
used to fund the previously mentioned mortgage-backed securities purchase,
partially offset by a $10.6 million, or 2.3%, decrease in average savings
deposits to $446.3 million for the 12 months ended March 31, 1996, from $456.9
million for the ten months ended March 31, 1995.
Net Interest Income. Net interest income increased by $866,000, or 6.9%, to
$13.5 million for the 12 months ended March 31, 1996, from $12.6 million for the
ten months ended March 31, 1995. The primary reason for the increase in net
interest income was the effect of the longer fiscal year and a $58.7 million
increase in average interest-earning assets, partially offset by a $45.6 million
increase in average interest-bearing liabilities and a decrease in the Bank's
interest rate spread to 2.16% from 2.92%.
Provision for Loan Losses. The Bank's allowance for loan losses increased
during the year ended March 31, 1996 and the ten months ended March 31, 1995 due
primarily to a steady increase in the balance of the total loan portfolio. Based
on the increase in consumer and commercial loans and the inherent risk
associated with such loans, for the fiscal year ended March 31, 1996 and the ten
months ended March 31, 1995, the Bank provided $450,000 and $350,000,
respectively, for loan losses. Management believes that through its provisions
for loan losses, the Bank has maintained the allowance for loan losses at a
level that is adequate to provide for loan losses, although there can be no
assurance that such losses will not exceed estimated amounts.
42
<PAGE>
Non-Interest Income. Non-interest income items resulted in a loss of $1.2
million for the 12 months ended March 31, 1996, a change of $1.3 million from
the $128,000 of income reported for the ten month period ended March 31, 1995.
This change in non-interest income resulted primarily from losses on the sale of
securities available for sale, partially offset by increases in loan fees and
service charges and other income. The Bank's loss on securities available for
sale increased by $1.7 million to $2.2 million for the year ended March 31,
1996, from $547,000 for the ten months ended March 31, 1995. This loss was the
result of the sale of $25.0 million of FHLB dual index notes, previously
categorized as held to maturity. Changes in accounting standards permitted the
Bank to change the designation on securities held in its investment portfolio
from held to maturity to available for sale. Subsequent to the redesignation,
the Bank liquidated the FHLB dual index notes at a pre-tax loss of $2.5 million.
The Bank recorded a $22,000 increase in loan fees and service charges primarily
due to the longer fiscal year and the Bank's ability to increase its loan
originations. Other income increased to $729,000 for the year ended March 31,
1996, from $452,000 for the ten months ended March 31, 1995. This increase was
primarily attributable to the longer reporting period and an increase in fee
income generated by the Bank's investment subsidiary.
Operating Expenses. Total operating expenses increased by $1.8 million, to
$10.8 million for the year ended March 31, 1996, from $9.0 million for the ten
months ended March 31, 1995, primarily as a result of the longer reporting
period. Compensation and employee benefits expense increased by $1.1 million, to
$5.8 million for the year ended March 31, 1996, from $4.7 million for the ten
months ended March 31, 1995. The increase was a result of the longer reporting
period and the implementation of the various stock plans associated with the
public offering. Equipment expense increased by $234,000 as a result of the
longer reporting period and the installation of new computer equipment.
Income Taxes. Income tax expense was $374,000 for the year ended March 31,
1996, compared to $1.2 million for the ten months ended March 31, 1995. Income
tax provisions for fiscal 1996 and fiscal 1995 generally reflect the Bank's
pre-tax income at tax rates then in effect.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required ratio currently is 5.0%. The
Bank's liquidity averaged 34.8% for the year ended March 31, 1997. The Bank
adjusts its liquidity levels in order to meet funding needs of deposit outflows,
payment of real estate taxes on mortgage loans, repayment of borrowings and loan
commitments. The Bank also adjusts liquidity as appropriate to meet its asset
and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other investments, funds from sales of securities, and earnings
and funds provided from operations. While scheduled principal repayments on
loans and mortgage-backed securities are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions, and competition. In addition, the Bank from
time to time borrows funds from the FHLB pursuant to repurchase agreements or
advances from the FHLB. The Bank manages the pricing of its deposits to maintain
a desired deposit balance. In addition, the Bank invests in short-term interest-
and dividend-earning assets, which provide liquidity to meet lending
requirements. Assets qualifying for liquidity outstanding at March 31, 1997,
1996 and 1995 amounted to $209.0 million, $204.3 million and $127.8 million,
respectively. The Bank experienced a decrease in deposits recently as depositors
have sought higher yields on investment products not offered by the Bank. For
additional information about cash flows from the Bank's operating, financing and
investing activities, see Statements of Cash Flows included in the Consolidated
Financial Statements.
At March 31, 1997, the Bank had outstanding loan commitments of $3.6
million. This amount does not include $4.2 million of undisbursed lines of
credit on home equity loans, and the unfunded portion of loans in process.
Certificates of deposit scheduled to mature in less than one year at March 31,
1997, totalled $32.9 million. Based on prior experience, management believes
that a significant portion of such deposits will remain with the Bank. An
additional $45.0 million of ten-year certificates of deposit which yield 10% are
scheduled to mature by April 1998. Management does not expect to retain a
significant portion of these deposits since the Bank no longer offers comparable
interest rate accounts. Based on the Bank's high level of liquid assets and its
borrowing capacity, management believes it has sufficient liquid funds to fund
significant withdrawals from among these accounts.
43
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements of the Bank and notes thereto, presented elsewhere
herein, have been prepared in accordance with generally accepted accounting
principles ("GAAP"), which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Bank's operations.
Unlike most industrial companies, nearly all of the assets and liabilities of
the Bank are monetary. As a result, interest rates have a greater impact on the
Bank's performance than does the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In September 1996, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities ("SFAS 125")." This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and Extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it no
longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with a pledge of collateral. The Statement is effective for transfers and
servicing of financial assets and Extinguishments of liabilities occurring after
December 31, 1996, and should be applied prospectively. Earlier or retroactive
application of this Statement is not permitted. The Bank has not yet determined
the impact that this Statement will have on the Bank's consolidated financial
statements.
Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," ("SFAS 127") an amendment
of SFAS 125. SFAS 127 defers for one year the effective date of portions of SFAS
125 that address secured borrowings and collateral for all transactions.
Additionally, SFAS 127 defers for one year the effective date of transfers of
financial assets that are part of repurchase agreements, securities lending and
similar transactions. The adoption of SFAS 125 and SFAS 127 is not expected to
have a material effect on the Bank's financial position or results of
operations.
Earnings Per Share. SFAS No. 128, "Earnings Per Share" ("SFAS 128")
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. SFAS 128 replaces the presentation of primary EPS with a presentation of
basic EPS and requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures. SFAS 128
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS 128 is effective for financial statement issued for periods ending after
December 15, 1997, including interim periods, earlier application is not
permitted. SFAS 128 also requires restatement of all prior period EPS data
presented. SFAS 128 is not expected to have a material effect on the Bank's
consolidated financial statements.
BUSINESS OF THE BANK
GENERAL
The Bank has been, and intends to continues to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the community it serves. The Bank's principal business is to operate a
customer oriented savings bank. The Bank attracts retail deposits from the
general public in its primary market area and invests those funds primarily in
fixed-rate one- to four-family, owner-occupied mortgage loans, consumer loans
and investment and mortgage-backed securities. To a lesser extent, the Bank
invests in multifamily and commercial
44
<PAGE>
real estate loans. The Bank's principal sources of funds have been deposits,
principal and interest payments on loans and mortgage-backed securities, funds
from sales of investments and borrowings and reverse repurchase agreements.
Principal sources of income have been interest received from loans,
mortgage-backed securities and other investments. The Bank's principal expense
has been interest paid on deposits, borrowings, compensation and employee
benefits, and SAIF insurance premiums.
MARKET AREA AND COMPETITION
The Bank is headquartered in the City of Bayonne, which is located in
northeastern New Jersey. The Bank currently conducts business from its main
office and three branch offices, all of which are located in Bayonne. The Bank's
deposit gathering base is concentrated in Bayonne, although the Bank also
receives deposits from residents of contiguous communities in Hudson County. A
significant portion of the Bank's mortgage loans are collateralized by
properties located in Bayonne, although the Bank also originates loans
collateralized by real estate located in other parts of Hudson County, and, to a
much lesser extent, other parts of New Jersey. Bayonne is a mature, densely
populated city that has experienced a declining population and diminished loan
demand in recent years. To the extent the Bank's lending and deposit activities
are concentrated in Bayonne, it may be unable to experience any significant
growth. The Bank's business strategy includes expansion of both deposit and
lending activities into communities surrounding Bayonne in an effort to increase
the Bank's customer base. See "Management Discussion and Analysis of Financial
Condition and Results of Operations--Business Strategy."
The City of Bayonne had a population of approximately 60,000 as of March
31, 1996, and is located at the tip of Hudson County, which is surrounded by the
Newark Bay, the Kill Van Kull, and the Lower New York Bay. Bayonne is a short
distance from New York City, the Newark International Airport, major rail
transportation lines, and New Jersey's major highways. A significant number of
Bayonne residents work in and commute to New York City. The Military Ocean
Terminal is a substantial employer, and Maidenform Corporation is headquartered
in Bayonne. Bayonne's economy also includes small business and industrial plants
owned and operated by, among others, Best Foods, ICI, Global Terminal, and
Bayonne Nipple.
In the late 1980s and early 1990s 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 years. Nevertheless, despite the
modest economic improvement, certain demographics of the Bank's primary market
area have continued to adversely affect its ability to generate loans. This
market area primarily consists of mature, fully developed communities. The
Bayonne population is declining and new housing starts in the Bank's primary
market are lower than those in New Jersey generally. The population density in
the Bank's primary market area is higher than the average density for the State
of New Jersey, which may limit the Bank's ability to grow within its current
market area. In determining the estimated pro forma market value of the Bank and
the Company, the Bank's independent appraiser considers such market area
demographics as population, age of residents, number of households, education
and income levels, and the level of rental units and number of vacancies within
the market area.
As of March 31, 1997, the Bank was the largest savings institution
headquartered in Bayonne. The Bank encounters strong competition both in
attracting deposits and in originating real estate and other loans. Its most
direct competition for deposits has historically come from commercial and
savings banks, other savings associations and credit unions in its market area.
Competition for loans comes principally from such financial institutions, as
well as mortgage banking companies. The Bank expects continued strong
competition in the foreseeable future, including increased competition from
"super-regional" banks entering the market by purchasing banks and savings
banks. Many such institutions have greater financial and marketing resources
available to them than does the Bank. The Bank currently holds approximately 40%
of all deposits held by branches of commercial banks, credit unions, and savings
associations located in Bayonne, and approximately 6% of such deposits held in
Hudson County. The Bank competes for savings deposits by offering depositors a
high level of personal service and a wide range of competitively priced
financial services. In recent years, additional strong competition has come from
stock brokers, securities firms and mutual funds. The Bank competes for real
estate loans primarily through the interest rates and loan fees it charges and
through advertising.
45
<PAGE>
LENDING ACTIVITIES
Loan Portfolio. The principal components of the Bank's loan portfolio are
first mortgage loans secured by one- to four-family residential real estate and,
to a much lesser extent, home equity loans, multifamily real estate loans, and
passbook and other consumer loans. At March 31, 1997, the Bank's total loans
receivable amounted to $240.6 million, of which $197.8 million, or 82.2%, were
one- to four-family residential real estate mortgage loans, $27.7 million, or
11.5%, were home equity loans, and $14.3 million, or 6.0%, were multifamily and
commercial real estate loans. Consumer loans, other than home equity loans,
totalled $727,000, or 0.3%, of the Bank's loan portfolio.
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 MARCH 31,(4) AT MAY 31,
------------------------------------------------------ -------------------------------------
1997 1996 1995 1994 1993
----------------- ---------------- ---------------- ------------------ -----------------
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 loans:(1)
One- to four-family
residential ............ $197,819 82.2% $189,283 82.7% $190,685 85.4% $167,633 86.4% $201,044 88.3%
Multifamily and
commercial ............. 14,330 6.0 14,253 6.2 11,239 5.0 9,803 5.11 0,388 4.6
-------- ----- -------- ----- -------- ----- -------- ---- -------- -----
Total real estate loans 212,149 88.2 203,536 88.9 201,924 90.4 177,436 91.5 211,432 92.9
Consumer loans:
Home equity(2) .......... 27,740 11.5 24,851 10.92 0,677 9.2 15,754 8.11 5,230 6.7
Passbook ................ 277 .1 322 0.1 382 0.2 289 0.2 457 0.2
Other(3) ................ 450 .2 341 0.1 355 0.2 468 0.2 540 0.2
-------- ----- -------- ----- -------- ----- -------- ---- -------- -----
Total consumer loans ... 28,467 11.8 25,514 11.1 21,414 9.6 16,511 8.5 16,227 7.1
-------- ----- -------- ----- -------- ----- -------- ---- -------- -----
Total loans receivable . 240,616 100.0% 29,050 100.0% 223,338 100.0% 193,947 00.0% 227,659 100.0%
-------- ===== -------- ===== -------- ===== -------- ==== -------- =====
Less:
Unamortized discount
and net deferred
loan fees .............. (1,834) (2,043) (2,108) (1,904) (2,328)
Allowance for loan
losses ................. (3,158) (2,979) (2,677) (2,918) (2,598)
------- -------- -------- -------- --------
Total loans
receivable, net ....... $235,624 $224,028 $218,553 $188,980 $222,733
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Excludes loans to joint ventures of the Bank's subsidiaries. See
"--Subsidiary Activities."
(2) Includes home equity lines of credit.
(3) Includes home improvement loans, student loans and automobile loans.
(4) At the time of the Bank's 1995 MHC Reorganization, it changed its fiscal
year end from May 31 to March 31.
46
<PAGE>
Loan Maturity. The following table sets forth the maturity or period of
repricing of the Bank's loan portfolio at March 31, 1997. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due within one year. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature, and fixed rate loans are
included in the period in which the final contractual repayment is due. The
table does not include the effect of future principal prepayments. Principal
prepayments and scheduled principal amortization on loans totalled $27.9
million, $26.3 million and $24.0 million for the years ended March 31, 1997 and
1996, and the ten months ended March 31, 1995, respectively.
BEYOND
WITHIN 1-3 3-5 5-10 10-20 20
1 YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
------ ----- ----- ----- ----- ----- -----
(IN THOUSANDS)
Real estate loans:
One- to four-family
residential ...... $21,221 $4,770 $11,092 $23,393 $70,883 $66,460 $197,819
Multifamily and
commercial ....... 32 128 1,295 3,353 8,180 1,342 14,330
Consumer loans ...... 3,477 1,791 3,106 7,616 12,477 -- 28,467
Total loans ...... $24,730 $6,689 $15,493 $34,362 $91,540 $67,802 $240,616
The following table sets forth at March 31, 1997 the dollar amount of loans
contractually due after March 31, 1998, and whether such loans have fixed
interest rates or adjustable interest rates.
DUE AFTER MARCH 31, 1998
--------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- -------
(IN THOUSANDS)
Real estate loans:
One- to four-family residential ....... $139,866 $36,732 $176,598
Multifamily and commercial ............ 9,911 4,387 14,298
Consumer loans .......................... 21,403 3,587 24,990
-------- ------- --------
Total loans receivable .................. $171,180 $44,706 $215,886
======== ======= ========
One- to Four-Family Residential Mortgage Lending. The Bank's primary
lending activity consists of the origination of one- to four-family residential
mortgage loans collateralized by owner-occupied properties located in the Bank's
market area. The Bank generally does not originate one- to four-family
residential loans collateralized by properties outside of the State of New
Jersey, and in recent years has not purchased mortgage loans collateralized by
out-of-state property. At March 31, 1997 the Bank had $197.8 million, or 82.2%,
of its total loan portfolio invested in one- to four-family residential mortgage
loans, approximately one-half of which were collateralized by properties located
in Bayonne. Beginning in the latter part of the 1994 calendar year, the Bank
began to emphasize growth of its one- to four-family residential mortgage loan
portfolio, which had declined in previous years. The Bank achieved this growth
through originations and correspondent lending in which the Bank agrees to
purchase loans from mortgage companies at the time such loans are closed. The
Bank may receive lower origination fees on loans purchased through the Bank's
correspondent relationships.
The Bank's one- to four-family residential real estate loans generally are
originated and underwritten according to standards that qualify such loans to be
included in Federal Home Loan Mortgage Corporation ("FHLMC") and Federal
National Mortgage Association ("FNMA") purchase and guaranty programs and that
otherwise permit resale in the secondary mortgage market. The Bank has not sold
any mortgage loans since 1989. The Bank has generally retained the servicing
rights on loans it has sold and contracts with sub-servicers to perform the
servicing activities, which include collecting and remitting loan payments,
inspecting the properties and making certain insurance and tax payments on
behalf of the borrowers. As of March 31, 1997, the Bank retained servicing
rights to loans with an aggregate principal amount of $14.4 million.
The Bank currently offers one- to four-family mortgage loans with terms
typically ranging from ten to 30 years, and with adjustable or fixed interest
rates. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their
47
<PAGE>
option. The average length of time that the Bank's one- to four-family
residential mortgage loans remain outstanding varies significantly depending
upon trends in market interest rates and other factors. In recent years, the
average maturity of the Bank's mortgage loans has decreased significantly due to
the unprecedented volume of refinancing activity. Accordingly, estimates of the
average length of time that one- to four-family loans may remain outstanding
cannot be made with any degree of accuracy.
Originations of fixed-rate mortgage loans versus adjustable rate mortgage
("ARM") loans are monitored on an ongoing basis and are affected significantly
by the level of market interest rates, customer preference, the Bank's interest
rate gap position, and loan products offered by the Bank's competitors. Although
management's strategy is to promote the origination of ARM loans, market
conditions may be such that there is greater demand for fixed-rate mortgage
loans. The Bank's fixed-rate mortgage loans amortize on a monthly basis with
principal and interest due each month. The Bank's fixed-rate loans are generally
originated with terms ranging from 10 to 30 years. At March 31, 1997, of the
Bank's $197.8 million in one- to four-family mortgage loans, $156.7 million, or
79.2%, had fixed rates of interest.
The Bank's ARM loans are generally originated with terms of 30 years. The
Bank offers ARM loans with interest rates that adjust annually after a period of
one, three, five, seven or ten years. Interest rate adjustments on ARM loans are
limited to 2% per year and 6% over the life of the loan. The Bank's current
index on its ARM loans is the one-year Treasury Bill rate, plus a margin of 275
basis points. The Bank occasionally will originate ARM loans with initially
discounted rates, often known as "teaser rates." The Bank determines whether a
borrower qualifies for an ARM loan based on the first full interest rate
adjustment on one- and three-year ARMs and on the initial rate of five-, seven-
or ten-year ARMs with a minimum rate of 7%. One- to four-family residential ARM
loans totaled $41.1 million, or 20.8% of the Bank's total one- to four-family
mortgage loans at March 31, 1997.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio less interest rate sensitive. ARM loans carry increased credit risk
associated with potentially higher monthly payments by borrowers as general
market interest rates increase. It is possible, therefore, that during periods
of rising interest rates, the risk of default on ARM loans may increase due to
the upward adjustment of interest costs to the borrower. Management believes
that the Bank's credit risk associated with its ARM loans is reduced because of
the annual and lifetime interest rate adjustment limitations on such loans.
The Bank's one- to four-family residential first mortgage loans customarily
include due-on-sale clauses, which are provisions giving the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. 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.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and 90% for all other real
estate loans. The Bank makes one- to four-family real estate loans with
loan-to-value ratios of up to 90%. The Bank's lending policies generally limit
the maximum loan-to-value ratio on fixed-rate and ARM loans without private
mortgage insurance, and construction loans, to 80% of the lesser of the
appraised value or the purchase price of the property which collateralizes the
loan. For one- to four-family real estate loans with loan-to-value ratios of
between 80% and 90%, the Bank requires the first 25% of the appraised value of
the underlying collateral to be covered by private mortgage insurance. The Bank
requires fire and casualty insurance, and flood insurance in certain cases, as
well as a title guaranty regarding good title on all properties securing real
estate loans made by the Bank.
Multifamily Residential Real Estate and Commercial Real Estate Lending. The
Bank originates multifamily residential and commercial real estate loans on a
limited basis. The Bank's multifamily loans are typically secured by residential
properties located in its market area. At March 31, 1997, such loans totaled
$14.3 million, or 6.0% of the Bank's total loan portfolio. Of these, $9.9
million, or 4.1%, had fixed rates of interest. The Bank originates commercial
loans on a case-by-case basis, and, at March 31, 1997 such loans constituted
only $1.7 million of the Bank's total loan portfolio. In the future, the Bank
intends to increase its efforts to originate commercial real estate loans within
its delineated lending area. The Bank's multifamily loans include loans
collateralized by mixed-use properties that are primarily residential, but have
some commercial use as well. Because of the increased credit risk
48
<PAGE>
associated with such loans and the low level of demand for such loans in the
Bank's primary market area, the Bank does not expect multifamily and commercial
lending to constitute a significant part of loan originations in the foreseeable
future. The Bank's largest multifamily real estate loan at March 31, 1997, had
an aggregate principal balance of $764,255 and was secured by a first mortgage
on an apartment complex located in Jersey City, New Jersey.
The Bank makes such loans in amounts up to 80% of the appraised value of
the property if owner-occupied and up to 75% if nonowner-occupied. The Bank
generally requires a positive cash flow on all multifamily properties.
Multifamily loans are offered with fixed or adjustable interest rates, with
terms not exceeding 15 years. In an effort to reduce the Bank's interest rate
risk exposure, the Bank will emphasize the origination of adjustable-rate or
balloon multifamily and commercial real estate loans.
Loans collateralized by multifamily and commercial real estate generally
involve a greater degree of credit risk than one- to four-family residential
mortgage loans and carry larger loan balances. This increased credit risk is a
result of several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income producing properties, and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
commercial real estate and multifamily real estate is typically dependent upon
the successful operation of the related property. If the cash flow from the
project is reduced, the borrower's ability to repay the loan can become
impaired.
Consumer Loans. The Bank also originates consumer loans consisting
principally of home equity loans, and to a lesser extent, loans secured by
deposit accounts, and home improvement, student and automobile loans. As of
March 31, 1997, consumer loans totaled $28.5 million, or 11.8% of the Bank's
total loan portfolio. Home equity loans, which totaled $27.7 million, or 11.5%
of the Bank's total loan portfolio, and 97.4% of the Bank's consumer loan
portfolio, consisted primarily of fixed-rate, fixed-term home equity loans for a
specified amount, and to a lesser extent, adjustable-rate, fixed-term home
equity lines of credit. The Bank offers consumer loans other than home equity
loans, primarily as a service to its customers. Consumer loans, other than home
equity loans, are offered primarily on a fixed-rate basis with maturities
generally of less than four years. The Bank's home equity and residential second
mortgage loans are secured by the borrower's principal residence with a maximum
loan-to-value ratio, including the principal balances of both the first and
second mortgage loans, of 75% or less. Consumer loans entail greater credit risk
than do residential mortgage loans but have smaller balances and tend to have
higher interest rates. See "--Lending Activities--Delinquencies and Classified
Assets" and "--Delinquent Loans and Nonperforming Assets" for information
regarding the Bank's loan loss experience and reserve policy.
Loan Originations, Solicitation, Processing and Commitments. Loan
originations are derived from a number of sources such as real estate agent
referrals, existing customers, borrowers, builders, attorneys, walk-in customers
and correspondent lenders. Upon receiving a loan application, the Bank obtains a
credit report and employment verification to verify specific information
relating to the applicant's employment, income and credit standing. In the case
of a real estate loan, an appraiser approved by the Bank appraises the real
estate intended to collateralize the proposed loan. An underwriter in the Bank's
loan department checks the loan application file for accuracy and completeness,
and verifies the information provided. A senior loan officer then reviews the
application and requests the appraisal. The loan application is then submitted
to, and must be approved by, the Board of Directors. For multifamily residential
and commercial real estate loans, the Bank requires that the borrower provide
operating statements, pro forma cash flow statements and, if applicable, rent
rolls. In addition, the Bank reviews the borrower's credit standing and
expertise in owning and managing the type of property that will collateralize
the loan. For one- to four-family construction loans, the Bank requires that the
borrower provide detailed construction plans and specifications. Fire and
casualty insurance, and in certain cases, flood insurance, is required at the
time the loan is made and throughout the term of the loan.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. Commitments are typically issued for 90-day periods. The
borrower must provide proof of fire and casualty insurance on the property
serving as collateral, which insurance must be maintained during the full term
of the loan. A title guaranty, based on a title search of the property, is
required on all loans secured by real property. At March 31, 1997, the Bank had
commitments to originate $3.6 million of mortgage and consumer loans. From time
to time, the Bank has purchased mortgage loans and participation interests in
loans originated by others, although the Bank has not purchased mortgage loans
since 1989 (other than loans closed by and purchased from correspondent
49
<PAGE>
lenders), and has not purchased participation interests since the 1970s. As of
March 31, 1997, the Bank had $8.3 million of mortgage loans secured by
properties located outside of New Jersey which were purchased in past years.
The Bank has also entered into commitments to extend credit. At March 31,
1997, the Bank had contractual commitments to extend credit (exclusive of
undisbursed loans in process) for irrevocable letters of credit of $18,000. The
Bank's irrevocable letters of credit expire annually, with automatic renewal
clauses.
The following table sets forth the Bank's loan originations and principal
repayments for the periods indicated. The Bank has not purchased or sold loans
within the last three fiscal years.
YEAR ENDED TEN MONTHS
MARCH 31, ENDED
-------------------- MARCH 31,
1997 1996 1995(2)
-------- -------- --------
(IN THOUSANDS)
Loans receivable at beginning of period .. $229,050 $223,338 $193,947
-------- -------- --------
Originations:(1)
Real estate:
One- to four-family residential ........ 28,620 18,248 42,783
Multifamily and commercial ............. 2,231 1,326 1,718
Consumer loans:
Home equity ............................ 8,905 11,472 8,873
Passbook ............................... 327 244 322
Other .................................. 298 827 129
-------- -------- --------
Total originations ................... 40,381 32,117 53,825
Transfer of mortgage loans to foreclosed
real estate ............................. 878 94 415
Repayments ............................... 27,937 26,311 24,019
-------- -------- --------
Net loan activity ........................ 11,566 5,712 29,391
-------- -------- --------
Loans receivable at end of period .... $240,616 $229,050 $223,338
======== ======== ========
- --------------
(1) Includes loans purchased from correspondent lenders at the time of closing.
(2) At the time of its 1995 MHC Reorganization, the Bank changed its fiscal
year end from May 31 to March 31; accordingly, certain comparative
information is for the ten month period ending March 31, 1995.
Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Bank generally receives fees in connection with loan originations.
Such loan origination fees, net of costs to originate, are deferred and
amortized using the interest method over the contractual life of the loan. Fees
deferred are recognized into income immediately upon prepayment of the related
loan. At March 31, 1997, the Bank had $1.8 million of deferred loan origination
fees. Such fees vary with the volume and type of loans and commitments made and
purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money. In
addition to loan origination fees, the Bank also receives loan fees and service
charges, that consist primarily of deposit transaction account service charges
and late charges. The Bank recognized loan fees and service charges of $294,000,
$307,000 and $285,000 for the fiscal years ended March 31, 1997 and 1996, and
the ten months ended March 31, 1995, respectively.
Loans to One Borrower. Savings associations are subject to the same limits
as those applicable to national banks, which under current regulations restrict
loans to one borrower to an amount equal to 15% of unimpaired capital and
unimpaired surplus on an unsecured basis, and an additional amount equal to 10%
of unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). The Bank's general policy is to limit the maximum loans to one
borrower to $5.0 million at March 31, 1997. At such date, the Bank's largest
borrower had an aggregate principal outstanding balance of $1.5 million.
Delinquencies and Classified Assets. The Bank's collection procedures
provide that when a loan is 15 days and 25 days past due, a computer generated
late charge notice is sent to the borrower requesting payment, plus a late
50
<PAGE>
charge. If delinquency continues, on the first day of the second month, a
delinquent notice is mailed along with a letter advising that the mortgagors are
in violation of the terms of their mortgage contract. A representative of the
Bank attempts to contact borrowers whose loans are more than 60 days past due.
If such attempts are unsuccessful, a Bank representative personally visits the
property and attempts to contact the borrower and inspect the property. A
delinquent loan report is presented to the Board of Directors, which must
authorize any legal action. To the extent required by the Department of Housing
and Urban Development ("HUD"), notice is given to the borrower which provides
access to consumer counseling services. It is sometimes necessary and desirable
to arrange special repayment schedules with mortgagors to prevent foreclosure or
filing for bankruptcy. The schedule is prepared by the Bank pursuant to
discussions with the borrower.
