As filed with the Securities and Exchange Commission on May 30, 1997
Registration No. 333-23199
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
BAYONNE BANCSHARES, INC.
(exact name of registrant as specified in its certificate of incorporation)
DELAWARE 6035 Being applied for
(state or other jurisdiction of (Primary Standard (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
568 Broadway
Bayonne, New Jersey 07002
(201) 437-1000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Patrick F.X. Nilan
President and Chief Executive Officer
First Savings Bank of New Jersey, SLA
568 Broadway
Bayonne, New Jersey 07002
(201) 437-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Joseph G. Passaic, Jr., Esquire
Christina M. Gattuso, Esquire
Ann E. Cox, Esquire
Thomas W. France, Esquire
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
(202) 362-0840
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / X /
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Title of each Class of Amount to Purchase Price Aggregate Offering Registration
Securities to be Registered be Registered Per Share Price(1) Fee
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<S> <C> <C> <C> <C>
Common Stock 8,993,000
$.01 par Value Shares $10.00 $89,930,000 $481
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Registration fee of $30,530 was previously paid with Form S-1 filed on
March 13, 1997.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
BAYONNE BANCSHARES, INC.
Cross Reference Sheet Showing Location in the Subscription and Community
Offering Prospectus ("Prospectus") of Information Required by Items of Form S-l:
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Registration Statement Item and Caption Prospectus Headings
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<S> <C>
l. Forepart of the Registration Statement and Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk Factors and Summary; Risk Factors
Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price The Conversion and Reorganization-- Stock Pricing
and Exchange Ratio
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Front Cover Page; The Conversion and
Reorganization -- Subscription Offering and
Subscription Rights; --Community Offering; --
Syndicated Community Offering
9. Description of Securities to be Registered The Conversion and Reorganization -- Certain
Restrictions on Purchase or Transfer of Shares After
Conversion; Restrictions on Acquisition of the
Company and the Bank; Description of Capital Stock
of the Company; Description of Capital Stock of the
Bank
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant Front Cover Page; Bayonne Bancshares, Inc.; First
Savings Bank of New Jersey, SLA; Bayonne
Bankshares, M.H.C.; Dividend Policy; Consolidated
Statements of Income; Management's Discussion and
Analysis of Financial Condition and Results of
Operations of the Bank; Business of the Bank;
Regulation; Management of the Company;
Management of the Bank; The Conversion and
Reorganization; Description of Capital Stock of the
Company; Description of Capital Stock of Bank;
Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
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<PAGE>
PROSPECTUS
BAYONNE 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 __.
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.
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>
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ESTIMATED UNDERWRITING
SUBSCRIPTION PRICE(1) COMMISSIONS ESTIMATED NET PROCEEDS(3)
AND OTHER FEES AND EXPENSES(2)
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<S> <C> <C> <C>
Minimum Per Share............... $10.00 $0.38 $9.62
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Midpoint Per Share.............. $10.00 $0.35 $9.65
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Maximum Per Share............... $10.00 $0.33 $9.67
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Total Minimum(1)................ $31,300,000 $1,195,000 $30,105,000
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Total Midpoint(1)............... $36,820,000 $1,296,000 $35,524,000
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Total Maximum(1)................ $42,340,000 $1,398,000 $40,942,000
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Total Maximum, as adjusted(4)... $48,700,000 $1,515,000 $47,185,000
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<FN>
(1) Based upon the minimum, midpoint and maximum of the valuation price range,
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
$609,000 and marketing fees to be paid to Sandler O'Neill & Partners, L.P.
("Sandler O'Neill") estimated to be $586,000 and $789,000 at the minimum
and the maximum of the Estimated Price Range, 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 Purchase Price, without resolicitation of
subscribers or any right of cancellation, due to regulatory considerations,
changes in the market and 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."
</FN>
</TABLE>
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SANDLER O'NEILL & PARTNERS, L.P.
THE DATE OF THIS PROSPECTUS IS _______________, 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 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
45.9% of the outstanding Bank Common Stock at March 31, 1997 (excluding shares
underlying options pursuant to the Bank's 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 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 the Bank's
ESOP thereafter (the "Exchange").
IN ADDITION TO THE EXCHANGE, NON-TRANSFERABLE 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 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 the total number of
shares of Conversion Stock offered for sale in the Conversion; 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 the total number of shares offered for sale in the Conversion;
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 3.0% of the total number
of shares of Conversion Stock offered for sale in the Conversion; 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 _____ _.M.,
NEW JERSEY TIME, ON _________, 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; provided that, if the
Conversion is not completed within 45 days after the close of the Subscription
and Community Offerings, unless such period has been extended with the consent
of the OTS, if necessary, all subscribers will have their funds returned
promptly with interest, and all withdrawal authorizations will be cancelled.
Such extensions may not go beyond ____________, 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. 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]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT ACCOUNTS OR DEPOSITS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
3
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements of the Bank and Notes thereto
appearing elsewhere in this Prospectus.
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 ("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 United
States 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
4
<PAGE>
assets, and U.S. Government and agency obligations totalled $76.7 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 fiscal 1996, in response to its declining loan demand.
Mortgage-backed securities increased 3.20x between March 31, 1995 and 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 fiscal 1997, the Bank experienced compression of its interest
rate spread, which was reduced to 1.99% for the fiscal year ended March 31,
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 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.
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 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 $70.2 million, or 11.7% of assets,
and the Company would
5
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have had pro forma stockholders' equity of $84.1 million, or
14.6% 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 insurance fund ("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 considered
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
network. See "Risk Factors - Effects of Repositioning of
Investment Portfolio," "- Sensitivity to Increases in Interest
Rates," "- Recent Decline in Operating Results."
o Interest Rate Risk Position. The Bank's profitability is
largely dependent upon its net interest income, which, in
turn, 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 may 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 "-
Restructuring of 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,
however, from a high of $286.5 million at May 31, 1990,
representing 53.8% of total assets, to a low of $193.9 million
at May 31, 1994, representing 35.4% of total assets. At March
31, 1997, total loans receivable had
6
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increased to $240.6 million, equalling 41.7% of total assets.
This overall decline is primarily due to a declining
population and diminished loan demand in the Bayonne market
area.
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 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 1.08% 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 50.7% 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, 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'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
7
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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, has announced his
plans to retire 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 will be succeeded by his son, Michael Nilan, who is
currently 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 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, as amended on February 20, and May 15,
1997, and in February 1997, the Company was incorporated under Delaware law.
Subsequent to its incorporation, 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 ("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. As a result of the merger of 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 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 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, 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 ______, 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 of the Voting Record Date at a special meeting of
Stockholders called for
8
<PAGE>
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 amounts 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 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 $7.07 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 $11.67, and the
pro forma stockholders' equity for the aggregate number of Exchange Shares to be
received for each Public Bank Share was $22.18. This represents a pro forma
increase of 90.1% from
9
<PAGE>
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 $18.85, $25.50 and $29.33 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 $0.38. 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 $0.52 for such period, as adjusted for the above referenced
nonrecurring losses, and the pro forma earnings for the aggregate number of
Exchange Shares to be received for each Public Bank Share was $1.15, as adjusted
for nonrecurring losses. On a pro forma basis, this represents a 45.6% 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 $1.11, $1.20
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
estimated 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 price of a share of Public Bank Shares
was $____ on ____________, 1997, the most recent day on which trading of the
Bank Common Stock occurred preceding the date of this Prospectus. ASSUMING THE
SALE OF CONVERSION STOCK AT LESS THAN THE MIDPOINT OF THE ESTIMATED PRICE RANGE,
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."
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 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 March 31, 1997 ("Supplemental Eligible Account Holders"); and (4)
other members of the MHC, consisting of depositors of the Bank as of
____________, 1997, the voting record date ("Voting Record Date") for the
special meeting of members to vote on the Conversion, and borrowers with loans
outstanding as of January 6, 1995, which continue to be outstanding as of the
Voting Record
10
<PAGE>
Date, other than those members who otherwise qualify as Eligible Account Holders
or Supplemental Eligible Account Holders ("Other Members"). For purposes of
determining subscription rights, a savings account is defined by OTS regulations
and the Plan of Conversion to include withdrawable accounts, including
certificates of deposit, but not including demand accounts. The OTS defines a
demand account generally to mean accounts with an original maturity or required
notice period of less than seven days; accounts for which the Bank does not
reserve the right to require seven days' advance notice prior to withdrawal; or
certain types of accounts made available to persons ineligible to hold
negotiable order of withdrawal accounts. A non-interest bearing demand account
cannot be considered a savings account. 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
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 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. 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, 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, 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."
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
11
<PAGE>
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, aggregates to more than the overall maximum purchase limitation
of 3.0% of the total number of shares of Conversion Stock offered in the
Conversion, 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."
For purposes of the purchase limitations set forth in the Plan of Conversion,
Exchange Shares will be valued at the $10.00 per share price at which shares of
Conversion Stock are issued in the Offerings. At any time during the Conversion
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, 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 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.
Prior to consummation of the Conversion, if the 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
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."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Federal regulations require that the aggregate purchase price of the
Conversion Stock to be offered in the Conversion be consistent with an
independent appraisal of the estimated pro forma market value of the Bank and
the Mutual Holding Company. FinPro, Inc. ("FinPro") an independent appraiser,
has advised the Primary Parties that in its opinion, dated May 23, 1997, the
estimated aggregate pro forma market value of the Bank and the Mutual Holding
Company was $68.0 million (the "Appraisal"). Because the holders of the Public
Bank Shares will continue to hold 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 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 and $____ closing prices
of the Bank Common Stock on
12
<PAGE>
December 26, 1996, the day preceding the Bank's announcement of the Conversion
and the Reorganization and _____, 1997, respectively, 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 $_____ 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 WILL BE ABLE TO SELL SUCH SHARES AFTER THE
COMPLETION OF THE CONVERSION AT OR ABOVE THE PURCHASE PRICE.
All shares of Conversion Stock issued in the Conversion 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, 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 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," "-- 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 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 options to purchase
112,716 shares of Bank Common Stock outstanding, 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 assumes that there is no cash paid in lieu of issuing
fractional Exchange Shares.
13
<PAGE>
<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
- --------------------------------
(1) Assumes that outstanding options to purchase 112,716 shares of Bank
Common Stock at March 31, 1997 are not exercised prior to consummation
of the Conversion and Reorganization.
</TABLE>
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 estimated 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). ASSUMING THE SALE OF
CONVERSION STOCK AT LESS THAN THE MIDPOINT OF THE ESTIMATED PRICE RANGE, 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 $30.1 million and $40.9 million (or $47.2 million if the Estimated Price
Range is increased by 15%) depending on the number of shares sold and the
expenses of the Conversion. See "Pro Forma Data." The Company 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 $15.1 million and $20.5 million (or $23.6 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, 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
through the acquisition or establishment of branch offices and the acquisition
of smaller
14
<PAGE>
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 are not funded with authorized but
unissued common stock of the Company, the Company or Bank may use net proceeds
from the Conversion 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. For a further description of the Stock Programs and Stock
15
<PAGE>
Option Plans, see "Risk Factors - Stock Based Benefits to Management and
Directors, Employment Contracts and Change in Control Payments" and "Management
of the Bank - Benefit Plans." See "Beneficial Ownership of Capital Stock -
Subscriptions of 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.
16
<PAGE>
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.
<TABLE>
<CAPTION>
AT MARCH 31,(4)
----------------------------------------------------------
1997 1996 1995
-------------------- ----------------- -----------------
SELECTED CONSOLIDATED FINANCIAL (IN THOUSANDS)
CONDITION DATA:
<S> <C> <C> <C>
Total assets........................... $577,004 $651,945 $512,126
Cash and cash equivalents.............. 15,472 11,790 6,111
Loans receivable, net:
Real estate.......................... 207,262 198,658 197,240
Consumer............................. 28,362 25,370 21,314
-------- -------- --------
Total loans receivable, net(1).... 235,624 224,028 218,554
U.S. Government and agency
obligations, net of valuation
allowance(2)........................... 76,489 101,729 148,062
Mortgage securities, net(3)............ 222,980 289,848 117,205
Deposits............................... 444,139 445,424 444,380
Borrowed funds......................... 75,598 151,334 15,032
Stockholders' equity................... 48,079 49,519 46,625
<CAPTION>
AT MAY 31,
-------------------------------------------
1994 1993
----------------- ---------------------
SELECTED CONSOLIDATED FINANCIAL (IN THOUSANDS)
CONDITION DATA:
<S> <C> <C>
Total assets........................... $547,550 $572,509
Cash and cash equivalents.............. 47,839 45,247
Loans receivable, net:
Real estate.......................... 172,552 206,573
Consumer............................. 16,428 16,160
-------- --------
Total loans receivable, net(1).... 188,980 222,733
U.S. Government and agency
obligations, net of valuation
allowance(2)........................... 146,806 64,006
Mortgage securities, net(3)............ 141,271 223,401
Deposits............................... 471,681 481,704
Borrowed funds......................... -- 50,000
Stockholders' equity................... 34,066 38,642
</TABLE>
- --------------------
(1) Excludes loans to joint ventures of the Bank's subsidiaries. See
"Business of the Bank -- Subsidiary Activities."
(2) 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.
(3) 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.
(4) At the time of the Bank's 1995 MHC Reorganization, the Bank changed its
fiscal year end from May 31 to March 31.
17
<PAGE>
<TABLE>
<CAPTION>
YEARS TEN MONTHS
ENDED MARCH 31, ENDED YEARS ENDED MAY 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)(2) (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(3)........................... 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 per share............................. $ (1.07) $ 0.21 N/A(4) N/A(4) N/A(4)
======= ========
(continued on next page)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
YEARS
ENDED TEN MONTHS
MARCH 31, ENDED YEARS 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%
Net 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(5)..................... N/A(4) 238.0% N/A(4) N/A(4) N/A(4)
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(6) 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....... 1.08 .92 1.14 1.53 1.55
Allowance for loan losses to loans 90 days
past due and other nonperforming assets.... 50.66 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
expense(6)................................. 1.18x 1.25x 1.41x 1.56x 1.65x
Net interest income after provision for loan
losses, to total operating expense(6)...... 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(7).......................... 8.99% 8.56% 10.83% 6.22% 6.75%
Core capital(7).............................. 8.99% 8.56% 10.83% 6.22% 6.75%
Risk-based capital(7)........................ 25.31% 27.04% 32.21% 20.61% 21.27%
NUMBER OF FULL-SERVICE OFFICES................. 4 4 4 4 4
</TABLE>
- ---------------------
(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) 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 Restructuring of
Investment Portfolio" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Reflects the SAIF Special Assessment of $2.9 million as of September 30,
1996.
(4) Not applicable.
(5) Aggregate dividends per share divided by net income per share.
(6) Total operating expense does not include income tax expense, the
provision for loan losses or the SAIF Special Assessment.
(7) 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%.
19
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock offered hereby.
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 it's 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 interest-earning assets.
While the Bank has improved its interest rate risk position as a result
of its efforts to reposition the 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."
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. 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. 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
20
<PAGE>
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, as measured by the OTS, indicated that
a 2% increase in interest rates would cause a 315 basis point decline in the
Bank's NPV Ratio. This NPV Ratio sensitivity measure exceeds the thresholds at
which the Bank could be required to hold additional risk- based capital under
OTS regulations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Management of Interest Rate Risk -- Net
Portfolio Value" 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, 1997s. 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 could 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 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-
21
<PAGE>
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 0.43%,
respectively, and a return on average equity of (6.56%), 1.2% and 5.89%,
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 insurance fund. 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 61.8% 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 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 effects 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 is likely to 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.
22
<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 underlying 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 market 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, $26.2 million and $24.0 million,
respectively, for the same periods. The Bank's total loan portfolio has also
declined in the 1990s, from a high of $286.5 million at May 31, 1990,
representing 53.8% of total assets, to a 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 by April 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
23
<PAGE>
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 New Jersey Department of Banking (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."
Recently enacted legislation provides that the Bank Insurance Fund
("BIF") and 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 as
state banks for purposes of federal banking laws. Subject to a narrow
grandfathering, all savings and loan holding companies would become subject to
the same regulation as bank holding companies under the pending legislative
proposals. Under such proposals, any lawful activity in which a savings
association was engaged would be permitted for up to two years following the
effective date of its conversion to the new charter, with two additional
one-year extensions which could be granted at the discretion of the regulator.
Additionally, such proposals would grandfather existing thrift intrastate and
interstate branches which were operated as branches or in the process of being
established on January 1, 1997 or January 7, 1997, respectively. 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 funds 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, which under current
OTS regulations may be held no earlier than six months after completion of the
Conversion. Assuming the receipt of stockholder approval, the Company expects to
acquire Common Stock on behalf of the Stock Programs in an amount equal to 4% of
the Conversion Stock sold in the Conversion 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
24
<PAGE>
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, which
under current OTS regulations may be held no earlier than six months after
completion of the Conversion. Although no specific determinations have been
made, assuming the receipt of stockholder approval, the Company expects that
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 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 a 1995 Stock Option Plan and a
1995 Recognition Plan which were adopted by the Bank in connection with the 1995
MHC Reorganization and subsequently approved by the stockholders of the Bank.
These plans will continue in existence after the Conversion and Reorganization
as plans of the 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."
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," "--Employee Severance
Compensation Plan."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAMS AND STOCK OPTIONS
Following the Conversion, the Stock Programs, if approved by the
stockholders of the Company, will acquire an amount of shares equal to 4% of the
shares of Conversion Stock issued in the Conversion, 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,
25
<PAGE>
the voting interests of then-existing shareholders will be diluted by 3.8%. Also
following the Conversion, directors, officers and employees will be granted
options, if the Stock Option Plans are approved by the stockholders of the
Company. Although no specific determinations have been made, the Company expects
that executive officers and directors will be granted options to purchase
authorized but unissued shares in an amount equal to 10% of the Conversion Stock
issued in the Conversion. Under certain circumstances, such options may be
exercised and sold on the same day, thereby eliminating any risk to officers and
directors in exercising options in the event that the market price exceeds the
exercise price. If all of the options were to be 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 3.0% 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
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, supermajority
voting on certain matters, staggered boards of directors, non-cumulative voting
for directors, limits on the calling of special meetings, limits on voting
shares in excess of 10% of the outstanding shares, and certain uniform price
provisions for certain business combinations. The Bank's Stock 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 minimum and the maximum of
26
<PAGE>
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 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 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 has applied to the
OTS to become a savings and loan holding company, and, as such, will be subject
to regulation by the OTS. See "The Conversion 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 of the
Conversion Stock issued, and 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.
27
<PAGE>
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 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 New Jersey Department of Banking 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 1,406,646
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
$69.9 million, or 12.1% 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.
28
<PAGE>
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.
<TABLE>
<CAPTION>
FIRST SAVINGS BANK OF NEW JERSEY, SLA
PRO FORMA AT MARCH 31, 1997
BASED UPON SALE AT $10.00 PER SHARE
-------------------------------------------------
3,130,000 SHARES 3,682,000 SHARES
(MINIMUM OF (MIDPOINT OF
HISTORICAL AT ESTIMATED ESTIMATED
MARCH 31, 1997 PRICE RANGE) PRICE RANGE)
--------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
--------- ---------- --------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital(3)............ $52,415 9.08% $65,435 11.01% $67,813 11.36%
======= ===== ======= ===== ======= =====
Tangible Capital:
Capital Level......... $52,260 8.99% $65,435 11.01 $67,813 11.36%
Requirement........... 8,718 1.50 8,915 1.50 8,951 1.50
------- ----- ------- ----- ------- -----
Excess................ $43,542 7.49% $56,520 9.51% $58,862 9.86%
======= ===== ======= ===== ======= =====
Core Capital:
Capital Level......... $52,260 8.99% $65,435 11.01% $67,813 11.36%
Requirement(4)........ 17,436 3.00 17,830 3.00 17,902 3.00
------- ----- ------- ----- ------- -----
Excess................ $34,824 5.99% $47,605 8.01% $49,911 8.36%
======= ===== ======= ===== ======= =====
Risk-Based Capital(5):
Capital Level(5)...... $54,975 25.31% $68,150 30.45% $70,528 31.34%
Requirement........... 17,379 8.00 17,906 8.00 18,001 8.00
------- ----- ------- ----- ------- -----
Excess................ $37,596 17.31% $50,244 22.45% $52,527 23.34%
======= ===== ======= ===== ======= =====
<CAPTION>
4,870,000 SHARES
4,234,000 SHARES (15% ABOVE
(MAXIMUM OF MAXIMUM
ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE)(1)
---------------------- ---------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2)
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
GAAP Capital(3)............ $70,191 11.72% $72,931 12.12%
======= ===== ======= =====
Tangible Capital:
Capital Level......... $70,191 11.72% $72,931 12.12%
Requirement........... 8,987 1.50 9,028 1.50
------- ----- ------- -----
Excess................ $61,204 10.22% $63,903 10.62%
======= ===== ======= =====
Core Capital:
Capital Level......... $70,191 11.72% $72,931 12.12%
Requirement(4)........ 17,974 3.00 18,056 3.00
------- ----- ------- -----
Excess................ $52,217 8.72% $54,875 9.12%
======= ===== ======= =====
Risk-Based Capital(5):
Capital Level(5)...... $72,906 32.23% $75,646 33.24%
Requirement........... 18,096 8.00 18,206 8.00
------- ----- ------- -----
Excess................ $54,810 24.23% $57,440 25.24%
======= ===== ======= =====
- ----------------------------
(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.
</TABLE>
29
<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 $30.1 million and $40.9 million (or $47.2 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. 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 prevailing 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. The Company, upon the Conversion and
Reorganization, 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
30
<PAGE>
repurchasing any shares of the Common Stock for three years except (i) for an
offer to all stockholders on a pro rata basis, or (ii) for the repurchase of
qualifying shares of a director. Notwithstanding the foregoing and except as
provided below, beginning one year following completion of the Conversion, the
Company may repurchase its Common Stock so long as: (i) the repurchases within
the following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a twelve-month period; (ii) the
repurchases do not cause the Bank to become "undercapitalized" within the
meaning of the OTS prompt corrective action regulation; and (iii) the Company
provides to the Regional Director of the OTS no later than 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 subject
to applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but not
be limited to: (i) market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
In the event the Company determines to repurchase stock, such repurchases may be
made at market prices which may be in excess of the Purchase Price in the
Conversion. 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."
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
31
<PAGE>
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."
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.
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 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
32
<PAGE>
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, 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.
CASH DIVIDENDS
HIGH LOW DECLARED(1)
------------- ----------- --------------------
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 ENDED
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 ENDED
MARCH 31, 1995
- -------------------------
Fourth Quarter $11.38 $10.00(2) $.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 is $1.9 million.
(2) Represents the initial offering price in the Bank's 1995 MHC
Reorganization.
33
<PAGE>
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."
<TABLE>
<CAPTION>
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> <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 42,780 48,189 53,597 59,828
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 $74,628 $79,384 $84,140 $89,620
======= ======= ======= ======= =======
(footnotes continued on next page)
</TABLE>
34
<PAGE>
- -------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) 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. If approved by the stockholders of
the Company, an amount equal to 10% of the shares of Conversion Stock
issued in the Conversion will be reserved for issuance upon the exercise of
options to be granted under the Stock Option Plans. See "Risk Factors -
Possible Dilutive Effect of Stock Programs and Stock Options," Footnote 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 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, an amount equal to 4% of the
shares of Conversion Stock issued in the Conversion is purchased by the
Stock Programs through open market purchases. The Common Stock purchased by
the Stock Programs is reflected as a reduction of stockholder's 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."
35
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $30.1 million and $40.9 million (or $47.2
million in the event the Estimated Price Range is increased by 15.0%) 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 expenses, excluding the marketing fees paid
to Sandler O'Neill, will be approximately $609,000. Actual Conversion 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 reflects a more achievable 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 Conversion 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 $3.2 million, $3.3 million, $3.4 million and
$3.6 million; net earnings per share of $0.59, $0.52, $0.47 and $0.43; and an
offering price as a percentage of stockholders' equity of 77.46x, 85.62x, 92.85x
and 100.30x 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 -
36
<PAGE>
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."
37
<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)(6)
------------- -------------- -------------- ------------------
(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................. (1,195) (1,296) (1,398) (1,515)
------- ------- ------- -------
Estimated net proceeds..................................... 30,105 35,524 40,942 47,185
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........................ $26,349 $31,105 $35,861 $41,341
======= ======= ======= =======
Consolidated net earnings:
Historical................................................ $(3,215) $(3,215) $(3,215) $(3,215)
Pro forma earnings on net proceeds, as adjusted........... 999 1,179 1,359 1,567
Less: Pro forma ESOP adjustment(2)..................... (105) (124) (142) (164)
Pro forma Stock Programs adjustment(3)........... (158) (186) (213) (245)
------- ------- ------- -------
Pro forma net earnings.................................. $(2,479) $(2,346) $(2,211) $(2,057)
======= ======= ======= =======
Per share net earnings (loss):
Historical................................................ $(0.60) $(0.51) $(0.44) $(0.38)
Pro forma earnings on net proceeds, as adjusted........... 0.19 0.19 0.19 0.19
Less: Pro forma ESOP adjustment(2)..................... (0.02) (0.02) (0.02) (0.02)
Pro forma Stock Programs adjustment(3)........... (0.03) (0.03) (0.03) (0.03)
------- ------- ------- -------
Pro forma net earnings (loss) per share................. $ (0.46) $ (0.37) $ (0.30) $ (0.24)
======= ======= ======= =======
Stockholders' equity:
Historical................................................ $48,079 $48,079 $48,079 $48,079
Estimated net proceeds.................................... 30,105 35,524 40,942 47,185
Plus: Assets consolidated from MHC..................... 200 200 200 200
Less: Common Stock acquired by ESOP(2)................. (2,504) (2,946) (3,387) (3,896)
Common Stock acquired by Stock Programs(3)....... (1,252) (1,473) (1,694) (1,948)
------- ------- ------- -------
Pro forma stockholders' equity(1)(2)(3)(4)(5)........... $74,628 $79,384 $84,140 $89,620
======= ======= ======= =======
Stockholders' equity per share:
Historical................................................ $ 8.32 $ 7.07 $ 6.15 $ 5.35
Estimated net proceeds.................................... 5.21 5.22 5.24 5.25
Plus: Assets consolidated from MHC..................... 0.03 0.03 0.03 0.02
Less: Common Stock acquired by ESOP(2)................. (0.43) (0.43) (0.43) (0.43)
Common Stock acquired by Stock Programs(3)....... (0.22) (0.22) (0.22) (0.22)
------- ------- ------- -------
Pro forma stockholders' equity per share(1)(2)(3)(4)(5). $ 12.91 $ 11.67 $ 10.77 $ 9.97
======= ======= ======= =======
Offering price as a percentage of pro forma
stockholders' equity per share........................... 77.46% 85.69% 92.85% 100.30%
Offering price to pro forma net earnings (loss) per share.. N/M N/M N/M N/M
(footnotes continued on next page)
</TABLE>
38
<PAGE>
- -----------
(1) It is assumed that 8% of the shares of Conversion Stock issued in the
Conversion, will be purchased by the ESOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the Company. The amount 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 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 Conversion Stock equal to 4% of the
shares of Common Stock issued in the Conversion, or 125,200, 147,280,
169,360 and 194,800 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or from
authorized but unissued shares of Common Stock or treasury stock of the
Company, if any. Funds used by the Stock Programs to purchase the shares
will be contributed to the Stock Programs by the Bank. In calculating the
pro forma effect of the Stock Programs, it is assumed that the required
stockholder approval has been received, that the shares were acquired by
the Stock Programs at the beginning of the period presented in open market
purchases at the Purchase Price and that 20% of the amount contributed was
an amortized expense during such period. The issuance of authorized but
unissued shares of the Company's Common Stock to the Stock Programs instead
of open market purchases would dilute the voting interests of existing
stockholders by approximately 4.29% and pro forma net earnings per share
would be $(0.44), $(0.35), $(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 $12.42, $11.23, $10.35 and $9.58 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. 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 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 $(0.18) respectively, and the pro
forma stockholders' equity per share would be $11.74, 10.62, $9.78 and
$9.06, 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. 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.
39
<PAGE>
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.
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31, TEN MONTHS
-------------------------------- ENDED MARCH
1997 1996 31, 1995
--------------- -------------- -----------------
(IN THOUSANDS)
INTEREST AND DIVIDEND INCOME:
<S> <C> <C> <C>
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 $ --
======= ===== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
40
<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
41
<PAGE>
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 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 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, 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 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
42
<PAGE>
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 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
43
<PAGE>
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. The OTS has adopted a rule that incorporates an
interest rate risk ("IRR") component into the risk-based capital rules. The
effective date of the new rule has been delayed, but is expected to occur
shortly. The IRR component is a dollar amount that will be deducted from total
capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts. An institution's IRR is measured as the change to
its NPV as a result of a hypothetical 200 basis point change in market interest
rates. A resulting change in NPV of more than 2% of the estimated market value
of its assets will require the institution to deduct from its capital 50% of
that excess change.
44
<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.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ---------------------------------------- ---------------------------
IN BASIS POINTS % NPV %
(RATE SHOCK) AMOUNT $ CHANGE CHANGE RATIO CHANGE
- ------------------------- ------------ ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $17,567 $(40,678) (69.8)% 3.28% (6.63)%
300 27,615 (30,630) (52.6) 5.04 (4.88)
200 37,964 (20,281) (34.8) 6.77 (3.15)
100 48,541 (9,704) (16.7) 8.45 (1.47)
Static 58,245 -- -- 9.92 --
(100) 65,255 7,010 12.0 10.92 1.01
(200) 69,434 11,189 19.2 11.48 1.56
(300) 74,740 16,495 28.3 12.18 2.27
(400) 80,530 22,285 38.3 12.94 3.02
</TABLE>
Based upon the above calculations, the Bank believes that it would have
been in compliance with the risk-based capital requirements of the new
regulations, as of March 31, 1997, if such regulation had been effective as of
such date. Based upon such calculations, 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 $54.9 million of risk-based capital, which exceeded the
OTS minimum requirements by $36.2 million. However, the calculations indicate
that as of March 31, 1997, 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.
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.
45
<PAGE>
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.
<TABLE>
<CAPTION>
AT MARCH 31,
1997
------------------
AVERAGE
ACTUAL YIELD/
BALANCE COST
-------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest-earning assets:
Mortgage loans(1) ................................... $207,262 8.36%
Consumer and other loans ............................ 28,362 8.57
Mortgage-backed securities available for sale ....... 222,979 6.64
Mutual funds available for sale ..................... -- --
Other investments available for sale(2) ............. 67,634 5.34
Investment securities and overnight
deposits with financial institutions(3) ........... 27,381 7.77
-------- ----
Total interest-earning assets..................... 553,618 7.28
Noninterest-earning assets ........................... 23,386
--------
Total assets ..................................... $577,004
========
Interest-bearing liabilities:
Deposits(4) ......................................... $444,139 4.69%
Advances from FHLB and other borrowings ............. 75,598 5.77
-------- ----
Total interest-bearing liabilities ............... 519,737 4.85
Noninterest-bearing liabilities ...................... 9,188
--------
Total liabilities ................................ 528,925
Stockholders' equity ................................. 48,079
--------
Total liabilities and stockholders' equity ....... $577,004
========
Net interest income ..................................
Net interest rate spread(5) .......................... 2.43%
====
Net interest margin(6) ............................... N/A
====
Ratio of average interest-earning assets to average
interest-bearing liabilities ........................ 1.07x
====
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------------------------
1997 1996
------------------------------ -------------------------------
AVERAGE AVERAGE
ANNUALIZED ANNUALIZED
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1) ................................... $205,744 $17,482 8.50% $197,206 $17,203 8.72%
Consumer and other loans ............................ 29,227 2,462 8.42 23,614 1,993 8.44
Mortgage-backed securities available for sale ....... 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) ............. 83,311 4,375 5.25 75,180 4,007 5.33
Investment securities and overnight
deposits with financial institutions(3) ........... 31,199 2,035 6.52 75,889 4,082 5.38
-------- ------- ---- -------- ------- ----
Total interest-earning assets..................... 599,260 41,126 6.86 543,850 37,310 6.86
Noninterest-earning assets ........................... 20,846 21,031
-------- --------
Total assets ..................................... $620,106 $564,881
======== ========
Interest-bearing liabilities:
Deposits(4) ......................................... $443,726 20,814 4.69 $446,300 20,761 4.65%
Advances from FHLB and other borrowings ............. 120,557 6,655 5.52 61,410 3,082 5.02
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities ............... 564,283 27,469 4.87 507,710 23,843 4.70
---- ----
Noninterest-bearing liabilities ...................... 6,838 5,861
-------- --------
Total liabilities ................................ 571,121 513,571
Stockholders' equity ................................. 48,985 51,310
-------- --------
Total liabilities and stockholders' equity ....... $620,106 $564,881
======== ========
Net interest income .................................. $13,657 $13,467
======= =======
Net interest rate spread(5) .......................... 1.99% 2.16%
==== ====
Net interest margin(6) ............................... 2.28% 2.48%
==== ====
Ratio of average interest-earning assets to average
interest-bearing liabilities ........................ 1.06x 1.07x
==== ====
<CAPTION>
TEN MONTHS ENDED MARCH 31,
1995
------------------------------
AVERAGE
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 United States 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.
46
<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
MARCH 31, 1997 VS. YEAR ENDED MARCH 31,
YEAR ENDED 1996 VS. TEN MONTHS ENDED
MARCH 31, 1996 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>
47
<PAGE>
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 $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 at March 31, 1996.
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 Restructuring of 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. In March 1997, Patrick F.X. Nilan,
the President and Chief Executive Officer of the Bank and the MHC, announced his
retirement effective July 1, 1997. Mr. 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,
48
<PAGE>
Inc. Mr. Nilan will be succeeded by his son, Michael Nilan, who currently serves
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. 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 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. 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. 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. Nilan's
retirement on July 1, 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 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 $189,000, 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
49
<PAGE>
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 an increase 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 $2.9 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.
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<PAGE>
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 millionfor 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.
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
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<PAGE>
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.
During 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.
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
52
<PAGE>
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.
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, 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
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<PAGE>
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 FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." 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
54
<PAGE>
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," 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. Statement of Financial Accounting Standards No. 128,
"Earnings per share" 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 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
55
<PAGE>
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 large 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 union, 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.
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 totalled $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
56
<PAGE>
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.
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<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT MARCH 31,(4)
----------------------------------------------------------
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>
Real estate loans:(1)
One- to four-family residential ... $197,819 82.2% $189,283 82.7% $190,685 85.4%
Multifamily and commercial ........ 14,330 6.0 14,253 6.2 11,239 5.0
-------- ----- -------- ----- -------- -----
Total real estate loans .......... 212,149 88.2 203,536 88.9 201,924 90.4
Consumer loans:
Home equity(2) .................... 27,740 11.5 24,851 10.9 20,677 9.2
Passbook .......................... 277 .1 322 0.1 382 0.2
Other(3) .......................... 450 .2 341 0.1 355 0.2
-------- ----- -------- ----- -------- -----
Total consumer loans .............. 28,468 11.8 25,514 11.1 21,414 9.6
-------- ----- -------- ----- -------- -----
Total loans receivable ............ 240,616 100.0% 229,050 100.0% 223,338 100.0%
-------- ===== -------- ===== -------- =====
Less:
Unamortized discount and net
deferred loan fees .............. (1,834) (2,043) (2,108)
Allowance for loan losses ......... (3,158) (2,979) (2,677)
-------- -------- --------
Total loans receivable, net ...... $235,624 $224,028 $218,553
======== ======== ========
<CAPTION>
AT MAY 31,
---------------------------------------
1994 1993
-------------------- ------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:(1)
One- to four-family residential ... $167,633 86.4% $201,044 88.3%
Multifamily and commercial ........ 9,803 5.1 10,388 4.6
--------- ----- -------- -----
Total real estate loans .......... 177,436 91.5 211,432 92.9
Consumer loans:
Home equity(2) .................... 15,754 8.1 15,230 6.7
Passbook .......................... 289 0.2 457 0.2
Other(3) .......................... 468 0.2 540 0.2
--------- ----- -------- -----
Total consumer loans .............. 16,511 8.5 16,227 7.1
--------- ----- -------- -----
Total loans receivable ............ 193,947 100.0% 227,659 100.0%
--------- ===== -------- =====
Less:
Unamortized discount and net
deferred loan fees .............. (1,904) (2,328)
Allowance for loan losses ......... (2,918) (2,598)
-------- --------
Total loans receivable, net ...... $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.
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<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 $32.9
million, $26.2 million and $24.0 million for the years ended March 31, 1997 and
1996, and the ten months ended March 31, 1995, respectively.
<TABLE>
<CAPTION>
BEYOND
WITHIN 1-3 3-5 5-10 10-20 20
1 YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
------- ------ --------- ----------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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
======= ====== ======= ======= ======= ======= ========
</TABLE>
59
<PAGE>
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 $156,673 $41,146 $197,819
Multi-family and commercial. 9,933 4,397 14,330
Consumer loans................ 24,381 4,086 28,467
-------- ------- --------
Total loans receivable........ $190,987 $46,629 $240,616
======== ======= ========
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, $98.8 million, or 50.8%, 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 999 loans sold, with an aggregate principal amount of $14.4 million.
The Bank currently offers one- to four-family mortgage loans with terms
typically ranging from 10 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 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 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
60
<PAGE>
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 amortized 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 totalled $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
totalled $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 real estate 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
61
<PAGE>
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 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 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 totalled $28.5 million, or 11.8%, of the Bank's
total loan portfolio. Home equity loans, which totalled $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
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<PAGE>
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
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.
63
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- --------------
1997 1996 1995(2)
--------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
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 ......................................... 32,929 26,311 24,019
-------- -------- --------
Net loan activity .................................. 6,574 5,712 29,391
-------- -------- --------
Loans receivable at end of period ............... $235,624 $229,050 $223,338
======== ======== ========
</TABLE>
- --------------------
(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 policy is to limit the maximum loans to one borrower
limit 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.
64
<PAGE>
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
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 real estate owned ("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
totalled $364,000, $24,000 and $233,000 as of March 31, 1997, 1996, and
1995, respectively.
65
<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 totalled $625,000 and
consisted of seven properties. It is the policy of the Bank to cease accruing
interest on 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.
<TABLE>
<CAPTION>
AT MARCH 31, AT MAY 31,
----------------------------- ---------------
1997 1996 1995 1994 1993
------------------ --------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
------ ------ ------ ------ ------
Other nonperforming assets:
REO ............................................ 625 575 1,006 1,522 945
Investments in and loans to joint ventures ..... -- -- -- -- --
------ ------ ------ ------ ------
Total other nonperforming assets .............. 625 575 1,006 1,522 945
------ ------ ------ ------ -------
Total loans delinquent 90 days or more and
other nonperforming assets ..................... $6,234 $6,542 $6,590 $8,399 $8,862
====== ====== ====== ====== ======
Total loans delinquent 90 days or more to net
loans receivable ............................... 2.38% 2.92% 3.02% 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 ............ 1.08% 1.00% 1.29% 1.53% 1.55%
</TABLE>
- ----------
(1) The Bank classifies as nonperforming only real estate loans 120 days or
more delinquent.
66
<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...... 625 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.
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<PAGE>
The following table sets forth the aggregate amount of the Bank's special
mention and classified assets at the dates indicated.
AT MARCH 31, AT 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 of 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 losses. Based upon that review, the Bank determines whether any loans
require the establishment on appropriate reserves or allowances for losses. Such
evaluation, which includes a review of all loans of 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 nonhomogenous 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 with in 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.
68
<PAGE>
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the following table.
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED
ENDED MARCH 31, MARCH 31, YEARS ENDED MAY 31,
----------------- --------- -------------------
1997 1996 1995 1994 1993
----------------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
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 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
======== ======== ======== ======== ========
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 loans charged off as a percent of average
loans outstanding. .......................... .06% .07% .29% .09% .35%
Ratio of allowance for loan losses to total
loans delinquent 90 days or more at end
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 ....... 50.66% 45.54% 40.62% 34.74% 29.30%
</TABLE>
69
<PAGE>
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.
<TABLE>
<CAPTION>
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
------ --------- ----- ------ --------- ----- ------ --------- -----
Balance at end of period applicable (DOLLARS IN THOUSANDS)
to:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family .......... $2,984 94.5% 94.1% $2,770 93.0% 82.6% $2,521 94.2% 85.4%
Multifamily residential ...... 60 1.9 2.1 59 2.0 6.0 56 2.1 5.0
Commercial ................... 9 .3 .3 6 0.2 .3 1 -- --
Consumer ..................... 105 3.3 3.5 144 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 OF PERCENT
LOANS IN OF LOANS
PERCENT OF EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ----- ------ --------- -----
Balance at end of period applicable (DOLLARS IN THOUSANDS)
to:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family ........... $2,784 95.4% 86.5% $2,477 95.4% 88.3%
Multifamily residential ....... 49 1.7 5.0 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>
70
<PAGE>
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, $302.2 million, or
52.4%, of the Bank's total assets consisted of securities issued or guaranteed
by the United States 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 in exchange for 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 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 $4.5 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 $318.3 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 totalled $223.0 million, or
38.6% of the Bank's total assets, U.S. Government and agency obligations
totalled $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, totalled $18.5 million,
or 3.2% 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 crosschecks have been
completed. Since December 1995, the Bank has significantly restructured its
investment portfolio. See "Risk Factors - Effects of Repositioning of Investment
Portfolio."
71
<PAGE>
Securities are classified as either available for sale or held to maturity
based upon the banks 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 issuer or guarantor:
(i) Securities that are backed by the full faith and credit of the United
States Government. The 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
FHA-insured or VA-guaranteed mortgages.
(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
72
<PAGE>
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 ("ARM Securities"). Unlike fixed-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
73
<PAGE>
scheduled payment of principal and an unscheduled repayment of principal will
increase current and total returns.
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.
74
<PAGE>
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
------ -------- ------ -------- ------ --------
<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 83.6 183,814 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 Potfolio ............ -- -- $ 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.
75
<PAGE>
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:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED MARCH
ENDED MARCH 31, 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>
76
<PAGE>
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:
<TABLE>
<CAPTION>
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 92,873 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>
77
<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
ONE YEAR OR LESS YEAR TO FIVE YEARS
------------------- ------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Investments available for sale:
Mortgage-backed securities ........... $ -- --% $ 83,417 5.64%
U.S. Government and
agency obligations ................. -- -- 51,985 4.85
------ ---- -------- ----
Total ............................... -- -- 135,402 5.34
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
------ --------
Total ............................... $8,694 6.47 $ 8,955 6.83
====== ========
<CAPTION>
AT MARCH 31, 1997
-----------------------------------------------------------------------
MORE THAN FIVE
YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
-------------------- ------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST YIELD COST VALUE YIELD
----------- -------- --------- -------- --------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Investments available for sale:
Mortgage-backed securities ........... $ 9,981 7.07% $134,043 6.65% $227,441 $222,980 6.30%
U.S. Government and
agency obligations ................. 14,969 5.79 2,992 7.04 69,945 67,634 5.15
------- ---- -------- ---- -------- -------- ----
Total ............................... 24,950 6.30 137,035 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 ................. 982 5.48 1,290 7.00 11,277 11,555 6.73
------- -------- -------- --------
Total ............................... $ 982 5.48 $ 8,750 6.45 27,381 $ 27,659 6.55
======= ======== ======== ========
</TABLE>
78
<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, nor 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:
TEN MONTHS
YEAR ENDED MARCH 31, ENDED MARCH 31,
-------------------------- -------------
1997 1996 1995
------------ ----------- -------------
(IN THOUSANDS)
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)
======== ======== =========
79
<PAGE>
At March 31, 1997, the Bank had $45.6 million in certificate accounts in amounts
of $100,000 or more maturing as follows:
MATURITY PERIOD AMOUNT
- ----------------------------------- ----------
(DOLLARS IN
THOUSANDS)
Within 12 months................... $32,872
Within 13 to 36 months............. 12,119
Beyond 36 months................... 666
-------
Total.............................. $45,657
=======
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average nominal
interest rates on each category of deposits presented. Averages for the periods
presented utilize average month-end balances.
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31, TEN MONTHS
----------------------------------------------------------- ENDED MARCH 31,
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS YIELD BALANCE DEPOSITS YIELD BALANCE DEPOSITS YIELD
-------- -------- ------- -------- --------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Club accounts ..................... $ 643 0.14% -- $ 671 0.15% -- $ 707 0.16% --
Noninterest-bearing demand......... 11,264 2.54 -- 8,332 1.87 -- 5,185 1.17 --
NOW accounts ...................... 31,576 7.11 2.44 30,288 6.80 2.44 27,772 6.25 2.44
Passbooks ......................... 133,817 30.13 2.92 134,940 30.29 2.92 142,837 32.14 2.92
Money market deposit accounts ..... 15,276 3.44 2.44 14,279 3.21 2.44 16,095 3.62 2.44
Time deposits that mature:
Within 12 months ................ 197,755 44.53 6.14 155,224 34.85 3.88 160,292 36.07 4.17
Within 13 to 36 months .......... 50,439 11.36 7.54 90,747 20.37 4.79 63,023 14.18 4.79
Beyond 36 months ................ 3,369 0.75 5.57 10,943 2.46 8.72 28,469 6.41 8.58
-------- ------ -------- ------ -------- ------
Total deposits ............... $444,139 100.00% 4.77 $445,424 100.00% 3.67 $444,380 100.00% 3.91
======== ====== ======== ====== ======== ======
</TABLE>
80
<PAGE>
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
======== ======== ========
81
<PAGE>
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.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
TEN MONTHS ENDED
YEAR ENDED MARCH 31, MARCH 31,
-------------------------- ----------------
1997 1996 1995
------------- ----------- ----------------
(DOLLARS IN THOUSANDS)
FHLB advances and line 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%
- ---------------------------
(1) Computed on the basis of month-end balances.
82
<PAGE>
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.
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.
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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
losses exceeds the amount that would have been allowed under the experience
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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 Internal Revenue Code of 1986, as
amended (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 income tax 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.
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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.
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
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March 31, 1997, the Bank's general limit on loans-to-one borrower was $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."
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
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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, 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."
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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 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
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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
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
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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
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risk to the subsidiary savings institution. The Bank must notify the OTS 30 days
before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. See "-
Federal 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
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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.
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 POSITIONS 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."
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MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE DIRECTOR TERM
NAME AGE(1) BANK(2) SINCE(3) EXPIRES
- -------------------- ----- ---------------------------------- ------ -------------
<S> <C> <C> <C> <C>
Patrick F.X. Nilan(4) 66 President, Chief Executive Officer and 1963 1998
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 1997 1999
and Director
</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 has announced his retirement as Chief Executive
Officer and President of the Bank, effective June 30, 1997. He will remain
as Chairman of the Board of Directors of the Company and the Bank. Mr.
Michael Nilan has been elected to succeed Patrick F.X. Nilan as Chief
Executive Officer and President of the Bank effective June 30, 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 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 Coughlin 37 Corporate Secretary
- ----------
(1) As of March 31, 1997.
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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 plans to retire 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 will remain 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 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. Effective July 1,
1997, Mr. Nilan will become President and Chief Executive Officer of the Bank
upon the retirement of Patrick F.X. Nilan from those positions. Mr. Nilan is the
head of the Bayonne Service Corporation annuity program and is a member of the
Budget Committee and Asset/Liability Committee. 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 and Liability Committees.
Eugene J. Harz has been the Vice President of Marketing, Investment and
Shareholder Services since 1995. Prior thereto, Mr. Harz was the Vice President
of Operations since 1990, and was Controller
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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.
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 a 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
Nonemployee directors received $750 for each Board of Directors meeting
attended, plus a $6,000 retainer each quarter. Nonemployee directors serving on
the Asset/Liability Committee and the Audit Committee are paid $250 for each
meeting attended. Nonemployee 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
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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 will become eligible to receive
compensation as a nonemployee director. It is expected that, 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 expects
to enter 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 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 First Savings Bank of New Jersey, S.L.A.
and Bayonne Bankshares, M.H.C. 1995 Stock Option Plan ("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 Stock Option Plan, nonemployee 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 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 First Savings Bank of New Jersey,
S.L.A. and Bayonne Bankshares, M.H.C. 1995 Recognition and Retention Plan ("1995
Recognition Plan") which authorized the issuance of 54,321 shares of Common
Stock. Under the Recognition Plan, nonemployee directors Conaghan, Lamparello,
Sisk and Whelply each have been awarded 2,716 shares of Common Stock, subject to
restrictions set forth in the Recognition Plan ("Restricted Stock"). The
aggregate value of the shares awarded to the nonemployee directors, based upon
the per share price of the time of award, was $152,096. The Restricted Stock
vests in five equal annual installments of 20% commencing on July 28, 1996.
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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 $100,000 during the fiscal year ended March 31,
1997 ("Named Executive Officers"). In addition, the table sets forth information
regarding total remuneration for the year ended March 31, 1996 and the ten
months ended March 31, 1995.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
--------------------------------------------------------------------
(i)
OTHER SECURITIES
FISCAL ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL YEARS COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS ENDED SALARY($)(1) BONUS($) ($) ($)(2) (#)(3) ($) ($)(5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Patrick F.X. Nilan(6) 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(4) 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 -- -- -- -- --
</TABLE>
- ----------
(1) Includes compensation deferred at the election of the officer pursuant to
the Bank's Financial Institution's Thrift Plan (the "401(k) Plan").
(2) Represents awards granted pursuant to the 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 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) Reflects total remuneration for the ten months ended March 31, 1995.
(5) 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.
(6) Mr. Nilan will retire from the positions of President and Chief Executive
Officer of the Bank effective June 30, 1997.
(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 the Bank and the Company.
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EMPLOYMENT AGREEMENTS
In July 1993, the Bank entered into an employment agreement with Patrick
F.X. Nilan which agreement will expire effective June 30, 1997 upon his
resignation from the positions of Chief Executive Officer and President of the
Bank. Effective upon the Conversion, 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. 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 also continue the Executive's life, health, and disability coverage for 36
months. Notwithstanding that both agreements would provide for a severance
payment in the event of a change in control, the Executive would only be
entitled to receive a severance payment under one agreement.
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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.
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
Agreements ("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 an Employment Agreement 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 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 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
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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 $1.5 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 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 10 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 10 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
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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>
YEARS OF BENEFIT SERVICE
---------------------------------------------------------------
HIGH 5 YEAR
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 22,736 45,472 68,209 90,945 118,800(2) 118,800(2)
and above
- ----------
</TABLE>
(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.
As of December 14, 1996, officers 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 will retire
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,
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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.
<TABLE>
<CAPTION>
HIGH FIVE-YEAR YEARS OF BENEFIT SERVICE AT RETIREMENT
AVERAGE --------------------------------------
EARNINGS(1) 25 30 35
- ------------ ----------- ----------- -----------
<S> <C> <C> <C>
$ 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
- ----------
</TABLE>
(1) The two persons, officers 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. Upon Mr.
Patrick F.X. Nilan's retirement from the Bank on June 30, 1997, he will
have 37 years of credited service.
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 agreement
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. 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. 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's combined benefit under the
Retirement Plan and supplemental executive retirement agreement does not exceed
the benefit provided under the Retirement Plan because Mr. Harz's compensation
and accrued benefits do not exceed the
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<PAGE>
amounts permitted by the applicable Code sections to be taken into consideration
under the Retirement Plan.
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 a majority of stockholders, excluding the Holding
Company, 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, 17,160
options were awarded to nonemployee directors, 85,556 were awarded to employees
and 23,086 were reserved for future issuance under the plan.
Set forth below is certain information concerning exercised and
unexercisable options during the fiscal year ended March 31, 1997, for Named
Executive Officers.
<TABLE>
<CAPTION>
============================================================================================================
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
- ------------------------------------------------------------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
SHARES ACQUIRED VALUE OPTIONS AT FISCAL YEAR- THE-MONEY OPTIONS AT
NAME UPON EXERCISE REALIZED END FISCAL YEAR-END(1)
--------------------------------------------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Patrick F.X. Nilan -- -- 6,790/27,160 $76,3880/$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 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 nonemployee directors administers the Recognition Plan, and makes
awards to executive officers pursuant to the Plan. Awards under the 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.
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<PAGE>
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 will become participants.