Nonperforming Assets. Loans are reviewed on a regular basis. Real estate
loans are placed on a nonaccrual status when either principal or interest is 120
days or more past due. Delinquent consumer loans generally are not placed on
nonaccrual status, but continue to accrue until charged-off. Delinquent consumer
loans are charged off when it appears no longer reasonable or probable that the
loan will be collected. Based on historical charge-offs in the consumer loan
portfolio, which have been relatively low in relation to the Bank's valuation
allowance, the Bank has not adopted a formal policy to stop accruing interest on
delinquent consumer loans after a certain specified time period, but instead
such loans are reviewed on a case-by-case basis. Interest accrued and unpaid at
the time a loan is placed on nonaccrual status is charged against interest
income.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is deemed REO until such time as it is sold. When REO is
acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or its estimated fair value, less estimated selling expenses.
Valuations are periodically performed, or obtained, by management and any
subsequent decline in fair market value is charged to operations. REO totaled
$364,000, $24,000 and $233,000 as of March 31, 1997, 1996, and 1995,
respectively.
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<PAGE>
Delinquent Loans and Nonperforming Assets. The following table sets forth
information regarding loans delinquent 30 days to 89 days, 90 days to 119 days,
and 120 days or more, and REO. At March 31, 1997, REO totaled $364,000 and
consisted of seven properties. It is the policy of the Bank to cease accruing
interest on real estate loans 120 days or more past due and charge off all
accrued interest. For the year ended March 31, 1997, the amount of additional
interest income that would have been recognized on nonaccrual loans if such
loans had continued to perform in accordance with their contractual terms was
$516,571.
AT MARCH 31, AT MAY 31,
---------------------- -------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Loans past due 30 days to 89 days:
One- to four-family residential ...... $4,318 $5,634 $5,743 $5,530 $7,734
Multifamily and commercial ........... 733 338 344 331 445
Consumer loans ....................... 473 614 644 815 231
------ ------ ------ ------ ------
Total loans past due 30 days
to 89 days ........................ $5,524 $6,586 $6,731 $6,676 $8,410
------ ------ ------ ------ ------
Loans past due 90 days to 119 days:
One- to four-family residential ...... $ 673 $ 492 $1,678 $ 958 $2,146
Multifamily and commercial 114 48 163 114 63
Consumer loans ....................... 491 158 53 179 122
------ ------ ------ ------ ------
Total loans past due 90 days
to 119 days ....................... 1,278 698 1,894 1,251 2,331
------ ------ ------ ------ ------
Loans past due 120 days or more(1):
One- to four-family residential ...... 3,629 4,606 3,346 5,208 5,106
Multifamily and commercial ........... 615 207 150 214 263
------ ------ ------ ------ ------
Total non-accrual loans ............ 4,244 4,813 3,496 5,422 5,369
------ ------ ------ ------ ------
Consumer loans ....................... 87 456 194 204 217
------ ------ ------ ------ ------
Total loans past due 120 days
or more ........................... 4,331 5,269 3,690 5,626 5,586
------ ------ ------ ------ ------
REO .................................. 364 24 233 1,522 945
------ ------ ------ ------ ------
Total loans delinquent 90 days or
more and other nonperforming
assets ............................... $5,973 $5,991 $5,817 $8,399 $8,862
====== ====== ====== ====== ======
Total loans delinquent 90 days or
more to net loans receivable ......... 2.38% 2.66% 2.56% 3.64% 3.55%
Total loans delinquent 90 days or
more to total assets ................. 0.97% 0.92% 1.09% 1.26% 1.38%
Total loans delinquent 90 days
or more and other nonperforming
assets to total assets ............... 1.04% 0.92% 1.14% 1.53% 1.55%
- ----------------
(1) The Bank classifies as nonperforming only real estate loans 120 days or
more delinquent.
52
<PAGE>
The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at March 31, 1997.
AT MARCH 31, 1997
-------------------
BALANCE NUMBER
-------- --------
(DOLLARS IN THOUSANDS)
One- to four-family residential real estate:
Loans 30 to 89 days delinquent ................... $4,318 55
Loans 90 to 119 days delinquent .................. 673 8
Loans 120 days or more delinquent ................ 3,629 40
Multifamily residential and commercial real estate:
Loans 30 to 89 days delinquent ................... 733 9
Loans 90 to 119 days delinquent .................. 114 1
Loans 120 days or more delinquent ................ 615 7
Consumer loans 30 to 89 days delinquent ........... 473 33
Consumer loans 90 to 119 days delinquent .......... 491 8
Consumer loans 120 days or more delinquent ........ 87 8
Foreclosed real estate and other repossessions .... 364 7
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings 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
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payment, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. Pursuant to the
Bank's internal guidelines, all loans 90 to 119 days past due are considered
special mention, and all loans 120 days or more past due are classified
substandard, doubtful, or loss.
The following table sets forth the aggregate amount of the Bank's special
mention and classified assets at the dates indicated.
AT
AT MARCH 31, JUNE 30,(1)
--------------- ----------------
1997 1996 1995 1994
------ ------ ------ -------
(IN THOUSANDS)
Special mention ............................. $1,044 $ 746 $1,671 $ 1,162
Substandard assets .......................... 3,523 1,588 4,731 9,262
Doubtful assets ............................. 2,230 4,201 323 --
------ ------ ------ -------
Total special mention and classified
assets(2) ............................... $6,797 $6,535 $6,725 $10,424
====== ====== ====== =======
- -------------
(1) Information as of May 31, 1994 is unavailable.
(2) Includes REO.
As of March 31, 1997, the Bank had no single special mention or classified
asset with a balance greater than $250,000. However, 12 mortgage loans to one
borrower with an outstanding balance of $1.4 million were placed on non-accrual
status. At March 31, 1997, the Bank provided an additional $200,000 to its
allowance for loan losses on account of these loans.
Allowance for Loan Losses. Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
potential losses that may be incurred. The Bank's Asset Classification Committee
meets quarterly to review the loan portfolio and the adequacy of the allowance
for loan
53
<PAGE>
losses. Based upon that review, the Bank determines whether any loans require
the establishment of appropriate reserves or allowances for losses. Such
evaluation, which includes a review of all loans on which full collectability of
interest and principal may not be reasonably assured, considers, among other
matters, the estimated fair value of the underlying collateral. Other factors
considered by management include the site and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods. The Committee also prepares a summary classifying all delinquent loans
and non-homogenous loans as special mention, substandard, doubtful or loss. The
Committee then recommends the general allowance for loan losses in part based on
past experience, and in part based on specified loan balances within each
classification. Loans in the non-accrual status are reviewed by the Committee to
determine a specific reserve to be established against these loans. Based on the
Committee's recommendation, the Board of Directors makes determinations as to
any reserves and changes to the provision for loan losses and allowance for loan
losses. 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 the Bank. Both general and specific
loan loss allowances are charged against earnings; however, general loss
allowances are added back to capital in computing total risk-based capital under
OTS regulations, subject to certain limitations.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loan loss provisions may be
deemed necessary. Management believes that the Bank's current allowance for
loan losses is adequate; however, there can be no assurance that the allowance
for loan losses will be adequate to cover losses that may in fact be realized
in the future or that additional provisions for loan losses will not be
required.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the following table.
TEN MONTHS
YEARS ENDED YEARS
ENDED MARCH 31, MARCH 31 ENDED MAY 31,
----------------- -------- ------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Allowance balances (at beginning
of period) ..................... $ 2,979 $ 2,677 $ 2,918 $ 2,597 $ 2,578
Provision for losses:
Real estate .................... 300 405 350 483 871
Consumer ....................... 20 45 -- 17 --
Charge-offs:
Real estate .................... (141) (148) (591) (179) (840)
Consumer -- -- -- -- (12)
-------- -------- -------- -------- --------
Allowance balance (at end of
period) ........................ $ 3,158 $ 2,979 $ 2,677 $ 2,918 $ 2,597
======== ======== ======== ======== ========
Total loans outstanding ......... $240,616 $229,050 $223,338 $193,947 $227,659
Average loans outstanding ....... 234,971 220,820 202,087 203,321 240,850
Allowance for loan losses as a
percent of net loans receivable
at end of period ............... 134% 1.33% 1.22% 1.54% 1.17%
Net loans charged off as a
percent of average loans
outstanding .................... .06% .07% .35% .09% .35%
Ratio of allowance for loan
losses to total loans
delinquent 90 days or more
at end of period ............... 56.30% 49.92% 47.94% 42.43% 32.80%
Ratio of allowance for loan
losses to total loans delinquent
90 days or more and other
nonperforming assets at end
of period ..................... 52.87% 49.72% 46.02% 34.74% 29.30%
54
<PAGE>
<TABLE>
<CAPTION>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
AT MARCH 31,
---------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ---------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN 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>
Balance at end of period applicable to:
Mortgage loans:
One- to four-family ................. $2,984 94.5% 82.2% $2,770 93.0% 82.7% $2,521 94.2% 85.4%
Multifamily residential ............. 60 1.9 5.7 59 2.0 5.9 56 2.1 5.0
Commercial ........................... 9 0.3 .3 6 0.2 .3 1 -- --
Consumer ............................. 105 3.3 11.8 144 4.8 11.1 99 3.7 9.6
------ ----- ----- ------ ----- ----- ------ ----- -----
Total allowance for
loan losses ...................... $3,158 100.0% 100.0% $2,979 100.0% 100.0% $2,677 100.0% 100.0%
====== ===== ===== ====== ===== ===== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
AT MAY 31,
------------------------------------------------------
1994 1993
--------------------------- -------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN 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>
Balance at end of period
applicable to:
Mortgage loans:
One- to four-family ............. $2,784 95.4% 86.4% $2,477 95.4% 88.3%
Multifamily
residential .................... 49 1.7 5.1 52 2.0 4.6
Commercial ....................... 1 -- -- 1 -- --
Consumer ......................... 84 2.9 8.5 67 2.6 7.1
------ ----- ----- ------ ----- -----
Total valuation
allowance .................... $2,918 100.0% 100.0% $2,597 100.0% 100.0%
====== ===== ===== ====== ===== =====
</TABLE>
INVESTMENT ACTIVITIES
General. The Bank maintains a substantial portfolio of investment-grade,
liquid investments with low credit risk. These investments are composed
primarily of mortgage-backed securities, U.S. Government and agency obligations
and municipal and agency obligations. At March 31, 1997, $301.9 million, or
52.3%, of the Bank's total assets consisted of securities issued or guaranteed
by the U.S. Government or an agency or sponsored corporation of the U.S.
Government, or of mortgage securities collateralized by such U.S.
Government-related instruments. The Bank's investment in mortgage-backed and
other investment securities at that date exceeded its total loan portfolio of
$240.6 million. By investing in these types of assets, the Bank has been able to
significantly reduce the credit risk of its asset base, although such assets
have lower yields than would typically be available on loans.
The Bank's investments include substantial investments in mortgage-backed
securities. The Bank's mortgage-backed securities represent an interest in, or
are collateralized by, pools of mortgage loans originated by private lenders
that have been grouped by various governmental, government-related, or private
organizations. Mortgage-backed securities generally enhance the quality of the
Bank's assets by virtue of the insurance or guarantees that back them, are more
liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Bank. Investments in mortgage-backed
securities, however, may involve risks not present with mortgage loans.
Mortgage-backed securities are subject to the risk that actual prepayments will
be greater than estimated prepayments over the life of the security, which may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments, thereby reducing the net yield on such
securities. Like mortgage loans, there is also reinvestment risk associated with
the cash flows from such securities or
55
<PAGE>
in the event such securities are redeemed by the issuer. In addition, the market
value of such securities may be adversely affected by changes in interest rates.
At March 31, 1997, the market value of the Bank's mortgage-backed securities was
$223.0 million, which was $4.6 million less than the amortized cost of such
securities. The Bank attempts to manage its interest rate risk, in part, by
maintaining adjustable-rate, mortgage-backed securities in its investment
portfolio. At March 31, 1997, $73.9 million, or 23.2%, of the Bank's $318.0
million of investments consisted of mortgage-backed securities with adjustable
interest rates. Management is seeking to increase its portfolio of
adjustable-rate mortgage-backed securities.
At March 31, 1997, mortgage-backed securities totaled $223.0 million, or
38.6% of the Bank's total assets, U.S. Government and agency obligations totaled
$76.7 million, or 13.3% of the Bank's total assets, and other investments held
to maturity, including primarily interest-earning deposits, FHLB stock and
municipal and other agency obligations, totaled $27.4 million, or 4.7% of the
Bank's total assets. U.S. Government and agency obligations are generally not
subject to credit risk, unlike mortgage loans, but may be subject to interest
rate risk in a fluctuating interest-rate environment.
The Bank is required under federal regulations to maintain a minimum amount
of liquid assets that may be invested in specified short-term securities and
certain other investments. The Bank has generally maintained a portfolio of
liquid assets that exceeds regulatory requirements. The Bank's Investment
Committee meets on a regular basis to decide, based on market levels and
conditions, current economic data, political and regulatory information, and
internal needs, whether any alterations need to be made to the Bank's investment
portfolio. Based on the parameters of the investment policy, the Bank endeavors
to diversify its holdings through the purchase of short- and medium-term and
fixed- and variable-rate instruments, which provide both an adequate return as
well as some protection from interest rate risk. All investment decisions are
made by the Committee after analysis and market price cross-checks have been
completed. Since December 1995, the Bank has significantly restructured its
investment portfolio. See "Risk Factors--Effects of Repositioning Investment
Portfolio."
Securities are classified as either available for sale or held to maturity,
based upon the Bank's intent and ability to hold such securities. Securities
available for sale include debt and mortgage-backed securities that are held for
an indefinite period of time and are not intended to be held to maturity.
Securities available for sale include securities that management intends to use
as part of its overall asset/liability management strategy and that my be sold
in response to changes in interest rate and resultant prepayment risk and other
factors related thereto. Securities available for sale are carried at fair
value, and unrealized gains and losses (net of related tax effects) on such
securities are excluded from earnings but are included in stockholders' equity.
Upon realization, such gains and losses will be included in earnings. Management
determines the appropriate classification of investment and mortgage-backed
securities as either available for sale or held to maturity at the purchase
date. Investment securities and mortgage-backed securities, other than those
designated as available for sale or trading, are comprised of debt securities
that the Bank has the positive intent and ability to hold to maturity.
Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts over the estimated lives of the securities.
Mortgage-Backed Securities. The Bank's mortgage-backed securities are
primarily pass-through securities, which means that they provide the Bank with
payments consisting of both principal and interest as mortgages in the
underlying mortgage pool are paid off by the borrowers. The average maturity of
pass-through mortgage-backed securities varies with the maturities of the
underlying mortgage instruments and with the occurrence of unscheduled
prepayments of those mortgage instruments. Mortgage-backed securities also
include collateralized mortgage obligations ("CMOs"), which are debt obligations
collateralized by the cash flows from mortgage loans or pools of mortgage loans.
Mortgage-backed securities may be classified into the following principal
categories, according to the issueror guarantor:
(i) Securities that are backed by the full faith and credit of the U.S.
Government. Government National Mortgage Association ( "GNMA "), the
principal U.S. Government guarantor of such securities, is a wholly
owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S., the timely payment of principal and
interest, but not of market value, on securities issued by approved
institutions and backed by pools of Federal Housing
Administration-insured or Veterans Administration-guaranteed
mortgages.
56
<PAGE>
(ii) Securities that are issued by a government agency but that are not
backed by the full faith and credit of the U.S. Government. The
primary issuers of these securities include FNMA and FHLMC. FNMA is a
U.S. Government-sponsored corporation owned entirely by private
stockholders. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA. FHLMC issues
securities representing interests in residential mortgage loans that
it pools. FHLMC is a U.S. Government-sponsored corporation that
guarantees the timely payment of interest and ultimate collection of
principal, and its stock is publicly traded.
(iii) Securities that represent interests in, or are collateralized by,
pools consisting principally of residential mortgage loans created by
non-governmental issuers. These securities generally offer a higher
rate of interest than the other two types of mortgage-backed
securities because there are no direct or implied government
guarantees of payment as in the former securities, although certain
credit enhancements may exist. Securities issued by certain private
organizations may not be readily marketable. Private mortgage-backed
securities purchased by the Bank must be rated in one of the two
highest rating categories by at least one nationally recognized
statistical rating organization.
The Bank's mortgage-backed securities are both fixed-rate and
adjustable-rate. Unlike fixed-rate mortgage-backed securities, adjustable-rate
mortgage-backed securities ("ARM Securities") have periodic adjustments in the
coupons on the underlying mortgages. Management believes that the
adjustable-rate feature of the mortgages underlying the ARM Securities generally
will help to reduce sharp changes in the value of the ARM Securities in response
to normal interest rate fluctuations. As the interest rates on the mortgages
underlying the ARM Securities are reset periodically (generally one to 12
months, but as long as five years), the yields of such securities will gradually
align themselves to reflect changes in the market rates so that the market value
of such securities will remain relatively constant as compared to fixed-rate
instruments. Management believes that this, in turn, should cause the value of
the ARM Securities to fluctuate less than fixed-rate mortgage-backed securities.
In contrast to fixed-rate mortgages, which generally decline in value
during periods of rising interest rates, ARM Securities permit the Bank to
participate in increases in interest rates through periodic adjustments in the
coupons of the mortgages that underlie the ARM Securities. Management believes
that ARM Securities should produce both higher current yields and lower price
fluctuations than fixed-rate mortgage-backed securities during such periods.
Furthermore, if prepayments of principal are made on the underlying mortgages
during periods of rising interest rates, the Bank generally will be able to
reinvest such amounts in assets with a higher yield. For certain types of ARM
Securities, the rate of amortization of principal, as well as interest payments,
can and does change in accordance with movements in a particular, pre-specified,
published interest rate index. The amount of interest due to an ARM Securities
holder is calculated by adding a specified additional amount, the "margin," to
the index, subject to limitations or "caps" on the maximum or minimum interest
that is charged to the mortgagor during the life of the mortgage or to maximum
and minimum changes in the interest during a given period. As a result, the Bank
will not benefit from increases in interest rates to the extent that interest
rates rise to the point where they cause the current coupon of adjustable rate
mortgages held as investments to exceed the maximum allowable annual (usually
100 to 200 basis points) or lifetime limits (or "cap rates") for a particular
mortgage. Fluctuations in interest rates above these levels could cause such
mortgage securities to behave more like long-term, fixed-rate debt securities.
Moreover, the value of the Bank's ARM Securities could vary to the extent that
current yields on such securities are different than market yields during
interim periods between coupon reset dates. Thus, the Bank could suffer some
principal loss if it sold such securities before the interest rates on the
underlying mortgages are adjusted to reflect current market rates.
During periods of declining interest rates, the coupon rates on the
mortgages that underlie the Bank's ARM Securities may readjust downward,
resulting in lower yields or such securities. Further, because of this feature,
ARM Securities may have less potential for capital appreciation than fixed-rate
instruments of comparable maturities during periods of declining interest rates.
As with other mortgage-backed securities, interest rate declines may result in
accelerated prepayment of mortgages and the proceeds from such prepayment of
mortgages may be reinvested at lower prevailing interest rates. For this reason,
ARM Securities may be less effective than other fixed-rate securities as a means
of "locking in" long-term interest rates.
If the Bank purchases mortgage-backed securities at a premium, mortgage
foreclosures and unscheduled principal prepayments may result in some loss of
the principal investment to the extent of the premium paid. On the other hand,
if mortgage-backed securities are purchased at a discount, both a scheduled
payment of principal and an unscheduled repayment of principal will increase
current and total returns.
57
<PAGE>
CMOs are securities created by segregating or partitioning 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 flow from the underlying
securities and thereby create multiple classes of securities with different
maturity and risk characteristics. The CMOs and other mortgage-backed securities
in which the Bank invests may have a multi-class structure ("Multi-Class
Mortgage Securities"). Multi-Class Mortgage Securities issued by private issuers
may be collateralized by whole loans or pass-through mortgage-backed securities
of private issuers. Each class has a specified maturity or final distribution
date. In one structure, payments of principal, including any principal
prepayments, on the collateral are applied to the classes in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class until all classes have an earlier stated
maturity or final distribution date have been paid in full. In other structures,
certain classes may pay concurrently, or one or more classes may have a priority
with respect to payments on the underlying collateral up to a specified amount.
The Bank has not and will not invest in any class with residual characteristics.
Additionally, the Bank will not invest in any subordinated debt class that is
not rated in one of the two highest rating categories by at least one nationally
recognized statistical rating organization.
Fixed- and Adjustable-Rate Mortgage Securities. The following table sets
forth selected data relating to the composition of the Bank's mortgage
securities portfolio as of the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------------------------
1997 1996 1995
--------------------- ----------------------- -------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Pass-through certificates:
Adjustable ................................. $ 73,927 32.5% $ 54,503 24.2% $31,753 56.1%
Fixed ...................................... 116,102 51.1 129,311 57.5 24,162 42.7
-------- ----- -------- ----- ------- -----
Total pass-through
certificates ............................ 190,029 83.61 183,814 81.7 55,915 98.8
-------- ----- -------- ----- ------- -----
CMOs ........................................ 12,751 5.6 13,664 6.1 714 1.2
-------- ----- -------- ----- ------- -----
Private Issues .............................. 24,661 10.8 27,448 12.2 -- --
-------- ----- -------- ----- ------- -----
Amortized cost of mortgage-backed
securities ................................. 227,441 100.0% 224,926 100.0% 56,629 100.0%
-------- ===== -------- ===== ------- =====
Valuation allowance ......................... (4,461) (4,244) (3,493)
-------- -------- -------
Carrying value of mortgage-backed
securities at end of period ............... $222,980 $220,682 $53,136
======== ======== =======
Mortgage related mutual funds(1):
AMF Adjustable Rate Mortgage
Portfolio ................................. -- -- $ 2,551 3.6% $ 2,399 3.6%
AMF Intermediate Mortgage
Securities Portfolio ...................... -- -- 68,889 96.4 64,690 --
-------- ----- -------- ----- ------- -----
Amortized cost of mutual funds ............. -- -- 71,440 100.0% 67,089 100.0%
===== =====
Valuation allowance ........................ -- (2,274) (3,020)
Carrying value of mortgage
related mutual funds at end of
period ................................... $ -- $ 69,166 $64,069
======== ======== =======
</TABLE>
- ----------------
(1) During the year ended March 31, 1997, the Bank sold intermediate and
adjustable-rate mutual funds totalling $71.5 million, for a net loss of
$2.9 million.
58
<PAGE>
<TABLE>
<CAPTION>
Purchases, Sales and Repayments of Mortgage Securities. The following table
sets forth the Bank's investment, mortgage-backed and mortgage-related
securities activities for the periods indicated:
YEAR TEN MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
---------------------- --------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of period ................... $224,926 $ 56,629 $ 58,016
Purchases .......................................................... 91,634 174,784 --
Sales .............................................................. 65,959 -- --
Repayments ......................................................... (25,737) (5,855) (1,339)
Discount accretion (premium) amortization .......................... 2,577 (632) (48)
-------- -------- --------
Amortized cost of mortgage-backed securities at end of period ....... 227,441 224,926 56,629
Valuation allowance ................................................. (4,461) (4,244) (3,493)
-------- -------- --------
Carrying value of mortgage-backed securities at end of period ....... $222,980 $220,682 $ 53,136
======== ======== ========
Mortgage related mutual funds at beginning of period ................ $ 71,440 $ 67,089 $ 89,012
Purchases .......................................................... -- -- --
Redemptions ........................................................ (71,088) -- (25,000)
Dividend credited .................................................. 2,350 4,351 3,624
Profit (loss) on redemption ........................................ (2,702) -- (547)
Mortgage related mutual funds at end of period ...................... -- 71,440 67,089
Valuation allowance ................................................. -- (2,274) (3,020)
-------- -------- --------
Carrying value of mortgage related mutual funds at
end of period ...................................................... $ -- $ 69,166 $ 64,069
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Investment Portfolio. The following table sets forth certain information
regarding the carrying and market values of the Bank's investment portfolio at
the dates indicated:
AT MARCH 31,
----------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investments available for sale:
Mortgage-backed securities .......... $227,441 $222,980 $224,926 $220,682 $ 56,629 $ 53,136
Mortgage related mutual funds ....... -- -- 71,440 69,166 67,089 64,069
U.S. Government and agency
obligations ........................ 69,945 67,634 94,868 92,874 69,908 64,338
-------- -------- -------- -------- -------- --------
Total amortized cost .............. 297,386 290,614 391,234 382,721 193,626 181,543
Valuation allowance ................. (6,772) -- (8,513) -- (12,083) --
-------- -------- -------- -------- -------- --------
Total investments held for sale ... 290,614 290,614 382,721 382,721 181,543 181,543
-------- -------- -------- -------- -------- --------
Investments held to maturity:
Short-term mutual funds ............. 144 144 6,009 6,009 760 760
Interest-earning deposits in other
institutions ....................... 8,500 8,500 325 325 323 323
FHLB stock .......................... 7,460 7,460 7,526 7,526 1,914 1,914
U.S. Government and
agency obligations ................. 8,855 9,028 8,855 9,103 83,725 75,789
Municipal and other agency
obligations ........................ 2,422 2,527 2,500 2,571 3,974 4,001
-------- -------- -------- -------- -------- --------
Total investments held to
maturity ......................... 27,381 27,659 25,215 25,534 90,696 82,787
-------- -------- -------- -------- -------- --------
Total investments .................... $317,995 $318,273 $407,936 $408,255 $272,239 $264,330
======== ======== ======== ======== ======== ========
</TABLE>
59
<PAGE>
The table below sets forth certain information regarding the scheduled
maturities, carrying value, amortized cost, market values and weighted average
yields for the Bank's investment portfolio at March 31, 1997.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-------------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
-------------------- --------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investments available for sale:
Mortgage-backed securities ................ $ -- --% $ 83,417 5.64% $ 9,981 7.07%
U.S. Government and agency
obligations .............................. -- -- 51,985 4.85 14,969 5.79
------- ---- -------- ---- ------ ----
Total .................................. -- -- 135,402 5.34 24,950 6.30
Valuation allowance .......................
Total investments available
for sale .............................
Investments held to maturity:
Short-term mutual funds ................... 144 5.19 -- -- -- --
Interest-earning deposits in other
institutions ............................. 8,500 6.50 -- -- -- --
FHLB stock ................................ -- -- -- -- -- --
U.S. Government, municipal and
other agency obligations ................. 50 5.34 8,955 6.83 982 5.48
------- -------- ------
Total investments held to
maturity .............................. $ 8,694 6.47 $ 8,955 6.83 $ 982 5.48
======= ======== ======
<CAPTION>
AT MARCH 31, 1997
--------------------------------------------------------------------------
MORE THAN TEN YEARS TOTAL
------------------------ ----------------------------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST VALUE YIELD
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investments available for sale:
Mortgage-backed securities ................ $134,043 6.65% $227,441 $222,980 6.30%
U.S. Government and agency
obligations .............................. 2,992 7.04 69,945 67,634 5.15
-------- ---- -------- -------- ----
Total .................................. 137,035 6.66 297,386 $290,614 6.03
========
Valuation allowance ....................... (6,772)
--------
Total investments available
for sale ............................. 290,614
Investments held to maturity:
Short-term mutual funds ................... -- -- 144 144 5.19
Interest-earning deposits in other
institutions ............................. -- -- 8,500 8,500 6.50
FHLB stock ................................ 7,460 6.35 7,460 7,460 6.35
U.S. Government, municipal and
other agency obligations ................. 1,290 7.00 11,277 11,555 6.73
-------- -------- --------
Total investments held to
maturity .............................. $ 8,750 6.45 $ 27,381 $ 27,659 6.55
======== ======== ========
</TABLE>
60
<PAGE>
SOURCES OF FUNDS
General. Deposits are the major source of the Bank's funds for lending and
other investment purposes. In addition to deposits, the Bank derives funds from
the amortization and prepayment of loans and mortgage-backed securities, the
maturity of investment securities, sales of mortgage securities, and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.
Deposits. Consumer and commercial deposits are attracted principally from
within the Bank's market area through the offering of a broad selection of
deposit instruments including noninterest-bearing demand accounts, NOW accounts,
passbook savings, money market accounts, term certificate accounts and
individual retirement accounts. Deposit account terms vary according to the
minimum balance required, the period of time during which the funds must remain
on deposit, and the interest rate, among other factors. Deposits have decreased
7.8% since 1993, from $481.7 million at May 31, 1993 to $444.1 million at March
31, 1997. This decrease has primarily been attributable to a declining
population in Bayonne and to attrition as depositors sought higher yields in
mutual funds and other markets. In addition the Bank expects approximately $45
million of ten-year certificates of deposit yielding 10% to mature by April
1998. The Bank does not expect to retain a significant portion of such deposits.
Management, however, believes that based on the Bank's level of liquid assets
and its borrowing capacity, it will have sufficient liquid funds to finance any
significant withdrawals on such accounts.