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 to reimburse the Company for
contributions made by it. Contributions to the ESOP will be discretionary,
however, the Company or the Bank intend to make annual contributions to the ESOP
in an aggregate amount at least equal to the principal and interest requirement
on the debt. The interest rate for the loan is 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
105
<PAGE>
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, 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 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, which under applicable
OTS regulations may be held no earlier than six months after the completion of
the Conversion, the Board of Directors intends to present the Option Plans or
the Master Stock-Based Benefit Plan to stockholders for approval and has
reserved an amount equal to 10% of the shares of Conversion Stock issued in the
Conversion, 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
106
<PAGE>
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 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 normal
retirement, the Company, if requested by the optionee, could elect, in exchange
for vested options, to pay the optionee, or beneficiary in the event of death,
the amount by which the fair market value of the Common Stock exceeds the
exercise price of the options on the date of the employee's termination of
employment.
107
<PAGE>
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 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
108
<PAGE>
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."
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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 loans 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 totalled 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.
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."
110
<PAGE>
<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%
- ------------------
* Less than 1%.
</TABLE>
(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 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: 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 Michael Nilan, 690 shares.
111
<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 (11 persons) 294,741 $1,145,000 114,500 407,137 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.
(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 purchase limitation, Mr. Nilan may only purchase 37,896 shares
at the midpoint of the Estimated Price Range.
112
<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, 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 has been called for this purpose to be held on _____________, 1997
and a special meeting of the Public Stockholders has been called for this
purpose to be held on ______________, 1997.
The Company filed an application with 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 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 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 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.
113
<PAGE>
The following is a brief summary of pertinent aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at each branch of the Bank
and at the Northeast Region and Washington, D.C. offices of the OTS. The Plan is
also filed as an Exhibit to the Registration Statement of which this Prospectus
is a part, copies of which may be obtained from the SEC. See "Additional
Information."
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 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
generally accepted accounting principles ("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 $70.2 million, or a ratio of GAAP capital to adjusted assets, on a
pro forma basis, of 11.7% 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.
114
<PAGE>
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
The Boards of Directors of the Bank and the Mutual Holding Company adopted
the Plan on December 19, 1996. 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. After receipt of all requisite regulatory approvals, the Company will form
Interim B as a first-tier, wholly owned subsidiary of the Company, and the Board
of Directors of Interim B shall adopt the Plan by at least a two-thirds vote. In
addition, the Bank and the Company shall approve the Plan in their capacities as
the sole shareholders of the Company and Interim B, respectively.
Following approval of the Conversion by the OTS, the Plan will be
submitted to the members for their consideration and approval at the Special
Meeting and to the Public Stockholders for their consideration and approval at
the Stockholders' Meeting. 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%
|
|
------------------------------------------------
INTERIM (TO BE FORMED)
------------------------------------------------
115
<PAGE>
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 (following its conversion into an interim federal
stock savings institution) with and into the Bank, (ii) the merger of Interim
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
----------------------------------------------------------
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
116
<PAGE>
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 will 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 (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 Conversion
and Reorganization, 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.
117
<PAGE>
Tax Effects. The Primary Parties have received an opinion from KPMG Peat
Marwick LLP 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
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see
"--Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
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
118
<PAGE>
the same aggregate 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 $48,695,000 (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 $48,695,000 (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.
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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 assumes that there is
no cash paid in lieu of issuing fractional Exchange Shares.
<TABLE>
<CAPTION>
CONVERSION STOCK TO BE
ISSUED EXCHANGE SHARES TO BE ISSUED TOTAL SHARES OF
---------------------- ---------------------------- COMMON STOCK TO
AMOUNT PERCENT AMOUNT PERCENT BE OUTSTANDING EXCHANGE RATIO
--------- ------- --------- ------- -------------- --------------
<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............ 3,234,000 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>
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."
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 may be increased to
4,870,000 shares due to regulatory considerations, changes in the market and
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. 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
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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
____________________, 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, extend, reopen or commence new Subscription and Community
Offerings or Syndicated Community Offering, establish a new Estimated Price
Range and commence a resolicitation of all subscribers with the approval of the
OTS or take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. In the event market or
financial conditions change so as to cause the aggregate purchase price of the
shares to be below the minimum of the Estimated Price Range or more than 15%
above the maximum of such range, and the Company and the Bank determine to
continue the Conversion, subscribers will be resolicited (i.e., be permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to decrease or cancel their
subscriptions). Any change in the Estimated Price Range must be approved by the
OTS. A resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days, or if following the Syndicated
Community Offering, 90 days, unless further extended by the OTS for periods up
to 90 days not to extend beyond ____________, 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.
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
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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
$48,695,000 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) holders
of savings accounts with a balance of $50 or more as of December 31, 1994
("Eligible Account Holders"); (2) the ESOP; (3) holders of savings accounts with
a balance of $50 or more as of March 31, 1997 ("Supplemental Eligible Account
Holders")); and (4) members of the Bank, consisting of depositors of the Bank as
of _____________, 1997, the Voting Record Date, and borrowers
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<PAGE>
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"). For purposes of
determining subscription rights, a savings account is defined by OTS regulations
and the Plan of Conversion to include withdrawable accounts, including
certificates of deposit, but not including demand accounts. The OTS defines a
demand account generally to mean accounts with an original maturity or required
notice period of less than seven days; accounts for which the Bank does not
reserve the right to require seven days' advance notice prior to withdrawal; or
certain types of accounts made available to persons ineligible to hold
negotiable order of withdrawal accounts. A non-interest bearing demand account
cannot be considered a savings account. 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 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 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 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, including any increase in
the number of shares of Conversion Stock to be issued in the Conversion after
the date hereof as a result of an increase of up to 15% in the maximum of the
Estimated Price Range. The ESOP intends to purchase 8% of the shares to be
issued in the Conversion or 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
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<PAGE>
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 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 Supplemental Eligible
Account Holder's Qualifying Deposit and the denominator is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders, in each case
on the Supplemental Eligibility Record Date, subject to the overall purchase
limitation and exclusive of an increase in the shares issued pursuant to an
increase in the Estimated Price Range of up to 15%. See "--Limitations on
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 offered, or one-tenth of one percent
(.10%) of the total offering of shares of Conversion Stock, subject to the
overall purchase limitation and exclusive of an increase in shares issued
pursuant to an increase in the Estimated Price Range of up to 15%. 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.
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Expiration Date for the Subscription Offering. The Subscription Offering
will expire at ______ _.m., New Jersey time, on ___________, 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 cancelled.
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 __________, 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 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 county in which the Bank
maintains an office in the State of New Jersey (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 offered subject to the
maximum overall 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 filed, 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
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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 2.0% 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 2.0% 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 2.0% of the Purchase Price
and provided, further, however, that the aggregate fees payable to Sandler
O'Neill and the selected dealers will not exceed 7.0% 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 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
totalling $50,000. Total marketing fees to Sandler O'Neill are expected to be
$586,000 and $789,000 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 is expected to receive a fee for these
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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 totalling $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, New Jersey 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.
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 has
not been completed within 45 days after the end of the Subscription and
Community Offerings, unless such period has been extended.
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 (March 31, 1997) and/or
the Voting Record Date (__________________, 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. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit
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account will continue to accrue interest at the contractual rates until
completion or termination of the Conversion, but a hold will be placed on such
funds, thereby making them unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date of
the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be cancelled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the 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, 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.
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, 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 have agreed to use their 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, 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.
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.
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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 ____________, 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 following limitations on the number of shares of
Conversion Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $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, 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, 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 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 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
offered, 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 offered in the Conversion 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%;
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(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 offered in the Conversion
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 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 3.0% of the shares of 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 25.00% of the total number of shares of Conversion Stock
offered for sale in the Conversion 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.
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 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 3.0% 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, subject to availability of shares and
the overall maximum purchase limit for purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) to fill the ESOP's
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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
"Restrictions on Acquisition of the Company and the Bank."
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, 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, including regular savings accounts, transaction accounts such as NOW
accounts, money market deposit accounts, and certificates of deposit, with a
balance of $50 or more held in the Bank on December 31, 1994 and March 31, 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
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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. Instead, the Bank has received an opinion of KPMG Peat
Marwick LLP, 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 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
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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
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 that the subscription rights issued in
connection with the Conversion 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
All shares of Conversion Stock purchased in connection with the Conversion
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, 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 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 1.0% 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.
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 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
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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. In addition, under current OTS policies, repurchases
may be allowed in the first year following Conversion and in amounts greater
than 5% in the second and third years following the Conversion, provided there
are valid and compelling business reasons for such repurchases and the OTS does
not object to such repurchases.
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 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
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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 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
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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 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
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extent authorized by the Delaware General Corporation Law of the State of
Delaware against expenses, liability and loss reasonably incurred or suffered by
such indemnitee in connection therewith.
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 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.
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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 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."
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
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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 entered into in
connection with the Conversion, 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.
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RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which 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.
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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, 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 the first annual meeting after the Conversion.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock to
approve certain "Business Combinations," as defined therein, and related
transactions. Under Delaware law, absent this provision, Business Combinations,
including mergers, consolidations and sales of all or substantially all of the
assets of a corporation must, subject to certain exceptions, be approved by the
vote of the holders of only a majority of the outstanding shares of Common Stock
of the Company and any other affected class of stock. Under the Certificate of
Incorporation, at least 80% approval of 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,
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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 3.0% of the
shares of the Common Stock at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the aggregate of the Conversion
Stock sold in the Conversion. Additionally, if at a meeting of stockholders
following the Conversion 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 expects to issue an amount equal to 10% of the aggregate of the
Conversion Stock issued in the Conversion 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
hereinabove.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein) to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity, or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Bank and the stockholders of the Company,
give due consideration to all relevant factors, including, without limitation,
the social and economic effects of acceptance of such offer on the Company's
customers and the Bank's present and future account holders, borrowers and
employees; on the communities in which the Company and the Bank operate or are
located; and on the ability of the Company to fulfill its corporate objectives
as a savings and loan holding company and on the ability of the Bank to fulfill
the objectives of a federally-chartered stock savings 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 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.
143
<PAGE>
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the employment agreements, 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 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.
144
<PAGE>
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.
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
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.
145
<PAGE>
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, 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.
146
<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. Except as discussed above in "Restriction
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.
147
<PAGE>
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
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."
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 will
148
<PAGE>
not be subject to redemption. Upon receipt by the Bank of the full specified
purchase price therefor, the common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is 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 Conversion and its valuation with
respect to subscription rights.
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 KPMG Peat Marwick LLP. 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. Pursuant to the rules and regulations of
the OTS, this Prospectus omits certain information contained in that
application. The application may be examined at the principal office of the OTS,
1700 G Street, N.W., Washington, D.C. 20552 and at the Office of the Regional
Director of the OTS located at 10 Exchange Place, 18th Floor, Jersey City, New
Jersey 07302.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(b) of the Exchange Act and, upon such
registration, the Company and the holders of its
149
<PAGE>
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.
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.
150
<PAGE>
<TABLE>
<CAPTION>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Index to Consolidated Financial Statements
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 40
Consolidated Statements of Stockholders' Equity - Years ended March 31, 1997
and 1996 and the ten month period ended March 31, 1995 F-3
Consolidated Statements of Cash Flows - Years ended March 31, 1997 and 1996 and
the ten month period ended March 31, 1995 F-4
Notes to Consolidated Financial Statements F-6
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 final regulatory approval.
</TABLE>
151
<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.
/s/ KPMG Peat Marwick LLP
------------------------------
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
(in thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
-------- -------
<S> <C> <C>
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 March 31, 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 and 10) 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
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
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
(in thousands)
UNALLO- UNAMOR-
ADDITIONAL CATED TIZED
COMMON PAID-IN ESOP MRP
STOCK CAPITAL SHARES SHARES
------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Balance at May 31, 1994 $ - - - -
Net income for the ten-month period - - - -
Net proceeds of stock offering 302 11,702 - -
Capitalization of mutual holding company - (200) - -
Common stock acquired by ESOP - - (1,086) -
Amortization of ESOP shares - 6 54 -
Net change in net unrealized losses on securities
available for sale, net of income tax benefit
of $248 - - - -
Dividends declared at $0.125 per share - - - -
------ ------- ------ -----
Balance at March 31, 1995 302 11,508 (1,032) -
Net income for the year - - - -
Amortization of ESOP - 110 217 -
Common stock issued to MRP 4 578 - (582)
Amortization of MRP - 20 - 87
Dividends declared at $0.5 per share - - - -
Net change in unrealized losses on securities available
for sale, net of income tax expense of $1,016 - - - -
------ ------- ------ -----
Balance at March 31, 1996 306 12,216 (815) (495)
Net loss for the period - - - -
Amortization of ESOP - 156 217 -
Amortization of MRP - 37 - 117
Dividends declared at $0.5 per share - - - -
Exercise of stock options 1 17 - -
Net change in unrealized losses on securities available
for sale, net of income tax benefit of $192 - - - -
------ ------- ------ -----
Balance at March 31, 1997 $ 307 12,426 (598) (378)
====== ======= ====== =====
See accompanying notes to consolidated financial statements.
<CAPTION>
NET
RETAINED UNREALIZED
EARNINGS - LOSS ON TOTAL
SUBSTAN- SECURITIES STOCK-
TIALLY AVAILABLE HOLDERS'
RESTRICTED FOR SALE EQUITY
---------- ------------ ----------
<S> <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 - - 12,004
Capitalization of mutual holding company - - (200)
Common stock acquired by ESOP - - (1,086)
Amortization of ESOP shares - - 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 44,669 (8,822) 46,625
Net income for the year 615 - 615
Amortization of ESOP - - 327
Common stock issued to MRP - - -
Amortization of MRP - - 107
Dividends declared at $0.5 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 44,575 (6,268) 49,519
Net loss for the period (3,215) - (3,215)
Amortization of ESOP - - 373
Amortization of MRP - - 154
Dividends declared at $0.5 per share (702) - (702)
Exercise of stock options - - 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 40,658 (4,336) 48,079
======== ====== =======
See accompanying notes to consolidated financial statements.
</TABLE>
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
(in thousands)
<TABLE>
<CAPTION>
TEN
YEARS ENDED MONTHS
MARCH 31, ENDED
----------------------- MARCH 31,
1997 1996 1995
-------- -------- --------
<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>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(in thousands)
<TABLE>
<CAPTION>
TEN
YEARS ENDED MONTHS
MARCH 31, ENDED
-------------------- MARCH 31,
1997 1996 1995
-------- ------- --------
<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 -
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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 March 31, 1997, the Bayonne
Service Corp. and The Final Bayonne Service Corp. are inactive and the
Bayonne Service Corp. via the Bayonne First Investment Center sells
non-insured investment products such as annuities and mutual funds.
All significant intercompany balances and transactions have been
eliminated in 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 March 31, 1997 and 1996, and the
ten-month period ended March 31, 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.
F-6
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
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
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.
F-7
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
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 residential, commercial, and commercial mortgage
loans in excess of $500,000. 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 March 31, 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 the loan portfolio.
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.
F-8
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
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. The Bank maintains
an allowance for real estate losses for subsequent declines in
estimated fair value. Certain costs incurred in preparing properties
for sale are capitalized. 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 bases.
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.
F-9
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
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.
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 March 31, 1995. The weighted
average number of shares outstanding during the years ended March 31,
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 December 1993, 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.
F-10
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), CONTINUED
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.
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 interest
statement of the financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible account holders and supplemental eligible account holders who
continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually, to the extent that eligible
account holders and supplemental eligible account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent increases
will not restore an eligible account holder's or supplemental eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation of the Bank, each eligible account holder and
supplemental eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.
F-11
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), CONTINUED
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.
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.
F-12
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3), CONTINUED
The following is a summary of the Bank's actual capital amounts and ratios
as of March 31, 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>
March 31, 1997:
Tangible capital $52,260 8.99% $ 8,720 1.50%
Tier I (core) capital 52,260 8.99 17,439 3.00 $29,066 5.00%
Risk-based capital:
Tier I 52,260 22.43 - - 13,970 6.00
Total 54,975 25.31 17,379 8.00 21,724 10.00
March 31, 1996:
Tangible capital 53,688 8.18 9,841 1.50
Tier I (core) capital 53,688 8.18 19,682 3.00 32,803 5.00
Risk-based capital:
Tier I 53,688 23.92 - - 13,469 6.00
Total 56,392 25.12 17,958 8.00 22,448 10.00
</TABLE>
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-13
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3), 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):
<TABLE>
<CAPTION>
GROSS GROSS
UNREAL- UNREAL-
AMORTIZED IZED IZED MARKET
COST GAINS LOSSES VALUE
----------- -------- ------- --------
<S> <C> <C> <C> <C>
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
========= === ===== =======
</TABLE>
F-14
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4), CONTINUED
<TABLE>
<CAPTION>
GROSS GROSS
UNREAL- UNREAL-
AMORTIZED IZED IZED MARKET
COST GAINS LOSSES VALUE
--------- ------ ------- -------
<S> <C> <C> <C> <C>
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
========= ====== ===== =======
</TABLE>
The amortized cost and market value of securities available for sale at
March 31, 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
======== =======
F-15
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4), CONTINUED
During the years ended March 31, 1997 and 1996, and the ten-month period
ended March 31, 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 March 31, 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):
<TABLE>
<CAPTION>
GROSS GROSS
UNREAL- UNREAL-
AMORTIZED IZED IZED MARKET
COST GAINS LOSSES VALUE
--------- ------- ------- --------
<S> <C> <C> <C> <C>
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
======= === === ======
</TABLE>
F-16
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), CONTINUED
The amortized cost and market value of securities held to maturity at March
31, 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
======== =======
F-17
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6), CONTINUED
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
====== ===== =====
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 $0.1 million, $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 none at March 31, 1997 and 1996.
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
====== =====
F-18
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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
======= =====
(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>
F-19
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9), CONTINUED
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-20
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), 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 March 31, 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-21
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), 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 loan losses $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-22
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), CONTINUED
Federal State Total
------- ----- -----
March 31, 1996:
Deferred tax assets:
Allowance for loan losses $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.
F-23
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), CONTINUED
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.
(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)
====== =====
F-24
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12), CONTINUED
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 March 31, 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.
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.
F-25
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12), CONTINUED
(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 and by compensating
balances of $300,000 in Federal funds at the unaffiliated lending
institution.
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 March 31, 1997 and 1996 were 3,168 and none, respectively.
F-26
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12), CONTINUED
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). This Statement establishes financial
accounting and reporting standards for stock-based employee compensation
plans. SFAS 123 encourages all entities to adopt the "fair value based
method" of accounting for employee stock compensation plans. However, SFAS
123 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 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 SFAS 123 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
==== === ===
F-27
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13), CONTINUED
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.
(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.
F-28
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15), CONTINUED
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.
F-29
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15), CONTINUED
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.
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-30
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes certain fiscal 1997 and 1996 quarterly
financial data:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1997 1996 1996 1996
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
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 2,553
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
<CAPTION>
QUARTER ENDED
------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1997 1996 1996 1996
-------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income $10,912 8,872 8,861 8,664
Interest expense 1,483 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
</TABLE>
(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.
F-31
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(17), CONTINUED
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.
(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.
F-32
<PAGE>
FIRST SAVINGS BANK OF NEW JERSEY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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-33
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by 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 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....................................................................
Selected Financial and Other Data..........................................
Risk Factors .............................................................
Bayonne Bancshares, Inc....................................................
Bayonne Bankshares, M.H.C..................................................
First Savings Bank of New Jersey, SLA......................................
Regulatory Capital Compliance..............................................
Use of Proceeds............................................................
Dividend Policy............................................................
Market for the Common Stock................................................
Capitalization.............................................................
Pro Forma Data.............................................................
First Savings Bank of New Jersey, SLA
and Subsidiaries Consolidated Statements
of Operations..........................................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business of the Bank.......................................................
Federal and State Taxation.................................................
Regulation.................................................................
Management of the Company..................................................
Management of the Bank.....................................................
Beneficial Ownership of Capital Stock......................................
The Conversion and Reorganization..........................................
Comparison of Stockholders' Rights.........................................
Restrictions on Acquisition of the Company
and the Bank...........................................................
Description of Capital Stock of the Company
Description of Capital Stock of the Bank
Transfer Agent and Registrar...............................................
Experts....................................................................
Legal and Tax Opinions.....................................................
Additional Information.....................................................
Index of Consolidated Financial Statements.................................
------------------------------
UNTIL _________, 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 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
BAYONNE BANCSHARES, INC.
(Proposed Holding Company for
First Savings Bank of New Jersey, SLA)
COMMON STOCK
__________
PROSPECTUS
__________
________, 1997
Sandler O'Neill & Partners, L.P.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.(1)
OTS filing fee.................................................... $ 14,400
SEC filing fee(1)................................................. 31,011
NASD filing fee(1)................................................ 9,354
Exchange listing fee(1)........................................... 39,634
Printing, postage and mailing..................................... 44,000
Legal fees and expenses .......................................... 250,000
Accounting fees and expenses...................................... 100,000
Appraiser's fees and expenses (including
business plan).................................................. 50,000
Marketing fees and selling commissions (1)........................ 789,000
Underwriter's expenses (including underwriters
counsel fees)(1)............................................... 50,000
Proxy solicitation and record management
fees and expenses.............................................. 22,500
Transfer agent fees and expenses.................................. 15,000
Certificate printing.............................................. 5,000
Telephone, temporary help and other
equipment....................................................... 40,000
Blue Sky fees and expenses........................................ 15,000
Miscellaneous..................................................... 582
----------
TOTAL ....................................................... $1,475,000
==========
- --------------------
(1) Actual expenses based upon the registration of 8,993,000 shares at $10.00
per share. All other expenses are estimated.
Item 14. Indemnification of Directors and Officers.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
Registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party to
or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify
II-1
<PAGE>
any such indemnitee in connection with a proceeding (or part thereof) initiated
by such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, services to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses under this
Article TENTH, or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses conferred in
this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself and
any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of expenses
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
II-2
<PAGE>
ELEVENTH:
A Director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability: (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 which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
Item 15. Recent Sales of Unregistered Securities
Not applicable.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits (Filed herewith unless otherwise noted)
1.1 Engagement Letter between First Savings Bank of New Jersey, SLA and
Sandler O'Neill & Partners, L.P.*
1.2 Draft Form of Agency Agreement
2.1 Amended Plan of Conversion and Agreement and Plan of Reorganization*
3.1 Certificate of Incorporation of Bayonne Bancshares, Inc.*
3.2 Bylaws of Bayonne Bancshares, Inc.*
3.3 Certificate of Incorporation and Bylaws of First Savings Bank of New
Jersey, SLA*
4.0 Draft Stock Certificate of Bayonne Bancshares, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of KPMG Peat Marwick LLP re: Federal and State Tax Matters
10.1 Form of First Savings Bank of New Jersey, SLA and Bayonne Bankshares,
M.H.C. 1995 Stock Option Plan*
10.2 Form of First Savings Bank of New Jersey, SLA and Bayonne Bankshares,
M.H.C. 1995 Recognition and Retention Plan*
10.3 Form of First Savings Bank of New Jersey, SLA 1995 Employee Stock
Ownership Plan and Trust*
10.4 Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.5 Form of Supplemental Executive Retirement Income-Deferred Compensation
Agreement between First Savings Bank of New Jersey, SLA and certain
executive officers*
10.6 Form of Employment Agreement between First Savings Bank of New Jersey,
SLA and certain executive officers*
10.7 Form of Employment Agreement between Bayonne Bancshares, Inc. and certain
executive officers*
10.8 Form of Change in Control Agreement between First Savings Bank of New
Jersey, SLA and certain executive officers*
10.9 Form of Change in Control Agreement between Bayonne Bancshares, Inc. and
certain executive officers*
10.10 Form of First Savings Bank of New Jersey, SLA Employee Severance
Compensation Plan*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule
99.1 Proxy Materials and Form of Revocable Proxy for First Savings Bank of New
Jersey, SLA Stockholders*
99.2 Conversion Valuation Appraisal of FinPro, Inc. (P)
- ----------
*Previously filed
(P) Filed pursuant to Rule 202 of Regulation S-T.
II-4
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the Offering.
The undersigned Registrant hereby undertakes to furnish stock certificates
to or in accordance with the instructions of the respective purchasers of the
Common Stock, so as to make delivery to each purchaser promptly following the
closing under the Plan of Conversion.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bayonne, State of New
Jersey, on May 30, 1997.
BAYONNE BANCSHARES, INC.
By: /S/ Michael Nilan
______________________________
Michael Nilan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Date
---- ----
*
- --------------------------------------------
Patrick F.X. Nilan
Chairman of the Board
/s/ Michael Nilan
- -------------------------------------------- May 30, 1997
Michael Nilan
President and Chief Executive Officer
*
- --------------------------------------------
Eugene V. Malinowski
Vice President and Chief Financial Officer
(principal accounting and financial officer)
*
- --------------------------------------------
Patrick D. Conaghan
Director
*
- --------------------------------------------
Sam P. Lamparello
Director
*
- --------------------------------------------
James F. Sisk
Director
*
- --------------------------------------------
Frederick G. Whelply
Director
*
- --------------------------------------------
Joseph L. Wisniewski
Director
- ----------
* Pursuant to the Power of Attorney filed on March 13, 1997 as Exhibit 24.1
to the Form S-1 Registration Statement of Bayonne Bancshares, Inc.
II-6
<PAGE>
EXHIBIT INDEX
List of Exhibits (Filed herewith unless otherwise noted)
1.1 Engagement Letter between First Savings Bank of New Jersey, SLA and
Sandler O'Neill & Partners, L.P.*
1.2 Draft Form of Agency Agreement
2.1 Amended Plan of Conversion and Agreement and Plan of Reorganization*
3.1 Certificate of Incorporation of Bayonne Bancshares, Inc.*
3.2 Bylaws of Bayonne Bancshares, Inc.*
3.3 Certificate of Incorporation and Bylaws of First Savings Bank of New
Jersey, SLA*
4.0 Draft Stock Certificate of Bayonne Bancshares, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of KPMG Peat Marwick LLP re: Federal and State Tax Matters
10.1 Form of First Savings Bank of New Jersey, SLA and Bayonne Bankshares,
M.H.C. 1995 Stock Option Plan*
10.2 Form of First Savings Bank of New Jersey, SLA and Bayonne Bankshares,
M.H.C. 1995 Recognition and Retention Plan*
10.3 Form of First Savings Bank of New Jersey, SLA 1995 Employee Stock
Ownership Plan and Trust*
10.4 Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.5 Form of Supplemental Executive Retirement Income-Deferred Compensation
Agreement between First Savings Bank of New Jersey, SLA and certain
executive officers*
10.6 Form of Employment Agreement between First Savings Bank of New Jersey,
SLA and certain executive officers*
10.7 Form of Employment Agreement between Bayonne Bancshares, Inc. and certain
executive officers*
10.8 Form of Change in Control Agreement between First Savings Bank of New
Jersey, SLA and certain executive officers*
10.9 Form of Change in Control Agreement between Bayonne Bancshares, Inc. and
certain executive officers*
10.10 Form of First Savings Bank of New Jersey, SLA Employee Severance
Compensation Plan*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule
99.1 Proxy Materials and Form of Revocable Proxy for First Savings Bank of New
Jersey, SLA Stockholders*
99.2 Conversion Valuation Appraisal of FinPro, Inc. (P)
- ----------
*Previously filed
(P) Filed pursuant to Rule 202 of Regulation S-T.
Exhibit 1.2 Draft Form of Agency Agreement
<PAGE>
7,820,000 Shares
(subject to increase up to 8,993,000 Shares
in the event of an oversubscription)
Bayonne Bancshares, Inc.
(a Delaware corporation)
Common Stock
(par value $0.01 per share)
AGENCY AGREEMENT
________________, 1997
SANDLER O'NEILL & PARTNERS, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
Bayonne Bancshares, Inc., a Delaware corporation (the "Company"), Bayonne
Bankshares, M.H.C., a mutual holding company organized under the laws of the
United States of America (the "MHC") and First Savings Bank of New Jersey, SLA,
a New Jersey-chartered stock savings and loan association (the "Bank"), hereby
confirm their agreement with Sandler O'Neill & Partners, L.P. ("Sandler O'Neill"
or the "Agent") with respect to the offer and sale by the Company of 4,870,000
shares (subject to increase up to 4,234,000 shares in the event of an
oversubscription) of the Company's common stock, par value $0.01 per share (the
"Common Stock"). The shares of Common Stock to be sold by the Company are
hereinafter called the "Securities."
The Securities are being offered for sale in accordance with the plan of
conversion and agreement and plan of reorganization (the "Plan") adopted by the
Boards of Directors of the MHC and the Bank pursuant to which: (i) the MHC will
convert into an interim federal savings bank ("Interim A") and will
simultaneously merge with and into the Bank, and the common stock of the Bank
currently held by the MHC will be cancelled; (ii) First Interim Bank of New
Jersey, a stock savings bank to be organized under federal law as a wholly-owned
subsidiary of the Company ("Interim B") will merge with and into the Bank; (iii)
shares of common stock of Interim B held by the Company will be converted into
shares of common stock of the Bank on a one-for-one basis; (iv) the Company will
offer shares of its common stock in a Subscription
<PAGE>
and Community Offering, as described herein; (v) each share of common stock of
the Bank held by the Bank's public stockholders will be converted into shares of
Common Stock (such shares hereinafter being referred to as the "Exchange
Shares") pursuant to an exchange ratio that will result in the holders of such
shares owning in the aggregate 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 shares or (b) purchases of Common Stock by such persons in the
Subscription and Community Offering.
Pursuant to the Plan, the Company is offering to certain of the Bank's
depositors and borrowers and to the Bank's tax-qualified employee benefit plans
("Employee Plans"), including the Bank's employee stock ownership plan (the
"ESOP"), rights to subscribe for the Securities in a subscription offering (the
"Subscription Offering"). To the extent Securities are not subscribed for in the
Subscription Offering, such Securities may be offered to certain members of the
general public, with a first preference given to the Bank's public stockholders
and a second preference given to natural persons residing in the Bank's Local
Community (as defined in the Plan) in a direct community offering (the
"Community Offering" and together with the Subscription Offering, as each may be
extended or reopened from time to time, the "Subscription and Community
Offering") to be commenced concurrently with the Subscription Offering. It is
currently anticipated by the Bank, the MHC and the Company that any Securities
not subscribed for in the Subscription and Community Offering will be offered,
subject to Section 2 hereof, in a syndicated community offering (the "Syndicated
Community Offering"). The Subscription and Community Offering and the Syndicated
Community Offering are hereinafter referred to collectively as the "Offerings."
The conversion of the MHC to Interim A, the merger of Interim A with and into
the Bank, the merger of Interim B with and into the Bank, the exchange of the
Bank's public stockholder's shares for shares of Common Stock and the Offerings
are hereinafter referred to collectively as the "Conversion and Reorganization."
It is acknowledged that the number of Securities to be sold in the Offerings may
be increased or decreased as described in the Prospectus (as hereinafter
defined). If the number of Securities is increased or decreased in accordance
with the Plan, the term "Securities" shall mean such greater or lesser number,
where applicable.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-23199) including
a prospectus for the registration of the Securities and the Exchange Shares
under the Securities Act of 1933, as amended (the "1933 Act"), has filed such
amendments thereto, if any, and such amended prospectuses as may have been
required to the date hereof by the Commission in order to declare such
registration statement effective, and will file such additional amendments
thereto and such amended prospectuses and prospectus supplements as may
hereafter be required. Such registration statement (as amended to date, if
applicable, and as from time to time amended or supplemented hereafter) and the
prospectus constituting a part thereof (including in each case all documents
incorporated or deemed to be incorporated by reference therein, if any, and the
information, if any, deemed to be part thereof pursuant to the rules and
regulations of the Commission under the 1933 Act, as from time to time amended
or supplemented pursuant to the 1933 Act or otherwise (the "1933 Act
Regulations")) are hereinafter referred to as the "Registration Statement" and
the "Prospectus," respectively, except that if any revised prospectus that shall
be used by the Company in connection with the Subscription and Community
Offering or the Syndicated
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Community Offering which differs from the Prospectus on file with the Commission
at the time the Registration Statement becomes effective (whether or not such
revised prospectus is required to be filed by the Company pursuant to Rule
424(b) of the 1933 Act Regulations), the term "Prospectus" shall refer to such
revised prospectus from and after the time it is first provided to the Agent for
such use.
Concurrently with the execution of this Agreement, the Company is
delivering to the Agent copies of the Prospectus of the Company to be used in
the Subscription and Community Offering. Such Prospectus contains information
with respect to the Bank, the MHC, the Company and the Common Stock.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company, the MHC and the Bank jointly and severally represent and
warrant to the Agent as of the date hereof as follows:
(i) The Registration Statement has been declared effective by the
Commission, no stop order has been issued with respect thereto and no
proceedings therefor have been initiated or, to the knowledge of the
Company, the MHC and the Bank, threatened by the Commission. At the time
the Registration Statement became effective and at the Closing Time
referred to in Section 2 hereof, the Registration Statement complied and
will comply in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading. The Prospectus, at the date hereof does not and at the Closing
Time referred to in Section 2 hereof will not, include an untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the representations
and warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in reliance
upon and in conformity with information with respect to the Agent furnished
to the Company in writing by the Agent expressly for use in the
Registration Statement or Prospectus (the "Agent Information," which the
Company, the MHC and the Bank acknowledge appears only in the sections
captioned "Market for Common Stock," and "The Conversion and
Reorganization - Marketing and Underwriting Arrangements and " - Syndicated
Community Offering" of the Prospectus).
(ii) The Company has filed with the Office of Thrift Supervision,
Department of the Treasury (the "OTS") the Company's application for
approval of its acquisition of the Bank (the "Holding Company Application")
on Form H-(e)1 promulgated under the savings and loan holding company
provisions of the Home Owners' Loan Act, as amended (the "HOLA"), and the
regulations promulgated thereunder. The Company has received written notice
from the OTS of its approval of the acquisition of the Bank, such approval
remains in full force and effect and no order has been issued by the OTS
suspending or revoking such approval and no proceedings therefor have been
initiated or, to the knowledge of the Company, the MHC or the Bank,
threatened by the OTS. At the
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date of such approval, the Holding Company Application complied in all
material respects with the applicable provisions of HOLA and the
regulations promulgated thereunder.
(iii) Pursuant to the rules and regulations of the OTS governing the
conversion of federally chartered mutual holding companies to stock form
(the "Conversion Regulations"), the MHC has filed with the OTS an
application for conversion on Form AC, and has filed such amendments
thereto and supplementary materials as may have been required to the date
hereof (such application, as amended to date, if applicable, and as from
time to time amended or supplemented hereafter, is hereinafter referred to
as the "Conversion Application"), including copies of (A) the MHC's Proxy
Statement, to be dated on or about June __, 1997, relating to the
Conversion and Reorganization (the "Members' Proxy Statement"), (B) the
Bank's Proxy Statement, to be dated on or about June __, 1997, relating to
the Conversion and Reorganization (the "Stockholders' Proxy Statement"),
and (C) the Prospectus. The Conversion Application includes applications to
form and merge Interim A and Interim B. The OTS has, by letter dated
___________, 1997, approved the Conversion Application (including the
formation and merger of Interim A and Interim B), such approval remains in
full force and effect and no order has been issued by the OTS suspending or
revoking such approval and no proceedings therefor have been initiated or,
to the knowledge of the Company, the MHC or the Bank, threatened by the
OTS. At the date of such approval and at the Closing Time referred to in
Section 2, the Conversion Application complied and will comply in all
material respects with the applicable provisions of the Conversion
Regulations.
(iv) The Bank has filed with the New Jersey Department of Banking the
Bank's application for approval of the merger of Interim A with and into
the Bank and of the merger of Interim B with and into the Bank (the "New
Jersey Application"). The Bank has received written notice from the New
Jersey Department of Banking of its approval of the New Jersey Application,
such approval remains in full force and effect and no order has been issued
by the New Jersey Department of Banking suspending or revoking such
approval and no proceedings therefor have been initiated or, to the
knowledge of the Company, the MHC or the Bank, threatened by the New Jersey
Department of Banking. At the date of such approval, the New Jersey
Application complied in all material respects with the applicable
provisions of New Jersey law and the regulations promulgated thereunder.
(v) At the time of their use, the Members' Proxy Statement, the
Stockholders' Proxy Statement and any other proxy solicitation materials
will comply in all material respects with the applicable provisions of the
Conversion Regulations and New Jersey law and will not contain an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The Bank, the MHC and the
Company will promptly file the Prospectus and any supplemental sales
literature with the OTS and the Commission. The Prospectus and all
supplemental sales literature, as of the date the Registration Statement
became effective and at the Closing Time referred to in Section 2, complied
and will comply in all material respects with the applicable requirements
of
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the Conversion Regulations and, at or prior to the time of their first
use, will have received all required authorizations of the OTS for use in
final form.
(vi) The OTS has not, by order or otherwise, prevented or suspended
the use of the Prospectus or any supplemental sales literature authorized
by the Company, the MHC or the Bank for use in connection with the
Offerings.
(vii) Finpro, Inc., which prepared the valuation of the Bank as part
of the Conversion and Reorganization, has advised the Company, the MHC and
the Bank that it satisfies all requirements for an appraiser set forth in
the Conversion Regulations and any interpretations or guidelines issued by
the OTS with respect thereto.
(viii) KPMG Peat Marwick LLP, the accountants who certified the
financial statements and supporting schedules of the Bank included in the
Registration Statement, have advised the Company, the MHC and the Bank that
they are independent public accountants within the meaning of the Code of
Ethics of the American Institute of Certified Public Accountants; and such
accountants are, with respect to the Company, the MHC, the Bank and each
subsidiary of the Bank, independent certified public accountants as
required by the 1933 Act and the 1933 Act Regulations.
(ix) The only direct subsidiary of the MHC is the Bank. The only
subsidiary of the Bank is Bayonne Service Corporation (the "Subsidiary").
(x) The consolidated financial statements and the related notes
thereto included in the Registration Statement and the Prospectus present
fairly the consolidated financial position of the Company, the Bank and the
Subsidiary as at the dates specified and the results of operations,
retained earnings and cash flows for the periods specified and comply as to
form in all material respects with the applicable accounting requirements
of the 1933 Act Regulations and the Conversion Regulations; except as
otherwise stated in the Registration Statement, said financial statements
have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis; and the supporting schedules and
tables included in the Registration Statement present fairly the
information required to be stated therein.
(xi) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein (A) there has been no material adverse change in the financial
condition, results of operations, or business of the Company, the MHC, the
Bank and the Subsidiary, taken as a whole, whether or not arising in the
ordinary course of business, and (B) except for transactions specifically
referred to or contemplated in the Prospectus, there have been no
transactions entered into by the Company, the MHC, the Bank or the
Subsidiary, other than those in the ordinary course of business and
consistent with past practice, which are material with respect to the
Company, the MHC, the Bank and the Subsidiary, taken as a whole.
(xii) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware
with corporate
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power and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; the Company is duly qualified as a
foreign corporation to transact business and is in good standing in the
State of New Jersey and in all other jurisdictions in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to so qualify
would not have a material adverse effect on the financial condition,
results of operations or business of the Company, the MHC, the Bank and the
Subsidiary, taken as a whole.
(xiii) Upon consummation of the Conversion and Reorganization as
described in the Prospectus, the authorized, issued and outstanding capital
stock of the Company will be within the range as set forth in the
Prospectus under "Capitalization" (except for subsequent issuances, if any,
pursuant to reservations, agreements or employee benefit plans specified in
the Prospectus); no shares of Common Stock have been or will be issued and
outstanding prior to the Closing Time referred to in Section 2; the
Securities have been duly authorized for issuance and, when issued and
delivered by the Company pursuant to the Plan against payment of the
consideration calculated as set forth in the Plan and stated on the cover
page of the Prospectus, will be duly and validly issued and fully paid and
nonassessable; the Exchange Shares have been duly authorized for issuance
and, when issued, will be duly and validly issued and fully paid and
nonassessable; the terms and provisions of the Common Stock and the capital
stock of the Company conform to all statements relating thereto contained
in the Prospectus; the certificates representing the shares of Common Stock
will conform with the requirements of federal and Delaware law; and the
issuance of the Securities and the Exchange Shares is not subject to
preemptive or other similar rights.
(xiv) The MHC has been duly chartered and is validly existing as a
mutual holding company under the laws of the United States of America with
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus and to enter into
and perform its obligations under this Agreement; the MHC is in good
standing under the laws of the State of New Jersey and is qualified to do
business in any jurisdiction in which the failure to so qualify would have
a material adverse effect on the financial condition, results of operations
or business of the Company, the MHC, the Bank and the Subsidiary taken as a
whole; upon consummation of the Conversion and Reorganization, the MHC will
convert into Interim A, which will merge with and into the Bank, with the
Bank being the surviving institution.
(xv) The Bank is a New Jersey-chartered savings and loan association
in stock form; the Bank has and after the consummation of the Conversion
and Reorganization will have, full corporate power and authority to own,
lease and operate its properties and to conduct its business as described
in the Prospectus; and the Bank is in good standing under the laws of New
Jersey and is qualified to do business in any jurisdiction in which such
qualification is required, except where the failure to so qualify would not
have a material adverse effect on the financial condition, results of
operations or business of the Company, the MHC, the Bank and the
Subsidiary, taken as a whole.
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(xvi) The deposit accounts of the Bank are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to the applicable limits and,
upon consummation of the Conversion and Reorganization, the liquidation
account for the benefit of eligible account holders and supplemental
eligible account holders will be duly established in accordance with the
requirements of the Conversion Regulations.
(xvii) The authorized capital stock of the Bank consists of 20,000,000
shares of common stock, par value $0.10 per share (the "Bank Common Stock")
and 10,000,000 shares of preferred stock, par value $0.10 per share (the
"Bank Preferred Stock"), of which 1,406,004 shares of Bank Common Stock and
no shares of Bank Preferred Stock are issued and outstanding as of the date
hereof; no additional shares of Bank Common Stock (except for shares issued
pursuant to employee benefit plans referred to in the Prospectus) and no
shares of Bank Preferred Stock will be issued prior to the Closing Time
referred to in Section 2; the issued and outstanding shares of Bank Common
Stock have been duly authorized and validly issued and are fully paid and
nonassessable and have been issued in compliance with all federal and state
securities laws; the MHC owns 1,659,485 shares of Bank Common Stock
beneficially and of record free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity; the terms and
provisions of the Bank Common Stock conform to all statements relating
thereto contained in the Prospectus; at the time of the consummation of the
Conversion and Reorganization, immediately following the merger of Interim
A with and into the Bank, the Bank shall merge with Interim B, with the
Bank being the surviving institution, and the shares of common stock of
Interim B held by the Company shall be converted into shares of Bank Common
Stock on a one-for-one basis, and all such Bank Common Stock will be owned
beneficially and of record by the Company free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity.
(xviii) The Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Registration Statement and Prospectus, and is duly
qualified to transact business and is in good standing in each jurisdiction
in which such qualification is required, except where the failure to so
qualify would not have a material adverse effect on the financial
condition, results of operations or business of the Company, the MHC, the
Bank and the Subsidiary, taken as a whole; the activities of the Subsidiary
are permitted to subsidiaries of a New Jersey-chartered savings and loan
association by federal and New Jersey law and the rules, regulations,
resolutions and practices of the OTS and the New Jersey Department of
Banking; all of the issued and outstanding capital stock of the Subsidiary
has been duly authorized and validly issued, is fully paid and
nonassessable and is owned by the Bank, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equitable claim.
(xix) The Company, the MHC, the Bank and the Subsidiary have obtained
all licenses, permits and other governmental authorizations required for
the conduct of their respective businesses or required for the conduct of
their respective businesses as contemplated by the Holding Company
Application, except where the failure to obtain
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such licenses, permits or other governmental authorizations would not have
a material adverse effect on the financial condition, results of operations
or business of the Company, the MHC, the Bank or the Subsidiary, taken as a
whole; all such licenses, permits and other governmental authorizations are
in full force and effect and the Company, the MHC, the Bank and the
Subsidiary is in all material respects in compliance therewith; neither the
Company, the MHC, the Bank nor the Subsidiary has received notice of any
proceeding or action relating to the revocation or modification of any such
license, permit or other governmental authorization which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a material adverse effect on the financial condition, results of
operations or business of the Company, the MHC, the Bank or the Subsidiary,
taken as a whole.
(xx) From the date of its incorporation until the Closing Time,
neither Interim A nor Interim B will be in violation of its charter or
bylaws, nor will either Interim A or Interim B engage in any business other
in connection with organizational matters and actions taken in connection
with the consummation of the Conversion and Reorganization.
(xxi) The Company, the MHC and the Bank have taken all corporate
action necessary for them to execute, deliver and perform this Agreement,
and this Agreement has been duly executed and delivered by, and is the
valid and binding agreement of, the Company, the MHC and the Bank,
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency or other laws affecting the enforceability of the
rights of creditors generally and judicial limitations on the right of
specific performance and except as the enforceability of indemnification
and contribution provisions may be limited by applicable securities laws.
(xxii) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the
Closing Time, except as otherwise may be specifically described or
contemplated therein, none of the Company, the MHC, the Bank or the
Subsidiary will have (A) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, except borrowings in
the ordinary course of business from the same or similar sources indicated
in the Prospectus, or (B) entered into any transaction or series of
transactions that is or are material in light of the business of the
Company, the MHC, the Bank and the Subsidiary, taken as a whole, excluding
the origination, purchase and sale of loans or the purchase and sale of
investment securities or mortgage-backed securities in the ordinary course
of business.
(xxiii) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Securities, the Exchange Shares and the
Foundation Shares that has not been obtained and a copy of which has been
delivered to the Agent, except as may be required under the securities laws
of various jurisdictions.
(xxiv) Neither the Company, the MHC, the Bank nor the Subsidiary is in
violation of its certificate or articles of incorporation, charter or
bylaws; and neither the Company, the MHC, the Bank nor the Subsidiary is in
default (nor has any event occurred which,
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with notice or lapse of time or both, would constitute a default) in the
performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement,
note, lease or other instrument to which the Company, the MHC, the Bank or
the Subsidiary is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company, the MHC, the Bank or
the Subsidiary is subject, except for such defaults that would not,
individually or in the aggregate, have a material adverse effect on the
financial condition, results of operations or business of the Company, the
MHC, the Bank and the Subsidiary, taken as a whole.
(xxv) The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated herein do not and will
not conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company, the MHC, the Bank or the Subsidiary
pursuant to, any contract, indenture, mortgage, loan agreement, note, lease
or other instrument to which the Company, the MHC, the Bank or the
Subsidiary is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company, the MHC, the Bank or
the Subsidiary is subject, except for such defaults that would not,
individually or in the aggregate, have a material adverse effect on the
financial condition, results of operations or business of the Company, the
MHC, the Bank and the Subsidiary, taken as whole, nor will such action
result in any violation of the provisions of the certificate or articles of
incorporation, charter or bylaws of the Company, the MHC, the Bank or the
Subsidiary, or any applicable law, regulation or administrative or court
decree.
(xxvi) No labor dispute with the employees of the Company, the MHC,
the Bank or the Subsidiary exists or, to the knowledge of the Company, the
MHC, or the Bank, is threatened; and the Company, the MHC and the Bank are
not aware of any existing or threatened labor disturbance by the employees
of any of its principal suppliers or contractors that might be expected to
result in any material adverse change in the financial condition, results
of operations or business of the Company, the MHC, the Bank and the
Subsidiary, taken as a whole.
(xxvii) Each of the Company, the MHC, the Bank and the Subsidiary has
good and marketable title to all properties and assets for which ownership
is material to the business of the Company, the MHC, the Bank or the
Subsidiary and to those properties and assets described in the Prospectus
as owned by them, free and clear of all liens, charges, encumbrances or
restrictions, except such liens, charges, encumbrances or restrictions as
are described in the Prospectus or are not material in relation to the
business of the Company, the MHC, the Bank and the Subsidiary, taken as a
whole; and all of the leases and subleases material to the business of the
Company, the MHC, the Bank and the Subsidiary taken as a whole under which
the Company, the MHC, the Bank and the Subsidiary hold properties,
including those described in the Prospectus, are valid and binding
agreements of the Company, the MHC, the Bank or the Subsidiary, enforceable
in accordance with their terms, subject, as to enforceability, to
bankruptcy,
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insolvency, reorganization, moratorium and other laws of general
applicability relating to or affecting creditors' rights, and to general
principles of equity.
(xxviii) Neither the Company, the MHC, the Bank nor the Subsidiary is
in violation of any directive from the OTS, the New Jersey Department of
Banking or the FDIC to make any material change in the method of conducting
their respective businesses; the MHC, the Bank and the Subsidiary have
conducted and are conducting their businesses so as to comply with all
applicable statutes, regulations and administrative and court decrees
(including, without limitation, all regulations, decisions, directives and
orders of the OTS, the New Jersey Department of Banking or the FDIC) except
in such respects as would not have a material adverse effect upon the
Company, the MHC, the Bank and the Subsidiary taken as a whole.
(xxix) There is no action, suit or proceeding before or by any court
or government agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, the MHC, the Bank, or the Subsidiary, threatened,
against or affecting the Company, the MHC, the Bank or the Subsidiary
(other than as disclosed in the Registration Statement) which might result
in any material adverse change in the financial condition, results of
operations or business of the Company, the MHC, the Bank and the
Subsidiary, taken as a whole, or which might materially and adversely
affect the properties or assets thereof or which might materially and
adversely affect the consummation of the Conversion and Reorganization; all
pending legal or governmental proceedings to which the Company, the MHC,
the Bank or the Subsidiary is a party or of which any of their respective
properties or assets is the subject that are not described in the
Registration Statement, including ordinary routine litigation incidental to
the business, are, in the aggregate, not material; and there are no
contracts or documents of the Company, the MHC, the Bank, or Subsidiary
which are required to be filed as exhibits to the Registration Statement or
the Conversion Application which have not been so filed.
(xxx) The Bank has obtained opinions of its counsel, Muldoon, Murphy &
Faucette, with respect to the legality of the Securities and the Exchange
Shares to be issued and the federal income tax consequences of the
Conversion and Reorganization, copies of which are filed as exhibits to the
Registration Statement; all material aspects of the aforesaid opinions that
are required to be disclosed are accurately summarized in the Prospectus;
the facts and representations upon which such opinions are based are
truthful, accurate and complete in all material respects, and neither the
Bank, the MHC, nor the Company has taken or will take any action
inconsistent therewith.
(xxxi) The Bank has obtained an opinion of KPMG Peat Marwick LLP with
respect to the New Jersey income tax consequences of the Conversion and
Reorganization, a copy of which is filed as an exhibit to the Registration
Statement; all material aspects of the aforesaid opinions that are required
to be disclosed are accurately summarized in the Prospectus; the facts and
representations upon which such opinions are based are truthful, accurate
and complete in all material respects, and neither the Bank nor the Company
has taken or will take any action inconsistent therewith.
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(xxxii) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(xxxiii) All of the loans represented as assets on the most recent
financial statements or selected financial information of the Bank included
in the Prospectus meet or are exempt from all requirements of federal,
state or local law pertaining to lending, including, without limitation,
truth in lending (including the requirements of Regulations Z and 12 C.F.R.
Part 226 and Section 563.99), real estate settlement procedures, consumer
credit protection, equal credit opportunity and all disclosure laws
applicable to such loans, except for violations which, if asserted, would
not result in a material adverse effect on the financial condition, results
of operations or business of the Company, the MHC, the Bank and the
Subsidiary, taken as a whole.
(xxxiv) To the knowledge of the Company, the MHC and the Bank, none of
the Company, the MHC, the Bank or the Subsidiary, or any of their
respective employees has made any payment of funds of the Company, the MHC,
the Bank or the Subsidiary as a loan for the purchase of the Common Stock
or made any other payment of funds prohibited by law, and no funds have
been set aside to be used for any payment prohibited by law.
(xxxv) The Company, the MHC, the Bank and the Subsidiary are in
compliance in all material respects with the applicable financial
recordkeeping and reporting requirements of the Currency and Foreign
Transaction Reporting Act of 1970, as amended, and the rules and
regulations thereunder.