The Bank regularly evaluates its internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity, and executes rate changes when deemed appropriate.
Furthermore, the Bank plans to introduce new deposit products, such as
commercial deposit accounts, and is considering expansion of its retail branch
network into surrounding communities as a means of increasing its deposit base.
The Bank anticipates establishing or purchasing several new branch offices over
the next few years. Management expects the mix of deposits to shift towards
transaction accounts as the Bank develops new products to obtain commercial
deposit accounts. Management also expects the balance of certificates of deposit
accounts to increase as the Bank introduces new deposit products, as well as
electronic banking. The Bank anticipates that the growth in deposits would be
accomplished through aggressive marketing of its retail branch network in
surrounding communities, competitive pricing of retail products and the ability
to provide loan and deposit products to commercial businesses in its market
area. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Business Strategy." The Bank does not obtain funds
through solicitation of brokers' funds from outside its market area, or by
offering negotiated rates on certificates of deposit in excess of $100,000.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED MARCH 31, ENDED
-------------------- MARCH 31,
1997 1996 1995
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net increase (decrease) before interest credited .... $(22,099) $(19,716) $(42,924)
Interest credited ................................... 20,814 20,760 15,628
-------- -------- --------
Net increase (decrease) in deposits ................. $ (1,285) $ 1,044 $(27,296)
======== ======== ========
</TABLE>
At March 31, 1997, the Bank had $45.7 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
MATURITY PERIOD AMOUNT
--------------- -------------
(IN THOUSANDS)
Within 12 months ......................... $32,872
Within 13 to 36 months ................... 12,119
Beyond 36 months ......................... 666
-------
Total .................................. $45,657
=======
61
<PAGE>
The following table sets forth the distribution of the Bank's average
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------------------------------------------
1997 1996
-------------------------------- -------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS YIELD BALANCE DEPOSITS YIELD
--------- -------- ------- --------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Club accounts ...................... $ 643 0.14% -- $ 671 0.15% --
Noninterest-bearing demand ......... 11,264 2.54 -- 8,332 1.87 --
NOW accounts ....................... 31,576 7.11 2.44 30,288 6.80 2.44
Passbooks .......................... 133,817 30.13 2.92 134,940 30.29 2.92
Money market deposit accounts ...... 15,276 3.44 2.44 14,279 3.21 2.44
Time deposits that mature:
Within 12 months .................. 197,755 44.53 6.14 155,224 34.85 3.88
Within 13 to 36 months ............ 50,439 11.36 7.54 90,747 20.37 4.79
Beyond 36 months .................. 3,369 0.75 5.57 10,943 2.46 8.72
-------- ------ -------- ------
Total deposits .................. $444,139 100.00% 4.77 $445,424 100.00% 3.67
======== ====== ======== ======
<CAPTION>
TEN MONTHS ENDED MARCH 31,
-------------------------------------
1995
-------------------------------------
PERCENT WEIGHTED
OF TOTAL AVERAGE
BALANCE DEPOSITS YIELD
--------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Club accounts ...................... $ 707 0.16% --
Noninterest-bearing demand ......... 5,185 1.17 --
NOW accounts ....................... 27,772 6.25 2.44
Passbooks .......................... 142,837 32.14 2.92
Money market deposit accounts ...... 16,095 3.62 2.44
Time deposits that mature:
Within 12 months .................. 160,292 36.07 4.17
Within 13 to 36 months ............ 63,023 14.18 4.79
Beyond 36 months .................. 28,469 6.41 8.58
-------- ------
Total deposits .................. $444,380 100.00% 3.91
======== ======
</TABLE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 1997.
AT MARCH 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Certificate accounts:
0 to 3.99% .............. $ 1,146 $ 8,805 $ 62,344
4.00 to 5.99% ........... 170,218 164,385 118,843
6.00 to 7.99% ........... 14,425 20,310 9,638
Over 8.00% .............. 65,774 63,414 60,959
-------- -------- --------
Total ................. $251,563 $256,914 $251,784
======== ======== ========
Borrowings. Savings deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. If the
need arises, however, the Bank may rely upon advances from the FHLB and the
Federal Reserve Bank discount window to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Advances from the FHLB typically
are collateralized by the Bank's stock in the FHLB and a portion of the Bank's
first mortgage loans. At March 31, 1997, the Bank had $75.0 million in FHLB
advances and reverse repurchase agreements outstanding.
The FHLB functions as a central reserve bank providing credit for the Bank
and other member savings institutions and financial institutions. As a member,
the Bank is required to own capital stock in the FHLB and is authorized to apply
for advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities that are obligations of, or guaranteed by,
the United States) provided certain standards related to creditworthiness have
been met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. At March 31, 1997, the Bank had entered into
repurchase agreements with the FHLB. These agreements, which totalled $30.0
million, are scheduled to mature in November 1997 and November 1998.
62
<PAGE>
The following table sets forth certain information regarding the Bank's
borrowed funds, which include FHLB advances and lines of credit and repurchase
agreements, at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
YEARS ENDED TEN MONTHS
MARCH 31, ENDED
----------------------- MARCH 31,
1997 1996 1995
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances and lines of credit:
Maximum month-end balance ..................... $59,600 $99,000 $16,000
Balance at end of period ...................... 45,000 59,600 14,000
Average balance ............................... 52,785 30,401 3,124
Weighted average interest rate on:
Balance at end of period ...................... 5.56% 5.55% 6.56%
Average balance for period(1) ................. 5.48% 6.73% 5.78%
Repurchase agreements:
Maximum month end balance ..................... $90,959 $90,919 --
Balance at end of period ...................... 30,000 90,919 --
Average balance ............................... 65,060 28,792 --
Weighted average interest rate on:
Balance at end of period ...................... 5.62% 5.39% --
Average balance for period(1) ................. 5.69% 4.36% --
</TABLE>
- ----------
(1) Computed on the basis of month-end balances.
SUBSIDIARY ACTIVITIES
As of March 31, 1997, the Bank had one subsidiary, Bayonne Service
Corporation ("BSC"). BSC is currently engaged in the sale of non-deposit
investment products primarily to the Bank's customers and members of the local
community. As of March 31, 1997, BSC had $155,000 in assets, and for the year
ended March 31, 1997, had $173,400 of income attributable to the sale of such
annuity products.
PROPERTIES
The Bank conducts its business through its main office and three full
service branch offices, all located in Bayonne, New Jersey. The following table
sets forth certain information concerning the main office and each branch office
of the Bank at March 31, 1997. The aggregate net book value of the Bank's
premises and equipment was $5.8 million at March 31, 1997. The Bank owns all of
its properties.
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD
YEAR IMPROVEMENTS AT
LOCATION ACQUIRED MARCH 31, 1997
-------- ------- ---------------
EXECUTIVE/MAIN OFFICE:
568 Broadway
Bayonne, New Jersey 07002 ......... 1945 $ 625,700
BRANCH OFFICES:
171 Broadway
Bayonne, New Jersey 07002 ......... 1987 1,205,000
441-447 Broadway(1)
Bayonne, New Jersey 07002 ......... 1973/1994 1,225,400
949 Broadway
Bayonne, New Jersey 07002 ......... 1990 1,300,400
- ----------
(1) Includes Financial Center building acquired in 1994 with a net book value
of $712,000 at March 31, 1997.
63
<PAGE>
In addition to the properties described above and the Bank's REO, the Bank
owns a 12-lot parcel of undeveloped land in Bayonne. The property was acquired
in 1987 for possible construction of executive offices. As of March 31, 1997,
the property was carried at $611,000.
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
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 March 31, 1997, the Bank had 83 full-time employees and 54 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--Benefit Plans" for a description of certain
compensation and benefit programs offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Bank and the Company 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 of the tax rules applicable to the
Bank or the Company. The Bank was last audited by the IRS in 1991 and has not
been audited by the New Jersey Division of Taxation ("DOT") in the past five
years.
Bad Debt Reserve. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on the Bank's
actual loss experience.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For the tax years beginning after December 31, 1995, the Bank is not
permitted to maintain a tax reserve for bad debts. As of March 31, 1997, the
Bank had an excess amount subject to recapture equal to $2.6 million. The new
rules allow an institution to suspend the bad debt reserve recapture for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institution's average mortgage lending activity for
the six taxable years preceding 1996. For this purpose, only home purchase and
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
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
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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 34% 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 was imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax ("AMT") was paid. The Bank does not expect to be
subject to the AMT.
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,
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
State of New Jersey. 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 income" generally
means federal taxable income, subject to certain adjustments (including the
addition of net interest income on state and municipal obligations). The Bank is
not currently under audit with respect to its New Jersey incometax returns.
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 exempt 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.
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REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the Department, as its chartering agency, the OTS, as its federal banking
regulator, and the FDIC, as the deposit insurer. The Bank is a member of the
FHLB System. The Bank's deposit accounts are insured up to applicable limits by
the SAIF managed by the FDIC. The Bank must file reports with the Commissioner
of the Department (the "Commissioner"), 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 Department, 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 Department, the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. 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 Department, the OTS, the FDIC or the Congress, could
have a material impact on the Company, the Bank, their operations or the
Conversion and Reorganization. Congress currently has under consideration
various proposals to eliminate the federal thrift charter and abolish the OTS.
The outcome of such legislation 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 and the Company and is qualified in
its entirety by reference to such statutes and regulations.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
Business Activities. The activities of 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 the regulations issued by the
agencies to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which savings associations may engage.
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, 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 March 31, 1997, the Bank's general policy is to
limit loans-to-one borrower to $5.0 million. At March 31, 1997, the Bank's
largest aggregate amount of loans-to-one borrower consisted of $1.5 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 nine 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 March 31, 1997,
the Bank maintained 85.5% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered as "qualified thrift investments."
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Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, 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 average liquidity
ratio for the year ended March 31, 1997 was 34.8%, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Assessments. Savings institutions are required by regulation to pay
assessments to the FDIC, the OTS and the New Jersey Department of Banking to
fund the various agency's operations. The assessments paid by the Bank to these
agencies for the years ended March 31, 1997 and 1996 totalled $974,000 and
$1,163,000, respectively.
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 any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts 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.
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 and state 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,
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fees and benefits and such other operational and managerial standards as the
agency deems appropriate. The federal banking agencies have adopted final
regulations and Interagency Guidelines Establishing 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; asset quality;
earnings; and compensation, fees and benefits. 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 acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
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 mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations 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 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 associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association 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 association's interest rate risk component on a
case-by-case basis. The OTS has postponed the date that the component will first
be deducted from an institution's total capital to provide it with an
opportunity to review the interest rate risk approaches taken by the other
federal banking agencies.
At March 31, 1997, 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 March 31, 1997, and
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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 3.0% 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 2.0% 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 undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association 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. 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 the year ended March 31, 1997 was .0648% of assessable
deposits. The Bank's assessment rate for the year ended March 31, 1996 and the
ten months ended March 31, 1995 was .23% of assessable deposits.
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 March 31, 1997 of $7.5 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. At March 31, 1997, the Bank had $75.0 million in FHLB advances
and repurchase agreements.
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
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members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended March 31, 1997 and 1996, and the
ten months ended March 31, 1995, dividends from the FHLB to the Bank amounted to
approximately $477,871, $186,000 and $138,000, respectively. If dividends were
reduced, the Bank's net interest income would likely also be reduced. Further,
there can be no assurance that the impact of recent or future legislation on the
FHLBs will not also cause a decrease in the value of the FHLB stock held by the
Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-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 $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $49.3 million, the reserve requirement is
$1.479 million (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $49.3
million. The first $4.4 million of otherwise reservable balances (subject to
adjustment 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
noninterest-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.
NEW JERSEY LAW
The Commissioner regulates, among other things, the Bank's internal
business procedures as well as its deposits, lending and investment activities.
The Commissioner must approve changes to the Bank's Certificate of
Incorporation, establishment or relocation of branch offices, mergers and the
issuance of additional stock. In addition, the Commissioner conducts periodic
examinations of the Bank. Certain of the areas regulated by the Commissioner are
not subject to similar regulation by the FDIC.
Recent federal and state legislative developments have reduced distinctions
between commercial banks and SAIF-insured savings institutions in New Jersey
with respect to lending and investment authority, as well as interest rate
limitations. As federal law has expanded the authority of federally chartered
savings institutions to engage in activities previously reserved for commercial
banks, New Jersey legislation and regulations ("parity legislation") have given
New Jersey chartered savings institutions, such as the Bank, the powers of
federally chartered savings institutions.
New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state which has reciprocal legislation
in effect on substantially the same terms and conditions as stated under New
Jersey law may acquire, or be acquired by, New Jersey insured institutions or
holding companies on either a regional or national basis. New Jersey law
explicitly prohibits interstate branching.
HOLDING COMPANY REGULATION
The Company 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
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"--Federal Regulation of Savings Institutions--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 Bank Holding Company ("BHC") Act, subject to the
prior approval of the OTS, and to other activities authorized by OTS regulation.
Recently proposed legislation would treat all savings and loan holding companies
as bank holding companies and limit the activities of such companies to those
permissible for bank 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; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies 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 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 of 1933, as amended ("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 contains 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. Lamparello and Sisk has a term of office expiring at the
first annual meeting of stockholders, a second class, consisting of Messrs.
Patrick F.X. Nilan and Wisniewski, has a term of office expiring at the second
annual meeting of stockholders, and a third class, consisting of Messrs.
Conaghan, Michael Nilan and Whelply 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 the executive officers of the Company and
hold the offices set forth below opposite their names.
NAME POSITION(S) HELD WITH COMPANY
-------- -----------------------------
Patrick F.X. Nilan Chairman of the Board
Michael Nilan President and Chief Executive Officer
Eugene V. Malinowski, CPA Vice President/Chief Financial Officer
Thomas M. Coughlin, CPA Corporate Secretary/Treasurer
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 at the discretion of the Board of Directors. Since
the formation of the Company, none of the executive officers, directors or other
personnel of the Company has received remuneration from the Company. Information
concerning the principal occupations, employment and other information
concerning 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
Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION(S) HELD WITH THE BANK(2) SINCE(3) EXPIRES
- ---- ------ --------------------------------- -------- -------
<S> <C> <C> <C>
Patrick F.X. Nilan(4) ........ 66 President, Chief Executive 1963 1998
Officer and Chairman
Patrick D. Conaghan .......... 59 Director 1986 1999
Sam P. Lamparello ............ 74 Director 1983 1997
James F. Sisk ................ 58 Director 1983 1997
Frederick G. Whelply ......... 76 Director 1973 1999
Joseph L. Wisniewski ......... 65 Director 1967 1998
Michael Nilan(4) ............. 33 Vice President/Chief Operating
Officer and Director 1997 1999
- ----------
</TABLE>
(1) As of March 31, 1997.
(2) All directors of the Bank are also directors of the Company.
(3) Reflects initial appointment to the Board of Directors of the Bank's mutual
predecessor.
(4) Mr. Patrick F.X. Nilan retired as Chief Executive Officer and President of
the Bank, effective June 30, 1997. He remains as Chairman of the Board of
Directors of the Company and the Bank. Mr. Michael Nilan succeeded Patrick
F.X. Nilan as Chief Executive Officer and President of the Bank effective
July 1, 1997.
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.
NAME AGE(1) POSITION(S) HELD WITH THE BANK
---- ------ ------------------------------
Eugene V. Malinowski, CPA ...... 57 Vice President/Chief Financial Officer
Eugene J. Harz ................. 60 Vice President/Shareholder Relations
James E. Collins ............... 48 Vice President/Loan Officer
Donald Mindiak ................. 38 Controller
Thomas M. Coughlin, CPA ........ 37 Corporate Secretary/Treasurer
- ----------
(1) As of March 31, 1997.
72
<PAGE>
Each of the executive officers of the Bank will retain his office in the
Bank until their re-election at the annual meeting of the Board of Directors of
the Bank, held immediately after the first annual meeting of stockholders
subsequent to the Conversion, and until their successors are elected and
qualified or until they are removed or replaced. Officers are subject to
re-election by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
Patrick F.X. Nilan has been employed by the Bank in various capacities
since 1954. Mr. Nilan was elected to the Board of Directors in 1963, and was
elected Chairman of the Board in 1991. Patrick F.X. Nilan is the father of
Michael Nilan. Mr. Nilan retired from active service as President and Chief
Executive Officer of the Bank at June 30, 1997, having completed 43 years of
service for the Bank. Mr. Nilan remains as Chairman of the Board of Directors of
the Company and the Bank.
Patrick D. Conaghan is a partner in the law firm of Conaghan & Conaghan in
Bayonne. Mr. Conaghan was elected to the Board of Directors in 1986.
Sam P. Lamparello was elected to the Board of Directors in 1983. Mr.
Lamparello is the President and founder of Beacon Oil Company located in
Bayonne.
James F. Sisk was the Chief of Police of the City of Bayonne until 1996. He
is now the Public Safety Director of the City of Bayonne. Mr. Sisk was elected
to the Board of Directors in 1983.
Frederick G. Whelply was elected to the Board of Directors in 1973. Mr.
Whelply is retired. Prior to his retirement, he was Executive Vice President of
Bayonne Hospital.
Joseph L. Wisniewski was employed by the Bank in various capacities from
1956 until his retirement from his position as Senior Vice President in August,
1996. He remains a director of the Bank.
Michael Nilan became President and Chief Executive Officer of the Bank
effective July 1, 1997 upon the retirement of Patrick F.X. Nilan from those
positions. Mr. Nilan has been Chief Operating Officer of the Bank since 1996.
Prior thereto, Mr. Nilan served as Vice President of Operations from 1995 to
1996 and Assistant Vice President from July 1993 until 1995. Mr. Nilan is the
head of the Bayonne Service Corporation annuity program and is a member of the
Investment, Budget and Asset/ Liability Committees. Mr. Nilan has been employed
by the Bank since 1986. He was appointed to the Board in February 1997. Michael
Nilan is the son of Patrick F.X. Nilan.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Eugene V. Malinowski is a Certified Public Accountant and has been employed
as Vice President and Chief Financial Officer since November 1996. Prior
thereto, Mr. Malinowski was Executive Vice President and Chief Financial Officer
of a $2.5 billion commercial bank and was a partner for 15 years with KPMG Peat
Marwick LLP. Mr. Malinowski is a member of the Investment, Budget and
Asset/Liability Committees.
Eugene J. Harz has been the Vice President of Shareholder Relations since
1995. Prior thereto, Mr. Harz was the Vice President of Operations since 1990,
and was Controller from 1970 through 1990. Mr. Harz is a member of the Budget
Committee and Chairman of the Asset Classification Committee. Mr. Harz has been
employed by the Bank in various capacities since 1959.
James E. Collins has been the Vice President/Loan Officer since 1990, and
was a Loan Officer from 1987 through 1990. Mr. Collins oversees all activity in
the Loan Department. In addition, Mr. Collins is the Bank's Community
Reinvestment Act officer, and is a member of the Bank's Budget Committee. Mr.
Collins has been employed by the Bank since 1972.
Donald Mindiak has been Controller since 1990. Mr. Mindiak oversees the
Bank's financial reporting and is Secretary of the Asset/Liability Committee and
the Investment Committee, and a member of the Budget Committee. Mr. Mindiak has
been employed by the Bank since 1977.
Thomas M. Coughlin is a Certified Public Accountant, and has been Corporate
Secretary since 1991. Mr. Coughlin has been employed by the Bank since 1986.
Prior to his appointment as Corporate Secretary, Mr. Coughlin served as a
part-time financial consultant and internal auditor, and was a self-employed
certified public accountant.
73
<PAGE>
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
OF THE BANK AND COMPANY
The business of the Bank's Board of Directors is conducted through meetings
and activities of the Board and its committees. During the year ended March 31,
1997, the Board of Directors held 26 regular meetings and five special meetings.
During the year ended March 31, 1997, no director attended fewer than 75% of the
total meetings of the Board of Directors of the Bank and committees on which
such director served.
The Audit Committee consists of Directors Sisk, Whelply, Conaghan and
Lamparello. The Audit Committee met 12 times during the year ended March 31,
1997. The Audit Committee reviews audit programs and results of audits of
compliance, departmental internal controls and operating procedures.
The Bank has no standing Nominating Committee. The entire Board of
Directors acts as the Nominating Committee. The Board of Directors met once in
its capacity as a nominating committee during the year ended March 31, 1997.
The Bank has no standing Compensation Committee. The entire Board of
Directors acts as the compensation committee. The Board of Directors met twice
in its capacity as a compensation committee during the year ended March 31,
1997.
DIRECTOR COMPENSATION
Non-employee directors received $750 for each Board of Directors meeting
attended, plus a $6,000 retainer each quarter. Non-employee directors serving on
the Asset/Liability Committee and the Audit Committee are paid $250 for each
meeting attended. Non-employee directors of the Security and Investment
Committee receive $500 monthly. During the year ended March 31, 1997, each
director received additional compensation of $22,500. In 1987, the Bank entered
into an annuity compensation agreement with each of the Bank's current
directors, pursuant to which the Bank currently pays each director an annual
benefit of $16,000. The payments will continue to be made over the lifetime of
each director with no fewer than 120 monthly payments to be made to each
director or his beneficiary, and are in addition to other fees received by
directors.
Upon retirement, Mr. Patrick F.X. Nilan became eligible to receive
compensation as a non-employee director. For his service as Chairman of the
Board, Mr. Nilan will receive a quarterly retainer of $7,500, plus $1,000 for
each Board of Directors meeting attended. The Bank also entered into a
three-year consulting agreement with Mr. Nilan, pursuant to which Mr. Nilan will
continue to provide advice on the operations of the Bank, in order to ensure a
smooth transition following the Conversion and Reorganization and change in
management. For his services, Mr. Nilan will be paid a fee of $100,000 annually.
1995 Stock Option Plan. During the fiscal year ending March 31, 1996, the
stockholders of the Bank approved the 1995 Stock Option Plan which authorizes
the grant of stock options and limited rights equal to 135,802 shares of Common
Stock. Pursuant to the 1995 Stock Option Plan, non-employee directors Conaghan,
Lamparello, Sisk and Whelply have each been granted options to purchase 6,790
shares of Common Stock at an exercise price of $13.00 per share. All options
granted under the 1995 Stock Option Plan are exercisable in five equal
installments of 20% commencing on August 9, 1996.
1995 Recognition and Retention Plan. During the fiscal year ending March
31, 1996, the Bank's stockholders approved the 1995 Recognition Plan which
authorized the issuance of 54,321 shares of Common Stock. Under the 1995
Recognition Plan, non-employee directors Conaghan, Lamparello, Sisk and Whelply
each have been awarded 2,716 shares of Common Stock, subject to restrictions set
forth in the 1995 Recognition Plan. The aggregate value of the shares awarded to
the non-employee directors, based upon the per share price at the timeof award,
was $152,096. The stock awards vest in five equal annual installments of 20%
commencing onJuly 28, 1996.
74
<PAGE>
<TABLE>
<CAPTION>
EXECUTIVE COMPENSATION
Cash Compensation. The following table sets forth certain information as to the total remuneration paid by the Bank to
executive officers who received salary and bonuses in excess of $100,000 during the fiscal year ended March 31, 1997 ("Named
Executive Officers"). In addition, the table sets forth information regarding total remuneration for the year ended March 31, 1996
and the ten months ended March 31, 1995.
LONG-TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
------------------------------------ ------------------------- -------
OTHER SECURITIES
FISCAL ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL YEARS COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS ENDED SALARY($)(1) BONUS($) ($) ($)(2) (#)(3) ($) ($)(4)
------------------ ----- ------------ -------- ------------ ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Patrick F.X. Nilan(5) March 31, 1997 $470,000 $37,500 $-- $329,315 33,950 -- $82,008
Chairman, President and March 31, 1996 432,597 75,000 -- 176,540 33,950 -- 38,203
Chief Executive Officer March 31, 1995(6) 341,667 75,000 -- -- -- -- 16,000
Joseph L. Wisniewski(7) March 31, 1997 $272,788 $22,500 $-- $131,726 5,888 -- $82,008
Senior Vice President, March 31, 1996 266,178 45,000 -- 70,616 13,580 -- 38,203
Senior Loan Officer March 31, 1995(4) 210,000 45,000 -- -- -- -- 16,000
Eugene J. Harz March 31, 1997 $120,000 $ 2,500 $-- $ 69,161 3,449 -- $57,230
Vice President March 31, 1996 120,356 5,000 -- 37,076 3,449 -- 20,226
Shareholder Relations March 31, 1995(4) 100,000 10,000 -- -- -- -- --
<FN>
- ----------------
(1) Includes compensation deferred at the election of the officer pursuant to the Bank's Financial Institutions Thrift Plan (the
"401(k) Plan ").
(2) Represents awards granted pursuant to the 1995 Recognition Plan. The awards were granted on July 28, 1995, and had a fair
market value of $13.00, based upon the closing price, per share on the date of grant. The value of such shares was determined
by multiplying the number of shares awarded by the fair market value of the shares on the date of award. Such awards vest in
equal installments at a rate of 20% per year beginning one year following the date of grant, unless otherwise determined by the
Board. Awards will be 100% vested upon termination of employment due to death, disability or following a change in control.
Pursuant to these Plans, Messrs. Nilan, Wisniewski and Harz were awarded 13,580, 5,432 and 2,852 restricted shares,
respectively, 80% of which were unvested as of March 31, 1997. At March 31, 1997, based upon the closing price of the Bank's
Common Stock of $24.25 per share, such awards had market values of $329,315, $131,726 and $69,161, respectively.
(3) Includes options awarded pursuant to the 1995 Stock Option Plan. The options vest in five equal annual installments commencing
on August 9, 1996, and the exercise price of such options is $13.00.
(4) Includes amounts received by officers Nilan and Wisniewski pursuant to the Bank's Annuity Compensation Agreements. Includes the
value of shares awarded under the Bank's ESOP. Does not include amounts contributed by the Bank pursuant to the Bank's
noncontributory defined benefit plan (the "Retirement Plan"), the Bank's nonqualified supplemental executive retirement
income-deferred compensation agreements ("Executive Agreements"), automobile insurance on personal vehicles used in lieu of
Bank supplied automobiles, nor reimbursement of mileage while on company business.
(5) Mr. Nilan retired from the positions of President and Chief Executive Officer of the Bank effective June 30, 1997.
(6) Reflects total remuneration for the ten months ended March 31, 1995.
(7) Mr. Wisniewski retired from his position of Senior Vice President, Senior Loan Officer in August 1996. Mr. Wisniewski continues
to serve as a member of the board of directors of te Bankand the Company.
</FN>
</TABLE>
75
<PAGE>
EMPLOYMENT AGREEMENTS
Effective upon the Conversion and Reorganization, the Bank and the Company
intend to enter into employment agreements (collectively, the "Employment
Agreements") with Mr. Michael Nilan (the "Executive"). The Employment Agreements
are subject to the review and approval of the Company, 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
and Reorganization. The continued success of the Bank and the Company depends to
a significant degree on the skills and competence of Mr. Michael Nilan.
The proposed Employment Agreements are expected to provide for a three-year
term for the Executive. It is expected that the Bank's Employment Agreement
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 Company Employment Agreement 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. The base salary which will
be effective for the Employment Agreement for Mr. Michael Nilan will be
$150,000. In addition to the base salary, the proposed Employment Agreements
would provide for, among other things, participation in stock benefit plans and
other fringe benefits applicable to executive personnel. The Employment
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 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 Employment Agreements.
Under the proposed Employment 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 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 Employment 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 Employment
Agreement 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 Employment 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 Employment Agreements,
based solely on cash compensation paid to Mr. Michael Nilan over the past three
fiscal years and excluding any benefits under any employee benefit plan which
may be payable, would be approximately $237,000.
76
<PAGE>
CHANGE IN CONTROL AGREEMENTS
In January 1995, the Bank entered into Severance Agreements (the "Severance
Agreements") with Messrs. Michael Nilan, Harz, Collins, Mindiak and Coughlin
which provide such officers with certain benefits in the event of a change in
control of the Bank or the Company. Effective upon the Conversion and
Reorganization, the Bank intends to replace the existing Severance Agreements
with new Change in Control Agreements for Messrs. Harz, Collins, Mindiak and
Coughlin and the Bank and the Company intend to enter into a Change in Control
Agreement ("CIC Agreement") with Mr. Malinowski. Such agreements will have terms
ranging from one to three years. The Company, the Bank and Mr. Nilan have
mutually agreed to terminate Mr. Nilan's existing Severance Agreement, and to
enter into Employment Agreements instead. 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 one to
three times the officer's average annual compensation for the five years
preceding termination, depending on the term of the officers' CIC Agreement. 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 12
to 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 the Company, the total payments that would be due under the CIC
Agreements, based solely on the cash compensation paid to the officers covered
by the CIC Agreements over the past three fiscal years and excluding any
benefits under any employee benefit plan which may be payable, would be
approximately $1.5 million.
EMPLOYEE SEVERANCE COMPENSATION PLAN
It is anticipated that the Bank's Board of Directors will, subsequent to
the Conversion and Reorganization, establish the First Savings Bank of New
Jersey, SLA 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 the Conversion and
Reorganization. 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 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. 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 March 31, 1997, would be approximately $1.3 million.
BENEFIT PLANS
Insurance Plans. All full-time employees of the Bank, upon completion of
the applicable probation period, are covered as a group for comprehensive
hospitalization, including major medical, dental, long-term disability,
accidental death and dismemberment insurance and group term life insurance.
Officers of the Bank are also provided with life insurance policies which
provide such officers the option of receiving the cash value of such policies
upon retirement or, in certain instances, upon termination of employment.
Financial Institutions Thrift Plan. The Bank maintains the Financial
Institutions Thrift Plan, which is a qualified tax-exempt profit sharing plan
with a cash-or-deferred feature under Section 401(k) of the Code (the "401(k)
Plan"). All employees who have completed six months of service with the Bank
during which they had at least 500 hours of service may participate in the Plan.
A participant may, with certain limitations, elect to contribute to
77
<PAGE>
the 401(k) Plan, in the form of deferrals of between 1% and 15% of the total
compensation that would otherwise be payable to the employee, not to exceed
$9,500 per year (adjusted for cost of living). Employee contributions are
fully-vested and nonforfeitable at all times. The 401(k) Plan permits
contribution by the Bank, although the Bank has not made contributions in the
past.
Annuity Compensation Agreements. The Annuity Compensation Agreements
provide that Mr. Patrick F.X. Nilan receives an annual payment of $16,000 over
his lifetime, with no fewer than ten such annual payments to be made to such
person or his beneficiaries. Payments under the Annuity Compensation Agreements
commenced in December 1992.
First Savings Bank of New Jersey Pension Plan. The Bank maintains a
Retirement Plan. All employees age 21 or older who have worked at the Bank for a
period of six months are eligible to accrue benefits under the Retirement Plan.
The Bank annually contributes an amount to the Retirement Plan necessary to
satisfy the actuarially determined minimum funding requirements in accordance
with the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The Retirement Plan operates on a plan year beginning December 15 each year.
At the normal retirement age of 65 (or the fifth anniversary of plan
participation, if later), the plan is designed to provide a life annuity
guaranteed for ten years. The retirement benefit provided is an amount equal to
2% of a participant's average monthly salary, multiplied by the total number of
years of service from the date of employment to normal retirement date. This
amount is reduced by approximately .63% of average monthly salary up to the
covered compensation wage base (as defined in the Retirement Plan) multiplied by
the total number of years of service (up to a maximum of 35 years).
Notwithstanding the above formula, the Retirement Plan will pay a minimum
monthly benefit equal to 2% of monthly salary, times years of service up to ten
years of service. Retirement benefits are also payable upon retirement due to
early and late retirement, disability or death. A reduced benefit is payable
upon early retirement at or after age 55 and the completion of ten years of
service with the Bank. Upon termination of employment other than as specified
above, a participant is eligible to receive his vested accrued benefit as a
retirement annuity commencing on such participant's normal date. Benefits are
payable in various annuity forms with the normal form being an annuity for the
participant's life, with a minimum guarantee of payments for five years. For the
plan year ended December 14, 1996, the Bank made an estimated contribution to
the Retirement Plan of $262,000. About the time of the Conversion and
Reorganization, the Board intends to freeze the future accrual of benefits under
the Retirement Plan in connection with the adoption or amendment of another
qualified employee benefit plan.
The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
1995, expressed in the form of a life annuity with a five year guaranteed
payment for the final average salary and benefit service classification
specified below. Benefits payable under the Retirement Plan are not subject to a
deduction for Social Security or other amounts.
<TABLE>
<CAPTION>
HIGH 5 YEAR YEARS OF BENEFIT SERVICE
FINAL AVERAGE -----------------------------------------------------------------
EARNINGS (1) 5 10 15 20 30 35
- ------------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 20,000 $ 1,375 $ 2,750 $ 4,125 $ 5,500 $ 8,250 $ 9,625
$ 40,000 2,750 5,500 8,250 11,000 16,500 19,250
$ 60,000 5,156 10,312 15,468 20,624 30,936 36,092
$ 80,000 7,156 14,312 21,468 28,624 42,936 50,092
$100,000 9,156 18,312 27,468 36,624 54,936 64,092
$150,000 14,156 28,312 42,468 56,624 84,936 99,092
$175,000 16,656 33,312 49,468 66,624 99,936 116,592
$200,000 19,156 38,312 57,968 76,624 114,936 118,800(2)
$235,840 and above 22,736 45,472 68,209 90,945 118,800(2) 118,800(2)
<FN>
- ------------
(1) High five-year average monthly earnings means the average of a participant's monthly
earnings in the five consecutive years yielding the highest such average while a
participant in the Retirement Plan. For participants with less than five years of
service, it is the average of monthly earnings for all complete calendar years of
participation.
(2) The maximum benefit that can be funded under Section 415(b)(1)(A) of the Code for 1996
is $125,000.
</FN>
</TABLE>
78
<PAGE>
As of December 14, 1996, officers Patrick F.X. Nilan, Wisniewski and Harz
had 37, 35 and 30 years of credit service, respectively, and accrued benefits
under the Retirement Plan equal to annual retirement benefits of $149,433,
$117,084 and $83,088, respectively. Mr. Wisniewski retired in August 1996, and
receives $9,757 per month under the Retirement Plan. Mr. Patrick F.X. Nilan
retired from the Bank effective June 30, 1997 and will receive $12,453 per month
under the Retirement Plan.
Supplemental Executive Retirement Income-Deferred Compensation Agreements.
The Bank maintains supplemental executive retirement agreements for certain
executives of the Bank and their beneficiaries whose benefit from the
tax-qualified defined benefit plan maintained by the Bank are reduced by reason
of (i) the annual limitation on benefits and contributions imposed by Section
415 of the Code and (ii) the limitation imposed by Section 401(a)(17) of the
Code with respect to compensation that can be taken into consideration in the
determination of benefits ($150,000 for 1995). As of March 31, 1997, there were
two executive employees (Messrs. Patrick F.X. Nilan and Harz) eligible to
participate in the supplemental executive retirement agreements and one former
employee receiving benefits under the supplemental executive retirement
agreements. If a covered executive dies while employed by the Bank but before
his normal retirement date, the executive's designated beneficiary will receive
a payment equal to 100 times the monthly benefit that would have been available
to the executive. The supplemental executive retirement agreements are
considered unfunded plans for tax and ERISA purposes. All obligations arising
under the supplemental executive retirement agreements are payable from the
general assets of the Bank.
The benefits paid under the Executive Agreements supplement the benefits
paid by the Retirement Plan. The following table indicates the expected
aggregate annual retirement benefit payable from the Retirement Plan and
Executive Agreements to participants in the Executive Agreements. Benefits under
the Executive Agreements are payable for the life of the participant or 120
months, whichever is longer.
HIGH FIVE-YEAR YEARS OF BENEFIT SERVICE AT RETIREMENT
AVERAGE --------------------------------------------
EARNINGS (1) 25 30 35
-------------- -------- -------- --------
$ 60,000 $ 25,780 $ 30,936 $ 36,092
80,000 35,780 42,936 50,092
100,000 45,780 54,936 64,092
150,000 70,780 84,936 99,092
175,000 83,280 99,936 116,592
200,000 95,780 114,936 134,092
250,000 120,781 144,938 169,094
300,000 145,781 174,938 204,094
350,000 170,781 204,938 239,094
400,000 195,781 234,938 274,094
450,000 220,781 264,938 309,094
- ----------
(1) The two persons, officers Patrick F.X. Nilan and Harz, who are eligible to
participate in the Executive Agreements have 37 and 30 years of credited
service under the Executive Agreements, respectively. Mr. Wisniewski had 35
years of credited service at the time of his retirement in August 1996. Mr.
Patrick F.X. Nilan had 37 years of credited service upon retirement from
the Bank on June 30, 1997.
Upon evaluation of the ongoing liability to fund the supplemental executive
retirement agreements, the Bank has determined to pay Mr. Patrick F.X. Nilan's
benefits that will be due under the supplemental executive retirement agreements
and Mr. Wisniewski's remaining payments due under the supplemental executive
retirement agreements in a lump sum payment. As of March 31, 1997, the Bank
provided an additional $1.8 million in employee benefit expense to provide for
one-time payments to Messrs. Patrick F.X. Nilan and Wisniewski. The lump sum
payments, which represent the present value of the executives' accrued annual
benefits under the supplemental executive retirement agreements based on a
current actuarial valuation. The Bank has determined that paying Messrs. Patrick
F.X. Nilan and Wisniewski in a lump sum will benefit the Bank over time by
saving the annual accruals that would otherwise be required to fund the
supplemental executive retirement agreements. As of March 31, 1996, Mr. Harz'
combined benefit under the Retirement Plan and supplemental executive retirement
agreement does not exceed the benefit provided under the Retirement Plan because
Mr. Harz' compensation and accrued benefits do not exceed the amounts permitted
by the applicable Code sections to be taken into consideration under the
Retirement Plan.
79
<PAGE>
1995 Stock Option Plan. During the fiscal year ended March 31, 1996, the
Bank adopted the 1995 Stock Option Plan. The 1995 Stock Option Plan was approved
at the 1995 Annual Meeting by Public Stockholders present at such meeting in
person or by proxy. The 1995 Stock Option Plan authorizes the grant of stock
options and limited rights equal to 10%, or 135,802 shares, of the Common Stock
sold in the Offering. Of this amount, 27,160 options were awarded to
non-employee directors, 85,556 were awarded to employees and 23,086 were
reserved for future issuance under the plan. Awards under the 1995 Stock Option
Plan become immediately vested in the event of death, disability, retirement or
a change in control of the Bank or its successors; provided, however, in the
event of retirement, if the participant continues to perform services as a
Director or consultant on behalf of the Bank, the Company, or an affiliate or,
in the case of a retiring Director, as a consulting director, unvested
nonstatutory stock option awards continue to vest in accordance with their
original vesting schedule until the recipient ceases to perform such services at
which time any unvested nonstatutory stock option awards would lapse.
Set forth below is certain information concerning exercised and
unexercisable options during the fiscal year ended March 31, 1997, for Named
Executive Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-
NUMBER OF UNEXERCISED THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
SHARES ACQUIRED VALUE -------------------------- -------------------------
NAME UPON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- -------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Patrick F.X. Nilan ..... -- -- 6,790/27,160 $76,388/$305,550
Joseph L. Wisniewski ... 1,810 $23,530 5,888/0 $66,240/0
Eugene J. Harz ......... -- -- 690/2,759 $7,763/$31,039
</TABLE>
- ----------
(1) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of Common Stock that
would be received upon exercise, assuming such exercise occurred on March
31, 1997, at which date the last sale of the Common Stock as quoted on the
Nasdaq National Market was at $24.25 per share.
1995 Recognition and Retention Plan. In 1995, the 1995 Recognition Plan was
approved by Public Stockholders and was implemented by the Bank and the Company
as a means of providing officers and outside directors, respectively, of the
Bank and the Company with a proprietary interest in the Bank in a manner
designed to encourage such persons to remain with the Bank and the Company. In
July 1995, the 1995 Recognition Plan acquired 54,321 shares of Bank Common Stock
from authorized but unissued shares.
A Committee of the Board of Directors of the Bank and the Company comprised
of non-employee directors administers the 1995 Recognition Plan, and makes
awards to executive officers pursuant to the Plan. Awards under the 1995
Recognition Plan become immediately vested in the event of death, disability,
retirement or a change in control of the Bank or its successors; provided,
however, in the event of retirement, if the participant continues to perform
services as a Director or consultant on behalf of the Bank, the Company, or an
affiliate or, in the case of a retiring Director, as a consulting director,
unvested awards continue to vest in accordance with their original vesting
schedule until the recipient ceases to perform such services at which time any
unvested awards would lapse.
Officers, directors and employees of the Bank were awarded a total of
44,821 shares of Bank Common Stock during the fiscal year ended March 31, 1996.
Of the total 54,321 shares of Bank Common Stock acquired by the 1995 Recognition
Plan, 9,500 shares are presently unallocated. At the completion of the
Conversion and Reorganization, the unallocated shares will be converted into
shares of Company Common Stock in accordance with the applicable Exchange Ratio
and will be available for grants to participants in the 1995 Recognition Plan.
Employee Stock Ownership Plan and Trust. The Bank established an ESOP and
related trust for eligible employees in connection with the 1995 MHC
Reorganization. Employees employed with the Bank as of January 1, 1995 and
employees of the Company or the Bank employed after such date, who have been
credited with at least 1,000 hours during a 12 month period and who have
attained the age of 21 are participants.
80
<PAGE>
In January 1995, the ESOP borrowed $1.1 million from an unaffiliated lender
to purchase 108,641 shares of Bank Common Stock issued in the 1995 MHC
Reorganization ("1995 ESOP Loan"). Upon consummation of the Conversion and
Reorganization, the Public Bank Shares held by the ESOP will convert into Common
Stock based upon the Exchange Ratio. See "The Conversion and
Reorganization--Effect on Existing Compensation Plans" and "Use of Proceeds."
In connection with the establishment of the ESOP, a Committee of the Board
of Directors was appointed to administer the ESOP (the "ESOP Committee"). An
unrelated corporate trustee for the ESOP was appointed prior to the 1995 MHC
Reorganization and continuing thereafter. The ESOP Committee may instruct the
trustee regarding investment of funds contributed to the ESOP. The ESOP trustee,
subject to its fiduciary duty, must vote all allocated shares held in the ESOP
in accordance with the instructions of the participating employees. Under the
ESOP, unallocated shares and allocated shares for which no instructions are
given will be voted by the trustee in a manner calculated to most accurately
reflect the instructions it has received from participants regarding the
allocated stock provided that such vote is in accordance with the provisions of
ERISA.
The ESOP intends to purchase 8% of the Conversion Stock issued in the
Conversion. As part of the Conversion and in order to fund the ESOP's purchase
of the Conversion Stock to be issued in the Conversion, the ESOP intends to
borrow funds either from the Company or a third party lender, equal to 100% of
the aggregate purchase price of the Conversion Stock. In either case, the loan
will be repaid principally from the Company's or the Bank's contribution's to
the ESOP over a period of 15 years and the collateral for the loan will be the
Common Stock purchased by the ESOP. This loan will be in addition to the 1995
ESOP Loan, which will continue to be repaid over its original term of five
years. 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 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 expected to be the prime rate.
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 will vest in their ESOP account after five
years of credited service. Participants vest completely if their service was
terminated due to death, early retirement, permanent disability or a change in
control. 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.
Adoption of Existing Bank Plans by Company. The Company has approved
adoption of the Bank's existing 1995 Stock Option Plan and 1995 Recognition Plan
(collectively the "Plans") as plans of the Company upon consummation of the
Conversion and Reorganization and will issue Common Stock in lieu of Bank Common
Stock to such Plans pursuant to the terms of such Plans. As of the effective
date of the Conversion and Reorganization, rights outstanding under the Plans
shall be assumed by the Company and thereafter shall be rights only for shares
of Company Common Stock, with each such right being for a number of shares of
Common Stock equal to the number of shares of Bank Common Stock that were
available thereunder immediately prior to such effective date times the Exchange
Ratio, and the price of each such right shall be adjusted to reflect the
Exchange Ratio and so that the aggregate purchase price of the right is
unaffected, but with no change in other terms or conditions of such right. The
Company shall make appropriate amendments to the Plans to reflect the adoption
of the Plans by the Company without adverse effect upon the rights outstanding
thereunder.
NEW BENEFITS RESULTING FROM THE CONVERSION AND REORGANIZATION
The Company intends to adopt certain stock benefit plans in connection with
the Conversion and Reorganization.
Stock Option Plans. Following the Conversion and Reorganization, 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,
81
<PAGE>
employees and directors of the Company and 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 (the "Master Stock-Based Benefit Plan")
which would incorporate the benefits and features of the Incentive Option Plan
and Directors' Option Plan. At a meeting of stockholders of the Company
following the Conversion and Reorganization, which under applicable OTS
regulations may be held no earlier than six months after the completion of the
Conversion and Reorganization, 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% of the shares of Conversion Stock issued
in the Conversion and Reorganization, or 368,200 shares (based upon the issuance
of 3,682,000 shares of Conversion Stock), for issuance under the Option Plans or
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. Individual awards have not been
determined at this time.
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 the
Incentive Option Plan. 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 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. It is anticipated that all options
granted contemporaneously with stockholder approval of the Incentive Option Plan
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 Board of Directors 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. However, the exercise of such options may create a preference for
purposes of the alternative minimum tax under the Code. 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, the
option holder would have to include the amount paid to
82
<PAGE>
him 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 could 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 would be treated as a Non-Statutory Stock Option as described above.
In the event of retirement, if the optionee continues to perform services as a
director or consultant on behalf of the Bank, the Company or an affiliate,
unvested options would continue to vest in accordance with their original
vesting schedule until the optionee ceases to serve as a consultant or director.
If the Incentive Stock Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, in the event of death, disability or 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 may 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 or Master Stock-Based Benefit 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 or Master Stock-Based Benefit 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. Subject to any applicable regulatory
requirements, the Incentive Option Plan and the Directors Option Plan or Master
Stock-Based Benefit Plan, and any awards made thereunder, described above may be
amended subsequent to the expiration of the one-year period following the
Conversion and Reorganization to 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 resulted 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 and Reorganization, the Bank
intends to establish 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. 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. 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 and Reorganization.
The Bank expects to contribute funds to the Stock Programs or Master
Stock-Based Benefit Plan to enable the plans to acquire, in the aggregate, an
amount equal to 4% of the shares of Conversion Stock issued in the Conversion
83
<PAGE>
and Reorganization or 147,280 shares (based upon the issuance of 3,682,000
shares of Conversion Stock). These shares would be acquired through open market
purchases, if permitted, or from authorized but unissued shares. Although no
individual 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 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, 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 the 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 Board. In establishing such goals,
the Board may utilize the annual financial results of the Bank, actual
performance of the Bank as compared to targeted goals such as the ratio of the
Bank's net worth to total assets, the Bank's return on average assets, or such
other performance standards as determined by 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 Board of Directors. 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, if the participant continues to perform services as a Director or
consultant 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. Subject to any applicable
regulatory requirements, the Stock Programs and any awards thereunder may be
amended subsequent to the expiration of the one year period following the
Conversion and Reorganization to provide for accelerated vesting in the event of
a change in control of the Company or the Bank. 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. 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 and
Reorganization, the interests of existing shareholders would be diluted. See
"Pro Forma Data."
84
<PAGE>
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") required that all loans or extensions of credit to executive officers
and directors 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 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 have been 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 may, in the
future, determine to offer loans to executive officers and directors on terms
not available to the public, but available to other employees, in accordance
with recently modified regulations.
Prior to the enactment of FIRREA, the Bank provided loans to Directors and
executive officers at reduced rates and/or with points waived or reduced. The
only such loan to the Bank's current executive officers and directors that
exceeded $60,000 as of March 31, 1997 was a first mortgage loan to Mr. Collins.
The largest principal amount outstanding on such loan during the year ended
March 31, 1997 was $83,000, and the amount outstanding and the interest rate on
such loan on such date were $68,600 and 6.5%, respectively. All other loans that
exceeded $60,000 at any time during fiscal year 1997 to executive officers,
directors, immediate family members of executive officers and directors, or
organizations with which executive officers and directors are affiliated, were
made in the ordinary course of business, on substantially the same terms
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons.
Director Conaghan is currently general counsel to the Bank, and acted as
general counsel during the year ended March 31, 1997. Mr. Conaghan received fees
from the Bank and fees from persons who filed loan applications with the Bank,
which totaled approximately $31,100 for the year ended March 31, 1997. Director
Sisk is employed, part-time, by the Bank to perform real estate inspections, and
received $20,000 in compensation for such services during the fiscal year ended
March 31, 1997.
85
<PAGE>
BENEFICIAL OWNERSHIP OF CAPITAL STOCK
BENEFICIAL OWNERSHIP OF BANK COMMON STOCK
The following table includes, as of March 31, 1997, certain information as
to the Bank Common Stock beneficially owned by (i) the only persons or entities,
including any "group" as that term issued in Section 13(d)(3) of the Exchange
Act, who or which was known to the Bank to be the beneficial owner of more than
5% of the issued and outstanding Bank Common Stock, (ii) the directors of the
Bank, (iii) certain executive officers of the Bank, and (iv) all directors and
executive officers of the Bank as a group. For information concerning proposed
subscriptions by directors and executive officers and the anticipated ownership
of Common Stock by such persons upon consummation of the Conversion and
Reorganization, see "--Subscriptions by Executive Officers and Directors."
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL BENEFICIAL PERCENT OF
OWNER OR NUMBER OF OWNERSHIP AS OF BANK
PERSONS IN GROUP MARCH 31, 1997(1)(3)(4)(5) COMMON STOCK
------------------- -------------------------- -------------
<S> <C> <C>
Bayonne Bankshares, M.H.C.(2)
568 Broadway
Bayonne, New Jersey 07002-3896 ............ 1,659,485 54.1%
Patrick F. X. Nilan ........................ 50,370 *
Patrick D. Conaghan ........................ 19,074 *
Sam P. Lamparello .......................... 24,716 *
James F. Sisk .............................. 14,374 *
Fredrick G. Whelply ........................ 24,074 *
Joseph L. Wisniewski ....................... 23,130 *
Eugene J. Harz ............................. 6,555 *
James E. Collins ........................... 6,542 *
Donald Mindiak ............................. 4,542 *
Thomas Coughlin ............................ 1,881 *
Michael Nilan .............................. 7,042 *
All Directors and Executive Officers
as a Group (12 persons) ................... 182,300 5.9
</TABLE>
- ------------
* Less than 1%.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner for purposes of this table, of any shares of Common
Stock if he has shared voting or investment power with respect to such
security, or has a right to acquire beneficial ownership at any time within
60 days from the date as to which beneficial ownership is being determined.
As used herein, "voting power" is the power to vote or direct the voting of
shares and "investment power" is the power to dispose or direct the
disposition of shares. Includes all shares held directly as well as by
spouses and minor children, in trust and other indirect ownership, over
which shares the named individuals effectively exercise sole or shared
voting and investment power.
(2) The Bank's executive officers and directors are also executive officers and
directors of Bayonne Bankshares, M.H.C.
(3) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals. Under regulations promulgated
pursuant to the Exchange Act, shares of Bank Common Stock are deemed to be
beneficially owned by a person if he directly or indirectly has or shares
(i) voting power, which includes the power to vote or to direct the voting
of the shares, or (ii) investment power, which includes the power to
dispose or to direct the disposition of the shares. Unless otherwise
indicated, the named beneficial owner has sole voting and dispositive power
with respect to the shares.
(4) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of Bank Common Stock which may be acquired within
60 days of March 31, 1997 pursuant to the exercise of outstanding stock
options. Shares of Bank Common Stock which are subject to stock options are
deemed to be outstanding for the purpose of computing the percentage of
outstanding Bank Common Stock owned by such person or group but not deemed
outstanding for the purpose of computing the percentage of Bank Common
Stock owned by any other person or group.
(5) Includes the following amount of unvested shares of restricted stock
awarded under the 1995 Recognition Plan which may be voted by the recipient
pending vesting and distribution; 2,173 shares to each of Messrs. Conaghan,
Whelply, Sisk and Lamparello; 10,864 shares to Mr. Patrick F.X. Nilan;
2,282 shares to each of Messrs. Harz, Collins, Mindiak and Michael Nilan;
and 654 shares to Mr. Coughlin. Includes options to purchase stock pursuant
to the Bank's Stock Option Plan which were vested as of March 31, 1997 in
the following amounts: Mr. Patrick F.X. Nilan, 6,790 shares; Messrs.
Conaghan, Sisk, Lamparello and Whelply, 1,358 shares each; Mr. Wisniewski,
5,888 shares; Mr. Harz, 690 shares; Mr. Collins, 690 shares; Mr. Mindiak,
690 shares; Mr. Coughlin, 564 shares; and Mr. Michael Nilan, 690 shares.
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<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth, for each of the Company's directors and
executive officers and for all of the directors and executive officers as a
group, (i) the number of Exchange Shares to be held upon consummation of the
Conversion and Reorganization, based upon their beneficial ownership of the Bank
Common Stock as of March 31, 1997, (2) the proposed purchases of Conversion
Stock, assuming sufficient shares are available to satisfy their subscriptions,
and (3) the total amount of Common Stock to be held upon consummation of the
Conversion and Reorganization, in each case assuming that 3,682,000 shares of
Conversion Stock are sold, which is the midpoint of the Valuation Price Range.
<TABLE>
<CAPTION>
PROPOSED PURCHASES OF TOTAL COMMON STOCK
CONVERSION STOCK(1) TO BE HELD
NUMBER OF -------------------------- ---------------------------
EXCHANGE SHARES TO NUMBER NUMBER PERCENTAGE
BE HELD (2)(3)(4) AMOUNT OF SHARES OF SHARES OF TOTAL
-------------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Patrick F.X. Nilan .......... 72,564 $ 400,000 40,000 110,460(5) 1.62%
Patrick D. Conaghan ......... 34,474 200,000 20,000 54,474 0.80
Sam P. Lamparello ........... 50,000 50,000 5,000 55,000 0.81
James F. Sisk ............... 24,050 30,000 3,000 27,050 0.40
Fredrick G. Whelply ......... 45,564 50,000 5,000 50,564 0.74
Joseph L. Wisniewski ........ 38,243 100,000 10,000 48,243 0.71
Eugene J. Harz .............. 7,947 10,000 1,000 8,947 0.13
James E. Collins ............ 7,918 25,000 2,500 10,418 0.15
Donald Mindiak .............. 3,482 25,000 2,500 5,982 0.09
Thomas Coughlin ............. 1,471 5,000 500 1,971 0.03
Michael Nilan ............... 9,027 50,000 5,000 14,027 0.21
Eugene Malinowski ........... -- 200,000 20,000 20,000 0.29
All Directors and Executive
Officers as a Group
(12 persons) ............... 294,740 1,145,000 114,500 407,136 6.02
</TABLE>
- ------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares issued in the Conversion and
Reorganization.
(2) Excludes shares which may be received upon the exercise of outstanding
stock options. Based upon the Exchange Ratio of 2.218 Exchange Shares for
each Public Bank Share at the midpoint of the Valuation Price Range, the
persons named in the table would have options to purchase Common Stock as
follows: Mr. Patrick F.X. Nilan, 75,301 shares; Mr. Conaghan, 15,060
shares; Mr. Wisniewski, 13,060 shares; Mr. Lamparello, 12,048 shares; Mr.
Sisk, 15,060 shares; Mr. Whelply, 15,060 shares; Mr. Harz, 7,650 shares;
Mr. Collins, 7,650 shares; Mr. Mindiak, 7,650 shares; Mr. Michael Nilan,
7,650 shares; Mr. Coughlin, 6,248 shares; and all directors and executive
officers as a group, 182,437 shares.
(3) Includes the following amount of shares awarded under the 1995 Recognition
Plan, based upon the above Exchange Ratio, in the following amounts: Mr.
Patrick F.X. Nilan, 6,024 shares; Mr. Conaghan, 1,204 shares; Mr.
Lamparello, 1,204 shares; Mr. Sisk, 1,204 shares; Mr. Whelply, 1,204
shares; Mr. Harz, 1,264 shares; Mr. Collins, 1,264 shares; Mr. Mindiak,
1,264 shares; Mr. Michael Nilan, 1,264 shares; Mr. Coughlin, 362 shares;
and all directors and executive officers as a group, 28,308 shares.
(4) Excludes stock options and awards to be granted under the Company's 1997
Stock Option Plan and 1997 Stock Program if such plans are approved by
stockholders at an annual or special meeting of shareholders at least six
months following the Conversion and Reorganization. See "Management of the
Bank--New Benefits Resulting from the Conversion and Reorganization."
(5) Due to the overall maximum purchase limitation of 3%, Mr. Patrick F.X.
Nilan may only purchase 37,896 shares at the midpoint of the Estimated
Price Range.