(xxxvi) Neither the Company, the MHC, the Bank nor the Subsidiary,
nor any properties owned or operated by the Company, the MHC, the Bank or
the Subsidiary, is in violation of or is liable under any Environmental Law
(as defined below), except for such violations or liabilities that,
individually or in the aggregate, would not have a material adverse effect
on the business, financial condition or results of operations of the
Company, the MHC, the Bank and the Subsidiary, taken as a whole. There are
no actions, suits or proceedings, or demands, claims, or notices
(including, without limitation, notices, demand letters or requests for
information from any environmental agency) instituted or pending, or to the
knowledge of the Company, the MHC or the Bank threatened, relating to the
liability of any property owned or operated by the Company, the MHC, the
Bank or the Subsidiary under any Environmental Law. For purposes of this
subsection, the term "Environmental Law" means any federal, state, local or
foreign law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree, injunction or
agreement with any regulatory authority relating to (i) the protection,
preservation or restoration of the environment (including, without
limitation, air, water, vapor, surface water, groundwater, drinking water
supply, surface soil, subsurface soil, plant and animal life or any other
natural resource), and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of any substance presently listed, defined, designated
or classified as hazardous, toxic, radioactive or dangerous, or otherwise
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regulated, whether by type or by quantity, including any material
containing any such substance as a component.
(xxxvii) The Company, the MHC, the Bank and the Subsidiary have filed
all federal, state and local tax returns required to be filed and has made
timely payments of all taxes shown as due and payable in respect of such
returns, and no deficiency has been asserted with respect thereto by any
taxing authority.
(xxxviii) The Company has received approval, subject to official
notice of issuance, to have the Common Stock quoted on the Nasdaq National
Market effective at the Closing Time referred to in Section 2 hereof.
(b) Any certificate signed by any officer of the Company, the MHC or the
Bank and delivered to either of the Agent or counsel for the Agent shall be
deemed a representation and warranty by the Company, the MHC or the Bank of each
as to the matters covered thereby.
SECTION 2. APPOINTMENT OF SANDLER O'NEILL; SALE AND DELIVERY OF THE
SECURITIES; CLOSING.
On the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, the Company hereby
appoints Sandler O'Neill as its Agent to consult with and advise the Company,
and to assist the Company in its solicitation of subscriptions and purchase
orders for Securities, in connection with the Company's sale of the Securities
in the Subscription and Community Offering and the Syndicated Community
Offering. On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, Sandler O'Neill
accepts such appointment and agrees to use its best efforts to assist the
Company with its solicitation of subscriptions and purchase orders for
Securities in accordance with this Agreement; provided, however, that the Agent
shall not be obligated to take any action that is inconsistent with any
applicable laws, regulations, decisions or orders. The services to be rendered
by Sandler O'Neill pursuant to this appointment include the following: (i)
consulting as to the securities marketing implications of any aspect of the Plan
or related corporate documents, (ii) reviewing all offering documents, the
Prospectus, stock order forms and related offering materials (it being
understood that preparation and filing of such documents is the sole
responsibility of the Company and the Bank and their counsel); (iii) assisting
in the design and implementation of a marketing strategy for the Offerings; (iv)
assisting Bank management in scheduling and preparing for meetings with
potential investors and broker-dealers; and (v) providing such other general
advice and assistance as may be requested to promote the successful completion
of the Offerings.
The appointment of the Agent hereunder shall terminate upon the earliest to
occur of (a) forty-five (45) days after the last day of the Subscription and
Community Offering, unless the Company and the Agent agree in writing to extend
such period and the OTS agrees to extend the period of time in which the
Securities may be sold, (b) the receipt and acceptance of subscriptions and
purchase orders for all of the Securities, or (c) the completion of the
Syndicated Community Offering.
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If any of the Securities remain available after the expiration of the
Subscription and Community Offering, at the request of the Company and the Bank,
Sandler O'Neill will seek to form a syndicate of registered brokers or dealers
("Selected Dealers") to assist in the solicitation of purchase orders of such
Securities on a best efforts basis, subject to the terms and conditions set
forth in a selected dealers' agreement (the "Selected Dealers' Agreement"),
substantially in the form set forth in Exhibit A to this Agreement. Sandler
O'Neill will endeavor to limit the aggregate fees to be paid by the Company and
the Bank to Selected Dealers under any such Selected Dealers' Agreement to an
amount competitive with gross underwriting discounts charged at such time for
underwritings of comparable amounts of stock sold at a comparable price per
share in a similar market environment; provided, however, that the aggregate
fees payable to Sandler O'Neill and Selected Dealers shall not exceed 7% of the
aggregate Purchase Price (as defined in the Prospectus) of the Securities sold
by such Selected Dealers. Sandler O'Neill will endeavor to distribute the
Securities among the Selected Dealers in a fashion that best meets the
distribution objectives of the Company and the Bank and the requirements of the
Plan and applicable law, which may result in limiting the allocation of stock to
certain Selected Dealers. It is understood that in no event shall Sandler
O'Neill be obligated to act as a selected dealer or to take or purchase any
Securities.
In the event the Company is unable to sell at least the Total Minimum of
Securities, as disclosed on the cover of the Prospectus, within the periods
herein provided, this Agreement shall terminate and the Company shall refund to
any persons who have subscribed for any of the Securities the full amount that
it may have received from them, together with interest as provided in the
Prospectus, and no party to this Agreement shall have any obligation to the
others hereunder, except for the obligations of the Company and the Bank as set
forth in Sections 4, 6(a) and 7 hereof and the obligations of the Agent as
provided in Sections 6(b) and 7 hereof. Appropriate arrangements for placing the
funds received from subscriptions for Securities or other offers to purchase
Securities in special interest-bearing accounts with the Bank until all
Securities are sold and paid for were made prior to the commencement of the
Subscription Offering, with provision for refund to the purchasers as set forth
above, or for delivery to the Company if all Securities are sold.
If at least the Total Minimum of Securities, as disclosed on the cover of
the Prospectus, are sold, the Company agrees to issue or have issued the
Securities sold and to release for delivery certificates for such Securities at
the Closing Time against payment therefor by release of funds from the special
interest-bearing accounts referred to above. The closing shall be held at the
offices of Muldoon, Murphy and Faucette, Washington, D.C., at 10:00 a.m., local
time, or at such other place and time as shall be agreed upon by the parties
hereto, on a business day to be agreed upon by the parties hereto. The Company
shall notify the Agent by telephone, confirmed in writing, when funds shall have
been received for all the Securities. Certificates for Securities shall be
delivered directly to the purchasers thereof in accordance with their
directions. Notwithstanding the foregoing, certificates for Securities purchased
through Selected Dealers shall be made available to the Agent for inspection at
least 48 hours prior to the Closing Time at such office as the Agent shall
designate. The hour and date upon which the Company shall release for delivery
all of the Securities, in accordance with the terms hereof, are herein called
the "Closing Time."
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The Company will pay any stock issue and transfer taxes that may be payable
with respect to the sale of the Securities.
In addition to reimbursement of the expenses specified in Section 4 hereof,
the Agent will receive the following compensation for its services hereunder:
2.0% of the aggregate Purchase Price (as defined in the Prospectus) of the
Securities sold in the Subscription Offering and in the Community Offering.
With respect to any Securities sold by an NASD member firm (other than
Sandler O'Neill) under the Selected Dealers' Agreement in the Syndicated
Community Offering, the Company shall pay (i) the compensation payable to
Selected Dealers under any Selected Dealers' Agreement, (ii) any sponsoring
dealer's fees, and (iii) a management fee to Sandler O'Neill of 2.0%. Any fees
payable to Sandler O'Neill for Securities sold by Sandler O'Neill under any such
agreement shall be limited to an aggregate of 2.0% of the aggregate Purchase
Price of such Securities.
Notwithstanding the foregoing, no fee shall be payable with respect to any
Securities sold in the Subscription and Community Offering to (i) any employee
benefit plan of the Company or the Bank established for the benefit of their
respective directors, officers or employees or (ii) any director, officer or
employee of the Company or the Bank or any member of such person's immediate
family (which term shall mean parents, spouse, siblings, children and
grandchildren).
If this Agreement is terminated by the Agent in accordance with the
provisions of Section 9(a) hereof or if the Conversion and Reorganization is
terminated by the Company or the Bank, no fee shall be payable by the Company or
the Bank to Sandler O'Neill; however, Sandler O'Neill shall be entitled to
reimbursement of its reasonable out-of-pocket expenses incurred prior to
termination in accordance with Section 4 hereof.
All fees payable to the Agent hereunder shall be payable in immediately
available funds at Closing Time, or upon the termination of this Agreement, as
the case may be. In recognition of the long lead times involved in the
conversion process, the Bank agrees to make advance payments to the Agent in the
aggregate amount of $50,000, $25,000 of which has been previously paid, and the
remaining $25,000 of which shall be payable upon execution hereof, which shall
be credited against any fees or expenses payable hereunder.
SECTION 3. COVENANTS OF THE COMPANY, THE MHC AND THE BANK. The Company, the
MHC and the Bank covenant with the Agent as follows:
(a) The Company, the MHC and the Bank will prepare and file such amendments
or supplements to the Registration Statement, the Prospectus, the Conversion
Application, the Members' Proxy Statement and the Stockholders' Proxy Statement
as may hereafter be required by the 1933 Act Regulations or the Conversion
Regulations or as may hereafter be reasonably requested by the Agent. Following
completion of the Subscription and Community Offering, in the event of a
Syndicated Community Offering, the Company, the MHC and the Bank will (i)
promptly prepare and file with the Commission a post-effective amendment to the
Registration Statement relating to the results of the Subscription and Community
Offering, any additional
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information with respect to the proposed plan of distribution and any revised
pricing information or (ii) if no such post-effective amendment is required,
file with, or mail for filing to, the Commission a prospectus or prospectus
supplement containing information relating to the results of the Subscription
and Community Offering and pricing information pursuant to Rule 424(c) of the
1933 Act Regulations, in either case in a form acceptable to the Agent. The
Company, the MHC and the Bank will notify the Agent immediately, and confirm the
notice in writing, (i) of the effectiveness of any post-effective amendment to
the Registration Statement, the filing of any supplement to the Prospectus and
the filing of any amendment to the Conversion Application, (ii) of the receipt
of any comments from the OTS or the Commission with respect to the transactions
contemplated by this Agreement or the Plan, (iii) of any request by the
Commission or the OTS for any amendment to the Registration Statement or the
Conversion Application or any amendment or supplement to the Prospectus or for
additional information, (iv) of the issuance by the OTS of any order suspending
the Offerings or the use of the Prospectus or the initiation of any proceedings
for that purpose, (v) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose, and (vi) of the receipt of any notice with
respect to the suspension of any qualification of the Securities for offering or
sale in any jurisdiction. The Company, the MHC and the Bank will make every
reasonable effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest possible moment.
(b) The Company, the MHC and the Bank will give the Agent notice of its
intention to prepare or file any amendment to the Conversion Application or
Registration Statement (including any post-effective amendment) or any amendment
or supplement to the Prospectus (including any revised prospectus that the
Company proposes for use in connection with the Syndicated Community Offering of
the Securities that differs from the prospectus on file at the Commission at the
time the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the 1933 Act
Regulations), will furnish the Agent with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such amendment or supplement or use any
such prospectus to which the Agent or counsel for the Agent may reasonably
object.
(c) The Company, the MHC and the Bank will deliver to the Agent as many
signed copies and as many conformed copies of the Conversion Application and the
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) as the
Agent may reasonably request, and from time to time such number of copies of the
Prospectus as the Agent may reasonably request.
(d) During the period when the Prospectus is required to be delivered, the
Company, the MHC and the Bank will comply, at their own expense, with all
requirements imposed upon them by the OTS, by the applicable Conversion
Regulations, as from time to time in force, and by the 1933 Act, the 1933 Act
Regulations, the Securities Exchange Act of 1934 (the "1934 Act") and the rules
and regulations of the Commission promulgated thereunder, including, without
limitation, Regulation M under the 1934 Act, so far as necessary to permit the
continuance of sales or dealing in shares of Common Stock during such period in
accordance with the provisions hereof and the Prospectus.
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(e) If any event or circumstance shall occur as a result of which it is
necessary, in the opinion of counsel for the Agent, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, the Company,
the MHC and the Bank will forthwith amend or supplement the Prospectus (in form
and substance satisfactory to counsel for the Agent) so that, as so amended or
supplemented, the Prospectus will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time it is delivered
to a purchaser, not misleading, and the Company, the MHC and the Bank will
furnish to the Agent a reasonable number of copies of such amendment or
supplement. For the purpose of this subsection, the Company, the MHC and the
Bank each will furnish such information with respect to itself as the Agent may
from time to time reasonably request.
(f) The Company, the MHC and the Bank will take all necessary action, in
cooperation with the Agent, to qualify the Securities for offering and sale
under the applicable securities laws of such states of the United States and
other jurisdictions as the Conversion Regulations may require and as the Agent
and the Company have agreed; provided, however, that the Company, the MHC and
the Bank shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation in any jurisdiction in which it
is not so qualified. In each jurisdiction in which the Securities have been so
qualified, the Company and the Bank will file such statements and reports as may
be required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the effective date of the
Registration Statement.
(g) The Company authorizes Sandler O'Neill and any Selected Dealers to act
as agent of the Company in distributing the Prospectus to persons entitled to
subscription rights and other persons having record addresses in the states or
jurisdictions set forth in a survey of the securities or "blue sky" laws of the
various jurisdictions in which the Offerings will be made (the "Blue Sky
Survey").
(h) The Company will make generally available to its security holders as
soon as practicable but no later than sixty (60) days from the close of the
period covered thereby an earnings statement (in compliance with the provisions
of Rule 158 of the 1933 Act Regulations) covering a twelve month period
beginning not later than the first day of the Company's fiscal quarter next
following the "effective date" (as defined in said Rule 158) of the Registration
Statement.
(i) During the period ending on the third anniversary of the expiration of
the fiscal year during which the closing of the transactions contemplated hereby
occurs, the Company will furnish to its stockholders as soon as practicable
after the end of each such fiscal year in such period an annual report
(including consolidated statements of financial condition and consolidated
statements of income, stockholders' equity and cash flows of the Company, the
Bank and the Subsidiary, certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), consolidated summary financial information of
the Company, the Bank and the Subsidiary for such quarter in reasonable detail.
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In addition, such annual report and quarterly consolidated summary financial
information shall be made public through the issuance of appropriate press
releases at the same time or prior to the time of the furnishing thereof to
stockholders of the Company.
(j) During the period ending on the third anniversary of the expiration of
the fiscal year during which the closing of the transactions contemplated hereby
occurs, the Company will furnish to the Agent (i) as soon as available, a copy
of each report or other document of the Company furnished generally to
stockholders of the Company or furnished to or filed with the Commission under
the 1934 Act or any national securities exchange or system on which any class of
securities of the Company is listed, and (ii) from time to time, such other
information concerning the Company as the Agent may reasonably request.
(k) The Company, the MHC and the Bank will conduct the Conversion and
Reorganization in all material respects in accordance with the Plan, the
Conversion Regulations and all other applicable regulations, decisions and
orders thereunder, including all applicable terms, requirements and conditions
precedent to the Conversion and Reorganization imposed upon the Company or the
Bank by the OTS.
(l) Each of the Company and the Bank will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds."
(m) The Company will file with the Commission such reports on Form SR as
may be required pursuant to Rule 463 of the 1933 Act Regulations.
(n) The Company will file a registration statement for the Common Stock
under Section 12(b) of the 1934 Act prior to completion of the Offerings and
will request that such registration statement be effective no later than upon
completion of the Conversion and Reorganization. The Company will maintain the
effectiveness of such registration for not less than three years. The Company
will file with the Nasdaq Stock Market all documents and notices required by the
Nasdaq Stock Market of companies that have issued securities that are listed on
the Nasdaq National Market.
(o) During the period beginning on the date hereof and ending on the later
of the third anniversary of the Closing Time or the date on which the Agent
receives full payment in satisfaction of any claim for indemnification or
contribution to which it may be entitled pursuant to Sections 6 or 7,
respectively, neither the Company nor the Bank shall, without the prior written
consent of the Agent, which consent shall not be unreasonably withheld, take or
permit to be taken any action that could result in the Bank common stock
becoming subject to any security interest, mortgage, pledge, lien or
encumbrance; provided, however, that this covenant shall be null and void if the
Board of Governors of the Federal Reserve System or other Federal agency with
jurisdiction over the Bank, by regulation, policy statement or general or
specific interpretive release or letter permits indemnification of the Agent by
the Bank as contemplated by Section 6(a) hereof.
(p) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by the Agent in order for the Agent to
ensure compliance with the
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National Association of Securities Dealers, Inc.'s ("NASD") "Interpretation
Relating to Free-Riding and Withholding."
(q) The Company and the Bank will comply with the conditions imposed by or
agreed to with the OTS in connection with its approval of the Holding Company
Application and the Conversion Application.
(r) The Company will not sell or issue, contract to sell or otherwise
dispose of, for a period of 180 days after the Closing Time, without the Agent's
prior written consent, any shares of Common Stock other than the Securities or
the Exchange Shares or other than in connection with any employee benefit plan
or arrangement described in the Prospectus.
SECTION 4. PAYMENT OF EXPENSES. The Company and the Bank jointly and
severally agree to pay all expenses incident to the performance of their
obligations under this Agreement, including but not limited to (i) the cost of
obtaining all securities and bank regulatory approvals, (ii) the printing and
filing of the Registration Statement as originally filed and of each amendment
thereto, (iii) the preparation, issuance and delivery of the certificates for
the Securities to the purchasers in the Offerings, (iv) the fees and
disbursements of the Company's, the MHC's and the Bank's counsel, accountants,
conversion agent and other advisors, (v) the qualification of the Securities
under securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the fees and disbursements of counsel in connection
therewith and in connection with the preparation of the Blue Sky Survey, (vi)
the printing and delivery to the Agent of copies of the Registration Statement
as originally filed and of each amendment thereto and the printing and delivery
of the Prospectus and any amendments or supplements thereto to the purchasers in
the Offerings and the Agent, (vii) the printing and delivery to the Agent of
copies of a Blue Sky Survey and (viii) the fees and expenses incurred in
connection with the listing of the Securities on the Nasdaq Stock Market. In the
event the Agent incurs any such fees and expenses on behalf of the Bank, the MHC
or the Company, the Bank will reimburse the Agent for such fees and expenses
whether or not the Conversion and Reorganization is consummated; provided,
however, that the Agent shall not incur any substantial expenses on behalf of
the Bank, the MHC or the Company pursuant to this Section without the prior
approval of the Bank.
The Company and the Bank jointly and severally agree to pay certain
expenses incident to the performance of the Agent's obligations under this
Agreement, including (i) the filing fees paid or incurred by the Agent in
connection with all NASD filings with the National Association of Securities
Dealers, Inc., and (ii) all reasonable out-of-pocket expenses incurred by the
Agent relating to the Offerings, including, without limitation, advertising,
promotional, syndication and travel expenses and fees and expenses of the
Agent's counsel, up to an aggregate of $50,000. All fees and expenses to which
the Agent is entitled to reimbursement under this paragraph of this Section 4
shall be due and payable upon receipt by the Company or the Bank of a written
accounting therefor setting forth in reasonable detail the expenses incurred by
the Agent.
SECTION 5. CONDITIONS OF AGENT'S OBLIGATIONS. The Company, the MHC, the
Bank and the Agent agree that the issuance and sale of the Securities and all
obligations of the Agent hereunder are subject to the accuracy of the
representations and warranties of the
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Company, the MHC and the Bank herein contained as of the date hereof and the
Closing Time, to the accuracy of the statements of officers and directors of the
Company, the MHC and the Bank made pursuant to the provisions hereof, to the
performance by the Company, the MHC and the Bank of their obligations hereunder,
and to the following further conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, no order suspending the Offerings or
authorization for final use of the Prospectus shall have been issued or
proceedings therefor initiated or threatened by the OTS and no order suspending
the sale of the Securities in any jurisdiction shall have been issued.
(b) At Closing Time, the Agent shall have received:
(1) The favorable opinion, dated as of Closing Time, of Muldoon,
Murphy & Faucette, counsel for the Company, the MHC and the Bank, in form
and substance satisfactory to counsel for the Agent, providing that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has full corporate power and authority to own
its properties and to conduct its business as described in the
Registration Statement and Prospectus and to enter into and perform
its obligations under this Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of New Jersey
and in each other jurisdiction in which such qualification is
required, except where the failure to so qualify would not have a
material adverse effect upon the financial condition, results of
operations or business of the Company, the Bank and the Subsidiary,
taken as a whole.
(iv) Upon consummation of the Conversion and Reorganization, the
authorized, issued and outstanding capital stock of the Company will
be within the range as set forth in the Prospectus under
"Capitalization," and no shares of Common Stock have been issued and
outstanding prior to the Closing Time.
(v) The Securities and the Exchange Shares have been duly and
validly authorized for issuance and sale; the Securities, when issued
and delivered by the Company pursuant to the Plan against payment of
the consideration calculated as set forth in the Plan, will be duly
and validly issued and fully paid and non-assessable; the Exchange
Shares, when issued, will be duly and validly issued and fully paid
and non-assessable.
(vi) The issuance of the Securities and the Exchange Shares is
not subject to preemptive or other similar rights arising by operation
of law or, to such counsel's knowledge and information, otherwise.
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(vii) The MHC has been duly organized and is validly existing and
in good standing under the laws of the United States of America as a
mutual holding company, with full corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement and Prospectus and is duly
qualified as a foreign corporation in each jurisdiction in which such
qualification is required, except where the failure to so qualify
would not have a material adverse effect upon the financial condition,
results of operations or business of the MHC.
(viii) The Bank has been at all times since the date hereof and
prior to the Closing Time organized, and is validly existing, under
the laws of the State of New Jersey as a state-chartered savings and
loan association of stock form, with full corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the
Prospectus; and the Bank is duly qualified as a foreign corporation in
each jurisdiction in which such qualification is required, except
where the failure to so qualify would not have a material adverse
effect upon the financial condition, results of operations or business
of the Company, the MHC, the Bank and the Subsidiary, taken as a
whole.
(ix) The Bank is a member of the Federal Home Loan Bank of New
York and the deposit accounts of the Bank are insured by the FDIC up
to the applicable limits.
(x) Upon consummation of the Conversion and Reorganization, all
of the issued and outstanding capital stock of Interim B will have
been duly authorized and validly issued and fully paid and
unassessable, and to such counsel's knowledge all such capital stock
will be converted into shares of Bank Common Stock upon the merger of
Interim B with the Bank and is not subject to any security interest,
mortgage, pledge, lien, encumbrance or claim.
(xi) The Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the state
of New Jersey, has full corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus and is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in
which such qualification is required, except where the failure to so
qualify would have a material adverse effect upon the financial
condition, results of operations or business of the Company, the Bank
and the Subsidiary, taken as a whole; the activities of the Subsidiary
as described in the Prospectus are permitted to subsidiaries of a
savings and loan holding company and of a New Jersey chartered savings
bank by the rules, regulations, resolutions and practices of the OTS
and by New Jersey law and the rules, regulations, resolutions and
practices of the New Jersey Department of Banking; all of the issued
and outstanding capital stock of the Subsidiary has been duly
authorized and validly issued, is fully paid and nonassessable and is
owned directly by the Bank, to such
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counsel's knowledge, free and clear of any security interest,
mortgage, pledge, lien, encumbrance or claim.
(xii) Upon consummation of the Conversion and Reorganization,
all of the issued and outstanding capital stock of the Bank will be
duly authorized and validly issued and fully paid and nonassessable,
and all such capital stock will be owned of record by the Company free
and clear of any security interest, mortgage, pledge, lien,
encumbrance or legal or equitable claim.
(xiii) The OTS has approved the Holding Company Application and
the Conversion Application (including the formation and merger of
Interim A and Interim B), such approvals remain in full force and
effect and no action is pending or, to such counsel's knowledge,
threatened respecting the Holding Company Application or the
Conversion Application or the acquisition by the Company of all of the
Bank's issued and outstanding capital stock; the Holding Company
Application and the Conversion Application comply as to form in all
material respects with the Conversion Regulations and all other
applicable requirements of the OTS, and, to such counsel's knowledge,
include all documents required to be filed as exhibits thereto,
excluding the Prospectus and any related marketing materials filed as
a part of the Holding Company Application or the Conversion
Application as to which no opinion need be given; the Company is duly
authorized to become a savings and loan holding company and is duly
authorized to own all of the issued and outstanding capital stock of
the Bank pursuant to the Plan.
(xiv) The New Jersey Department of Banking has approved the New
Jersey Application, and such approval remains in full force and effect
and no action is pending or, to such counsel's knowledge, threatened
respecting the New Jersey Application; the New Jersey Application
complies as to form in all material respects with New Jersey law and
regulations and all other applicable requirements of the New Jersey
Department of Banking, and, to such counsel's knowledge, includes all
documents required to be filed as exhibits thereto.
(xv) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, (A) have been
duly and validly authorized by all necessary action on the part of
each of the Company, the MHC and the Bank, and this Agreement
constitutes the legal, valid and binding agreement of each of the
Company, the MHC and the Bank, enforceable in accordance with its
terms, except as rights to indemnity and contribution hereunder may be
limited under applicable law (it being understood that such counsel
may avail itself of customary exceptions concerning the effect of
bankruptcy, insolvency or similar laws and the availability of
equitable remedies), (B) to such counsel's knowledge, will not
conflict with or constitute a breach of, or default under, and no
event has occurred which, with notice or lapse of time or both, would
constitute a default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Company,
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the MHC, the Bank or the Subsidiary pursuant to any contract,
indenture, mortgage, loan agreement, note, lease or other instrument
to which the Company, the MHC, the Bank or the Subsidiary is a party
or by which any of them may be bound, or to which any of the property
or assets of the Company, the MHC, the Bank or the Subsidiary is
subject that, individually or in the aggregate, would have a material
adverse effect on the financial condition, results of operations or
business of the Company, the Bank and the Subsidiary, taken as a
whole, and (C) will not result in any violation of the provisions of
the certificate or articles of incorporation, charter or bylaws of the
Company, the MHC, the Bank or the Subsidiary.