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<PAGE>
THE CONVERSION AND REORGANIZATION
THE BOARDS OF DIRECTORS OF THE MUTUAL HOLDING COMPANY, THE BANK AND THE
COMPANY HAVE APPROVED THE PLAN OF CONVERSION, AS HAS THE OTS, SUBJECT TO
APPROVAL BY THE MEMBERS OF THE MUTUAL HOLDING COMPANY AND THE STOCKHOLDERS 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.
GENERAL
On December 19, 1996 the Boards of Directors of the Mutual Holding Company
and the Bank unanimously adopted, and subsequently amended, subject to approval
by the OTS, the Plan pursuant to which the Mutual Holding Company will convert
to a stock form of organization; the Company will offer and sell the Conversion
Stock; and the Company will issue Common Stock in exchange for the Public Bank
Shares. It is 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 Members of the Mutual Holding Company and the stockholders of the Bank. A
special meeting of members and a special meeting of stockholders have been
called for this purpose to be held on August 14, 1997.
The Company has received approval of the OTS to become a savings and loan
holding company and to acquire all of the Common Stock of the Bank to be issued
in the Conversion and Reorganization. The Company plans to retain 50% of the net
proceeds from the sale of the Conversion Stock, with all the remaining proceeds
contributed to the Bank. The Conversion and Reorganization will be effected only
upon completion of the sale of all of the shares of Conversion Stock of the
Company to be issued pursuant to the Plan.
The Plan provides generally that (i) the Mutual Holding Company will
convert to the stock form of organization and (ii) the Company will offer shares
of Conversion Stock for sale in the Subscription Offering to the Bank's Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders, and Other
Members. Concurrently, shares will be offered in a Community Offering with a
first preference given to the holders of the Public Bank Shares and a second
preference given to natural persons residing in the City of Bayonne in the State
of New Jersey. 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 Syndicated Community Offering. The Primary Parties have
the right to accept or reject, in whole or in part, any orders to purchase
shares of the Conversion 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 Conversion Stock to be issued in the
Conversion and Reorganization within the Estimated Price Range, currently
estimated to be between $31.3 million and $42.3 million, will be determined
based upon an independent appraisal, prepared by FinPro of the estimated pro
forma market value of the Conversion Stock of the Company. All shares of
Conversion Stock to be issued and sold in the Conversion and Reorganization 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 FinPro, a
consulting firm experienced in the valuation and appraisal of savings
institutions. See "--Stock Pricing and Exchange Ratio" for additional
information as to the determination of the estimated pro forma market value of
the Conversion Stock.
The Primary Parties had initially proposed the establishment of a
charitable foundation in connection with the Conversion and Reorganization,
which was to be funded with Common Stock of the Company. Establishment of the
foundation was for the benefit of the Bayonne community, and was intended to
provide funding to support community activities and charitable causes within the
City of Bayonne. The proposal to establish the foundation was subject to the
approval of the OTS. During the course of the regulatory review process, the OTS
determined to impose certain restrictive conditions upon the establishment of
the foundation. Based upon an evaluation of those conditions, and the
uncertainty of being able to successfully comply with the conditions, the
Primary Parties determined not to proceed with their plans for a charitable
foundation. Neither the Company nor the Bank have any present plans to establish
a foundation in the future.
The following is a brief summary of pertinent aspects of the Conversion and
Reorganization. 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
88
<PAGE>
Exhibit to the Registration Statement of which this Prospectus is a part, copies
of which may be obtained from the SEC. See "Additional Information."
PURPOSES OF THE CONVERSION AND REORGANIZATION
The Mutual Holding Company, as a federally-chartered mutual holding
company, does not have stockholders and has no authority to issue capital stock.
As a result of the Conversion and Reorganization, the Mutual Holding Company
will be restructured into the form used by holding companies of commercial
banks, other business entities and a growing number of savings institutions. The
Conversion and Reorganization will enhance the ability of the Company and the
Bank to access capital markets, expand current operations, acquire other
financial institutions or branch offices, provide affordable home financing
opportunities to the communities the Bank serves or diversify into other
financial services to the extent allowable by applicable law and regulation.
The stock holding company form of organization would 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 and
Reorganization, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise. See "Use
of Proceeds."
While the Bank prior to the consummation of the Conversion and
Reorganization has the ability to raise additional capital through the sale of
additional shares of its common stock, that ability is limited by the mutual
holding company structure which, among other things, requires that the Mutual
Holding Company own a majority of the outstanding shares of its savings
institution subsidiary's common stock. The Conversion and Reorganization will
significantly increase the Bank's capital position to a level whereby the Bank
will be better positioned to take advantage of business opportunities as they
arise. At March 31, 1997, the Bank had stockholders' equity, determined in
accordance with GAAP, of $48.1 million, or 8.33% of total assets. Assuming that
the Company contributes 50% of net proceeds at the maximum of the Estimated
Price Range to the Bank, the Bank's GAAP capital will increase to $67.6 million,
or a ratio of GAAP capital to adjusted assets, on a pro forma basis, of 11.34%
after the Conversion and Reorganization. The investment of the net proceeds from
the sale of the Conversion Stock is expected to provide the Bank with additional
income to increase further its capital position. The additional capital may also
assist the Bank in offering new programs and expanded services to its customers.
See "Use of Proceeds."
If the Bank had undertaken a standard conversion involving the formation of
a stock holding company in 1995 when it reorganized into mutual holding company
form, applicable OTS regulations would have required a greater amount of common
stock to be sold than the $12.5 million raised in the 1995 MHC Reorganization,
and in light of then prevailing market conditions there was uncertainty as to
whether the greater amount of common stock could have been sold. A standard
conversion in 1995 also would have immediately eliminated all aspects of the
mutual form of organization. In light of current market conditions for the
stocks of savings institutions and their holding companies and the Bank's
financial condition, the Boards of Directors of the Bank and the Mutual Holding
Company believe that it is in the best interests of such companies and their
respective stockholders and members to raise additional capital at this time,
and that the most feasible way to do so is through the Conversion.
After completion of the Conversion and Reorganization, 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 under the Stock Option Plans or Master Stock-Based Benefit Plan or
the possible issuance of authorized but unissued shares to the Stock Programs
under the Stock Option Plans or Master Stock-Based Benefit Plan. Following the
Conversion and Reorganization, 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."
DESCRIPTION OF THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Bank and the Mutual Holding Company adopted
the Plan on December 19, 1996, and subsequent thereto amended the Plan.
Thereafter, the Bank caused the Company to be incorporated under Delaware law as
a first-tier, wholly owned subsidiary of the Bank, and the Board of Directors of
the Company adopted the Plan on February 6, 1997, and subsequently adopted all
amendments thereto. To facilitate the Conversion and
89
<PAGE>
Reorganization, the MHC will convert from mutual form to a federal interim stock
savings institution and simultaneously merge into the Bank. The Company formed
First Interim Bank of New Jersey, FSB ("First Interim Bank") as a first-tier,
wholly owned subsidiary of the Company; First Interim Bank will merge with and
into the Bank. The Board of Directors of First Interim Bank has adopted the Plan
by at least a two-thirds vote. In addition, the Bank and the Company have
approved the Plan in their capacities as the sole shareholders of the Company
and First Interim Bank, respectively.
Pursuant to OTS regulations, the Plan must be approved by the affirmative
vote of at least a majority of the total number of votes eligible to be cast by
Members at the Special Meeting and by holders of at least two-thirds of the
outstanding common stock of the Bank at the Stockholders' Meeting. In addition,
in accordance with current OTS policy, the Plan must be approved by a majority
of the votes cast, in person or by proxy, by the holders of the Public Bank
Shares at the Stockholders' Meeting.
The following diagram outlines the current organizational structure of the
parties' ownership interests:
------------------------- ------------------------------
BAYONNE BANKSHARES, M.H.C. HOLDERS OF PUBLIC BANK SHARES
------------------------- ------------------------------
54.1% 45.9%
-------------------------------------
FIRST SAVINGS BANK OF NEW JERSEY, SLA
-------------------------------------
100%
------------------------
BAYONNE BANCSHARES, INC.
------------------------
100%
---------------------------------------------
FIRST INTERIM SAVINGS BANK OF NEW JERSEY, FSB
---------------------------------------------
The following diagram reflects the resulting structure of the parties upon
consummation of the Conversion and Reorganization, including (i) the merger of
the Mutual Holding Company with and into the Bank, (ii) the merger of First
Interim Bank with and into the Bank, pursuant to which the Public Bank Shares
will be converted into Exchange Shares, and (iii) the offering of Conversion
Stock. The diagram assumes that there are no fractional shares and does not give
effect to purchase of Conversion Stock by holders of Public Bank Shares or the
exercise of outstanding stock options.
------------------- -------------------
PURCHASERS HOLDERS OF
OF CONVERSION STOCK PUBLIC BANK SHARES
------------------- -------------------
54.1% 45.9%
------------------------
BAYONNE BANCSHARES, INC.
------------------------
100%
-------------------------------------
FIRST SAVINGS BANK OF NEW JERSEY, SLA
-------------------------------------
90
<PAGE>
EFFECTS OF THE CONVERSION AND REORGANIZATION
General. Each depositor in the Bank 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 Mutual Holding Company. 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
Mutual Holding Company 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 Mutual Holding Company, which is lost to the extent that the
balance in the account is reduced.
Consequently, the depositors of the Bank normally have no way to realize
the value of their ownership interest, which has realizable value only in the
unlikely event that the Mutual Holding Company is liquidated. In such event, 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.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock is created to represent the ownership of the net
worth of the Company. THE COMMON STOCK OF THE COMPANY IS SEPARATE AND APART FROM
DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT INSURED 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 Bank.
Continuity. While the Conversion and Reorganization 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 and Reorganization, 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 and Reorganization
will serve initially as Directors of the Bank after the Conversion and
Reorganization. The Directors of the Company will consist initially of
individuals currently serving on the Board of Directors of the Mutual Holding
Company. All officers of the Bank at the time of Conversion and Reorganization
will retain their positions immediately after Conversion and Reorganization.
Effect on Public Bank Shares. Under the Plan, upon consummation of the
Conversion and Reorganization, the Public Bank Shares shall be converted into
Common Stock based upon the Exchange Ratio without any further action on the
part of the holder thereof. Upon surrender of the Public Bank Shares, Common
Stock will be issued in exchange for such shares.
Upon consummation of the Conversion and Reorganization, the Public
Stockholders of the Bank, a New Jersey chartered savings association, will
become stockholders of the Company, a Delaware corporation. For a description of
certain changes in the rights of stockholders as a result of the Conversion and
Reorganization, see "Comparison of Stockholders' Rights" below.
Under New Jersey law, Public Stockholders of the Bank do not have
dissenters' rights or appraisal rights in connection with the Conversion and
Reorganization. See "Comparison of Stockholders' Rights--Dissenters' Rights of
Appraisal."
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of Conversion and Reorganization will automatically continue as a
depositor after the Conversion and Reorganization, 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 and Reorganization (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 Reorganization, and the amount, interest rate, maturity and
security for each loan will remain as they were contractually fixed prior to the
Conversion and Reorganization.
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 Mutual
Holding Company as to all matters requiring membership action. Upon
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<PAGE>
Conversion and Reorganization, the MHC will cease to exist and therefore,
depositors and borrowers will cease to be members and will no longer be entitled
to vote at meetings of the Mutual Holding Company. Upon Conversion and
Reorganization, 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 and borrowers
of the Bank will not have voting rights in the Company after the Conversion and
Reorganization except to the extent that they become stockholders of the
Company.
Tax Effects. The Primary Parties have received an opinion from Peat Marwick
with regard to federal income taxation and New Jersey taxation which provides
that the adoption and implementation of the Plan of Conversion and Agreement and
Plan of Reorganization set forth herein will not be taxable for federal or New
Jersey tax purposes to the Primary Parties or the Bank's Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members, except as
discussed below. See "--Tax Aspects."
Effect on Liquidation Rights. If the Mutual Holding Company 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 the
Conversion and Reorganization, 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.
EFFECT ON EXISTING COMPENSATION PLANS
Under the Plan, the Bank's 1995 Stock Option Plan and 1995 Recognition Plan
will become stock benefit plans of the Company and the Bank's 1995 ESOP will
continue as a benefit plan of the Bank and shares of Common Stock will be issued
(or reserved for issuance) pursuant to such benefit plans. See "Management of
the Bank--Benefit Plans."
STOCK PRICING AND EXCHANGE RATIO
The Plan of Conversion requires that the Aggregate Purchase Price of the
Conversion Stock must be based on the appraised pro forma market value of the
Conversion Stock, as determined on the basis of an independent valuation. The
Primary Parties have retained FinPro to make such valuation. For its services in
making such appraisal, FinPro will receive a fee of $20,000, plus reasonable
expenses. The Primary Parties have agreed to indemnify FinPro 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 FinPro liability results from its negligence, willful
misconduct or bad faith.
An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
FinPro also considered the following factors, among others: the present and
projected operating results and financial condition of the Primary Parties and
the economic and demographic conditions in the Mutual Holding Company's and the
Bank's existing marketing area; certain historical, financial and other
information relating to the Mutual Holding Company and 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 Mutual Holding Company's and the Bank's primary market area and
northeastern United States; the aggregate size of the offering of the Conversion
Stock; the impact of Conversion and Reorganization on the Mutual Holding
Company's and the Bank's net worth and earnings potential; the proposed dividend
policy of the Company and the Bank; and the trading market for the Bank Common
Stock and securities of comparable institutions and general conditions in the
market for such securities.
On the basis of the foregoing, FinPro has advised the Primary Parties in
its opinion the estimated pro forma market value of the Bank and the Mutual
Holding Company on a combined basis was $68,000,000 as of May 19, 1997. Because
the holders of the Public Bank Shares will continue to hold approximately the
same aggregate
92
<PAGE>
percentage ownership interest in the Company as they currently hold in the Bank
(before giving effect to the payment of cash in lieu of issuing fractional
Exchange Shares, and any shares of Conversion Stock purchased by the Bank's
stockholders in the Offerings or by the ESOP thereafter), the Appraisal was
multiplied by the Mutual Holding Company's percentage interest in the Bank which
corresponds with the amount of Conversion Stock to be sold in the Offerings
(i.e., 54.1%), to determine the midpoint of the valuation ($36,820,000), and the
minimum and maximum of the valuation were set at 15% below and above the
midpoint, respectively, resulting in a range of $31,300,000 to $42,340,000. The
Boards of Directors of the Primary Parties determined that the Conversion Stock
would be sold at $10.00 per share, resulting in a range of 3,130,000 to
4,234,000 shares of Conversion Stock being offered. Upon consummation of the
Conversion and Reorganization, the Conversion Stock and the Exchange Shares will
represent approximately 54.1% and 45.9%, respectively, of the Company's total
outstanding shares. The Boards of Directors of the Primary Parties reviewed
FinPro's appraisal report, including the methodology and the assumptions used by
FinPro, and determined that the Valuation Price Range was reasonable and
adequate. The Boards of Directors of the Primary Parties also established the
formula for determining the Exchange Ratio. Based upon such formula and the
Valuation Price Range, the Exchange Ratio ranged from a minimum of 1.885 to a
maximum of 2.933 Exchange Shares for each Public Bank Shares, with a midpoint of
2.218. Based upon these Exchange Ratios, the Company expects to issue between
2,650,000 and 3,586,000 shares of Exchange Shares to the holders of Public Bank
Shares outstanding immediately prior to the consummation of the Conversion and
Reorganization. The Valuation Price Range and the Exchange Ratio may be amended
with the approval of the OTS, if required, or if necessitated by subsequent
developments in the financial condition of any of the Primary Parties or market
conditions generally. In the event the Appraisal is updated to below $31,300,000
or above $48,700,000 (the maximum of the Valuation Price Range, as adjusted by
15%), such Appraisal will be filed with the SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices and
policies of the OTS, in the event the Company receives orders for Conversion
Stock in excess of $42,340,000 (the maximum of the Valuation Price Range) and up
to $48,700,000 (the maximum of the Valuation Price Range, as adjusted by 15%),
the Company may be required by the OTS to accept all such orders. No assurances,
however, can be made that the Company will receive orders for Conversion Stock
in excess of the maximum of the Valuation Price Range or that, if such orders
are received, that all such orders will be accepted because the Company's final
valuation and number of shares to be issued are subject to the receipt of an
updated appraisal from FinPro which reflects such an increase in the valuation
and the approval of such increase by the OTS. There is no obligation or
understanding on the part of management to take and/or pay for any shares of
Conversion Stock in order to complete the Offerings.
The following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Valuation Price Range, the following: (i) the
total number of shares of Conversion Stock and Exchange Shares; (ii) the
percentage of the total Common Stock represented by the Conversion Stock and the
Exchange Shares; and (iii) the Exchange Ratio. The table does not give effect to
cash paid in lieu of issuing fractional Exchange Shares.
TOTAL SHARES
CONVERSION STOCK EXCHANGE SHARES OF
TO BE ISSUED TO BE ISSUED COMMON STOCK
---------------- --------------- TO BE EXCHANGE
AMOUNT PERCENT AMOUNT PERCENT OUTSTANDING RATIO
-------- ------- ------- ------- ----------- --------
Minimum ........... 3,130,000 54.1% 2,650,000 45.9% 5,780,000 1.885
Midpoint .......... 3,682,000 54.1 3,118,000 45.9 6,800,000 2.218
Maximum ........... 4,234,000 54.1 3,586,000 45.9 7,820,000 2.550
15% above maximum . 4,870,000 54.1 4,123,000 45.9 8,993,000 2.933
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.
FINPRO DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE BANK AND THE MUTUAL HOLDING COMPANY, NOR DID
FINPRO VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK AND THE MUTUAL
HOLDING COMPANY. THE VALUATION CONSIDERS THE BANK AND THE MUTUAL HOLDING
COMPANY AS GOING CONCERNS AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE
LIQUIDATION VALUE OF THE BANK AND THE MUTUAL HOLDING COMPANY. 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 CONVERSION STOCK OR RECEIVING EXCHANGE
STOCK IN THE CONVERSION AND REORGANIZATION 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 "MARKET FOR THE
COMMON STOCK."
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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 Conversion Stock to be issued in the Conversion and Reorganization
may be increased to 4,870,000 shares due to regulatory considerations or changes
in market or general financial and economic conditions, without the
resolicitation of subscribers. See "--Limitations on Conversion 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 Conversion Stock may be consummated unless, prior to
such consummation, FinPro confirms to the Primary Parties and the OTS that, to
the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, would cause FinPro to conclude that
the value of the Conversion Stock at the price so determined is incompatible
with its estimate of the pro forma market value of the Conversion Stock at the
conclusion of the Subscription and Community Offerings.
If the pro forma market value of the Conversion 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 and
Reorganization. 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 August 14, 1999.
If all shares of Conversion Stock are not sold through the Subscription and
Community Offerings, then the Bank and the Company expect to 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 Offerings subject to prior
rights of subscribers. All shares of Conversion 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 Conversion Stock may be consummated unless, prior to
such consummation, FinPro 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
FinPro to conclude that the aggregate value of the Conversion 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 Primary Parties may extend
the Conversion and Reorganization, 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 and Reorganization, 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 and Reorganization,
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 August 14, 1999. 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.
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Copies of the appraisal report of FinPro 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."
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the Plan by the Boards of Directors of the Primary
Parties will be final, subject to the authority of the OTS, including but not
limited to interpretations relating to residence requirements applicable to
subscribers and purchase limitations. The Plan provides that, if deemed
necessary or desirable by the Boards of Directors of the Primary Parties, the
Plan may be substantively amended prior to the solicitation of proxies from
members entitled to vote on the Plan by a two-thirds vote of the Boards of
Directors; amendment of the Plan thereafter requires the approval of the OTS.
The Plan will terminate if the sale of all shares of stock being offered
pursuant to the Plan is not completed prior to 24 months after the date of the
Special Meeting. The Plan may be terminated by a two-thirds vote of the Boards
of Directors of the Primary Parties at any time prior to the Special Meeting,
and thereafter by such a vote with the approval of the OTS.
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 of
Conversion Stock to be issued in the Conversion and Reorganization 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 of the Estimated Price Range or more than 15% above the maximum of
the Estimated Price Range. Based on a fixed purchase price of $10.00 per share
and the FinPro estimate of the pro forma market value of the Conversion Stock
ranging from a minimum of $31,300,000 to a maximum, as increased by 15%, of
$48,700,000 the number of shares of Conversion Stock expected to be issued is
between a minimum of 3,130,000 shares and a maximum, as adjusted by 15%, of
4,870,000 shares. The actual number of shares issued between this range will
depend on a number of factors and shall be determined by the Primary Parties
subject to OTS approval, if necessary.
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 the Estimated Price Range and,
if the Plan is not terminated by the Primary Parties 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 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 Conversion Stock Purchases." Any increase or
decrease in the number of shares of Common Stock will result in a corresponding
change in the number of Exchange Shares, so that upon consummation of the
Conversion and Reorganization, the Conversion Stock and the Exchange Shares will
represent approximately 54.1% and 45.9%, respectively, of the Company's total
outstanding shares of Common Stock.
An increase in the number of shares of Conversion Stock 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 of Conversion Stock 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 Conversion Stock have been granted under the Plan of Conversion to
the following persons in the following order of descending priority: (1)
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holders of savings accounts, as defined in the Plan, with a balance of $50 or
more as of December 31, 1994 ("Eligible Account Holders"); (2) the ESOP; (3)
holders of savings accounts, as defined in the Plan, with a balance of $50 or
more as of June 30, 1997 ("Supplemental Eligible Account Holders"); and (4)
members of the Bank, consisting of depositors of the Bank as of June 30, 1997,
the Voting Record Date, and borrowers with loans outstanding as of January 6,
1995, 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
Conversion 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 Conversion Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable 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 Conversion Stock, one-tenth of one percent (.10%) of the total offering of
shares of Conversion Stock or fifteen times the product (rounded down to the
next whole number) obtained by multiplying the total number of shares of
Conversion Stock to be issued by a fraction of which the numerator is the amount
of the Eligible Account Holder's Qualifying Deposit (defined by the Plan as any
savings account in the Bank with a balance of $50 or more as of December 31,
1994) 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 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 Conversion Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares in excess of the total number of shares eligible for
subscription, the shares will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make his
total allocation equal to the lesser of 100 shares or the number of shares
subscribed for. Thereafter, unallocated shares will be allocated among the
remaining subscribing Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective Qualifying
Deposits bear to the total amount of Qualifying Deposits of all remaining
Eligible Account Holders whose subscriptions remain unfilled, 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 December 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, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of Conversion Stock issued in the Conversion and Reorganization,
including any increase in the number of shares of Conversion Stock to be issued
in the Conversion and Reorganization 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 and
Reorganization or 250,400 shares and 338,720 shares, based on the issuance of
3,130,000 shares and 4,234,000 shares, respectively. Subscriptions by the ESOP
will not be aggregated with shares of Conversion 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--Benefit
Plans--Employee Stock Ownership Plan and Trust."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable 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 Conversion Stock, one-tenth of one
percent (.10%) of the total offering of shares of Conversion Stock or fifteen
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion 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
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Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall maximum 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 Conversion Stock
Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares in excess of the total number of
shares eligible for subscription, the shares will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make his total allocation equal to
the lesser of 100 shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated among the remaining subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective Qualifying Deposits bear to the
total amount of Qualifying Deposits of all remaining Supplemental Eligible
Account Holders whose subscriptions remain unfilled, 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 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 nontransferable subscription
rights to subscribe for Conversion Stock in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $200,000 of Conversion Stock, or one-tenth of one percent (.10%) of
the total offering of shares of Conversion Stock, subject to the overall maximum
purchase limitation and exclusive of an increase in shares issued pursuant to an
increase in the Estimated Price Range of up to 15%. See "--Limitations on
Conversion Stock Purchases."
In the event that Other Members exercise subscription rights for a number
of shares in excess of the total number of shares eligible for subscription, the
shares will be allocated so as to permit each subscribing Other Member, to the
extent possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of 100 shares or the number of shares subscribed
for. Thereafter, unallocated shares will be allocated among the remaining
subscribing Other Members whose subscriptions remain unfilled on a pro rata
basis in the same proportion as a subscribing Other Member's total votes on the
Voting Record Date for the Special Meeting bears to the total votes of all
subscribing Other Members on such date.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire at 12:00 noon, Eastern time, on August 11, 1997 unless extended for
up to 45 days by the Primary Parties or such additional periods with the
approval of the OTS. Subscription rights which have not been exercised prior to
the Expiration Date will become void.
The Primary Parties will not execute orders until all shares of Conversion
Stock have been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the 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 canceled. If
an extension beyond the 45 day period following the Expiration Date is granted,
the Primary Parties will notify subscribers of the extension of time and of any
rights of subscribers to modify or rescind their subscriptions and have their
funds returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Primary Parties of their intention to
confirm, modify, or rescind their subscription. If an affirmative response to
any resolicitation is not received by the Company from a subscriber, such order
will be rescinded and all subscription funds will be promptly returned with
interest. Such extensions may not go beyond August 14, 1999.
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 Primary Parties
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have determined to offer shares pursuant to the Plan to certain members of the
general public, with a first preference given to holders of Public Bank Shares
and a second preference given to natural persons residing in the City of Bayonne
(such natural persons referred to as "Preferred Subscribers"), subject to the
right of the Company to accept or reject any such orders, in 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 $200,000 of Conversion
Stock subject to the overall maximum purchase limitation and exclusive of shares
issued pursuant to an increase in the Estimated Price Range by up to 15%. See
"--Limitations on Conversion Stock Purchases." This amount may be increased to
up to a maximum of 5% of the Conversion Stock offered or decreased to less than
$200,000 of Conversion Stock at the sole discretion of the Primary Parties. THE
OPPORTUNITY TO SUBSCRIBE FOR SHARES OF CONVERSION STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE PRIMARY PARTIES, IN THEIR 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 the Public Stockholders after completion of the
Subscription and Community Offerings, such stock will be allocated first to each
holder of Public Bank Shares 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 Public Stockholder, if possible. Thereafter, unallocated shares will be
allocated among the Public Stockholders whose order remains unsatisfied on a 100
shares per order basis until all such orders have been filled or the remaining
shares have been allocated. To the extent that there are shares remaining after
all subscriptions by Public Stockholders have been filled, shares will be
allocated, applying the same allocation formula described above, to Preferred
Subscribers. 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 Public Stockholders and
Preferred Subscribers.
Persons in Nonqualified States or Foreign Countries. The Primary Parties
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 Plan provides that the Primary Parties 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 both of the following apply: (i) a small number of persons otherwise
eligible to subscribe for shares of Conversion Stock reside in such state; and
(ii) the Primary Parties 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 Primary Parties 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 Conversion 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 Primary Parties will base
their decision as to whether or not to offer the Conversion 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 has engaged Sandler O'Neill as a consultant and financial advisor
in connection with the offering of the Conversion Stock, 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 Conversion Stock in the
Offerings. Based upon negotiations between the Primary Parties concerning fee
structure, Sandler O'Neill will receive a fee equal to 2% of the aggregate
Purchase Price of all shares sold in the Subscription Offering and Community
Offering, excluding shares purchased by directors, officers, employees and any
immediate family member thereof and the ESOP for which Sandler O'Neill will not
receive a fee. 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 be
negotiated at such time under such agreement) to such selected dealers, any
sponsoring dealers fees, and a management fee to Sandler O'Neill of 2% for
shares sold by a National Association of Securities Dealers, Inc. ("NASD")
member firm pursuant to a selected dealers agreement; provided, however, that
any fees payable to Sandler O'Neill for Conversion Stock sold by them pursuant
to such a selected dealers agreement shall not exceed 2% of the Purchase Price
and provided, further, however, that the aggregate fees payable to Sandler
O'Neill and the selected dealers will not exceed 7% of the aggregate purchase
price of the Conversion Stock sold by selected dealers. Fees to Sandler O'Neill
and to any other broker-dealer may be deemed to
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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
$50,000. 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
Primary Parties have agreed to indemnify Sandler O'Neill for reasonable costs
and expenses in connection with claims or liabilities under applicable federal
or state law, or otherwise, related to or arising out of the Conversion except
to the extent that such claim or liability arose out of or was based upon any
untrue statement of material fact, omission of a material fact related to or
made in reliance upon and in conformity with written information furnished to
the Primary Parties by Sandler O'Neill or such claim or liability was primarily
attributable to the gross negligence, willful misconduct or bad faith of Sandler
O'Neill. Such claims and liabilities could include claims under the federal and
state securities laws. Sandler O'Neill has received advances towards its fees
totaling $50,000. Total marketing fees to Sandler O'Neill are expected to be
$566,000 and $769,000 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 also will perform proxy solicitation services, conversion
agent services and records management services for the Primary Parties in the
Conversion and Reorganization and is expected to receive a fee for these
services of approximately $22,500, plus reimbursement of reasonable
out-of-pocket expenses. Sandler O'Neill has received advances toward its fees
for these services totaling $5,000.
Directors and executive officers of the Primary Parties 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 administrative
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 Primary Parties 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 Conversion 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 12:00
noon, Eastern time, on the Expiration Date. 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 Primary Parties are 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 Conversion Stock for which they subscribe in the Community
Offering at any time prior to 48 hours before the completion of the Conversion
and Reorganization. The Primary Parties 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 Primary Parties unless
the Conversion and Reorganization 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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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 (December 31,
1994) and/or the Supplemental Eligibility Record Date (June 30, 1997) and/or the
Voting Record Date (June 30, 1997) must list all accounts on the stock order
form giving all names in each account and the account number.
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 and Reorganization. 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 and Reorganization, but a hold will
be placed on such funds, thereby making them unavailable to the depositor until
completion or termination of the Conversion and Reorganization.
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 and Reorganization. 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 canceled at the time of the withdrawal, without penalty, and
the remaining balance will earn interest at the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Conversion Stock subscribed
for at the Purchase Price upon consummation of the Subscription and Community
Offering, if all shares are sold, or upon consummation of the Syndicated
Community Offering if shares remain to be sold in such offering; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use the
assets of such IRAs to purchase shares of Conversion Stock in the Subscription
and Community Offerings, provided that such IRAs are not maintained at the Bank.
Persons with self-directed 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, directors and 10%
shareholders who use self-directed IRA funds to purchase shares of Conversion
Stock in the Subscription and Community Offerings, make such purchases for the
exclusive benefit of the IRAs.
Certificates representing shares of Conversion Stock purchased will be
mailed to purchasers at the address specified in properly completed stock order
forms, as soon as practicable following consummation of the sale of all shares
of Conversion 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 and Reorganization, 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 Conversion 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 Conversion Stock prior
to the completion of the Conversion and Reorganization.
THE PRIMARY PARTIES 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 and Reorganization, the Plan provides
that, if feasible, all shares of Conversion 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
Conversion Stock. The Company and the Bank have the right to reject orders in
whole or in 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 Conversion 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 Conversion Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing and
Exchange Ratio." 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 $200,000 of the
total number of shares offered in the Conversion and Reorganization, 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 Conversion 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 the overall maximum purchase
limitation, 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 and Reorganization.
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 Conversion 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
Conversion 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 August 14, 1999. See
"--Stock Pricing and Exchange Ratio" above for a discussion of rights of
subscribers, if any, in the event an extension is granted.
LIMITATIONS ON CONVERSION STOCK PURCHASES
The Plan includes the limitations set forth below on the number of shares
of Conversion Stock which may be purchased during the Conversion and
Reorganization. The purchase limits set forth in paragraphs (2), (4), (5), (6)
and (7) are subject to the overall maximum purchase limitations in (8) below
which includes Exchange Shares received by purchasers.
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(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 $200,000 of Conversion Stock
offered, one-tenth of one percent (.10%) of the total offering of shares of
Conversion Stock or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of
Conversion 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 purchase 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 Conversion Stock issued in the Conversion and Reorganization, 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 Conversion Stock issued in
the Conversion and Reorganization, including any increase in the number of
shares to be issued after the date hereof as a result of an increase of up
to 15% in the maximum of the Estimated Price Range;
(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 $200,000 of Conversion
Stock, one-tenth of one percent (.10%) of the total offering of shares of
Conversion Stock or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of
Conversion 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 maximum purchase 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 $200,000 of Conversion Stock, or one-tenth of
one percent (.10%) of the total offering of shares of Conversion Stock
subject to the overall maximum purchase 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 Conversion 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 $200,000 of
Conversion Stock in the Conversion and Reorganization subject to the
overall maximum purchase 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 Conversion 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 $200,000 of
shares of Conversion Stock in the Conversion and Reorganization subject to
the overall maximum purchase 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
Conversion 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 limitations described in (6) and
(7) above, provided that, except for the ESOP, the overall maximum number
of shares of Conversion Stock subscribed for or purchased in all categories
of the Conversion and Reorganization by any person, together with
associates of and groups of persons acting in concert with such persons
when combined with any Exchange Shares received by such persons, shall not
exceed 3% of the shares of
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Conversion Stock offered in the Conversion and Reorganization 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
(9) No more than 25% of the total number of shares of Conversion Stock offered
for sale in the Conversion and Reorganization may be purchased by directors
and officers of the Bank and the Mutual Holding Company and their
associates in the aggregate, when combined with any Exchange Shares
received and excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Mutual Holding Company or the Public Stockholders 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 Primary Parties. 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 Primary Parties may, in their sole discretion, increase the
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 Conversion 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. In any event,
any Exchange Shares received by an individual will be aggregated with shares
subscribed for by such person for purposes of applying the maximum purchase
limitation.
The overall maximum purchase limitation may not be reduced to less than 1%
but the individual amount permitted to be subscribed for may be reduced by the
Primary Parties to less than 1%, subject to paragraphs (2), (4), and (5) above
without the further approval of members or Public Stockholders 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 3% of the shares of Conversion
Stock 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 and Reorganization, subject to
availability of shares, the overall maximum purchase limit for purchases in the
Conversion and Reorganization and the amount of Exchange Shares received by such
individual.
In the event of an increase in the total number of shares offered in the
Conversion and Reorganization 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 Maximums; and (v) to
fill unsatisfied subscriptions in the Community Offering to the extent possible,
exclusive of the Adjusted Maximum and with a first preference to Public
Stockholders and a second preference to Preferred Subscribers.
The term "associate" of a person is defined to mean: (i) any corporation
(other than the Primary Parties 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 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 "Beneficial Ownership of Capital
Stock--Subscriptions by Executive Officers and Directors," "--Certain
Restrictions on Purchase or Transfer of Shares After Conversion and
Reorganization" and "Restrictions on Acquisition of the Company and the Bank."
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LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Mutual Holding
Company in its present mutual form, each depositor would receive his pro rata
share of any assets of the Mutual Holding Company 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 and Reorganization, 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 or the Company above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion and Reorganization, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders in
an amount equal to the greater of (1) the Bank's retained earnings at August 31,
1994, the date of the latest statement of financial condition contained in the
final offering circular utilized in the 1995 MHC Reorganization or (2) 54.1% of
the Bank's shareholders' equity as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the Conversion and
Reorganization. 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
and Reorganization, 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 with a balance of $50 or more held
in the Bank on December 31, 1994 and June 30, 1997, respectively. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account based on the proportion that the
balance of his Qualifying Deposits on the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, bore to the total amount of
all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders in the Bank. For Qualifying Deposits in existence at
both dates separate subaccounts shall be determined on the basis of the
Qualifying Deposits in such deposit accounts on such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits 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
accounts are 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 and Reorganization is expressly conditioned
upon the receipt by the Primary Parties of either a favorable ruling from the
IRS or an opinion of counsel with respect to federal income taxation, and an
opinion of an independent accountant with respect to New Jersey, to the effect
that the Conversion and Reorganization will not be a taxable transaction to the
Mutual Holding Company, the Company, the Bank, Eligible Account Holders, or
Supplemental Eligible Account Holders except as noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion and Reorganization. Instead, the Bank has received an
opinion of Peat Marwick, to the effect that for federal income tax purposes,
among other matters: (1) the conversion of the Mutual Holding Company from
mutual form to a federal interim stock savings institution and its simultaneous
merger with and into the Bank, with the Bank being the surviving institution,
will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of
the Code, (2) no gain or loss will be recognized by the Bank upon the receipt of
the assets of the Mutual Holding Company in such merger, (3) the merger of the
Interim with and into the Bank, with the Bank being the surviving institution,
will qualify as a reorganization
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within the meaning of Section 368(a)(1)(A) of the Code, (4) no gain or loss will
be recognized by Interim upon the transfer of its assets to the Bank, (5) no
gain or loss will be recognized by the Bank upon the receipt of the assets of
Interim, (6) no gain or loss will be recognized by the Company upon the receipt
of Bank Common Stock solely in exchange for Common Stock, (7) no gain or loss
will be recognized by the Public Stockholders upon the receipt of Common Stock
solely in exchange for their Public Bank Shares, (8) the basis of the Common
Stock to be received by the Public Stockholders will be the same as the basis of
the Public Bank Shares surrendered in exchange therefore, before giving effect
to any payment of cash in lieu of fractional shares, (9) the holding period of
the Common Stock to be received by the Public Stockholders will include the
holding period of the Public Bank Shares, provided that the Public Bank Shares
were held as a capital asset on the date of the exchange, (10) no gain or loss
will be recognized by the Company upon the sale of shares of Conversion Stock in
the Offering, (11) the Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members will recognize gain, if any, upon the issuance to them
of withdrawable savings accounts in the Bank following the Conversion and
Reorganization, interests in the liquidation account and nontransferable
subscription rights to purchase Conversion Stock, but only to the extent of the
value, if any, of the subscription rights, and (12) the tax basis to the holders
of Conversion Stock purchased in the Offerings will be the amount paid
therefore, and the holding period for the shares of Conversion Stock will begin
on the date of consummation of the Offerings if purchased through the exercise
of subscription rights and on the day after the date of purchase if purchased in
the Community Offering or Syndicated Community Offering. Peat Marwick has also
opined that the Conversion and Reorganization 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 and local tax opinions are based upon
the assumption that the subscription rights issued in connection with the
Conversion and Reorganization will have no value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant 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.
In the opinion of FinPro, the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration, and afford the recipients the right
only to purchase the Conversion 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 Conversion Stock. Such valuation is not binding on 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 be taxable 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.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
AND REORGANIZATION
All shares of Conversion Stock purchased in connection with the Conversion
and Reorganization by a director or an executive officer of the Primary Parties
will be subject to a restriction that the shares not be sold for a period of one
year following the Conversion and Reorganization, 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 Company and 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 Conversion Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Primary Parties after adoption of the Plan of Conversion) and
their associates during the three-year period following Conversion and
Reorganization 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 any
Stock Option Plan to be established after the Conversion and Reorganization.
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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, beginning one year following completion of the Conversion and
Reorganization 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 ten 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.
COMPARISON OF STOCKHOLDERS' RIGHTS
GENERAL
As a result of the Conversion and Reorganization, holders of the Bank
Common Stock will become stockholders of the Company. There are certain
differences in stockholder rights arising from distinctions between the Bank's
Certificate of Incorporation and Bylaws and the Company's Certificate of
Incorporation and Bylaws and from distinctions between laws with respect to New
Jersey chartered savings associations and Delaware law.
The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the more
significant differences and certain important similarities. The discussion
herein is qualified in its entirety by reference to the Certificate of
Incorporation and Bylaws of the Company and the Delaware General Corporation
Law.
Authorized Capital Stock. The Company's authorized capital stock consists
of 22,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock,
par value $.01 per share, whereas the Bank's authorized capital stock consists
of 20,000,000 shares of Bank Common Stock and 10,000,000 shares of serial
preferred stock, par value $.10 per share (the "Bank Preferred Stock"). The
increased authorized capitalization will provide the Company's Board of
Directors with additional flexibility to effect, among other transactions,
acquisitions, financings, stock dividends, stock splits and stock benefit plans.
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 Stock Option Plans or Master Stock-Based Benefit Plan all of which are to
be established and presented to stockholders at a meeting after the Conversion.
The Company will be subject to annual franchise taxes under Delaware law
based on its authorized capitalization. As a New Jersey chartered institution,
the Bank is not subject to franchise taxes, regardless of the amount of its
authorized capitalization.
Issuance of Capital Stock. Pursuant to applicable laws and regulations, the
Mutual Holding Company is required to own not less than a majority of the
outstanding Bank Common Stock. There will be no such restriction applicable to
the Company following consummation of the Conversion and Reorganization.
Neither the Certificate of Incorporation of the Bank nor the Certificate of
Incorporation of the Company contains a restriction on the issuance of shares of
capital stock to directors, officers or controlling persons of the Company and
the Bank, respectively. Thus, stock-related compensation plans such as stock
option plans could be adopted by the Company and the Bank without stockholder
approval and shares of Company capital stock and Bank capital stock could be
issued directly to directors, officers or controlling persons without
stockholder approval. The Bylaws of the NASD, however, generally require
corporations with securities which are quoted on the Nasdaq National Market to
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obtain stockholder approval of most stock compensation plans for directors,
officers and key employees of the corporation. Moreover, although generally not
required, stockholder approval of stock-related compensation plans may be sought
in certain instances in order to qualify such plans for favorable federal income
tax and securities law treatment under current laws and regulations.
Voting Rights. The Bank's Bylaws and Certificate of Incorporation prohibit,
and the Company's Bylaws do not provide for, cumulative voting in elections of
directors. The prohibition on cumulative voting will help to ensure continuity
and stability of the Company's Board of Directors and the policies adopted by it
by making it more difficult for the holders of a relatively small amount of the
Common Stock to elect their nominees to the Board of Directors and possibly by
delaying, deterring or discouraging proxy contests.
Neither the Certificate of Incorporation of the Bank nor the Certificate of
Incorporation and Bylaws of the Company provide for pre-emptive rights to
stockholders in connection with the issuance of capital stock.
For additional information relating to voting rights, see
"--General--Limitation on Acquisitions of Voting Stock and Voting Rights" below.
Payment of Dividends. The ability of the Bank to pay dividends on its
capital stock is restricted by federal regulations and New Jersey law and
regulations and by tax considerations related to savings associations such as
the Bank. See "Regulation--Federal Regulation of Savings Institutions--Capital
Requirements" and "Federal and State Taxation--Federal Taxation." Although the
Company is not subject to these restrictions as a Delaware corporation, such
restrictions will indirectly affect the Company because dividends from the Bank
will be a primary source of funds of the Company for the payment of dividends to
stockholders of the Company.
The Delaware General Corporation Law generally provides that, subject to
any restrictions in the corporation's Certificate of Incorporation, dividends
may be declared from the corporation's surplus or, if there is no surplus, from
its net profits for the fiscal year in which the dividend is declared and the
preceding fiscal year. However, if the corporation's capital (generally defined
in the Delaware General Corporation Law as the sum of the aggregate par value of
all shares of the corporation's capital stock, where all such shares have a par
value and the board of directors has not established a higher level of capital)
has been diminished to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, dividends may not be declared and
paid out of such net profits until the deficiency in such capital has been
repaired.
Board of Directors. The Bank's Certificate of Incorporation and the
Certificate of Incorporation and Bylaws of the Company, respectively, require
the Board of Directors of the Bank and the Company to be divided into three
classes as nearly equal in number as possible and that the members of each class
shall be elected for a term of three years and until their successors are
elected and qualified, with one class being elected annually.
Under the Bank's Bylaws, any vacancies in the Board of Directors of the
Bank may be filled by the affirmative vote of a majority of the remaining
directors although less than a quorum of the board of directors. Persons elected
by the directors of the Bank to fill vacancies may only serve until the next
annual meeting of stockholders. However, under the Company's Certificate of
Incorporation, any vacancy occurring in the Board of Directors of the Company,
including any vacancy created by reason of an increase in the number of
directors, may be filled by the remaining directors, and any director so chosen
shall hold office for the remainder of the term to which the director has been
elected and until his successor is elected and qualified.
Under the Bank's Bylaws, any director may be removed for cause by a
two-thirds vote of the Board of Directors or by the affirmative vote of at least
80% of the voting power of the then outstanding shares of capital stock of the
Bank entitled to vote in an election of directors. Under the Company's
Certificate of Incorporation, a director or the entire board of directors may be
removed only for cause and only by the affirmative vote of the holders of at
least 80% of the outstanding voting shares of the Company.
Limitations on Liability. The Company's Certificate of Incorporation
provides that the personal liability of the directors and officers of the
Company for monetary damages shall be eliminated to the fullest extent permitted
by the Delaware General Corporation Law as it exists on the effective date of
the Certificate of Incorporation or as such law may be thereafter in effect.
Section 102(b)(7) of the Delaware General Corporation Law currently provides
that
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directors (but not officers) of corporations that have adopted such a provision
will not be so liable, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) for the payment of certain unlawful dividends and the making of
certain stock purchases or redemptions, or (iv) for any transaction from which
the director derived an improper personal benefit.
If Delaware law was amended in the future to provide for greater
limitations on the personal liability of directors or to permit corporations to
limit the personal liability of officers, the provision in the Company's
Certificate of Incorporation limiting the personal liability of directors and
officers would automatically incorporate such authorities without further action
by stockholders. Similarly, if Delaware law was amended in the future to
restrict the ability of a corporation to limit the personal liability of
directors, the Company's Certificate of Incorporation would automatically
incorporate such restrictions without further action by stockholders.
The Bank's current Certificate of Incorporation contains similar provisions
regarding the elimination of director liability consistent with New Jersey law.
Indemnification of Directors, Officers and Employees. The Bank's
Certificate of Incorporation provides that the Bank shall indemnify its
directors, officers and employees for any costs incurred in connection with any
litigation involving any such person's activities as a director, officer or
employee. In addition, indemnification is permitted in the case of a settlement,
a final judgment against such person or final judgment other than on the merits,
if it is determined by the board of directors and the Commission that such
person was acting in good faith within the scope of his or her employment as he
or she could reasonably have perceived it under the circumstances and for a
purpose he or she could have reasonably believed under the circumstances was in
the best interest of the Bank or its stockholders.
The Company's Certificate of Incorporation provide that the Company shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suite or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person is or was a director, officer or employee of the Company or any
predecessor of the Company, or is or was serving at the request of the Company
or any predecessor of the Company as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, liability and loss reasonably incurred or suffered by such indemnitee
in connection therewith to the fullest extent authorized by the Delaware General
Corporation Law of the State of Delaware.
The Company's Certificate of Incorporation also provides that reasonable
expenses (including attorneys' fees) incurred by a director, officer or employee
of the Company in defending any civil, criminal, administrative or investigative
action, suit or proceeding described above shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors upon receipt of an undertaking by or on
behalf of such person to repay such amount if it shall ultimately be determined
that the person is not entitled to be indemnified by the Company.
Special Meetings of Stockholders. The Bank's Bylaws provide that special
meetings of the stockholders of the Bank may be called by the Chairman,
President, a majority of the Board of Directors or the holders of not less than
ten percent of the outstanding capital stock of the Bank entitled to vote at the
meeting. The Certificate of Incorporation and Bylaws of the Bank provide,
however, that until the fifth anniversary of the 1995 MHC Reorganization,
special meetings of stockholders relating to changes in control of the Bank or
amendments to its Certificate of Incorporation may only be called upon direction
of the Board of Directors of the Bank. The Company's Certificate of
Incorporation contains a provision pursuant to which special meetings of
stockholders of the Company only may be called by the Board of Directors of the
Company.
Stockholder Nominations and Proposals. The Bank's Bylaws generally provide
that stockholders may submit nominations for election as director at an annual
meeting of stockholders 60 days prior to the annual meeting and any new business
to be taken up at such a meeting at least 60 days before the date of any such
meeting.
The Company's Bylaws 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 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
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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.
Inspectors of Election. The Bank's Bylaws provide that the Board of
Directors may appoint one or more persons other than nominees for office as
inspectors of election at a meeting of stockholders and that if inspectors of
election are not so appointed, the Chairman of the Board or the President may,
and on the request of not less than 10% of the votes represented at the meeting
shall, make such appointment at the meeting. The Company's Bylaws provide that
the Board of Directors of the Company shall appoint one or more persons as
inspectors of election, and that the chairman of any meeting of stockholders
shall make such an appointment in the event that the inspector(s) appointed by
the Board of Directors shall be unable to act or the board shall fail to appoint
any inspector. The Bylaws of the Bank and the Company also specify the duties of
inspectors of election.
Stockholder Action Without a Meeting. The Bylaws of the Bank provide that
any action to be taken or which may be taken at any annual or special meeting of
stockholders must be taken at such annual or special meeting and may not be
taken without a meeting. The Certificate of Incorporation and Bylaws of the
Company similarly provide that any action required by Delaware law to be taken
at any annual or special meetings of stockholders, or any action which may be
taken at any annual or special meeting of stockholders, must be taken at such
annual or special meeting, and may not be taken without a meeting.
Limitations on Acquisitions of Voting Stock and Voting Rights. The Bank's
Certificate of Incorporation provides that no person, other than the MHC or the
Company, shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of the issued and outstanding shares of any class of
an equity security of the Bank, unless such offer to acquire or acquisition is
approved by a majority of the Board of Directors. In the event that shares are
acquired in violation of this restriction, all shares beneficially owned by any
person in excess of 10% shall be considered "Excess Shares" and 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
stockholders for a vote.
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).
Mergers, Consolidations and Sales of Assets. The Bank's Certificate of
Incorporation and Bylaws do not impose any specific vote requirement for
stockholder approval of mergers and certain business transactions.
The Delaware General Corporation Law requires the approval of the Board of
Directors and the holders of a majority of the outstanding stock of the Company
entitled to vote thereon for mergers or consolidations, and for sale, leases or
exchanges of all or substantially all of the Company's assets, unless a higher
requirement is specified in the Company's Certificate of Incorporation.
As holder of all of the outstanding Bank Common Stock after consummation of
the Conversion and Reorganization, the Company generally will be able to
authorize a merger, consolidation or other business combination involving the
Bank without the approval of the stockholders of the Company. However, the
Company's 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. See "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws."
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Dissenters' Rights of Appraisal. Under New Jersey corporate law, which is
applicable to the Bank generally, a stockholder of a New Jersey corporation
which engages in a merger, consolidation or sale of all or substantially all of
its assets shall have the right to demand from such corporation payment of the
fair or appraised value of his stock in the New Jersey corporation, subject to
specified procedural requirements. This law also provides, however, that the
stockholders of a New Jersey chartered corporation with stock which is listed on
a national securities exchange or which has more than 1,000 shareholders are not
entitled to dissenters' rights in connection with a merger involving such
corporation if the stockholder is required to accept only "qualified
consideration" for his stock, which is defined to include cash, shares of stock
of any corporation which at the effective date of the merger will be listed on a
national securities exchange or quoted on the Nasdaq National Market System or
any combination of such shares of stock and cash.
After the Conversion and Reorganization, the rights of appraisal of
dissenting stockholders of the Company will be governed by the Delaware General
Corporation Law. Pursuant thereto, a stockholder of a Delaware corporation
generally has the right to dissent from any merger or consolidation involving
the corporation or sale of all or substantially all of the corporation's assets,
subject to specified procedural requirements. However, no such appraisal rights
are available for the shares of any class or series of a corporation's capital
stock if (i) as of the record date fixed to determine the stockholders entitled
to receive notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, such shares were either listed on a
national securities exchange or held of record by more than 2,000 stockholders,
or (ii) the corporation is the surviving corporation of a merger and the merger
did not require the approval of the corporation's stockholders, unless in either
case, the holders of such stock are required by an agreement of merger or
consolidation to accept for that stock something other than: (a) shares of stock
of the corporation surviving or resulting from the merger or consolidation; (b)
shares of stock of any other corporation that, at the effective date of the
merger, will be listed on a national securities exchange or held of record by
more than 2,000 stockholders; (c) cash in lieu of fractional shares of a
corporation described in clause (a) or (b) above; or (d) any combination of the
shares of stock and cash in lieu of fractional shares described in clauses (a)
through (c) above.
Amendment of Governing Instruments. No amendment of the Bank's Certificate
of Incorporation may be made unless it is first proposed by the Board of
Directors of the Bank, thereafter approved by the holders of a majority of the
total votes eligible to be cast at a legal meeting and submitted to the
Commissioner for action as specified by law or regulation. The Company's
Certificate of Incorporation similarly provides that no amendment of the
Company's Certificate of Incorporation may be made unless it is first approved
by the Board of Directors of the Company and thereafter is approved by the
holders of a majority of the shares of the Company entitled to vote generally in
an election of directors, voting together in a single class; provided, however,
that the affirmative vote of at least 80% of the outstanding voting stock
entitled to vote is needed for certain amendments.
The Bylaws of the Bank may be amended by a majority of the full Board of
Directors of the Bank or by a majority vote of the votes cast by the
stockholders of the Bank at any legal meeting. The Bylaws of the Company may be
amended by a majority vote of the Board of Directors of the Company or by the
affirmative vote of the holders of 80% of the votes cast by stockholders of the
Company at a meeting of stockholders.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Plan of Conversion provides for the conversion of the Mutual Holding
Company from the mutual to the stock form of organization. See "The Conversion
and Reorganization--General." Certain provisions in the Company's Certificate of
Incorporation and Bylaws and in its management remuneration agreements entered
into in connection with the Conversion and Reorganization, together with
provisions of Delaware corporate law, may have anti-takeover effects. 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
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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 stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have 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 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 22,000,000 shares of Common Stock and 2,000,000 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 and Reorganization 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,
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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 Stock Option Plans or Master Stock-Based Benefit
Plan all of which are to be established and presented to stockholders at a
meeting after the Conversion and Reorganization.
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 stockholders 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 stockholders 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 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, pledge, 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 3% of the
shares of the Conversion Stock at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the aggregate of the Conversion
Stock sold in the Conversion. Additionally, if at a meeting of stockholders
following the Conversion and Reorganization stockholder approval of the proposed
Stock Programs and Stock Option Plans or Master Stock-Based Benefit Plan is
received, the Company expects to acquire 4% of the aggregate of the Conversion
Stock issued in the Conversion and Reorganization and expects to issue an amount
equal to 10% of the aggregate of the Conversion Stock issued in the Conversion
and Reorganization 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 25% of the Company's Common Stock, thereby enabling 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 above.
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
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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 association 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 give at least 90
days advance notice to the Corporate 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 AND REORGANIZATION
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, CIC Agreements, Severance Plan, Stock
Programs, Stock Option Plans and Master Stock-Based Benefit Plan 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 "--New Benefits Resulting from the
Conversion and Reorganization--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
113
<PAGE>
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.
RESTRICTIONS IN THE BANK'S 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 and
Reorganization, the Board of Directors believes that it is appropriate to retain
certain provisions permitted by New Jersey law and to adopt certain new
provisions to protect the interests of the 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 Which May Discourage Takeover Attempts."
The Bank's Certificate of Incorporation will continue to 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 and Reorganization. Any stock in excess of 10% acquired in violation
of the Certificate of Incorporation 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 Certificate of
Incorporation 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 Certificate of Incorporation, 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, 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 and Reorganization.
Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of Bank
114
<PAGE>
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 Bank Preferred Stock with rights and
preferences which could impede the completion of such a transaction. An effect
of the possible issuance of such Bank Preferred Stock, therefore, may be to
deter a future takeover attempt. The Board of Directors does not intend to issue
any Bank 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 and Reorganization, 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
Conversion Stock to be issued upon their exercise. The Plan also prohibits any
person, prior to the completion of the Conversion and Reorganization, from
offering, or making an announcement of an offer or intent to make an offer, to
purchase such subscription rights or Conversion Stock.
For three years following the Conversion and Reorganization, 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.
115
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 22,000,000 shares of Common Stock having
a par value of $.01 per share and 2,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). The Company currently
expects to issue up to 7,820,000 shares of Common Stock (or 8,993,000 in the
event of an increase of 15% in the Estimated Price Range) and no shares of
Preferred Stock in the Conversion and Reorganization. Except as discussed above
in "Restrictions on Acquisition of the Company and the Bank," 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.
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% stockholder vote. See
"Restrictions on Acquisition of the Company and the Bank."
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
and Reorganization--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 and Reorganization. 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.
116
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Certificate of Incorporation of the Bank authorizes the issuance of
capital stock consisting of 20,000,000 shares of common stock, par value $.10
per share, and 10,000,000 shares of preferred stock, par value $.10 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 has the same relative rights
as, and will be identical in all respects with, each other share of common
stock. After the Conversion and Reorganization, the Board of Directors will be
authorized to approve the issuance of Common Stock up to the amount authorized
by the Certificate of Incorporation without the approval of the Bank's
stockholders. Following the Conversion and Reorganization, 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 and Reorganization, 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, provided that 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 and Reorganization."
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 additional preferred stock is issued subsequent to the Conversion and
Reorganization, 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 is not 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 Chase Mellon
Shareholder Services, Ridgefield Park, New Jersey.
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries as
of March 31, 1997 and 1996 and for the years ended March 31, 1997 and 1996 and
the ten month period ended March 31, 1995 have been included herein, 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.
FinPro, Inc. has consented to the publication herein of the summary of its
report to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon the Conversion and Reorganization
and its valuation with respect to subscription rights.