(xvi) The Prospectus has been duly authorized by the OTS for
final use pursuant to the Conversion Regulations and no action has
been taken, or is pending or, to such counsel's knowledge, threatened,
by the OTS to revoke such authorization.
(xvii) The Registration Statement is effective under the 1933
Act and no stop order suspending the effectiveness of the Registration
Statement has been issued under the 1933 Act nor have proceedings
therefor been initiated or, to such counsel's knowledge, threatened by
the Commission.
(xviii) No further approval, authorization, consent or other
order of any public board or body is required in connection with the
execution and delivery of this Agreement, the issuance of the
Securities, the Exchange Shares and the consummation of the Conversion
and Reorganization, except as may be required under the securities or
Blue Sky laws of various jurisdictions as to which no opinion need be
rendered.
(xix) At the time the Registration Statement became effective,
the Registration Statement (other than the financial statements,
appraisal and statistical data included therein, as to which no
opinion need be rendered) complied as to form in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations.
(xx) The Common Stock conforms to the description thereof
contained in the Prospectus, and the form of certificate used to
evidence the Common Stock is in due and proper form and complies with
all applicable statutory requirements.
(xxi) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against or affecting
the Company, the MHC, the Bank or the Subsidiary that are required,
individually or in the aggregate, to be disclosed in the Registration
Statement and Prospectus, other than those disclosed therein, and all
pending legal or governmental proceedings to which the Company, the
MHC, the Bank or the Subsidiary is a party or to which any of their
property is subject which are not described in the Registration
Statement,
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<PAGE>
including ordinary routine litigation incidental to the business, are,
considered in the aggregate, not material.
(xxii) The information in the Prospectus describing the
liquidation account under the captions "The Conversion and
Reorganization - Liquidation Rights" and "- Effects of Conversion and
Reorganization - "Effect on Liquidation Rights" and the information
under "Risk Factors - Financial Institution Regulation and Possible
Legislation," "- Certain Anti-Takeover Provisions Which May Discourage
Takeover Attempts," " - Possible Adverse Income Tax Consequences of
the Distribution of Subscription Rights," "Dividend Policy," "Federal
and State Taxation," "Regulation," "The Conversion and
Reorganization," "Restrictions on Acquisition of the Company and the
Bank," "Description of Capital Stock of the Company" and "Description
of Capital Stock of the Bank" to the extent that it constitutes
matters of law, summaries of legal matters, documents or proceedings,
or legal conclusions, is correct in all material respects.
(xxiii) To such counsel's knowledge, there are no contracts,
indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed as exhibits thereto.
(xxiv) The Plan has been duly authorized by the Boards of
Directors of the Company, the MHC and the Bank; to such counsel's
knowledge, the Company, the MHC and the Bank have conducted the
Conversion and Reorganization in all material respects in accordance
with applicable requirements of the Plan, the Conversion Regulations
and all other applicable regulations, decisions and orders thereunder,
including all material applicable terms, conditions, requirements and
conditions precedent to the Conversion and Reorganization imposed upon
the Company, the MHC or the Bank by the OTS, and no order has been
issued by the OTS to suspend the Offerings and no action for such
purpose has been instituted or, to such counsel's knowledge,
threatened by the OTS; and, to such counsel's knowledge, no person has
sought to obtain review of the final action of the OTS in approving
the Plan.
(xxv) To such counsel's knowledge and information, each of the
Company, the MHC, the Bank and the Subsidiary have obtained all
licenses, permits and other governmental approvals and authorizations
currently required for the conduct of their respective businesses as
described in the Registration Statement and Prospectus, except for
such licenses, permits, approvals or authorizations the failure of
which to have would not result in a material adverse change in the
financial condition, results of operations or the business of the
Company, the MHC, the Bank and the Subsidiary, taken as a whole, and
all such licenses, permits and other governmental authorizations are
in full force and effect, and each of the Company, the MHC, the Bank
and the Subsidiary is in all material respects complying therewith.
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<PAGE>
(xxvi) Neither the Company, the MHC, the Bank nor the Subsidiary
is in violation of its certificate or articles of incorporation or
charter, as the case may be, upon consummation of the Conversion and
Reorganization nor, to such counsel's knowledge, in default (nor has
any event occurred which, with notice or lapse of time or both, would
constitute a default) in the performance or observance of any
obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company, the MHC, the Bank or the Subsidiary
is a party or by which the Company, the MHC, the Bank or the
Subsidiary or any of their respective property may be bound in any
respect that would have a material adverse effect upon the financial
condition, results of operations or business of the Company, the MHC,
the Bank and the Subsidiary, taken as a whole.
(xxvii) The stockholders of the Bank do not have dissenters'
rights or any other rights to dissent from the Conversion and
Reorganization and receive the fair value of their shares of Bank
Common Stock under New Jersey or Federal law.
(2) The favorable opinion, dated as of Closing Time, of Breyer &
Aguggia, counsel for the Agent, with respect to the matters set forth in
Section 5(b)(1)(i), (iv), (v), (vi) (solely as to preemptive rights arising
by operation of law), (xvi)(A), (xx) and (xxi) and such other matters as
the Agent may reasonably require.
(3) In giving their opinions required by subsections (b)(l) and
(b)(2), respectively, of this Section, Muldoon, Murphy & Faucette and
Breyer & Aguggia shall each additionally state that nothing has come to
their attention that would lead them to believe that the Registration
Statement (except for the appraisal, financial statements and schedules and
other financial or statistical data included therein, as to which counsel
need make no statement), at the time it became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus (except for the appraisal, financial
statements and schedules and other financial or statistical data included
therein, as to which counsel need make no statement), at the time the
Registration Statement became effective or at Closing Time, included an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading. In giving their opinions, Muldoon, Murphy & Faucette and Breyer
& Aguggia may rely as to certain matters of fact on certificates of
officers and directors of the Company, the MHC and the Bank and
certificates of public officials, and as to matters of New Jersey law
and Delaware law upon the opinions of ____________________ and Morris,
Nichols, Arsht & Tunnell, respectively, which opinions shall be in form and
substance satisfactory to the Agent, and Breyer & Aguggia may also rely as
to certain matters on the opinion of Muldoon, Murphy & Faucette.
(c) At the Closing Time referred to in Section 2, the Company, the MHC and
the Bank will have completed in all material respects the conditions precedent
to the Conversion and Reorganization in accordance with the Plan, the applicable
Conversion Regulations and all other
24
<PAGE>
applicable laws, regulations, decisions and orders, including all terms,
conditions, requirements and provisions precedent to the Conversion and
Reorganization imposed upon the Company, the MHC or the Bank by the OTS, the
FDIC, or any other regulatory authority, other than those that the OTS or the
FDIC permit to be completed after the Conversion and Reorganization.
(d) At Closing Time, there shall not have been, since the date hereof or
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change in the financial
condition, results of operations or business of the Company, the MHC, the Bank
and the Subsidiary, taken as a whole, whether or not arising in the ordinary
course of business, and the Agent shall have received a certificate of the
President and Chief Executive Officer of the Company, the MHC and of the Bank
and the chief financial or chief accounting officer of the Company, the MHC and
of the Bank, dated as of Closing Time, to the effect that (i) there has been no
such material adverse change, (ii) there shall have been no material transaction
entered into by the Company, the MHC or the Bank from the latest date as of
which the financial condition of the Company, the MHC or the Bank is set forth
in the Registration Statement and the Prospectus other than transactions
referred to or contemplated therein and transactions in the ordinary course of
business, (iii) neither the Company, the MHC nor the Bank shall have received
from the OTS or the New Jersey Department of Banking any direction (oral or
written) to make any material change in the method of conducting its business
with which it has not complied (which direction, if any, shall have been
disclosed to the Agent) or which materially and adversely might affect the
financial condition, results of operations or business of the Company, the MHC
and the Bank taken as a whole, (iv) the representations and warranties in
Section 1 hereof are true and correct with the same force and effect as though
expressly made at and as of the Closing Time, (v) the Company, the MHC and the
Bank have complied with all agreements and satisfied all conditions on their
part to be performed or satisfied at or prior to Closing Time, (vi) no stop
order suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been initiated or threatened by the
Commission and (vii) no order suspending the Offerings or the authorization for
final use of the Prospectus has been issued and no proceedings for that purpose
have been initiated or threatened by the OTS or the FDIC and no person has
sought to obtain regulatory or judicial review of the action of the OTS in
approving the Plan in accordance with the Conversion Regulations.
(e) At the time of the execution of this Agreement, the Agent shall have
received from KPMG Peat Marwick LLP a letter dated such date, in form and
substance satisfactory to the Agent, to the effect that: (i) they are
independent certified public accountants with respect to the Company, the MHC
the Bank and the Subsidiary within the meaning of the 1933 Act, the 1933 Act
Regulations and the Conversion Regulations; (ii) it is their opinion that the
consolidated financial statements and supporting schedules included in the
Registration Statement and covered by their opinion therein comply as to form in
all material respects with the applicable accounting requirements of the 1933
Act, the 1933 Act Regulations and the OTS Regulations; (iii) based upon limited
procedures as agreed upon by the Agent and KPMG Peat Marwick LLP and set forth
in detail in such letter, nothing has come to their attention which causes them
to believe that (A) the unaudited financial statements and supporting schedules
of the Bank and the Subsidiary included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act, the 1933 Act Regulations
25
<PAGE>
and the OTS Regulations or are not presented in conformity with generally
accepted accounting principles applied on a basis substantially consistent with
that of the audited financial statements included in the Registration Statement
and the Prospectus, (B) at a specified date not more than five (5) days prior to
the date of this Agreement, there has been any increase in the consolidated long
term or short term debt of the Bank and the Subsidiary or any decrease in
consolidated total assets, allowance for loan losses, total deposits or retained
earnings exclusive of the unrealized gain in investment securities available for
sale of the Bank and the Subsidiary, in each case as compared with the amounts
shown in the March 31, 1997 balance sheet included in the Registration Statement
or, (C) during the period from December 31, 1997 to a specified date not more
than five days prior to the date of this Agreement, there were any decreases, as
compared with the corresponding period in the preceding year, in net interest
income, net interest income after provision for loan losses, or net income of
the Bank and the Subsidiary, except in all instances for increases or decreases
that the Registration Statement and the Prospectus disclose have occurred or may
occur; and (iv) in addition to the examination referred to in their opinions and
the limited procedures referred to in clause (iii) above, they have carried out
certain specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information that are included in the
Registration Statement and Prospectus and that are specified by the Agent, and
have found such amounts, percentages and financial information to be in
agreement with the relevant accounting, financial and other records of the
Company, the MHC the Bank and the Subsidiary identified in such letter.
(f) At Closing Time, the Agent shall have received from KPMG Peat Marwick
LLP a letter, dated as of Closing Time, to the effect that they reaffirm their
statements made in the letter furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not more
than five days prior to Closing Time.
(g) At Closing Time, the Securities shall have been approved for listing on
the Nasdaq National Market upon notice of issuance.
(h) At Closing Time, the Agent shall have received a letter from
Finpro, Inc., dated as of the Closing Time, confirming its appraisal.
(i) At Closing Time, counsel for the Agent shall have been furnished with
such documents and opinions as they may require for the purpose of enabling them
to pass upon the issuance and sale of the Securities and the Exchange Shares as
herein contemplated and related proceedings, or in order to evidence the
accuracy of any of the representations or warranties, or the fulfillment of any
of the conditions, herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities, the Exchange Shares as
herein contemplated shall be satisfactory in form and substance to the Agent and
counsel for the Agent.
(j) At any time prior to Closing Time, (i) there shall not have occurred
any material adverse change in the financial markets in the United States or
elsewhere or any outbreak of hostilities or escalation thereof or other calamity
or crisis the effects of which, in the judgment of the Agent, are so material
and adverse as to make it impracticable to market the Securities or to enforce
contracts, including subscriptions or orders, for the sale of the Securities,
and (ii)
26
<PAGE>
trading generally on either the Nasdaq National Market, the American Stock
Exchange, or the New York Stock Exchange shall not have been suspended, or
minimum or maximum prices for trading shall not have been fixed, or maximum
ranges for prices for securities shall not have been required, by either of such
Exchange or Market or by order of the Commission or any other governmental
authority, and a banking moratorium shall not have been declared by either
Federal, New York or New Jersey authorities.
SECTION 6. INDEMNIFICATION.
(a) The Company and the Bank, jointly and severally, agree to indemnify and
hold harmless the Agent, each person, if any, who controls the Agent, within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and its
respective partners, directors, officers, employees and agents as follows:
(i) from and against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, related to or arising out of the
Conversion and Reorganization or any action taken by the Agent where acting
as agent of the Company, the MHC and the Bank or otherwise as described in
Section 2 hereof; provided, however, that this indemnity agreement shall
not apply to any loss, liability, claim, damage or expense found on a final
judgement by a court of competent jurisdiction to have resulted primarily
from the bad faith, willful misconduct or gross negligence of the Agent.
(ii) from and against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, based upon or arising out of any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), or the omission or
alleged omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(iii) from and against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever described in clauses (i) or (ii) above, if such settlement is
effected with the written consent of the Company or the Bank, which consent
shall not be unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as incurred
(including, subject to Section 6(c) hereof, the fees and disbursements of
counsel chosen by the Agent), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation,
proceeding or inquiry by any governmental agency or body, commenced or
threatened, or any pending or threatened claim whatsoever described in
clauses (i) or (ii) above, to the extent that any such expense is not paid
under (i), (ii) or (iii) above;
27
<PAGE>
provided, however, that the indemnification provided for in this paragraph (a)
shall not apply to any loss, liability, claim, damage or expense to the extent
arising out of any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission of a material fact required to be stated
therein or necessary to make not misleading any statements contained in the
Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto) made in reliance upon and in conformity with
the Agent Information. Notwithstanding the foregoing, the indemnification
provided for in this paragraph (a) shall not apply to the Bank to the extent
that such indemnification by the Bank would constitute an impermissible covered
transaction under Section 23A of the Federal Reserve Act, as amended.
(b) The Agent agrees to indemnify and hold harmless the Company, the Bank,
their directors and trustees, each of their officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or alleged untrue statements of a material fact or omissions or
alleged omissions of a material fact, made in the Registration Statement (or any
amendment thereto) or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with the Agent Information.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
that it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of any such
action. In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to no more than one local counsel
in each separate jurisdiction in which any action or proceedings is commenced)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
(d) The Company and the Bank also agree that the Agent shall not have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Bank, the Company, its security holders or the Bank's or the Company's creditors
relating to or arising out of the engagement of the Agent pursuant to, or the
performance by the Agent of the services contemplated by, this Agreement, except
to the extent that any loss, claim, damage or liability is found in a final
judgment by a court to have resulted primarily from the Agent's bad faith,
willful misconduct or gross negligence.
(e) In addition to, and without limiting, the provisions of Section
(6)(a)(iv) hereof, in the event that the Agent, any person, if any, who controls
the Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act or any of its partners, directors, officers, employees or agents is
requested or required to appear as a witness or otherwise gives testimony in any
action, proceeding, investigation or inquiry brought by or on behalf of or
against the Company, the MHC or the Bank or any of its respective affiliates or
any participant in the transactions contemplated hereby in which the Agent or
such person or agent is not named as a
28
<PAGE>
defendant or subject to an investigation or inquiry, the Company and the Bank
jointly and severally agree to reimburse the Agent for all reasonable and
necessary out-of-pocket expenses incurred by it in connection with preparing or
appearing as a witness or otherwise giving testimony and to compensate the Agent
in an amount to be mutually agreed upon.
SECTION 7. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 6 hereof is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company, the Bank
and the Agent shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by said indemnity agreement
incurred by the Company or the Bank and the Agent, as incurred, in such
proportions (i) that the Agent is responsible for that portion represented by
the percentage that the maximum aggregate marketing fees appearing on the cover
page of the Prospectus bears to the maximum aggregate gross proceeds appearing
thereon and the Company and the Bank are jointly and severally responsible for
the balance or (ii) if, but only if, the allocation provided for in clause (i)
is for any reason held unenforceable, in such proportion as is appropriate to
reflect not only the relative benefits to the Company, the MHC and the Bank on
the one hand and the Agent on the other, as reflected in clause (i), but also
the relative fault of the Company and the Bank on the one hand and the Agent on
the other (relative fault shall be determined by reference to, among other
things, whether the untrue statement of a material fact or omission to state a
material fact relates to information supplied by the Company and Savings Bank or
the Agent and the parties relative intent, knowledge, and access to
information), as well as any other relevant equitable considerations; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section, each person, if any, who controls the Agent within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same
rights to contribution as the Agent, and each director of the Company, each
director of the Bank, each officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company or the Bank within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company and the Bank.
Notwithstanding anything to the contrary set forth herein, to the extent
permitted by applicable law, in no event shall the Agent be required to
contribute an aggregate amount in excess of the aggregate marketing fees to
which the Agent is entitled and actually paid pursuant to this Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this Agreement, or
contained in certificates of officers of the Company, the MHC or the Bank
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of the Agent or any
controlling person, or by or on behalf of the Company, and shall survive
delivery of the Securities.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Agent may terminate this Agreement, by notice to the Company, at
any time at or prior to Closing Time (i) if there has been, since the date of
this Agreement or since the
29
<PAGE>
respective dates as of which information is given in the Registration Statement,
any material adverse change in the financial condition, results of operations or
business of the Company, the MHC or the Bank, or the Company, the MHC, the Bank
and the Subsidiary, taken as a whole, whether or not arising in the ordinary
course of business; or (ii) if there has occurred any material adverse change in
the financial markets in the United States or elsewhere or any outbreak of
hostilities or escalation thereof or other calamity or crisis the effects of
which, in the judgment of the Agent, are so material and adverse as to make it
impracticable to market the Securities or to enforce contracts, including
subscriptions or orders, for the sale of the Securities; or (iii) or if trading
generally on either the Nasdaq National Market, the American Stock Exchange, or
the New York Stock Exchange has been suspended, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices for securities have been
required, by either of such Exchange or Market or by order of the Commission or
any other governmental authority, or if a banking moratorium has been declared
by either Federal, New York or New Jersey authorities; or (iv) if any condition
specified in Section 5 shall not have been fulfilled when and as required to be
fulfilled; or (v) if there shall have been such material adverse change in the
condition or prospects of the Company or the Bank or the prospective market for
the Company's securities as in the Agent's good faith opinion would make it
inadvisable to proceed with the offering, sale or delivery of the Securities; or
(vi) if in the Agent's good faith opinion, the aggregate price for the
Securities established by Finpro, Inc. is not reasonable or equitable under then
prevailing market conditions; or (vii) if the Conversion and Reorganization is
not consummated prior to __________, 1997.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except
that the provisions of Section 4 relating to reimbursement of expenses and the
provisions of Sections 6 and 7 hereof shall survive any termination of this
Agreement.
SECTION 10. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the Agent
shall be directed to the Agent at Two World Trade Center, 104th Floor, New York,
New York 10048, attention of Mark B. Cohen, with a copy to Paul M. Aguggia,
Esq., Breyer & Aguggia, 1300 I Street, N.W., Suite 470 East, Washington, D.C.
20005; notices to the Company and the Bank shall be directed to either of them
at 568 Broadway, Bayonne, New Jersey 07002, attention Mr. Patrick F.X. Nilan,
President, with a copy to Joseph G. Passiac, Jr., Esq., Muldoon, Murphy &
Faucette, 5101 Wisconsin Avenue, N.W., Washington, D.C. 20016.
SECTION 11. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the Agent, the Company, the MHC and the Bank and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Agent, the Company, the MHC and the Bank and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein or
therein contained. This Agreement and all conditions and provisions hereof and
thereof are intended to be for the sole and exclusive benefit of the Agent, the
Company, the MHC and the Bank and their respective
30
<PAGE>
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT. With the exception of that certain
agreement between the Bank and Sandler O'Neill dated December 12, 1996 relating
to records management services in connection with the Bank's Conversion, this
Agreement represents the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and supersedes any and all
other oral or written agreements heretofore made. No waiver, amendment or other
modification of this Agreement shall be effective unless in writing and signed
by the parties hereto.
SECTION 13. GOVERNING LAW AND TIME. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said State without regard to the
conflicts of laws provisions thereof. Specified times of day refer to Eastern
time.
SECTION 14. SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
SECTION 15. HEADINGS. Sections headings are not to be considered part of
this Agreement, are for convenience and reference only, and are not to be deemed
to be full or accurate descriptions of the contents of any paragraph or
subparagraph.
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<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Agent, the Company and the Bank in accordance with its terms.
Very truly yours,
BAYONNE BANCSHARES, INC.
By:
Patrick F.X. Nilan
President and Chief Executive Officer
BAYONNE BANKSHARES, M.H.C.
By:
Patrick F.X. Nilan
President and Chief Executive Officer
FIRST SAVINGS BANK OF NEW JERSEY, SLA
By:
Patrick F.X. Nilan
President and Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
SANDLER O'NEILL & PARTNERS, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By:
32
Exhibit 5.0 Opinion of Muldoon, Murphy & Faucette re: legality
<PAGE>
[MULDOON, MURPHY & FAUCETTE LETTERHEAD]
May 30, 1997
Board of Directors
Bayonne Bancshares, Inc.
568 Broadway
Bayonne, New Jersey 07002
Re: The offering of up to 7,820,000 share of Bayonne Bancshares, Inc.
Common Stock
Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with (i) the reorganization of Bayonne Bankshares, M.H.C. (the
"Mutual Holding Company"), a federal mutual holding company that owns a majority
of the outstanding stock of First Savings Bank of New Jersey, SLA, a New Jersey
chartered stock savings association (the "Bank"), into stock form of ownership
(the "Conversion"), and (ii) the subscription and community offering (the
"Offering"), in connection with the Conversion by Bayonne Bancshares, Inc., a
Delaware corporation (the "Company"), of up to 7,820,000 shares of its common
stock, par value $0.01 per share (the "Common Stock") (8,993,000 shares if the
Estimated Valuation Range is increased up to 15% to reflect changes in market
and financial conditions following commencement of the Offerings.)
In connection with your request for our opinion, you have provided to us
and we have reviewed the Company's certificate of incorporation filed with the
Delaware Secretary of State on February 4, 1997 and amended on February 20, 1997
(the "Certificate of Incorporation"); the Company's Bylaws; the Company's
Registration Statement on Form S-1, as filed with the Securities and Exchange
Commission initially on March 13, 1997 and as amended on May 30, 1997 (the
"Registration Statement"); a consent of the sole incorporator of the Company;
resolutions of the Board of Directors of the Company (the "Board") concerning
the organization of the Company, the Offerings and designation of a Pricing
Committee of the Board, and the form of stock certificate approved by the Board
to represent shares of Common Stock. We have also been furnished a certificate
of the Delaware Secretary of State certifying the Company's good standing as a
Delaware corporation. Capitalized terms used but not defined herein shall have
the meaning given them in the Certificate of Incorporation.
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law upon which opinion we
believe we are justified in relying.
<PAGE>
Board of Directors
May 30, 1997
Page 2
We understand that the Company will loan to the trust for the Bank's
Employee Stock Ownership Plan (the "ESOP") the funds the ESOP Trust will use to
purchase shares of Common Stock for which the ESOP Trust subscribes pursuant to
the Offerings and for purposes of rendering the opinion set forth in paragraph 2
below, we assume that: (a) the Board of Directors of the Company has duly
authorized the loan to the ESOP Trust (the "Loan"); (b) the ESOP serves a valid
corporate purpose for the Company; (c) the Loan will be made at an interest rate
and on other terms that are fair to the Company; (d) the terms of the Loan will
be set forth in customary and appropriate documents including, without
limitation, a promissory note representing the indebtedness of the ESOP Trust to
the Company as a result of the Loan; and (e) the closing for the Loan and for
the sale of Common Stock to the ESOP Trust will be held after the closing for
the sale of the other shares of Common Stock sold in the Offerings and the
receipt by the Company of the proceeds thereof.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares of Common Stock to be sold in the Offerings, the Common
Stock to be issued in the Offerings (including the shares to be issued to the
ESOP Trust) will be duly authorized and, when such shares are sold and paid for
in accordance with the terms set forth in the Prospectus and such resolution of
the Pricing Committee, and certificates representing such shares in the form
provided to us are duly and properly issued, will be validly issued, fully paid
and nonassessable.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe
and apply the provisions of those Articles, subsection C.4 of
Article FOURTH, to the extent that subsection obligates any
person to provide to the Board the information such subsection
authorizes the Board to demand, and the provision of Subsection
C.7 of Article EIGHTH empowering the Board to determine the Fair
Market Value of property offered or paid for the Company's stock
by an Interested Stockholder, in each case to the extent, if any,
that a court applying Delaware law were to impose equitable
limitations upon such authority; and
<PAGE>
Board of Directors
May 30, 1997
Page 3
(b) Article NINTH, which authorizes the Board to consider the effect
of any offer to acquire the Company on constituencies other than
stockholders in evaluating any such offer.
We consent to the filing of this opinion as an exhibit to the Registration
Statement on Form S-1 and the Form AC and to the use of the name of our firm
where it appears in the Registration Statement, Form AC and Prospectus.
Very truly yours,
/s/ MULDOON, MURPHY & FAUCETTE
----------------------------------
Muldoon, Murphy & Faucette
MORRIS, NICHOLS, ARSHT & TUNNELL
1201 North Market Street
P.O. Box 1347
Wilmington, Delaware 19899-1347
----------
Telephone (302) 658-9200
Telecopy (302) 658-3959
May 30, 1997
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with (i) the reorganization of Bayonne Bankshares, M.H.C. (the
"Mutual Holding Company"), a federal mutual holding company that owns a majority
of the outstanding stock of First Savings Bank of New Jersey, SLA, a New Jersey
chartered stock savings association (the "Bank"), into stock form of ownership
(the "Conversion"), and (ii) the subscription and community offering (the
"Offering"), in connection with the Conversion, by Bayonne Bankshares, Inc., a
Delaware corporation (the "Company"), of up to 8,993,000 shares of its common
stock, par value $0.01 per share (the "Common Stock").