117
<PAGE>
LEGAL AND TAX OPINIONS
The legality of the Common Stock 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. Muldoon, Murphy & Faucette will rely as to certain matters
of Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell. The federal
income and New Jersey tax consequences of the Conversion and Reorganization will
be passed upon for the Bank and the Company by Peat Marwick. Certain legal
matters will be passed upon for Sandler O'Neill by Breyer & Aguggia, 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. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company. This
Prospectus contains a description of the material terms and features of all
material contracts, reports or exhibits to the Registration Statement required
to be described, however, 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 Mutual Holding Company has filed an application for conversion with the
OTS with respect to the Conversion and Reorganization. Pursuant to the rules and
regulations of the OTS, this Prospectus omits certain information contained in
that application. The application may be examined at 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 and Reorganization, the Company will
register its Common Stock with the SEC under Section 12(b) 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 and Reorganization.
A copy of the Certificate of Incorporation and the Bylaws of the Company
and the Stock Charter and Bylaws of the Bank are available without charge from
the Bank.
118
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Auditors' Report of KPMG Peat Marwick LLP .......................... F-1
Consolidated Financial Statements:
Consolidated Statements of Financial Condition--March 31, 1997 and 1996 ....... F-2
Consolidated Statements of Operations--Years ended March 31, 1997 and 1996
and the ten month period ended March 31, 1995 ................................. 33
Consolidated Statements of Stockholders' Equity--Years ended March 31, 1997
and 1996 and the ten month period ended March31, 1995 ......................... F-3
Consolidated Statements of Cash Flows--Years ended March31, 1997 and 1996
and the ten month period ended March 31, 1995 ................................. 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.
The financial statements of Bayonne Bancshares, Inc. (the Holding Company)
are not available.
The Holding Company has not yet been capitalized, as it is awaiting
completion of the Conversion and Reorganization.
119
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Savings Bank of New Jersey:
We have audited the consolidated financial statements of First Savings Bank of
New Jersey and subsidiaries 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 First Savings Bank
of New Jersey and subsidiaries as of March 31, 1997 and 1996, and the results of
their operations and their cash flows for the years ended March 31, 1997 and
1996, and the ten-month period ended March 31, 1995 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
April 25, 1997
F-1
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1997 AND 1996
1997 1996
------- -------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents:
Cash on hand and in banks ............................. $ 6,828 $ 5,782
Deposits with financial institutions .................. 8,500 --
AMF short-term fund ................................... 144 6,009
-------- --------
Total cash and cash equivalents ..................... 15,472 11,791
Securities available for sale at market value
(notes 4 and 10) ........................................ 290,614 382,721
Securities held to maturity, estimated market value of
$11,555 and $11,674 at March31, 1997 and 1996,
respectively (note 5) ................................. 11,277 11,355
Loans receivable, net (notes 6 and 10) .................. 235,624 224,028
Accrued interest receivable, net (note 7) ............... 3,720 3,744
Federal Home Loan Bank stock, at cost ................... 7,460 7,526
Real estate acquired in settlement of loans ............. 364 24
Office properties and equipment, net (note 8) ........... 5,812 6,000
Prepaid expenses ........................................ 816 463
Other assets ............................................ 5,845 4,293
-------- --------
Total assets ........................................ $577,004 $651,945
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 9) ..................................... 444,139 445,424
Borrowings (notes 4, 6 and10) ......................... 75,000 150,519
Employee Stock Ownership Plan (ESOP) debt (note 12) ... 598 815
Advance payment by borrowers for taxes and insurance .. 1,539 1,093
Accrued expenses and other liabilities ................ 7,649 4,575
-------- --------
Total liabilities ................................... 528,925 602,426
-------- --------
Stockholders' equity (notes 2, 3 and 12):
Common stock, $0.10 par value. Authorized 20,000,000
shares; issued and outstanding 3,065,489 and 3,062,321
shares at March 31, 1997 and 1996, respectively ...... 307 306
Additional paid-in capital ............................ 12,426 12,216
Unallocated ESOP shares ............................... (598) (815)
Unamortized MRP shares ................................ (378) (495)
Retained earnings--substantially restricted ........... 40,658 44,575
Net unrealized loss on securities available for sale,
net of tax ........................................... (4,336) (6,268)
-------- --------
Total stockholders' equity .......................... 48,079 49,519
Commitments and contingencies (note 14)
-------- --------
Total liabilities and stockholders' equity .......... $577,004 $651,945
======== ========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 AND
THE TEN-MONTH PERIOD ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
NET
RETAINED UNREALIZED
UNALLO- UNAMOR- EARNINGS- LOSS ON TOTAL
ADDITIONAL CATED TIZED SUBSTAN- SECURITIES STOCK-
COMMON PAID-IN ESOP MRP TIALLY AVAILABLE HOLDERS'
STOCK CAPITAL SHARES SHARES RESTRICTED FOR SALE EQUITY
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1994 ............... $ -- $ -- $ -- $ -- $ 42,635 $ (8,568) $ 34,067
Net income for the ten-month
period .............................. -- -- -- -- 2,191 -- 2,191
Net proceeds of stock offering ....... 302 11,702 -- -- -- -- 12,004
Capitalization of mutual holding
company ............................. -- (200) -- -- -- -- (200)
Common stock acquired by ESOP ........ -- -- (1,086) -- -- --
Amortization of ESOP shares .......... -- 6 54 -- -- -- 60
Net change in net unrealized losses on
securities available for sale, net of
income tax benefit of $248 .......... -- -- -- -- -- (254) (254)
Dividends declared at $0.125 per
share ............................... -- -- -- -- (157) -- (157)
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1995 ............. 302 11,508 (1,032) -- 44,669 (8,822) 46,625
Net income for the year .............. -- -- -- -- 615 -- 615
Amortization of ESOP ................. -- 110 217 -- -- -- 327
Common stock issued to MRP ........... 4 578 -- (582) -- -- --
Amortization of MRP .................. -- 20 -- 87 -- -- 107
Dividends declared at $0.50 per
share ............................... -- -- -- -- (709) -- (709)
Net change in unrealized losses on
securities available for sale, net of
income tax expense of $1,016 ........ -- -- -- -- -- 2,554 2,554
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1996 ............. 306 12,216 (815) (495) 44,575 (6,268) 49,519
Net loss for the year ................ -- -- -- -- (3,215) -- (3,215)
Amortization of ESOP ................. -- 156 217 -- -- -- 373
Amortization of MRP .................. -- 37 -- 117 -- -- 154
Dividends declared at $0.50 per
share ............................... -- -- -- -- (702) -- (702)
Exercise of stock options ............ 1 17 -- -- -- -- 18
Net change in unrealized losses on
securities available for sale,
net of income tax benefit
of $192 ............................. -- -- -- -- -- 1,932 1,932
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1997 ............. $ 307 $ 12,426 $ (598) $ (378) $ 40,658 $ (4,336) $ 48,079
======== ======== ======== ======== ======== ======== --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 AND
THE TEN-MONTH PERIOD ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
TEN
YEARS ENDED MONTHS
MARCH 31, ENDED
---------------------- MARCH 31,
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ........................................... $ (3,215) $ 615 $ 2,191
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of office properties and equipment ........... 705 528 427
Loss on securities available for sale, net ................ 2,878 2,217 547
Loss on sales of real estate acquired in settlement
of loans ................................................. 92 7 --
Provision for loan losses ................................. 320 450 350
Proceeds from sales of real estate acquired in settlement
of loans ................................................. 446 296 1,704
Amortization of ESOP and MRP shares ....................... 527 435 54
Amortization (accretion) of premiums and discounts on
investment securities and mortgage-backed securities ..... (44) 15 (22)
Net decrease (increase) in deferred loan fees ............. 209 (65) 204
Net decrease (increase) in accrued interest receivable, net 24 (540) 360
Net (increase) decrease in prepaid expenses ............... (353) 363 174
Net (increase) decrease in other assets ................... (1,360) 345 (334)
Net increase (decrease) in accrued expenses and
other liabilities ........................................ 3,074 (241) 1,124
-------- --------- ---------
Total adjustments ...................................... 6,518 3,810 4,588
-------- --------- ---------
Net cash provided by operating activities ................. 3,303 4,425 6,779
-------- --------- ---------
Cash flows from investing activities:
Increase in loans receivable ................................ (13,003) (5,953) (30,543)
Purchase of investments held to maturity .................... -- (10,000) (5,534)
Principal payments and maturities of investments held
to maturity ................................................ 78 42,853 1,340
Proceeds from maturities of securities available for sale ... 25,725 5,000 --
Proceeds from sales of securities available for sale ........ 159,548 25,871 25,000
Purchases of securities available for sale .................. (94,260) 187,221) --
Sale (purchase) of Federal Home Loan Bank stock ............. 66 (5,612) 586
Purchases of premises and equipment ......................... (517) (141) (816)
-------- --------- ---------
Net cash provided by (used in) investing activities ....... $ 77,637 $(135,203) $ (9,967)
======== ========= =========
</TABLE>
F-4
<PAGE>
<TABLE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996 AND
THE TEN-MONTH PERIOD ENDED MARCH 31, 1995
<CAPTION>
TEN
YEARS ENDED MONTHS
MARCH 31, ENDED
---------------------- MARCH 31,
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits .......................... $ (1,285) $ 1,044 $(27,301)
-------- -------- --------
Net (decrease) increase in advance payments
by borrowers for taxes and insurance ....................... 446 (199) 647
Increase (decrease) in borrowings ............................ (75,519) 136,519 14,000
Stock subscriptions (refunded) received ...................... -- -- (37,485)
Purchase of ESOP shares ...................................... -- -- (1,086)
Payment on ESOP debt ......................................... (217) (217) (54)
Proceeds from ESOP debt ...................................... -- -- 1,086
Net proceeds of stock offering ............................... -- -- 12,010
Transfer of working capital to holding company ............... -- -- (200)
Stock options exercised ...................................... 18 -- --
Dividends paid ............................................... (702) (690) (156)
-------- -------- --------
Net cash (used in) provided by financing
activities ............................................... (77,259) 136,457 (38,539)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ............................................. 3,681 5,679 (41,727)
Cash and cash equivalents at beginning of year ................. 11,791 6,112 47,839
-------- -------- --------
Cash and cash equivalents at end of year ....................... $ 15,472 $ 11,791 $ 6,112
======== ======== ========
Supplemental schedule of noncash investing and
financing activities:
Real estate acquired in settlement of loans
and transfer from investments in and loans
to joint ventures, net ................................... $ 878 $ 94 $ 415
======== ======== ========
Taxes (received) paid ...................................... $ 1,150 $ (210) $ 1,377
======== ======== ========
Interest paid .............................................. $ 27,193 $ 23,780 $ 15,831
======== ======== ========
Transfer from HTM to AFS ................................... $ -- $ 50,000 $ --
======== ======== ========
Implementation of MRP ...................................... $ -- $ 682 $ --
======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of First Savings
Bank of New Jersey (the Bank) and its wholly-owned subsidiaries, Bayonne Old
Mill Service Corp., Bayonne Service Corp. and The Final Bayonne Service Corp. As
of March31, 1997, the Bayonne Service Corp. and The Final Bayonne Service Corp.
are inactive and the Bayonne Service Corp. through the Bayonne First Investment
Center sells non-insured investment products such as annuities and mutual funds.
All significant intercompany balances and transactions have been eliminatedin
consolidation.
Business
The Bank provides a full range of banking services to individual and
corporate customers in New Jersey. The Bank is subject to competition from other
financial institutions and to the regulations of certain Federal and state
agencies and undergoes periodic examinations by those regulatory authorities.
As a result of the plan of reorganization and stock issuance (see note 2),
the Bank adopted a reporting date to coincide with the calendar quarter ended
March 31. These consolidated financial statements are presented for the years
ended March31, 1997 and 1996, and the ten-month period ended March31, 1995.
The following are the significant accounting policies which were followed
in preparing and presenting these consolidated financial statements.
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 dates of
the consolidated statements of financial condition and operations. Actual
results could differ significantly from those estimates.
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
satisfaction of loans. In connection with the determination of the allowance for
loan losses, and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans, management generally obtains
independent appraisals for significant properties.
A substantial portion of the Bank's loans are secured by real estate in the
New Jersey market. In addition, although not significant, real estate owned is
located in that same market. Accordingly, as with most financial institutions in
the market area, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of the carrying amount of real estate
owned are susceptible to changes in market conditions.
Investment and Mortgage-backed Securities
Securities are classified as either available for sale or held to maturity,
based upon the Bank's intent and ability to hold such securities. Securities
available for sale include debt and mortgage-backed securities that are held for
an indefinite period of time and are not intended to be held to maturity.
Securities available for sale include securities that management intends to use
as part of its overall asset/liability management strategy and that may be sold
in response to changes in interest rates and resultant prepayment risk and other
factors related thereto. Securities available for sale are carried at fair
value, and unrealized gains and losses (net of related tax effects) on such
securities are excluded from earnings but are included in stockholders' equity.
Upon realization, such gains and losses will be included in earnings using the
specific identification method. Management determines the appropriate
classification of
F-6
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MARCH 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
investment and mortgage-backed securities as either available for sale or held
to maturity at the purchase date. Investment securities and mortgage-backed
securities, other than those designated as available for sale or trading, are
comprised of debt securities that the Bank has the positive intent and ability
to hold to maturity. These securities held to maturity are carried at cost,
adjusted for amortization of premiums and accretion of discounts using the
level-yield method over the estimated lives of the securities.
Loans Receivable
Loans are carried at their unpaid principal amount, less unearned
discounts, net of deferred loan origination fees and costs and commitment fees.
Unearned discounts are recognized over the contractual lives of the loans using
the level-yield method.
The accrual of interest income and amortization of deferred fee income on
loans is generally discontinued when a loan is past due 120 days or more, or
when certain factors indicate reasonable doubt as to the timely collectibility
of such income. Real estate loans are placed on a non-accrual status when either
principal or interest is 120 days or more past due. Delinquent consumer loans
generally are not placed on non-accrual status, but continue to accrue until
charged-off. Delinquent consumer loans are charged-off when it appears no longer
reasonable or probable that the loan will be collected. Interest accrued and
unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Interest income is recognized subsequently only in the period
collected. Loans are returned to an accrual status when factors indicating
doubtful collectibility on a timely basis no longer exist.
Allowance for Loan Losses
A provision for loan losses is charged to operations based on management's
evaluation of the credit risk in its portfolio. Such evaluation includes a
review of all loans for which full collectibility may not be reasonably assured
and considers, among other matters, the estimated net realizable value of the
underlying collateral, economic conditions and other matters which warrant
consideration.
Management believes that the allowance for losses on loans is adequate.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions in their market area. 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 recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
Loan Impairment
Statement of Financial Accounting Standards SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114) and SFAS 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures," were
adopted prospectively on April 1, 1995. These statements address the accounting
for impaired loans and specify how allowances for loan losses related to these
impaired loans are calculated. The Bank defined the population of impaired loans
to include nonaccrual commercial and commercial mortgage loans. Smaller balance
homogeneous loans that are collectively evaluated for impairment such as
residential mortgage loans are specifically excluded from the impaired loan
portfolio. A loan is impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Adoption of these new standards
had no effect on the level of the allowance for loan losses or operating results
for the years ended March31, 1997 and 1996. SFAS 114 also provides that
in-substance foreclosed loans should not be included in real estate owned for
financial reporting purposes, but rather should be included in theloan
portfolio.
F-7
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MARCH 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Loan Origination Fees and Costs
Loan origination fees, net of certain direct loan origination costs, are
deferred and amortized into income over the lives of the related loans as an
adjustment to the related loan yields.
Loan Servicing
The Bank services real estate loans for investors which are not included in
the accompanying consolidated statements of financial condition. Net fees earned
for servicing loans are reported as income when the related mortgage loan
payments are collected and are not significant. Loan servicing costs are charged
to expense as incurred.
Real Estate Acquired in Settlement of Loans
When properties are acquired through foreclosure or by deed in lieu of
foreclosure, they are transferred at estimated fair value, and any required
write-downs are charged to the allowance for loan losses. Subsequently, such
properties are carried at the lower of the adjusted cost or fair value less
estimated selling costs. Estimated fair value of the property is generally based
on an appraisal. Subsequent declines in estimated fair value, if any, are
charged to operations through an increase to the allowance for real estate
losses. Provisions for real estate losses and the related allowance for real
estate losses were zero for the periods ended March 31, 1997, 1996 and 1995 and
as of March 31, 1997 and 1996. Expenses of holding foreclosed properties, net of
other income, are charged to operations as incurred. Gains and losses from sales
of such properties are recognized as incurred.
Office Properties and Equipment
Depreciation on office properties and equipment, exclusive of land, is
computed using the straight-line method over the estimated useful lives of the
assets. Maintenance and repairs are charged to expense, improvements are
capitalized and gains or losses on disposals are credited or charged to
operations. The Bank depreciates buildings over a period of 10 to 40 years and
equipment over a period of 3 to 10 years.
Income Taxes
The Bank accounts for income taxes based upon the asset and liability
method which requires that deferred tax assets and liabilities be recognized for
the future tax consequences attributable to differences between the financial
statement carrying value amounts of existing assets and liabilities and their
respective tax basis.
Pension Plans
The Bank maintains a noncontributory defined benefit pension plan for the
benefit of all eligible employees. It is the Bank's policy to fund the plan in
an amount equal to at least the minimum contribution required by the Employee
Retirement Income Security Act of 1974 (ERISA).
Other Postretirement Benefit Plans
In addition to the Bank's defined benefit plan, the Bank provides a retiree
medical insurance plan to its retirees. The plan is first available to retirees
at the age of 60 years and with 30 years of service to the Bank. The Bank
recognizes expense associated with retirement medical insurance plan based upon
the accrual method through the use of actuarial determined data.
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. For purposes of the
consolidated statements of cash flows, cash equivalents consist of deposits in
other financial institutions and short-term mutual funds.
F-8
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MARCH 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Earnings Per Share
Earnings per common share is calculated by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. Comparative income per share data is not
presented for 1995 as the Bank completed its initial public offering on January
9, 1995, and shares were not outstanding for the entire ten-month period ended
March31, 1995. The weighted average number of shares outstanding during the
years ended March31, 1997 and 1996 used in the earnings per share calculation
was 2,992,720 and 2,956,187, respectively.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 amounts to
conform to the 1997 presentation.
(2) PLAN OF REORGANIZATION AND STOCK ISSUANCE
In December1993, the Board of Directors of the Bank unanimously adopted the
Plan of Reorganization from a Mutual Savings and Loan Association to a Mutual
Holding Company and Stock Issuance Plan, which plan was subsequently amended (as
amended, the Plan). Pursuant to the Plan, the Bank reorganized from a New Jersey
chartered mutual savings and loan association into a Federal mutual holding
company and concurrently formed a New Jersey chartered capital stock savings and
loan association subsidiary.
Following the completion of the reorganization, all depositors who had
membership or liquidation rights with respect to the Bank as of the effective
date of the reorganization will continue to have such rights solely with respect
to the holding company so long as they continue to hold deposit accounts with
the Bank. In addition, all persons who become depositors of the Bank subsequent
to the reorganization will have such membership and liquidation rights with
respect to the holding company. Borrower members of the Bank at the time of the
reorganization will have the same membership rights in the holding company that
they had in the Bank immediately prior to the reorganization so long as their
existing borrowings remain outstanding. Borrowers will not receive membership
rights in connection with any new borrowings made after the reorganization.
As part of the reorganization, the Bank was authorized to offer stock in
one or more offerings, up to a maximum of 49.9% of the issued and outstanding
shares of its common stock.
On January 9, 1995, the Bank completed its minority stock offering whereby
the Bank issued 1,358,000 shares at $10 per share for a total of $13.6 million,
which represents a minority ownership of 45% of the Bank based upon its
valuation by an independent appraiser. The net proceeds of the stock offering,
after reflecting offering expenses of $1.6 million, were $12.0 million. The
proceeds were added to the Bank's general funds to be used for general corporate
purposes.
In December 1996, the Board of Directors of Bayonne Bancshares, M.H.C., the
mutual holding company of the Bank, adopted a proposed Plan of Conversion to
convert Bayonne Bancshares, M.H.C. to stock form and to reorganize Bayonne
Bancshares, M.H.C., and the Bank by forming a new stock Delaware corporation to
become the parent company of the Bank. The new Delaware corporation will
exchange certain shares of its common stock for the outstanding common stock of
the Bank and will issue and offer for sale certain additional shares of its
common stock. The additional shares of common stock of the new Delaware
corporation will be offered to eligible account holders of the Bank as of
December 31, 1994, who will receive nontransferable subscription rights to
purchase these shares, as well as certain other persons as provided for in the
Plan. The amount and pricing of the proposed stock offering will be based on an
independent appraisal of the Bank.
F-9
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MARCH 31, 1997 AND 1996
(2) PLAN OF REORGANIZATION AND STOCK ISSUANCE--(Continued)
In connection with the proposed transaction, Bayonne Bancshares, M.H.C.
will file applications with the Office of Thrift Supervision and a registration
statement with the U.S. Securities and Exchange Commission with respect to the
reorganization and common stock offering. After receipt of the required
regulatory approvals, the Plan of Conversion will be submitted to the members of
Bayonne Bancshares, M.H.C. for approval by at least a majority of the votes
eligible to be cast at a special meeting and will also be submitted by the
Bank's stockholders for approval at a special meeting. The transaction is
expected to be completed during the third calendar quarter of 1997.
At the time of the conversion, the Bank will establish a liquidation
account in an amount equal to its equity as reflected in the 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 accountsthen 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 requirement.
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. There were approximately $400,000 of capitalized
conversion costs as of March 31, 1997.
(3) REGULATORY MATTERS
Capital distributions, in the form of any dividend paid or other
distribution in cash or in kind, are limited by the OTS. A Tier 1 association,
which is defined as an association that has capital immediately prior to a
proposed capital distribution that is equal to or greater than the amount of its
fully phased-in capital requirement, is authorized to make capital distributions
during a calendar year up to the higher of 100% of its net income to date during
the calendar year plus the amount that would reduce by one-half its surplus
capital ratio at the beginning of the calendar year, or 75% of its net income
over the most recent four-quarter period. The Bank is a Tier 1 association.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) was signed into law on August 9, 1989 and the regulations for savings
institutions' minimum capital requirements went into effect on December 7, 1989.
In addition to its capital requirements, FIRREA includes provisions for changes
in the Federal regulatory structure for institutions, 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 institution.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items are
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors.
F-10
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MARCH 31, 1997 AND 1996
(3) REGULATORY MATTERS--(Continued)
Management believes that, as of March 31, 1997, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent OTS
notification categorized the Bank as a well-capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the Bank's capital
classification.
The following is a summary of the Bank's actual capital amounts and ratios
as of March31, 1997 and 1996, compared to the OTS minimum capital adequacy
requirements and classification as a well-capitalized institution:
<TABLE>
<CAPTION>
OTS REQUIREMENTS
--------------------------------------
FOR CLASSIFICATION
ASSOCIATION MINIMUM AS WELL
ACTUAL CAPITAL ADEQUACY CAPITALIZED
---------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
March31, 1997:
Tangible capital ........ $52,260 8.99% $ 8,720 1.50% -- --
TierI (core) capital .... 52,260 8.99 17,440 3.00 $29,067 5.00%
Risk-based capital:
TierI ................. 52,260 24.06 -- -- 13,034 6.00
Total ................. 54,975 25.31 17,379 8.00 21,724 10.00
March31, 1996:
Tangible capital ........ 55,787 8.48 9,873 1.50 -- --
TierI (core) capital .... 55,787 8.48 19,746 3.00 32,911 5.00
Risk-based capital:
TierI ................. 55,787 24.85 -- -- 13,469 6.00
Total ................. 55,593 26.10 17,958 8.00 22,448 10.00
</TABLE>
The following provides a reconciliation of the Bank's stockholders' equity
to regulatory capital at March31, 1997 (in thousands):
Stockholders' equity ................................................ $48,079
Plus: Unrealized loss on securities available for sale, net of tax .. 4,336
Less: Investments in subsidiaries ................................... (155)
-------
Tangible/core capital ............................................... 52,260
Plus: Allowance for loan losses ..................................... 2,715
-------
Total risk based capital ............................................ $54,975
=======
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.
New Jersey banking statutes further restrict the amounts of dividends paid
by the Bank on its common stock to an amount which, following the payments of
such dividends, will not reduce paid-in capital and retained earnings to an
amount less than 50% of common stock or the payment of such dividend will not
reduce the statutory surplus of the Bank.
F-11
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MARCH 31, 1997 AND 1996
(3) REGULATORY MATTERS--(Continued)
During the year ended March 31, 1997, the Bank declared cash dividends to
holders of common stock of the Bank amounting to $0.50 per share. The Bank's
mutual holding company, waived the receipt of the cash dividends paid by the
Bank, and it currently intends to continue this policy. There can be no
assurance that the Bank's regulators will permit future dividend waivers or the
terms of such waivers. Total cumulative waived dividends amount to $1.9 million
at March 31, 1997.
(4) SECURITIES AVAILABLE FOR SALE
In November 1995, the Financial Accounting Standards Board issued a special
report on the implementation of SFAS No. 115. This special report provided an
opportunity for a one time reassessment of the classification of securities as
of a single measurement date between November 15, 1995 and December 31, 1995. On
December 8, 1995, the Bank recorded a transfer of $50.0 million of U.S.
Government Agency securities and U.S. Treasury notes to available for sale from
the held to maturity portfolio and subsequently sold $25.0 million of the
securities prior to December 31, 1995.
Securities available for sale at March 31, 1997 and 1996 are summarized as
follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ---- ------ --------
March 31, 1997:
U.S. Government and agency obligations.. $ 69,945 $ -- $2,311 $ 67,634
Mortgage-backed securities:
GNMA ................................. 30,110 -- 398 29,712
FNMA ................................. 41,767 71 229 41,609
FHLMC ................................ 118,152 43 2,820 115,375
CMOs (FHLMC and FNMA) ................ 12,751 -- 430 12,321
Private issue ........................ 24,661 -- 698 23,963
-------- ---- ------ --------
$297,386 $114 $6,886 $290,614
======== ==== ====== ========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ---- ------ --------
March 31, 1996:
U.S. Government and agency obligations.. $ 94,868 $ -- $1,994 $ 92,874
Mutual funds ......................... 71,400 -- 2,274 69,166
Mortgage-backed securities:
GNMA ................................. 81 -- -- 81
FNMA ................................. 30,771 -- 199 30,572
FHLMC ................................ 152,962 -- 3,116 149,846
CMOs (FHLMC and FNMA) ................ 13,664 -- 363 13,301
Private issue ........................ 27,448 -- 567 26,881
-------- ---- ------ --------
$391,234 $ -- $8,513 $382,721
======== ==== ====== ========
F-12
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MARCH 31, 1997 AND 1996
(4) SECURITIES AVAILABLE FOR SALE (Continued)
The amortized cost and market value of securities available for sale at
March31, 1997 by contractual maturity are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalties.
AMORTIZED MARKET
COST VALUE
--------- --------
Due after one year through five years ....... $ 49,978 $ 48,869
Due after five years through ten years ...... 14,969 13,950
Due after ten years ......................... 4,998 4,816
-------- --------
69,945 67,635
Mortgage-backed securities .................. 227,441 222,979
-------- --------
$297,386 $290,614
======== ========
During the years ended March 31, 1997 and 1996, and the ten-month period
ended March31, 1995, proceeds from sales of securities available for sale of
$159.5 million, $25.9 million and $25.0 million, respectively, were received,
resulting in gross gains of $486,000, $296,000 and $0, respectively, and gross
losses of $3.4 million, $2.5 million and $547,000, respectively.
Pledged securities, under reverse repurchase agreements and advances
included above, amount to $68.0 million and had an estimated market value of
$65.6 million at March31, 1997. The securities are predominantly United States
Government agency securities and are under the joint control of the Bank and the
counter party to the agreements at year end.
(5) SECURITIES HELD TO MATURITY
Securities held to maturity at March 31, 1997 and 1996 are summarized as
follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
March 31, 1997:
Tax-exempt obligations ............ $ 2,422 $105 $-- $ 2,527
U.S. Government and agency
obligations ..................... 8,855 174 1 9,028
------- ---- --- -------
$11,277 279 1 11,555
======= ==== === =======
March 31, 1996:
Tax-exempt obligations ............ $ 2,500 71 -- $ 2,571
U.S. Government and agency
obligations ..................... 8,855 248 -- 9,103
------- ---- --- -------
$11,355 $319 $-- $11,674
======= ==== === =======
F-13
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MARCH 31, 1997 AND 1996
(5) SECURITIES HELD TO MATURITY (Continued)
The amortized cost and market value of securities held to maturity at
March31, 1997 by contractual maturity are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalties.