In connection with your request for our opinion, you have provided to us,
and we have reviewed, the Company's certificate of incorporation (the
"Certificate of Incorporation"), its by-laws, the Registration Statement filed
with the Securities and Exchange
<PAGE>
Muldoon, Murphy & Faucette
May 30, 1997
Page 2
Commission in connection with the Offering (the "Registration Statement"),
including the prospectus constituting a part thereof (the "Prospectus"), a
consent of the sole incorporator of the Company, resolutions of the Board of
Directors of the Company (the "Board") concerning, inter alia, the organization
of the Company, the Offering and the designation of a Pricing Committee of the
Board (the "Pricing Committee") and the form of stock certificate approved by
the Board to represent shares of Common Stock. We have also obtained a
certificate of the Delaware Secretary of State as to the Company's good standing
as a Delaware corporation. Capitalized terms used but not defined herein shall
have the meanings given them in the Certificate of Incorporation.
We understand that the Company will loan to the Bank's Employee Stock
Ownership Plan (the "ESOP") the funds the ESOP will use to purchase the shares
of Common Stock for which the ESOP has subscribed as part of the Offering. In
this regard, we have assumed, for purposes of rendering the opinion set forth in
paragraph 2 below, that: (a) the Board has duly authorized the loan to the ESOP
(the "Loan"); (b) the Loan serves a valid corporate purpose; (c) the Loan will
be made at an interest rate and on other terms that are fair to the Company; (d)
the terms of the Loan will be set forth in customary and appropriate documents
including, without limitation, a promissory note representing the indebtedness
of the ESOP to the Company as a result of the Loan; and (e) the closing for the
Loan and for the sale of Common Stock to the ESOP
<PAGE>
Muldoon, Murphy & Faucette
May 30, 1997
Page 3
will be held after the closing for the sale of the other shares of Common Stock
sold in the Offering and the receipt by the Company of the proceeds thereof.
We call your attention to the fact that the opinions expressed herein are
limited in all respects to matters of Delaware corporate law. We express no
opinion concerning the requirements of any other law, rule or regulation, state
or federal, applicable to the Bank, the Mutual Holding Company, the Company, the
Offering, or the Conversion, including, without limitation, those applicable to
state chartered, federally insured savings associations or their holding
companies.
Based upon and subject to the foregoing, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware, with the
corporate power and authority to own, lease and operate its property and conduct
its business as now conducted as described in the Prospectus.
2. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares of Common Stock to be sold in the Offering and the price
therefor, the Common Stock to be issued in the Offering (including the shares to
be issued to the ESOP) will be duly authorized and, when such shares are sold
and paid for in accordance with the terms set forth in the Prospectus and such
resolution, and certificates representing such shares in
<PAGE>
Muldoon, Murphy & Faucette
May 30, 1997
Page 4
the form provided to us are duly and properly issued, will be duly and validly
issued, fully paid and nonassessable, with no personal liability for the payment
of the Company's debts arising solely by virtue of the ownership thereof; such
issuance and sale will not be in violation of or subject to any preemptive
rights provided for by Delaware law or by the Company Certificate of
Incorporation.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of Article
EIGHTH, which grant the Board the authority to construe and apply the provisions
of those Articles, subsection C.4 of Article FOURTH, to the extent that
provision obligates any person to provide to the Board the information such
subsection authorizes the Board to demand, and the provision of Section C.7 of
Article EIGHTH empowering the Board to determine the Fair Market Value of
property offered or paid for the Company's stock by an Interested Stockholder,
to the extent, if any, that a court applying Delaware law were to impose
equitable limitations upon the authority of the directors of the Company under
such provisions.
(b) Article NINTH of the Certificate of Incorporation, which purports to
permit the Board to consider the effect of any
<PAGE>
Muldoon, Murphy & Faucette
May 30, 1997
Page 5
offer to acquire the Company on constituencies other than stockholders in
evaluating any such offer.
Very truly yours,
/s/ MORRIS, NICHOLS, ARSHT & TUNNELL
-----------------------------------------
Morris, Nichols, Arsht & Tunnell
Exhibit 8.0 Opinion of KPMG Peat Marwick LLP re: Federal and State Tax
Matters
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
May 30, 1997
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
567 Broadway
Bayonne, NJ 07002
GENTLEMEN:
You have requested that we render to you our opinion as to certain Federal and
New Jersey income tax issues related the proposed reorganization of Bayonne
Bankshares, M.H.C. (Mutual Holding Company) into the stock form of organization
(the Reorganization) by creating Bayonne Bancshares, Inc. (the Company). The
opinions contained herein are based solely on the facts as contained in the
section of this letter entitled "STATEMENT OF FACTS" and the representations
described in the section of the letter entitled "REPRESENTATIONS." All sectioned
references are to the Internal Revenue Code of 1986 as amended ("the Code") as
in effect as of date of this opinion. If any of the facts and or representations
are not correct or complete, it is imperative that we be informed in writing as
this could have a material adverse effect on our opinion.
STATEMENTS OF FACTS
The Mutual Holding Company is a Federally chartered mutual holding company and
owns 54.1% of the common stock of First Savings Bank of New Jersey, SLA (the
Bank). Prior to January 6, 1995, the Mutual Holding Company was a New Jersey
state chartered mutual savings and loan association. On January 6, 1995 the
state chartered mutual savings and loan association transferred virtually all of
its assets to a newly chartered New Jersey stock savings and loan association,
the Bank, in exchange for the Bank's common stock and assumption of all of the
transferor's liabilities. The state chartered mutual savings and loan
association converted to a Federally chartered Mutual Holding Company. The Bank
also sold its common stock for cash in a public offering (the Public common
stock). A ruling was obtained from the Internal Revenue Service which among
other things, held that no gain or loss was recognized on the transfer, and no
recapture of the reserve for bad debts was required.
On December 19, 1996 the Board of Directors of the Mutual Holding Company and
the Bank adopted the Plan of Conversion and Agreement and Plan of Reorganization
of Bayonne Bankshares, M.H.C. and First Savings Bank of New Jersey S.L.A., as
amended
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -2-
on February 20, 1997 and May 15, 1997 (the Plan), pursuant to which the Bank
caused the Company to be incorporated under Delaware law as a first-tier, wholly
owned subsidiary of the Bank, and the Company will form Interim B after receipt
of all requisite regulatory approvals, as a first tier, wholly owned subsidiary
of the Company. The Company adopted the Plan on February 6, 1997 and the Board
of Directors of Interim B will adopt the Plan by at least a two-thirds vote. In
addition, the Bank and the Company will approve the Plan in their capacities as
the sole shareholders of the Company and Interim B, respectively.
In accordance with 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. As a result of the Conversion and Reorganization,
each share of common stock, par value $.10 per share of the Bank held by the
Mutual Holding Company, which currently holds 1,659,485 shares or 54.1% of the
outstanding Bank common stock, will be canceled and each share of Bank common
stock held by the Bank's public stockholders (the "Public Bank Shares"), which
amounted to 1,404,004 shares, or 45.9% of the outstanding Bank common stock at
March 31, 1997, will be converted into shares of the Company's common stock
pursuant to a ratio that will result in the holders of such shares (the "Public
Shareholder's") owning in the aggregate the same percentage of the Company as
they previously owned in 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 the Bank's
ESOP thereafter.
In addition to the exchange of Company common stock for Public Bank Shares,
non-transferable subscription rights to subscribe for up to 4,234,000 shares
(which may be increased to 4,870,000 shares) 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 the Bank's Supplemental Eligible Account
Holders, and to certain Other Members in a subscription offering. Subscription
rights are nontransferable. 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. Shares not
subscribed for in the Subscription and Community Offerings will be offered to
members of the general public in a syndicated community offering.
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -3-
The aggregate sales price of the common stock issued in the Conversion will be
based on an independent appraiser's valuation of the estimated pro forma market
value of the Bank and the Mutual Holding Company. The conversion and sale of
common stock will be accomplished in accordance with the rules and regulations
of the Office of Thrift Supervision (OTS) and will be subject to the approval of
the OTS.
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 the total number of shares of
Conversion Stock offered for sale in the Conversion; 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 the total number of shares offered for sale in the Conversion; 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 3.0% of the total number of shares of
Conversion Stock offered for sale in the Conversion; 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 without further approval of the Mutual Holding Company's
members or the Public Shareholders. The minimum purchase is 25 shares.
The Company intends to seek stockholder approval of certain 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. 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, 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.
The reorganization will be structured as follows:
(i) The Bank organized the Company which issued to the Bank 10 shares of common
stock, consisting of all the issues of outstanding stock of the Company for $.01
per share. The Company is a wholly owned subsidiary of the Bank. The Company
will then form Interim B, as a Federally-chartered stock savings
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -4-
association, as a wholly owned subsidiary of the Company, solely to facilitate
the reorganization.
(ii) Pursuant to the Plan, the Mutual Holding Company which owns 54.1% of the
common stock ("Institution Common Stock") of the Bank will convert to a
Federally chartered interim stock savings bank (Interim A) and simultaneously
merge with and into the Bank pursuant to the Plan. All shares of the Institution
Common Stock held by the Mutual Holding Company will be canceled. The Bank will
establish a liquidation account on behalf of each depositor member of the Mutual
Holding Company.
(iii) The Bank and Interim B will merge pursuant to which the Company's shares
of Interim B will be converted into shares of Bank common stock and the Bank
will become a wholly owned subsidiary of the Company.
(iv) The Public Shareholders of Bank common stock will exchange their shares of
Bank common stock for common stock of the Company.
(v) The Company will offer additional shares of its common stock for sale in a
Subscription and Community Offering and possibly a Syndicated Community Offering
as set forth in the Plan.
The Company intends to adopt the stock option plan of the Bank. All unexercised
stock options to acquire Bank common stock existing prior to the merger shall,
upon the consummation of the merger, become stock options to acquire stock of
the Company.
As a result of the above transactions, all Public Shareholders of the Bank will
become the stockholders of the Company, and the Bank will become a wholly owned
subsidiary of the Company. After the reorganization is consummated, the Bank and
Interim B will constitute a single corporation and the separate existence of the
Interim B will cease by operation of law. All assets and liabilities of Interim
B will be transferred to and assumed by the Bank as of the date of
reorganization. The Bank will continue to operate as a savings association and
retain its present state charter. Directors of the Bank will continue as
Directors of the Bank after the reorganization is consummated.
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
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -5-
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 deposits 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,
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 or she
were to continue to maintain his or her 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, including regular savings accounts,
transaction accounts such as NOW accounts, money market deposit accounts, and
certificates of deposit, with a balance of $50 or more held in the Bank on
December 31, 1994 and March 31, 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 the 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 Deposits 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
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -6-
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.
REPRESENTATIONS
You have provided the following representations concerning this transaction:
(a) The fair market value of Company common stock to be received by each
Public Shareholder will be approximately equal to the fair market value of the
Bank common stock surrendered in exchange.
(b) The management of the Bank has no knowledge of any plan or intention on
the part of its Public Shareholders who own 5% or more of the Bank common stock,
and to the best of the knowledge of management of the Bank, there is no plan or
intention on the part of the remaining shareholders of the Bank to sell,
exchange, or otherwise dispose of a number of shares of the Company stock to be
received in the reorganization that would reduce the Public Shareholders
ownership of Company common stock to a number of shares having a value, as of
the date of the reorganization, of less than 50% of the value of all of the
formerly outstanding Bank common stock as of the same date. For purposes of this
representation, shares of Bank common stocks exchanged for cash or other
property, or exchanged for cash in lieu of fractional shares of Company common
stock, will be treated as outstanding common stock on the date of the
transaction, but the shares of Bank common stock held by the Mutual Holding
Company prior to the consummation of the merger will be disregarded. Moreover,
shares of Bank common stock and shares of Company common stock held by the
Bank's shareholders and otherwise sold, redeemed or disposed of prior to or
subsequent to the transaction as part of the agreement will be considered in
making this representation.
(c) Following the reorganization, the Bank will hold at least 90% of the
fair market value of its net assets and at least 70% of the fair market value of
its gross assets and at least 90% of the fair market value of Interim B's net
assets and at least 70% of the fair market value of Interim B's gross assets
held immediately prior to the reorganization. For purposes of this
representation, amounts paid by the Bank or Interim B to shareholders who
receive cash or other property, amounts used by the Bank or Interim B to pay
reorganization expenses and all redemptions and distributions (except for
regular, normal dividends) made by the Bank will be included as assets of the
Bank or Interim B respectively, immediately prior to the reorganization.
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -7-
(d) Prior to the transaction, the Company will be in control of Interim B
within the meaning of Section 368(c).
(e) As of the date of the execution of this agreement, the Bank has no plan
or intention to issue additional shares of its stock that would result in the
Company losing control of the Bank within the meaning of Section 368(c).
(f) As of the date of this agreement, the Company has no plan or intention
to acquire any of its stock issued in the transaction.
(g) The Company has no plan or intention to liquidate the Bank; to merge
the Bank with or into another corporation, or sell or otherwise dispose of the
stock of the Bank except for transfers of stock to corporations controlled by
the Company; to cause the Bank to sell or otherwise dispose of any of its assets
or any of the assets acquired from the Interim B, except for dispositions made
in the ordinary course of business or transfers of assets to a corporation
controlled by the Bank.
(h) The liabilities of the Interim B, if any, assumed by the Bank and the
liabilities to which the transferred assets of Interim B are subject to, were
incurred by Interim B in the ordinary course of its business.
(i) Following the transaction, the Bank will continue its historic business
or use a significant portion of its business assets in a business.
(j) The Company, Interim B, the Bank and the shareholders of the Bank will
pay their respective expenses, if any, incurred in the reorganization. The Bank
will pay or assume only those expenses of Interim B, if any, that are solely and
directly related to the transaction according to the guidelines established in
Revenue Ruling 73-54, 1973-1 C.B. 187.
(k) There is no intercorporate indebtedness existing between the Company
and the Bank or between the Interim B and the Bank that was issued, acquired, or
would be settled at a discount.
(l) In the Reorganization, shares of Bank stock representing control of the
Bank, as defined in Section 368(c), will be exchanged solely for voting stock of
the Company. For purposes of this representation, shares of Bank stock exchanged
for cash or other property originating with the Company will be treated as
outstanding Bank common stock on the date of the Reorganization.
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -8-
(m) At the time of the Reorganization, the Bank will not have outstanding
any warrants, options, convertible securities or any other type of right
pursuant to which any person could acquire stock in the Bank that, if exercised
or converted, would affect the Company's acquisition or retention of control of
the Bank, as defined in Section 368(c).
(n) The Company does not own, nor has it owned during the past five years,
any shares of the stock of the Bank, nor will the Company acquire any such stock
prior to the proposed transaction.
(o) No two parties to the transaction are investment companies as defined
in Section 368(a)(2)(F)(iii) and (iv).
(p) On the date of the Reorganization, the fair market value of the assets
of the Bank on a going concern basis will exceed the sum of its liabilities,
plus the amount of liabilities, if any, to which the assets are subject.
(q) The Bank is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A).
(r) None of the compensation received by any of the shareholder-employees
of the Bank will be separate consideration for, or allocable to, any of their
shares of Bank common stock; none of the shares of Company common stock received
by any shareholder-employees will be separate consideration for, or allocable
to, any employment agreement; and the compensation paid to any
shareholder-employees will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length for
similar services.
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -9-
FEDERAL TAX OPINION
Based solely upon the terms of the proposed transaction described herein and the
representations set forth, it is our opinion that the following Federal income
tax consequences will result from the Reorganization.
(1) The conversion of the Mutual Holding Company from a Federally chartered
mutual holding company to a Federally chartered interim savings bank will
qualify as a tax-free reorganization since the conversion will constitute a mere
change in identity, form or place of organization within the meaning of Section
368(a)(1)(F). Provided that the merger of the Mutual Holding Company with and
into the Bank qualifies as a statutory merger under applicable law, and that
after the reorganization the Bank will hold substantially all of the assets of
the Mutual Holding Company, the merger will constitute a reorganization within
the meaning of Section 368(a)(1)(A). The exchange of the member's equity in
Mutual Holding Company for interests in a liquidation account established at the
Bank in the merger will satisfy the continuity of interest required by Section
1.368-1(b)(Rev. Rul. 69-3, 1968-1 C.B. 103 and Rev. Rul. 69-646, 1969-2 C.B.
54). The Bank and the Mutual Holding Company will each be a party to the
reorganization within the meaning of Section 368(b).
(2) The Bank will not recognize any gain or loss on the receipt of the
assets of the Mutual Holding Company in exchange for the liquidation accounts of
the Bank (Section 1032(a)).
(3) Provided that the merger of Interim B with and into the Bank qualifies
as a statutory merger under applicable law, and that after the reorganization
the Bank will hold substantially all of the assets of Interim B, and in the
reorganization, Bank Shareholders exchange solely for voting Company common
stock an amount of Bank common stock constituting "control" of the Bank within
the meaning of Section 368(c), the merger will constitute a reorganization
within the meaning of Section 368(a)(1)(A). The reorganization will not be
disqualified by reason of the fact that common stock of the Company is used in
the transaction (Section 368(a)(2)(E)). The Bank, the Company and Interim B will
each be a party to the reorganization within the meaning of Section 368(b).
(4) Interim B will not recognize any gain or loss on the transfer of its
assets to the Bank in exchange for Bank common stock and the assumption by the
Bank of the liabilities, if any, of Interim B (Sections 361(a) and 357(a)).
(5) The Bank will not recognize any gain or loss on the receipt of the
assets of Interim B in exchange for Bank common stock (Section 1032(a)).
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -10-
(6) The Company will not recognize any gain or loss upon its receipt of
Bank common stock solely in exchange for Interim B stock (Section 354(a)).
(7) Bank Public Shareholders will not recognize any gain or loss upon their
exchange of Bank Common Stock solely for shares of Company common stock (Section
354(a)).
(8) A Bank Public Shareholder's basis in his or her Company common stock
received in the exchange will be the same as the basis of the Bank common stock
surrendered in the exchange thereof (Section 358(a)).
(9) A Bank Public Shareholder's holding period in his or her Company common
stock received in the exchange will include the period during which the Bank
common stock surrendered was held, provided that the Bank common stock
surrendered is a capital asset in the hands of the Bank Public Shareholder on
the date of the exchange (Section 1223(1)).
(10) No gain or loss will be recognized by the Company on the receipt of
money in exchange for Company common stock in the offering (Section 1032(a)).
(11) No gain or loss shall be recognized by the Eligible Account Holders,
Supplemental Eligible Account Holders, or Other Members on the issuance to them
of withdrawable deposit accounts in the Bank, in exchange for their deposit
accounts in the Bank or to the other depositors on the issuance to them of
withdrawable deposit accounts or to the issuance of interest in the liquidation
account for the Members' equity in the Mutual Holding Company (Section 354(a) of
the Code).
Provided that the amount to be paid for such stock pursuant to the subscription
rights is equal to the fair market value of the stock, no gain or loss will be
recognized by Eligible Account Holders and Supplemental Eligible Account Holders
upon the distribution to them of the nontransferable subscription rights to
purchase shares of stock in the Company (Section 356(a)). Gain realized, if any,
by the Eligible Account Holders and Supplemental Eligible Account Holders on the
distribution to them of nontransferable subscription rights to purchase shares
of Common Stock will be recognized, but only in an amount not in excess of the
fair market value of such subscription rights (Section 356(a)). Eligible Account
Holders and Supplemental Eligible Account Holders will not realize any taxable
income as a result of the exercise by them of the nontransferable subscription
rights (Rev. Rul. 56-572, 1956-2 C.B. 182).
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -11-
(12) The basis of the Company common stock to its stockholders will be the
purchase price thereof, plus the basis, if any, of nontransferable subscription
rights (Section 1012 of the Code). Accordingly, assuming the nontransferable
subscriptions rights have no value, the basis of the common stock to the
Eligible Account Holders and Supplemental Eligible Account Holders will be the
amount paid therefor. The holding period of the common stock purchased pursuant
to the exercise of subscription rights shall commence on the date on which the
right to acquire such stock was exercised (Section 1223(6) of the Code).
Our opinion under Paragraph (11) above is predicated on the representation that
no person shall receive any payment, whether in money or property, in lieu of
the issuance of subscription rights. Our opinion under Paragraphs (11) and (12)
above assumes that the subscription rights to purchase shares of common stock
received by Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members have a fair market value of zero. We understand that you have
received a letter from FinPro, Inc. which indicates that the subscription rights
do not have any value. We express no view regarding the valuation of the
subscription rights.
If the subscription rights are subsequently found to have a fair market value,
income may be recognized by various recipients of the subscription rights (in
certain cases, whether or not the rights are exercised) and the Company and/or
the Bank may be taxable on the distribution of the subscription rights.
NEW JERSEY STATE TAX OPINION
Based on and subject to the foregoing, it is our opinion that under New Jersey
State Tax Law:
(1) No gain or loss will be recognized by the Mutual Holding Company, the
Company or Interim B under the New Jersey Corporation Business Tax Act.
(2) No gain or loss will be recognized by the Mutual Holding Company, the Bank,
or Interim B under the New Jersey Savings Institution Tax Act.
(3) Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock, no gain
or loss will be recognized by depositors or the Public stockholders of the
Bank under the New Jersey Gross Income Tax Act.
<PAGE>
Board of Directors
Bayonne Bankshares, M.H.C.
First Savings Bank of New Jersey, S.L.A.
May 30, 1997
- -12-
SCOPE OF OPINION
Since this letter is rendered in advance of the closing of this transaction, we
have assumed that the transaction will be consummated in accordance with the
Plan, as well as all the information and representations referred to herein. Any
change in the transaction could cause us to modify our opinion.
The opinions contained herein are rendered only with respect to the specific
matters discussed herein and we express no opinion with respect to any other
legal, Federal, state, local or foreign aspect of these transactions. If any of
the information upon which we have relied is incorrect, or if changes in the
relevant facts occur after the date hereof, our opinion could be affected
thereby. Moreover, our opinion is based on case law, the Code, Treasury
Regulations thereunder, and Internal Revenue Service rulings as they now exist,
as well as the Revised Statutes of New Jersey (1937) as amended, the regulations
thereunder and judicial and administrative interpretations thereof, as they now
exist. These authorities are all subject to change, and such change may be made
with retroactive effect. We can give no assurance that, after such change, our
opinion would not be different. We undertake no responsibility to update or
supplement our opinion. This opinion is not binding on the Internal Revenue
Service or the New Jersey Division of Taxation and there can be no assurance,
and none is hereby given, that the Internal Revenue Service or the New Jersey
Division of Taxation will not take a position contrary to one or more of the
positions reflected in the foregoing opinion, or that our opinion will be upheld
by the courts if challenged by the Internal Revenue Service or the New Jersey
Division of Taxation.
CONSENT
We consent to the inclusion of this opinion as an exhibit to the Form AC of
Bayonne Bankshares, M.H.C. and the Form S-1 Registration Statement of Bayonne
Bancshares, Inc. and the references to and summary of this opinion in such Form
AC and Form S-1 Registration Statement.
Very truly yours,
/s/ KPMG Peat Marwick LLP
Exhibit 10.4 Draft ESOP Loan Commitment Letter and ESOP Loan Documents
<PAGE>
DRAFT
FIRST SAVINGS BANK OF NEW JERSEY, SLA
EMPLOYEE STOCK OWNERSHIP TRUST
LOAN AND SECURITY AGREEMENT
Bayonne Bancshares, Inc.
568 Broadway
Bayonne, New Jersey 07002
_______________ , 1997
Gentlemen:
The undersigned, _____________________, __________, ___________
("Trustee"), not individually but solely as Trustee under the First Savings Bank
of New Jersey, SLA Employee Stock Ownership Trust (the "Trust") effective
_____________, 199_ (the "Borrower"), applies to you for your commitment,
subject to all of the terms and conditions hereof and on the basis of the
representations hereinafter set forth, to make a loan available to the Borrower
as hereinafter set forth. Bayonne Bancshares, Inc. is hereinafter referred to as
the "Lender". The term "Bank" as used herein refers to First Savings Bank of New
Jersey, SLA, as the sponsoring employer of First Savings Bank of New Jersey, SLA
Employee Stock Ownership Plan (the "ESOP").
SECTION ONE. THE TERM LOAN.
1.1 Amount and Terms. By its acceptance hereof the Lender agrees, subject
to all of the terms and conditions hereof and on the basis of the
representations hereinafter set forth, to make a loan (the "Loan") of up to
_________________________________ ($_____________) (the "Commitment"), such
proceeds to be used by the Borrower entirely to acquire shares ("Shares") of the
common stock, par value $.01 of Bayonne Bancshares, Inc., a Delaware
corporation.
The Loan is intended to be an "exempt loan" as described in Section 4975(d)
of the Internal Revenue Code of 1986, as amended (the "Code"), as defined in
Section 54.4975-7(b) of the Treasury Regulations (the "Regulations"), as
described in Section 408(b)(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and as described in Department of Labor Regulations
Section 2550.408b-3 (collectively, the "Exempt Loan Rules").
<PAGE>
1.2 The Note. The disbursement of the Loan pursuant to Section 1.1 hereof
shall be made against and evidenced by a promissory note of the Borrower in the
form annexed hereto as Exhibit A (the "Note"), such Note to bear interest as
hereinafter provided, and shall become due and payable in ______ (__)
consecutive annual equal installments consisting of both principal and interest
amortized over a _____ (__) year period in an amount sufficient to repay the
Loan plus interest, commencing on _____________, 1997 and on the last day of
each and _____________ each year thereafter, except that the final installment
in the amount of all principal and interest not sooner paid shall be due on
_____________, the final maturity thereof.
Without regard to the principal amount of the Note stated on its face, the
actual principal amount at any time outstanding and owed by the Borrower on
account of the Note shall be the amount of the disbursement of the Loan made by
the Lender under Section 1.1 hereof less all payments of principal actually
received by the Lender. The amount of such disbursement made by the Lender and
any repayments of principal thereof shall be recorded by the Lender on its books
or records or, at its option, endorsed on the reverse side of the Note by the
Lender and the unpaid principal balance at any time so recorded or endorsed by
the Lender shall be prima facie evidence in any court or other proceedings
brought to enforce the Note of the principal amount remaining unpaid thereon.
1.3 Exempt Loan Rules. Notwithstanding anything to the contrary contained
in this Loan and Security Agreement (the "Agreement") or in the Note, the
Borrower shall be obligated to make repayments of the Loan only to the extent
that such repayments when added to the repayments theretofore made during the
applicable plan year would not exceed an amount which would cause the
limitations of Section 415 of the Code to be exceeded for any ESOP participant.
Except as set forth in the next succeeding sentence and to the extent
permitted by applicable law, including, without limitation, the Exempt Loan
Rules, the principal amount of the Loan and any interest thereon shall be
payable solely from contributions (other than contributions of employer
securities) made to the Trust in accordance with the ESOP, and cash dividends
received on the Shares, to enable the Borrower to pay its obligations under the
Loan and from earnings attributable to the Shares and the investment of such
contributions and dividends.
The Lender acknowledges and agrees that it shall have no other recourse
against the Borrower for repayment of the Loan and that it shall have no
recourse against assets of the ESOP included in the Trust other than pursuant to
Sections 3 and 8 hereof.
SECTION TWO. INTEREST AND FEES.
2.1 Interest Rate. The Loan shall bear interest (which the Borrower hereby
promises to pay) prior to maturity (whether by lapse of time, acceleration or
otherwise) at a rate per annum equal at all times to the Interest Rate as
defined in Section 10.3 hereof.
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<PAGE>
2.2 Basis and Payment Dates. All interest accruing on the Note prior to
maturity shall be due and payable on a annual basis on the last day of each year
(commencing _____________, 1997) and at maturity (unless prepaid in whole prior
to such date, then on the date of such prepayment in whole) and interest
accruing after maturity shall be due and payable upon demand. All interest on
the Note shall be computed on the basis of a year of 360 days.
SECTION THREE. COLLATERAL.
3.1 Grant of Security Interest-Pledged Shares. The Borrower hereby grants,
pledges and assigns to the Lender ___________________________________ (_______)
shares of the issued and outstanding common stock, par value $.01 per share all
of which were either (i) purchased by the Borrower from the proceeds of the
disbursement of the Loan; (ii) acquired by the Borrower with the proceeds of a
prior exempt loan within the meaning of Section 54.4975-7(b) of the Regulations,
and pledged as collateral for such prior exempt loan, where the balance of such
prior exempt loan has been repaid with the proceeds of the disbursement of the
Loan (the "Pledged Shares" being hereinafter referred to as the "Collateral").
The Pledged Shares shall be evidenced by a stock certificate. The assignment and
pledge herein granted and provided for is made and given to secure and shall
secure the prompt payment of principal of and interest on the Note as and when
the same becomes due and payable and the payment, observance and performance of
any and all obligations and liabilities arising under or provided for in this
Agreement or the Note or any of them in each instance as the same may be amended
or modified and whether now existing or hereafter arising.
3.2 Further Assurances. The Borrower covenants and agrees that it will at
any time and from time to time as requested by the Lender execute and deliver
such further instruments and do and perform such other acts as the Lender may
reasonably deem necessary or desirable to provide for or perfect the lien of the
Lender in the Collateral hereunder.
3.3 Voting. Upon the occurrence of a Default or an Event of Default
hereunder, the Lender shall have the right to transfer the Collateral or any
part thereof into its name or into the name of its nominee. The Lender shall not
be entitled to vote the Pledged Shares unless and until an Event of Default has
occurred and so long as the same shall not have been waived by the Lender.
3.4 Partial Releases. The Lender agrees, provided always that no Default or
Event of Default shall have occurred and be continuing, as promptly as is
practicable after _____________ in each year (the period commencing
_______________ and ending _____________, 1997 and each subsequent 12-month
period ending on _____________ being hereinafter referred to as a "Plan Year"),
to release that number of Pledged Shares then being held to secure the Loan
which is equal to the number of such Pledged Shares held as of the last day of
the Plan Year multiplied by a fraction, the numerator of which is the aggregate
amount of all principal and interest payments made on the Note during the Plan
Year and the
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<PAGE>
denominator of which is the sum of the numerator plus the unpaid principal and
interest of the Note as of the last day of such Plan Year.
SECTION FOUR. PAYMENTS.
4.1 Place and Application. All payments of principal, interest, fees and
all other amounts payable hereunder shall be made to the Lender at 568 Broadway,
Bayonne, New Jersey 07002, for the account of the Lender (or at such other place
for the account of the Lender as the Lender may from time to time in writing
specify to the Borrower) in immediately available and freely transferable funds
at the place of payment. All payments shall be paid in full without setoff or
counterclaim and without reduction for and free from any and all taxes, levies,
duties, fees, charges, deductions, withholdings, restrictions or conditions of
any nature imposed by any government or any political subdivision or taxing
authority thereof.
4.2 Prepayments. The Borrower shall have the privilege of prepaying in
whole or in part the Note at any time upon giving three (3) Business Days' prior
notice to the Lender, each such prepayment to be made by the payment of the
principal amount to be prepaid and accrued interest thereon to the date fixed
for prepayment. All such prepayments shall be made without premium or penalty.
Prepayments shall first be applied to the several installments of the Note in
the inverse order of their respective maturities.
SECTION FIVE. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Lender as follows:
5.1 The Trust is a duly organized, validly existing employee stock
ownership trust.
5.2 The proceeds of the disbursement of the Loan shall be applied in their
entirety to the payment of the purchase price for the Pledged Shares.
5.3 The Borrower has full right, power and authority to enter into this
Agreement, to make the borrowings hereunder provided for, to issue the Note in
evidence thereof and to perform each and all of the matters and things herein
and therein provided for and this Agreement does not, and the Note when issued
will not, nor will the performance or observance by the Borrower of any of the
matters or things herein or therein provided, contravene any provision of law or
the Trust or any other covenant or agreement affecting the Trust or any of its
assets. As of the date of the disbursement of the Loan, the Pledged Shares will
be fully paid and non-assessable and the Pledged Shares will be owned by the
Borrower free and clear of all liens, charges and encumbrances whatsoever,
except for any lien of Lender provided for herein.
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<PAGE>
5.4 Except as disclosed to the Lender in writing, there is no litigation or
governmental proceeding pending, nor to the knowledge of the Borrower
threatened, against the ESOP and Trust.
5.5 The ESOP and Trust have no material liabilities, whether absolute or
contingent, except for those heretofore disclosed to the Lender.
SECTION SIX. REPRESENTATIONS AND WARRANTIES OF THE LENDER
The Lender represents and warrants that:
6.1 The Lender is a corporation duly organized under the laws of the State
of Delaware, and is validly existing and in good standing under the laws of the
State of Delaware. The Lender has full power and authority and legal right to
make and perform this Agreement.
6.2 The execution, delivery and performance by the Lender of this Agreement
have been duly authorized by all necessary action by the Lender and is not and
will not violate any provisions of law applicable to the Lender, any rules,
regulations or orders applicable to the Lender or any judgments or decrees
binding upon the Lender. This Agreement is a valid and legally binding
obligation of the Lender enforceable against the Lender in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting credits' rights generally
and the general principles of equity (regardless of whether considered in a
proceeding at law or in equity).
6.3 No authorizations, approvals or consents of, and no filings or
registrations with, any governmental regulatory authority or agency are required
for the execution, delivery or performance by the Lender of this Agreement, or
any transaction contemplated hereby, or for the validity or enforceability
against the Lender hereof except as have already been received or accomplished.
6.4 The execution, delivery and performance of the Agreement and the
consummation of the transactions contemplated hereby will not violate, conflict
with or constitute a default under (i) any of the provisions of the Lender's
Certificate of Incorporation or Bylaws, (ii) any provision of any agreement,
instrument, order, arbitration award, judgment or decree to which the Lender is
a party or by which it is or its assets are bound (iii) any statute, rule or
regulation of any federal, state or local government or agency applicable to the
Lender, except in any such case (i), (ii), (iii) above, for any such conflicts,
violations, defaults which either individually or in the aggregate do not have a
material adverse effect on the business properties of the Lender and its
subsidiaries, taken as a whole.
6.5 The Bank has taken such actions as are required by applicable law to be
taken by it to establish the ESOP and the Trust.
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6.6 There is no action, suit, investigation or proceeding pending, or to
the best knowledge of the Bank, threatened against or affecting the ESOP before
any court or governmental department, agency or instrumentality.
6.7 The Loan will be an "exempt loan" as that term is defined under Section
54.4975-7(b)(1)(iii) of the Regulations, provided the ESOP Committee determines
that the interest rate is not more than reasonable; and the transactions
contemplated by this Agreement are not "prohibited transactions" within the
meaning of Section 4975 of the Code or Section 406(a) of ERISA.
6.8 Except as otherwise provided in this Agreement, the Shares are not
subject to any restriction on transfer under applicable Federal securities law
and may be freely traded over-the-counter.
SECTION SEVEN. CONDITIONS PRECEDENT.
The obligation of the Lender to make the Loan shall be subject to
satisfaction of the following conditions precedent:
7.1 The Lender shall have received executed originals of this Agreement and
the Note duly signed and properly completed.
7.2 The Lender shall have received either (i) the certificate evidencing
all the Pledged Shares together with duly executed blank stock power therefore
or (ii) if such Pledged Shares are not yet available, a duly executed agreement
to pledge such stock in the form attached hereto as Exhibit B (in which event
such certificate and stock power will be delivered within 10 days of the date of
the Lender makes the Loan).
7.3 The Lender shall have received copies (executed or certified, as may be
appropriate) of all legal documents or proceedings taken in connection with the
execution and delivery of this Agreement and the Note.
SECTION EIGHT. COVENANTS.
Borrower covenants and agrees that so long as any amount remains unpaid on
the Note or the Commitment is outstanding, except to the extent compliance in
any case or cases is waived in writing by the Lender:
8.1 Compliance. The Borrower will comply with all requirements of the Code,
ERISA and any other law, rule or regulation applicable to it as such laws, rules
or regulations affect the ESOP or the Trust.
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<PAGE>
8.2 Reports.
(a) The Borrower will maintain a system of accounting for the ESOP and
the Trust in accordance with sound accounting practice and will, from time
to time, furnish to the Lender and its duly authorized representatives,
such information and data with respect to the financial condition of the
ESOP and the Trust as the Lender may reasonably request.
(b) Without any request the Borrower will furnish to the Lender
promptly after knowledge thereof shall have come to the attention of the
Borrower, written notice of the occurrence of any Default or Event of
Default hereunder or of any threatened or pending litigation or
governmental proceeding against the Plan or the Trust.
8.3 Determination Letter. The Bank shall apply for a determination letter
from the Internal Revenue Service that the Plan and the Trust, taken together,
qualify as an employee stock ownership plan for purposes of Section 4975(e)(7)
of the Code and the rules and regulations thereunder.
SECTION NINE. EVENTS OF DEFAULT AND REMEDIES.
9.1 Event of Default. Any one or more of the following shall constitute an
Event of Default hereunder:
(a) The Borrower shall default in the payment of principal and/or
interest in respect of the Note or any other amounts payable under this
Agreement when due;
(b) Any representation, warranty or statement made by the Borrower
herein or in connection with the making of the Loan proves to be incorrect
in any material respect as of the date of the issuance or making thereof;
(c) The Borrower shall default in the due performance or observance by
it of any term, covenant or agreement (other than those referred to in
subparts (a) and (b), inclusive, of this Section 9.1) contained in this
Agreement and such default shall continue unremedied for a period of 30
days after notice to the Borrower by the Lender or any other holder of the
Note;
(d) The ESOP shall be terminated prior to the expiration of the term
of this Agreement.
9.2 Limitations on Use of Trust Assets. When any Event of Default described
in subsections (a) to (c), of Section 9.1 has occurred and is continuing, the
Lender or the holder of the Note shall have no rights to assets of the Trust
other than (i) contributions (other than contributions of employer securities)
that are made by the Lender to enable the Borrower to meet its obligations
pursuant to the Loan, cash dividends received by the Borrower on the
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<PAGE>
Shares and earnings attributable to the investment of such contributions and
dividends and (ii) the Pledged Stock; provided further, however, that the value
of Trust assets transferred to the Lender as a result of an Event of Default
shall not exceed the amount of the repayment then in default, and, provided
further, that so long as the Lender is a "party in interest" within the meaning
of ERISA Section 3(14) or a "disqualified person" within the meaning of Section
4975(e)(2) of the Code, a transfer of Trust assets upon default shall be made
only if, and to the extent of, the Borrower's failure to meet the loan's payment
schedule.
9.3 Rights Upon an Event of Default. When any Event of Default has occurred
and is continuing the Lender may, in addition to such other rights or remedies
as it may have, then or at any time or times thereafter exercise with respect to
the Collateral any and all of the rights, options and remedies of a secured
party under the Uniform Commercial Code of New Jersey (the "UCC") including
without limitation the sale of all or any part of the Collateral at any brokers'
board or any public or private sale, provided, however that the Lender shall
only be able to exercise such rights and remedies to the extent of all interest
and principal payments which are due and payable as of the date of the Event of
Default and provided further that prior to such exercise the Lender shall
release from the Collateral so much thereof as it would have been required to
release under Section 3.4 hereof if the period from the previous December 31 to
the date of such release constituted a Plan Year and no Event of Default had
occurred. The net proceeds of any such sale, after deducting all costs and
expenses incurred in the collection, protection, sale and delivery of the
Collateral (which expenses Borrower promises to pay) shall be applied first to
the payment of any costs and expenses incurred by the Lender in selling or
otherwise disposing of the Collateral, second, to the payment of the principal
of and the interest on the Note, and, third, ratably as among any other items of
the indebtedness hereby secured. Any surplus remaining after the full payment
and satisfaction of the foregoing shall be returned to the Borrower or to
whomsoever a court of competent jurisdiction shall determine to be entitled
thereto. Any requirement of said UCC as to reasonable notice shall be met by the
Lender personally delivering or mailing notice (by certified mail - return
receipt requested) to the Borrower at its address as provided in Section 11.6
hereof at least ten (10) days prior to the event giving rise to the requirement
of such notice. In connection with any offer, solicitation or sale of the
Collateral, the Lender may restrict bidders and otherwise proceed in whatever
manner it reasonably believes appropriate in order to comply or assure
compliance with applicable legal requirements pertaining to the offer and sale
of securities of the same type as the Collateral.
9.4 ERISA Restrictions. The number of shares of Pledged Stock as to which
the Lender may exercise the rights set forth in this Section 9 may not exceed
that number of shares (then remaining subject to pledge hereunder) which is then
equal in current value to the amount in default under the Note. The remedies set
forth in this Section 9 may only be exercised to the extent consistent with the
restrictions on remedies set forth in Section 408(b)(3) of ERISA and the
regulations thereunder and Section 4975(d)(3) of the Code and the regulations
thereunder.
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SECTION TEN. DEFINITIONS.
10.1 The term "Business Day" shall mean any day on which savings
institutions are generally open for business in New Jersey other than a Saturday
or Sunday.
10.2 The term "Event of Default" shall mean any event condition specified
as such in Section 9.1 hereof and the term "Default" shall mean any event or
condition which, with the lapse of time, the giving of notice, or both would
constitute an Event of Default.
Capitalized terms defined elsewhere in this Agreement shall have the
meanings as defined in all provisions hereof.
10.3 The term "Interest Rate" shall mean prime rate as published in the
Wall Street Journal on __________, 1997.
SECTION ELEVEN. MISCELLANEOUS.
11.1 Holidays. If any principal of the Note shall fall due on Saturday,
Sunday or on another day which is a legal holiday for savings institutions in
the State of New Jersey, interest at the rate the Note bears for the period
prior to maturity shall continue to accrue on such principal from the stated due
date thereof to and including the next succeeding Business Day on which the same
is payable.
11.2 No Waiver, Cumulative Remedies. No delay or failure on the part of the
Lender or the part of the holder of the Note in the exercise of any power or
right shall preclude any other or further exercise thereof, or the exercise of
any other power or right, and the rights and remedies hereunder of the Lender
and of any holder of the Note are cumulative to, and not exclusive of, any
rights or remedies which any of them would otherwise have.
11.3 Amendments, Etc. No amendment, modification, termination or waiver of
any provision of this Agreement or of the Note nor consent to any departure by
the Borrower therefrom, shall in any event be effective unless the same shall be
in writing and signed by the Lender, and then such consent, modification or
waiver shall be effective only in the specific instance and for the specific
purpose for which given. No notice to or demand on the Borrower in any case
shall entitle the Borrower to any other further notice or demand in similar or
other circumstances.
11.4. Survival of Representations. All representations and warranties made
herein or in certificates given in connection with the Loan shall survive the
execution and delivery of this Agreement and of the Note, and shall continue in
full force and effect with respect to the date as of which they were made as
long as any credit is in use or available hereunder.
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11.5 Payments. So long as the Lender is the holder of the Note, the
Borrower will promptly and punctually pay the principal of and interest on the
Note without presentment of the Note and without any notation of any such
payment being made on the Note.
11.6 Addresses for Notices. All communications provided for herein shall be
in writing and shall be deemed to have been given or made when served personally
or when deposited in the United States mail addressed, if to the Borrower at
[Trustee Address], Trust Officer; if to the Lender at 568 Broadway, Bayonne, New
Jersey 07002, or at such other address as shall be designated by any party
hereto in a written notice to each other party pursuant to this Section 11.6.
11.7 Headings. Article and Section headings used in this Agreement are for
convenience or reference only and are not a part of this Agreement for any other
purpose.
11.8 Severability of Provisions. Any provision of this Agreement which is
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such unenforceability without impairing the enforceability of
the remaining provisions hereof affecting the enforceability of such provision
in any other jurisdiction.
11.9 Counterparts. This Agreement may be executed in any number of
counterparts, and by different parties hereto on separate counterparts, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument.
11.10 Binding Nature, Governing Law, Etc. This Agreement shall be binding
upon the Borrower and its successors and assigns and shall inure to the benefit
of the Lender and the benefit of its successors and assigns, including any
subsequent holder of the Note. To the extent not preempted by Federal law, this
Agreement and the rights and duties of the parties hereto shall be construed and
determined in accordance with the laws of the State of New Jersey without regard
to principles of conflicts of laws. This Agreement constitutes the entire
understanding of the parties with respect to the subject matter hereof and any
prior agreements, whether written or oral, with respect thereto are superseded
hereby.
11.11 Concerning the Borrower. The term "Borrower" as used herein shall
mean and include the undersigned as Trustee of the Trust and its successors in
trust not individually but solely as Trustee under that certain First Savings
Bank of New Jersey, SLA Employee Stock Ownership Trust effective _____________,
199_, by and between the undersigned and First Savings Bank of New Jersey, SLA
and this Agreement shall be binding upon the undersigned and its successors and
assigns and upon the trust estate. The undersigned assumes no personal or
individual liability or responsibility for payment of the indebtedness evidenced
by the Note or for observance or performance of the covenants and agreements
herein contained or for the truthfulness of the representations and warranties
herein contained, the undersigned having executed this Agreement and the Note
solely in its capacity as trustee as aforesaid to bind the undersigned, its
successors in trust and the trust estates.
10
<PAGE>
11.12 Limited Liability. Anything contained herein or in the Note to the
contrary notwithstanding, the sole and only recourse of the Lender and any other
holder of the Note for payment of the obligations hereunder and under the Note,
as against the Borrower for the payment of the obligations hereunder and under
the Note shall be to (i) the Collateral, (ii) contributions, other than employer
securities not constituting Collateral hereunder, made to the ESOP and the Trust
by sponsoring employers to enable the Borrower to meet its obligations hereunder
and under the Note, and (iii) earnings attributable to the Pledged Shares and to
the investment of such employer contributions, but only to the extent of the
failure of the Borrower to meet the payment schedule of the Loan provided for
herein. The Trust assets may be transferred to Lender upon the occurrence of a
Default or an Event of Default hereunder only upon and to the extent of the
failure of the Plan to meet the payment schedule of the Loan. In no event may
the value of the Trust assets so transferred exceed the amount of the default.
11.13 Lender's Duty of Care. It is agreed and understood that the Lender's
duty with respect to the Collateral shall be solely to use reasonable care in
the custody and preservation of the Collateral in the Lender's possession, which
shall not include any steps necessary to preserve rights against prior parties.
All provisions in this Agreement shall be construed so as to maintain (i)
the ESOP as a qualified leveraged employee stock ownership plan under Sections
401(a) and 4975(e)(7) of the Code, (ii) the Trust as exempt from taxation under
Section 501(a) of the Code, and (iii) the Loan as an "exempt loan" under the
Exempt Loan Rules.
[Remainder of this page intentionally left blank]
11
<PAGE>
Upon your acceptance hereof in the manner hereinafter set forth, this
Agreement shall constitute a contract between us for the uses and purposes
hereinabove set forth.
Dated as of this ___ day of ______________, 1997.
_____________________, and its
successors in trust, as Trustee
under that certain First Savings
Bank of New Jersey, SLA Employee
Stock Ownership Trust effective
_____________, 199_ by and between
the undersigned and First Savings
Bank of New Jersey, SLA.
By_________________________________
Accepted and agreed to at Bayonne, New Jersey as of the date last above
written.
By_________________________________
12
<PAGE>
DRAFT EXHIBIT A
PROMISSORY NOTE
$--------
Bayonne, New Jersey __________, 1997
For VALUE RECEIVED, the undersigned, [Trustee], not individually but solely
as Trustee under that certain First Savings Bank of New Jersey, SLA Employee
Stock Ownership Trust effective _____________, 199_ by and between the
undersigned ("Borrower") and First Savings Bank of New Jersey, SLA promises to
pay to the order of Bayonne Bancshares, Inc. (the "Lender") at its office at 568
Broadway, Bayonne, New Jersey 07002, the principal sum of
_________________________________ ($_____________), if less, the aggregate
principal amount of the loan made to the Borrower under Section 1.1 of the Loan
and Security Agreement hereinafter referred to in _____ (__) consecutive annual
equal installments consisting of both principal and interest, amortized over
such period in an amount sufficient to repay the Loan plus interest, payable
annually commencing on _____________, 1997, and on the last business day of each
and _____________ in each year thereafter, except that the final installment in
the amount of all principal and interest not sooner paid shall be due on
_____________, 200_, the final maturity hereof.
The Borrower promises to pay interest (computed on the basis of a year of
360 days) at said office on the balance of principal from time to time remaining
outstanding and unpaid hereon at the rate per annum equal at all times to the
Interest Rate as defined in Section 10.3 of the Loan and Security Agreement (as
defined below) on the last business day of each and _____________, commencing
_____________, 1997, and in each year thereafter and on the final maturity date
of this Note. On demand, the Borrower promises to pay interest on any overdue
principal hereof (whether by lapse of time, acceleration, or otherwise) until
paid at the stated rate.
This Note is issued under the terms and provisions of that certain
First Savings Bank of New Jersey, SLA Employee Stock Ownership Trust Loan and
Security Agreement bearing even date herewith by and between the Borrower and
the Lender (the "Loan and Security Agreement") and this Note and the holder
hereof are entitled to all the benefits and security provided for thereby or
referred to therein to which Loan and Security Agreement reference is hereby
made for a statement thereof.
This Note may be declared due prior to its express maturity and voluntary
prepayments may be made hereon, all in the events, on the terms and in the
manner as provided in such Loan and Security Agreement.
Recourse for the payment of this Note has been limited by the provisions of
the Loan and Security Agreement and this Note is expressly made subject to such
provisions. This
<PAGE>
Note shall be governed by and construed in accordance with the laws of New
Jersey without regard to principles of conflicts of laws. The Borrower hereby
waives presentment for payment and demand.
Upon the occurrence of an Event of Default as such term is defined in the
Loan and Security Agreement at the option of the Lender, all amounts payable by
the Borrower to the Lender under the terms of this Note may immediately become
due and payable by the Borrower to the Lender pursuant to the provisions of
Section 9.2 of the Loan and Security Agreement, and the Lender shall have all of
the rights, powers, and remedies available under the terms of this Note, any of
the other documents evidencing and securing this Loan and all applicable laws.
The Borrower and all endorsers, guarantors, and other parties who may now or in
the future be primarily or secondarily liable for the payment of the
indebtedness evidenced by this Note hereby severally waive presentment, protest
and demand, notice of protest, notice of demand and of dishonor and non-payment
of this Note and expressly agree that this Note any payment hereunder may be
extended from time to time without in any way affecting the liability of the
Borrower, guarantors and endorsers.
_____________________ and its successors in trust, as
Trustee under that certain First Savings Bank of New Jersey,
SLA Employee Stock Ownership Trust effective _____________,
199_ by and between the undersigned and First Savings Bank
of New Jersey, SLA.
By:_________________________________________________________
<PAGE>
DRAFT EXHIBIT B
SECURITY AGREEMENT
INSTRUMENTS OR NEGOTIABLE DOCUMENTS TO BE DEPOSITED
For new value contemporaneously given by Bayonne Bancshares, Inc.,
("Lender") to the undersigned ("Borrower"), the receipt whereof is hereby
acknowledged, the Borrower does hereby grant a security interest to said Lender
in the instruments or negotiable documents hereafter described ("Collateral"),
in all of which Collateral the Borrower warrants that the Borrower has good,
valid and effective rights to the ownership and possession thereof and to the
grant of the security interest hereby made:
________ shares of the common stock, par value $.01 per share, of Bayonne
Bancshares, Inc., a Delaware corporation.
Borrower agrees to deliver said collateral to said Lender not later than
the close of business on ______________, 1997, said date being within 10
days from the date hereof.
Said security interest secures the payment of all indebtedness and
liabilities as undertaken in the Loan and Security Agreement to which this is a
part, now existing or hereafter arising, and the Lender has all the rights with
respect to said Collateral and said security interest as more fully set forth in
the form of secured note or notes executed and delivered by the undersigned to
said Lender prior hereto or contemporaneously herewith.
This agreement, including matters of interpretation and construction, and
the rights of the Lender and the duties and obligations of the debt hereunder
are to be determined in accordance with the laws of the State of New Jersey,
particularly the Uniform Commercial Code, except where preempted by federal law.
Dated at Bayonne, New Jersey the ______ day of ______________, 1997.
[TRUSTEE], and its successors in trust, as Trustee under
that certain First Savings Bank of New Jersey, SLA Employee
Stock Ownership Trust effective _____________, 199_ by and
between the undersigned and First Savings Bank of New
Jersey, SLA.
By:_________________________________________________________
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
First Savings Bank of New Jersey:
We consent to the use of our report, dated April 25, 1997, included herein, and
to the reference to our Firm under the heading "Experts" included in the
Registration Statement/Prospectus of First Savings Bank of New Jersey and
Subsidiaries.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
May 29, 1997
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