AMORTIZED MARKET
COST VALUE
------- -------
Due with one year ............................ $ 50 $ 50
Due after one year through five years ........ 8,955 9,130
Due after five years through ten years ....... 982 1,029
Due after ten years .......................... 1,290 1,346
------- -------
$11,277 $11,555
======= =======
(6) LOANS RECEIVABLE, NET
A summary of loans receivable at March 31, 1997 and 1996 is as follows (in
thousands):
1997 1996
-------- --------
Real estate loans:
One- to four-family residential .......... $197,819 $189,283
Multifamily and commercial ............... 14,330 14,253
-------- --------
Total real estate loans ................ 212,149 203,536
-------- --------
Consumer loans:
Home equity loans ........................ 27,740 24,851
Passbook ................................. 277 322
Other .................................... 450 341
-------- --------
Total consumer loans ................... 28,467 25,514
-------- --------
Total loans ............................ 240,616 229,050
Unearned discounts and deferred fees ....... (1,834) (2,043)
Allowance for loan losses .................. (3,158) (2,979)
-------- --------
$235,624 $224,028
======== ========
A summary of the activity in the allowance for loan losses for the years
ended March 31, 1997 and 1996 and the ten-month period ended March 31, 1995 is
as follows (in thousands):
1997 1996 1995
------ ------ ------
Allowance for loan losses at beginning of period .. $2,979 $2,677 $2,918
Provision for loan losses ......................... 320 450 350
Charge-offs, net .................................. (141) (148) (591)
------ ------ ------
Allowance for loan losses at end of period ........ $3,158 $2,979 $2,677
====== ====== ======
F-14
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MARCH 31, 1997 AND 1996
(6) LOANS RECEIVABLE, NET (Continued)
Nonaccrual loans totaled $4.2 million, $4.8 million and $3.5 million at
March 31, 1997, 1996 and 1995, respectively. In addition, at March 31, 1997,
1996 and 1995, loans receivable 120-days delinquent and accruing interest
totaled $87,000, $456,000 and $194,000 respectively. The amount of interest
income on nonaccrual loans, which would have been recorded had these loans
continued to pay interest at the original contract rate, was approximately
$517,000, $468,000 and $241,000 for the years ended March 31, 1997 and 1996 and
the ten-month period ended March 31, 1995, respectively.
The recorded investment in loans receivable considered impaired under the
provisions of SFAS 114, as adopted was approximately $2,399,000 and $1,084,000
at March 31, 1997 and 1996, respectively. Specific allowances associated with
impaired loans totalled $716,000 and $399,000 at March31, 1997 and 1996,
respectively.
At March 31, 1997 and 1996, loans to officers and directors amounted to
approximately $1.4 million and $739,000, respectively. All loans were performing
according to their terms.
At March 31, 1997, 1996 and 1995, first mortgage loans serviced by the Bank
for investors amounted to approximately $14.4 million, $18.1 million and $21.7
million respectively.
(7) ACCRUED INTEREST RECEIVABLE
A summary of accrued interest receivable at March 31, 1997 and 1996 is as
follows (in thousands):
1997 1996
------ ------
Loans ............................................. $1,608 $1,584
Mortgage-backed securities ........................ 1,207 1,065
Investment securities ............................. 905 1,095
------ ------
$3,720 $3,744
====== ======
(8) OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment at March 31, 1997 and 1996 are summarized
as follows (in thousands):
1997 1996
------- ------
Land .............................................. $ 1,693 $1,693
Building and improvements ......................... 5,253 5,237
Furniture, equipment and automobiles .............. 3,251 2,876
------- ------
10,197 9,806
Less accumulated depreciation and amortization .... 4,385 3,806
------- ------
$ 5,812 $6,000
======= ======
F-15
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(9) DEPOSITS
Deposits at March 31, 1997 and 1996 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- -----------------------------------------------
INTEREST WEIGHTED INTEREST WEIGHTED
RATE AVERAGE RATE AVERAGE
RANGE RATE AMOUNT % RANGE RATE AMOUNT %
----------- -------- -------- ------ ---------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Types of deposits:
Passbooks ................ 2.92% 2.92% $133,817 30.13 2.92% 2.90% $134,939 30.29
NOW accounts ............. 2.44 2.44 31,576 7.11 2.44 2.48 30,288 6.80
Money market deposit
accounts ................ 2.44 2.44 15,277 3.44 2.44 2.50 14,279 3.21
Noninterest-bearing
demand .................. -- -- 11,264 2.54 -- -- 8,333 1.87
Club accounts ............ -- -- 642 0.14 -- -- 671 0.15
-------- ------ -------- ------
192,576 43.36 188,510 42.32
Certificates of deposit ... 3.21-9.50 6.41% 251,563 56.64 2.92-9.50 6.03% 256,914 57.68
========= ==== -------- ------ ========= ==== -------- ------
Total deposits .......... $444,139 100.00 $445,424 100.00
======== ====== ======== ======
</TABLE>
Certificates of deposit at March 31, 1997 have scheduled maturities as
follows (in thousands):
Within one year ................................. $197,755
One to three years .............................. 50,439
Three to five years ............................. 3,369
Thereafter ...................................... --
--------
$251,563
========
Interest expense on deposits for the years ended March 31, 1997 and 1996
and the ten-month period ended March 31, 1995 is comprised of the following (in
thousands):
1997 1996 1995
------- ------- -------
Regular, club and certificates of deposit .. $19,671 $19,611 $14,633
NOW and money market checking .............. 1,143 1,149 995
------- ------- -------
$20,814 $20,760 $15,628
======= ======= =======
Time deposits of $100,000 or more totaled approximately $45.7 million and
$42.9 million as of March 31, 1997 and 1996, respectively. Deposits in excess of
$100,000 are not Federally insured.
(10) BORROWINGS
Short-term borrowings are summarized as follows (in thousands):
1997 1996
------- --------
FHLB advances ..................................... $45,000 $ 59,600
Securities sold under agreements to repurchase .... 30,000 90,919
------- --------
Total borrowings .............................. $75,000 $150,519
======= ========
F-16
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(10) BORROWINGS (CONTINUED)
The FHLB advances are as follows at March 31, 1997 (in thousands):
AVAILABLE DRAWN RATE MATURITY
--------- ------- ----- ---------
Term loans ......... $25,000 $25,000 5.565% Nov. 2002
10,000 10,000 5.507 Jan. 1998
10,000 10,000 5.590 Jan. 1999
------- -------
Total ............ $45,000 $45,000
======= =======
The advances are secured by certain mortgage loans under a blanket
collateral agreement. The maximum amount outstanding under such agreements
during fiscal 1997 was $59.6 million and the average amount outstanding for
fiscal 1997 was $52.8 million.
The securities sold under agreements to repurchase at March31, 1997, are as
follows (in thousands):
COUNTER PARTY AMOUNT RATE MATURITY
------------- ------- ---- ---------
FHLB of New York .............. $15,000 5.51% Nov. 1998
FHLB of New York .............. 15,000 5.72 Nov. 1999
-------
Total ....................... $30,000
=======
(11) INCOME TAXES
Income tax expense for the years ended March 31, 1997 and 1996 and the
ten-month period ended March 31, 1995 is comprised of the following components
(in thousands):
1997 1996 1995
----- ---- ------
Current income tax expense:
Federal $ 579 $ 87 $1,351
State 80 15 80
----- ---- ------
659 102 1,431
----- ---- ------
Deferred income tax expense
Federal (476) 257 (183)
State (29) 15 (12)
----- ---- ------
(505) 272 (195)
----- ---- ------
Total income tax expense $ 154 $374 $1,236
===== ==== ======
F-17
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(11) INCOME TAXES--(CONTINUED)
A reconciliation between the expected amount computed using the applicable
statutory Federal income tax rate and the effective income tax expense for the
years ended March 31, 1997 and 1996 and the ten-month period ended March 31,
1995 are as follows (in thousands):
1997 1996 1995
-------- ---- ------
Income (loss) before income taxes ....... $(3,061) $989 $3,427
Applicable statutory Federal tax rate ... 34% 34% 34%
Expected Federal income tax expense ..... (1,041) 336 1,165
State tax net of Federal benefit ........ 34 19 53
Decrease in Federal income tax benefit
resulting from--tax-exempt income ...... (21) (31) (51)
Valuation allowance ..................... 973 -- 186
Other ................................... 209 49 (117)
-------- ---- ------
$ 154 $373 $1,236
======== ==== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset at March 31, 1997 and 1996 are as follows (in
thousands):
FEDERAL STATE TOTAL
------- ----- -------
March 31, 1997:
Deferred tax assets:
Allowance for doubtful accounts .... $1,162 $ 68 $1,230
Loan fees .......................... 486 29 515
Deferred directors' compensation ... 108 6 114
Uncollected interest ............... 179 11 190
Retirement plan .................... 1,268 75 1,343
Capital loss carryforwards ......... 919 54 973
Unrealized loss on securities
available for sale ................ 2,273 133 2,406
Postretirement benefits ............ 720 42 762
Other .............................. 166 10 176
Valuation allowance ................ (919) (54) (973)
------ ---- ------
6,362 374 6,736
Deferred tax liabilities:
Tax reserve for loan losses ........ 766 46 812
Depreciation ....................... 68 4 72
Other .............................. 21 1 22
------ ---- ------
Net deferred tax asset ........... $5,507 $323 $5,830
====== ==== ======
F-18
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(11) INCOME TAXES--(CONTINUED)
FEDERAL STATE TOTAL
------- ----- -----
March 31, 1996:
Deferred tax assets:
Allowance for doubtful accounts ..... $1,183 $ 69 $1,252
Loan fees ........................... 678 40 718
Deferred directors' compensation .... 120 7 127
Uncollected interest ................ 333 19 352
Unrealized loss on securities
available for sale ................. 2,894 169 3,063
Postretirement benefits ............. 797 46 843
Other ............................... 373 22 395
Valuation allowance ................. (773) (45) (818)
------ ---- ------
5,605 327 5,932
Deferred tax liabilities:
Tax reserve for loan losses ......... 1,156 67 1,223
Depreciation ........................ 184 11 195
Other ............................... 7 -- 7
------ ---- ------
Net deferred tax asset ............ $4,258 $249 $4,507
====== ==== ======
The valuation allowance increased from $818,000 at March 31, 1996 to
$973,000 at March 31, 1997. The valuation allowance at March 31, 1997 relates to
realized capital losses on securities for which the Bank may not utilize to
offset taxable income.
Management believes that it is more likely than not that the net deferred
tax asset will be realized based upon taxable income in the carryback period and
the probability of future operations to generate sufficient taxable income.
However, there can be no assurance about the level of future earnings.
Under tax law that existed prior to 1996, the Bank was generally allowed a
special bad debt deduction in determining income for tax purposes. The deduction
was based on either a specified experience formula or a percentage of taxable
income before such deduction ("reserve method"). The reserve method was used in
preparing the income tax returns for 1995 and 1994. Legislation was enacted in
August 1996 which repealed the reserve method for tax purposes. As a result, the
Bank must instead use the direct charge-off method to compute its bad debt
deduction. The legislation also requires the Bank to recapture its post-1987 net
additions to its tax bad debt reserves. The Bank has previously provided for
this liability in the financial statements.
Pursuant to SFAS 109, the Bank is generally not required to provide
deferred taxes for the difference between book and tax bad debt expense taken in
years prior to, or ending at, December 31, 1987. The tax bad debt expense
deducted in those years (net of charge-off and recoveries) created an
approximate $11.5 million tax loan loss reserve which could be recognized as
taxable income and create a tax liability of up to $4.1 million under current
income tax rates, if one of the following occurs: the Bank's retained earnings
represented by this reserve are used for purposes other than to absorb losses
from bad debts, including excess dividends or distributions in liquidation; the
Bank redeems its stock; the Bank fails to meet the definition provided by the
Code for a bank; or there is a change in the Federal tax law.
F-19
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(12) BENEFIT PLANS
(a) Pension Plan
The Bank has a qualified, noncontributory defined benefit pension plan
covering all eligible employees. Retirement benefits are based upon a formula
utilizing years of service and average monthly compensation, as defined. It is
the Bank's policy to fund the maximum amount that can be deducted for Federal
income tax purposes.
The following table sets forth the plan's funded status and amounts
recognized as of March 31, 1997 and 1996 (in thousands):
1997 1996
------ ------
Actuarial present value of benefit obligations--
accumulated benefit obligations:
Vested ........................................... $4,292 $4,500
------ ------
Non-vested ....................................... 11 8
$4,303 $4,508
Projected benefit obligation for service
rendered to date .................................. 5,935 5,743
Plan assets at fair value .......................... 6,067 5,704
------ ------
(Deficit)/excess of plan assets over
projected benefit obligation .................... 132 (39)
Unrecognized net gain deferred ..................... (227) --
Unrecognized net transition liability .............. 23 29
------ ------
(Accrued) prepaid pension cost ................... $ (72) $ (10)
====== ======
The components of net pension expense for the years ended March 31, 1997
and 1996 and the ten-month period ended March 31, 1995 are as follows (in
thousands):
1996 1995 1994
---- ---- ----
Service cost--benefits earned during the period .. $265 $219 $221
Interest cost on projected benefit obligation .... 402 361 343
Actual return on plan assets ..................... (177) (365) (332)
Net amortization and deferral .................... (228) (6) 17
---- ---- ----
Net pension expense ............................ $262 $209 $249
==== ==== ====
Assumptions used to develop the net periodic pension cost for the years
ended March31, 1997 and 1996 and the ten-month period ended March 31, 1995
are as follows:
1997 1996 1995
---- ---- ----
Discount rate .................................... 7% 7% 7%
Expected long-term rate of return on assets ...... 7 7 7
Rate of increase in compensation levels .......... 5 5 5
= = =
The Bank maintains nonqualified supplemental executive retirement
income-deferred compensation agreements (Executive Agreements) for certain
executives of the Bank and their beneficiaries. At March 31, 1997, there were
two executive employees participating in the Executive Agreements. The
Executive Agreements are considered unfunded plans for tax and ERISA purposes.
All obligations arising under the Executive Agreements are payable from the
general assets of the Bank.
F-20
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(12) BENEFIT PLANS--(CONTINUED)
In March 1997, Patrick F.X. Nilan, the President of the Bank, announced
his retirement effective July 1, 1997. Upon evaluation of the SERP agreement
with Mr. Nilan and one other retired executive, the Bank and the two
participating individuals agreed to terminate the SERP agreement and pay the
benefits due under the SERP in a lump-sum payment as of March 31, 1997. Based
upon the announced retirement of Mr. Nilan and the agreement between the
parties to terminate the SERP, the Bank recorded an additional $1.8 million in
employee benefit expense during March of 1997.
(b) Employee Stock Ownership Plan
The Bank has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed five years of service with the
Bank. The ESOP Trust purchased 108,641 shares of common stock in the Bank's
initial public offering with proceeds from a loan from an unaffiliated lender.
The Bank makes cash contributions to the ESOP on an annual basis sufficient to
enable the ESOP to make the required loan payments to the unaffiliated lender.
The note payable referred to above bears interest at the lender's prime
rate which was 8.50% at March 31, 1997, with interest and principal payable
quarterly in installments over five years. The loan is secured by the shares of
the stock purchased.
As the debt is repaid, shares are released from collateral and allocated
to qualified employees based on the proportion of debt service paid in the year
although rights to the shares do not vest until the fifth year. Shares pledged
as collateral are reported as deferred ESOP shares in the consolidated
statements of financial position. As shares are released from collateral, the
Bank reports compensation expense equal to the current market price of the
shares, and the shares become outstanding for earnings per share computations.
Accordingly, during the year ended March 31, 1997, the unearned ESOP
shares were amortized by $217,000. At March 31, 1997, 65,185 shares were
unallocated and had a fair value of $1.6 million.
(c) Management Recognition Plan
During July 1995, subsequent to stockholders' approval, the Bank
transferred 44,821 shares of authorized but unissued common stock to the
management recognition plan. The Bank has approval for a total of 54,321 shares
that may be transferred before further stockholders' approval is required.
(d) Stock Option Plans
At the 1995 annual meeting of the Bank's stockholders a stock option plan
was approved, authorizing 135,802 shares available to be granted to certain
directors, officers and employees of the Bank. Options granted under the plan
amount to 112,716 shares and are exercisable at $13.00 per share. The options
vest over a five-year term, and expire after ten years from the date of grant.
Options exercised during the years ended March31, 1997 and 1996 were 3,168 and
none, respectively.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based
Compensation" (SFAS123). This Statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. SFAS123
encourages all entities to adopt the "fair value based method" of accounting
for employee stock compensation plans. However, SFAS123 also allows an entity
to continue to measure compensation cost under such plans using the "intrinsic
value based method" as described in APB No. 25. Under the fair value based
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, usually the vesting
period. Fair value is
F-21
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(12) BENEFIT PLANS--(CONTINUED)
determined using an option pricing model that takes into account the stock
price at the grant date, the exercise price, the expected life of the option,
the volatility of the underlying stock and the expected dividends on it, and the
risk-free interest rate over the expected life of the option.
The Bank continues to recognize compensation expense using the method
prescribed in APB No.25. Had compensation cost been determined consistent with
SFAS123 for options granted during fiscal 1996, the Bank's fiscal 1997 and 1996
compensation cost would have increased by $40,000 and $26,000, respectively. As
a result net income (loss) and net income per share for fiscal 1997 and 1996
would have been changed to ($3.3) million or ($1.09) per share and $589,000 or
$.20 per share, respectively. The stock option plan's fair value of options
granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for the grants issued
during 1996: dividend yield of 3.85%, expected volatility 23.79%; risk-free
interest rate of 6.18%, and expected lives of 5 years. There were no option
plans prior to 1996.
(13) POSTRETIREMENT BENEFITS
Net postretirement benefit costs for the years ended March 31, 1997 and
1996 and the ten-month period ended March 31, 1995 are as follows (in
thousands):
1997 1996 1995
---- ---- ----
Service cost ..................................... $ 82 $ 65 $ 48
Interest cost on accumulated post-retirement
benefit obligation ............................. 122 114 120
Amortization of unrecognized net gain ............ (77) (14) --
---- ---- ----
$127 $165 $168
==== ==== ====
For measurement purposes, the cost of medical benefits was projected to
increase at a rate of 13% in 1994, thereafter decreasing 1% per year until a
stable 5% medical inflation rate is reached. The present value of the
accumulated benefit obligation assumed a 7% discount rate compounded annually.
The plan is unfunded as of March 31, 1997, as the Bank funds the plan on a cash
basis.
(14) COMMITMENTS AND CONTINGENCIES
The Bank is a party to commitments to extend credit in the normal course
of business to meet the financial needs of its customers. Commitments to extend
credit are agreements to lend money to a customer as long as there is no
violation of any condition established in the contract. Commitments to fund
mortgage loans generally have fixed expiration dates or other termination
clauses, whereas home equity lines of credit have no expiration date. Since
some commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis.
Collateral is not required by the Bank for loan commitments. The Bank's loans
are located primarily in the State of New Jersey.
At March 31, 1997 and 1996, the Bank had loan commitments of $3.6 million
and $11.5 million respectively, consisting primarily of fixed rate loans which
are not included in the accompanying consolidated financial statements. The
commitments at March 31, 1997 have commitment periods that range from 90 to 120
days and interest rates that range from 6.625% to 10.0%. There is no exposure
to credit loss in the event the other party to commitments to extend credit
does not exercise its right to borrow under the commitment.
In the normal course of business, the Bank may be a party to various
outstanding legal proceedings and claims. In the opinion of management, the
financial position of the Bank will not be materially affected by the outcome
of such legal proceedings and claims.
F-22
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset
or obligation could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Fair value estimates are
made at a specific point in time based on relevant market information and
information about the financial instrument. Such estimates do not include 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
value exists for a significant portion of the 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 assumptions, many of which involve circumstances outside
the control of management. Because of the uncertainties surrounding these
factors and assumptions, the reported fair values represent estimates only and,
therefore, cannot be compared to the historical accounting model. Changes in
assumptions or methodologies could significantly affect the estimates of fair
value.
Fair value estimates presented are based on financial instruments both on-
and off-balance-sheet, and no attempt has been made to estimate the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. In addition, the tax consequences related
to the realization of the unrealized gains and losses can have a potential
effect on fair value estimates and have not been considered in any of the
estimates. The fair value information supplements the basic consolidated
financial statements and other traditional financial data presented throughout
the consolidated financial statements, and the aggregate fair value of
financial instruments presented does not represent the underlying value of the
Bank taken as a whole and should not be compared with the fair value of other
financial institutions, which may differ depending on the assumptions used and
the valuation techniques employed.
The following methods and assumptions were used to estimate the fair value
of significant financial instruments at March 31, 1997 and 1996:
Financial Assets
The carrying amount of cash and cash equivalents is considered to
approximate fair value. The fair values of securities available for sale
and investment securities are based on quoted market prices. The fair value
of loans represents the present value of the estimated future cash flows
discounted at estimates of market interest rates adjusted for criteria
discussed above. Fair value of significant nonperforming loans is generally
based on appraisals of collateral securing such loans. If such appraisals
are not available, estimated cash flows are discounted employing a rate
that incorporates the risk associated with such cash flows. The fair value
of the FHLB and FHLMC stock is the same as its carrying value.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand are
considered to approximate fair value. The fair value of fixed maturity
deposits was estimated by discounting estimated future cash flows using
rates currently offered for deposit products with similar maturities.
Long-term borrowing fair values are discounted using rates available on
borrowings with similar terms and maturities.
Off-balance-sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar arrangements. The fair value of
letters of credit is based on the estimated costs to terminate them or
otherwise settle the obligations with the counterparts.
F-23
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The carrying amounts and related fair values at March 31, 1997 and 1996 are
as follows (in thousands):
1997
------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
Financial assets:
Cash and cash equivalents ............. $ 15,472 $ 15,472
Securities available for sale ......... 290,614 290,614
Securities held to maturity ........... 11,277 11,555
Net loans ............................. 235,624 241,587
FHLB stock ............................ 7,460 7,460
Financial liabilities:
Deposits .............................. 444,139 447,970
Borrowings ............................ $ 75,598 $ 73,238
======== ========
1996
------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
Financial assets:
Cash and cash equivalents ............. $ 11,791 $ 11,791
Securities available for sale ......... 382,721 382,721
Securities held to maturity ........... 11,355 11,674
Net loans ............................. 224,028 228,469
FHLB stock ............................ 7,526 7,526
Financial liabilities:
Deposits .............................. 445,424 451,167
Borrowings ............................ $150,519 $150,519
======== ========
F-24
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes certain fiscal 1997 and 1996 quarterly
financial data:
QUARTER ENDED
---------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1997 1996 1996 1996
------- ------- ------- -------
(IN THOUSANDS)
Interest income .................... $ 9,917 $ 9,647 $10,712 $10,850
Interest expense ................... 6,170 6,672 7,491 7,136
Net interest income ................ 3,747 2,975 3,221 3,714
Provision for loan losses .......... 230 30 30 30
Noninterest income (loss) .......... 142 690 (2,958) 330
Operating expenses ................. 4,047 2,572 5,428 2,555
Income (loss) before tax expense ... (388) 1,063 (5,195) 1,459
Net (loss) income for the quarter .. (244) 667 (4,557) 919
Earnings (loss) per share .......... (0.08) 0.22 (1.52) 0.31
QUARTER ENDED
---------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1996 1995 1995 1995
------- ------- ------- -------
(IN THOUSANDS)
Interest income ................... $10,912 $ 8,872 $ 8,861 $ 8,664
Interest expense .................. 7,483 5,662 5,446 5,251
Net interest income ............... 3,429 3,210 3,415 3,413
Provision for loan losses ......... 150 -- 150 150
Noninterest income (loss) ......... 658 (2,314) 192 251
Operating expenses ................ 2,625 2,545 2,750 2,895
Income (loss) before tax expense .. 1,312 (1,649) 707 619
Net income (loss) for the quarter . 826 (1,039) 445 383
Earnings (loss) per share ......... 0.28 (0.35) 0.15 0.13
(17) INSURANCE FUNDS LEGISLATION
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF-insured deposits to recapitalize
Savings Associations Insurance Fund (SAIF) and spread the obligations for
payment of Financing Corporation (FICO) bonds across all SAIF and Bank Insurance
Fund (BIF) members. The Federal Deposit Insurance Corporation (FDIC) special
assessment being levied amounts to 65.7 basis points on SAIF assessable deposits
held as of March 31, 1995. The Bank recorded a $2.9 million charge (before
tax-effect) as a result of the FDIC special assessment. This legislation will
eliminate the substantial disparity between the amount that BIF and SAIF member
institutions had been paying for deposit insurance premiums.
Beginning on January 1, 1997, BIF members will pay a portion of the FICO
payment equal to 1.29 basis points per $100 in BIF-insured deposits compared to
6.44 basis points per $100 in SAIF-insured deposits, and will pay a pro rata
share (approximately 2.4 basis points per $100 in deposits) of the FICO payment
on the earlier of January 1, 2000, or the date upon which the last savings
association ceases to exist. The legislation also requires BIF and SAIF to be
merged by January 1, 1999, provided that subsequent legislation is adopted to
eliminate the savings association charter and no savings associations remain as
of that time.
F-25
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997 AND 1996
(18) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities". SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. These standards are based on consistent application of a
financial-component approach and focuses on control. Under this approach, after
a transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS is effective for transfers occurring after December 31, 1996
and has been applied prospectively.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125", an amendment of SFAS 125.
SFAS 127 defers for one year the effective date of portions of SFAS 125 that
address secured borrowings and collateral for all transactions. Additionally,
SFAS 127 defers for one year the effective date of transfers of financial assets
that are part of repurchase agreements, securities lending and similar
transactions. The adoption of SFAS 125 and SFAS 127 is not expected to have a
material effect on the Bank's consolidated financial statements
Statement of Financial Accounting Standards No. 128, "Earnings per share"
(SFAS 128) establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. SFAS 128 requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the dilute EPS
computation. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods, earlier application
is not permitted. SFAS 128 also requires restatement of all prior period EPS
data presented. SFAS 128 is not expected to have a material effect on the Bank's
consolidated financial statements.
(19) RELATED-PARTY TRANSACTIONS
The Bank has paid amounts of $31,000, $16,000 and $23,000 for the years
ended March 31, 1997 and 1996 and the ten-month period ended March 31, 1995,
respectively, to a director of the Bank for legal services in connection with
the acquisition of real estate on foreclosed loans. The Bank has also paid
amounts of $20,000, $20,000 and $16,000 for the years ended March 31, 1997 and
1996 and the ten-month period ended March 31, 1995, respectively, to a director
for inspection fees of properties maintained by the Bank in the real estate
portfolio.
F-26
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR 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 BAYONNE BANCSHARES, INC., 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 THE BAYONNE BANCSHARES, INC. OR THE BANK SINCE ANY OF
THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
----------
TABLE OF CONTENTS
PAGE
----
Summary .................................................................. 4
Selected Financial and Other Data ........................................ 14
Recent Developments ...................................................... 17
Risk Factors ............................................................. 17
Bayonne Bancshares, Inc. ................................................. 23
Bayonne Bankshares, M.H.C ................................................ 24
First Savings Bank of New Jersey, SLA .................................... 24
Regulatory Capital Compliance ............................................ 25
Use of Proceeds .......................................................... 26
Dividend Policy .......................................................... 27
Market for the Common Stock .............................................. 28
Capitalization ........................................................... 29
Pro Forma Data ........................................................... 30
First Savings Bank of New Jersey, SLA
and Subsidiaries Consolidated Statements
of Operations ........................................................... 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ........................................................... 34
Business of the Bank ..................................................... 44
Federal and State Taxation ............................................... 64
Regulation ............................................................... 66
Management of the Company ................................................ 72
Management of the Bank ................................................... 72
Beneficial Ownership of Capital Stock .................................... 86
The Conversion and Reorganization ........................................ 88
Comparison of Stockholders' Rights ....................................... 106
Restrictions on Acquisition of the Company
and the Bank ............................................................ 110
Description of Capital Stock of the Company .............................. 116
Description of Capital Stock of the Bank ................................. 117
Transfer Agent and Registrar ............................................. 117
Experts .................................................................. 117
Legal and Tax Opinions ................................................... 118
Additional Information ................................................... 118
Index to Consolidated Financial Statements ............................... 119
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UNTIL AUGUST 6, 1997 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.
7,820,000 SHARES
(LOGO)
BAYONNE
BANCSHARES,
INC.
(PROPOSED HOLDING COMPANY FOR
FIRST SAVINGS BANK OF NEW JERSEY, SLA)
COMMON STOCK
-----------
PROSPECTUS
-----------
JULY 2, 1997
Sandler O'Neill & Partners, L.P.
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